Ty Jameson

In a case that had previously made its way to the U.S. Supreme Court,[1] the North Carolina Supreme Court recently issued a decision in Jackson v. Home Depot U.S.A., Inc., providing guidance on the predominance requirement for class certification. The Court vacated a class‑certification order, grappling with issues of a multi-state class and how inducement as an element of a claim can create individualized issues to defeat predominance.

Read on for a discussion of this important decision.

BACKGROUND

In 2014, George Jackson bought a RainSoft home water system from Carolina Water Systems, an authorized provider for Home Depot. Carolina Water Systems participated in a RainSoft promotion that provided rebates or refunds to purchasers who referred additional purchasers. A purchaser who provided enough referrals could even get a full refund for their purchase of a RainSoft system.

Mr. Jackson bought his RainSoft water system in 2014, using his Citibank credit card. Two years later when Citibank brought a debt-collection action against him for failure to make payments, he asserted that the debt he owed for the RainSoft system was void under North Carolina’s “referral statute.”[2] The referral statute prohibits sales promotions that offer discounts or other benefits to buyers in exchange for referring prospective customers. 

Mr. Jackson also brought third-party claims against Home Depot and Carolina Water Systems and sought class certification. The putative class action complaint asserted claims for: (1) a declaration that the class members’ obligations under their sale contracts were “void and a nullity”; (2) a claim for return of “all consideration paid” by class members for their RainSoft system; and (3) a claim for unfair and deceptive trade practices.

The trial court granted Mr. Jackson’s motion for class certification, finding that the putative class met all requirements for class certification and that the class action format was the superior method of adjudicating the dispute.  The class consisted of all persons who bought a RainSoft home water‑treatment system from the defendants between November 2012 and November 2016.

Defendants appealed directly to the North Carolina Supreme Court pursuant to section 7A‑27(a)(4) of the North Carolina General Statutes.

THRESHOLD CRITERIA FOR CLASS CERTIFICATION

The North Carolina Supreme Court began its analysis by discussing the threshold criteria for class certification in North Carolina. Under Rule 23(a) of the North Carolina Rules of Civil Procedure, “[i]f persons constituting a class are so numerous as to make it impracticable to bring them all before the court, such of them, one or more, as will fairly insure the adequate representation of all may, on behalf of all, sue or be sued.” Although “Rule 23(a) itself offers little guidance,” North Carolina courts have held that a class exists under Rule 23 when the putative class members have an interest in the same issue of law or fact and that the common issue predominates over issues affecting individual class members.[3] The predominance test evaluates whether there are individualized, fact-intensive determinations that would ultimately require a series of mini‑trials. The predominance test also examines whether the individualized issues are “inextricably tied” to the common issues and whether the individual questions and common questions become so intertwined as to make them inseparable.

CERTIFICATION WHERE INDUCEMENT IS AN ELEMENT OF THE CLAIM

Defendants’ central argument on appeal was that the referral statute requires buyers to prove that the illegal sales promotion induced them to buy the product, and this inducement element makes it impossible to satisfy the predominance requirement. If inducement is an element of the referral statute, certification would be inappropriate because the court would have to determine whether each individual class member was induced by the referral program into buying the product. 

Engaging in statutory construction and starting with the plain language of the referral statute, the North Carolina Supreme Court observed that nothing in the statute requires the sales promotion to have induced the buyer to enter into the sale. The Court also discussed how other states have similar referral statutes that, unlike North Carolina’s, contain an express “inducement” requirement. The North Carolina General Assembly could have used similar language when it drafted its referral statute, but it chose not to. Thus, the Court concluded that North Carolina’s referral statute does not require plaintiffs to show that the referral scheme induced them to buy the product. Therefore, the trial court properly rejected this argument as a reason to deny class certification.

Defendants next argued that there is a predominance problem because the certified class also included South Carolina residents who are subject to South Carolina’s referral statute, which includes an express inducement requirement. The Court agreed. The record showed that most, if not all, of the South Carolina residents entered into the sales at their homes in South Carolina. As a result, these putative class members’ purchases are governed by South Carolina law, and the South Carolina referral statute’s inducement requirement “defeats the predominance prong of class certification.” 

Thus, although the North Carolina Supreme Court agreed with the trial court’s interpretation of the North Carolina referral statute, the Court concluded that the class, as certified, did not satisfy the predominance test. The Court vacated the certification order and remanded to the trial court for further proceedings.

ADDITIONAL PREDOMINANCE ISSUES ON REMAND

The Court identified several additional predominance issues that warranted further discussion to guide the trial court’s analysis on remand.

First, Mr. Jackson’s claim sought the return of all consideration paid by class members for the RainSoft systems. Under the North Carolina referral statute though, to obtain a return of consideration paid, the purchaser must “tender to the seller” the “tangible consumer goods” that they purchased. Because it has been nearly ten years since the last alleged sale to a putative class member, this tender requirement could create many individualized issues, including whether the tendered product actually was the one the defendants sold to the class member. The Court instructed the trial court on remand to determine whether this fact question would involve too many individualized, fact‑intensive determinations or whether there is some efficient means of resolving it on a class‑wide basis.

Another potential predominance issue arose from the trial court’s failure to analyze the predominance issue in the context of Mr. Jackson’s claim for unfair and deceptive trade practices (“UDTP”).  One element of a UDTP claim is that the alleged unfair or deceptive practice proximately caused injury to the plaintiff. The remedy is damages based on the actual injury. The Court predicted that “[f]iguring out how each class member was actually injured by the referral promotion—if at all—and then calculating that class member’s actual injuries—if at all—could cause this case to degenerate into a series of individual trials for each class member.”

Although the Court did not direct the trial court to deny certification, the Court’s discussion of the predominance issues suggests that certification should either be denied or that at least the certified class should be defined in a much narrower manner than the one the trial court originally certified. The Court also directed the trial court on remand to consider “whether a class action remains the superior method for adjudicating the remaining claims.”

JUSTICE NEWBY’S SEPARATE OPINION

Chief Justice Newby wrote separately, concurring in part and dissenting in part. Chief Justice Newby agreed with the majority’s decision to vacate the trial court’s order based on the predominance issues. However, in his view, inducement is an element of the North Carolina referral statute.

CONCLUSION

Jackson provides an important reminder that class certification demands a rigorous analysis of predominance, and common issues alone are insufficient for certification. Parties seeking to oppose certification of multi-state classes may find success in identifying variations in state laws. Even for single-state classes, parties may find arguments in diving deep into the statute and exploring, for example, how the remedy sought may be a source of individualized issues.

[1] In Home Depot U.S.A. Inc. v. Jackson, 587 U.S. 435 (2019), the U.S. Supreme Court held that a third-party counterclaim defendant cannot remove a case to federal court under the general removal statute, 28 U.S.C. § 1441(a), or the Class Action Fairness Act, 28 U.S.C. § 1453(b).

[2] N.C. Gen. Stat. § 25A-37.

[3] See Crow v. Citicorp Acceptance Co., Inc., 319 N.C. 274, 280, 354 S.E.2d 459, 464 (1987).