Although Not an "Adjudication," Refund Programs Can Still Defeat Class Certification in the Seventh Circuit

It is not uncommon for retailers and manufacturers to voluntarily reimburse consumers when faced with a product issue, allowing consumers to receive 100% of their money back by simply returning the merchandise and requesting a refund.  However, retailers and manufacturers often find themselves facing "no injury" class actions, even when they voluntarily provide full reimbursement.

In the past, class certification has been denied on the grounds that class actions are not superior to full reimbursement programs voluntarily available directly from the retailer or manufacturer.  The U.S. Court of Appeals for the Seventh Circuit recently faced this situation and, while not agreeing with the superiority analysis, opened the door to another avenue to challenge class certification in such cases – adequacy of representation.

In 2007, the distributor of a product called Aqua Dots (a toy consisting of small, brightly colored beads that can be joined together when sprayed with water) determined that its contract-manufacturer substituted an adhesive when manufacturing the product.  While the substituted adhesive is chemically similar to the intended adhesive, it presents a significant issue (especially for the children's toy) -- the adhesive is metabolized into gamma-hydroxybutyric (GHB) when consumed.  GHB (commonly known as a "date-rape drug" and illegal in many jurisdictions) can cause nausea, dizziness, drowsiness, agitation, depressed breathing, amnesia, unconsciousness and death when consumed.

Reports of children swallowing large quantities of the beads and becoming sick were being made to the distributor of the product, and the distributor announced a full recall, providing the purchasers with the option of a replacement product or a refund under the money-back guarantee.  As expected, consumers returned the defective merchandise – roughly 600,000 of the more than 1,000,000 defective products were returned (and more than 500,000 consumers received full refunds).

On the heels of the announcement, purchasers of the Aqua Dots product (whose children were not harmed and who did not ask for a refund) brought several class action lawsuits against the distributor and retailers of the product.  The distributors and retailers argued that no class should be certified because plaintiffs could not show that the class action was "superior to other available methods for fairly and efficiently adjudicating the controversy" and the District Court agreed -- denying plaintiffs' motion for class certification  In Re Aqua Dots, 270 F.R.D. 377 (N.D. Ill. 2010).  The District Court recognized that consumer would be better off returning their products for a refund or replacement than pursuing litigation (which would require payment of attorneys' fees and notice costs).

The Fifth Circuit recognized that "[i]t is hard to quarrel with the district court's objective" as "[t]he transaction costs of a class action include not only lawyers' fees but also the giving of notice under Rule 23(c)(2)(B)."  In Re Aqua Dots, Case No. 10-3847, 2011 U.S. App. LEXIS 17039, *5 (7^th Cir. August 17, 2011).  While not quibbling with the conclusion, the Fifth Circuit disagreed with the analysis.  The superiority requirement requires "adjudication," and a voluntary recall program is not an adjudication of any claim.  Id. at * 6-7.

However, the Fifth Circuit held that the adequate representation requirement provided all the authority the District Court needed to deny class certification in the case.  Id. at *7.  Fed. R. Civ. P. 23(a)(4) states that a court may certify a class only if "the representative parties will fairly and adequately protect the interests of the class."   Since plaintiffs "want relief that duplicates a remedy that most buyers already have received, and remains available to all members of the putative class, [a] representative that proposes that high transaction costs (notice and attorneys' fees) be incurred at the class members' expense to obtain a refund that already is on offer is not adequately protecting the class members' interest."  Id.  Class certification was properly denied, albeit for the wrong reasons.

This lesson is not a new one -- properly managed refund programs can defeat class certification in consumer class actions.  However, now when faced with a "no injury" class action, defense lawyers should look to the superiority requirement and to the adequacy of representation requirement to seek to defeat class certification.