Class Certification of Consumer Protection Claims against Franchisors

January 1, 2012 Published Work
Distribution - The Newsletter of the Distribution and Franchising Committee, Antitrust Section, American Bar Association, Vol. 16, No. 1

One of the basic principles of franchising is uniformity: consistency in operating procedures, product offerings, and advertising creates the brand recognition and reputation necessary to drive consumers to patronize franchise locations. Similarly, the decision whether to certify a class—the defining moment of virtually all class action cases1—often hinges on whether the named plaintiffs can show that Federal Rule of Civil Procedure 23(b)(3)'s requirement that "questions of law or fact common to class members predominate over any questions affecting only individual members" is met.2 And in consumer fraud class actions, this predominance inquiry usually focuses on whether (1) representations to the consumer are sufficiently uniform,3 (2) potential class members bought a product for the same reason,4 and (3) material variations exist in the laws that will govern each class member's claim.5 Because the uniformity of a franchise system appears, at first blush, to suggest that these inquiries will show that common questions predominate, a fair inference is that plaintiffs will often succeed in getting courts to grant class certification in consumer fraud cases against franchisors. In reality, in a number of recent cases, federal district courts have refused to certify consumer fraud class claims against franchisors. This article will discuss these cases and then summarize the lessons they provide for franchisors opposing class certification.

I. Recent Cases Denying Certification

In Marshall v. H&R Block Tax Services, Inc.,6 the United States District Court for the Southern District of Illinois denied the plaintiffs' motion to certify a class of consumers from eleven states who had purchased a "Piece of Mind" guarantee ("POM") from any H&R Block location after January 1, 1997. POM was an extended warranty that H&R Block sold to its customers where it agreed to pay a customer's additional tax liability if that liability resulted from an error by H&R Block. Plaintiffs alleged that H&R Block improperly failed to disclose that POM actually had little value because the simplicity of most customer's tax returns made the risk of an error resulting in additional taxes "remote."7 Specifically, Plaintiffs claimed that H&R Block should have disclosed to class members the likelihood that they would have a POM claim based on their individual circumstances (i.e., gross adjusted income, complexity of tax return), that the median amount of a POM claim was a little over $1,000, and that tax preparers received a commission for selling POM.8

The district court found that the plaintiffs had not shown that either common issues of law or fact predominated over individual issues. Common issues of law did not predominate because the consumer protection statutes of the eleven states at issue differed in their legal requirements for proximate causation, proving reliance, intent to deceive, the measure of damages, and the length of the applicable limitations period. After cataloging these variations, the court concluded that these differences demonstrated that certification would not be manageable due to "the multiple and different variables that would have to be proved for each member."9

The district court then explained that the common issues of fact did not predominate for three reasons. First, it noted that the plaintiffs had ignored that there was a lack of uniformity between franchisees and company owned stores in the sale of POM. Specifically, the franchisees, as independently owned businesses, were not required to sell POM at all or to use the software prompting the sale of POM until 1999. Franchisees and company owned stores would also require a different damage calculation method because franchisees only paid a flat royalty for sales of POM. In addition, there was nothing in the record indicating that franchisees paid their tax preparers commissions for selling POM.10 Second, plaintiffs could not show that each class member heard or saw any representations about POM. While there was a system in the tax preparation software that prompted the tax preparer to discuss POM with customers, the script varied by year and was meant to facilitate a conversation between the customer and tax preparer—an obviously individualized event.11 Finally, the district court noted that the reasons why customers may have purchased POM were inherently individualized: some customers may simply be risk adverse, others may have past experience with audits, and others may have unique tax issues that increased the risk of an IRS audit.12

Similarly, in Schmidt v. Bassett Furniture Industries,13 the United States District Court for the Eastern District of Wisconsin denied certification of a class of consumers who had purchased furniture during a liquidation sale at a Bassett licensed dealer that was never delivered to them. Plaintiffs alleged that David Ewald Enterprises ("Ewald"), a licensed Bassett dealer that operated a Bassett Direct store, experienced significant financial problems that caused Bassett to force Ewald to liquidate its inventory to repay its debts to Bassett. During the liquidation sale, which was run by a third party liquidator, some customers placed orders for Bassett furniture to be delivered at a later date, but that this furniture was never delivered because Ewald—with Bassett's alleged approval—used the order money to repay its debts to Bassett instead. Plaintiffs alleged that Bassett had breached the sales contract (under an agency theory), had violated the Wisconsin Deceptive Trade Practices Act, and committed fraud.14

The district court concluded that individualized issues would predominate on plaintiffs' breach of contract claims. To establish liability, plaintiffs had to show that Ewald was Bassett's apparent agent, which would require proof that each class member reasonably believed that Ewald was Bassett's agent.15 But there was no way for the court to make this determination on a class wide basis—whether a class member entered the store knowing that Ewald was an independent business or merely entered because he recognized Bassett's brand name was inherently individualized.

Plaintiffs' deceptive trade practice claim failed for the same reason. Plaintiffs' theory was that the Bassett sign outside the store and "other indicia of agency" improperly caused consumers to believe they were dealing directly with Bassett.16 But like the breach of contract claim, this theory required inherently individualized inquiries into if the class members were even aware of what brand of furniture they were buying, if they even saw the signs or "other indicia" of agency before purchasing, and whether Bassett's representations caused a particular class member to make a deposit on a particular piece of furniture.17

Finally, plaintiffs' fraud claim suffered the same fate. The court found that while there were some common representations to consumers, including the signs on the buildings and the order forms used for furniture purchases, the representations as a whole were not the susceptible to common proof because defendants had put forth evidence showing that different salespeople made different representations to different customers during different purchases.18

In Thompson v. Jiffy Lube International, Inc.,19 the existence of a franchise system played a large role in the United States District Court for the District of Kansas' decision to deny the plaintiff's motion for class certification. There the plaintiff, on behalf of a nationwide putative class, alleged that Jiffy Lube had violated state consumer protection laws because Jiffy Lube technicians made misleading recommendations about maintenance the plaintiff's car needed and sold her unnecessary services. The plaintiff asserted that Jiffy Lube was liable under an agency theory for the actions of its franchisees and technicians.

The district court denied plaintiff's motion for class certification. After briefly discussing how the presence of varying, oral representations meant that the plaintiff had not satisfied Rule 23(a)(2)'s commonality requirement,20 the district court focused the majority of its discussion on how the plaintiff did not satisfy Rule 23's typicality requirement, which requires plaintiff to have claims or defenses that "are typical of the claims or defenses of the class."22 The court explained that because plaintiff had visited a franchise location instead of a company owned store, the plaintiff's claims had "several unique characteristics." This fact was important because plaintiff could be subject to defenses "arising from the agency relationship" that would not apply to class members who visited the company stores. The court highlighted that unlike claims arising for events at company owned stores, plaintiff's claims would depend on whether she could show that Jiffy Lube had "control over the specific aspect of a franchisee's business that caused harm" or if Jiffy Lube demonstrated that "the conduct at issue was controlled by the franchisee."23 Plaintiff also could not satisfy the typicality requirement because some of her claims occurred before Jiffy Lube franchisees began using a computer program that purportedly was used to make improper service recommendations, and the franchise that she visited in fact used a different program.24

Finally, in Martinelli v. Petland, Inc.,25 the plaintiffs attempted (unsuccessfully) to use the existence of a franchise system to demonstrate common proof of causation existed so that their proposed class would satisfy Rule 23(b)(3). Plaintiffs alleged that they bought puppies from Petland, a pet store having both company owned and franchise locations, that were either sick at the time of purchase or became ill soon thereafter. They claimed that Petland misled them into purchasing the puppies because it had represented that the puppies were bred under "safe and humane conditions by a reputable breeder," even though the puppies were actually bred at a "puppy mill"—breeding facilities that disregard the health of dogs in order to maximize profits.26 Although the complaint had asserted a number of causes of actions, when plaintiffs moved for class certification, only claims under the Racketeer Influenced and Corrupt Organization's Act ("RICO"), the Maine Unfair Trade Practices Act, and for unjust enrichment remained. The proposed class included any person that had purchased a puppy from Petland that was supplied by a breeder that Petland had not previously inspected.

The district court denied class certification because the proposed class "clearly fail[ed]" Rule 23(b)(3)'s predominance requirement.27 The district court first concluded that under plaintiff's legal theories, "this is a case where proof of reliance is a ‘mile post on the road to causation,'"28 and then analyzed whether plaintiffs' first-party or third party reliance theories29 could be the subject of common proof. Like in Marshall and Thompson, the plaintiffs attempted to demonstrate that common proof of causation was possible because of the existence of uniform statements on Petland's website and written brochures to customers about the quality of its puppies. This argument did not come close to convincing the court. Instead, the court highlighted the fact that plaintiffs had not shown how class members that never saw the supposedly fraudulent representations could have relied on them, and that the eight declarations plaintiffs had submitted from class members showed that each had "received and relied on oral representations."30 And the court went onto to note that class members also may have purchased puppies from Petland for a variety of reasons, such as "fall[ing] in love with [the puppy] in the store window," hearing "it will make a good guard dog," or "lik[ing] the price."31

The third-party reliance theory fared no better. Plaintiffs alleged that it could show common proof of reliance because Petland's franchisees had relied on uniform misrepresentations Petland made to them about the quality of breeders it uses and the health of the puppies its suppliers provide. The district court, however, held that plaintiffs would need to show third party reliance on a "franchisee by franchisee basis" because Petland had presented evidence that franchisees make their purchasing decisions on "a host of factors other than what Petland allegedly represents."32 These factors included, among others, the selection, price, and availability of certain puppies; the franchisees' relationship with and proximity to suppliers, and the warranty that various suppliers were willing to provide; and the recommendations other franchisees made about a supplier.

II. Lessons to Franchisors Opposing Class Certification

Although a court's class certification decision in any particular case will always depend on its unique factual circumstances, these cases clearly demonstrate that franchisors have four effective arguments for defeating class certification:

  1. variations in the state laws that apply to the class will inevitability make the case unmanageable;
  2. even if there are some standard representations made to the public, the variations that occur due to oral conversations or the circumstances at a particular franchise make it nearly impossible to demonstrate with common proof that each class member heard, saw, or relied upon the same representations;
  3. the different reasons consumers may choose to purchase a product make common proof of causation impossible; and
  4. consumers actually make their purchases from franchisees. This fact creates individualized issues, such as was the franchisee acting as the apparent agent of a franchisor in any given situation, which prevent that plaintiffs from demonstrating that common questions predominate.

While only time will tell if courts will continue to refuse to certify classes in consumer in cases against franchisors, these four arguments provide franchisors with a strong arsenal for opposing attempts by consumers to bring class claims against them.

1. In re: Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir. 2008) (citing Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 162 (3d Cir. 2001)).

2. Fed. R. Civ. P. 23(b)(3).

3. See Moore v. Painewebber, Inc., 306 F.3d 1247, 1253-54 (2d Cir. 2002) (explaining that fraud claims are only appropriate candidates for class certification where defendant made uniform misrepresentations to class); In re Ferrero Litig., No. 11-cv-205 H (CAB), 2011 U.S. Dist. LEXIS 131533, at *16-17 (S.D. Cal. Nov. 15, 2011) (holding that common question of whether "Defendant made a material misrepresentation regarding the nutritious benefits of Nutella" which violated California consumer protection laws predominated over individual issues because "any injury suffered by a class member in this case stems from Defendant's common advertising campaign of Nutella.").

4. Compare McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 225-26 (2d Cir. 2008) (refusing to certify a nationwide class alleging violations of RICO due to false statements in advertising claiming light cigarettes were healthier than other cigarettes because each smoker may have chosen light cigarettes for other reasons, like taste, peer pressure, or habit) with In re Nat'l W. Life Ins. Deferred Annuities Litig., 268 F.R.D. 652, 665 (S.D. Cal. 2010) (holding that individual circumstances will not prevent class certification if no rational purchaser, regardless of individual circumstances, would have purchased the product if he had received an adequate disclosure of facts).

5. See, e.g., Pilgrim v. Universal Health Care, LLC, Nos. 10-3211/3475, 2011 U.S. App. LEXIS 22715 (6th Cir. Nov. 10, 2011) (holding that class cannot be certified where consumer protection laws of multiple states will apply); Castano v. Am. Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996) ("In a multi-state class action, variations in state law may swamp any common issues and defeat predominance.").

6. 270 F.R.D. 400 (S.D. Ill. 2010).

7. Id. at 403.

8. Id. at 410.

9. Id.

10. Id. at 410-11.

11. Id.

12. Id. at 412; see also Pelman v. McDonald's Corp., 272 F.R.D. 82, 94 (S.D.N.Y. 2010) (holding that although defendant engaged in common advertising campaign regarding health benefits of its food, individual issues predominated because court could not determine on a class wide basis why any particular person chose to eat at McDonald's); McLaughlin, 522 F.3d at 224 (refusing to presume a "fraud on the market" because "[t]he market for consumer goods, however, is anything but efficient.").

13. No. 08-C-1035, 2011 U.S. Dist. LEXIS 3633 (E.D. Wisc. Jan. 10, 2011).

14. Id. at *2.

15. Id. at *12-14.

16. Id. at *17-18.

17. Id.

18. Id. at *21-22.

19. 250 F.R.D. 607 (D. Kan. 2008).

20. See Fed. R. Civ. P. 23(a)(2) (one requirement necessary to certify a class is that "there are questions of law or fact common to the class."). Although courts have often treated the commonality requirement as a very low hurdle, see, e.g., Keele v. Wexler, 149 F.3d 589, 594 (7th Cir. 1998) (there need only be at least one question or fact common to the class), the Supreme Court's recent decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) suggests that Rule 23(a)(2) requires something more.

21. Fed. R. Civ. P. 23(a)(3).

22. Jiffy Lube, 250 F.R.D. at 623. The district court also held that plaintiff's claims were not typical because the court would need to apply different state law for each class members. Id. at 625-26.

23. Id. at 623.

24. Id.

25. 274 F.R.D. 658 (D. Ariz. 2011).

26. Id. at 660.

27. Id.

28. Id. at 661.

29. Plaintiff's attempt to use a third party reliance theory was a clear response to the Supreme Court's decision in Bridge v. Phoenix Bond Indemnity Company, 553 U.S. 639 (2008) where the Court held that a third-party reliance could be used to demonstrate causation under RICO.

30. Id. at 661-62.

31. Id. at 662.

32. Id. at 664.