FOR THE THIRD CIRCUIT Nos. 97-5155, 97-5156, 97-5216, 97-5217 IN RE: PRUDENTIAL LIFE INSURANCE COMPANY OF AMERICA On Appeal from the United States District Court for the District of New Jersey (Civil No. 95-CV-04704) BRIEF AMICUS CURIAE OF PUBLIC CITIZEN, INC. IN SUPPORT OF REVERSAL Brian Wolfman
Attorneys for Amicus Curiae Public Citizen, Inc. June 2, 1997 In this brief, amicus Public Citizen will focus on what it believes is the settlement's fundamental defect: In an effort to achieve global peace and to mollify all of its insureds, Prudential insisted that the class be expanded, and benefits provided, to not only the relatively modest number of policyholders who were injured by the specific Prudential sales practices identified in the complaint, but to every person who purchased a Prudential policy during the 14-year class period. As a result, the settlement misallocates hundreds of millions of dollars, by awarding benefits to Prudential policyholders who have suffered no discernible legal harm, and by taking those benefits from class members who are truly injured. In the pages that follow, we first set forth the interest of the amicus, and then turn to a short statement of the case in which we describe only those facts relevant to the settlement's fundamental shortcoming. Finally, in the Argument section, we explain that the settlement should not have been approved by the district court because, as presently structured to include all Prudential policyholders, the settlement (1) is not fair, adequate, and reasonable under Federal Rule of Civil Procedure 23(e); (2) does not satisfy the certification criteria of Rules 23(a) and (b); and (3) violates Article III's case-or-controversy requirement. Whether a settlement composed only of class members whose injuries were properly identified could be sustained is not before the Court and should not be decided. We recognize that, ordinarily, it would be appropriate to begin the Argument with a contention that the suit does not present an Article III case or controversy because, unless the requirements of Article III are met, that is the end of the matter. Thus, if, as we argue below, the representative plaintiffs here--all of whom have alleged injuries--lack standing to represent millions of class members who have not claimed any injuries at all, the judgment below cannot stand. See Lewis v. Casey, 116 S. Ct. 2174, 2183 (1996)(named plaintiff prisoners who had alleged specific denials of constitutional right of access to the courts lacked standing to represent class of inmates who had not made such specific allegations). We have placed the fairness and class certification arguments first, however, because they present equally compelling reasons for reversing the decision below, and a decision on one or both of those grounds would allow this Court to avoid the constitutional question, as it chose to do in Georgine v. Amchem, 83 F.3d 610, 623 (3d Cir.), cert. granted sub nom. Amchem v. Windsor, 117 S. Ct. 379 (1996). Public Citizen was founded in 1971 as a public advocacy, lobbying, and litigation organization. On behalf of its 100,000 members, Public Citizen has worked toward the enactment and effective enforcement of consumer protection laws, such as those applicable to the wrongful conduct of Prudential in this case. In the last five years alone, through its Litigation Group, Public Citizen has represented objectors in more than a dozen nationwide class action settlements in which the named representatives and their attorneys were inattentive to the needs and divergent interests of the absent class members whom they were supposed to represent. See, e.g., Bowling v. Pfizer, 143 F.R.D. 141 (S.D. Ohio 1992); In re Ford Motor Co. Bronco II Prod. Liab. Litig., 1995 U.S. Dist. Lexis 3507 (E.D. La. Mar. 20, 1995); see generally Henry J. Reske, "Two Wins for Class Action Objectors," 82 A.B.A. Journal 36, 37 (June 1996)(highlighting Public Citizen's work representing absent class members). Public Citizen is filing this brief not only because of its concern for the injured Prudential policyholders here, but because of the unfortunate precedent that would be set if the judgment below is affirmed. Public Citizen's attorneys argued on behalf of lead objectors in two recent cases from this Court involving nationwide class settlements which, like this one, present fundamental intra-class conflicts. See In re General Motors Corp. Pick-up Truck Fuel Tank Litig., 55 F.3d 768 (3d Cir.), cert. denied, 116 S. Ct. 88 (1995); Georgine v. Amchem, 83 F.3d 610 (3d Cir.), cert. granted sub nom. Amchem v. Windsor, 117 S. Ct. 379 (1996). Our experience in consumer class actions, and in particular in General Motors and Georgine, enables us to provide a perspective that may be useful to the Court. The Breadth of the Class Throughout this litigation, the plaintiffs have alleged three specific types of sales conduct perpetrated by Prudential and its agents to the detriment of the plaintiff class: (1) "churning" or unjustified policy replacement, (2) the fraudulent sale of policies claimed to have "vanishing premiums," and (3) the sale of policies as investment instruments when in fact they were nothing more than life insurance policies. See Second Amended Complaint, 105 (filed Sept. 19, 1996)("Each of the Plaintiffs was victimized by one or more of Prudential's churning, vanishing premium, or investment plan tactics"). Only these three specific kinds of conduct are contained in the complaint's class allegations as involving common questions, id. 176, and the class representatives' claims are alleged to be typical of the absent class members' claims only insofar as the class representatives had been injured by those three types of unlawful Prudential conduct. Id. 177; see In re Prudential Ins. Co. Sales Practices Litig., 1997 U.S. Dist. Lexis 4049, *22-*34 (D.N.J. Mar. 17, 1997)(detailing class representatives' claims). This complaint, which was filed just days before the settlement was announced, states that the class encompassed "hundreds of thousands" of persons. Second Amended Complaint, 175. The Stipulation of Settlement, however, signed in October 1996, did not limit itself to this narrowly defined class. Rather, as part of the settlement, Prudential sought global resolution for any claim, past or future, that could be asserted by any of its more than 8 million policyholders who purchased a total of approximately 10.7 million policies during the class period. See Affidavit of Richard E. Meade, Vice President and Associate General Counsel, Prudential, 11 (Nov. 25, 1996); Affidavit of Esther Milnes, Vice President and Actuary, Prudential, 5 (Nov. 22, 1996). Thus, rather than limiting the settlement to the several hundred thousand policyholders who had been injured by the three specific sales practices alleged in the Second Amended Complaint, the settlement bars all of Prudential's 8 million policyholders from asserting any claim that has arisen, or may in the future arise, out of their contracts of insurance. Neither the Second Amended Complaint nor any other pleading asserts any claim on behalf of these millions of new class members. From the class' perspective, the first inkling that every policyholder was being swept into the class came late in the Notice sent to class members. See Exh. F-2 to the Settlement Agreement. Thus, on pages 5-6 of the Notice, the class members are told that policy replacement (churning), "vanishing premium," and mischaracterized "investment" policies were the three theories under which the class has sought relief. It is not until page 11 of the Notice, after the class members are again told that the settlement provides compensation for the three specific wrongs alleged in the complaint (at page 10), that they are told, in very cryptic terms, that they can obtain relief if they were injured by "other improper life insurance sales practices." Nowhere, however, does the Notice explain what such "other" practices might be, nor does it even suggest how a class member might go about proving such a claim. This is hardly surprising, since there is no evidence that the millions of class members who have been placed in the "other improper sales practices" category have suffered any injuries as a result of Prudential's wrongful conduct. Whether or not the class members were adequately informed, there is no doubt that the settlement extinguishes any legal rights that all 8 million policyholders might have against Prudential. When the settlement release is read together with the term "Released Transactions," it is clear that every present or future claim of illegality involving the Prudential policies is released by the settlement. (See Footnote 1) The Settlement Terms The settlement provides a minimum of $410 million in cash compensation for class members who have suffered injury from Prudential's sales practices. These proceeds will be allocated among the estimated several hundred thousand class members who have sustained injuries, through an alternative dispute resolution (ADR) procedure in which claimants document their transactions with Prudential, and adjudicators give claimants scores ranging from 1 to 3, depending on the strength of the claim. The ADR component contains no absolute ceiling. After 330,000 valid claims, however, although the aggregate relief will continue to grow, the per-claim value of the settlement will diminish. Plaintiff's expert, Arthur Andersen, has valued the ADR part of the settlement at $1.187 billion, based on an assumption that class members will file 330,000 valid claims, representing only approximately 3% of the 10.7 million policies covered by the settlement. See Prudential, 1997 U.S. Dist. Lexis 4049, *107-*108; Milnes Aff., 5. In addition, the settlement provides what it terms "Basic Claim Relief" (BCR) for any class member who does not seek relief through the ADR procedure. Under the BCR component, class members can choose from four options under which they may purchase new Prudential insurance or investment products, or enhance existing policies, at reduced rates. It is worth asking why anyone entitled to cash relief under the ADR would seek BCR, which consists mainly of reductions in the price of other Prudential insurance and investment products. To be sure, some injured class members will opt for BCR because it is easier to obtain than the ADR relief. However, it is clear that the BCR is designed principally for the vast majority of class members--those who have been categorized as victims of "other improper sales practices," but who have no discernible injuries and, therefore, never could obtain ADR relief. Arthur Andersen has determined that the BCR component is worth approximately $800 million to the class members, while Prudential's actuarial expert estimated the BCR's value to be $425 million. Prudential, 1997 U.S. Dist. Lexis 4049, *108. If we assume that the actual value of the BCR is roughly halfway between the parties' respective estimates, that means that about $600 million is not available to pay claims of the several hundred thousand people who were actually injured by Prudential, and that the money is being used instead to benefit those with no known claims against the company. At first blush, it appears curious that Prudential decided to reward all of its policyholders, the vast majority of whom have no injuries, with valuable BCR relief, rather than pay all of the relief to policyholders who had sustained real injuries. The answer, we believe, is tucked away in the fine print of Exhibit D to the settlement: Prudential insisted on the BCR so that it could "mitigate the disappointment of Policyholders with the performance of products which they previously purchased from the Company." Stipulation of Settlement, Exh. D, at 1. Whether it is a good idea for an insurance company to curry favor with millions of uninjured policyholders who nonetheless have a dim view of the company, because they have heard nothing but bad things about the company in the press, may be debatable as a business matter. But the question here is whether it is permissible for a court to allow the company to achieve that goal by using funds generated by injured class members' claims. As we now show, the answer to that question is "no," for three interrelated reasons. A. The Treatment Of The "Other Improper Sales Practices" Claims Renders The Settlement Unfair. Prudential's massive purchase of res judicata--by wiping out the claims of every Prudential insured--is fundamentally unfair for two reasons. First, the settlement enriches millions of class members who sustained no injuries at the expense of those who were injured. Second, the settlement prematurely extinguishes the rights of class members who may in the future have valid claims against Prudential. We treat each of these problems in turn. 1. The settlement is unfair because hundreds of millions of dollars in BCR relief will go principally to the "other improper sales practices" claimants, who generally have no injuries and will not therefore seek ADR relief. This allocation of valuable benefits greatly disadvantages the class members who have actually suffered harm. To be sure, some "other improper sales practices" claimants may seek and obtain relief in the ADR. However, virtually all of those class members--in other words, the vast majority of the class--have not suffered any legal harm, yet they will receive valuable BCR relief. Indeed, as noted earlier, not a word about "other improper sales practices" is spoken in the complaint or in any other pleading. Thus, the settlement's entire value--whether it be the nearly $2 billion estimated by Arthur Andersen or something less--had to have been generated by the claims of the plaintiff class for which there is evidentiary support, i.e., those class members who were victims of replacement, were sold "vanishing premium" contracts, or were fraudulently sold life insurance as an investment opportunity. It is thus fundamentally unfair for part of this value to be transferred to undeserving class members, as the settlement does here. Nor can the settling parties escape this basic misallocation problem by claiming that the class members who have valid ADR claims will receive 100 cents on the dollar for out-of-pocket losses. Even if that were the case--which we doubt--the ADR does not compensate for class members' inconvenience, consequential damages, and pain and suffering, not to mention punitive damages. Although such non-compensatory damages can properly be compromised in a mass settlement, that argument is entitled to no weight here, where monies that otherwise would be available to injured class members are being allocated to class members who have no injuries at all. This basic proposition is all the more true here, because, in cases that have been tried to date, victims of the very unlawful conduct that will result in recovery under the ADR have produced huge jury verdicts, including substantial pain and suffering and punitive damage awards. See Joint Appendix at 617a, District Court Order Regarding Motion to Remand, at 2 (entered Jan. 22, 1996)(juries recently returned $25 million verdicts in two actions by individual policyholders). Although we believe the misallocation of settlement proceeds to undeserving class members will cost the injured class members hundreds of millions of dollars, the misallocation injures them in another way. If that money were transferred back to the injured class members, it could be used in many beneficial ways other than in direct pro rata cash distribution. For instance, the burden of proof on certain types of claims could be lowered (e.g., reducing the requisite number of prior complaints about particular sales agents). Or, more fundamentally, anyone whose policy has been replaced--which is generally discernible from Prudential's own records--could be provided with some presumption of recovery, or an automatic score of 3 under the ADR. See Affidavit of Melvin I. Weiss, 107, 109 (Nov. 22, 1996)(class counsel originally pressed for presumptive relief or automatic ADR score for replacement victims). But under the current scheme, the value of the BCR is transferred away from class members who have sustained injuries to class members who have not. A settlement containing such a fundamental misallocation of settlement resources cannot be deemed fair, adequate, and reasonable. General Motors, 83 F.3d at 800-01, 808-09 (disapproving settlement in part because of improper allocation of settlement relief among different segments of the class); Georgine, 83 F.3d at 630-31 (same); In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1133 (7th Cir.)(same), cert. denied, 444 U.S. 879 (1979). 2. Class members with legitimate future (i.e., undiscovered) claims receive practically nothing from the settlement. An example will illustrate the problem. Take a class member who is currently one of the millions of class members who has no injury. Five years from now, she learns that her premiums have been unlawfully excessive, that her agent lied to her about the amount of coverage, that Prudential failed properly to pay benefits, or that Prudential committed any other of the myriad "improper sales practices" that could arise. If this class member files suit against Prudential, her claim is barred because, under the settlement approved by the district court, she has released all of these potential future claims, even though none of them is even mentioned in the complaint. At present, there is no evidence of record that any "other improper sales practices" occurred. The settling parties will likely argue, therefore, that this settlement provides the best of both worlds: Class members who have suffered discernible injuries get full relief under the ADR, and the "other improper sales practice" claimants get something--the BCR--for nothing. No harm, no foul. But the eradication of future claims cannot be squared with this Court's recent decision in Georgine, 83 F.3d at 630-31, where an attempt at global resolution of future claims was rejected in part because the interests of some class members were sacrificed for the benefit of others. See also National Super Spuds v. New York Mercantile Exchange, 660 F.2d 9, 19 (2d Cir. 1981)("The justification for permitting the representatives to sue on behalf of the class has no application to claims of class members in which the representatives have no interest and which, as shown here, they are willing to throw to the winds in order to settle their own claims"). And although it is likely that the number of claimants holding valid future "other sales practices" claims will be a relatively small percentage of the 8 million policyholders, it should go without saying that "convenience and expediency cannot justify disregard of the individual rights of even a fraction of the class." General Motors Corp. Engine Interchange, 594 F.2d at 1133. B. Certification Of The Class Was Erroneous. The overinclusiveness of the class also dooms the plaintiffs' quest for class certification. First, the settlement class fails for lack of typicality under Rule 23(a)(3), because there is no class representative who claims to have been injured by "other improper sales practices." This is not surprising, since those sales practices are not discussed in the Second Amended Complaint or any other pleading, and it is thus impossible to tell what these alleged sales practices entail. By definition, typicality cannot be met unless a named representative can identify his or her own claim so that it can be compared to those of the absent class members. Put another way, no class representative can say what the "other sales practices" claims are, let alone show that his or her claims are typical of those of the absentees. The district court concluded that it was unnecessary to have a class representative for the "other improper sales practices" class. Prudential, 1997 U.S. Dist. Lexis 4049, *192. But that holding is plainly incorrect under East Texas Motor Freight System, Inc. v. Rodriguez, 431 U.S. 395 (1977), where the Supreme Court overturned a class certification in a race discrimination case because, among other reasons, the class representatives had not suffered the same injury as the class that they purported to represent. If class certification was inappropriate in East Texas, where at least there were class representatives and the injuries of the class were stated with particularity, it is surely inappropriate here where even those formalities are lacking as to the "other improper sales practices" class. See also Lewis v. Casey, 116 S. Ct. 2174, 2183 (1996), discussed infra at 19-20. The district court permitted the certification of the "other sales practices" claimants only by analyzing Rule 23 typicality at a level of generality that eviscerates the requirement entirely. The court ruled that all class members--those who have alleged discernible legal harms and those who supposedly have suffered other harms--"have suffered the same injury" solely because they are all "victims of Prudential's deception." Prudential, 1997 U.S. Dist. Lexis 4049, *193. But that kind of amorphous claim of injury cannot possibly meet Rule 23(a)(3)'s typicality requirement. If it did, a mere claim of "misrepresentation" would suffice to certify any consumer fraud class action, or an allegation of "discrimination" would suffice to certify any Title VII class action, or the claim that the defendant "restrained trade" would suffice in a Sherman Act class action. But that is not the law. Class actions do not exist in the air, but only in relation to the particular types of claims asserted by the named representatives. See East Texas, 431 U.S. at 403-04; Lewis, 116 S. Ct. at 2183. This point is well illustrated by the Supreme Court's decision in General Telephone Co. of the Southwest v. Falcon, 457 U.S. 147, 158-59 & n.13 (1982), an employment discrimination class action in which the Court held that a Mexican-American employee, who was denied a job promotion, was not typical of a class of Mexican-American job applicants. Thus, in Falcon, it was not sufficient to allege that the defendant had discriminated against the plaintiffs generally; rather, it was necessary to show that the plaintiff class had been injured in the same manner as had the named representative. If the relatively small differences between the class representatives and the absentees in Falcon defeated typicality, then this case does not even remotely justify certification, where there is no named representative for the "other improper sales practices" claimants and the settlement release bars the future claims of millions of policyholders, the legal and factual bases for which are unknown and unknowable. See Georgine, 83 F.3d at 633. By the same token, common questions cannot predominate over the individual questions for the "other improper sales practices" plaintiffs as required by Rule 23(b)(3), since it is impossible to tell what the common and individual questions would be for these class members. Similarly, certification is improper because the class cannot demonstrate adequacy of representation under Rule 23(a)(4). First, adequacy, like typicality, fails for want of a named representative--an individual who will champion the cause of the "other improper sales practices" claimants. Additionally, representation has been inadequate because, without any knowledge of what, if anything, the "other improper sales practice" claimants are entitled to, the current class representatives have bestowed enormous value on those claimants at the expense of the class members who have legitimate and valuable claims. See supra at 9-11; Georgine, 83 F.3d at 630-31; see also East Texas, 431 U.S. at 405-06 ("The mere fact that a complaint alleges racial or ethnic discrimination does not in itself ensure that the party who has brought the lawsuit will be an adequate representative of those who may have been the real victims of that discrimination"). For all of these reasons, the district court erred in certifying the class. C. The Claims Of The "Other Improper Sales Practices" Class Do Not Present A Justiciable Case or Controversy. The district court's approval of a headless class of millions of "other improper sales practices" claimants also violates basic Article III case-or-controversy principles. Whether analyzed under the feigned case doctrine or as a failure of Article III standing, the approval of this all-inclusive class action settlement, as opposed to a class of actually injured Prudential policyholders, was beyond the limited powers of a federal court. Late during the settlement negotiations, Prudential decided that it wanted to include in the class not only those who had alleged discernible claims for relief, but also everyone else who held a Prudential insurance policy. Class counsel agreed, possibly as part of the final series of trade-offs that led to the global settlement. Cf. Affidavit of Melvin Weiss, 107, 109 (describing how class counsel dropped insistence on automatic payments to victims of policy replacement for financial guarantees for class as a whole). This joint effort to create an all-encompassing res judicata effect was made without any intention of adjudicating the rights of the "other improper sales practices" claimants, who, as noted earlier, asserted no claims whatsoever in any pleading filed in the district court. The problem with the settling parties' machinations is that federal courts possess only the power to adjudicate. See, e.g., City of Los Angeles v. Lyons, 461 U.S. 95, 101-02 (1983); United States v. Freuhauf, 365 U.S. 146, 157 (1961). Here, the record contains virtually no information about the alleged improper sales practices; there is no plaintiff who claims injury from such practices; and there was never any intent to litigate such claims. In short, there never has been any live controversy between Prudential and the "other improper sales practices" class. And, although the Stipulation of Settlement makes a cryptic reference to such "other" claims, Stip. of Settlement, Exh. B, at 37, the settlement itself cannot create a controversy where none exists. See Georgine, 83 F.3d at 638 (Wellford, J., concurring); see also Poe v. Ullman, 367 U.S. 497, 501 (1961). Illustrative of the feigned case principle is Moore v. Charlotte-Mecklenburg Bd. of Educ., 402 U.S. 47, 48 (1971), where the plaintiffs brought an action asking for a judicial determination that a state anti-busing statute was unconstitutional. Because the state's Attorney General agreed with the plaintiffs, the Supreme Court found that there was no case or controversy and dismissed the action. Similarly, here, the record demonstrates that the settling parties agreed to add to the settlement (and then release) the non-existent claims of millions of additional class members, without any inquiry into the validity of those claims, solely to obtain federal court approval of a global settlement. This gimmick to invoke federal jurisdiction should have been rejected by the district court under the feigned case doctrine. See also United States v. Johnson, 319 U.S. 302 (1943); Muskrat v. United States, 219 U.S. 346 (1911). (See Footnote 2) 2. The inclusion of the "other sales practices" class members raises an insurmountable standing problem as well. To establish standing under Article III, a litigant must demonstrate "that he has suffered an 'injury in fact.' That injury ... must be concrete in both a qualitative and a temporal sense." Whitmore v. Arkansas, 495 U.S. 149, 155 (1990). An "injury in fact" is "an invasion of a legally protected interest which is (a) concrete and particularized, and (b) 'actual or imminent, not conjectural or hypothetical.'" Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)(citation omitted). This case cannot satisfy these constitutional requirements, since no class representative, let alone a single person among the multi-million member class, has alleged any injury on account of "other improper sales practices." Cf. Georgine, 83 F.3d at 636-38 (Wellford, J., concurring)(claimants who alleged injuries, but actually did not seek relief for such injuries, did not have standing). And even if it could be assumed that some of the millions of class members have suffered injury from "other improper sales practices"--which would not, of course, provide standing for others who had not suffered such injuries--the lack of an appropriate class representative is dispositive on the standing question:
Recently, in Lewis v. Casey, 116 S. Ct. 2174 (1996), the Supreme Court addressed a situation that is conceptually identical to the one presented here. In that case, the Ninth Circuit had affirmed an injunction which required an entire state prison system to provide a broad range of legal assistance and law library facilities to all of its inmates. However, only two named plaintiffs had suffered any specific injuries regarding a lack of legal assistance: One non-English speaking inmate alleged that his lawsuit had been dismissed with prejudice because of inadequate legal assistance, and another inmate claimed that he had been unable to file suit for the same reason. In words that describe almost precisely the situation here, the Court rejected the attempt to bootstrap the two inmates' specific claims into a wholesale restructuring of the state's system for providing legal assistance to its prisoners:
In sum, whether seen as a problem of fairness, a failure to meet the requirements for class certification, or want of a case or controversy, "what the district court did here might be ordered by a legislature, but should not have been ordered by a court." Georgine, 83 F.3d at 635. The decision of the district court approving the class actions settlement should therefore be reversed.
For the foregoing reasons, the decision of the district court should be reversed. Respectfully submitted, Brian Wolfman
Attorneys for Amicus Curiae
June 2, 1997 |