Class warfare: the Eighth Circuit clamps down on consumer class actions under Rule 23(b) (3).

• Author: Wagner, Caleb

Halvorson v. Auto-Owners Ins. Co., 718 F.3d 773 (8th Cir. 2013)

1. Introduction

   The class action has proven to be one of the most successful tools in the American justice system for consumers to vindicate their rights. When corporations receive windfalls through misconduct that causes small losses to large groups of people, class actions are often the only effective method for the losses to be recovered. As a result, class litigation plays an important part in the civil justice system's goals of deterring harmful behavior and compensating victims. (1)

   Much maligned by the business lobby, this important vehicle for justice is now under attack in legislatures and in the courts. In recent years, the Supreme Court of the United States has taken steps to constrain the use of class actions by consumers and employees. (2) Following their example, the United States Court of Appeals for the Eighth Circuit now appears poised to impose severe restrictions on the use of the device by viewing trial courts' grants of class certification with a heavy dose of skepticism. (3)

   This Note will discuss a lawsuit, brought on behalf of North Dakota insurance policyholders, which challenged a scheme by their insurance company to reduce payments on medical claims. Though the trial court allowed the suit to proceed as a class action, the Eighth Circuit found this decision improper and ruled that the class must be decertified. (4) In doing so, the Eighth Circuit did not merely apply the recent Supreme Court rulings disfavoring class actions but also extended them. This Note will argue that these precedents should instead be narrowly construed so that the goals of class litigation may be achieved.

   Part II of this Note discusses the facts and claims that gave rise to the dispute in Halvorson. Part III discusses the requirements for certifying a class action under Rule 23 of the Federal Rules of Civil Procedure, as well as recent decisions by the Supreme Court and the Eighth Circuit interpreting the requirements for class certification. Part IV discusses the Eighth Circuit's analysis and resolution of the issues presented by the case. Finally, Part V of this Note analyzes the Eighth Circuit's decision and critiques its holding on various grounds.

2. Facts and Holding

   In December 2008, Shelene and Gale Halvorson tiled suit against Auto-Owners Insurance Company (Auto-Owners) and its subsidiary, Owners Insurance Company, alleging breach of contract and bad faith. (5) The suit arose out of a 2005 car accident after which Shelene Halvorson submitted her medical bills to Auto-Owners under her policy's personal injury protection (PIP) provision. (6) Auto-Owners failed to pay $88.01 of the bill, claiming that it exceeded the customary amount for the services she received. (7) The Halvorsons sued for full payment and sought class action certification to pursue redress on behalf of similarly situated policyholders. (8)

   According to the Halvorsons, Auto-Owners shortchanged them by an improper third-party review process. (9) Their policy stated that Auto-Owners was required to pay all "reasonable charges incurred" for medical treatment resulting from an automobile accident. (10) To determine whether or not an incurred charge was reasonable, Auto-Owners employed third-party bill reviewers, who reduced the amount paid on claims by making "reasonable and customary" reductions based on a statistical model they maintained. (11)

   This statistical model was created by determining the cost of various medical services charged by providers in a given geographic area and arranging these costs based on percentiles. (12) For example, a fifty-fifth percentile assignment reflects the amount at or under which fifty-five percent of doctors would charge for the service in the pertinent geographic area. (13) Auto-Owners determined that it would pay up to the eightieth percentile, essentially concluding that the eightieth percentile reflected their contractual obligation to pay for reasonable charges incurred. (14) Thus, when bills were submitted to Auto-Owners, the bill reviewers would recommend to the claims adjustors that the amount of the claim paid be reduced so that it would not exceed the eightieth percentile. (15)

   Auto-Owners argued that its claims adjustors had broad discretion to reject these recommendations. (16) The Halvorsons claimed, however, that this discretion was rarely exercised. (17) They argued, in effect, that Auto-Owners had a corporate policy of denying payment on any amount that exceeded the eightieth percentile and that this failure amounted to a breach of good faith in fulfilling their contractual duties. (18)

   The Halvorsons sought to represent a class of North Dakota and Minnesota policyholders who had their claims payments reduced due to a percentile-based review. (19) The Halvorsons initially filed suit in Arizona state court, but Auto-Owners had the case removed to federal court and transferred to the District of North Dakota. (20) On February 23, 2012 the district court entered an order denying class certification to the Minnesota policyholders but granting class certification to policyholders in North Dakota. (21) The court held that Minnesota law required all no-fault claims under $10,000 to be arbitrated, and as a result, the Minnesota class could not be maintained. (22) The court ruled, however, that the class of North Dakota policyholders could go forward. It stated that "because the evidence in this case reflects that the bill review recommendations were almost always followed, the question of whether that process was unfair is ripe for resolution on a class-wide basis." (23)

   On appeal, the Eighth Circuit held that the district court abused its discretion by certifying the class. (24) The court found that the class could not be maintained because some of the members did not have standing to sue and because common questions did not predominate over individualized ones. (25) As a result, the requirements for class certification were not met. (26) The court held that because the answer to the question of reasonableness would not produce a uniform answer throughout the class, a class action was not the proper form of adjudication. (27)

3. Legal Background

   This Part will first discuss the requirements for class certification under Rule 23 of the Federal Rules of Civil Procedure. Next, this Part will detail some recent developments in class certification law that have resulted from recent decisions by the Supreme Court. Finally, this Part will discuss the Eighth Circuit's view on class certification prior to its ruling in Halvorson.

   1. Requirements of Rule 23

      Likely the most fiercely contested decision type in civil litigation is the decision by a court to grant or deny a motion for class certification. This seemingly innocuous pretrial decision often determines whether the litigation will continue at all, and thus, it often amounts to a multi-million dollar question. As one court stated, the certification decision is the "defining moment" in a class action. (28) A denial of certification, in many cases, amounts to a "death knell" for the plaintiffs, closing their only feasible avenue for redress. (29) A court's decision to certify a class, on the other hand, puts enormous pressure on a defendant to settle the case, lest they risk ruinous liability in front of a jury. (30) Though the court's decision on certification has little bearing on the underlying merits of the claim, it is nonetheless often determinative of the outcome. (31)

      The reasons for the outsized importance of this seemingly obscure civil procedure device stem from the ubiquity of "negative value" class actions. (32) A negative value claim is a claim that, without the aid of an aggregating mechanism like a class action, is too small to be brought. (33) Essentially, the costs of bringing the claim exceed the amount that could be recovered. (34) A paradigmatic example of such a situation would be a class of 500,000 consumers suing a company for $50 each. If the court denies the consumers' request to proceed as a class, the litigation effectively comes to an end because the cost for each individual to bring a claim would greatly exceed $50. However, if the claims are aggregated, the amount at stake in the suit would be $25 million, easily enough money to retain representation and present proof. Thus, in negative value class actions, a decision to deny class certification usually determines whether the litigation will continue in any form and is therefore essentially dispositive of the outcome. (35)

      Despite its importance in class action litigation, the motion for certification has little to do with the merits of the claims being made. (36) Instead, it asks whether the plaintiffs have met the requirements set forth in Rule 23(a)(b) of the Federal Rules of Civil Procedure, which are concerned with determining whether the group of plaintiffs is large enough, cohesive enough, and sufficiently represented to make class adjudication appropriate. (37) To qualify as a class, the plaintiffs must meet the four requirements of Rule 23(a), colloquially referred to as numerosity, commonality, typicality, and adequacy of representation. (38) They must then fit within one of the three types of class actions described in Rule 23(b). (39)

      The first requirement of Rule 23(a), numerosity, asks whether the class is so large that use of the joinder device to combine the claims would be impracticable. (40) Generally, courts presume that classes of more than forty members fulfill this requirement, (41) though there are exceptions. (42) The second requirement, commonality, asks if there are questions of law or fact common to the class. (43) Traditionally, courts saw this requirement as being easily met by the plaintiffs. (44) However, in the wake of recent Supreme Court decisions, courts have begun to be much more exacting. (45) The third requirement, typicality, queries whether "the claims...