Ninth Circuit Rules Out State’s Claims in Class Settlement with Fetal-Gender Testing Co.

The Ninth Circuit Court of Appeals has enjoined California’s effort to obtain restitution on behalf of individual citizens bound by the bargainedfor restitution in a class settlement under the Class Action Fairness Act (CAFA) involving false advertising for a gender-prediction test, ruling that the state cannot obtain a duplicate recovery when it had the opportunity to but did not participate in the class-action proceeding. Cal. v. IntelliGender, LLC, No. 13-56806 (9th Cir., decided November 7, 2014).

A class of all those in the United States who purchased and used IntelliGender’s test was certified for purposes of the class-action settlement of unfair-competition and false-advertising claims brought by a private litigant under CAFA in 2010. Gram v. IntelliGender, LLC. To receive a $10 restitution payment, a class member was required to swear under penalty of perjury that the test result was inaccurate as to her child’s gender. After the court approved the settlement, the San Diego city attorney filed an action in the name of the people of California against the company for injunctive relief and to obtain civil penalties, restitution and other remedies for alleged violations of the same laws. 

IntelliGender sought to stop the enforcement action, claiming that allowing the suit to go forward would “undermine the ability of the district court to enforce its final order and judgment in the Gram class action.” The court denied that request and a subsequent request that the court enjoin the government’s restitution claims only; IntelliGender argued that allowing these claims “to go forward would amount to a double recovery and run afoul of the doctrine of res judicata.” 

On appeal, the Ninth Circuit determined that the government enforcement action could not be enjoined in its entirety, stating that, because the action “is brought on behalf of the people, it implicates the public’s interest as well as private interests, and therefore the remedial provisions sweep much more broadly” than those at issue in a CAFA class-action settlement. As to the government’s claims for restitution, the court explored whether sufficient privity exists between the state and the class members to warrant res judicata’s application. Because the class pursued restitution and the government now sought the same remedy, the court ruled that the res judicata requirements had been met. According to the Ninth Circuit, the district court’s suggestion that privity did not exist was based on “two mistaken premises: that the individuals on whose behalf restitution was sought are different from the certified class and that the amounts sought are different.” 

As to the former, the district court said that only those who had received an inaccurate result from the test were in the settlement class, whereas the government sought restitution on behalf of all California purchasers, regardless of the results received. While only those individuals who had received an inaccurate result were eligible for compensation under the settlement’s terms, the Ninth Circuit noted that the certified class covered “anyone who purchased and used the Test—substantially the same individuals for whom the State now seeks restitution. . . . Individual Gram class members who bought a Test and used it but did not obtain an incorrect result remain bound by the settlement, even though they will not receive any compensation. If the State wished to secure compensation for those class members, it had an opportunity to do so by intervening after receiving notice of the proposed settlement.” Its claims for restitution were therefore barred by res judicata principles. 

As to the district court’s “mistaken belief that the amount of restitution sought affects the propriety of issuing an injunction,” the Ninth Circuit said 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. Here, the class pursued restitution, and the government now seeks the same.” In the Ninth Circuit’s view, these errors strengthened its conviction that the district court abused its discretion in not issuing an injunction. CAFA was intended to prohibit relitigation; “[o]nce removal takes place, the consolidation of multiple overlapping suits allows one legal standard to govern the case.” Allowing the government’s claims to go forward would undermine CAFA “by in effect sending the same claims CAFA envisioned as removable back to be ‘adjudicated in the state courts, where the governing rules are applied inconsistently.’”

Read more in Issue 87 of the Life Sciences & Biotechnology Legal Bulletin.