States can't obtain double recovery in class settlements

The 9th U.S. Circuit Court of Appeals recently decided People v. IntelliGender LLC, 2014 DJDAR 15025 (9th Cir. Nov. 7, 2014), holding that public officials cannot obtain a duplicate recovery in the form of restitution to individuals who previously participated in a class action settlement. The 9th Circuit's decision is an important recognition of principles of res judicata in a post-Class Action Fairness Act context and should prove useful in defending against claims brought by state attorneys general and other authorities that are the subject of prior class action settlements.

A private plaintiff filed a nationwide class action in federal court in June 2010 against IntelliGender LLC challenging its marketing of a prenatal gender prediction test. The plaintiff asserted various claims, including for restitution under California's Unfair Competition Law and False Advertising Law. In April 2012, final approval of a settlement was granted, pursuant to which IntelliGender agreed to make a $40,000 cy pres donation, change certain marketing materials, and pay $10 for each approved claim submitted by a class member whose test result was inaccurate.

The San Diego city attorney, acting on behalf of the state, sued IntelliGender in state court in November 2012 for violations of California's Unfair Competition Law and False Advertising Law, seeking civil penalties, restitution and an injunction. IntelliGender removed the case to federal court, successfully sought transfer to the judge who had approved the settlement, and then moved for an injunction prohibiting the state from prosecuting the enforcement action. The court denied IntelliGender's request for injunctive relief and remanded the state's action. IntelliGender subsequently filed a motion in the class action to enjoin only the state's pursuit of restitution to members of the settlement class, which also was denied. IntelliGender appealed.

The 9th Circuit began by analyzing the "relitigation exception" to the Anti-Injunction Act, which otherwise generally prohibits federal courts from enjoining state court actions. Under the relitigation exception, as explained by the court, a district court may issue an injunction to enforce the res judicata effect of a prior judgment when the earlier suit: (1) reached a final judgment on the merits; (2) involved the same cause of action or claim; and (3) involved identical parties or privies.

The court found the first two elements easily satisfied, but held that IntelliGender had not met its burden of showing that the settlement could bind the state in its sovereign capacity where it asserted public as well as private interests.

The court distinguished two prior 9th Circuit cases, Leon v. IDX Systems Corp., 464 F.3d 951, 962 (9th Cir. 2006), and Chao v. A-One Medical Services Inc., 346 F.3d 908, 923 (9th Cir. 2003), in which the court found that the state plaintiffs were pursuing only compensatory relief to the plaintiffs in the prior actions. Unlike the state plaintiffs in Leon and Chao, here the state was seeking both civil penalties and injunctive relief in the action against IntelliGender.

The court further rejected the argument that the state should be enjoined because it had received notice of the class action settlement as required under CAFA but had failed to object. The 9th Circuit affirmed the denial of an injunction prohibiting the state from prosecuting the enforcement action.

However, IntelliGender's motion to enjoin the state's claims for restitution presented "an entirely separate question," according to the court. In denying that motion, the district court had relied, in part, on the fact that the settlement made restitution of $10 available only to those class members whose test results were inaccurate, whereas the state was seeking restitution of the full $30 purchase price for all individuals who purchased the test. The court rejected this approach, stressing that "the appropriate inquiry is not what relief was ultimately granted, but whether the government is suing for the same relief already pursued by the plaintiff." Finding this was the case, and citing recent cases reaching the same or similar results, the 9th Circuit held that the state's claims for restitution were barred by res judicata and ordered the restitution claims enjoined.

The 9th Circuit's decision is an important recognition of principles of res judicata in a time of heightened scrutiny of class action settlements. The decision reaffirms the basic principle that court-approved settlements preclude class members from later obtaining additional relief for the same claims, while at the same time preserving the traditional power of the state to act in its own interests.