Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—9th Cir.: State restitution claim barred by prior class action judgment, (Nov 10, 2014)

By Edward L. Puzzo, J.D.

After a judgment was reached in a class action against the marketer of a pregnancy gender test kit for violating California’s Unfair Competition Law and False Advertising Law, the state’s enforcement action against the same defendant for violation of the same laws could proceed, but its restitution claims could not, the U.S. Court of Appeals in San Francisco has ruled (California v. IntelliGender, LLC, November 7, 2014, Wardlaw, K.).

IntelliGender had marketed a test kit, purportedly “proven over 90% accurate in laboratory tests,” which allegedly predicted a fetus’ gender using a urine sample from the mother.

Julie Gram brought a nationwide class action against IntelliGender, alleging violations of California’s Unfair Competition Law (UCL) and False Advertising Law (FAL). The lawsuit was brought in federal district court, pursuant to jurisdiction granted by the Class Action Fairness Act (CAFA). A settlement agreement was reached and a judgment was entered.

Subsequently, the State of California brought an enforcement action against IntelliGender in state court, also alleging violations of California’s UCL and FAL. That matter was removed to federal court to be heard by the same court that had presided over the class action.

Enjoining State’s action. IntelliGender moved to enjoin the state from prosecuting its enforcement action, arguing that to permit it to proceed would violate res judicata and undermine the court’s ability to enforce its final judgment in the class action matter. This motion was denied, and IntelliGender appealed.

The appellate court agreed that two of the three elements of res judicata applied here regarding the private class action settlement and the state’s enforcement action: a final judgment on the merits had been reached, and the same claims or causes of action were involved. The question then became whether the third element—the involvement of identical parties or privies in both actions—applied to bar the State’s action.

The CAFA class action settlement could not bind the state in its sovereign capacity where it cited both public and private interests, the court ruled. Citing Herman v. South Carolina National Bank, 140 F.3d 1413 (11th Cir. 1998), which relied on several U.S. Supreme Court cases, the court stated that the government is not bound by private litigation when the government’s action seeks to enforce a federal statute that implicates both public and private interests. Similarly, a CAFA class action settlement, though approved by the district court, did not act as res judicata against the state in its sovereign capacity, even though many of the same claims were included in both actions.

Cases cited by IntelliGender where privity was found and a government action was enjoined on res judicata grounds involved situations, unlike here, where the government was not trying to vindicate broader governmental interests but instead was seeking to recoup a plaintiff’s personal economic loss, the court stated.

The court also ruled that the state’s failure to object to the proposed class action settlement, after receiving notice pursuant to CAFA, was not a basis for enjoining their enforcement action, as the notification requirement did not impose an affirmative duty on government officials.

Enjoining restitution. At the lower court level, IntelliGender had moved to enjoin the state’s restitution claims only, arguing that restitution for the members of the settlement class designated in the private class action would undermine the finality of the class action settlement, and amount to a double recovery. This motion too was denied and IntelliGender appealed.

Although the considerations in this inquiry were similar to those in the above inquiry, the result must be different, the appellate court found. The state’s action, insofar as it seeks restitution for individual members of the settlement class, may be enjoined under the court’s continuing jurisdiction to administer the settlement, in order to prevent double recovery by those individuals. This situation is akin to the cases wherein a government sought to enforce the plaintiffs’ personal economic loss, creating privity, rather than pursue a broader governmental interest. The individuals on whose behalf the government was pursing its enforcement action were not different from the certified class, the appellate court ruled. The fact that the amounts sought differed from the class action had no bearing on the question of privity.

It was true that, under the class action settlement, certain individuals who would receive restitution in the state’s case would be ineligible for recovery in the private action. Still, the court continued, the appropriate inquiry was whether the relief sought by the government was the same relief already pursued in the private action, even if the settlement did not result in the full measure of relief sought. Because the requirements of res judicata are met with regard to restitution sought by the state, an injunction against the state may issue, the appellate court ruled. Further, it should issue based on equitable considerations. Court approved settlements should preclude class members from seeking the same relief for the same claims a second time. Absent such a guarantee, defendants would have little incentive to agree to any settlement. Allowing the state’s restitution claims to go forward would undercut the policy against double recovery and the CAFA’s purpose of increasing the fairness and consistency of class action settlements, the court stated. The decision does not preclude the State from seeking civil penalties or broad injunctive relief, the court stated; it merely precluded the State from seeking the same relief sought in the class action.

The case is Civil Action No. 13-56806.

Attorneys: Douglas J. Collodel, Paul Jeffrey Riehle and Nora Wetzel (Sedgwick LLP) for IntelliGender, LLC. Kristine A. Lorenz (San Diego City Attorney’s Office) for the State of California.

Companies: IntelliGender, LLC

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