UNITED STATES – On July 10, 2015, the Eleventh Circuit Court of Appeals issued a ruling that could cause state legislatures to think twice before seeking to limit the class action rights of consumer plaintiffs. In Lisk v. Lumber One Wood Preserving LLC, No. 14-11714, 2015 U.S. App. LEXIS 11891 (11th Cir. July 10, 2015), the Eleventh Circuit held that Federal Rule of Civil Procedure 23 (“Rule 23”) can permit product liability plaintiffs to bring their state law claims through a federal class action, even where those same claims could only be heard individually in state court. Where a state statute may restrict the right of plaintiffs to bring their claims through a class, the Eleventh Circuit made clear that Rule 23 imposes no such restriction. And in a putative class action brought in federal court under substantive state law – where the class-averse state statute runs headlong into Rule 23 – the Lisk court held that Rule 23 controls.
In Lisk, the plaintiff purchased “treated” wood that allegedly went rotten three years after he installed it on his fence posts. The treated wood manufacturer, however, had warranted through its product label, advertising, and website, that its treated wood remained rot-free for 15 years. When the plaintiff learned from his wood retailer that other customers had complained of the same defect, the plaintiff filed a complaint in federal court on behalf of a nationwide putative class of customers who had purchased the manufacturer’s defectively treated wood.
Plaintiff, a citizen of Alabama, sued the manufacturer, a citizen of Tennessee, as the lone defendant, alleging statutory violations of Alabama Deceptive Trade Practices Act (“ADTPA”) and breach of express warranty under Alabama common law. Although the plaintiff’s individual claim did not exceed the federal courts’ $75,000 threshold for jurisdiction, plaintiff invoked federal jurisdiction under the Class Action Fairness Act (“CAFA”). The defendant, for its part, opposed federal jurisdiction on the basis that the ADTPA provides only that the attorney general of Alabama, or a district attorney, could bring a class action. The district court agreed, and dismissed both claims. Plaintiff then appealed the case to the Eleventh Circuit.
On appeal, it was undisputed that plaintiff’s ADTPA claims – brought as private actions rather than through a public attorney – could not be brought as a state court class action. But the Eleventh Circuit, in taking a diverging view from the lower court, emphasized that this was federal court, where Rule 23 “allows class actions and makes no exception for cases of this kind.” Lisk, at *6-7. Citing the United States’ Supreme Court’s ruling in Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., the Eleventh Circuit held that Rule 23 trumps a “state law prohibition on class actions for claims of this kind.” Id. at *7-15 (citing 559 U.S. 393 (2010)).
In Shady Grove, a New York statute required insurers to pay out claims within 30 days and imposed interest at a set monthly rate for late payments. A separate New York statute followed Rule 23 requirements, but barred class actions for claims seeking statutory penalties – which included the monthly interest within the meaning of the class action statute. After an individual whose claim was paid late filed a putative class action in federal court seeking to recover the statutory interest, the Supreme Court held that Rule 23 governed such that the individual could pursue his class action in federal court notwithstanding the state statute.
The Lisk court, in turn, held that there was “no relevant, meaningful distinction between a statutorily created penalty of the kind at issue in Shady Grove, on the one hand, and a statutorily created claim for deceptive trade practices of the kind at issue here, on the other hand.” 2015 U.S. App. LEXIS 11891, at *6-9. To be sure, the Eleventh Circuit acknowledged the 4-1-4 plurality in certain parts of the Shady Grove decision, but underscored that “all five justices agreed that applying Rule 23 to allow a class action for a statutory penalty created by New York law did not abridge, enlarge, or modify a substantive right; Rule 23 controlled.” Id. at *8-9. The court also acknowledged that “some district courts” have noted that the Alabama class action bar “is part of the ADTPA itself.” Id. at *10 (citing Lisk v. Lumber One Wood Preserving, LLC, 993 F. Supp. 2d 1376, 1383-84 (N.D. Ala. 2014)). But “how a state chooses to organize its statutes affects the analysis not at all.” Id. In language that lauded substance over form, the Eleventh Circuit explained:
Surely the New York legislature could not change the Shady Grove holding simply by reenacting the same provisions as part of the statutory-interest statute … The goal of national uniformity that underlies the federal rules ought not to be sacrificed on so insubstantial a ground. And more importantly, the question of whether a federal rule abridges, enlarges, or modifies a substantive right turns on matters of substance – not on the placement of a statute within a state code.”
Id. at *10-11.
Finally, the Eleventh Circuit took a close look at the Lisk facts to lay plain that a federal class action, if permitted to proceed, would not materially affect either party’s substantive rights. The court noted the manufacturer’s “substantive obligation to make only accurate representations about its product” and the substantive right of plaintiff “and other buyers to obtain wood that complied with [defendant’s] representations, concluding that “Rule 23 alters” the parties’ “substantive rights and obligations not a whit[.]” Id. at *14. After so holding, the court turned to the substantive pleadings under Alabama law and held that the complaint adequately stated a claim under the ADTPA as well as for breach of warranty. Id. at *15-18. Accordingly, the district court’s ruling was reversed by the Eleventh Circuit, allowing the plaintiff, with his Alabama state law claims, to pursue a class action in federal court.
What does Lisk mean for companies looking to avoid U.S. class action litigation? It may portend broader extension of Rule 23 despite state statutes which – as the Eleventh Circuit observed – are passed by state legislatures concerned that class recoveries otherwise “may go too far.” Id. at *9. If other federal circuits follow the Eleventh’s lead, companies worldwide doing business in the U.S. should be careful not to take too much heed in state legislation that purports to provide safe harbor from unwieldy, consumer-driven class action suits. Companies should beware that federal judges, and not state legislators, have the last word on whether those suits belong in their courtrooms; and those judges, following the lead of the Eleventh Circuit, may find that Rule 23 allows them to keep them there in spite of business-friendly state laws.