Defeating Class Actions the Old-Fashioned Way

There was a time, several years ago, when one of the biggest risks a dealer faced in connection with its F&I activities was a class-action lawsuit. Regulatory actions and attorney general actions were both pretty high up the list of potential legal perils, but class actions typically involved big numbers and were potentially very dangerous for the continuing health of the dealership.

The class-action threat was so serious that many dealers and sales finance companies started using mandatory, pre-dispute arbitration agreements in their sales and finance contracts. Properly drafted, such agreements can serve as an effective first line of defense against class-action lawsuits. But the Consumer Financial Protection Bureau, many of us believe, is poised to declare the use of such agreements illegal. If that happens, it will bring back the bad old days of class-action risk.

Arbitration, though, is not the only defense against class actions. Over the years, defense lawyers used a number of different theories to defeat a plaintiff’s motion to “certify” a class, permitting an action to proceed in class-action form. One such theory is to argue that the class-action process is not a better way to proceed than requiring each member of the class to file his or her own action for relief.

Here’s a recent example of the effective employment of this defense.

In 2010, Phillys Johnson bought a car from MKA Enterprises Inc., dba Legends Toyota. The purchase agreement failed to disclose that the car had previously been used as a rental car. When Johnson discovered the car had been a rental car, she filed a class action against Legends, and the trial court certified Johnson’s class. Facing a certified class, Legends appealed.

The Court of Appeals of Kansas reversed the trial court’s decision and denied Johnson’s motion for class certification. While the trial court determined that prosecuting separate actions by individual members of the class would create the risk of inconsistent results, the appellate court disagreed. The appellate court held that, because the process of buying a car is inherently fact-driven, class certification would deny each individual claimant the opportunity to seek his or her actual damages or a civil penalty, which might in fact be greater than the actual damages.

Second, the trial court determined that questions of law or fact common to class members predominated over any questions affecting only individual members, making class certification the superior manner in which to manage and prosecute the claims of the individual class members. Again, the appellate court disagreed, finding that the trial court would be required to conduct multiple “mini-trials” in order to determine each class member’s injury or loss, proceedings which would be time-consuming and likely inefficient.

For these reasons, the appellate court reversed the trial court’s certification of class-action status and remanded the case to the trial court so that Johnson could proceed on her individual claims. Suddenly, a big, dangerous hurricane became a windstorm — still possibly a problem, but nowhere nearly as bad as it was originally.

If class actions enjoy a revival after the CFPB bans arbitration, defense lawyers will need precedents like this one to counter the threat. Maybe you should snip this article out and send it over to your lawyer.