Navigating New Roads: Prevailing Trends in Consumer Product

Navigating New Roads: Prevailing Trends in Consumer Product Litigation

Webinar | May 16, 2012

Speakers:

Neal WaltersBallard Spahr LLP

Justice Roberto Rivera-SotoBallard Spahr LLP

Dr. Bruce A. SrombomAnalysis Group, Inc.Michael R. CarrollBallard Spahr LLP

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Speakers – Neal Walters

• Partner at Ballard Spahr LLP and head of its Product Liability and Mass Tort Group

• Defends consumer product class actions

• Tried two consumer product class actions to jury verdict

• Experience addressing some of the unique developments that occur later in a class action, including post-trial decertification of a class and complex issues surrounding post trial claims proceedings

• Substantial experience counseling clients on product and class-action-related risks before they reach litigation, including regulatory, advertising and risk management

• Graduate of Rutgers College and Rutgers School of Law

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Speakers – Michael Carroll

• Associate at Ballard Spahr LLP

• Litigates complex commercial and product liability matters, including class actions, with an emphasis on consumer products

• Manages complex issues, including attacks on the pleadings, manages discovery, develops class certification strategies, litigates post-certification and post-trial claims, and counsels on pre-litigation risk management strategies

• Significant experience with regulatory issues facing drug and medical device companies in litigation

• Graduate of The College of New Jersey and Rutgers, The State University of New Jersey School of Law-Camden

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Speakers – Bruce Strombom, Ph.D.

• Managing Principal at Analysis Group, Inc.

• Expert in applied microeconomics, industrial organization, finance and quantitative/statistical methods

• Has provided expert testimony on class certification, liability and damages issues in more than 50 cases

• Experience in antitrust, intellectual property, labor and employment, securities, product defects, contract disputes and complex commercial litigation

• Significant experience in the automotive, shipping, health care,insurance, mortgage lending, and real estate industries

• Ph.D. in economics from University of California, Irvine

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Speakers – Justice Roberto Rivera-Soto

• After serving a seven-year term as Justice of the Supreme Court of New Jersey, Justice Rivera-Soto returned to the practice of law, joining Ballard Spahr LLP as a litigation partner

• Prior to his service on the Court, he was a partner in a national law firm, and had been general counsel of two major gaming and entertainment companies

• Started his career as an Assistant United States Attorney assigned to the Criminal Division of the U.S. Attorney's Office in Philadelphia, Pennsylvania. During his career, he has received anumber of awards and is a Fellow of the American Bar Foundation

• Graduate of Haverford College and Cornell University School of Law

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Introduction

Overview

Prevailing Trends

The Expert on Economic Damages

AppellateIssues

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Consumer Class Actions – Background

• Calls for increased consumer protection lead to “Little FTC Acts” in 1960s and 1970s

• Originally designed to enable attorneys general to prosecute and enjoin unfair trade practices

• Amended to enable private rights of action, including class actions, without imposing traditional common law requirements (e.g., reliance, privity)

• Interpreted broadly to provide generous remedies under ill-defined standards

• Result: Expansive litigation unrelated to its original purpose

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• Automobiles

• Electronics

• Appliances

• Foods

• Medical Devices

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Why Consumer Product Companies?

• Mass distribution of product with same design + mass distribution of similar literature = attractive ROI for class counsel

• Robust warranty programs or regulatory reporting requirements means substantial data on product performance, complaints, and service

• Opportunity for settlements with significant non-monetary relief allowing for creative valuation to support fees

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Elements of Consumer Claim

• Unlawful or unfair trade practice- Untruthful, materially inaccurate or misleading description of the

product and its capabilities

- Omission about a product defect or limitation

• Reliance or Causation- Significant jurisdictional variability; one of the most contested

issues in consumer product class actions

• Damages (e.g. ascertainable loss)

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• CAFA (and Rule 23(f)) reign in abuse and create substantial body of federal class action law

• Prevailing Issues:- Rigorous analysis, from Falcon to Dukes

- Daubert-lite review

- Arbitration provisions

- Article III standing

- Aggregate damages

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Prevailing Issue: Rigorous Analysis

• Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) vs. General Telephone Co. v. Falcon, 457 U.S. 147 (1982)- Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975) (citing Eisen for

proposition that merits inquiry not permitted for certification determination)

- In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008) (holding that court must resolve all factual or legal disputes relevant to class certification even if they overlap with the merits)

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• Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011): confirmed and reinforced rigorous analysis- Revived commonality element

• “What matters to class certification … is not the raising of common ‘questions’ – even in droves – but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.”

- Nod in support of Daubert analysis

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• Strategic impact- Dukes/Peroxide team naturally with Twombly and Iqbal to

support more detailed scrutiny throughout pre-certification period

- Motions to dismiss/strike• Insufficient pleadings (Alban v. BMW, 2011 WL 900114 (D.N.J.

March 15, 2011))

• Choice of law (In re OnStar Contract Litig., 278 F.R.D. 352 (E.D.Mich. 2011))

- Motion to deny class certification (Vinole v. Countrywide Home Loans, Inc., 571 F.3d 935 (9th Cir. 2009))

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Prevailing Issue: Expert Scrutiny

• Rigorous analysis includes expert evidence- American Honda Motor Co., Inc. v. Allen, 600 F.3d 813, 814 (7th

Cir. 2010): “[T]he district court must perform a full Daubert analysis before certifying the class if the situation warrants.”

- Other Circuits have taken more restrictive approach. See In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124 (2d Cir. 2001) (stating that motion to strike under Daubert involves inquiry distinct from that applicable to class certification)

- Pro-Daubert position bolstered by Dukes

• Consumer behavior experts can be critical

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Consumer Purchase Decision Model

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Rigorous Analysis: What does it all mean?

• Initial class certification decisions made upon a more robust record

• Bifurcation may become more difficult as rigorous analysis chips away at practical benefit

• Decertification could be more difficult

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Prevailing Issue: Arbitration

• FAA vs. state law - FAA: arbitration agreements “shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or equity for the revocation of any contract”

- State law: class action waivers in arbitration agreements are unconscionable as a matter of state law

• AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011)- State law unconscionability rulings create scheme inconsistent

with, and thus preempted by the FAA

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Prevailing Issue: Standing

• Key issues: Exposure and Manifestation- Named plaintiff(s) must have been exposed to advertising or

manifested alleged defect. See In re Zurn Pex Plumbing Prod. Liab. Litig., 644 F.3d 604 (8th Cir. 2011) (“[P]laintiffs must allege that their product actually exhibited the alleged defect.”)

- Absent class member confusion• “[N]amed plaintiff cannot represent a class of persons who lack the

ability to bring the suit themselves.” Avritt v. Reliastar Life Insurance Co., 615 F.3d 1023 (8th Cir. 2010)

• “[S]tanding is satisfied if at least one named plaintiff meets the requirements.” Stearns v. Ticketmaster, 655 F.3d 1013 (9th Cir. 2011).

- In re Toyota Unintended Acceleration Litig.

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Prevailing Issue: Standing

• In Re: Toyota Motor Corp. Unintended Acceleration Marketing, Sales Practices, and Prod. Liab. Litig., No. 8:10ML 02151 (C.D.Ca.)

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Prevailing Issue: Aggregate Damages

• Individual damages claims generally small and many consumers may not have been impacted at all

• Class counsel resort to average or aggregate damages

• BUT: Question of methodology is separate from existenceof damages to every class member See, e.g., Muise v. GPU, Inc., 851 A.2d 799 (N.J.Super. App. Div. 2004)

• Battle of the experts

BOSTON CHICAGO DALLAS DENVER LOS ANGELES MENLO PARK MONTREAL NEW YORK SAN FRANCISCO WASHINGTON

Class Certification Damages Theories: Consumers’ Valuation of Product Attributes

Presented by Bruce Strombom, Ph.D.


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Changing Standards for Determining Whether Requirements of Rule 23 Have Been Satisfied

“Threshold showing” that Rule 23 requirements have been met is no longer sufficient

Merits issues must be resolved, to the extent they touch on Rule 23 requirements

“Battle of the experts” may be unavoidable

Greater emphasis on evaluating

– Commonality

– Predominance

May 16, 2012


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Key Questions for Certification of the Class

May 16, 2012

1. Can class-wide injury be shown using a common method of proof?

2. Is the same evidence sufficient for each member, or will the class need to present evidence that varies from member to member?

3. Is there a common method of proof that harm, however measured, resulted from the defendant’s alleged wrongdoing?


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Consumer Product Litigation – Common Damages Concepts

May 16, 2012

1. Incremental costs incurred due to the defect

2. Cost to cure the defect

‒ Repair

‒ Replacement

3. Diminution in value

‒ When defect is revealed

‒ At time of purchase: value as represented v. value as delivered


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Economics of Consumer Goods

May 16, 2012

Complex consumer goods may be viewed as bundles of attributes orcharacteristics1

For standardized products (in contrast to customized products), the price of specific attributes may not be observed

Not all consumers place the same value on each product attribute

1) See for example Kelvin J. Lancaster, “A New Approach to Consumer Theory,” Journal of Political Economy 74 (1966), pp. 132-57, and Sherwin Rosen, “Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition,” Journal of Political Economy 82, (1974), pp. 34-55.


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Valuation of Product Attributes May Vary Across Consumers

May 16, 2012

A B CAir Conditioning 2,000 2,500 500Turbo 5,000 2,000 -1,000Domestic 1,500 0 500Automatic Transmission 2,000 2,000 2,500All Other Attributes 19,000 18,000 19,000Reservation Price 29,500 24,500 21,500

Market Price 25,000 25,000 25,000

Consumer

Valuation of Vehicle Attributes


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Determining the Value of a Product Attribute – Hedonic Regression

May 16, 2012

Vehicle price = Function of:

– Continuous attributes (e.g., Horse Power/Weight, Size, MPG)

– Discrete attributes (e.g., Air, Turbo, Domestic, Automatic)

– All other (unmeasured) attributes of the vehicle

– A disturbance term – unexplained differences in price should be small and random

The hedonic price of an attribute is a measure of the average effect of the attribute on the price of a vehicle.


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Hedonic Regression – Advantages

May 16, 2012

Accepted scientific methodology with determinable error rates and statistical properties

May be based on actual transaction prices

May allow estimation of “prices” for attributes that are not priced separately

May improve on simple price comparisons (e.g., benchmarks) by controlling for other factors that may influence prices


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Hedonic Regression – Limitations

May 16, 2012

Class certification stage: offering an actual model may be required rather than opining that one could be estimated

Data intensive: available data may not support estimation of the model

Tests of robustness are required because results may be sensitive to model specification

‒ Choice of explanatory variables

‒ Choice of functional form

Assumptions underlying the statistical model must be met

– Omitted variable bias

– Multicolinearity

– Heteroskedasticity


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Hedonic Regression – Results as Proof of Common Impact

May 16, 2012

Standard hedonic specification assumes, rather than tests, that there is a common price paid for the attribute

Hedonic prices measure average effects across all consumers and transactions

In fact, valuations may vary:

‒ Over time, across geographic markets, between brands, across channels of distribution (i.e., may fail macro-commonality test)

‒ Across individual class members (i.e., may fail micro-commonality test)

A positive and statistically significant hedonic price does not establish that:

– All class members valued the attribute equally

– All, or even most, class members placed any value on the attribute


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Implementation of Macro-Commonality Test

May 12, 2010

$0

One-Size-Fits-All Estimate of

Average Price

Sub-Group 1 Estimate of

Average Price

Sub-Group 2 Estimate of

Average Price

Estimate of Average

Price


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Conjoint Analysis – An Alternative or Complement to Hedonic Regression

May 16, 2012

Relies on sampling and survey techniques to value combinations of product attributes from which the values of separate features may be derived

Revealed preferences (e.g., hedonic regression) versus stated preferences (e.g., conjoint analysis)

May provide direct evidence on customer heterogeneity to assess numerosity, commonality and conflict

Advantages

– May be used when data for hedonic regression are not available

– May test combinations of attributes that do not exist

Disadvantages

– Sampling and survey techniques may be subject to criticism

– Based on stated preferences, not actual transactions


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About Analysis Group

May 16, 2012

Analysis Group is the largest privately held economic consulting firm in North America

For over 30 years, we have provided economic and financial analysis and consulting services to a global client base, including law firms, corporations, industry associations, and government agencies

Our staff consists of 550 professionals, many with advanced degrees in economics, finance, accounting, management, or law, in offices across North America – Boston, Chicago, Dallas, Denver, Los Angeles, Menlo Park, Montreal, New York, San Francisco, and Washington, D.C.

We work closely with a network of affiliated experts from leading academic institutions, industry, and government

We have extensive experience in matters involving the coordination and management of large, complex litigations where consistency in approach, detail, and quality across numerous deliverables is critical

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Appellate Issues: Background

• What are the options upon an adverse class certification decision?

• To the plaintiff, the denial of class certification is alleged to be the death knell of the case, removing the incentive to pursue larger recovery, by leaving only a single or several individual claims

• To the defendant, the grant of class certification is akin to a final judgment as to all issues, placing immense pressure on the defendant to settle given the large number of claims to be considered in one venue

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Appellate Issues: Strategy and Choices

• Is the best choice an interlocutory appeal, or to further develop the trial court record in hopes that more specific facts will demonstrate that class certification is improper?

• States and federal courts continue to look at the efficacy of interlocutory review differently. FRCP 23(f) continues to be construed more liberally in favor of review

• While state courts do recognize that class actions are perhaps more deserving of interlocutory review, a state court on average is still far less likely than a federal court to grant a motion for leave on class certification

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Appellate Issues: Is this the right case?

• Are there issues below sufficiently developed to enable the appellate court to clearly address the basis for appeal?

• Timing: do you want to chance the interim findings associated with interlocutory review or do you want to preserve the issue for an appeal on the merits?

• Be careful what you ask for; you just might get it!

• Consumer product cases often raise class certification issues, which complicated the interplay with the merits on appeal

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• The Third Circuit confirmed that a court shall apply the rigorous scrutiny standard of review to class certification decisions

• Courts are to weigh the evidence proffered in support and opposition to class certification

• This may require mini-Daubert challenges to the parties’experts at the class certification stage

In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008)

Peroxide Changed Things

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Peroxide’s Impact on Consumer Claims

• Many courts will be making the initial class certification decision upon a fuller record

• Consequently, appellate courts may show greater deference to the trial court’s decision

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ExpertsRep DepositionsClass

Written DiscoveryPleadings

Appeal: Is the Bathtub Too Full?

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Peroxide and Product Evidence

• With a fuller class certification record on consumer issues, there may be more merits evidence about the product and the individual consumer, including:

- More information about testing and statistics;

- A greater consideration of the advertising and marketing at issue;

- More evidence about absent class members; and

- A greater scrutiny of the merits of all experts opinions;

Thank You

Neal Walters, Partner, Ballard Spahr LLP856.761.3438 | [email protected]

Justice A. Roberto Rivera-Soto, Partner, Ballard Spahr LLP856.761.3416 | [email protected]

Dr. Bruce A. Srombom, Managing Principal, Analysis Group, Inc.213.896.4520 | [email protected]

Michael R. Carroll, Associate, Ballard Spahr LLP856.761.3452 | [email protected]

Documents

Navigating New Roads: Prevailing Trends in Consumer Product