On August 17, 2011, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s denial of class certification on the basis that the company’s process for reimbursing purchasers of a defective toy more efficiently distributed refunds to putative class members than a class action lawsuit would. The decision, Aqua Dots Products Liability Litigation, provides companies with grounds for challenging class certification where the relief sought is duplicative and less efficient than the defendant’s voluntary recall or refund process.

Background

Spin Master distributed a toy, Aqua Dots, consisting of brightly colored beads that could be fused together with water. The manufacturer produced Aqua Dots with the wrong chemicals, and some children became seriously ill when they swallowed the beads. Spin Master recalled the product, instructed purchasers that the product could harm children, and offered to exchange the defective Aqua Dots for non-defective Aqua Dots or a comparably priced toy. The recall notice did not mention refunds, but Spin Master and retailers provided refunds when asked by customers.

A number of class action complaints were filed against Spin Master and related defendants on behalf of those who purchased defective Aqua Dots but who did not receive a refund and whose children were not harmed by the product. These lawsuits sought a refund under federal consumer protection law and punitive damages under state law.

The district court denied Plaintiffs’ request for class certification under Federal Rule of Civil Procedure 23(b)(3) because the defendant’s refund program was “superior” to a class action lawsuit. The district court determined that the consumers were better off returning their products for a refund or replacement than pursuing a class action lawsuit, which would require the class to bear attorneys’ fees in order to obtain a remedy that was already available to them.

The Seventh Circuit’s Opinion

The Seventh Circuit affirmed the denial of class certification but relied on a different element for class certification. The appellate court held that the superiority determination under Rule 23(b)(3) must compare class litigation to different types of judicial proceedings available to the class members, and thus the district court improperly based its denial of class certification on the superiority of a non-adjudicatory process: i.e., the defendants’ refund program.

Using the same reasoning of the district court, however, the Seventh Circuit affirmed the denial of class certification under Rule 23(a)(4)’s requirement that the class representative be “adequate” to protect the interests of the class. The court concluded that a class representative who proposes incurring high transaction costs – attorneys’ fees and costs related to class notices – at the class members’ expense to obtain a refund that is already available to affected consumers is not adequately protecting the class members’ interests. Although the class action sought punitive damages in addition to a refund, the punitive damages claim would depend on the state law of many different states and thus posed case management problems that precluded class certification. Furthermore, the absence of information on who purchased defective Aqua Dots added case management difficulties related to the required notices to the putative class members.

Implications of the Decision

Companies often voluntarily provide replacements and refunds when there is a problem with a product, but are nonetheless targeted by opportunistic class action lawsuits. Aqua Dots provides such companies with a powerful argument that class action claims should not be permitted in light of the voluntary refund plan.

For more information on this topic or on the firm’s Class Action practice, please contact one of the attorneys listed below.