The Ninth Circuit has agreed to review a panel decision from the court which rejected a settlement in multidistrict litigation over the fuel efficiency of Hyundai Motor America Inc. and Kia Motors Corp. vehicles. The case and rehearing raise the issue of what weight, if any, is given to disparate state laws when reviewing proposed settlement agreements in a multidistrict case and to what extent courts and class counsel bear the burden of addressing that issue.

The Hyundai and Kia fuel economy litigation was assigned to the U.S. District Court for the Central District of California in 2013. The case involved 12 class actions pending in five federal districts, all involving the marketing, sale and advertising of the mileage estimates for certain Hyundai Motor America  and Kia Motors Corp. vehicles. In all, 56 actions were consolidated into the multidistrict litigation.

An earlier ruling had previously indicated the case was not appropriate for certification because of variances in state laws. Despite this earlier concern, a class was then certified for settlement purposes consisting of current and former owners of specified Hyundai and Kia vehicles registered in the United States. Subsequently, the district court granted final approval of a settlement and dismissed the case.

On appeal, objectors brought five consolidated appeals raising challenges to class certification, approval of the settlement as fair and adequate, and approval of attorneys’ fees as reasonable in proportion to the benefit conferred on the class. A panel of the Ninth Circuit vacated the district court’s order granting class certification in the nationwide class action settlement.

With respect to choice of law issues, the panel held that the district court abused its discretion in concluding that common questions predominated, and in certifying the settlement class under Fed. R. Civ. P. 23(b)(3). The panel noted that Rule 23(b)(3)’s predominance inquiry was far more demanding than Rule 23(a)’s commonality requirement. The panel further noted that where plaintiffs bring a nationwide class action under CAFA and invoke Rule 23(b)(3), a court must consider the impact of potentially varying state laws. Finally, in determining whether predominance was defeated by variations in state law, the panel proceeded through a framework outlined by previous opinions of the Ninth Circuit.

The panel majority quoted from Castano v. Am. Tobacco Co. and stated that, “a court must consider the impact of potentially varying state laws, because ‘[i]n a multi-state class action, variations in state law may swamp any common issues and defeat predominance.’” The panel also relied on Mazza v. Am. Honda Motor Co, under which a judge reviewing a proposed settlement should determine whether predominance is defeated by variations in state law. According to the panel decision, under the predominance inquiry “the class action proponent must establish that the forum state’s substantive law may be constitutionally applied to the claims of a nationwide class.” Once demonstrated, the court applies the forum state’s choice of law rules to determine whether the forum state’s law or the law of multiple states apply to the claims. There is no issue if the result is the application of only one state’s laws to the entire class, but, if class claims require adjudication under the laws of multiple states, then the court must determine whether common questions will predominate over individual issues and whether litigation of a nationwide class may be managed fairly and efficiently.

Applying the predominance inquiry to the case at hand, the panel first determined that California choice of law provisions could permissibly be applied and that this required the district court to apply the California governmental interest test. The court stated that it was undisputed that the district court did not conduct a choice of law analysis, and did not apply California law or the law of any particular state in deciding to certify the class for settlement.  The panel further opined that “factors such as whether the named plaintiffs were in favor of the settlement or whether other class members had an opportunity to opt out are irrelevant to the determination whether a class can be certified.” The court also reasoned that the error in the certification arose because of “the mistaken assumption that the standard for certification was lessened in the settlement context.”

In dissent, Judge Nguyen wrote that, contrary to Ninth Circuit case law and that of other circuits, the majority shifted the burden of proving whether foreign law governed from the foreign law proponent – here, the objectors – to the district court or class counsel, thereby creating a circuit split and violating the doctrine of Erie R.R. v. Tompkins.  Judge Nguyen opined that “[f]ar from imposing geographic limitations, the predominance inquiry under Rule 23(b)(3) simply tests whether questions common to the class are more prevalent or important than individual ones.” She reasoned that the district court permissibly determined that issues regarding fuel economy statements predominated other matters and warranted certification. Judge Nguyen also reasoned it was wrong to require the district court or class counsel to extensively canvass every state’s laws and determine that none other than California’s apply when the issue was not adequately raised by objectors. Judge Nguyen concluded by stating that under the majority’s framework, “no one will recover anything.”

The opinion has already begun to affect other settlements. Given the panel’s admonishments, district court judges have become more cautious in granting approval for settlement agreements, faced with the task of surveying state laws nationwide prior to doing so.  For example, in the U.S. District Court for the Northern District of California, Tesla’s settlement over allegedly faulty Autopilot and safety features is conditioned upon a state law analysis to be completed prior to the court considering final approval (Sheikh et al. v. Tesla Inc.). In another California case, Uber’s settlement concerning “safe ride fees” and employee screening has been paused until the Ninth Circuit’s en banc decision is rendered  (Byron McKnight et al. v. Uber Technologies Inc. et al.). Likewise, a settlement involving ADT security devices has been paused pending the Ninth Circuit’s en banc review (Edenborough v. ADT LLC).

Although certification was still possible if the case were remanded, both plaintiffs and class action defense attorneys filed briefs requesting the full Ninth Circuit to review the ruling arguing that the panel’s January ruling clashed with precedent, would impede nationwide settlements and class action litigation, and would burden trial courts. Others believe that it is impossible for a court to determine the fairness of a settlement without considering potentially meaningful differences in the chances of success of a claim under the laws of one state as opposed to another. Under this view, assessing the fairness of a settlement to all class members in a nationwide class action based on the weaknesses of the claim under the forum state’s law, without considering whether all class members face similar hurdles, would run roughshod over the rights of absent class members. After granting rehearing en banc, the Ninth Circuit has set oral arguments for the week of September 24 in Pasadena, California.