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Over the past two years, the Third Circuit Court of Appeals has proved itself an aggressive guardian of Rule 23’s class certification requirements.[1] It has also provided some much needed guidance for lower state and federal courts applying the choice of law standard for tort cases adopted relatively recently by the New Jersey Supreme Court.[2] The Third Circuit visited both issues again in Grandalski v. Quest Diagnostics,[3] affirming the district court’s denial of class treatment for consumer fraud and unjust enrichment claims asserted on behalf of a nationwide class.

Facts

Grandalski involved the billing practices of the defendant Quest Diagnostics (“Quest”), which performed medical diagnostic and clinical testing on patients at the request of treating physicians. When Quest billed the patient’s insurance company, the insurer reviewed the claim and sent Quest an Explanation of Benefits (“EOB”), which informed Quest of the amount, if any, that the patient was responsible for paying. Quest then sent the patient a bill, and, if no response was received, could turn the bill over to a collection agency. The plaintiffs alleged, inter alia, that Quest billed patients in excess of the amount stated on the EOB.[4] They asserted claims under the New Jersey Consumer Fraud Act and for unjust enrichment.[5]

The plaintiffs sought certification of a nationwide class of individuals who had paid Quest an amount in excess of that stated on the EOB.[6] However, the district court found that the requisite application of fifty different consumer fraud statutes would be unwieldy and inappropriate for class treatment at trial. With respect to the unjust enrichment claim, the court found that there were numerous explanations for overbilling that would not be wrongful or unjust, and therefore an individual inquiry would be necessary for each class member. This defeated any possible finding of predominance of common issues under Rule 23(b)(3). The district court further held that because the plaintiffs’ class definition implicitly included a requirement that each class member had suffered a wrongful loss, the proposed class was unascertainable.[7] The plaintiffs then appealed.

The Decision 

Consumer Fraud and Choice of Law

At the outset, the Court of Appeals rejected the plaintiffs’ argument that the district court’s decision on choice of law was premature. Acknowledging its statement in a 2011 case that “many courts find it inappropriate to decide choice of law issues incident to a motion for class certification,” the Court distinguished that statement on the ground that it was made with respect to a settlement class, not a litigation class like the one proposed by the plaintiffs.[8] Indeed, failure to consider the choice of law issue could be considered reversible error.[9]

Turning next to the district court’s ruling that each class member’s consumer fraud claim was governed by the law of their state of residence rather than the law of New Jersey, the Third Circuit first reaffirmed its holding last year in Maniscalco v. Brother Int’l (USA) Corp.[10] that fraud cases in which statements made by a defendant in one state are read or heard by the plaintiff in another are subject to Section 148(2) of the Restatement test rather than Section 148(1).[11] Applying Section 148(2)’s multi-factor inquiry, the appeals court found that only the third factor (the place where the defendant made the alleged misrepresentations) favored the application of New Jersey law, whereas several other factors (the place where the class members received the misrepresentations, where they paid money to Quest, and where Quest performed the medical testing) favored the application of the law of each class member’s state of residence.[12] The domicile of the plaintiffs was also more important than that of the defendant under the Restatement standard.[13] Noting that Section 148(2) must also be construed in light of the principles set forth in Section 6 of the Restatement, the Court held that those principles applied “with equal force in favor of [applying] class members’ home states laws.”[14]

The Court turned next to the plaintiffs’ argument that any problems created by choice of law could be addressed through “grouping” the different states’ laws into two categories (i.e., the states that proscribe “unfair of deceptive conduct” similar to the FTC Act, and those that prohibit false or misleading conduct).[15] Rejecting this contention, the Third Circuit again distinguished cases involving class action settlements.[16] Instead, it cited cases holding that plaintiffs “face a significant burden to demonstrate that grouping is a workable solution.”[17] The Grandalski plaintiffs’ argument consisted of a citation to one district court case purporting to follow a grouping procedure, and an exhibit setting forth the National Consumer Law Center’s 2009 analysis of various state consumer fraud statutes.[18] The appeals court stated that a plaintiff “must do more than provide their own ipse dixit, citation to a similar case, and a generic assessment of consumer fraud statutes, to justify grouping.”[19]

Unjust Enrichment

The appeals court then turned its attention to the plaintiffs’ unjust enrichment claim. Most of the recent Third Circuit class certification case law has focused on the ascertainability requirement – whether individuals fitting the class definition may be identified without resort to mini-trials.[20] In Grandalski, the district court ruled that the plaintiffs had again failed to clear the ascertainability hurdle, holding that the proposed class definition required an implicit finding of fact of harm (i.e., a finding that each class member had paid an excessive bill), which could only be resolved with an individual inquiry. The appeals court concluded that the correct basis for the trial court’s concern was not ascertainability but rather the predominance requirement of Rule 23(b)(3).[21] It explained that “predominance and ascertainability are separate issues” – the ascertainability inquiry “focused on whether objective records could readily identify class members,” whereas predominance focused on the nature of the evidence (individual or common) required to prove the substantive claim.[22]

Citing evidence from the defendant’s expert that there were several factual scenarios that could lead to ostensible overbilling of a patient but not necessarily unjust or fraudulent billing, the Third Circuit held that individual inquiries would be required to determine whether an alleged overbilling constituted unjust enrichment.[23] Such specific evidence was incompatible with representative litigation”[24] and class certification was therefore properly denied.[25]

Impact on Future Cases

The decision is important on several fronts. Allied with last year’s decision in Maniscalco, Grandalski more or less sounds the death knell for attempts to certify traditional consumer fraud cases as nationwide class actions. The “most significant relationship” test of the Restatement mandates the application of the fifty states’ laws, and that necessity precludes class treatment on a nationwide scale. Grandalski also reaffirms the onerous burden confronting plaintiffs seeking to circumventing choice of law problems with “grouping” arguments. The decision also demonstrates that while in theory the class certification inquiry is the same for both litigation and settlement classes, in practice they can be very different.

On ascertainability, the decision may reflect a subtle effort on the part of the Court to redirect litigants towards the predominance inquiry as the prism through which individual issues should be examined. However, it also reaffirms the validity of the ascertainability rulings in prior cases.

With respect to unjust enrichment, the Grandalski decision does not address an issue that is percolating currently in the lower federal courts – whether the unjust enrichment laws of the various states are similar enough to permit nationwide certification.[26] That question must await resolution in a future appeal. Instead, the Third Circuit focused on one individual issue, an issue it considered important enough on its own to defeat predominance. This finding is, in itself, significant. The Court quoted the Supreme Court’s recent Wal-Mart decision for the proposition that “a common contention … must be of such a nature that … determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in a single stroke.”[27] The predominance requirement clearly retains real teeth in the Third Circuit.

Added to the other recent Third Circuit decisions on class certification, Grandalski affords defendants cause for continued but cautious optimism that class actions will remain, as the Supreme Court described them some 35 years ago, “the exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.”[28]

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[1] See, e.g., Hayes v. Wal-Mart Stores, Inc., 725 F.3d 349 (3d Cir. 2013); Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013); Marcus v. BMW of N. Am., LLC, 687 F.3d 583 (3d Cir. 2012).

[2] See, e.g., Maniscalco v. Brother Int’l (USA) Corp., 709 F.3d 202 (3d Cir. 2013); Nafar v. Hollywood Tanning Sys., Inc., 339 Fed. Appx. 216 (3d Cir. 2009); see also P.V. v. Camp Jaycee, 197 N.J. 132 (2008) (adopting the “most significant relationship” test of the Restatement (Second) of Conflict of Laws in tort cases).

[3]Grandalski v. Quest Diagnostics, Inc., No. 13-4329 (slip op.) (3d Cir. Sept. 11, 2014).

[4] Id. at 4.

[5] Id. at 5.

[6] Id. at 4.

[7] Id. at 5.

[8] Id. at 8-9 (citing Sullivan v. DB Investments, Inc., 667 F.3d 273, 309 (3d Cir. 2011)).

[9] Id. at 10 (citing In re LifeUSA Holding Inc., 242 F.3d 136, 147 (3d Cir. 2001)).

[10] 709 F.3d 202.

[11]Grandalski, slip op at 11-12 (citing Maniscalco, 709 F.2d at 208).

[12] Id. at 13-15.

[13] Id. at 14.

[14] Id. at 15. The Section 6 principles are (1) the interests of interstate comity, (2) the interests of the parties, (3) the interests underlying the field of tort law, (4) the interests of judicial administration, and (5) the competing interests of the states. Id. (citing Maniscalco, 709 F.2d at 207).

[15] Id. at 15.

[16] Id. at 15-17 (citing Sullivan, 667 F.3d at 301, and In re Prudential of Am. Sales Pract. Litig., 148 F.3d 283, 315 (3d Cir. 1998)).

[17] Id. at 17 (citing Klay v. Humana, Inc., 382 F.3d 1241, 1262 (11th Cir. 2004); Walsh v. Ford Motor Co., 807 F.2d 1000, 1017 (D.C. Cir. 1986)).

[18] Id. at 16.

[19] Id. at 17.

[20]In Marcus and then again in Carrera, the Third Circuit held that a class action is inappropriate if (a) “class members are impossible to identify without extensive and individualized fact-finding or ‘mini-trials,’” or (b) class members cannot be identified in a reliable and administratively feasible fashion, through a method that permits a defendant to challenge the evidence. Applying these principles in consumer fraud cases, the Third Circuit reversed certification where class membership was predicated upon potentially self-serving affidavits from putative class members as to their purchases of the defendants’ products. Marcus, 687 F.3d at 593-94; Carrera, 727 F.3d at 308-09. The Carrera court further rejected the use of customer membership cards or online sales records absent evidence that they were reliable methods of establishing class member purchases. Id. at 309. The Third Circuit in Hayes vacated a district court order certifying a consumer fraud class, remanding the case for additional findings on the ascertainability issue, warning that certification would fail “if the only proof of class membership is the say-so of putative class members or if ascertaining the class requires extensive and individualized fact-finding.” 725 F.3d at 356.

[21] Grandalski, slip op. at 18-21.

[22] Id. at 19-20.

[23] Ibid.

[24] Id. at 20 (quoting Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2551 (2011)).

[25] Id.

[26]Several courts in the District of New Jersey have held that there is no significant conflict. See, e.g., Snyder v. Farnam Cos., Inc., 792 F.Supp.2d 712, 723 (D.N.J. 2011); Agostino v. Quest Diagnostics, 256 F.R.D. 437, 464 (D.N.J. 2009). Courts in other districts have reached the opposite conclusion. See, e.g., True v. Conagra Foods, Inc., 2011 WL 176037, at *9 (W.D. Mo. Jan 4, 2011); Tyler v. Alltel Corp., 256 F.R.D. 415, 422 (E.D. Ark. 2010). The courts in other districts have the better of the argument. As one court explained, “unjust enrichment is a tricky type of claim that can have varying interpretations even by courts within the same state, let alone among the fifty states.” In re Sears Roebuck & Co., Tools Mktg. & Sales Pract. Litig., 2006 WL 3754823, at *1 n.3 (N.D. Ill. Dec. 18, 2006).

[27] Id. at 20 (quoting Wal-Mart, 131 S.Ct. at 2551).

[28] Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979).