JASON YOUNG, et al., Plaintiffs-Appellees, v. NATIONWIDE MUTUAL INSURANCE COMPANY, et al., Defendants-Appellants.
Nos. 11-5015/ 5016/ 5018/ 5019/ 5020
United States Court of Appeals for the Sixth Circuit
Decided and Filed: September 5, 2012
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206. File Name: 12a0302p.06. Argued: April 11, 2012. Appeal from the United States District Court for the Eastern District of Kentucky at Covington. Nos. 2:06-cv-141; 2:06-cv-146; 2:10-cv-215; 2:10-cv-216; 2:10-cv-217; 2:10-cv-220; 2:10-cv-221; 2:10-cv-224—David L. Bunning, District Judge.
Before: SUHRHEINRICH, STRANCH, and DONALD, Circuit Judges.
COUNSEL
ARGUED: Drew H. Campbell,
JANE B. STRANCH, Circuit Judge. Defendants, insurance companies doing business in Kentucky, appeal the district court‘s certification under
I. BACKGROUND
Nationwide Mutual Insurance Company, Kentucky Farm Bureau Mutual Insurance, State Farm Fire and Casualty Insurance, Standard Fire Insurance Company, and Travelers Property Casualty Insurance Company (collectively, the “Defendants“) are all insurers that write consumer and commercial insurance in Kentucky. Kentucky has a unique system of taxation that authorizes local governments to impose a tax on insurers for the premiums the insurer collects on its sale of certain insurance products.
The named Plaintiffs in the five subclasses in this appeal—Jason and Diana Young, Matthew Sanning, Robert and Johnna Dyas, and Martha Yunker—are policyholders of their respective subclass Defendant insurers. Each Plaintiff claims that their insurer charged them a local government tax on their premiums when either the tax was not owed or the tax amount owed was less than the insurer billed. Plaintiffs allege that these miscalculations of premium tax obligations were unlawful under various state law causes of action.
In June 2006, Plaintiffs brought their claims in two separate cases filed in Kentucky state court. Both actions were removed to federal court and were considered together for the purpose of class certification. Plaintiffs’ claims were ultimately narrowed to illegal dealing in premiums, negligence, conversion, and a declaration of rights; Plaintiffs sought refunds of the amount of improperly charged municipal tax and collection fee as well as injunctive and declarative relief.
Prior to its final consideration of class certification, the district court considered several motions that are relevant to this appeal. On March 31, 2007, the court denied Defendants’ Motions to Dismiss, which alleged that the court lacked jurisdiction because Kentucky law allowed Plaintiffs an administrative remedy, then subsequently granted their request to bifurcate class certification discovery from merits-based discovery. Defendants also unsuccessfully moved to strike Plaintiffs’
On July 10, 2008, Plaintiffs moved for class certification. The district court entered an order on September 30, 2010 subdividing the Plaintiffs into ten subclasses, each comprising one of the remaining ten Defendants, and sua sponte severing the subclasses into separate actions. The district court found the class ascertainable and administratively feasible, the
All persons in the Commonwealth of Kentucky who purchased insurance from or underwritten by [Defendant insurer] during the Relevant Time Period [[June 16, 2001, through the present) for 06-141 and (June 22, 2001, through the present) for 06-146] and who were charged local government taxes on their payment of premiums which were either not owed, or were at rates higher than permitted.1
Defendants timely appealed, challenging each of the district court‘s findings. After several voluntary settlements, only five appeals remain before this court.
II. DISCUSSION
A. Standard of Review
The district court has broad discretion to decide whether to certify a class, In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 678 F.3d 409, 416 (6th Cir. 2012), and this court reviews class certification for an abuse of discretion, Pipefitters Local 636 Ins. Fund v. Blue Cross Blue Shield of Mich., 654 F.3d 618, 629 (6th Cir. 2011), cert. denied, 132 S. Ct. 1757 (2012). A district court‘s decision to certify a class is subject to “very limited” review and will be reversed only if a strong showing is made that the district court clearly abused its discretion. Olden v. LaFarge Corp., 383 F.3d 495, 507 (6th Cir. 2004). An abuse of discretion occurs if the district court relies on clearly erroneous findings of fact, applies the wrong legal standard, misapplies the correct legal standard when reaching a conclusion, or makes a clear error of judgment. Pipefitters Local 636 Ins. Fund, 654 F.3d at 629. This court should not find an abuse of discretion unless it has a “definite and firm conviction that the trial court committed a clear error of judgment.” Miami Univ. Wrestling Club v. Miami Univ., 302 F.3d 608, 613 (6th Cir. 2002) (citation and internal quotation marks omitted).
“The class action is ‘an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.‘” Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550 (2011) (quoting Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979)). “A class representative must be part of the class and possess the same interest and suffer the same injury as the class members.” Id. (citation and internal quotation marks omitted). To be certified, a class must satisfy all four of the
”
In laying out the required standard of review, the district court recognized the need to conduct a “rigorous analysis” of the
1. Class Definition
Before a court may certify a class pursuant to
All parties concede that a class definition is impermissible where it is a “fail-safe” class, that is, a class that cannot be defined until the case is resolved on its merits. See Randleman v. Fidelity Nat‘l Title Ins. Co., 646 F.3d 347, 352 (6th Cir. 2011) (“Either the class members win or, by virtue of losing, they are not in the class and, therefore, not bound by the judgment.“). The class definition at issue before us includes persons “who were charged local government taxes on their payment of premiums which were either not owed, or were at rates higher than permitted.” Defendants assert that the determination of whether premium taxes were charged that were not owed or were at rates higher than permitted goes to the heart of the claims and impermissibly determines a required element of each claim against them. But a “fail-safe” class is one that includes only those who are entitled to relief. Such a class is prohibited because it would allow putative class members to seek a remedy but not be bound by an adverse judgment—either those “class members win or, by virtue of losing, they are not in the class” and are not bound. Randleman, 646 F.3d at 352. Such a result is prohibited in large part because it would fail to provide the final resolution of the claims of all class members that is envisioned in class action litigation. Plaintiffs’ classes will include both those entitled to relief and those not. Defendants’ other argument—that they are not ultimately liable for many of the class members, even if they were incorrectly charged—proves the point. This is not a proscribed fail-safe class.
Defendants also assert that the class definition is not administratively feasible because it requires impermissible merits inquiries. Defendants’ argument is less a question of violating the limitation on merits inquiries and more related to fulfilling the requirement that a class description must be sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member. See Crosby v. Social Sec. Admin., 796 F.2d 576, 580 (1st Cir. 1986) (citations omitted). Courts have found feasibility lacking in a class definition that contains claimants who did not have a hearing “within a reasonable time,” id., a definition requiring individual determinations of constitutional violations, see Catanzano v. Dowling, 847 F. Supp. 1070, 1079 (W.D.N.Y. 1994), and a definition requiring legal determinations of whether each class member was “disabled” under the Americans with Disabilities Act, Davoll v. Webb, 194 F.3d 1116, 1146 (10th Cir. 1999). Permissible defining criteria have been described as follows:
For a class to be sufficiently defined, the court must be able to resolve the question of whether class members are included or excluded from the class by reference to objective criteria. In some circumstances, a reference to damages or injuries caused by particular wrongful actions taken by the defendants will be sufficiently objective criterion for proper inclusion in a class definition. Similarly, a reference to fixed, geographic boundaries will generally be sufficiently objective
for proper inclusion in a class definition.
Moore‘s Federal Practice § 23.21[3] (citations omitted).
Plaintiffs’ classes are defined by classic categories of objective criteria. Class membership based on the proposed definition requires determining the following facts: the location of the insured risk/property; the geographical boundaries for the relevant local government; the local tax for a particular taxing district within whose boundaries the insured property is located; and the local tax charged and collected from the policyholder. Although Defendants describe these facts as disputed, it is clear from their briefs and arguments below that what they dispute is whether they are ultimately liable to a policyholder for an incorrect overcharge, not whether the policyholder was, in fact, so charged. Cf. Kinder v. Nw. Bank, 278 F.R.D. 176, 183 (W.D. Mich. 2011) (finding class definition sufficiently definite when based on objective criteria including whether plaintiffs used one of the defendant‘s ATMs at one of the specified locations during the relevant time period and whether they were charged a fee).
To the extent that these facts overlap with a required element of Plaintiffs’ claims (such as showing injury), allowing a determination that an individual was subject to one tax, but was charged a different tax, is no different than determining whether an individual is of a minority race or gender, required elements in class action discrimination cases and most certainly part of the class definition. See, e.g., Dukes, 131 S. Ct. at 2547 (describing class as including only female employees of Wal-Mart). Had this class included all Kentucky policyholders, Defendants would surely have challenged the definition as overly broad. The criteria referenced in the class definition are objective and are not necessarily determinative of the ultimate issue of liability. The district court did not abuse its discretion in finding the proposed definition sufficiently definite.2
Defendants also argue the class is not administratively feasible because it would entail a large number of individual determinations in order to ascertain class membership. Defendants point to the great number of policies issued to Kentucky insureds3 that they claim would have to be reviewed in order to determine which policyholders overpaid premium taxes. Finding that the class properly could be certified without the 100% accuracy Defendants assume to be requisite, the district court agreed with Plaintiffs that the subclasses can be “discerned with reasonable accuracy” using Defendants’ electronic records and available geocoding software, though the process may require additional, even substantial, review of files.
Several other courts have found that the size of a potential class and the need to review individual files to identify its members are not reasons to deny class certification. See, e.g., In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 145 (2d Cir. 2001), (holding that the sheer size of a class and the concomitant size of liability “alone cannot defeat an otherwise
Equally—if not more—persuasive is the district court‘s practical rationale: “[T]he need to manually review files is not dispositive. If it were, defendants against whom claims of wrongful conduct have been made could escape class-wide review due solely to the size of their businesses or the manner in which their business records were maintained.” We find this reasoning compelling. It is often the case that class action litigation grows out of systemic failures of administration, policy application, or records management that result in small monetary losses to large numbers of people. To allow that same systemic failure to defeat class certification would undermine the very purpose of class action remedies. We reject Defendants’ attacks on administrative feasibility based on the number of insurance policies at issue.
Plaintiffs further support administrative feasibility through expert evidence that Defendants’ policy records are in a form compatible with geocoding software. Such software uses geographic information systems technology to verify the precise location of any address and has been used to process local-tax-jurisdiction data. Plaintiffs’ software expert, Paul Manning, was permitted to testify (after an earlier, separate Daubert hearing5) that he believed Defendants’ data is in a format that can be used in conjunction with geocoding software. Although Defendants argue that Manning opined beyond his training, the district court‘s ruling on admissibility was limited and also noted that the software would be used to assist in identifying potential class members and would be used in conjunction with manual review.
Defendants argue that their own software expert, Craig Knoblock, provided the only testimony about the accuracy of the geocoding programs and he opined that the error rate could be between 5 and 30%.
Defendants’ arguments are unavailing. The district court did not abuse its discretion in deciding that the class is not “fail-safe” and in finding that the class definition is administratively feasible.
2. Rule 23(a) Requirements
a. Numerosity
Defendants assert the district court erred in finding numerosity because it impermissibly calculated potential class size by relying on an assumption that a 1% error rate could be attributed to the assignment of premium tax rates by all Defendants. “In ruling on a class action a judge may consider reasonable inferences drawn from facts before him at that stage of the proceedings.” Senter v. Gen. Motors Corp., 532 F.2d 511, 523 (6th Cir. 1976); see also In re Am. Med. Sys., Inc., 75 F.3d at 1079. Plaintiffs presented evidence from their expert, Manning, on the total number of policies written by each Defendant during the class period. Plaintiffs then advocated for application of a 1% error rate to these totals, relying on Plaintiffs’ past experience with identifying members of other settlement subclasses in related actions and relying on the results offered by the Kentucky Office of Insurance when it conducted random market analyses of some insurers.
It was within the district court‘s discretion to infer that the 1% error rate was applicable to the Defendants. Cf. Kinder, 2011 WL 5282589, at *5 (relying on assumption about number of potential class members to satisfy numerosity requirement); Garrison v. Asotin Cnty., 251 F.R.D. 566, 569 (E.D. Wash. 2008) (requirement is met “so long as general knowledge and common sense indicate that joinder would be impracticable“). This error rate results in class members ranging between 270 and 9,000 depending on the insurer.
b. Commonality and Typicality
Plaintiffs present two facts common to the class: (1) whether each member was charged an incorrect amount for local government premium taxes; and (2) whether the insurer had a uniform, institutional policy or practice to identify local government taxing districts for its insureds. Plaintiffs present seven common legal questions:
- have Defendants engaged in unlawful billing practices and illegal dealings contra to Kentucky‘s illegal Dealing in Premium statute,
Ky. Rev. Stat. Ann. § 304-12-190 ; - is a “charge” on a premium a tax within the meaning of the Illegal Dealing statute;
- does “willful” under the Illegal Dealing statute require individual proof of intent;
- does Defendants’ collection of taxes that were either not owed or at rates higher than permitted constitute conversion;
- are Defendants authorized to charge their customers a collection fee that is in addition to an otherwise lawful premium tax;
- do Defendants owe Plaintiffs and class members a duty to use best methodologies available to determine the applicable local government premium tax; and
- does Defendants’ charge of additional fees to Plaintiffs and class members violate Kentucky Department of Insurance regulations for servicing the collection of municipal taxes imposed by local governments.
Defendants generally do not challenge the enumerated common questions of law. Instead, Defendants each contend that they do not have a uniform institutional policy that affected the tax jurisdiction assignment of each policyholder. They argue that misassignments result from factual
Because the named Plaintiffs allege that geocoding verification procedures would have prevented both their tax misassignment, notwithstanding the allegedly garbled voice mail message, and the tax misassignments of the class members generally, Plaintiffs have satisfied the elements of both commonality and typicality. Common proof of causation—that use of geocoding software could have prevented the harms suffered by the class members—is central to all of Plaintiffs’ claims and would advance the interests of the class as a whole. As Plaintiffs concede, Defendants will have some individualized defenses against certain policyholders; however, the existence of these defenses does not defeat the commonality requirement under the theory asserted by Plaintiffs. See Sterling v. Velsicol Chem. Corp., 855 F.2d 1188, 1197 (6th Cir. 1988) (holding that the presence of questions peculiar to each individual member of the class was no bar when liability arose from a single course of conduct). The court did not abuse its discretion in finding commonality under
c. Adequacy of Representation
“The adequacy inquiry under
Based on this standard, the district court did not abuse its discretion in concluding that the adequacy requirement of
The district court rejected Defendant Nationwide‘s argument that its post-filing refund of excess taxes to the Youngs rendered them inadequate class representatives. Nationwide fails to explain how this refund satisfies all the Youngs’ claims against it such that it removes their incentive to be vigorous advocates for the interests of the class. Further, a review of the class identification process advocated by Plaintiffs and approved by the district court—the use of geocoding software combined with manual review—does not reveal a carelessness with regard to potentially unidentified members.
The district court also found Plaintiffs’ counsel were sufficiently qualified and experienced and thus capable of serving as class counsel. Defendants do not dispute this finding on appeal.
3. Rule 23(b)(3)
In addition to meeting the requirements of
a. Predominance
“To meet the predominance requirement, a plaintiff must establish that issues subject to generalized proof and applicable to the class as a whole predominate over those issues that are subject to only individualized proof.” Randleman, 646 F.3d at 352-53 (citing Beattie v. CenturyTel, Inc., 511 F.3d 554, 564 (6th Cir. 2007)). Further, “the fact that a defense may arise and may affect different class members differently does not compel a finding that individual issues predominate over common ones.” Beattie, 511 F.3d at 564 (citation and internal quotation mark omitted). While the commonality element of
As in the commonality and typicality discussions, Defendants again urge that individualized inquiries are required. Defendants, in essence, argue that Plaintiffs cannot establish the causation element of their claims without reviewing the communications between each policyholder and insurance agent to decipher where the error originated. Defendants point to situations, such as the provision of incorrect information by a policyholder, which they claim relieve them of responsibility for an incorrect premium tax charge. These potential individual inquiries do not defeat the predominance of common questions. See Powers v. Hamilton Pub. Defender Comm‘n, 501 F.3d 592, 619 (6th Cir. 2007) (rejecting challenge to class of criminal defendants allegedly denied indigency hearings before being taken into custody based on variations in the experiences of individual class members).
Plaintiffs proceed on the theory that verification processes using geocoding software would catch most types of errors and that Defendants caused each class members’ injury simply by failing to use such processes. Plaintiffs will have to prove their theory at trial; but for class certification, this is a predominate issue central to each of Plaintiffs’ claims and subject to generalized proof. And, of course, the district court would be free to revisit this
b. Superiority
“The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Amchem Prods., 521 U.S. at 617 (citation omitted). In considering whether the superiority requirement of
“[C]ases alleging a single course of wrongful conduct are particularly well-suited to class certification.” Powers, 501 F.3d at 619; see also Sterling, 855 F.2d at 1197 (acknowledging an “increasingly insistent need” to certify class actions for lawsuits arising out of a “single course of conduct“). Where many individual inquiries are necessary, a class action is not a superior form of adjudication. See Pipefitters Local 636 Ins. Fund, 654 F.3d at 631. However, where a threshold issue is common to all class members, class litigation is greatly preferred. Daffin, 458 F.3d at 554 (“Permitting individual owners and lessees of 1999 or 2000 Villagers to litigate their cases is a vastly inferior method of adjudication when compared to determining threshold issues of contract interpretation that apply equally to the whole class.“).
Defendants again rely on their assertion that individual inquiries predominate in arguing Plaintiffs have not shown that class litigation is a superior method of adjudication. For the reasons discussed above, this argument will not prevail here. Defendants also argue class litigation is not superior because the Kentucky Office of Insurance has an administrative process by which policyholders can challenge a premium tax charge and that process has been made mandatory since the start of this litigation.6 See
The alleged tax overcharges in this case are relatively small for each potential class member, ranging from $32.60 to $126. Further, few policyholders are likely to be aware of their tax misassignment. See Kinder, 278 F.R.D. at 186 (“Most members of the class are likely not aware of the technical violation of the statute. The likelihood that many members of the class will choose to bring individual lawsuits is remote.“). Given the unlikelihood that many injured policyholders will discover, let alone attempt to vindicate, their injury individually through the administrative process in Kentucky, the district court did not abuse its discretion in finding that class litigation was a superior method of adjudicating Plaintiffs’ claims. Cf. Franklin Cnty., Ky. v. Travelers Prop. Cas. Ins. of Am., 368 F. App‘x 669, 672 (6th Cir. 2010) (noting that the Kentucky Office of Insurance cited “manpower concerns” when it declined to consider all plaintiff‘s claims of tax miscalculations by insurance companies).
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district court‘s certification of the Plaintiff subclasses.