In a case closely watched by corporations and the class action bar, on May 29, 2014, the California Supreme Court issued its decision in Duran v. U.S. Bank, N.A., 59 Cal. 4th 1 (2014). Although it was an employment law dispute, Duran has implications for class actions in California state court (and perhaps in federal court as well), including those asserted against financial services defendants.
Some had hoped that Duran would bar the use of statistical sampling in class actions completely. While it did not go that far and therefore has received mixed reviews from the defense bar, the decision could provide lenders and mortgage servicers with some very powerful weapons to defeat class certification by its emphasis on points that, while not new, are now made more potent by the Supreme Court’s discussion. Most fundamentally, Duran stands for the proposition that defendants have a due process right to litigate their affirmative defenses under the substantive law at issue, and that this right cannot be curtailed for convenience. Duran may be very useful to defendants facing trial court judges who, before, may have assumed that any individualized issues raised by such defenses were secondary or even irrelevant at the class certification stage. In addition, because so few class actions actually make it to trial, courts sometimes treat trial “manageability” concerns as mere hypotheticals – Duran emphasizes that they are not and that such concerns must be treated seriously by trial courts, both at the class certification stage and after.
Duran addressed what the Supreme Court called an “exceedingly rare beast” – a wage and hour class action that actually made it to trial and judgment. Plaintiffs alleged that U.S. Bank had misclassified certain employees as “exempt” from overtime laws. After certifying a class of 260 employees, the trial court had determined U.S. Bank’s liability by extrapolating from a random sample of 21 plaintiffs. The trial court’s statistical sampling model for determining liability was “profoundly flawed,” the Supreme Court held, because it did not allow U.S. Bank to introduce any evidence from any class member outside those chosen by the trial court. U.S. Bank was not allowed to show either that members of the class were not misclassified or that their liability was less than what the sampling showed.
Duran’s most important point, and the one that financial services defendants should be aware of, is that defendants have a due process right to try their affirmative defenses, and that trial courts “must permit” defendants to try these defenses under the correct substantive legal standard, even if they raise the specter of individualized issues in an already certified class action. Even if this means that the class should be decertified, defendants cannot be deprived of this right.
Moreover, Duran reminds trial courts that the issue of whether a certified class is manageable for trial is not a mere hypothetical concern. Briefing and argument in class actions sometimes seems like a contest to see whether plaintiffs can name any issue that is common and that predominates. Duran reminds courts that “settlement should never be treated as a foregone conclusion… trial courts deciding whether to certify a class must consider not just whether common questions exist, but also whether it will be feasible to try the case as a class action.” 59 Cal. 4th at 27. Moreover, Duran emphasizes that, if, after a class is certified, defendants are able to show that individualized issues make a trial unmanageable, then the court should not foreclose the possibility that the class should be decertified. The Supreme Court, in fact, called this an “obligation.” Id. at 29.
For lenders and mortgage servicers, plaintiffs are often able to point to standard contract language as a basis for certifying a class. Duran is a reminder that defenses matter too – and that, if individualized issues arising from these defenses make trial unmanageable, trial courts cannot bar evidence of these concerns to keep the class certified. And, while Duran is a state court decision, its analysis regarding a defendant’s due process rights to litigate their defenses under the correct substantive legal standard should be helpful in federal courts as well. Although Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) made similar points about not having trials “by formula,” Duran may provide some needed repetition. It is a decision that should be reviewed carefully whenever a defendant is defending any type of class action.