Antitrust Law Daily Wrap Up, RICO—E.D. Tex.: Individual questions predominate in LG HVAC unit racketeering suit, (Sep 29, 2015)

By Greg Hammond, J.D.

Class certification was denied in a Racketeer Influenced and Corrupt Organization Act (RICO) suit against LG Electronics, Inc. concerning allegedly defective heating, ventilation, and air conditioning (HVAC) units. The federal district court in Tyler, Texas, determined that individual issues regarding causation and damages predominated over issues common to the class (St. Gregory Cathedral School v. LG Electronics, Inc., September 22, 2015, Schneider, M.).

Consumers from eight states filed RICO and consumer fraud claims against LG and LG Electronics U.S.A., Inc., alleging that marketing materials LG USA provided its distributors made false representations concerning energy consumption, noise level, fan speed, and durability. Because LG relied on a network of distributors and services to enter the American HVAC market, the consumers claim that LG operated the network as a RICO enterprise. In addition, the consumers claim that had the network of distributors known the truth about the quality of LG HVAC units, they would not have agreed to sell them, and ultimate purchasers would not have bought them. The consumers moved for class certification.

Common questions in this case included: (1) whether the network of licensed distributors LG used to enter the American HVAC market constitutes an association-in-fact RICO enterprise; and (2) if so, whether LG operated that RICO enterprise through a pattern of racketeering activity.

The common issues did not predominate over individual questions, however, the court concluded. With regard to causation, the consumers essentially alleged that no rational person would have agreed to sell or purchase an LG HVAC unit unless someone had, at some point, relied on a misrepresentation about the quality of the HVAC units. This “inference of reliance,” according to the court, was inappropriate in the instant RICO action because there were numerous reasons why a consumer might elect to purchase an LG HVAC unit rather than some other brand, and record evidence also demonstrated that not all distributors in the network relied on LG’s misrepresentations. An inference of reliance could therefore not be uniformly applied to the class without establishing first what each distributor in the LG network knew, when they knew it, and to whom they conveyed their information.

With regard to allegations that LG misrepresented the quality of its HVAC units by not disclosing defects in four broad categories of component parts (the thermistor, PC Board, fan motor, and coils), the court found that these component parts comprised dozens of smaller components that vary within the different product lines at issue. In addition, the court found that the misrepresentations complained of concerned dozens of subcomponents designed, manufactured, and redesigned over a six year period. Consequently, there was no common misrepresentation that class members could have relied on or that a third party could have relied on to their detriment.

Lastly, the court concluded that individual questions predominated with regard to damages. The consumers’ damages expert constructed a model in which each class member would receive rescission damages. The model, however, was fatally flawed because estimating the sales price from LG’s net revenue was not an appropriate means to calculate purchase price in view of the price variance among the different unit models. In addition, both parties agreed that at worse, only 30 percent of LG HVAC units experienced some kind of component failure. Consequently, rescission would be an inappropriate remedy where 70 percent of the class never actually experienced any kind of failure.

The case number is 6:12-cv-739.

Attorneys: Cavender C. Kimble (Balch & Bingham LLC) for St. Gregory Cathedral School, ADK Quarter Moon, LLC, Lexmi Hospitality, LLC, Shri Balaji, LLC, and Pioneer LLC. Phoebe A. Wilkinson (Hogan Lovells US LLP) for LG Electronics, Inc. and LG Electronics, U.S.A., Inc. David Balser (King & Spalding) for LG Electronics, U.S.A., Inc.

Companies: St. Gregory Cathedral School; ADK Quarter Moon, LLC; Lexmi Hospitality, LLC; Shri Balaji, LLC; Pioneer LLC; LG Electronics, Inc.; LG Electronics, U.S.A., Inc.

Cases: RICO TexasNews