First American v. Edwards could reshape class action litigation

Without having incurred any damages, Edwards lacked standing, 9th Circuit says

When Denise Edwards bought a house in Cleveland in 2006, California-based First American Financial Corp. provided the title insurance. Edwards later learned that First American had an exclusivity agreement with her title company, Tower City. The insurer allegedly paid millions of dollars to title companies such as Tower City in exchange for exclusive referral relationships.  

Such deals violate the Real Estate Settlement Procedures Act (RESPA), a federal statute that bars kickbacks. Congress enacted RESPA in 1974 to require lenders and providers of real estate settlement services to be more transparent about homebuyers’ closing costs. The statute authorizes homebuyers to sue violators in federal court for treble damages.

Edwards sued on behalf of a nationwide class of homebuyers who bought title insurance from First American. But there was one thing missing from Edwards’ complaint—any allegation that she’d suffered damages as a result of the kickbacks. In fact, she concedes that she received the same price on title insurance as she would have received in the absence of kickbacks.

First American moved to dismiss the case, arguing that without any actual harm, Edwards lacked standing to sue. Standing is the constitutional principle that courts can’t rule on legal questions in the abstract, but rather can only hear live “cases and controversies” in which the plaintiff has suffered harm due to the defendant’s unlawful actions.

Both a district court and the 9th Circuit rejected First American’s standing argument, finding that in enacting RESPA, Congress gave consumers a right to closing services untainted by referral agreements, and that denial of that right represented sufficient injury to give Edwards standing to sue. The Supreme Court granted cert and heard oral arguments in November 2011.

Much more than the rights of homebuyers such as Denise Edwards is at stake in First American v. Edwards. The high court’s decision could reshape class action litigation and keep many plaintiffs out of federal court.

“Statutory damages are potentially on the chopping block for a wide range of consumer protection statutes,” says Kevin C. Walsh, a professor at the University of Richmond School of Law.

Class Warfare

Most observers expect a divided ruling from the high court. “Several justices seemed willing to say that there is some presumed harm when there’s a kickback,” says Michael Leffel, a partner at Foley & Lardner. “Five justices are concerned with a broad reading. One or two justices will say that a statutory violation is not enough.”

The decision is likely to have a significant impact on class action litigation. In order to seek class certification, the proponents of the class must show that there is a common core of factual and legal issues that make resolution of the claims on a class basis more efficient. A key question that courts consider is whether it is practicable to fashion a single remedy for the whole class without answering separate questions about each class member’s damages.

If the high court rejects the position Edwards advocates, it will become more difficult for plaintiffs to pursue large class actions because each class member will have to show how he was damaged, which could lead to unwieldy individualized inquiries, a point Justice Antonin Scalia raised during oral arguments.

“Edwards pleaded her case this way for a reason: to make class certification easier,” Leffel says. “The alleged violation of statute is a commonality, but damages are particular to each plaintiff.”

Fewer Remedies

While Edwards will undoubtedly impact RESPA class actions, it may also significantly curtail several other areas of federal litigation. Congress has enacted approximately 15 statutes that permit plaintiffs to sue in federal court without proving an actual economic injury.

Mary Massaron Ross, a partner at Plunkett Cooney who authored an amicus brief in Edwards on behalf of the Defense Research Institute, an organization of defense attorneys and in-house counsel, points to the Fair Credit Reporting Act (FCRA), the Electronic Fund Transfer Act and the Fair Debt Collection Practices Act as other statutes that authorize lawsuits without a showing of actual harm. These laws allow a plaintiff to sue violators for a predefined amount of statutory damages, regardless of whether (or how much) he was harmed. For instance, the FCRA authorizes plaintiffs to seek $1,000 in statutory damages as an alternative to showing an actual injury.

Ross argues that such statutes disturb the constitutional balance among the branches of government by giving the judiciary the executive function of enforcing the laws enacted by Congress. Moreover, she points out that when coupled with class actions, these statutes pose a great potential for abuse by lawyers seeking huge attorney’s fees without any real benefit to the class members. Still, Ross does not foresee the court doing away with all forms of statutory damages.

“The court could try to fashion a limited middle ground,” she says. “It would look at the nature of the right at stake in the specific statute and determine whether this statute addresses a type of injury that could be recognized.”

On the other hand, most observers do not expect the court to hold that Congress has an unfettered right to confer statutory standing.

“A broad holding that the purchaser had standing simply because she was the victim of a statutory violation is unlikely,” Walsh says. “A broad holding that the purchaser did not have standing, notwithstanding the statutory violation, would be a major event in federal justiciability doctrine.”

Adele Nicholas

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