Stammco: A Primer on the New Era of the Ohio Class Action

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The Ohio Supreme Court has decided the first in a trilogy of cases addressing Civil Rule 23 — its first foray into class action law since the landmark decision in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. ___, 131 S. Ct. 2541, 180 L. Ed. 2d. 374 (2011). In Stammco, L.L.C. v. United Telephone Company of Ohio, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, (Stammco II)1 the Ohio Supreme Court resoundingly endorsed Dukes and the applicability of federal law as an interpretive aid for Ohio Rule 23. Further, the Court adopted the Seventh Circuit’s formulation of a “fail-safe class,” and clarified that class certification is subject to “rigorous analysis,” which requires plaintiffs to prove compliance with Rule 23 and may include probing the merits of the plaintiffs’ claims. One wonders what more there is to say in the remaining two cases on the Court’s docket. Now that the Court has denied the plaintiff’s motion to reconsider the decision, there is no doubt that Stammco is here to stay.

Stammco I

Stammco is a cramming case. The plaintiff complained that its phone bills contained unauthorized charges and insisted that they be removed, despite the carrier’s insistence that the charges had been approved by one of the plaintiff’s employees.

In the first trip to the Ohio Supreme Court, Stammco, L.L.C. v. United Telephone Company of Ohio, 125 Ohio St.3d 91, 2010-Ohio-1042, 926 N.E.2d, the Court reversed the trial court’s certification of a Rule 23(B)(3) class on the basis that:

• The class definition “failed to readily identify prospective class members;”
• “[I]ndividualized determinations would be needed as to ‘whether and how each prospective class member had authorized third-party charges on his or her phone bill;’” and
• “[T]he identification of class members would require ‘more than a reasonable effort.’”

Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶7, quoting Stammco I at ¶10–11.

The majority did not reach the question of whether the class was fail-safe, but based its holding instead on the lack of administrative feasibility and remanded the case for further consideration of the class definition. Stammco I, 125 Ohio St. 3d at 95, 2010-Ohio-1042, 926 N.E.2d 292, at ¶12–13. The dissent would have found that the definition was not fail-safe since, in his view, “determination of membership in the class in this case [did] not depend on a predetermination of the merits of the case or liability of the appellants.” Stammco I at ¶43–44 (Moyer, J. concurring in part and dissenting in part).

Stammco II

On remand, the plaintiffs revised their class definition to include those “who were billed for third-party charges as to which Sprint had no prior authorization from the customer,” evidently in an effort to cure the potentially fail-safe class. Stammco II at ¶9. But the trial court would have no part of it and found that the revised definition was fail-safe. Stammco II at ¶10. It also denied certification on the alternative bases that the plaintiffs had sued the local exchange carrier instead of “the culprit ‘third party provider,’” and because the plaintiffs imposed a duty on the carrier not required by law. Stammco II at ¶10.

The court of appeals reversed. First, it found that the class definition was not fail-safe because it “‘deletes any reference to customers who receive unauthorized charges’” and thus “did not rely upon a determination of liability.” Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶11–12, quoting Stammco, L.L.C. v. United Tel. Co. of Ohio, 6th Dist. Fulton No. F-11-003, 2011-Ohio-6503, ¶39, ¶42–46. The court also rejected the trial court’s alternative bases for denying class certification since “‘both rationales are improper incursions into the merits of this case.’” Stammco II at ¶13, quoting Stammco, 2011-Ohio-6503, at ¶49.

After initially denying the defendant’s motion for discretionary appeal (131 Ohio St. 3d 1511, 2012-Ohio-1710, 965 N.E.2d 311), the Court granted its motion to reconsider (132 Ohio St.3d 1425, 2012-Ohio-2729, 969 N.E.2d 272), reversed the court of appeals and ultimately issued perhaps the most thorough analysis of Rule 23 in the Court’s history.

The decision is notable for the sweeping breadth of ground the Court covered and its emphasis on the fundamentals of Rule 23. Indeed, Stammco II is a primer on class certification and provides an easy-to-follow roadmap for courts and practitioners alike.

Here is a summary of the principles governing the new era in class action law in Ohio.

1. Federal law is persuasive authority in interpreting Ohio Rule 23.

The Court’s analysis of the Stammco class began with an acknowledgement that the Federal Rule of Civil Procedure 23 is “persuasive authority in interpreting [the] similar Ohio Rule.” Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶18 (citations omitted).

Although the observation is not new, it is profoundly helpful. The Stammco II court relied substantially on Wal-Mart Stores, Inc. v. Dukes, 564 U.S. ___, 131 S. Ct. 2541, 180 L. Ed. 2d. 374 (2011) in its analysis of Rule 23, and its conclusions regarding a plaintiff’s burden of proof, the need to conduct a “rigorous analysis” of the facts at the class certification phase, the scope of an appropriate class definition and the like. Stammco II will thus provide important guidance to lower courts whose decisions historically have not been uniform. Federal law will now provide a useful analogue to those who are trying to provide illustrative precedent to Ohio courts as they apply Stammco and adjust to the new era of Rule 23 jurisprudence in Ohio.

2. Plaintiffs must prove that they meet the elements of Rule 23 before a class can be certified.

Quoting Dukes, the Court said that “‘Rule 23 does not set forth a mere pleading standard. […] A party seeking class certification must affirmatively demonstrate compliance with the Rule — that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.’” Stammco II at ¶30, quoting Dukes at 2551–52.

Here, the Court refused to permit the class to be certified because the plaintiff failed to prove that common questions of law and fact predominated over individual questions. Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶57–66. This failure was the result of the plethora of individual issues necessary to prove compliance with the Rule, i.e., whether the third-party charges were “authorized.” In fact, the plaintiff’s effort to prove this central fact illustrated several other weaknesses in the proposed class and presented the Court with several significant teaching moments.

3. A trial court must perform an evidentiary analysis to determine whether a plaintiff can prove that the elements of Rule 23 have been met.

Just as a plaintiff must prove the elements of Rule 23, courts are obligated to undertake a rigorous analysis at the class certification stage to ensure that this has happened. Thus, “a trial court must conduct a rigorous analysis, which may include probing the merits of plaintiffs’ claims, to ensure that the prerequisites of Civ. R. 23 are satisfied.” Stammco II at ¶3, ¶44.

The Court reviewed the evidentiary record, which revealed significant questions regarding the plaintiff's own authorization of the third-party charges, as well as the fact that third-party service providers — and not the defendant — were often responsible for placing charges on the plaintiff’s bill. Stammco II at ¶59, ¶64. The mere fact that a charge might be waived could just as easily have resulted from the defendant’s desire to maintain customer goodwill as from a bona fide claim of cramming. Stammco II at ¶59.

The Court also clarified its prior holding in Ojalvo v. Ohio State University Board of Trustees, 12 Ohio St.3d 230, 466 N.E.2d 875 (1984). Noting that some have cited Ojalvo for the proposition that the merits may never be considered at the class certification stage, the Court harmonized Ojalvo with Dukes, Amgen v. Connecticut Retirement Plans & Trust Funds, 568 U.S. ___, 133 S. Ct. 1184, 185 L. Ed. 2d 308 (2013) and Comcast Corp. v. Behrend, __ U.S. __, 133 S. Ct. 1426, 185 L. Ed. 2d 515 (2013), saying “Ojalvo is consistent with Dukes and Amgen to the extent that a trial court may probe the underlying merits of the plaintiff's claim in order to determine whether the prerequisites for class certification have been satisfied under Civ. R. 23.” Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶44.

4. The need for individualized determinations is fatal to class certification.

The Court’s conclusion that the plaintiff failed to satisfy the predominance requirement of Rule 23(B)(3) was based on its determination that too many individual questions would have to be resolved to determine who could be included within the proposed class.

Specifically, the plaintiff’s revised class definition sought inclusion of those “who were billed for third-party charges as to which Sprint had no prior authorization from the customer in writing or by a method acceptable to Sprint sufficient for Sprint to verify that the customer had agreed to such charge.” Stammco II at ¶9.

But the Court recognized that the question of whether a charge had been “authorized” was fact-specific and could not be resolved without inquiring of each potential class member and reviewing the records of the third-party provider that maintained the relevant records. Stammco II at ¶58–60. These questions would “overwhelm the questions common to the class.” Stammco II at ¶58.

The class representative’s situation was a case in point. Stammco disputed a third-party charge from Bizopia. But Bizopia claimed that the charge had been authorized by a Stammco employee and it had both a voice recording and a written fax confirmation to prove it. Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶64. Thus, to determine whether Stammco had a claim — and could represent a class of people with the same type of claim — the trial court would first have to hear and decide the underlying factual dispute. But resolving Stammco’s dispute would do nothing to resolve the same dispute that would inevitably arise among the other class members. Under these circumstances, the individual issues would dwarf any common issues that may have been present.

The Court thus recognized “that the need for individualized determinations is dispositive in concluding that the class does not comport with Civ. R. 23.” Stammco II at ¶52.

5. Fail-safe classes are prohibited.

At the heart of the problem with the Stammco class was the fact that membership was based on the answer to the question of whether third-party charges on a phone bill were “authorized.” If not, then the defendant could be liable for placing them on a customer’s bill.

The problem was that the class was defined to include only those who “were billed for charges on their local telephone bills […] without their permission.” Stammco II at ¶5. Thus, to figure out who could be in the class, the trial court would have to decide whether a potential class member had been subjected to an unauthorized third-party charge — the very issue in the case. If this were to happen, then class members would either win simply by their inclusion in the class or they would be excluded from the class and not bound by any judgment in the case. This is known as a “fail-safe class.”

The Court provided a practical definition for the fail-safe class: “A fail safe class definition is one in which the putative class is defined by reference to the merits of the claim.” Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶8, citing Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 826 (7th Cir. 2012). In other words, if you have to decide a merits issue just to determine who is a member of the class, the definition is fail-safe and the class is prohibited.

6. No trial by technology.

A corollary of the Court’s rule that individualized issues are fatal to class-wide litigation is that proxies for individualized inquiries don't change this result.

In response to the concern that only a plaintiff-specific inquiry could answer the question of whether a third-party charge was authorized, the plaintiffs argued that they could create a database of information that would answer this question without resort to individual depositions. According to the plaintiffs, “You’ve got the tapes, we got the technology.” Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶47.

The Court rejected the plaintiffs’ “trial by technology” proposal, which has become a standard feature in many class actions. The Court’s concern was a practical one: The proposed database did not address the fundamental question of customer consent. While it purported to track credit adjustments issued by the carrier and the defendant, it did not — and could not — identify why the adjustments were made. Stammco II at ¶62. The Court concluded that the proposed database provided “no probative evidence” that would assist in determining whether third-party charges were authorized. Stammco II at ¶63.

The takeaway is this: Trial by technology is highly suspect because it is rarely capable of resolving the individual questions that are often at the heart of class claims, especially in Rule 23(B)(3) classes like Stammco. High-tech solutions like computer programs, algorithms and statistical sampling are all subject to the old-fashioned rules of evidence. Courts only need to ask two questions to figure out whether the use of technology will solve class issues:

• First, what issue is the technology trying to solve? If it is being presented to answer the “why” of causation or the subjective intent of a party, then it is presumptively suspect.
• Second, is the result reliable standing alone or are there questions remaining for live witnesses?

7. No-injury classes are prohibited.

The other side of the fail-safe coin is the no-injury class. Just as a class definition may not require a decision on the merits to determine class membership, it also cannot be written so broadly that it includes those who have suffered no injury at all. This is exactly what happened in Stammco II. The Court held that the revised class definition was overly broad because it included those who had suffered no injury:

If * * * a class is defined so broadly as to include a great number of members who for some reason could not have been harmed by the defendant’s allegedly unlawful conduct, the class is defined too broadly to permit certification.

Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶53, quoting Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 825 (7th Cir. 2012).

The revised class was overly broad because it included everyone who was billed a third-party charge, even if the charge was proper. Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶56. The Court recognized that the revised class definition “seemingly cure[d] the problem that the class was not readily identifiable” since it purported to include only those who received “unauthorized” charges. Stammco II at ¶56. But the class definition was overly broad because the defendant’s long distance carrier had no records to show which charges were authorized and which were not — only the third parties who solicited the charges had those records. So, the proposed amended class included those who were billed a third-party charge, even if it was proper. Stammco II at ¶56. But those people hadn’t really suffered an injury at all and would have no claim for damages against the defendant.

The takeaway is that class definitions must satisfy constitutional principles of standing if they are to pass muster. Plaintiffs must be able to prove, at the class certification phase, that class members have suffered a cognizable injury for the same reason as the class representative.

8. Class certification may be decided — and reversed — at the appellate level.

Perhaps the most practical insight from Stammco was the Court’s decision to exercise its authority to reverse the court of appeals and remand the case to the trial court.

The Court recognized that the case was before it for the second time, and that it was more than 8 years old at the time of decision. Stammco II, 2013-Ohio-3019, 2013 Ohio LEXIS 1682, at ¶52.

But more important, the clarity of the Court’s ruling — “that the need for individualized determinations is dispositive in concluding that the class does not comport with Civ.R. 23” — led it to conclude that remanding the case for further consideration was pointless since the lower court will “reach an inevitable result.” Stammco II at ¶52. The Court thus exercised its discretionary authority “to decide the class-certification question.” Stammco II at ¶52.

Practitioners should take note. Where there is a developed trial record and a sympathetic court of appeals, defendants should ask for reversal, not merely a remand, under appropriate circumstances.

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Footnotes

1. For clarity, the 2013 Stammco case will be referred to as Stammco II, and the 2010 case will be referred to as Stammco I.