The Ninth Circuit Court of Appeals recently reversed a district court’s decision to strike the class action allegations of a putative class action against Microsoft.^[1]  The Ninth Circuit’s decision means that the district court must reconsider whether to allow the case to proceed as a class action.  Because the decision as to whether to certify a class generally determines whether a class action will proceed, the Ninth Circuit’s decision is an important one for game companies, which are often confronted with class action lawsuits.

The Baker lawsuit alleged that a design defect in Xbox 360 video game consoles caused the consoles to malfunction and scratch game discs―although only 0.4% of Xbox console owners reported such problems.^[2]  The majority opinion held that the district court misapplied the law and should have followed an earlier Ninth Circuit decision rejecting the notion that individual manifestations of a defect preclude resolution of claims on a class-wide basis.^[3]  Rather, the majority held, where a lawsuit presents issues as to whether a defect exists and whether the defect breached an express warranty that are common to all of the would-be members of the class, proof that the alleged defect caused any damages to any individual in the class is not necessary for a class action to be certified.^[4]

The takeaway for game companies?  The Ninth Circuit’s decision in Baker v. Microsoft isn’t a road map for obtaining class certification in defective product cases, but it may smooth the path to certification in such cases, and thereby encourage more class actions.  On the other hand, companies may give greater attention to limiting or disclaiming warranties, in order to avoid the kind of claims that the decision addresses.

If you want a more detailed explanation of the Ninth Circuit’s reasoning, and the concurring judge’s suggestion that the Ninth Circuit needs to take on the issue of “comity” and what it means for class action lawsuits, read on.

The Gory Details

The district court’s decision to strike the class action allegations was based on two prior district court decisions that denied class certification in similar cases.  In Gable v. LandRover N. Am., Inc.,^[5] the putative class action plaintiffs alleged that the defendant’s vehicles had a defect in their alignment that caused uneven and premature tire wear.  The district court denied class certification because the plaintiffs failed to demonstrate that the purported defect manifested in a majority of vehicles.  In In re Microsoft Xbox 360 Scratched Disc Litigation,^[6] a 2009 case with claims very similar to those in Baker, the district court relied on the Gables decision to deny class certification on the basis that individual issues of fact and law predominated over common issues of fact and law.  As was the case in Gable and Baker, the alleged defect manifested in fewer than one percent of the total number of Xbox consoles purchased.  The district court ruled that the need to consider damages on an individual basis and the lack of any uniform manifestation of the common design flaw prevented class certification in both Gableand Scratched Disc Litigation.

In Wolin v. Jaguar Land Rover N. Am., LLC,^[7] however, the Ninth Circuit reversed the Gabledecision and held that proof of the manifestation of a defect is not a prerequisite to class certification in cases asserting a diminution in the value of a product as the result of a breach of warranty.  In Wolin, the Court decided that, regardless of when the premature tire wear was experienced, all class members at some point experienced the same injury due to the same defect.  The Court rejected the notion that differences in individual manifestations of the defect precluded resolving the claims on a class-wide basis, because all prospective class members alleged the same injury from a defective alignment in their vehicles and sought recovery under the same legal theories.

The district court in Baker nevertheless determined that Wolin did not undermine the analysis set forth in Scratched Disc Litigation, and that comity required deferral to the earlier order in that case denying class action certification.^[8]  Comity, in this context, means the respect or deference one court may give to the decision of another court in a related proceeding.  The district court in Baker noted that no Ninth Circuit or Supreme Court precedent articulated the mechanism by which comity was to operate. It therefore adopted a rule proposed by the American Law Institute (an influential legal research institution that publishes summaries of common law principles known as “restatements”), providing that a different district judge ruling on the same subject matter be given a rebuttable presumption of correctness, and determined that the presumption (that class certification should be denied) had not been rebutted.^[9]

The majority of the Ninth Circuit panel of judges who heard the appeal disagreed, concluding that Wolin was controlling because, as in Wolin, the Baker district court erred in finding that the individual issues of causation predominated over the common questions of whether there was a defect and whether that defect breached the express warranty.^[10]  The Court found that although the timing and extent of the disc scratching resulting from the alleged defect might vary from one consumer to the next, the complaint alleged that the game consoles were sold with a defective disc system that breached Microsoft’s express warranties for the Xbox 360.^[11]  The Ninth Circuit also rejected the defendant’s argument that the defect did not manifest in the vast majority of its products, finding that it had no bearing on whether the action could proceed on a class-wide basis.^[12]  As in Wolin, the plaintiffs in Baker alleged that the design defect breached an express warranty and thereby diminished the value of their purchase.^[13] The Ninth Circuit held that because these allegations were common to all potential members of the class, and because it was not necessary to show any “manifestation” of the alleged defect (i.e., any harmful result) to individual class members, the district court erred when it struck the class action allegations from the complaint.^[14]

Notably, the Ninth Circuit’s decision only determined that the district court misapplied the law in striking the class action allegations from the complaint.^[15]  The decision expressly disclaimed any determination of whether the issues would be best decided on a class-basis or whether class certification should be granted.^[16]  Moreover, it asserted that it was not establishing a rule requiring class certification in all product defect cases.^[17]

In a concurring opinion, Judge Bea argued that the case should have instead been decided on principles on comity.^[18]  Summarizing his proposed framework, Judge Bea suggested that a district court’s ruling to deny class certification for a similar class should create a rebuttable presumption that the litigation is not amenable to class action treatment – but that the presumption was rebutted in this case with the change in law by Wolin.^[19]

Judge Bea recognized the importance of class certification from a practical perspective, noting that “the decision whether or not the class is certified is usually the most important ruling in such a case; once a class is certified, plaintiffs who brought claims of even dubious validity can extract an ‘in terrorem’ settlement from innocent defendants who fear the massive losses they face upon an adverse jury verdict.”^[20]  Because filing a class action requires only minimal costs, members of a putative class could file similar lawsuits, with different plaintiffs and in different jurisdictions, until a judge grants class certification.^[21]

Judge Bea suggested that district courts adopt his approach to comity to resolve (or at least reduce) the possibility of repeated certification efforts by a putative class of plaintiffs, while ensuring that putative class members who have new evidence or law in favor of certification not be foreclosed by the failed efforts of their predecessors.^[22]

Possible Impacts

The Ninth Circuit’s decision could encourage class actions based on breach of warranty claims.  Although it denies that it is establishing a per se rule that such actions are appropriate for class treatment, the Court’s holding that plaintiffs need not show that product defects were manifest and resulted in individual damages appears to make it significantly easier to obtain class certification.  On the other hand, if the Ninth Circuit takes up the approach to comity advocated by the concurring opinion, that approach could limit repeated attempts to certify a class based on related allegations.  In any event, as noted above, companies may be motivated to provide fewer and more restrictive warranties for their products.

A copy of the Ninth Circuit Court of Appeals opinion in Baker v. Microsoft can be accessed here.

[1] Baker v. Microsoft Corp., No. 12-35946, 2015 U.S. App. LEXIS 4317 (9th Cir. Mar. 18, 2015).

[2] Id. at *1-4.

[3] Id.

[4] Id., at *16.

[5] No. CV07-0376, 2008 U.S. Dist. LEXIS 82996 (C.D. Cal. Sept. 29, 2008), rev’d Wolin v. Jaguar Land Rover N. Am., LLC, 617 F.3d 1168,  1176 (9th Cir. 2010).

[6] No. C07-1121, 2009 WL 10219350 (W.D. Wash. Oct. 5, 2009).

[7] 617 F.3d 1168 (9th Cir. 2010).

[8] Baker, 2015 U.S. App. LEXIS 4317 at *9.

[9] Id. at *9-10.

[10] Id. at *16-17.

[11] Id. at *14, *17.

[12] Id. at *17.

[13] Id.

[14] Id. at *20.

[15] Id.

[16] Id.

[17] Id., at *19-20.

[18] See id. at *21-22 (Bea, J., concurring).

[19] Id. at *22, *29.

[20] Id. at *30-31.

[21] Id. at *31.

[22] Id. at *33.