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

 ... to provide a brief update on the Supreme Court's decision yesterday in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., which held that, unless there is a specific contractual basis to do so, one party cannot force another to submit to classwide arbitration.  

Since the decision involves a firm client (which had retained a team headed by firm colleague Amy Manning), I'm going to refrain from the usual tactical analysis.  Instead, I'll simply reprint the firm's press release, and wish Amy and the rest of the McGuireWoods team congratulations on a job well done.  

Supreme Court Rules in Favor of McGuireWoods Client
in Landmark Class Action Arbitration Case

CHICAGO – McGuireWoods LLP announced that it has secured a victory before the U.S. Supreme Court on behalf of firm clients Jo Tankers B.V. and Jo Tankers Inc. In a 5-3 decision in Stolt-Nielsen S.A. et al v. AnimalFeeds International Corp., No. 08-1198, 559 U.S. ___ (2010), the court addressed the key question of whether parties can be compelled to submit to class arbitration where the arbitration clause is silent on the issue of class treatment. In the decision, the court held that “a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

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The copy edits have come back on The Class Action Playbook.  Between those and actual billing work for clients, posting will be very light here for a week or so.  However, normal posting should resume no later than Tuesday, May 9.

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That’s the question posed by a student note coming out from the Hastings College of Law in July. And the answer, according to author Joshus Stadler, is “No.”

Stadler’s primary argument is that the class action has its roots in equity, and was conferred its current status by the Rules Enabling Act, which does not enlarge or constrict any substantive rights. Since the Seventh Amendment only allows for jury trials for causes of action that existed in common law at the time of its adoption (generally, 1791), and the class action was given its modern status as a procedural device under the Rules Enabling Act, Stadler argues that there is no Seventh Amendment guarantee for a jury trial in a class action.

Stadler’s argument has to overcome a few obstacles. (Most notably, the Seventh Amendment applies to “Suits at common law,” which implies substantive causes of action instead of procedural devices. One can file a class action asserting a common-law cause of action like breach of contract, but there is not – nor has there ever been – a suit for “class action” as a cause of action.) But if it is correct, it would have significant strategic ramifications for class-action defense lawyers. In many cases, class-action defendants have expressed valid concerns about placing a lawsuit with bet-the-company stakes into the hands of a single, twelve-person jury. In others, however, defendants have successfully defeated class certification by pointing out either the Seventh Amendment concerns implicated by a plaintiff’s proposed trial plan, or the difficulties that would arise from instructing a jury in the laws of the various states implicated by proposed class action. 

Stadler’s argument is worth a read for another reason. It’s the second time in the last year that someone has attacked the legitimacy of the class action device by looking at its roots in the Rules Enabling Act. (The first was Martin Redish’s discussion of whether the class action is constitutional in general.) Stadler may have been influenced by Redish (though his one cite to the professor is not to his class-action work). Regardless, it’s worth noting this trendlet in the legal academy: there may be an emerging generation of students who wind up questioning the legitimacy of the class action on constitutional rather than policy grounds.

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Securities class actions have often drawn criticisms from both defense counsel and their ideological allies. One of the more interesting criticisms has been that securities class actions may be nothing more than shell games moving money around in such a way that the only parties to benefit are the lawyers. The theory goes like this: when a plaintiff files a securities class action, she seeks compensation for a drop in the value of her shares. The firm, faced with a bet-the-company lawsuit, settles (with a payout to the plaintiffs’ lawyers). The settlement, on a prorated basis, goes to the plaintiff. And then the value of her stock in the company drops because the company has paid her a settlement and her (and its) attorneys a large fee.
It’s a tidy story, presenting a logic that’s difficult to argue against. But is it true? Law professors Lynn Bai, James Cox, and Randall Thomas set out to test this story. Their study, “Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms” reached a number of conclusions, two of which are important to this discussion.

• Defendant firms tend to perform worse than their counterparts after they’re sued. Or, as the authors put it, their regression analysis “confirm[s] the deterioration in sample defendants’ operational efficiency in the early years following the commencement of the lawsuit. For the post-settlement periods, defendant firms with high settlement amounts had a higher probability of under-performing their peer groups than companies facing lower settlement amounts.”
• Class-action settlements often come out of a firm’s operating capital. “These numbers are consistent with the theory that insurance provided less than a full coverage of the settlement amounts and the discrepancy was paid out of the defendants’ current assets. The settlement payment exacerbated liquidity constraints on the part of the defendants, making them more vulnerable to liquidity crunches and prone to bankruptcy.”

In this case, the bottom line for defendants is that securities class actions affect the bottom line of defendants. One hardly needs an academic study to prove that. But this is one of the first studies to outline the ways in which a securities class action can directly affect the financial health of a firm. Ironically, the securities class action winds up sapping the very assets that a firm needs to stay healthy, and provide an adequate return on investment for the same shareholders the lawsuit is supposed to protect. From a strictly doctrinal standpoint, this study suggests that a securities class action may not be superior to other methods of resolving any controversy arising out of a stock drop. It’s an argument that defense counsel will surely pursue further.
 

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Debra Lynn Bassett recently published a discussion of the preclusive effect of class actions in the Brigham Young University Law Review. Her thesis is aimed at the theoretical justifications for allowing class actions to have preclusive effect, most of which she finds severely wanting. In general, her discussion does not have much practical use; it’s aimed instead at reforming class-action policy.

However, Lynn Bassett does highlight one important issuefor practitioners.

Despite the Court's insistence on "adequate representation" as a prerequisite, the actual meaning and scope of the term remains surprisingly elusive. Although it is clear that adequate representation may be challenged at any stage of a class action, and that adequate representation is a prerequisite both for class certification and for a binding judgment, the meaning of the term itself is unclear. Perhaps necessarily, most of the Supreme Court's guidance on adequate representation addresses failure-what is insufficient to constitute adequate representation. The Court has found adequate representation lacking in situations involving intraclass conflicts of interest, as illustrated in Hansberry, Amchem, and Ortiz. And the Court has found adequate representation lacking when courts have not rigorously scrutinized class actions to ensure that the protections of Rule 23 have been satisfied.

(Internal footnotes omitted.)

When a defendant first challenges a class action, there is a strong temptation to challenge adequacy of the named plaintiff. However, a class action can only have preclusive effect (either on the merits or in denying certification) if the class was adequately represented. Given Ms. Lynn Bassett’s analysis and recent opinions, it is clear that the defendant should be careful about challenging adequacy if it hopes to enjoy the preclusive effect of any later decisions in the case. In particular, should the defendant defeat certification in federal court, that decision is binding unless it depends on the plaintiffs’ lack of adequacy.

There are still strong reasons to challenge the adequacy of a named plaintiff in a particular case. (The strongest is that the named plaintiff would not serve as an adequate class representative, a particularly important problem if the defendant is considering settling.) However, it is important for the defendant to think through whether it plans on settling or fighting a class action as early as possible – doing so may dictate the specific responses the defendant makes in responding to a motion for certification.
 

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When faced with a complex factual issue, where it would be difficult to certify under Rule 23(b)(3) (because individual issues of causation or liability clearly predominate over common issues), plaintiffs will sometimes seek injunctive relief under Rule 23(b)(2) instead. From a rhetorical standpoint, seeking injunctive relief under Rule 23(b)(2) makes a powerful argument for certification – an injunction is true group relief; why wouldn’t it be appropriate to certify a class looking for an injunction?

This rhetorical technique has largely worked. A number of plaintiffs’ and defense counsel I’ve spoken with operate under the distinct impression that it is easier to certify a class under Rule 23(b)(2) than it is under Rule 23(b)(3), and that what holds plaintiffs back from seeking more injunctions is the lack of monetary relief on which to base a fee request.

This impression is wrong. To see just how wrong, take the case of Gates v. Rohm & Haas Co., --- F.R.D. ---, 2010 WL 774327 (E.D. Pa. March 5, 2010). Gates is an environmental case, in which the plaintiffs sued Rohm & Haas for polluting the water and air around Ringwood, Illinois with chemicals including vinylidene chloride, a known carcinogen. The plaintiffs sued for violations of CERCLA and state law, and sought damages for medical monitoring and damage to property. The proposed class action – like many environmental class actions – would turn on questions of causation, which can pose a number of thorny individualized issues in toxic torts. So, in addition to seeking damages, the plaintiffs sought an injunction compelling Rohm & Haas to set up a medical monitoring regime.

Rather than arguing that Rule 23(b)(2) did not apply because plaintiffs also sought money damages (a common argument), Rohm & Haas apparently directly challenged whether Rule 23(b)(2) would allow for certification in this case. And the trial court held that it did not:

While 23(b)(2) class actions have no predominance or superiority requirements, it is well established that the class claims must be cohesive. A (b) (2) class may require more cohesiveness than a (b)(3) class because in a (b)(2) action, unnamed members are bound by the action without the opportunity to opt out. The district court has the discretion to deny certification in Rule 23(b)(2) cases in the presence of disparate factual circumstances. The determination of whether a class involves individualized issues is important for two reasons: (1) unnamed members with valid individual claims are bound by the action without the opportunity to withdraw and may be prejudiced by a negative judgment in the class action; and (2) the suit could become unmanageable and little value would be gained in proceeding as a class action if significant individual issues were to arise consistently. At base, the (b)(2) class is distinguished from the (b)(3) class by class cohesiveness. Injuries remedied through (b) (2) actions are really group, as opposed to individual injuries. The members of a(b)(2) class are generally bound together through preexisting or continuing legal relationships or by some significant common treat such as race or gender. Indeed, a court should be more hesitant in accepting a(b)(2) suit which contains significant individual issues than it should under subsection 23(b)(3).

The individual issues that defeat the predominance requirement of Rule 23(b)(3) also defeat the cohesion requirement of Rule 23(b) (2).

(Multiple quotations, citations, and footnotes omitted; emphases added.)

The lesson here is a simple, but powerful one. A plaintiff cannot seek to avoid individualized issues by changing the rule under which she seeks certification. If individualized issues predominate, then the class will not be cohesive enough to certify under Rule 23(b)(2).

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The Supreme Court issued an opinion in Shady Grove Orthopedic Associates v. Allstate Insurance Company yesterday.

The case stemmed from a class action that had been filed in New York state. The class action arose after a woman was injured in a car accident. She was treated by Shady Grove Orthopedic Associates (the plaintiff). To pay for the treatment, the woman assigned her insurance benefits to Sahdy Grove. Shady Grove submitted the claim, but Allstate paid it late, and did not pay the required 2% interest on the overdue benefits. So Shady Grove filed a class action on behalf of everyone to whom Allstate had refused interest on their benefits.

Allstate moved to dismiss the claim, invoking a New York statute (NY Civ. Prac. Law Ann. § 901(b)) that prohibited class actions for statutory penalties. Accepting this reasoning, the federal trial court dismissed the claim for lack of subject matter jurisdiction: since § 901(b) prohibited the class action, all that was before the court was a $500 claim, too little in controversy to allow for diversity jurisdiction. Shady Grove appealed, and, after the Second Circuit affirmed, appealed to the Supreme Court.

The majority (in an opinion by Justice Scalia) began from the premise that

Rule 23 provides a one-size-fits-all formula for deciding the class-action question.

Based on that premise (and an analysis of the consequences of allowing substantive state law to deprive federal plaintiffs of the benefit of the federal rules) the majority held the New York prohibition on penalty class actions could not prevent a New York plaintiff from bringing a class action in federal court.

The majority was careful to set out the limits of its holding:

Contrary to the dissent’s implication, we express no view as to whether state laws that set a ceiling on damages recoverable in a single suit, see App. A to Brief for Respondent, are pre-empted.

The majority was also realistic about the strategic consequences of the decision, specifically, that some plaintiffs might file class actions in federal court to get around state prohibitions of certain kinds of class actions.

We must acknowledge the reality that keeping the federal-court door open to class actions that cannot proceed in state court will produce forum shopping. That is unacceptable when it comes as the consequence of judge-made rules created to fill supposed ‘gaps in positive federal law. … But divergence from state law, with the attendant consequence of forum shopping, is the inevitable (indeed, one might say the intended) result of a uniform system of federal procedure.

But while this opinion represented a defeat for Allstate in the specific litigation, it did provide at least one tool for defense lawyers. In holding that a state law could not override Rule 23, the Supreme Court reaffirmed that the class action is a procedural device – not a substantive right, and that class members would still have to prove all of the elements of their claims as they would in an individual lawsuit.

A class action, no less than traditional joinder (of which it is a species), merely enables a federal court to adjudicate claims of multiple parties at once, instead of in separate suits. And like traditional joinder, it leaves the parties’ legal rights and duties intact and the rules of decision unchanged.

That analysis alone makes this a case that most class-action defendants will want to study.
 

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