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8th Cir. Reverses Data Breach Class Settlement, Holds Appellate Bond Not to Include Delay-Based Administrative Costs

In a data breach putative class action, the U.S. Court of Appeals for the Eighth Circuit recently held that the trial court had not conducted the required “rigorous analysis” of Federal Rule of Civil Procedure 23(a)’s class certification prerequisites when certifying the settlement class or when evaluating arguments raised by class objectors.

Additionally, the Eighth Circuit also reversed the trial court’s ruling on the amount of the appeal bond, holding that an appellate bond should not include costs associated with delays in administering a class action settlement while the matter was on appeal.

A copy of the opinion in Jim Sciaroni v. Target Corporation is available at:  Link to Opinion.

As you may recall, Target announced a security breach in 2013 that compromised the payment card data and personal information of approximately 110 million customers.  Consumers brought a class action against Target and eventually agreed to settle on behalf of a class that included all persons in the U.S. whose information was compromised as a result of the data breach.

The trial court preliminarily approved the class and the settlement, which created a $10 million settlement fund and an additional $6.75 million to the class counsel, and required Target to make specific data security improvements.  The settlement fund was to be distributed first to class members with documented losses, with the balance distributed equally among the class members with undocumented losses. Class members with no loss would receive nothing even if they incurred a future loss.

Two class members objected, asserting inadequate compensation to the settlement class members and excessive attorney’s fees.  Another class member additionally asserted that the class failed to meet Rule 23(a) prerequisites.

The objectors argued that the class representatives were inadequate because they had alleged documented losses and would receive compensation, while the objectors and many others had no documented losses yet, such that they would receive no compensation, even if they incurred future losses. The objectors requested that the court certify and appoint separate counsel for a separate sub-class for those without documented losses who were set to receive zero compensation.

The trial court overruled the objections, issued a final certification of the class and approved the settlement.

As you may recall, a district court may not certify a class unless it performs a “rigorous analysis” and is satisfied that the class meets Rule 23(a)’s certification prerequisites.  Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 351 (2011).  “Actual, not presumed, conformance with Rule 23(a)” is required.  Gen Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161 (1982). The trial court must continue to assure that the class is certifiable through the litigation, not just through the initial grant of certification.  Petrovic v. Amoco Oil Co., 200 F.3d 1140, 1145 (8th Cir. 1999).  In addition, the court must provide “close scrutiny” to guard the due process rights of absent class members.  Rattray v. Woodbury Cnty., 614 F.3d 831, 835 (8th Cir. 2010).

The Eighth Circuit analyzed what it means to provide a “rigorous analysis” of Rule 23 class certification prerequisites, and found that it must be more than simply repeating the language of Rule 23(a), but must include an adequate statement of the basic facts to show that each Rule 23 requirement is satisfied.  In addition, the Eighth Circuit held, the trial court must provide its reasoning for certification specifically enough so that the appellate court can provide meaningful review.

The Eighth Circuit held that the trial court had failed to meet that standard because, in its preliminary class certification, it had merely recited the Rule 23 prerequisites and stated that certification was proper. That, the Appellate Court explained, amounted to conclusions and not reasons, demonstrating that rigorous analysis had not taken place.

The Appellate Court further held that the trial court failed to continuously analyze the class certification ruling after the objectors raised issues that warranted inquiry into the propriety of certification and the possibility for an independent sub-class. The Eighth Circuit found that to be an abuse of discretion and remanded the matter for the trial court to conduct and articulate a rigorous analysis of Rule 23(a)’s certification prerequisites.

The Eighth Circuit enumerated the factors it expected to be included in the rigorous analysis.

The factors included whether the named representatives have common interests with the members of the class and will vigorously prosecute the interests of the class through qualified counsel, and whether there were any conflicts of interest between the named parties and the class they represent.

The Eighth Circuit further noted the important concerns raised by the objectors concerning whether an intra-class conflict existed between those who would recover funds and those who would not, whether that conflict prevents adequate representation, and if the conflict is fundamental, required a subclass, or separate attorney representation.  The Appellate Court took no position on those issues but demanded a satisfactory analysis from the trial court on those points.

Finally, the Appellate Court ruled on an issue of first impression for the Eighth Circuit:  whether costs associated with delays in administering a class action settlement while these issues were appealed may be included in an appeal bond under Federal Rule of Appellate Procedure 7.

Rule 7 allows a trial court to “require an appellant to file a bond or provide other security in any form and amount necessary to ensure payment of costs on appeal.” Fed. R. App. P. 7.  The Eighth Circuit noted that “[a]ppeal bonds are a type of guarantee for an appellee that an unsuccessful appellant can pay the costs the appellee incurs as a result of the appeal.”

The Eighth Circuit held that Rule 7 costs on appeal included only those costs that the prevailing appellant could recover under a specific rule or statute to avoid creating “an impermissible barrier to appeal.”  Adsani v. Miller, 139 F.3d 67, 76 (2nd Cir. 1998).  Applying this rule here, the Court held that the bond set by the trial court was excessive because it included delay-based administrative costs, and ordered the trial court to reduce the bond consistent with the standard articulated.

Accordingly, the trial court’s class certification orders and bond order were remanded for revisions consistent with the Eighth Circuit’s opinion.

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