Of Blackouts And Lawsuits
Class-action claims for widespread utility service interruptions are a growing trend.
July 2004
By Gavin J. Rooney and Nicole Bearce Albano
During the dog days of summer, a severe heat wave settles over the service territory of an electric utility. Electricity demand reaches an all-time peak as customers turn their air conditioners to the highest setting. Service interruptions occur throughout the utility's territory as high loads and low voltages cause breakers to trip, fuses to operate, transformers to overheat, and equipment to fail. When the heat at last subsides, the utility wants to repair its damaged image among customers and its worsened relationship with regulators.
But what kind of legal exposure does a utility face as a result of losses caused by the blackout-such as spoiled food and damaged electrical equipment for residential customers, and business interruption for commercial customers? Is that exposure limited to individual claims by disgruntled customers, or can the claims of all customers be litigated in a single proceeding to secure an aggregate damages award on behalf of all affected customers (see "Class-Action Lawsuits: A Reference," p. 38)?
Plaintiffs today are all too quick to cry negligence when they have suffered a loss. Whether the case can be litigated as a class action will vastly affect the legal exposure facing the utility, literally making the difference between a claim of hundreds versus millions of dollars. Blackout class actions have been brought against utilities in Texas, Louisiana, Illinois, Arizona, New York, and New Jersey, and at least two have resulted in multi-million dollar settlements-all of which suggests that class actions for widespread service interruptions are a growing trend.
The Blackout Context
Several aspects of a widespread blackout make the use of the class-action device attractive. First, there is usually a large population of customers who lost power, and they can form a class to assert a common claim. Second, while the damages of individual class members are normally modest, aggregation of those claims results in a large number, often in the millions or tens of millions of dollars. And finally, public utilities are sufficiently flush (and insured) to be good for the judgment. As the infamous bank robber Willie Sutton put it, he robbed banks because "that's where the money is."1
The principal cause of action in an electricity blackout class-action case normally is negligence. In most states, negligence requires the plaintiff to prove: (1) a duty of care to take reasonable steps to protect the plaintiff from harm; (2) that the defendant breached a standard of care on a particular matter, usually proven by expert testimony; (3) that the defendant's breach directly caused the plaintiff to suffer some loss; and (4) the amount of damages sustained.
Class actions generally are disfavored in the negligence context because, oftentimes, each plaintiff is injured as a result of differing and multiple accidents or events. As a result, the proofs offered at trial will differ among class members. For example, a class action against a hospital on behalf of all persons injured by medical malpractice is largely unheard of, since a finding of liability (or non-liability) for one incident of malpractice will have little or nothing to do with another incident. The principal exception to this rule is the case that involves a "single event," where many people are injured by one accident, such as a train derailment or bridge collapse. In these limited cases, all injured parties could prove liability by establishing that the train operator fell asleep at the switch or that the bridge's construction was shoddy and substandard.
An increasing number of class actions filed against utilities have arisen from widespread electricity interruptions. The viability of the class action, however, depends upon a single event analysis-i.e., if the power went out due to a single event, then a class action is permissible; if not, the class will not be certified. Whether a blackout fits within this "single event" exception, therefore, will generally control a court's decision as to whether to certify a blackout case as a class action.
Most widespread blackouts occur due to a severe weather event affecting the distribution system, such as an ice storm, heat wave, or cold front. These weather events interrupt power in multiple locations, usually for differing reasons-including ice-laden tree limbs faulting out lines, overloading circuits, or transformers tripping breakers. In most blackout cases, there is an ample factual record on which to argue that there is no single event. While plaintiffs will do their best to make the case look like a single event-e.g., by emphasizing the ice storm, heat wave, or other severe weather event that triggered the outages-a detailed review of why the outages occurred often will illustrate why there is no "single" event. To assign fault, in other words, a court would have to review each separate cause of an interruption to determine whether there had been some fault in the utility's planning or operations.
For example, in the case of widespread outages triggered by a severe heat wave, interruptions will occur at many different locations over a series of hours or days. While at first blush this may appear to be a single event due to the heat wave, the heat alone will not explain any individual interruption. Breakers may operate due to high load or low voltage at different places in the system, and a fault analysis would need to look at the load forecasting and capacity planning for each individual transformer or circuit to determine if it complied with industry standards. Likewise, to the extent that outages occur due to operator decisions to shed load during a heat wave, each such decision would have to be examined to determine whether it could have been avoided with the exercise of reasonable care. Interruptions caused by equipment failure would require analysis of maintenance records and industry standards for routine maintenance, all of which will vary depending upon the equipment at issue. Indeed, in a typical widespread outage case, a fault analysis would have to be made for each location as to whether a breaker tripped, a fuse operated, a line faulted, or a system operator chose to shed load.
The significance of the single event illustrates itself with the extrapolation issue. In the securities fraud context, if the company artificially inflated the stock purchased by one plaintiff, then the court can conclude that the same conduct inflated the price of the stock purchased by all members of the class during the inflationary period. In the blackout context, by contrast, a conclusion of negligence for a single breaker operation because that breaker was undersized for the reasonably anticipated load will have little or nothing to do with whether the utility was at fault for an outage at a different location due to a blown fuse. In other words, the evidence offered by one plaintiff to prove liability will have no bearing on the evidence offered by other class members.
This is not to say, however, that there can never be a single event in the blackout context. It is, of course, conceivable that a single event such as a lightning strike could interrupt power over a wide area. However, given the increasing complexity of the electrical infrastructure-including the use of redundant and back-up systems-the possibility of such a single event triggering widespread outages is becoming increasingly remote.
Can Damages Be Assessed for the Class?
Even if the utility's compliance with a standard of care can be determined for the class because the plaintiff can establish that a single event caused the blackout, there is no reason to expect that damages can be proven through proofs common to the class. The damages experienced by individual class members are, inherently, an individual matter. Many customers will suffer no damages at all during a power outage; accordingly, they have no claim and should not even be part of the class. The kinds of losses experienced by others will differ depending upon individual circumstances. A movie theater, for example, may experience a total interruption in business during a power outage, whereas a hardware store may see little impact on business, especially if the outage occurs during daylight hours. Indeed, a hardware store may actually see an upsurge in business as customers come in to purchase flashlights, portable lamps, generators, and other equipment to assist with the electrical service interruptions.
A large part of the attraction of a class action for plaintiffs, however, is to secure a single, massive damages award for the class. This both maximizes the profit of the plaintiffs' attorney prosecuting the case (who is generally compensated on a contingent fee basis) and exerts the maximum pressure on the defendant to settle prior to trial. Again due to the extrapolation principle, however, classwide damages awards are generally only permissible where the damages can be determined through the application of a mathematical formula.
By way of example, the success of securities fraud class actions2 is largely due to the use of classwide damages formulae in those cases, permitting the jury to return a single judgment of both liability and damages against the defendant company. In a securities fraud case, the plaintiff can prove the degree to which the stock price was inflated due to the fraud, and then determine the class's damages by multiplying the number of shares purchased during the class period by the amount of the inflation. Another example of utilizing a mathematical formula to calculate classwide damages can be found in the antitrust price-fixing context, where the class's damages can be determined by subtracting the price a competitive market would have set from the price actually charged, and then multiplying that figure by the number of units purchased by the class during a defined time period.
Recognizing that little about the damages experienced by customers during electricity blackouts resembles these sorts of mathematical formulae, plaintiffs in at least two blackout class actions have tried to replicate them by using survey data. In each case, the plaintiff used past surveys of electricity customers designed to elicit their prediction of losses in a hypothetical outage. These surveys were generally performed as part of a cost-benefit analysis in the infrastructure planning process, which sought to compare the capital costs of reinforcing a utility's infrastructure with the economic worth customers associated with more reliable service.
Although, cursorily, the average loss figures derived from these surveys (varying only by rate class of the customer and length of the outage) create the illusion of a mathematical formula akin to what courts commonly see in securities fraud and antitrust class actions, they are, in fact, markedly different. Given the intended use of the survey data for utility system planning, to date, these types of survey reports have not been accepted by our courts to award damages in litigation, or to provide compensation to customers for actual monetary losses following an electricity blackout or service interruption. Nonetheless, as plaintiffs' attorneys explore the potential of widespread service interruptions as a new growth area for class action litigation, they likely will continue their efforts to tweak the use of this survey data and to shoehorn the figures into what appears to be a mathematical formula. Alternatively, plaintiffs' counsel may attempt to develop other seemingly mathematical formulae in the hopes of establishing damages through proofs common to the class and avoiding the time and expense of individual proofs at trial.
Endnotes
- Theodore H. White, America In Search of Itself (1982).
- One of the most notable examples is Cendant Corp.'s record-setting $3.2 billion settlement in 1999. Even excluding the staggering Cendant settlement, the average settlement value of a securities class action is surging. A PricewaterhouseCoopers study of securities litigation in 2002 indicates that, during that year, a record number of 40 settlements of federal private securities class actions exceeded $10 million; moreover, the total value of the 106 settlements in 2002 surpassed $2.1 billion. See PricewaterhouseCoopers LLP 2002 Securities Litigation Study, at 2 (2003), located at http://www.10b5.com/2002_study.pdf.
Gavin J. Rooney is a member of, and Nicole Bearce Albano is counsel with, the law firm of Lowenstein Sandler PC based in Roseland, N.J. Rooney and Albano defended an electric utility in a blackout class action pending in New Jersey, Muise v. GPU Inc., in which they recently convinced the court to rescind its earlier decision certifying the class-action suit. Rooney can be reached at 973-597-2472 or grooney@lowenstein.com, and Albano can be reached at 973-597-2570 or nalbano@lowenstein.com.
Class-Action Lawsuits: A Reference
A class action is a procedural device that permits the litigation of multiple claims in a single proceeding. The attractiveness of the class action device arises from the power of aggregation, especially in cases where the dollar value of the claims of individual class members is small but their collective value is very large. Absent a class action, the vast majority of customers will normally accept the fact that there is no guarantee of continuity of electrical service and will not pursue blackout-related damages claims. With a class action, however, the claims are asserted on the customer's behalf by plaintiffs' counsel interested in securing a handsome fee.
To achieve class action status, a representative plaintiff must convince a court to certify the case by satisfying several criteria laid out in the court rules.1 If the court declines to certify the class, then the action remains an individual case brought by the named plaintiff only. Therefore, the class certification decision, albeit a procedural one, has often been termed a "death knell" decision-effectively ending the case if denied, and placing enormous pressure on the defendant to settle if granted.2
Among the class certification criteria, a would-be class plaintiff must show that the class is numerous, the class plaintiff's claims are typical of those of the class, and a class action is superior to any alternative means of handling the claims. In most cases, however, the key element controlling class certification is whether common (or individual) issues predominate among the class' claims.
The predominance requirement arises from the fact that a class action is really little more than a sampling procedure applied in litigation. In polling and other sorts of exercises designed to elicit facts regarding a large population, those facts often can be determined from a small sample and then extracted to the population as a whole. For this technique to be valid, however, the sample must be representative of the population; otherwise the extrapolated results will be erroneous. The Chicago Daily Tribune published its erroneous (and famous) headline for the 1948 presidential election announcing that "Dewey Defeats Truman" based on a poll of a skewed sample of voters who were more likely than the population at large to vote Republican.3 Likewise, in a class action, the court adjudicates the claims of the representative plaintiff, and its determination on liability is then extrapolated to the class as a whole. Reflecting the idea of a representative sample, it is only where common issues of fact and law predominate that this sort of extrapolation is permissible.
The class-action device has been particularly effective in securities fraud lawsuits. In these cases, the plaintiffs generally contend that through fraudulent statements of financial results, a public company artificially pumped up the market value of its stock and, therefore, anyone who purchased the stock during the inflationary period suffered a loss by paying more for the stock than should have been. On this sort of claim, the plaintiffs offer evidence at trial that focuses almost entirely on the defendant's conduct: that is, whether the defendant, in fact, lied about financial results. Moreover, the damages of the class can often be determined by a mathematical formula-once an expert opines as to the percentage by which the stock price was inflated, that number is simply multiplied by the number of shares that were purchased during the class period. Because common issues almost always predominate in these claims, securities fraud cases are typically certified for class treatment, creating a massive exposure for the public company out of what otherwise might have been small claims by a few disgruntled stockholders.
The securities class action has been remarkably successful for the plaintiffs' bar. While the corporate scandals of the late 1990s have resulted in some massive settlements of such suits, almost all of these cases result in multi-million dollar settlements if the case survives a threshold motion to dismiss. This successful track record in the securities fraud context has led many plaintiffs' attorneys to look for other class-action opportunities, and some have focused on electricity blackouts as a potential new growth area. -G.J.R & N.B.O.
Endnotes
- See, e.g., Federal Rule of Civil Procedure 23.
- See, e.g., Blair v. Equifax Check Servs. Inc., 181 F.3d 832, 834 (7th Cir. 1999) (noting that one of the reasons that Fed. R. Civ. P. 23(f) was adopted was to give appellate courts discretion to entertain appeals in "death knell" cases where the representative plaintiff's claim is too small to justify the expense of litigation); see also Waste Management Holdings, Inc. v. Mowbray, 208 F.3d 288, 294 (1st Cir. 2000); Sumitomo Copper Litig. v. Credit Lyonnais Rouse, Ltd., 262 F.3d 134, 139 (2d Cir. 2001); In re Delta Air Lines, 310 F.3d 953, 958-60 (6th Cir. 2002); Prado-Steiman ex rel. Prado v. Bush, 221 F.3d 1266, 1273 (11th Cir. 2000); In re Lorazepam & Clorazepate Antitrust Litig., 289 F.3d 98, 99-100 (D.C. Cir. 2002).
- David McCullough, Truman, at 657, 669, 694, 697, 703, 714 (Simon & Schuster 1992); see also "Classic Polling Surprises," located at
http://www.studyworksonline.com/cda/content/worksheet/0,,EXP545_NAV2-76_SWK543,00.shtml.
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