jan-lubin-gilberto-villanueva-michael-paladino-gerald-hooks-and-lesly-k ( 2005 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-03-00374-CV
Jan Lubin, Gilberto Villanueva, Michael Paladinao, Gerald Hooks and
Lesly K. Hooks, Appellants
v.
Farmers Group, Inc.; Farmers Underwriters Association; Fire Underwriters Association;
Farmers Insurance Exchange; Fire Insurance Exchange; Texas Farmers Insurance
Company; Mid-Century Insurance Company of Texas; Mid-Century Insurance
Company; Truck Insurance Exchange; Truck Underwriters Association;
Farmers Texas County Mutual Insurance Company; The State of
Texas; Texas Department of Insurance; and Texas
Commissioner of Insurance, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 261ST JUDICIAL DISTRICT
NO. GV202501, HONORABLE SCOTT H. JENKINS, JUDGE PRESIDING
OPINION
The issue in this interlocutory appeal is whether article 21.21, section 17 of the
insurance code allows the Attorney General to maintain a class action without satisfying the class
action prerequisites set out in article 21.21, section 18. See Tex. Ins. Code Ann. art. 21.21, §§ 17,
18 (West Supp. 2004-05). Section 17 of article 21.21 authorizes the Attorney General, at the request
of the Texas Department of Insurance (the “Department”), to institute a class-action suit to recover
from an insurer damages for injuries done to the insurance-buying public. Id. § 17(a). Section 18
sets out procedural requirements for class actions, including the appointment of a class
representative. Id. § 18. In this case, the Attorney General initiated a class action under section 17,
but did not comply with section 18’s procedural requirements; in particular, no class representative
was appointed. The district court found that strict compliance with section 18 was unnecessary
because the Attorney General was qualified through his capacity as parens patriae to adequately
represent the interests of the potential class members without the appointment of a class
representative. Appellants, individual policyholders who intervened and objected to the class
settlement agreement, contend that the trial court erred in allowing the Attorney General to pursue
a class action without satisfying the requirements ordinarily applied to class action lawsuits. We
agree and hold that the Attorney General must comply with the procedural requirements of section
18 to maintain a class-action suit under section 17. Accordingly, we reverse the district court’s order
certifying the class and remand the cause to the district court for further proceedings.
PROCEDURAL AND FACTUAL BACKGROUND
In late 2001, Farmers1 stopped offering HO-B (“all-risk”) homeowners policies and
began offering HO-A (“stated-peril”) homeowners policies that limited coverage for water damage
and eliminated mold coverage. The Department investigated and discovered that even with the
reduced coverage, Farmers’ premiums had in fact increased. The Department determined that the
rate increase was due to the method Farmers used to calculate homeowner rates. Although Farmers
1
There are eleven appellees, all related or associated insurance providers. We will refer to
appellees collectively as “Farmers.”
2
had established discounts based on a policyholder’s good credit, geographic location, and age of the
home, those discounts were not applied uniformly, resulting in over- and undercharges, unfair rates,
and geographic discrimination.
In late 2001, the Office of the Attorney General opened an investigation into Farmers’
failure to disclose the use of credit scoring in determining rates or the particulars of its management-
fee arrangement with subsidiaries. In June 2002, the Attorney General opened a separate antitrust
investigation into whether Farmers was improperly tying auto and homeowners policies2 and whether
it engaged in an unlawful boycott when it discontinued offering all-risk insurance.
The Department referred its investigation to the Attorney General, and on August 5,
2002, the Attorney General sued Farmers, alleging that Farmers failed to adequately disclose its
rating practices and the use of credit scoring and that some of its rating practices were unfairly
discriminatory.3 On August 13, 2002, the Commissioner of Insurance began an administrative
proceeding against Farmers and issued an emergency cease and desist order, ordering Farmers to
change its rating practices within three months.4 On August 30, 2002, Farmers filed suit in district
2
“Tying” is the practice of conditioning the sale of one policy on the purchase of another,
for example, requiring a purchaser to buy an auto policy as a condition of obtaining a homeowners
policy.
3
Originally, the suit was brought not as a class action but “in the name of the State of Texas
and on behalf of the Texas Commissioner of Insurance” against Farmers for “deceptive, misleading,
and discriminatory homeowners-insurance practices” in violation of the insurance code and the
Deceptive Trade Practices Act. See Tex. Bus. & Com. Code Ann. §§ 17.41-.63 (West 2002 & Supp.
2004-05) (the “DTPA”).
4
Section 83.051 of the insurance code authorizes the Commissioner of Insurance to issue
an emergency cease and desist order if he believes an insurer is committing an unfair act that is
fraudulent, endangers public safety, or will cause imminent public injury incapable of being rectified
and likely to have effect. Tex. Ins. Code Ann. § 83.051 (West Supp. 2004-05).
3
court, appealing the cease and desist order and seeking a declaration that the Commissioner of
Insurance lacked regulatory authority over Farmers.
On November 30, 2002, the State, the Attorney General, the Department, and the
Commissioner of Insurance entered into a Memorandum of Understanding (“MOU”) with Farmers,
settling the administrative proceeding and the Attorney General’s investigations and suit and setting
forth the terms of a “global settlement.” Under the settlement, the Attorney General was to amend
his pleadings to transform the suit into a settlement class action including all claims that had been
or could be made by individual policyholders in Texas. The MOU stated that the amended suit:
shall include (and the Parties will stipulate to) the definition of a settlement class or
class with settlement sub-classes under Rule 42 of the Texas Rules of Civil
Procedure and the parens patriae doctrine, and based upon the [Attorney General]’s
authority under article 21.21 § 17 of the Texas Insurance Code . . . .
Under the MOU, Farmers agreed to reduce homeowners’ base rates by 6.8%
immediately, refrain from increasing those base rates until August 31, 2003, and adopt
nondiscriminatory discounts based on a home’s age and location and the insureds’ credit history.
The MOU also created several settlement funds. Farmers agreed to offer refunds to past
policyholders who did not renew their homeowners’ policies when Farmers replaced the HO-B
policies with HO-A policies. One fund was to be used to compensate policyholders who were
wrongly denied any discounts, and another was to reimburse policyholders for any overcharges
associated with erroneous credit information. The MOU also called for the payment of $2 million
in attorneys’ fees and costs to the State, included a provision allowing either party to terminate the
4
settlement agreement if more than 2% of the eligible policyholders opted out of the settlement, and
required Farmers to discontinue its practice of tying one kind of policy with another.
On December 18, as required by the MOU, the Attorney General filed his first
amended petition “in the name of the State of Texas . . . and on behalf of the Commissioner of
Insurance . . . , the Department of Insurance . . . , and certain classes of Texas homeowners and
automobile insureds.” The amended petition stated, “At the request of the Commissioner and in the
public interest, the State, by and through the Office of the Attorney General, brings these claims as
a class action pursuant to Tex. Ins. Code art. 21.21, § 17 and Tex. R. Civ. P. 42 on behalf of the
Settlement Classes,” and defined the following three settlement classes: the “Rate Class,” the
“Discount Class,” and the “Credit Usage Notice Class.”5 The petition also alleged:
The prerequisites to maintaining a class action under the Texas Insurance Code have
been met. The classes are so numerous that joinder of all members is impracticable,
there are questions of law or fact common to the classes, the claims that Plaintiffs
have brought are typical of the claims of class members, and the State will fairly and
adequately protect the interests of the classes. . . . Furthermore, the questions of law
or fact common to each class predominate over any questions affecting only
individual members, and a class action is superior to other available methods for the
fair and efficient adjudication of the controversy.
5
The Rate Class was to encompass all Farmers’ Texas homeowners-insurance policyholders
whose policies began or were renewed between December 28, 2001 and December 27, 2002, or who
received notice after November 14, 2001 that their HO-B policies would not be renewed. The
Discount Class was to consist of all Texas homeowners-insurance policyholders who were eligible
to receive certain discounts from November 16, 2000 through December 10, 2002. The Credit Usage
Class was to include all Texas homeowners or auto-insurance policyholders who received or should
have received a credit usage notice from October 1, 1999 through February 28, 2003.
5
On February 18, 2003, the Attorney General filed a second amended petition making
the same substantive allegations. The Attorney General changed the manner in which he purported
to represent the class parties from stating that he was bringing the suit “on behalf of . . . certain
classes of Texas homeowners and automobile insureds” to asserting that he was bringing the suit “in
the interest of Farmers’ Texas homeowners-insurance policyholders and the Automobile Insurers’
automobile-insurance policyholders.” (Emphasis added.) The description of the Attorney General’s
role changed as well, to state, “At the request of the Commissioner and in the public interest, the
State, by and through the Office of the Attorney General, brings these claims as a class action
pursuant to Tex. Ins. Code Ann. art. 21.21, § 17 and as parens patriae under Tex. R. Civ. P. 42 to
seek restitution for insureds of Defendants.” The petition again alleged that the prerequisites to
maintaining a class action under the insurance code were met, and added an assertion that the
prerequisites to maintaining a class action as parens patriae were also satisfied.
The district court conducted a lengthy hearing on the class certification issue and
heard testimony from several witnesses. One of the main issues was whether sections 17 and 18 of
article 21.21 of the insurance code authorized the Attorney General to bring a class action suit
without satisfying traditional class-action prerequisites, in particular, the appointment of a class
representative who would adequately represent the interests of the class and whose claims were
typical of the class. See Tex. Ins. Code Ann. art. 21.21, §§ 17, 18(a)(3), (a)(4). The Attorney
General argued that he was not required to designate a class representative because section 18(a)
applied by its terms only to “private class actions” and because the Attorney General was, as a matter
of law, unauthorized to enter into an attorney-client relationship with an individual class
6
representative. One of Farmers’s witnesses, Professor Samuel Issacharoff, agreed and opined that
a suit brought by the Attorney General under section 17 was comparable to a parens patriae action
brought under federal law.6
On June 27, 2002, the court signed an “Order of Preliminary Approval,” finding that
the Attorney General could bring the class action. The court found that the Attorney General could,
“fulfill the role of the Settlement Classes’ Counsel” by virtue of “the parens patriae authority
granted in section 17 of article 21.21 of the Insurance Code and Rule 42 of the Texas Rules of Civil
Procedure.” The court further found that, if the requirements of Rule 42 and section 18 had to be
satisfied:
each of those requirements has been met, specifically: (a) each of the Settlement
Classes is so numerous that joinder of all members is impracticable; (b) there are
questions of law or fact common to the Settlement Classes which predominate over
any individual questions; (c) the claims or defenses brought by the State on behalf of
Farmers’ policyholders are typical of the claims or defenses of the Settlement Classes
and the State is authorized to bring claims on behalf of the Settlement Classes; (d)
in negotiating and entering into the Settlement Agreement, the State has fairly and
adequately represented and protected the interests of the Settlement Classes; (e) the
questions of law or fact common to the Settlement Classes predominate over any
questions affecting only individual members; and (f) certifying this Action as a class
6
Under federal law, an attorney general may sue as parens patriae on behalf of the state’s
citizens for monetary relief for injury done to citizens by antitrust violations. 15 U.S.C.A. § 15c(a)
(West 1997). This legislation was designed to enhance the effectiveness of antitrust enforcement
on behalf of small consumers by authorizing states’ attorneys general to bring suits in their capacities
as parens patriae on behalf of their citizens without compliance with Federal Rule of Civil
Procedure 23 prerequisites for maintaining a federal class action. Illinois v. Abbott & Assocs., Inc.,
460 U.S. 557, 573 n.29 (1983). Texas Rule of Civil Procedure 42 (“Rule 42”) was patterned after
Federal Rule of Civil Procedure 23 (“Rule 23”). Stary v. DeBord, 967 S.W.2d 352, 353 (Tex. 1998).
Rule 42 and section 18 of article 21.21 are nearly identical, and those rules, along with Rule 23,
impose the same requirements for establishing the propriety of a class-action suit. Compare Fed.
R. Civ. P. 23 with Tex. R. Civ. P. 42 and Tex. Ins. Code Ann. art. 21.21, § 18 (West Supp. 2004-05).
7
action is superior to other available methods for the fair and efficient adjudication of
the controversy.
Appellants brought this interlocutory appeal. See Tex. Ins. Code Ann. art. 21.21,
§ 18(d) (authorizing interlocutory appeals of certification orders). Appellants argue that the district
court abused its discretion in certifying the settlement class action because (1) the Attorney General
is not exempt from the requirements of section 18 and rule 42; (2) there is no class representative;
(3) settlement classes are subject to heightened scrutiny; (4) the Attorney General lacks authority to
assert the class’s strongest claims; (5) there is a conflict of interest between the Attorney General and
the Department; (6) there is intra-class conflict; and (7) the Attorney General failed to evaluate some
of the released claims.7 Because we conclude that the district court committed an error of law in
certifying the settlement class without a class representative, we limit our review to that issue alone.
STANDARD OF REVIEW
We review a trial court’s preliminary order to certify a class for an abuse of discretion.
Southwestern Ref. Co. v. Bernal, 22 S.W.3d 425, 433 (Tex. 2000); see General Motors Corp. v.
Bloyed, 916 S.W.2d 949, 955 (Tex. 1996). A trial court abuses its discretion when ruling on class
7
The Hookses, who are also class members in a breach of contract suit brought against
Farmers in August 2002 by Sandra Geter in Jefferson County, further assert in this appeal that the
Attorney General was not authorized to release the claims of the Geter class dealing with Farmers’
contractual obligation to renew HO-B policies. On October 21, 2004, the Beaumont Court of
Appeals reversed the trial court’s order certifying the Geter class and remanded the cause to allow
the trial court to consider notice and opt-out issues and to “rigorously analyze [class] cohesiveness,”
relying on a recent supreme court decision regarding class certifications under rule 42(b)(s) of the
rules of civil procedure. Farmers Group, Inc. v. Geter, Nos. 09-03-404-CV, 09-03-396-CV, 2004
Tex. App. LEXIS 9364, at *13-17 (Beaumont Oct. 21, 2004, no pet.) (memorandum op.) (citing
Compaq Computer Corp. v. LaPray, 135 S.W.3d 657, 667-70 (Tex. 2004)).
8
certification if it does not properly apply the law to the undisputed facts. State Indus., Inc. v. Fain,
38 S.W.3d 167, 169 (Tex. App.—Waco 2000, pet. denied).
Because the trial court’s ruling was based on its construction of sections 17 and 18
of the insurance code, we apply rules of statutory construction in deciding to what extent the
Attorney General must comply with section 18(a) of article 21.21 of the insurance code in bringing
a class-action suit under section 17. Statutory construction is a question of law we review de novo.
Johnson v. City of Fort Worth, 774 S.W.2d 653, 656 (Tex. 1989). In construing a statute, the
primary objective is to determine and give effect to the legislature’s intent, beginning with the plain
and common meaning of the statute’s words. McIntyre v. Ramirez, 109 S.W.3d 741, 745 (Tex.
2003). We are bound to construe the statute as written, and if possible, ascertain the legislature’s
intent from the language used in the statute. Texas Workers’ Comp. Ins. Fund v. Del Indus., Inc.,
35 S.W.3d 591, 593 (Tex. 2000). In ascertaining legislative intent, we may consider the evil sought
to be remedied, the legislative history, and the consequences of a particular construction. See Liberty
Mut. Ins. Co. v. Garrison Contractors, Inc., 966 S.W.2d 482, 484 (Tex. 1998). Additionally, we
must consider the statute as a whole rather than as isolated provisions and should not give one
provision a meaning inconsistent with other provisions, although it might be susceptible to such a
construction standing alone. Barr v. Bernhard, 562 S.W.2d 844, 849 (Tex. 1978).
DISCUSSION
The issue is whether sections 17 and 18 of article 21.21 authorize the Attorney
General to bring a parens patriae action or, alternatively, whether he may bring a class action
without complying with the class action requirements of section 18, subsections (a)(3) and (4).
9
We begin our analysis with a textual review of sections 17 and 18. Section 17 is
entitled “Class Actions.” Tex. Ins. Code Ann. art. 21.21, § 17. Section 17(a) authorizes a class
action for damages if a member of the insurance-buying public is harmed by an unlawful deceptive
trade practice. Id. The suit may be brought by “the individual damaged . . . on behalf of himself and
others similarly situated” or by the Attorney General at the request of the Board of Insurance.8 Id.
In either situation, the plaintiff may seek damages, costs and attorneys’ fees, injunctive relief, and
any other relief the court deems proper. Id. § 17(a), (b). Subsection (c) authorizes a court to award
attorney’s fees to a defendant insurer where an “individual plaintiff” has sued in bad faith or for the
purpose of harassment. Id. § 17(c). Subsection (e) prohibits a class-action suit by an individual or
the Attorney General if the Attorney General had already initiated an “administrative class action
under Section 14 of this Article” against the same insurer for the same acts or practices.9 Id. § 17(e).
Section 18 is entitled “Class Action: Procedure.” Id. § 18. Paragraph (a) provides
that a court may allow one or more class members to act as “representative parties” and to sue or be
8
The Board is empowered to “investigate into the affairs of every person engaged in the
business of insurance in this state” to determine whether “such person has been or is engaged in any
unfair method of competition or in any unfair or deceptive act or practice.” Tex. Ins. Code Ann. art.
21.21, § 5 (West Supp. 2004-05).
9
Section 14, entitled “Administrative Class Action,” authorizes the Department to order an
insurer to refund premiums to policyholders injured by the insurer’s unlawful acts. Tex. Ins. Code
Ann. art. 21.21, § 14(a) (West Supp. 2004-05). If the insurer fails to comply with the Department’s
refund order, the Department may ask the Attorney General to sue the insurer to enforce the order.
Id. § 14(b).
10
sued on behalf of the class if the number of potential class members is so large that it would be
impracticable to join each individually, the class members share common questions of law or fact,
the representative’s claims are typical of individual class members’ claims, and the representative
would fairly and adequately protect the interests of the individual class members. Id. § 18(a)
(referred to as “numerosity,” “commonality,” “typicality,” and “adequacy of representation”
requirements). Under section 18(b), “an action may be maintained as a class action if the
prerequisites of Subsection (a)” are met and one of the following is true: (1) prosecution of separate
actions by individual class members would create a risk of inconsistent adjudications or individual
adjudications essentially disposing of the non-party class members’s interests or substantially
impairing their ability to protect their interests; (2) the opposing party has acted or refused to act on
grounds generally applicable to the class, thereby making appropriate injunctive or declaratory relief
with respect to the class as a whole; or (3) common questions of law or fact predominate over
individual issues, making a class action superior to other methods for a fair and efficient adjudication
of the controversy. Id. § 18(b). The remainder of section 18 can be summarized as follows:
subsection (c) directs the courts to consider cases interpreting federal Rule 23 for guidance in
construing section 18; subsection (d) requires an expedited certification proceeding and authorizes
an interlocutory appeal from a certification order; notice is discussed in subsections (e), (f), and (i);
subsection (g) requires court approval of an agreement dismissing, settling, or compromising the
class action; subsection (h) allows the creation of subclasses; subsection (j) authorizes the court to
manage the proceedings; and subsection (k) provides for the tolling of limitations. Id. § 18(c)-(j)
(West Supp. 2004-05).
11
Parens Patriae
Appellees argue that section 17 of article 21.21 of the insurance code grants parens
patriae authority for the Attorney General to bring this type of class action, pointing to the evolution
of the parens patriae doctrine and the legislative history of article 21.21. Derived from the English
common law, parens patriae means “parent of the country,” and enabled the King to act as guardian
for “infants, idiots, and lunatics.” See Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 600
(1982); Hawaii v. Standard Oil Co., 405 U.S. 251, 257 (1972); Black’s Law Dictionary 1114 (6th
ed. 1990). In the United States, the parens patriae doctrine expanded to include state-brought suits
to “prevent or repair harm to its quasi-sovereign interests.” Hawaii, 405 U.S. at 257-28. To have
standing under parens patriae, a governmental entity must establish that the state has a
quasi-sovereign interest, apart from the interests of private parties,10 there is an injury to a substantial
segment of its population, and the injured individuals could not obtain complete relief through a
private suit. Alfred L. Snapp, 458 U.S. at 607-08.
According to appellees, the legislative purpose behind the passage of article 21.21
can be traced to Hawaii v. Standard Oil Co. and California v. Frito-Lay, Inc., 474 F.2d 774 (9th Cir.
1973), both of which concerned the use of parens patriae power. The issue in Hawaii was whether
a particular federal statute authorized a state to sue for damages for injury to its economy. 405 U.S.
at 252-53. Acting in its proprietary capacity, in its parens patriae capacity, and as the representative
of a class, Hawaii sued Standard Oil for antitrust violations. Id. at 253. The Supreme Court held
10
“Quasi-sovereign” interests include those touching on the “health and well-being—both
physical and economic—of its residents in general.” Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458
U.S. 592, 607 (1982).
12
that in determining whether Hawaii could maintain the action, the issue was not whether Hawaii
could sue on behalf of its citizens under general parens patriae principles but whether the injury was
compensable under the statute in question. Id. at 259. The Court held that the statute authorized a
state to recover for injuries suffered in its capacity as a consumer of goods and services, but not for
economic injuries to the sovereign interests of a state. Id. at 265. The Court concluded that if the
statute were intended to allow a state to recover for damage to its general economy, then “we should
insist upon a clear expression of a congressional purpose to make it so, and no such expression is
to be found in” the statute. Id. at 264.
The issue addressed in Frito Lay was whether a state could sue as parens patriae for
injury to the business or property of the state’s citizens. See 474 F.2d at 775. California sued Frito-
Lay, arguing that the practical inability of an injured citizen to bring an individual antitrust suit
warrants a state to act on behalf of the individual. Id. The Ninth Circuit noted that parens patriae
actions had not been recognized as a basis for recovery of money damages for injuries suffered by
individuals; instead, parens patriae actions were generally used to “halt injury to a quasi-sovereign
state interest . . . ‘apart from that of particular individuals who may be affected.’” Id. (quoting
Georgia v. Pennsylvania R.R., 324 U.S. 439, 451 (1945)). The court observed that the state was
acting “not as parens patriae in the sense in which that term is recognized in this country, but as
guardian ad litem” for the class it purported to represent and that the state’s procedure bypassed the
procedural requirements of Rule 23. Id. at 776 & n.9. Heeding the Supreme Court’s admonition in
Hawaii, the Ninth Circuit concluded that “if the state is to be empowered to act in the fashion here
13
sought, we feel that authority must come not through judicial improvisation but by legislation and
rule making.” Id. at 777.
Under Hawaii and Frito-Lay, without a specific statutory grant of authority, the
Attorney General may not rely on a general invocation of parens patriae authority to bring suit for
damages on behalf of individually injured persons. See Hawaii, 405 U.S. at 264-65; Frito-Lay, 474
F.2d at 777. We disagree with appellees’ assertion that the legislature, in drafting article 21.21 of
the insurance code, provided a “classic grant of statutory parens patriae authority to the Attorney
General to protect the interest of Texas insureds.”
The general rule in Texas is that the Attorney General can only act within the limits
of the Texas Constitution and statutes. Perry v. Del Rio, 67 S.W.3d 85, 92 (Tex. 2001). Consistent
with this rule, absent a special provision, the Attorney General must comply with the same rules of
procedure as other litigants. Texas Dep’t of Corrections v. Herring, 513 S.W.2d 6, 7-8 (Tex. 1974).
Parens patriae has been used sparingly in Texas. Lakeshore Util. Co. v. Texas Natural Res.
Conservation Comm’n, 92 S.W.3d 556, 565 (Tex. App.—Austin 2002, pet. granted). Clear
legislative intent is required before we will recognize parens patriae authority to sue for monetary
damages. See Hawaii, 405 U.S. at 264.
A plain reading of article 21.21 reveals no clear grant of parens patriae authority
under sections 17 and 18. The legislature explicitly stated that in interpreting section 18, courts
should be guided by federal cases construing the federal class action rule, and throughout article
21.21, the statutory language references “class actions,” not parens patriae suits. As the Supreme
Court made clear, parens patriae actions are not interchangeable with class actions: “Parens patriae
14
actions may, in theory, be related to class actions, but the latter are definitely preferable in the
antitrust area. Rule 23 provides specific rules for delineating the appropriate plaintiff-class,
establishes who is bound by the action, and effectively prevents duplicative recoveries.” Id. at 266.
A comparison to a federal statute that expressly grants parens patriae authority
further supports our reading of article 21.21 as nothing more than a class action statute. The
Hart-Scott-Rodino Antitrust Improvements Act of 1976, enacted soon after the Hawaii and Frito-Lay
decisions, authorizes states’ attorneys general to sue for monetary relief on behalf of state residents
injured by federal antitrust violations. See 15 U.S.C.A. § 15c (West 1997) (the “HSRA”) (“Any
attorney general of a State may bring a civil action in the name of such State, as parens patriae on
behalf of natural persons residing in such State.”). The HSRA’s provisions allowing state attorneys
general to bring parens patriae suits on behalf of state residents were enacted to remedy the
difficulties and complexities associated with certifying and maintaining antitrust class actions under
federal Rule 23 and in distributing damages. Illinois v. Abbott & Assocs., Inc., 460 U.S. 557, 573
n.29 (1983); see New York v. Reebok Int’l Ltd., 96 F.3d 44, 46 (2d Cir. 1996). Congress understood
that an individual consumer overcharged a small amount lacked a practical, individual remedy and
that Rule 23 class-action suits were ineffective because large consumer classes with small individual
claims were unmanageable. See H.R. Rep. No. 94-499, pt. 1, at 2575-76 (1976).
The HSRA illustrates the kind of “clear and express” statutory mandate required to
create parens patriae authority. It does not refer to class actions or class action procedures but
instead explicitly allows a state attorney general to bring a civil action in the state’s name as parens
patriae on behalf of the state’s citizens. 15 U.S.C.A. § 15c. In contrast, nothing in article 21.21’s
15
language or legislative history indicates that the legislature intended to create parens patriae
authority as an alternative to class actions in this context. See Tex. Ins. Code Ann. art. 21.21, § 17(a)
(“If a member of the insurance buying public has been damaged by an unlawful method, act, or
practice . . . the Board may request the Attorney General to bring a class action . . . .”). We therefore
hold that article 21.21 of the insurance code does not grant parens patriae authority.11
Modified Class Action
Appellees concede that the settlement class does not have a class representative; thus,
the settlement class does not meet the typicality and adequacy of representation prerequisites.
However, they contend the Attorney General is not required to do so, arguing that section 17 allows
for two different types of class action suits—(1) one brought by an individual, and (2) one brought
by the Attorney General—and that only actions brought by individuals must meet the prerequisites
11
Appellees cite Bara v. Major Funding Corporation Liquidating Trust, 876 S.W.2d 469
(Tex. App.—Austin 1994, writ denied), and Texas Department of Mental Health & Mental
Retardation v. Petty, 778 S.W.2d 156 (Tex. App.—Austin 1989, writ dism’d w.o.j.), asserting that
“Texas courts have recognized the validity of statutory parens patriae suits brought by the Attorney
General in order to restore unlawfully obtained funds to Texas citizens.” However, we note first that
our reference to section 17 in Petty was dicta and second that the other two cited statutes explicitly
allowed the Attorney General to intervene in suit or represent certain individuals. See 778 S.W.2d
at 163 (citing former section 32.51 of education code, which required compliance with Rule 42 and
allowed Attorney General to join as class action plaintiff, see Act of May 29, 1971, 62d Leg., R.S.,
ch. 620, § 1, 1971 Tex. Gen. Laws 2006, 2015 (repealed 1993), and article 4447w, section 6 of
revised statutes, which specifically authorized Attorney General to represent “class of individuals
composed of veterans,” see Act of May 27, 1981, 67th Leg., R.S., ch. 874, § 1, 1981 Tex. Gen. Laws
3330, 3331 (repealed 1989)). In Bara, we held that a DTPA suit brought by the Attorney General
in the State’s name and on behalf of “a specified group of individuals” was a “de facto class action”
that tolled the running of limitations against individuals while they were part of the Attorney
General’s suit. 876 S.W.2d at 472-73. Petty and Bara do not support a conclusion that section 17
grants the Attorney General parens patriae authority to sue.
16
of section 18(a). According to appellees, the legislature has determined that the Attorney General
adequately fulfills the role of class representative, thus obviating the need for a traditional class
representative with typical claims. For support, they focus on the first sentence of section 18(a):
“The court shall permit one or more members of a class to sue or be sued as representative parties
on behalf of the class only if” the prerequisites of numerosity, commonality, typicality, and adequacy
of representation are satisfied. Tex. Ins. Code Ann. art 21.21, § 18(a) (emphasis added). Appellees
conclude that only in class actions initiated by individual class members must the prospective class
satisfy section 18(a)’s prerequisites. In other words, appellees assert that when the Attorney General
institutes a class action under article 21.21, he is not constrained by the traditional class action
requirements and need only comply with section 18(b) because the legislature has already determined
that he is an adequate class representative. We disagree.
Statutory Language
A review of the language used in article 21.21 shows that a class-action suit brought
by the Attorney General should be treated the same as one brought by a member of the insurance-
buying public. Article 21.21 provides for two types of class-action suits: (1) an administrative civil
enforcement class action under section 14 and (2) a more traditional section 17 class action. See
Tex. Ins. Code Ann. art. 21.21, §§ 14 (West Supp. 2004-05) (“Administrative Class Action”), 17
(“Class Actions”). The two types of suits address two distinct circumstances: (1) recovery through
an administrative class action of unlawfully obtained premiums after a Board finding that an insurer
committed some sanctionable act, and (2) recovery of damages after a judicial determination that an
insurer has committed a sanctionable act. Clearly, section 17 authorizes a class action by either the
17
Attorney General or an individual. See id. § 17(a). Such a suit, however, may only be brought if “a
member of the insurance buying public has been damaged.” Id. In other words, even at the
insistence of the Board, the Attorney General cannot initiate a class action to recover damages done
only to the State or the Department in their proprietary capacities. A class action for damages may
be brought under section 17 only when the public has been injured, although it offers two choices
as to who may initiate such an action.
We disagree with appellees that section 18 creates two types of class actions that may
be brought on behalf of the injured insurance-buying public. Indeed, section 18(b), which mandates
compliance with the subsection (a) class action prerequisites, makes clear that section 17 class
actions brought by the Attorney General are subject to the same prerequisites as those initiated by
individual class members. Subsection 18(b) does not distinguish suits brought by class members
from those brought by the Attorney General in requiring compliance with subsection (a)’s
prerequisites. Compare id. § 18(a) with id. § 18(b). Under appellees’ argument, the Attorney
General could bring a class action on behalf of any number of class members without regard to
typicality or commonality of injury or adequacy of representation. Appellees’ argument lacks
support in the plain language of section 18(b), which does not qualify its requirement of section 18
compliance based on the initiator of the suit. The language is clear: all section 17 class actions must
meet the requirements of section 18(a).
Legislative History and Federal Rule 23
Article 21.21 was enacted in 1951 to bar insurers from discriminating in the setting
of premiums. See Act of June 7, 1951, 52d Leg., R.S., ch. 491, § 2, 1951 Tex. Gen. Laws 868, 1075-
18
76. In 1973, the legislature enacted House Bill 417, which amended article 21.21, adding section
14, “Administrative Class Actions,” section 17, “Class Actions,” and section 18, “Class Action:
Procedure.” See Act of May 10, 1973, 63d Leg., R.S., ch. 143, § 2, 1973 Tex. Gen. Laws 322, 338-
41. The parties disagree over the legislative purpose behind the enactment of House Bill 417.12
Appellees assert that the legislative history shows that the legislature intended to exempt Attorney
General class actions from traditional class-action requirements, citing the committee notes on
sections 17 and 18, which state that section 17 “[d]elineates the procedures available for class
actions,” and that section 18 “[s]ets out the procedure for a private class action and is the same as”
the procedure formerly included in the DTPA. House Comm. on Bus. & Indus., Bill Analysis, Tex.
H.B. 417, 63d Leg., R.S. (1973). Although appellees argue that by “private class action” the
12
Appellees cite the comments preceding House Bill 417, which enacted the DTPA and
expanded article 21.21 to allow class actions, in which then-Attorney General John Hill stated:
[House Bill 417] strikes directly at the inequities now existing in consumer
protection legislation, and will provide remedies under which the Attorney
General’s Office can properly determine between premeditated practiced
deception and honest error. . . . Under our system as it now stands, a suit can
be filed by a consumer against a person or organization committing an act, but
the consumer must prove common law fraud. The present conditions provide
only for the Attorney General’s office to bring a restraining order and limits
their ability to prosecute. The common law remedy is not adequate for a
consumer to recover the loss, thereby making this bill a major step in the
direction of providing the consumer, through the Attorney General’s office,
with the necessary tools for equitable recovery subject to, of course, a ruling in
favor of the consumer.
House Comm. on Bus. & Indus., Bill Analysis, Tex. H.B. 417, 63d Leg., R.S. (1973). This explains
the rationale for allowing the Attorney General to bring a class-action suit but does not answer
whether, in doing so, the Attorney General must comply with section 18(a).
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committee meant one instituted by an injured individual, the notes can also be interpreted as
distinguishing “a private class action,” which must be brought by a person aggrieved by an insurer’s
conduct or the Attorney General, from a section 14 “administrative class action” brought by the
Attorney General at the Department’s request.
According to appellants, the bill was enacted in response to the Texas Supreme
Court’s decision in Commercial Travelers Life Insurance Co. v. Spears, which revealed the problem
with the former version of Rule 42 under which class action certification depended on whether the
class action was “true,” “hybrid,” or “spurious.” See 484 S.W.2d 577, 578-79 (Tex. 1972) (orig.
proceeding). A year after the Spears decision, the legislature enacted article 21.21’s class action
provisions, using Rule 23’s procedures and federal decisions construing Rule 23 as precedent. See
Bernal, 22 S.W.3d at 433; Stary v. DeBord, 967 S.W.2d 352, 353 (Tex. 1998).
The language of section 18 mirrors that found in federal Rule 23, which includes
subtitles for each subsection. For example, Rule 23(a) is titled, “Prerequisites to a Class Action,”
and Rule 23(b) is “Class Actions Maintainable,” making it clear that subsections (a) and (b) were
intended to work together. Before individuals may sue on behalf of a class, they must first satisfy
the subsection (a) prerequisites. After those prerequisites are satisfied, the class action can only be
“maintained” if the elements of subsection (b) are present. In other words, subsection (a) determines
whether an individual can represent the class, and if so, subsection (b) determines whether the suit
may be maintained as a class action. Although section 18 does not include these same titles, it is
modeled after Rule 23 and the descriptive phrases of Rule 23 may properly guide our construction
of section 18.
20
Federal Case Law
A review of federal case law reveals that some courts have approved of a state’s
attorney general acting as a class representative. In some of those cases, however, the state itself was
part of the injured class and therefore satisfied the “typicality” requirement, a fact not present in the
case before us. See State Teachers Ret. Bd. v. Fluor Corp., 73 F.R.D. 569, 572 (S.D.N.Y. 1976)
(holding that state attorney general may act on behalf of out-of-state class members when state
agency he represents is allied with class members and agency’s representativeness is sufficiently
shown); In re Antibiotic Antitrust Actions, 333 F. Supp. 278, 280 (S.D.N.Y. 1971) (court determined
states’ claims were typical of consumer claims because states supported welfare programs that
reimbursed for prescription drugs and therefore stood “in the shoes of a substantial number of
purchasers of the drugs”); see generally In re Anthracite Coal Antitrust Litigations, 78 F.R.D. 709
(M.D. Pa. 1978) (state-plaintiff satisfied requirement that it be personally affected and harmed by
defendant in same manner as proposed class but did not satisfy other requirements for class
certification, such as common questions of law and fact). In other cases in which state attorneys
general were allowed to represent a class, the attorneys general represented other governmental
entities. See Illinois v. Brunswick Corp., 32 F.R.D. 453, 460 (N.D. Ill. 1963) (attorney general acted
as class representative in antitrust suit brought by “the State of Illinois, for itself, its agencies and
public institutions, the various school districts of the State . . . and all other Illinois school districts
similarly situated by class”); see generally Minnesota v. United States Steel Corp., 44 F.R.D. 559
(D. Minn. 1968) (attorneys general, representing plaintiff-states in antitrust suit, allowed to represent
21
class of governmental entities); Illinois v. Harper & Row Publishers, Inc., 301 F. Supp. 484 (N.D.
Ill. 1969) (same).
When a state-plaintiff has not been injured in the same manner as the members of a
class, however, courts have frequently refused to allow the attorney general to act as class
representative. See Illinois ex. rel. Bowman v. Home Fed. Sav. & Loan Ass’n, 521 F.2d 704, 707
(7th Cir. 1975) (state’s attorney sought to sue savings and loan associations on behalf of citizens
seeking home mortgage loans but did not allege that state sought such a loan; “[a] state, like any
plaintiff-representative, may maintain a class action on behalf of its citizens only if it satisfies the
requirements of Rule 23,” and “[s]ince the State’s Attorney is not a member of the class which he
purports to represent, the district court properly dismissed the complaint”); see also In re Rusty
Jones, Inc., 128 B.R. 1001, 1012-15 (N.D. Ill. 1991) (proposed class representatives (attorney
general, banking commissioner, insurance commissioner, and governmental committee) could not
satisfy requirements of Rule 23(a) and could not adequately and fairly represent the proposed class).
We conclude that absent express statutory language granting the Attorney General
parens patriae authority, the Attorney General cannot maintain a class action without satisfying the
class-action prerequisites.13 Article 21.21, which mirrors the federal class-action rule, contains no
clear, express grant of authority for the Attorney General to assume parens patriae authority.
13
As supporting authority, appellees cite In re Toys “R” Us Antitrust Litigation, 191 F.R.D.
347 (E.D.N.Y. 2000), and In re Sclater, 40 B.R. 594, 595 (E.D. Mich. 1984). In Toys “R” Us, the
attorney general sued pursuant to his statutory parens patriae authority, which is lacking here. 191
F.R.D. at 349. In Sclater, the attorney general was allowed to act as class representative under his
parens patriae authority and under a state law allowing him to “bring a class action on behalf of
persons residing in or injured in this state.” 40 B.R. at 597. The Sclater court relied on
distinguishable federal cases, and we decline to follow its reasoning.
22
Further, the Attorney General has not shown that the State has suffered an injury similar to those
suffered by the class members and thus has not shown that he may act as the class representative
himself. Therefore, the Attorney General must comply with the class-action prerequisites listed in
section 18.
1. Class Representative and the Attorney General as Class Counsel
The Attorney General maintains that he may not act as class counsel in the usual
meaning of the term. Jeff Boyd, Deputy Attorney General, testified that there was no authority for
the Attorney General to have an attorney-client relationship with individuals other than state
officials, agencies, or employees. Professor Issacharoff read 17(a) to “grant the Attorney General
the capacity to bring a class action when requested by” the Department and opined that allowing the
Attorney General to represent an individual would create a “bizarre mechanism” whereby he might
have to solicit a class representative. Issacharoff continued:
I’ll concede that the AG could easily find somebody to put up as a named plaintiff
if they had to. But the reason that it’s not required in the AG class actions, I believe,
is that when the AG speaks on behalf of the citizens of the state, the legitimacy of
representation is presumed, or conclusively presumed, as opposed to when a private
party does that. . . . It is presumed that certain officials can act on behalf of the
people that they already represent.
However, the plain language of sections 17 and 18 does not show a legislative intent
to allow the Attorney General to avoid meeting the class representative requirement. See generally
Susan Beth Farmer, More Lessons from the Laboratories: Cy Pres Distributions in Parens Patriae
Antitrust Actions Brought by State Attorneys General, 68 Fordham L. Rev. 361, 376-81 (1999).
23
Indeed, section 17 arguably confers on the Attorney General the very authority Boyd and Issacharoff
testified was lacking—the authority to represent “a member of the insurance buying public [who]
has been damaged by an unlawful method, act, or practice.” Tex. Ins. Code Ann. art. 21.21, § 17(a);
cf. Texas Dep’t of Mental Health & Mental Retardation v. Petty, 778 S.W.2d 156, 163 (Tex.
App.—Austin 1989, writ dism’d w.o.j.) (citing Act of May 27, 1981, 67th Leg., R.S., ch. 874, § 1,
1981 Tex. Gen. Laws 3330, 3331 (repealed 1989)) (statute provided that Attorney General “may
represent a class of individuals composed of veterans” injured by Agent Orange).
2. Does Adequacy of Representation Excuse Section 18 Compliance?
Appellees contend that strict compliance with section 18 and Rule 42 is unnecessary
because the Attorney General will adequately represent the class members. However, the Supreme
Court rejected a similar argument that as long as there was adequate representation, technical
compliance with federal Rule 23 and its notice provisions was unnecessary. See Eisen v. Carlisle
& Jacquelin, 417 U.S. 156, 176-77 (1974). The Eisen Court held that a finding of adequate
representation did not excuse the class representative from giving notice to potential class members
under Rule 23. Id. The Court observed that under the petitioner’s argument, notice would not be
required at all, and stated, “This cannot be so, for quite apart from what due process may require, the
command of Rule 23 is clearly to the contrary.” Id. In other words, “individual notice to identifiable
class members is not a discretionary consideration to be waived in a particular case. It is, rather, an
unambiguous requirement of Rule 23.” Id. at 176. Similarly, section 18 imposes unambiguous
requirements, not discretionary considerations, on class actions brought under the insurance code.
24
Appellees argue that strict compliance is unnecessary if the settlement is determined
to be fair, but in Amchem Products, Inc. v. Windsor the Supreme Court rejected the same argument:
The safeguards provided by the Rule 23(a) and (b) class-qualifying criteria, we
emphasize, are not impractical impediments—checks shorn of utility—in the
settlement class context. First, the standards set for the protection of absent class
members serve to inhibit appraisals of the chancellor’s foot kind—class certifications
dependent upon the court’s gestalt judgment or overarching impression of the
settlement’s fairness.
Second, if a fairness inquiry under Rule 23(e) controlled certification, eclipsing Rule
23(a) and (b), and permitting class designation despite the impossibility of litigation,
both class counsel and court would be disarmed. . . . Federal courts, in any case, lack
authority to substitute for Rule 23’s certification criteria a standard never
adopted—that if a settlement is “fair,” then certification is proper.
521 U.S. 591, 621-622 (1997); see also Ortiz v. Fibreboard Corp., 527 U.S. 815, 849 (1999) (“a
fairness hearing . . . is no substitute for rigorous adherence to those provisions of the Rule ‘designed
to protect absentees’”). Further, the Texas Supreme Court recently reaffirmed that the law requires
strict compliance with Rule 42’s class-action requirements. See Compaq Computer Corp. v. Lapray,
135 S.W.3d 657, 670-71 (Tex. 2004). In Lapray, the court admonished trial courts to perform a
“rigorous analysis” to determine whether all prerequisites to class certification have been met, and
stated, “All prerequisites means all prerequisites.” Id. at 671 (quoting Bernal, 22 S.W.3d at 435)
(emphasis added); see also McAllen Med. Ctr., Inc. v. Cortez, 66 S.W.3d 227, 232 (Tex. 2001)
(subjecting settlement class action to “heightened scrutiny”). Although the district court made an
alternative finding that the Attorney General did comply with the procedural requirements of Rule
42 and section 18, the record shows a lack of strict compliance with Rule 42 and article 21.21,
25
section 18(a) and (b) because no class representative was appointed. See Tex. R. Civ. P. 42(a)(3),
(4); Tex. Ins. Code Ann. art. 21.21, § 18(a)(3), (4).
Finally, to ensure fair and adequate representation there must be (1) an absence of
antagonism between the class representative and the class members and (2) an assurance that the
class representative will vigorously prosecute the class members’ claims and defenses. Forsyth v.
Lake LBJ Inv. Corp., 903 S.W.2d 146, 150 (Tex. App.—Austin 1995, writ dism’d w.o.j.); see
General Tel. Co. of the SW v. Falcon, 457 U.S. 147, 157 n.13 (1982); Sosna v. Iowa, 419 U.S. 393,
403 (1975).
Although the district court found that there were no conflicts between the class and
the Attorney General, it had no class representative against which conflicts could be measured. The
record shows that a discovery dispute arose between the Attorney General and
appellants/intervenors, putative members of the class he sought to represent. Appellants, as putative
class members, sought documentation related to the settlement negotiations resulting in the MOU,
some of which were in the possession of two senators involved in settling the dispute. The Attorney
General resisted, and the district court granted the Attorney General a protective order. Further, there
was evidence that the Attorney General himself initially saw the seeds of possible conflict. In a letter
to Farmers, Executive Deputy Commissioner of Insurance Casari said, “Farmers’ proposal clearly
attempts to use Farmers’ significant market share as leverage to induce a conflict between the
Department’s responsibilities to protect policyholders from unfair acts and to also promote
competition in the marketplace.” The Attorney General may be conflicted by the dual roles he
purports to play as both the Department’s attorney and the class representative. See Trbovich v.
26
United Mine Workers of Am., 404 U.S. 528, 539 (1972) (discussing conflicting interests of Secretary
of Labor in protecting rights of union members). A class representative against whom the adequacy
of settlement can be measured is indispensable to protect both the class and Farmers. See Phillips
Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985) (notice, opportunities to be heard and to opt out,
and adequate representation are fundamental due process components of class litigation); Hansberry
v. Lee, 311 U.S. 32, 44-45 (1940) (persons with conflicting interests who are inadequately
represented in prior action cannot be bound by prior judgment); see also Amchem Prods., 521 U.S.
at 625-26 & n.20 (adequacy inquiry uncovers conflicts of interest between representative and class
members). We hold that the Attorney General must comply with section 18.
CONCLUSION
Appellees argue that only some of the rules set out in section 18 and Rule 42 apply
to class actions brought by the Attorney General: “Although section 18(a) & (b) are inapplicable to
this suit, other portions of section 18 are indeed applicable. Indeed, section 18(g), requiring court
approval of the settlement, applies because unlike section 18(a), section 18(g) is not limited by its
terms to class actions brought by a class member ‘on behalf of’ others similarly situated.” We
disagree. As in federal Rule 23, section 18(a) determines whether a party can represent a class, and
section 18(b) determines whether the suit may be maintained as a class action. Section 18(a) does
not excuse a class action brought by the Attorney General under section 17 from strict compliance
with the other rules set out in section 18 and Rule 42. Nor may the Attorney General bring this suit
under parens patriae powers without an explicit grant of those powers in this context.
27
Section 17 allows the Attorney General to bring a class action at the Department’s
request if a member of the insurance-buying public has been damaged by an unlawful act. Tex. Ins.
Code Ann. art. 21.21, § 17(a). Section 18 provides that a class action may be instituted if the
requirements of numerosity, commonality, typicality and adequacy of representation are met. Id.
§ 18. We are bound by the plain language of the statutes, see Bernal, 22 S.W.3d at 435 (citing
Amchem Prods., 521 U.S. at 620), and do not believe that the legislature intended sections 17 and
18 to allow the Attorney General to bring a class action suit without complying with the traditional
class action requirements. Unlike the legislative history of the HSRA, the legislative history of
article 21.21 does not show an intent to exempt the Attorney General from the requirements of Rule
42 or section 18(a). As stated in Frito-Lay, such an exemption would ignore the problems associated
with class actions: “The joining of the claims of numerous, dispersed claimants in a single judicial
action is inherently complicated and requires safeguards if injustice is to be avoided.” See 474 F.2d
at 777 n.11. When the Attorney General brings a class action suit pursuant to article 21.21, section
17 of the insurance code, he must comply with the requirements outlined in section 18(a) and (b).
We reverse the trial court’s judgment certifying the class and remand the case for proceedings
consistent with this opinion.
__________________________________________
David Puryear, Justice
Before Chief Justice Law, Justices Kidd and Puryear;
Justice Kidd Not Participating
Reversed and Remanded
Filed: January 21, 2005
28