Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

Since I first wrote about fighting fishing expeditions, Google has sent a number of readers to the blog looking for “fishing expeditions discovery” or “deny class certification discovery abuse.” (It also sent one reader looking for “botulism,” which I’m proud to say is not available here.) Clearly, fighting fishing expeditions in class actions is an important topic to defense lawyers. And the good news is, there’s more than one way to do so. For example, in addition to objecting to the relevance of some of plaintiff’s document requests or interrogatories, one can also object that the plaintiff is not entitled to class-related discovery if she cannot make a prima facie showing that her class will meet the requirements of Rule 23.

In Heerwagen v. Clear Channel Communications, an antitrust class action, the plaintiff alleged that Clear Channel’s charging of high prices for live concerts violated Section 2 of the Sherman Act, which prohibits monopolistic practices or attempts to monopolize a relevant market. After a three-day hearing, the trial court declined to certify a class. The plaintiff appealed, arguing among other things that the trial court had impermissibly limited the discovery she could take to demonstrate that classwide proof of her claims existed.

Starting from the premise that the decision to limit discovery is within the sound discretion of the trial court, the Second Circuit Court of Appeals reasoned that:

Limiting discovery in preparation for the class certification motion in order to reduce expense, the district court allowed plaintiff's deposition and the deposition of experts. Although Judge Sprizzo made comments suggesting improper bases for limiting discovery — including a categorical statement that he generally does not allow plaintiffs discovery on the issue of class certification and an unsupported claim that plaintiff's counsel here sought discovery "as some sort of settlement leverage" — we nonetheless cannot conclude that the decision to limit discovery here amounted to an abuse of the district court's broad discretion.

In addition to the discovery allowed, significant relevant information was apparently available in the public domain, as evidenced by the exhibits submitted in connection with plaintiff's motion for class certification. Moreover, plaintiff failed to make any showing, however preliminarily, that she could satisfy the predominance requirement of Rule 23(b)(3) or that she might be able to do so with additional discovery. See Mantolete v. Bolger, 767 F.2d 1416, 1424 (9th Cir.1985) ("Although in some cases a district court should allow discovery to aid the determination of whether a class action is maintainable, the plaintiff bears the burden of advancing a prima facie showing that the class action requirements of Fed.R.Civ.P. 23 are satisfied or that discovery is likely to produce substantiation of the class allegations.").

In other words, the Second Circuit ruled that, because the plaintiff bears the ultimate burden of proving that a class is certifiable under Rule 23, she also bears the burden of making a prima facie showing that her class is certifiable under Rule 23 in order to justify extensive discovery.

For cases where the defendant faces a class complaint that is facially deficient, but where the plaintiff hopes to use discovery to fish for a viable cause of action or leverage a settlement, objecting because the plaintiff cannot make a prima facie case for discovery can be effective. The plaintiff will no doubt fight this objection as hard as she can; but a fight about the propriety of a defective class action? That’s a fight the defense is ready to have.


 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Martin Redish is back in the news. In the past week, he’s been written up in Forbes and the ABA Journal, as well as a series of associated blog posts by academics like Elizabeth Chamblee Burch. The Forbes profile – which kicked off the coverage – quotes him as saying that the rights held by class action litigants:

are individually held rights … What a lot of class action scholars and proponents have done--quite cleverly, I must say--is engage in a sort of alchemy to transform individual rights into collective rights.

The Forbes profile doesn’t focus on any particular work of Redish’s, although the discussion of cy pres relief recalls his forthcoming article on “Cy Pres Pathologies,” and Chamblee Burch uses it to highlight his latest book: Wholesale Justice: Constitutional Democracy and the Problem of the Class Action Lawsuit. But the Forbes headline (“Are Class Actions Unconstitutional?”), which has generated much of the buzz, presumably refers to Redish’s argument that the Rules Enabling Act (which gives authority to the Federal Rules of Civil Procedure) is unconstitutional because it violates Article III’s “case and controversy” requirement and the nondelegation doctrine. (For those playing along at home, Redish makes this argument at pp. 73-85.)

Redish predicts that his proposals will fall on “deaf ears.” He’s likely right – not because those proposals are unsound (or even invalid), but because very few lawyers would argue that the Rules Enabling Act (and with it, the entire structure of the federal rules) is unconstitutional. The typical class-action defendant – which is usually a corporation familiar with the benefits and drawbacks of litigation – is unlikely to want to bring the entire temple down on top of itself, no matter how much it might dislike the effects of Rule 23. And a settlement objector – most often a moonlighting plaintiff’s attorney – is even less likely to want to undermine the entire class-action structure. Nor is Congress likely to un-delegate responsibility for the Rules of Civil Procedure anytime soon.

Does this mean Redish’s work is useless? Hardly. There’s always value in going back and kicking the tires on people’s assumptions; no one wants a constitutional blowout at high speeds. But even more importantly, Redish at his best is gimlet-eyed about the disconnects between the legal fictions that accompany the class action and the realities of how class awards and class settlements get administered. While Redish’s approach to these disconnects is largely theoretical, it provides an excellent starting point for some more grounded legal attacks on meritless class actions.


 

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

Since the Supreme court set out its “plausible claim” pleading standard in Ashcroft v. Iqbal last year, there has been a flurry of commentary – in law reviews and online – about the wisdom and the policy implications of the decision and its immediate predecessor, Bell Atlantic v. Twombly. The latest entry into that debate comes from Professor Robin Effron of Brooklyn Law School, who has written an article on The Plaintiff Neutrality Principle: Pleading Complex Litigation in the Era of Twombly and Iqbal (forthcoming from the William and Mary Law Review).

Effron’s primary concern is that a broad application of Twombly and Iqbal might lead to full-fledged Rule 23 inquiry at the motion to dismiss. (This is unlikely. Even if a defendant preempts a plaintiff’s motion for class certification, a comprehensive motion to deny will still require some discovery record. Iqbal’s plausibility standard may enhance a motion to strike or deny certification applying a Rule 12(b)(6) standard, but there – like in a motion to dismiss – courts will likely allow well-pled complaints to survive unless they have insurmountable legal defects.)

The more interesting part of the paper from a tactical standpoint is Effron’s concern with costs. The cost of litigation was not an explicit concern in Iqbal, but it was in Twombly. As Effron describes:

The Court repeatedly referred to the costs of litigation, especially the purportedly high cost of discovery in antitrust class actions as a factor in turning an increasingly critical eye to the factual sufficiency of the pleadings. This aspect of the Twombly opinion suggests that courts are to look not only at the plausibility of the allegations in the complaint, but the relationship between the plausibility of the allegations and the cost of discovery. The higher the cost of litigation, in other words, the more plausibility the court ought to demand from a complaint.

(Emphasis in original.) This suggests at least one rhetorical tactic for the motion to dismiss. A defendant may wish to remind the court of the very high costs involved in allowing a class action to proceed past the motion to dismiss stage. Most courts are very aware that, should they dismiss a claim (or compel arbitration), they may deny a plaintiff access to the courts.  But, on the other side, when courts allow overly vague or outright implausible claims to proceed, they are authorizing an incredibly costly venture each time with little to no factual basis, which defies Rule 1's admonition to ensure a "just, speedy, and inexpensive determination of every action and proceeding." There is every reason for a defendant to remind the court of that issue when moving to dismiss complex litigation.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

For practitioners, clauses in consumer contracts that require consumers to arbitrate smaller claims rather than bring large-scale class actions have been a hot issue for several years. Defendants (and their counsel) like these clauses because, when they work, they can reduce a bet-your-company class action back to a manageable individual claim. Class-action plaintiffs (and their counsel) tend to dislike the clauses for the same reason.

In general, the debate surrounding class-action arbitration clauses centers on whether a given clause – which is usually part of a take-it-or-leave-it consumer contract – is unconscionable because the consumer had no chance to negotiate it. And while defendants can win this debate, they can lose it just as easily.

However, one federal district court case from 2007 shows how a defendant can craft an arbitration clause that may allow it to take advantage of this low-cost alternative to class actions, even in a generally pro-plaintiff jurisdiction like the Ninth Circuit, applying consumer-friendly law like Washington state’s. In Carideo v. Dell, Inc., the plaintiffs sued Dell alleging that it sold them defective laptops. Dell invoked its arbitration clause, which the trial court upheld.

The plaintiffs moved for reconsideration. In denying that motion, the trial court found that plaintiffs could still vindicate their claims in arbitration because:

• the individual amount in controversy was $1,300 to $1,700, large enough to justify a day in front of an arbitrator;
• the arbitration forum (the NAF) did not provide for confidential awards, which meant that later plaintiffs would benefit from these first arbitrations;
• there was enough freely-available evidence (including internet complaints) for the plaintiffs to make a persuasive factual case without expending lots of costs; and, most importantly
• Dell agreed to pay all of plaintiffs’ arbitration costs in excess of the initial $25 filing fee.

Since the end result was that arbitration would be less expensive (and less time-consuming) than bringing a suit in court, the court refused to find the arbitration clause substantively unconscionable. Nor, since the arbitration clause provided a genuine means of redress, did the court find the clause procedurally unconscionable, even though it noted the take-it-or-leave-it nature of the contract.

So what does this mean for defendants? For those that might consider arbitration clauses to reduce the risk from class actions, it may make sense to reduce the barriers to arbitrating the claims. There is at least some evidence that people prefer informal dispute resolution to litigation.  Assuming in general the products are sound, the potential liability from a handful of arbitrations – even including costs – is far less than the cost of litigating a class-action suit brought by an entrepreneurial plaintiff’s lawyer, or an extremely disgruntled consumer, even if the suit is dismissed early in. And, even if the case were to proceed as a class action, the presence of a realistic arbitration program available at the outset would be a strong argument that class litigation was not superior to individual litigation.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Last week, I wrote that in class actions, divining the motives of plaintiffs’ firms can feel like Kremlinology; this week it seems more like missology. The Florida State Board of Administration (which oversees Florida’s retirement funds) has conducted a “beauty contest” for its next securities counsel, and done so with what various observers have called unparalleled transparency. The result is a trove of publicly-available data on the securities plaintiffs’ bar’s practices and priorities.

The American Lawyer’s Litigation Daily managed to obtain the various submissions from the securities firms that bid for the SBA’s business. And the submissions – from noted plaintiffs' firms Coughlin Stoia, Lieff Cabraser, Barrack Rodos & Racine, Berman DeValerio, Bernstein Liebhard, Bernstein Litowitz, Entwistle & Capucci, Granet & Eisenhoffer, Kaplan Fox, Labaton Sucharow, and Pomerantz Haudek – reveal a number of interesting facts about the competing firms. Among them:

• A number of plaintiffs’ firms have their own proprietary software systems for monitoring their clients’ investments. When an investment loses value, and the firm can correlate it to some fraud or other mismanagement, they recommend filing a lawsuit.
• In addition to monitoring investments, a number of these firms employ teams of in-house forensic accountants. At least one (Lieff Cabraser) also employs a former FBI agent for “identifying and conducting interviews with witnesses and performing other investigative tasks.”
• In response to the SBA’s question about litigation financing, most firms answered that they were sufficiently capitalized to handle motions practice, discovery, and the retention of experts.
• The SBA is very concerned with dismissal rates of lawsuits.
• Despite the fact that they weren’t asked, a number of firms discussed the number of times that they had been appointed Lead Counsel or – more interesting – the number of times they had won Lead Counsel motions.

There are a number of inferences defense firms can draw from the information in these submissions. Among them:

• Intelligence is very important to plaintiffs’ firms. Each of these firms invests a lot of money in monitoring stock prices and performing preliminary research
• For plaintiffs, the Motion to Dismiss is the critical motion. Because class-action defense firms want to rid themselves of a case early and completely, they often structure their defense around each of the dispositive motions that occur in a class action, starting with the motion to dismiss, but including the certification motion and summary judgment. Securities plaintiffs and their lawyers really emphasize the 12(b)(6) motion.
• Plaintiffs’ counsel are subject to intense competition. The other motion that the various firms tout is the Motion for Lead Counsel, which indicates that this is another landmark. (The intense investment in pre-lawsuit research also suggests intense competition to be “first to file.”)
• Reputation is paramount. Firms that compete regularly to represent public pension funds must work extremely hard to avoid the appearance of impropriety. (This beauty contest offers two examples. One firm was anonymously accused of various shady practices – including diverting cy pres settlement funds to a partner’s synagogue – into which the SBA is looking. In addition, Coughlin Stoia’s response to questions on restructuring and ethics issues labors to avoid mentioning founding partner William Lerach’s legal difficulties.)
• These firms’ business models are built around settlement. When touting their “wins” each of these firms promoted settlements that had resulted in large payments, as opposed to trial wins. This is no surprise (very few securities class actions go to trial), but it is helpful to remember that securities class-action practice is less about trial victory than it is about leveraging a successful settlement.

These aren’t universal observations. These are the firms at the top of the food chain, so their practices will not be the same as other plaintiffs’ firms. Also, these were submissions for beauty contests, which – as defense lawyers know – require a firm to put its best face forward. Still, knowing the structural differences between plaintiff and defense firms can be instructive in figuring out how best to respond to plaintiffs.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Defendants walk a thin tightrope over a deep chasm when they have to litigate and settle a class action. On the one hand, litigating a class action vigorously requires the defendant to argue that a class is not certifiable. On the other, to settle a case on a classwide basis, the parties have to convince the court to certify a class.

At the best of times, a defendant may have to explain in one class action why it did not oppose certifying a settlement class in a similar lawsuit. But the danger of this tightrope is even clearer when a settlement falls through. Then, defendants face the possibility that most of their arguments against certification of a litigation class will be foreclosed.

For a stark example of this dilemma, look no further than Carnegie v. Household Int’l, Inc., 376 F.3d 656 (7th Cir. 2004). In Carnegie, the defendants were a bank and a tax preparer who jointly offered tax-refund anticipation loans. The plaintiffs alleged that the tax preparers never disclosed that they received a fee for offering the loan as well as an ownership interest in the loan, both evidence of self-dealing by a supposed fiduciary.

The parties settled, and the trial court approved the settlement, but the Seventh Circuit (Posner, J.) reversed, because it was worried about collusion between the plaintiff and defendant. On remand, the trial court refused to approve a settlement, asked the defendants for any objections to certification, and proceeded to certify a class over their objections. When the defendants appealed the certification, the Seventh Circuit held that – because

In the previous round of this protracted litigation the defendants had urged the district court to accept the giant class as appropriate for a global settlement, had prevailed in their urging, and so are now precluded by the doctrine of judicial estoppel from challenging its adequacy …

The consequences are less severe if the settlement merely falls apart at the trial court level. Instead of judicial estoppel, the defendant only has to explain to the court why it’s reversing itself on the arguments it made in favor of certification.

So what can defendants do to minimize these risks? Most important, they should think carefully about the implications of a class settlement before arguing for certification. Proposing a classwide settlement with an inadequate representative, or where common issues do not predominate, may pose long-term problems. If a settlement still appears to be the best bet, then the defendant should highlight the potential unmanageability of a class trial, even when briefing the fairness of the settlement. Should the settlement fall through, that will be the defendant's best argument against certifying a class, and highlighting manageability problems may actually aid the settlement because it shows the court there may not be another means of getting the entire class the relief it seeks.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 Despite the amount of time defense counsel spend handling class actions, one aspect often continues to frustrate analysis – plaintiffs’ counsel. Studying how plaintiffs’ counsel operate in class actions (which is, of course, essential to opposing them in individual litigation) can sometimes feel like Kremlinology, or reading tea leaves. Since plaintiffs’ counsel have a strong interest in presenting their best possible face to the world – and defendants often feel strong distrust of plaintiffs’ PR – defense counsel risk predicting the moves of a caricature, rather than a fully-fleshed opponent.

Fortunately, a number of academics have begun to examine the ways in which plaintiffs’ counsel interact, find clients, and build their cases. One of the more prolific scholars of class-action practice, Stephen Choi, has teamed with longtime co-author A.C. Pritchard and judicial clerk Drew T. Johnson-Skinner to perform an analysis of “pay to play” practices among plaintiffs’ counsel and state pension funds. 

As Choi and company describe it, since the passage of the Private Securities Litigation Reform Act (which heavily favors institutional investors over individual investors as class representatives, on the theory that they are more likely to be independent of class counsel):

Most of the institutional investors that have agreed to serve as lead plaintiffs have been government-sponsored pension funds. Many of these funds are managed directly by politicians, such as state comptrollers, who must campaign to retain their current positions, or may have designs on higher offices. Alternatively, these funds are managed by political appointees, who typically owe their position to the state’s governor. The presence of political influence over these funds naturally raises the question of whether law firms are making political contributions to the politicians who wield that influence in order to enhance their chances of being selected to represent the pension funds. Simply put, are law firms buying lead counsel status with campaign contributions, i.e., do class action lawyers pay to play?

(Emphasis added.) Their conclusion? Yes. Class-action lawyers do. And firms that appear to win their work as a result of “pay to play” practices generally receive higher attorneys’ fees than those that don’t.

So what are the strategic implications of this finding? For defendants, Choi and company’s analysis implies that it's worth serving discovery exploring the various relationships plaintiffs’ counsel may have had, even with larger institutional investors. Commentators (and courts) had previously presumed that institutional investors would be more adequate than smaller clients because they had the incentive to oversee counsel (because they had a larger stake in the litigation), and the investing knowledge required to do it effectively. However, Choi and company's analysis implies that pension funds that accept “pay to play” contributions may lack the financial independence to oversee class counsel. If they lack that independence, they may not be adequate fiduciaries of the interests of the class. And that's a powerful argument against certifying a class.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Often, when a defendant receives a class-action complaint, its first reaction is to see whether or not there are grounds to dismiss the action. (For defendants in federal court, that impulse is particularly acute since the Supreme Court handed down its opinion in Ashcroft v. Iqbal, which demonstrates little tolerance for purposely vague pleadings.) If the motion to dismiss succeeds, then the action goes away. But even if a complaint survives a motion to dismiss, the defense may still have achieved a valuable victory by setting up the eventual denial of class certification.

Take the 2008 case of In re FEMA Trailer Formaldehyde Products Liability Litigation, 2008 WL 5423488 (E.D. La. Dec. 29, 2008), a proposed class action in multi-district litigation alleging that various manufacturing defendants had built emergency trailers for victims of the devastating 2005 Hurricanes Katrina and Rita that exposed them to unsafe levels of the chemical preservative formaldehyde. Plaintiffs alleged causes of action for negligence, strict liability, and breach of warranty. The defendants moved to dismiss several of the plaintiffs’ claims that were brought under varying state laws, a motion the trial court denied. Later, however, when ruling on class certification, the court referred back to its decision on the motion to dismiss in finding that the named plaintiffs were not typical of the proposed class, in part because of the legal variations among the claims of various class members. In doing so, the trial court specifically stated that these legal variations were 

evident in the Court’s Order and Reasons [on the Motion to Dismiss], wherein the Court analyzed these claims in considerable detail according to the laws of the applicable states.

Courts are rarely this explicit about how their rulings on motions to dismiss may inform their decisions whether to certify a class. But there is little doubt that proffering valid legal arguments, even when they do not prevail at the motion-to-dismiss stage, can influence the court’s thinking when it later decides whether to certify a class. (Psychologists and behavioral economists refer to this effect as “framing.”) Sifting through complicated choice-of-law analyses or individualized allegations about statutes of limitations can help convince a court that a full-fledged class trial of individualized claims will be more work than it can adequately manage. Plaintiffs – who control the choice of forum, the complaint, and often even media contacts – have a number of powerful framing tools at their disposal. There’s no reason for the defendant to ignore those tools in its kit.

• Email This
• Print
• Comments
• Trackbacks
• Share Link