In Torres v. S.G.E. Management LLC, the en banc Fifth Circuit reversed a panel opinion about a class action involving an alleged pyramid scheme. The case alleged RICO claims about the multi-level marketing program associated with Stream Energy; the panel rejected class certification, finding that individual causation issues would predominate at trial.
The en banc court disagreed, reasoning: “The Defendants’ challenge to predominance rests on their belief that th[e] causation element will require individualized proof. But that premise . . . is at odds with recent decisions from the Supreme Court and this court emphasizing that RICO claims predicated on mail and wire fraud do not require first-party reliance to establish that the injuries were proximately caused by the fraud.” Accordingly, “[b]ecause pyramid schemes are per se mail fraud, which include inherent concealment about the deceptive payment scheme, one who participates in a pyramid scheme can be harmed ‘by reason of’ the fraud regardless of whether he or she relied on a misrepresentation about the scheme.” Additionally, the Court concluded that “if the Plaintiffs prove that Ignite is a fraudulent pyramid scheme, they may use a common inference of reliance to prove proximate causation under RICO.”
This is a significant ruling from a court that is generally considered hostile to class actions, in an area of the economy – multi-level marketing programs – that involves millions of participants. No. 14-20129 (Sept. 30, 2016) (en banc).
A putative class of New Orleans landowners sought damages arising from the construction of a flood-control canal. The Fifth Circuit affirmed the denial of class certification, noting: “This lawsuit seeks to recover different damages caused by different acts committed by different defendants at different times over a five year period.” Even under Louisiana state law theories that arguably reduced the proof problems, the Court still found fatal problems as to “individual questions regarding causation” (and the exclusion of other potential causes), as well as damages: “Any . . . formula would at a minimum need to take account of the variances in age, size, type, construction, condition, soil composition, and location of the properties.” The Court distinguished other cases that affirmed class certifications as involving “single episodes of tortious conduct usually committed by a single defendant.” Crutchfield v. Sewerage & Water Board, No. 15-30709 (July 13, 2016).
In EEOC v. Bass Pro Outdoor World LLC, the Fifth Circuit addressed a “pattern or practice” suit by the EEOC, which is related to a traditional class action certified under Fed. R. Civ. P. 23, but has additional features by statute. The Court observed several features of the Federal Rules that can reduce the risk of unfair prejudice in such a large-scale case — EEOC or otherwise — including bifurcation, sequenced special interrogatories during the liability phase, and careful attention to the availability of injunctive remedies. No. 15-20078 (
The district court granted the plaintiff’s motion for conditional class certification under the Fair Labor Standards Act. The defendant sought mandamus review, and the Fifth Circuit held the petition in abatement for more information: ” Although there is generally no ‘inflexible rule requiring district courts to file a written order explaining their decisions,” in this case the district court’s ‘lack of explanation makes it impossible for us to determine’ whether mandamus relief would be appropriate here.” In re Schlumberger Tech. Corp., No. 16-20267 (May 13, 2016, unpublished).
The issue in Seacor Holdings v. Mason was whether a party had “informally” opted out of a class action related to the Deepwater Horizon disaster. Acknowledging that a party can opt out of a class without strictly complying with specified procedures, especially if the party is unsophisticated and unrepresented by legal counsel, the Fifth Circuit found no abuse of discretion in not finding an opt-out here. “The gargantuan size and extraordinary complexity of this litigation therefore supports the district court’s decision. . . . . When the district court approved the Agreement, it noted the class had potentially 200,000 members and that over 1,700 individuals sent opt-out requests to the claims administrator. Given the size and complexity of this MDL proceeding, the court and parties should not have to intuit an opt out from vague statements made in one of thousands of filings before the court. To hold otherwise would allow class members to make ambiguous statements and motions while waiting to see if the outcome of the class action is favorable.” No. 15-30597 (April 6, 2016).
The panel majority in Torres v. SGE Management, 805 F.3d 145 (5th Cir. 2015) decertified a class action about the operation of a multilevel marketing program. The full Court has now granted en banc review of this important decision about a significant area of the economy.
A failed class action alleging sex discrimination by Wal-Mart concluded as follows:
- The named plaintiffs settled with Wal-Mart, and the district court entered final judgment on May 15, 2015;
- Appellants intervened on June 2; and then
- Appellants filed a notice of appeal (as to the dismissed class claims) on June 12.
While the notice of appeal divested the district court of jurisdiction over the pending motion to intervene, the Fifth Circuit may dismiss such an appeal and remand for purposes of considering the motion, which it did here with the agreement of the parties. Odle v. Wal-Mart Stores, Inc., No. 15-10571 (Dec. 16, 2015, unpublished).
In a case that has now gone en banc, the plaintiffs in Torres v. S.G.E. Management, 805 F.3d 145 (5th Cir. 2015), alleged that they were victims of an alleged pyramid scheme about a multi-level marketing program to sell electricity. The district court certified a class, acknowledging that the plaintiffs could not show a common misrepresentation, but concluding that they could show a common failure to disclose the illegality of such a scheme. In other words, “Because it can rationally be assumed (at least without any contravening evidence) that the legality of the Ignite program was a bedrock assumption of every class member, a showing that the program was actually a facially illegal pyramid scheme would provide the necessary proximate cause.”
The Fifth Circuit disagreed: “[A]n investor could reasonably choose to knowingly invest in a pyramid scheme in the hope that they would make money. As we have already explained, a pyramid scheme provides an opportunity for those at the top of the pyramid to profit from their investments. While many of the Plaintiffs might have decided to invest in the scheme in the belief that it was legal, it is equally possible that many of the Plaintiffs chose to invest in the scheme in the belief that, legal or illegal, it provided them with an opportunity to make money.” Accordingly, because Plaintiffs had to establish reliance with individualized proof, the Court decertified the class.
A detailed dissent warned: “By erecting this barrier to class certification based on nothing more than the theoretical possibility of prior knowledge of illegality, the panel majority creates an insurmountable barrier in this circuit to future class certification of cases that claim the presence of an illegal pyramid scheme. But, even worse, because individuals who are duped into joining such schemes uniformly invest relatively few dollars, none will possibly be able to afford to litigate their individual claims separately. Absent the availability of a class action, there simply will be no possibility of court challenges to such pyramid schemes.”
A dispute about the scope a “Chinese drywall” settlement illustrates the operation of complex class settlements. Defendants settled with a broadly-defined group of claimants about defective drywall, but limited to claims involving “Affected Property.” Defendants sought to enjoin a case by a class member who alleged that his condominium – which did not have Chinese drywall – had lost value because of its association with a neighboring property that did have defective Chinese drywall (also called or a “stigma” claim). The district court denied the request and the Fifth Circuit affirmed. Mangiarelli v. Sixty-Fifth and One, LLC, No. 14-31355 (Oct. 2, 2015, unpublished). The Court distinguished between the situation when “individuals [are] ‘class members’ under a settlement agreement, yet [are] barred from recovery under the terms of that agreement” from this situation, where the plaintiff “was never entitled to a benefit under the . . . agreements in exchange for releasing his stigma claims.”
Hooks sued Landmark Industries, the operator of an ATM, as the representative of a putative class alleging that Landmark failed to give proper notices under the Electronic Funds Transfer Act about withdrawal fees. Hooks v. Landmark Industries, Inc., No. 14-20496 (Aug. 12, 2015). Pursuant to Fed. R. Civ. P. 68, Landmark offered $1,000 (the maximum allowable statutory damages) and costs and fees “through the date of acceptance of the offer, as agreed by the parties, or to be determined by the court if agreement cannot be reached.” Hooks did not accept it, and the district court dismissed, finding the action mooted by the unaccepted Rule 68 offer.
Sidestepping the thorny question of whether this offer was “complete” under Rule 68, the Fifth Circuit reversed. It reasoned: “[i]t is hornbook law that the rejection of an offer nullifies the offer,” and expressed concern that “[a] contrary ruling would serve to allow defendants to unilaterally moot named-plaintiffs’ claims in the class action context — even though the plaintiff, having turned the offer down, would receiver no actual relief. This holding places the Fifth Circuit in the minority of a 6-3 circuit split on the issue of whether an unaccepted offer of judgment can moot a named plaintiff’s claim in a putative class action.
The latest appeal about BP’s class settlement of Deepwater Horizon claims — a long and winding path — involved the rights of claimants to appeal a benefit decision to the Fifth Circuit, after review in the district court. While the Court’s ultimate holdings turn on the specific parts of the settlement at issue, on the threshold issue of the claimants’ appeal right, the Court held: “We choose to follow these other circuits’ decisions in similar cases involving consent decrees to hold that, where a settlement agreement does not resolve claims itself but instead establishes a mechanism pursuant to which the district court will resolve claims, parties must expressly waive what is otherwise a right to appeal from claim determination decisions by a district court. Given that there has been no such express waiver in the instant case, the parties have preserved their right to appeal from the district court to this court.” Lake Eugenie Land & Development v. BP Exploration & Production, No. 13-30843 (May 8, 2015).