Opinion
Civil Action No. 3:02-CV-1245-N.
June 3, 2003.
ORDER
Before the Court is Plaintiff's motion for class certification. Because questions of fact and law common to the class do not predominate over questions affecting individual members, that motion is DENIED.
Defendant TIG Insurance Co. ("TIG") sold a worker's compensation insurance policy to Plaintiff Gyarmathy Associates, Inc. ("Gyarmathy"), effective December 18, 1999. Gyarmathy acquired the policy through its insurance broker Arthur Gallagher Co. Gyarmathy claims that the printed materials it received showed that TIG would be obligated to pay Gyarmathy a flat rate dividend fifteen months after the inception date of the policy, in an amount equal to a fixed percentage of the premium. Based on its understanding of the dividend provisions, Gyarmathy elected to acquire the flat rate dividend policy instead of other dividend options from TIG or, presumably, insurance from other carriers. TIG later told Gyarmathy that payment of a dividend was contingent upon approval by the TIG Board of Directors, which had not approved a dividend.
Gyarmathy has sued TIG under various legal theories, including civil RICO, Texas Deceptive Trade Practices Act, Texas Insurance Code, fraud, negligent misrepresentation, breach of contract, and breach of duty of good faith and fair dealing. Gyarmathy has sued both on behalf of itself and a putative class consisting of:
All persons (and entities) other than officers, directors, employees or controlling persons of TIG who purchased Defendants' Workers Compensation Policies with a loss valuation date on or after February 1,2001, and who elected the Flat Dividend Proposal but who were not paid the flat dividend because the Board of Directors declared that a dividend would not be paid on policies with a loss valuation date after February 1, 2001.
Although Gyarmathy sues under various legal theories, its motion for class certification does not address the different theories, and instead addresses all the theories under a factual scenario of misrepresentations and omissions in the placing of the insurance policies. E.g., Memorandum in Support of Class Certification at 14 ("Therefore, the core of this litigation will overwhelmingly focus on common factual issues concerning the omissions and uniform misrepresentations on the face of the Flat Dividend Policies and the consistent activities of Defendants relating to selling these Flat Dividend Policies."); id. at 10 n. 7. At the class certification hearing, however, Gyarmathy did distinguish somewhat among its different legal theories.
Gyarmathy moves for class certification under Federal Rule of Civil Procedure 23(b)(3), which provides, in part, that class certification is appropriate when "the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members. . . ." In considering the predominance question, the Court will first consider which state's law would apply to the claims of the class members. Gyarmathy argues, with support from some courts, that a different choice of law standard applies in class certification. See Reply Brief at 7 n. 7. Under this approach, the most significant relationship test is applied class-wide. Unsurprisingly, the state of the defendant's residence in the aggregate has a greater relationship to the putative class action than the state of any individual class member. E.g., In re Great Southern Life Ins. Co. Sales Practices Litigation, 192 F.R.D. 212 (N.D. Tex. 2000); National Western Life Ins. Co. v. Rowe, 86 S.W.3d 285 (Tex.App.-Austin 2002, no pet.).
The Texas Supreme Court and the Fifth Circuit appear to have rejected this approach, however. In Spence v. Glock, Ges.m.b.H, 227 F.3d 308 (5th Cir. 2000), the Fifth Circuit, applying Texas choice of law principles, held that plaintiffs failed to carry their burden of examining "the policies of each state with contacts." Id. at 313. Likewise, in Henry Schein, Inc. v., Stromboe, 2002 WL 31426407 (Tex. Oct. 31, 2002) (Part IV.C) (page references not presently available), the Texas Supreme also found that plaintiffs failed to demonstrate that Texas law should apply to so many of the claims in the case that a common issue of law would predominate; again, the Court rejected a wholesale "defendant lives here" approach to the choice of law analysis.
With Spence v. Glock and Henry Schein, Inc. in mind, the Court must decline Gyarmathy's invitation to apply Texas law simply because TIG lives here. Applying Texas choice of law rules vis a vis a hypothetical class member suggests that a Texas court would apply the substantive law of the class member's domicile to the claims at issue here. Texas follows the Restatement (Second) of Conflict of Laws generally. See Spence, 227 F.3d at 311-12. Under section 193 of the Restatement, the validity of and rights under a workers compensation insurance contract are generally determined by the local law of the state that is the principal location of the risk. Section 193 suggests that the local law of the class member's domicile would apply.
As in those cases, the Court could perhaps conclude its analysis at this point on the basis that plaintiff failed to carry its burden. The Court will, however, proceed with the choice of law analysis.
For purposes of this hypothetical, the Court will assume that the employees protected by the workers compensation insurance are in the same state as the hypothetical class member.
Although no Texas case has directly applied section 193, National Western did apply the analogous section for life insurance policies. 86 S.W.3d at 301. This Court questions whether the result in National Western is valid after Henry Shein, Inc., but the case nonetheless reinforces the view that a Texas court would apply section 193 of the Restatement to a workers compensation insurance question.
Application of the class member's state's law is also consistent with the more general analysis of sections 6, 145, and 188 of the Restatement. Texas may be the situs of the defendant, the place where the "last act" giving rise the to contract occurred, and a state with an interest in regulating the conduct of insurers domiciled here. The class member's state, however, is the situs of most of the representations in the sales process, it has an interest in regulating the conduct of foreign insurers doing business in that state, it is where premiums are paid, and it is where the loss is incurred. Moreover, in the context of workers compensation insurance, that state has a strong interest in regulating insurance that will provide benefits to injured workers in the state. All in all, it appears that the state of the class member has the most significant relationship to the contract of workers compensation insurance and that a Texas court would apply that state's law.
This result seems unsurprising. There are relatively few Texas choice of law cases in ordinary insurance disputes, perhaps because it never occurs to most litigants to argue for the law of the state of the insurance company, instead of the law of the state of the insured, and perhaps because that result is statutorily required in most circumstances involving Texas insureds. See TEX. INS. CODE art. 21.42 (apply Texas law to certain insurance policies of Texas insureds). As a consequence, many of the reported cases involve unusual facts, but nonetheless apply the law of the state where the risk is located. See, e.g., TV-3, Inc. v. Royal Ins. Co., 28 F. Supp.2d 407, 415-16 (E.D. Tex. 1998); SnyderGeneral Corp. v. Great American Ins. Co., 928 F. Supp. 674, 677-78 (N.D. Tex. 1996); Mayo v. Hartford Life Ins. Co., 193 F. Supp.2d 927, 937-60 (S.D. Tex. 2002) (applying Texas law to life insurance policies on Texas employees purchased by their employers). See also Society of Mount Carmel v. National Ben Franklin Ins. Co., 643 N.E.2d 1280, 1287 (Ill.App. 1994) (applying section 193 of the Restatement to workers compensation insurance).
Accordingly, it appears that a Texas court would apply the law of each insureds' states of residence to the claims before the Court. Gyarmathy has thus failed to show that common issues of law predominate.
The Court could probably conclude its analysis at this point. "In a multi-state class action, variations in state law may swamp any common issues and defeat predominance." Castano v. American Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996).
The Court will now consider briefly Gyarmathy's claim that common issues of fact predominate. Gyarmathy's argument is that all putative class members were given an essentially identical flat dividend proposal, all of which omitted the same material information. In support of its arguments, Gyarmathy relied heavily on the district court opinion in Sandwich Chef of Texas, Inc. v. Reliance National Indem. Ins. Co., 202 F.R.D. 484 (S.D. Tex. 2001), which was recently reversed by the Fifth Circuit, 319 F.3d 205 (5th Cir. 2003) (holding individual reliance issues preclude class action certification in RICO fraud case). See also Henry Schein, Inc., supra, (Part IV.A, holding individual issues of reliance or cause in fact preclude class certification of fraud, breach of express warranty, negligent misrepresentation, promissory estoppel and DTPA claims); Richard v. Hoechst Celanese Chemical Group, Inc., 208 F.R.D. 575, 584 (E.D. Tex. 2002) ("it may not be possible to certify a class in a RICO action within the Fifth Circuit"). It appears that the case law precludes certification of Gyarmathy's RICO, DTPA, fraud and negligent misrepresentation claims.
In addition to the case law counseling against class certification, the factual record before the Court shows that individual fact issues likely will predominate here. Gyarmathy argues that it will prove its case with the text of the flat dividend proposal, and that nothing else is necessary as they were all substantially identical. While the text of the flat dividend proposals may have been identical, the record before the Court shows that those documents were not delivered to the putative class members in identical contexts. Many of the potential class members placed their coverage through brokers. The record reflects that at least some potential class members received varying representations from their brokers above and beyond what is contained in the flat dividend proposal. While Gyarmathy may be content to limit its proof to the content of the flat dividend proposal, there is no reason TIG should be so limited in its defense. TIG may legitimately argue that in the context of a specific class member, the flat dividend proposals were not misleading and did not omit material information or that the class member did not rely on the proposal in making its decision. Cf. Cimino v. Raymark Indus., Inc., 151 F.3d 297, 315-19 (5th Cir. 1998) (holding in asbestos case that class-based finding of causation of injury improperly denied defendant right to trial by jury of causation on individual basis). Accordingly, the Court finds that common issues of fact do not predominate.
Gyarmathy suggests that the Court can infer class-wide reliance, and avoid the problems in individualized proof, citing Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). The Fifth Circuit has rejected extending an Affiliated Ute presumption beyond fraud on the market securities theories to this sort of class action context. See McManus v. Fleetwood Enterprises, Inc., 320 F.3d 545, 549 (5th Cir. 2003) (applying Texas law); Summit Properties Inc. v. Hoechst Celanese Corp., 214 F.3d 556, 561 (5th Cir. 2000) ("No court has accepted the use of this theory outside the context of securities fraud . . ."). This Court declines to rush in where the Fifth Circuit fears to tread.
Plaintiff Gyarmathy has thus failed to carry its burden of showing that common issues of fact and law would predominate as required by Rule 23(b)(3). Accordingly, Gyarmathy's motion for class certification is DENIED.