The Supreme Court’s Wal-Mart decision1 put to rest persistent arguments that federal courts, when deciding whether to certify a class, should accept (without further proof) some or all of the allegations in the plaintiffs’ complaint. The Court made clear that “Rule 23 does not set forth a mere pleading standard” and that a plaintiff seeking class certification “must be prepared to prove” that he has met the Rule 23 prerequisites, regardless whether such proof ends up duplicating questions of fact or law that he will need to demonstrate in order to prevail on the merits.2
Of course, state courts do not necessarily follow the U.S. Supreme Court’s lead on certification issues, and some have been reluctant to permit defendants to seek to defeat class certification by contesting questions of fact or law that relate directly to the merits of the plaintiff’s claims. Ohio is one such state; but an interesting case—in which a petition for review has been filed in the Ohio Supreme Court—provides an opportunity for Ohio to decide whether to bring its class certification rules into conformance with federal rules.
The case involves a claim by an auto insurance policy holder, Michael Cullen, that his insurer should have paid to replace his car windshield rather than to repair it. In general, insurers give their policy holders the right to insist upon replacement of a damaged windshield. However, many insurers (including the defendant, State Farm Mutual Automobile Insurance Co.) attempt to persuade their insureds to agree to repair windshields that have experienced very minor damage, such as small cracks caused by a stone. State Farm persuaded Cullen to opt for windshield repair instead of replacement, by assuring him that repair was as effective as replacement for very small cracks and by agreeing to pay for the repair in full (i.e., it waived the $250 deductible on Cullen’s policy). Cullen never complained about the quality of the repair and continued to drive the same car with the same windshield for many years thereafter.
Cullen later sued State Farm, claiming breach of contract, bad faith, and breach of fiduciary duty. He contended that his insurance contract gave him the option to demand a cash payment equal to the cost of replacing his windshield (less his deductible) and then decide for himself whether to repair or replace his windshield or simply to retain the payment. He further contended that State Farm inappropriately failed to inform him of this “cash out” option, and that he would have chosen that option if it had been offered to him. Because replacement of a windshield costs more than repair, he contends that he would have derived a financial benefit (even taking into account his $250 policy deductible) if he had exercised the “cash out” option and paid for the repairs himself.
In September 2010, the trial court granted Cullen’s motion to certify a plaintiff class under both Ohio Rule of Civil Procedure 23(B)(2) and Rule 23(B)(3). The 100,000-member certified class comprises all Ohio policy holders insured by State Farm who, at any time after January 1, 1991, submitted a “glass-only” damage claim (i.e., no damage to the car other than to the windshield) that was resolved by payment of the cost of repairing the windshield. In determining that the prerequisites for certification had been met, the trial court relied in several respects on the allegations of the complaint without requiring additional proof from the plaintiff. The Ohio Court of Appeals affirmed the certification order in December 2011.3 State Farm petitioned for Supreme Court review on March 30, 2012.
The wording of Ohio Rule 23 is substantially identical to the Federal Rule 23. Indeed, the Ohio Supreme Court has repeatedly counseled Ohio courts to look to federal authority for guidance in understanding and applying the Ohio rule.4 Ohio courts nonetheless have often declined to permit defendants to oppose class certification by introducing evidence that goes to the merits of the plaintiffs’ claims, even when the evidence is relevant to whether the prerequisites of Ohio Rule 23 have been met.5 The appeals court expressed similar reluctance in its opinion affirming class certification.6 State Farm’s petition for review asks the Ohio Supreme Court to reconsider that position in light of the Wal-Mart decision.
The trial court declined to require the plaintiff to present evidence on several issues relevant to whether common questions of fact and law predominate over individual issues. For example, State Farm presented evidence indicating that it would be impossible to determine in advance of trial who was a member of the plaintiff class. That difficulty arises because the class definition is limited to policy holders who suffered a loss under the plaintiff’s theory of the case (i.e., policy holders who could have pocketed cash had they asked to be paid the cash value of a replacement windshield). Policy holders whose deductible exceeded the cash value of a replacement windshield are, accordingly, not included within the class. State Farm presented evidence that the cash value of a replacement windshield varies significantly from class member to class member, based on such factors as car make and model, geographic location, and market conditions at the time of replacement. But the trial and appeals courts simply accepted the plaintiff’s allegation (without supporting evidence) that “a mathematical calculation to determine whether a given windshield replacement is more expensive than a given deductible can be accomplished without trying the issues of the case and can be done in a straight forward, mechanical manner.”7 The courts similarly concluded, based on the plaintiff’s allegations, that “computerized algorithms and State Farm’s databases” would be sufficient to allow damages of each class member to be calculated accurately.”8 The only evidence submitted to the trial court regarding damage calculations came from State Farm, whose evidence tended to show that its databases did not include sufficient information from which to calculate the damages of individual class members.
State Farm also argues that the appeals court erred in failing to address the legal issue at the heart of the dispute: whether State Farm policies really do offer policy holders a “cash out” option. The plaintiff asserts a contractual right to a cash payment of several hundred dollars (the cost of replacing his windshield less his deductible) to pay the $25 to $50 necessary to have the scratch on his windshield repaired, and then to pocket the difference. State Farm argues that the plain meaning of its policies is that it is only required to pay the amount necessary to return the car to its pre-loss condition (in this case, the cost of windshield repair). The appeals court held that the contractual interpretation issue was a merits-based issue of law that should only be determined at trial or in connection with a motion for summary judgment.9 State Farm contends that the issue should be determined in connection with class certification because if State Farm policies are not deemed to include a “cash out” option, then the class will not meet the prerequisites of Ohio Rule 23(B)(3); under those circumstances, common questions of fact and law would not predominate over individual questions.
The Ohio appeals court does not stand alone in concluding that merits-based contractual interpretation issues should not be decided in connection with class certification motions even when relevant to Rule 23(B)(3) issues. Indeed, a number of federal appeals courts have reached similar conclusions. Both the Ninth and Seventh Circuits have reasoned—in the context of securities fraud claims seeking class certification based on a fraud-on-the-market theory—that a ruling on a merits-based issue should always be deferred to trial if the issue is capable of being decided on a class-wide basis, regardless whether the issue is relevant to Rule 23(b)(3) “predominance.”10 Those decisions conflict with decisions from several other federal appeals courts, and the Ninth Circuit decision is the subject of a pending certiorari petition.11
The Ohio appeals court’s decision to defer until trial a ruling on the meaning of State Farm’s standard insurance contract is at least arguably in conflict with the principles of Wal-Mart. Its decision not to look behind other allegations of the complaint at the class certification stage indisputably conflicts with the principles of Wal-Mart. State Farm’s petition thus presents an opportunity for the Ohio Supreme Court to determine whether Ohio Rule 23 is more than a mere pleading standard and requires plaintiffs seeking class certification to introduce evidence affirmatively demonstrating that they satisfy each of the Rule 23 requirements. In light of the dangers of inappropriate class certification—including the pressure that defendants face to settle even the most insubstantial of class actions—some observers say that review by the Ohio Supreme Court is fully warranted.
* Richard A. Samp is Chief Counsel of the Washington Legal Foundation (WLF), a nonprofit public interest law firm located in Washington, D.C. WLF submitted an amicus brief with the Ohio Supreme Court in support of the petition for review.
1 Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).
2 Id. at 2551.
3 Cullen v. State Farm Mut. Auto. Ins. Co., 2011 WL 6780177 (Ohio App. 8 Dist.), 2011-Ohio-6621.
4 Marks v. C.P. Chemical Co., 31 Ohio St.3d 200, 201 (1987).
5 See, e.g., Ojalvo v. Bd. of Trustees, 12 Ohio St. 230, 233 (1984).
6 Cullen at ¶ 55 (A finding that “goes to the heart of the merits of the case” is “inappropriate” in connection with a ruling on a class certification motion.).
7 Id. at ¶ 34.
8 Id. at ¶ 36.
9 Id. at ¶ 55.
10 Conn. Ret. Plans & Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. 2011); Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010).
11 U.S. Sup. Ct. No. 11-1085.