Years typically pass between Appellate Division opinions addressing class certification issues. Earlier this month, two such opinions were issued in the space of just five days. In Myska v. New Jersey Mfrs. Ins. Co.[1] and Daniels v. Hollister Co.,[2] the Appellate Division clarified the law on several important issues. Both opinions will be published and therefore bind New Jersey’s trial courts.[3]

Motions to Dismiss Class Action Allegations on the Pleadings

Most federal courts in New Jersey have held that a defense motion seeking the immediate dismissal of class action allegations (i.e., before discovery and a class certification motion filed by the plaintiff) is premature and therefore improper.[4] In Myska, the Appellate Division held that such a motion is appropriate in the state courts, but only where the plaintiffs’ allegations, on their face, “do not lend themselves to class certification.”[5]

Myska involved allegations that the defendant insurers improperly denied coverage for diminution in the value of automobiles involved in accidents, rather than the mere cost of repair.[6] The trial court dismissed the plaintiffs’ claims on substantive grounds, with the single exception of their claim for breach of contract. [7]  As for that claim, the trial court held that it could proceed individually but not as a class action.[8] Class treatment was unsuitable because of “the significant factual differences regarding the allegations supporting each plaintiff’s action.”[9] On appeal, the plaintiffs argued that the striking of the class allegations prior to discovery was error, based upon the improper consideration of documents not referenced in the Complaint and the drawing of improper inferences from those documents.[10]

“Flatly rejecting” the imposition of “a bright-line rule prohibiting examination of the propriety of class certification until discovery is undertaken,” the Appellate Division agreed that “the facts underpinning each plaintiff’s claims [were] dependent upon the individual insurance policy provisions, the distinct vehicle damaged and the specific calculation of damages alleged, which require[d] separate litigation of every action.”[11] While each policy had similar provisions, the facts and circumstances surrounding the claim and an insured’s compliance with the policy terms to submit claims was unique.[12] For example, one named plaintiff’s claims were not denied, but rather were not paid because he lacked sufficient proof as to the diminution in value. Another named plaintiff never actually filed a claim asserting such coverage.[13]

The appellate court also rejected the plaintiffs’ claims that the trial court improperly considered documents outside the pleadings and drew unwarranted inferences from those documents.[14] The relevant documents were all referenced, if not described in detail, in the plaintiffs’ Complaint. The inferences drawn were entirely appropriate because the documents were susceptible of only one interpretation, the one the trial court reached.[15]

Negative Value Suits

The fact that a claim has “negative value” (i.e., that the cost of litigating each claim individually outweighs the actual value of the claim) has been described by the state courts as “the most compelling rationale for finding superiority in a class action.”[16] However, courts have disagreed over what dollar figure actually constitutes a “negative value” claim.[17]

In Myska, the named plaintiffs’ claims were worth $14,399 and $17,524.[18] The Appellate Division rejected as unfounded the suggestion that the size of these losses was too small to warrant an individual lawsuit.

Ascertainability

The ascertainability requirement – whether individuals fitting the class definition may be identified without resort to mini-trials – has been the subject of considerable controversy recently in the federal courts. In Marcus v. BMW of N. Am., LLC,[19] and then again in Carrera v. Bayer Corp.,[20] 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.[21] 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.[22]

Some federal district courts in other Circuits have criticized these Third Circuit decisions, positing that “if class actions could be defeated because membership was difficult to ascertain at the class certification stage, there would be no such thing as a consumer class action.”[23] In Daniels v. Hollister,[24] the Appellate Division held, rather emphatically, that “ascertainability” must play no role in considering the certification of a low-value consumer class action” in the state courts of New Jersey.[25]

Daniels involved claims that the defendant clothing retailer conducted a promotion by which customers purchasing at least $75 of merchandise were given a $25 gift card for use in its stores and on its website.[26] The plaintiff alleged that, even though the gift cards had no expiration date on their face, the defendant imposed such a date after the fact, voiding all outstanding cards on January 30, 2010. [27] Rejecting the defendant’s argument that the class was unascertainable, the Appellate Division stated first that “[New Jersey state] courts have never viewed [the state’s class action rule] as requiring that a class be ‘ascertainable’ as a condition for certification.”[28] In so holding, the court distinguished the ascertainability requirement from the requirement that a class be properly defined.[29] In answer to the question of whether New Jersey courts should adopt such a requirement in light of recent developments in the Third Circuit, the panel noted that “federal experimentation with the ascertainability doctrine seems far from over.”[30] Only a few Circuits had expressly adopted such a requirement,[31] and the law in the Third Circuit “appear[ed] quite unsettled.”[32] These factors aside, the Court noted its agreement with the dissenting judges in Carrera that the inflexible application of the ascertainability concept “serves to burden or eliminate nascent class actions without providing any societal benefit.”[33] This was particularly so in cases of negative value. The application of the doctrine was even more misguided when the difficulties encountered in identifying class members were a consequence of the defendant’s own actions.[34] In Daniels, the panel held that the defendant could have obtained the identities of the consumers to whom it issued the gift cards but failed.[35] The Third Circuit’s experiences suggested that “the doctrine is practically unworkable in application and is being exploited by defendants in unsuitable cases to evade liability.”[36] In a final salvo, the Court stated that “allowing a defendant to escape responsibility for its alleged wrongdoing by dint of its particular recordkeeping policies” – an outcome the panel described as “admittedly un-troubling to some federal courts” – was “not in harmony with … principles governing class actions.”[37]

While Daniels opinion centered on ascertainability, the defendant also argued that the identification of class members created issues of manageability. The Appellate Division gave this concern short shrift, describing it as “at most a matter of concern at the claims administration stage, not a ground for rejecting class certification.”[38] It based this conclusion in part on the fact that some class members were still in possession of the voided gift cards.   However, it also held that other class members (i.e., those who discarded the gift card because they were told that they were void) could prove their class membership “through submission of an affidavit.”[39] Significantly, the Court offered no opinion on how such a process could be undertaken consistent with the defendant’s due process rights.[40]

Interlocutory Appeal of Class Certification Rulings

Federal Rule 23 was amended in 1998 to permit discretionary appeals from class certification decisions. Such an amendment was considered unnecessary in New Jersey, which already had a provision for discretionary appeals of interlocutory orders “in the interests of justice.”[41] While there are no published statistics concerning the percentage of class certification rulings accepted on interlocutory appeal, decisions to grant appellate review are relatively frequent.

In Daniels, the Appellate Division announced for the first time the standards that will govern the grant of interlocutory appellate review going forward. The Court will ”liberally indulge” applications for leave to appeal: (1) “when a denial of class status effectively ends the case (because, for example, the named plaintiff’s claim is not of a sufficient magnitude to warrant the costs of stand-alone litigation)”; (2) “when the grant of class status raises the stakes of the litigation so substantially that the defendant likely will feel irresistible pressure to settle”; and (3) when permitting leave to appeal “will lead to a clarification of a fundamental issue of law.”[42]

Impact on Future Cases

These decisions have significant importance for putative class actions filed in New Jersey’s state courts. Myska is likely to lead to more frequent motions to dismiss class action allegations. However, as federal trial courts have observed,[43] it is the unusual case in which such motions will be granted. In fact, such motions are even less likely to succeed in the state courts, which apply more liberal standards to dismissal motions.[44] A premature motion also invites error in cases where discovery is necessary for the court to conduct the “rigorous analysis” required under N.J. Ct. R. 4:32-1.[45]

The observations of the Myska court on “negative value” lawsuits provide a welcome guidepost for future cases, although it can still be argued that the benchmark should be set lower still. Claims worth $5, $6 or $10,000 are worth pursuing individually. Indeed, such claims are pursued every day in New Jersey’s small claims courts.

Another welcome development is the promulgation in Daniels of clear standards against which applications for interlocutory appellate review of class certification decisions will be measured. These standards, modeled on federal circuit decisions interpreting Federal Rule 23(f),[46] clarify what was previously an unclear area of class certification law here in New Jersey.

Finally, the Daniels court’s ruling on ascertainability is not altogether surprising, although the somewhat sharp tone of the opinion will strike some as unfortunate. While ascertainability is not now a requirement for class certification in the state courts, an identifiable class remains a prerequisite.[47] The question of whether a class that is not ascertainable can nevertheless be identifiable is likely to provide the battlefield for the next round of class certification duels. That, and the unanswered question of what happens to the defendant’s due process right to challenge potentially self-serving affidavits used to establish class membership.[48]

 Notes:

[1] Myska v. N.J. Mfrs. Ins. Co., 2015 WL 21300870 (N.J. Super. Ct., App. Div., May 8, 2015).

[2] Daniels v. Hollister Co., 2014 WL 8808428 (N.J. Super. Ct., App. Div., May 13, 2015).

[3] Only published opinions are precedential. See N.J. Ct. R. 1:36-3 (“No unpublished opinion shall constitute precedent or be binding upon any court”).

[4] See, e.g., Landsman & Funk PC v. Skinder-Strauss Assoc., 640 F.3d 72, 93 (3d Cir. 2011) (class certification ruling “premature” where there had been no motion for class certification and no discovery); McGuire v. BMW of N. Am., LLC, 2014 WL 2566132, at *4 (D.N.J. June 6, 2014) (“Dismissal of class claims prior to discovery and a motion to certify the class by plaintiff is … almost uniformly disfavored”). But see, e.g., Piemonte v. Viking Range, LLC, 2015 WL 519144, at *4 (D.N.J. Feb. 9, 2015) (granting motion to dismiss class action allegations for failure to adequately plead predominance); Himmelman v. Cont’l Cas. Co., 2006 WL 2347873, at *2 (D.N.J. Aug. 11, 2006) (“[a] defendant may move to strike class action allegations prior to discovery in those rare cases where the complaint itself demonstrates that the requirements for maintaining a class action cannot be met”).

[5] Myska, 2015 WL 21300870, at *8-9.

[6] Id. at *2.

[7] Id. at *2.

[8] Id. at *5.

[9] Id. The trial judge noted, by way of illustration, that one insurer did not in fact deny the plaintiff’s claims, but rather requested additional proof to quantify the alleged loss.

[10] Id. The trial judge noted, by way of illustration, that one insurer did not in fact deny the plaintiff’s claims, but rather requested additional proof to quantify the alleged loss.

[11] Id. at *6-7, *9.

[12] Id. at *10.

[13] Id.

[14] Id. at *11.

[15] Id.

[16] Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 115 (2007).

[17] See, e.g., Clark v. Bally’s Park Place, Inc., 298 F.R.D. 188, 202 (D.N.J. 2014) (claims worth “a few thousand dollars each” not worth pursuing individually); Cima v. WellPoint Health Networks, Inc., 250 F.R.D. 374, 388 (S.D. Ill. 2008) (claims worth tens of thousands of dollars not “negative value” suits).

[18] Myska, 2015 WL 21300870, at *11.

[19] 687 F.3d 583 (3d Cir. 2012).

[20] 727 F.3d 300 (3d Cir. 2013)

[21] Marcus, 687 F.3d at 593-94; Carrera, 727 F.3d at 308-09.

[22] Carrera, 727 F.3d at 309. More recently in Hayes v. Wal-Mart Stores, Inc., 725 F.3d 349 (3d Cir. 2013), the Third Circuit 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.” Id. at 356.

[23] See, e.g., Rahman v. Mott’s LLP, 2014 WL 6815779, at *4 (N.D. Cal. Dec. 3, 2014); Astiana v. Kashi Co., 291 F.R.D. 493, 500 (S.D. Cal. 2013); see also McCrary v. Elations Co., LLC, 2014 WL 1779243, at *8 (C.D. Cal. Jan. 13, 2014) (“While this may now be the law in the Third Circuit, it is not currently the law in the Ninth Circuit”); Bezdek v. Vibram USA Inc., 2015 WL 223786, at *7 n.11 (D. Mass. Jan. 16, 2015) (“the law in the First Circuit does not dictate rejection of such a class”).

[24] 2014 WL 8808428.

[25] Id. at *1 (emphasis added).

[26] Id.

[27] Id.

[28] Id. at *3.

[29] Id. In Iliadis, the New Jersey Supreme Court held that “the proposed class may not be amorphous, vague, or indeterminate and it must be administratively feasible to determine whether a given individual is a member of the class.” 191 N.J. at 106 n.2.

[30] Id. at *4 n.4.

[31] In addition to the Third Circuit decisions in Marcus, Carrera and Hayes, the Appellate Division cited EQT Prod. Co. v. Adair, 764 F.3d 347, 358–59 (4th Cir. 2014); Little v. T–Mobile U.S.A., Inc., 691 F.3d 1302, 1304 (11th Cir. 2012); John v. Nat’l Sec. Fire & Cas. Co., 501 F.3d 443, 445 (5th Cir. 2007); In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 30 (2d Cir. 2006). Daniels, 2014 WL 8808428 at 4 n.4.

[32] Id. at *4.

[33] Id.

[34] Id. at *5.

[35] Id. at *5.

[36] Id.

[37] Id.

[38] Id. at 6.

[39] Id.

[40] See, e.g., Marcus, 687 F.3d at 594 (“Forcing BMW and Bridgestone to accept as true absent persons’ declarations that they are members of the class, without further indicia of reliability, would have serious due process implications”); Carrera, 727 F.3d at 307 (“defendant has … due process right to challenge the proof used to demonstrate class membership as it does to challenge the elements of a plaintiff’s claim”).

[41] N.J. Court Rule 2:2–4.

[42] Daniels, 2014 WL 8808428, at *1 n.1.

[43] See, e.g., 6803 Blvd. E., LLC v. DIRECTV, Inc., 2012 WL 3133680, at *1 (D.N.J. July 31, 2012); Himmelman, 2006 WL 2347873, at *2.

[44] As the Myska court itself noted, “courts must liberally view class allegations and allow reasonable inferences to be gleaned from the complaint’s allegations and search for a possible basis for class relief so as to avoid premature dismissals. 2015 WL 21300870, at *8 (citing Lee v. Carter–Reed Co., 203 N.J. 496, 506-07, 518 (2010)).

[45] Myska, 2015 WL 21300870, at *6.

[46] The court cited the decisions of the First and Seventh Circuits in Waste Mgmt. Holdings, Inc. v. Mowbray, 208 F.3d 288 (1st Cir. 2000) and Blair v. Equifax Check Servs., Inc., 181 F.3d 832 (7th Cir. 1999). Daniels, 2014 WL 8808428, at *1 n.1.

[47] Daniels, 2014 WL 8808428, at *3. As the Iliadis court noted, “the proposed class may not be amorphous, vague, or indeterminate and it must be administratively feasible to determine whether a given individual is a member of the class.” 191 N.J. at 106 n.2.

[48] See, e.g., Goldberg v. Kelly, 397 U.S. 254, 269 (1970) (“In almost every setting where important decisions turn on questions of fact, due process requires an opportunity to confront and cross-examine adverse witnesses”); Carroll v. Cellco P’Ship, 313 N.J. Super. 488, 501 (rejecting proposed certification, noting that “defendant’s right to cross-examine each plaintiff could not be protected in such a class action”).