The Dangers of Watering Down Class-Certification Standards in Fraud Cases

Class actions have long been difficult to certify in fraud cases.  But a recent district court decision in California takes a new approach that would make class certification in fraud cases the norm.  That decision is now on appeal to the Ninth Circuit, where Robinson Bradshaw filed an amicus brief on behalf of the Chamber of Commerce of the United States of America.  Our brief highlights the flaws in the district court’s decision and the damage that its approach to class certification would inflict on American businesses and the national economy.  This post summarizes our brief.

In DZ Reserve v. Meta Platforms, Inc., the U.S. District Court for the Northern District of California certified a class of more than three million companies that advertise on Facebook.  The class asserts that Facebook’s parent company, Meta, committed fraud by showing advertisers inflated estimates of how many people their ads might reach.  By certifying a class on that claim, the district court departed from the settled understanding that class treatment is usually improper in fraud cases.

That understanding dates to 1966, when the current version of Rule 23 of the Federal Rules of Civil Procedure was adopted.  Rule 23 includes the predominance requirement, under which questions common to the class must predominate over individual ones.  As the Advisory Committee that drafted the predominance requirement observed at the time, fraud claims may often be unsuited for class treatment.  That is because individualized inquiries often predominate over common questions on two key elements of fraud.

First, the defendant must have made a material misrepresentation to the plaintiff.  If the defendant made different representations to different class members, the class cannot use class-wide evidence to satisfy this element.  Rather, each class member must make an individualized showing that the defendant said something to that class member that was materially misleading.

Second, the plaintiff must have detrimentally relied on the defendant’s alleged misrepresentation.  Because people usually have their own individual reasons for their actions, individual inquiries are typically needed to judge why each class member acted as she did—and thus to determine whether the reliance element is met.

The DZ Reserve case exemplifies both of these stumbling blocks for certifying class actions in fraud cases.

First, Meta’s alleged misrepresentations varied across the class.  For example, Meta allegedly inflated its estimates about the potential reach of ads, but those estimates and their alleged levels of inflation differed from class member to class member.

Second, class members’ alleged reliance also varied.  Each advertiser placed its own individualized degree of weight on Meta’s estimates about potential reach.  For instance, some advertisers cared how many users actually clicked on their ads, not how many users those ads might have reached.

For these reasons, litigating the class’s fraud claim in DZ Reserve would require millions of individualized inquiries.  Those particularized questions would dwarf any common ones, defeating predominance and precluding class certification.

The district court nevertheless certified the class.  In so doing, the court adopted an approach under which fraud plaintiffs would almost always be deemed to have class-wide evidence of material misrepresentations and reliance.  As our amicus brief shows, if that approach were replicated in other cases, it would allow classes to be certified for fraud claims with ease.

Here, we emphasize two flaws in the court’s approach that have widespread significance.

First, on the element of material misrepresentations, the district court reasoned that the plaintiffs have class-wide evidence because the potential reach of ads was important for advertisers.  To win on their fraud claims, however, the plaintiffs must show that Meta’s alleged misrepresentations were material.  The question for predominance purposes is thus whether the plaintiffs have class-wide evidence that Meta’s alleged misstatements were important.  The district court instead cited evidence that potential reach was important.  In other words, the court cited evidence that the topic of the alleged misstatements was material, as opposed to evidence that the alleged misstatements themselves were material.

That difference matters.  Class-action plaintiffs could almost always cite evidence that, at some level, the topic of an alleged misrepresentation was material to all class members, even if the alleged misrepresentation itself was not.  The district court’s approach would thus largely do away with the predominance requirement for the material-misrepresentation element of fraud.

Second, on the element of reliance, the district court reasoned that advertisers rely on potential reach as a metric for their ads.  But the question is whether class members relied on Meta’s alleged misstatements about potential reach, not whether they relied on potential reach in the abstract.  Like the court’s approach on materiality, its approach on reliance would dilute the predominance requirement by allowing plaintiffs to cite purported class-wide evidence on an issue that is framed at the incorrect level of generality.  The result is that classes could be certified in the mine run of fraud cases.

As our amicus brief also shows, the district court’s overly permissive approach to class certification would impose serious harms on the business community and the public.

Class actions are expensive to defend.  They also create massive damages exposure.  These twin pressures often compel defendants to settle even meritless claims when classes are improperly certified.

These settlement dynamics are especially pronounced in fraud cases.  Fraud claims come with the threat of punitive damages, exposing defendants to huge risks of liability even for marginal claims.  That exposure heightens the incentive to settle for inflated amounts if classes are certified under diluted standards.

The costs of defending and settling class actions directly harm the businesses that pay them.  But as the Chamber has noted, those businesses pass along at least some of these costs to others in the form of higher prices and lower wages.  U.S. Chamber of Commerce Institute for Legal Reform, Nuclear Verdicts: Trends, Causes, and Solutions 34-38 (2022).  Defense and settlement costs are thus borne by consumers, employees, other businesses and the economy as a whole.  See id.

The DZ Reserve case highlights these cascading harms that result when class-certification standards are watered down.  Advertising on technology platforms like Facebook is essential for many small businesses.  In a recent survey, the Chamber found that:

  • 93% of small businesses use at least one technology platform.
  • 41% of small businesses use digital marketing platforms in particular.
  • 77% of small businesses “would struggle to survive without access to their technology platforms.”

U.S. Chamber of Commerce Technology Engagement Center, Empowering Small Business, The Impact of Technology on U.S. Small Businesses 4-5 (2022).  If class actions become too easy to certify against technology platforms, small businesses that rely on those platforms—along with those businesses’ employees and customers—will pay the price.

To prevent that result, our amicus brief in DZ Reserve urges the Ninth Circuit to reverse the district court’s class-certification decision and reaffirm the understanding that class actions are difficult to certify in fraud cases.