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

One aspect of grand strategy in litigation is making preparations for the possibility of getting sued. Preparing to get sued does not mean that a company has done something wrong. While some lawsuits are valid, others are not. And, given the pressures that entrepreneurial class-action lawyers face, it is inevitable that some will file lawsuits regardless of merit. In an atmosphere like this, preparing for lawsuits in advance is a necessary caution. 

Corporations really do make these preparations. In their working paper “Litigation Risks and Corporate Cash Holdings,” professors Matteo Arena and Brandon Julio found that the concentration of securities class actions in a particular industry "is a strong predictor of actual litigation events." (In other words, the more lawsuits already filed in a particular industry, the more lawsuits likely will be filed in the immediate future.) They also found (as one might expect) a strong correlation between that concentration and the amount of cash companies in that industry stockpiled. Companies stockpiled additional cash whether or not they were actually sued. (The authors subjected their hypothesis to a mathematical technique known as “simultaneous equations” to confirm that the companies weren’t just being sued because they had extra cash on hand.)

The authors made several other observations as well. Among them, increased litigation risk makes it harder to find auditors, depresses stock price, and increases managerial turnover. What lessons can we draw from all of this?

• Start talking to clients before they're sued if they're in a high-risk industry that's just been hit. They may be putting aside money in anticipation of a case anyway, and learning about how they conduct business can be very helpful for hitting the ground running once they are actually served with a complaint.
• Be specific with clients about the consequences of litigation risk. Even in the best of companies, the incentives may not align for preventing litigation. Minimizing risk (which can be hard to quantify) may take a backseat to increasing revenue, or ensuring that the current stock price is as high as possible. (It’s not like we lawyers are immune to these pressures.) The consequences of increased litigation risk are concrete things that will matter to firm management. Stock price affects their compensation. Managerial turnover means their jobs are at risk.

No one can predict exactly when a given company will be sued. But knowing generally what risks a company may face (even just by virtue of the industry it competes in) can enable defense lawyers to get a head start on some of the preparations for complex litigation.

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On October 3, 2007, Joyce Huntley—who, like many Americans at one time or another—owed some creditors some money--picked up her phone to learn that if she did not immediately wire money for the debt via Western Union to The Law Office of Richard Clark, her wages would be garnished. The call was placed by Shirley Bratton, a then-employee of the Law Office of Richard Clark, and the threat violated the terms of the Fair Debt Collection Practices Act ("FDCPA").

Huntley filed a lawsuit, and added allegations that it would be appropriate for class treatment. Bratton had worked for The Law Office of Richard Clark, a law firm specializing in debt-collection, for six months, and her only job was to call debtors requesting payment. So it only stood to reason that she would have similarly harassed hundreds or even thousands of other customers, right?

Maybe not. The class Huntley sought to certify was everyone "who [was] threatened with unlawful wage garnishment by debt collector Shirley [Bratton] during a telephone call." See Huntley v. Law Office of Richard Clark, 262 F.R.D. 203, 204 (E.D.N.Y. 2009). When Huntley moved to certify the class, The Law Office challenged it on numerosity grounds. Huntley may have had a bad experience with Bratton, but she had offered no evidence that Bratton had threatened anyone else. Since the plaintiff bears the burden of proof, the court found that she had not demonstrated numerosity in this case.

What can defendants learn from this case? First, don't ignore numerosity. A defendant will often concede numerosity out of the gate, because it usually seems easy to prove. In this case, it wasn't. Second, look for the simplest way to frame a problem with a proposed class. A defendant could challenge Huntley's proposed class on several grounds. The class definition she proposed (everyone "threatened ... by debt collector Shirley Bratton") was merits-based. And, if one amended the class definition, it was very possible that Huntley was not typical of the proposed class.  It's possible the defendant challenged these grounds as well (the opinion doesn't say); but the simplest way for the court to grasp the problem was through numerosity. Courts have long recognized that class-action requirements tend to blend together, so it pays to argue more than one if you can.

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What is grand strategy? It's a term that's usually thrown around in military, security, and foreign policy circles. As the military historian Liddell Hart defined it in his classic book Strategy:

[T]he role of grand strategy – higher strategy – is to co-ordinate and direct all the resources of a nation, or band of nations, towards the attainment of the political object of the war – the goal defined by fundamental policy.

...

while the horizons of strategy is bounded by the war, grand strategy looks beyond the war to the subsequent peace. It should not only combine the various instruments, but so regulate their use as to avoid damage to the future state of peace – for its security and prosperity.

What does this mean for class actions? It means that often, the best defenses against a class action don't involve a specific lawsuit. Instead, they involve larger policies and strategic decisions. For one thing, it is possible to have a firm-specific (or client-specific) "grand strategy" for fighting class actions. The most obvious grand-strategic move is one that law firms sell to clients all the time, a compliance policy. If a corporation has a robust compliance policy, it is less likely to get sued for breaking the law.

But some corporations are just located in industries where they're more likely to be sued in class actions. A corporation like that might decide that part of its grand strategy will be to oppose every class action on Rule 23 grounds and settle class actions where the plaintiff has a valid claim on a named-plaintiff basis. Its goal over time could be twofold: (1) build a reputation as a vigorous litigator, which should deter those plaintiffs looking for a quick settlement; and (2) make incremental changes in class-action law to eliminate the worst plaintiff-side abuses. Specific law firms may have grand strategies as well. For example, throughout the 2000s, O'Melveny & Myers, under the leadership of John Beisner, made part of its goal to create a legislative environment that curbed the worst of plaintiff-side abuses. Part of that effort involved providing scholarship that analyzed the reasons why some plaintiff practices made for bad policy. One outcome that grand strategy helped produce was passage of the Class Action Fairness Act. These are hardly trade secrets, Beisner's scholarship is published, and he mentions his CAFA testimony in his firm biography. [Disclaimer - I worked at OMM during the period I'm discussing.]

The most important part of developing grand strategy is recognizing that defending a lawsuit, even a "bet the company" lawsuit, still must fit into a company's (or law firm's) larger goals. Defense lawyers tend to treat this statement as a truism: of course you align your strategy with your client's goals. But treating this advice as strategy instead of marketing can help lawyers develop far more robust defenses to class actions.

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In the summer of 2007, Julie Grimes went to the movies. And, presumably to avoid the line at the box-office register, she used the self-service kiosk. But when she looked at her receipt, she noticed that the machine had printed more than the last five digits of her credit card. For most patrons, this would be unremarkable. For some careful patrons, it might be grounds for shredding the receipt instead of just throwing it away. For Ms. Grimes, it was a violation of the Fair and Accurate Credit Transaction Act (FACTA), and a class action lawsuit, Grimes v. Rave Motion Pictures, 2010 U.S. Dist. LEXIS 12894 (N.D. Ala. Jan. 12, 2010).

FACTA (as amended, after Congress recognized it had become a source of no-injury class actions) prohibits a company from “willfully” printing a credit card receipt with too many digits or an expiration date.

Ms. Grimes sought to certify a class consisting of:

All persons to whom the Defendants provided an electronically printed purchase receipt at the point of sale or transaction, in a transaction occurring after December 4, 2006, which receipt displayed more than the last five digits of the person's credit and/or debit card number; said class seeks only statutorily defined damages as set out in 15 U.S.C. § 1681; said class excludes anyone who has incurred actual damages as defined in said statute; said class excludes anyone who has filed a similar individual action against the Defendants, judicial officers of the United States and State of Alabama and counsel for the parties in this action.

The trial court decided that this proposed class was not ascertainable. Ascertainability is a threshold inquiry for a class action: it asks whether, by looking at the class definition, an individual could tell whether she was a class member. One of the largest concerns in ascertainability inquiries is what courts have termed “merits-based” classes, where the class is defined by reference to the ultimate merits of the case. (For example: “Everyone who lost money because of Acme Corp’s fraudulent sale of Road Runner traps.” If the trial determines there was no fraud, there is no class.)

Most courts that have declined to certify merits-based classes have relied on technical explanations of the Rule 23 requirements. But the Grimes court came up with a simple, powerful explanation of why merits-based classes are a bad idea:

Courts do not delve into the merits of individual claims at the class certification stage. To do so would allow the prospective class representative "to obtain a determination on the merits of the claims advanced on behalf of the class without any assurance that a class action may be maintained." Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78, 94 S. Ct. 2140, 40 L. Ed. 2d 732 (1974). Thus, class certification is not appropriate if the court is called on to engage in individualized determinations of disputed fact in order to ascertain a person's membership in the class.

The use for defendants should be pretty clear: when challenging a merits-based class, tie the definition problem into the standard for certification.

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A little while ago, I reviewed Circle of Greed, the story of William Lerach’s rise and fall in the world of the class-action plaintiffs’ bar. The posts on the subject drew some criticism from some plaintiffs’ lawyers, but I still think it was worth it to see how at least one plaintiffs’ counsel treated his class actions.

But Circle of Greed is not the only book to have been published taking an “inside the plaintiffs” view of class-action practice. Another, Inside a Class Action: The Holocaust and the Swiss Banks, by Jane Schapiro, looks at the litigation that then then-Cohen Milstein lawyer Michael Hausfeld filed (pro bono) against various Swiss banks for alleged mismanagement of funds during World War II. While the litigation did not progress very far before it was settled, Schapiro’s account of Hausfeld’s behind-the-scenes maneuvering provides a number of insights for defense counsel:

• Being first to file can bring disproportionate leverage for some plaintiffs. Plaintiffs’ attorney Ed Fagan filed before Hausfeld, in the same district he was intending to. Throughout the litigation, Fagan and Hausfeld clashed repeatedly over tactical decisions (such as whether to include compelling but difficult-to-prove slave labor claims).
• Government action can cause headaches for plaintiffs as well as defendants. While Schapiro does describe some coordination between the plaintiffs’ consortium and New York Senator Alfonse D’Amato, she also takes pains to describe how the consortium would hold its breath over various State Department actions, hoping that State would not interfere (inadvertently or otherwise) with the prosecution of the lawsuit. (The lawyers wound up having the same problems with some non-governmental organizations that became involved in the case.)
• The more lawyers involved, the harder it is to coordinate litigation. Schapiro reports that throughout the litigation Hausfeld, Fagan, and other attorneys would worry every time a new attorney was added to the Executive Committee. The lawyers attracted to this high-profile litigation tended to have large egos and conflicting agendas, and coordinating among them grew exponentially with each new addition.
• Settlement is still the endgame for plaintiffs. Given the size of this litigation, Schapiro reports that the plaintiffs seriously talked settlement at various preliminary stages, including during jurisdictional motions. Hausfeld was convinced for a long time that the mere threat of discovery would be enough induce the banks to negotiate.

Schapiro’s book isn’t perfect. For one thing, she seems unsure whether she’s writing about Holocaust victims or the workings of a class-action lawsuit, an ambiguity that tends to undercut the objectivity of her reporting as well as the power of her advocacy. But lawyers looking for an account of how driven lawyers interact in a single piece of high-profile litigation can find a lot of resources here.

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While I was on my self-imposed editing hiatus (shameless plug: The Class Action Playbook  comes out in September), the Ninth Circuit handed down its en banc opinion in Dukes v. Wal-Mart. The court worked overtime to tie its opinion to the specific facts and arguments in front of it, which may prevent some generalizing about the opinion. (Not that that has ever stopped legal pundits.)  

First, some background: Dukes is a Title VII sex-discrimination case. The plaintiffs alleged that, as women, they received less money for comparable work, and that they were passed over for promotions within the company. Their complaint sought injunctive relief, “back pay” (technically monetary relief, although some courts have held that, as restitution, it does not fall under Rule 23(b)(3)) and punitive damages. The trial court certified a class under Rule 23(b)(2). Wal-Mart appealed, challenging the trial court’s finding of commonality and its reliance on plaintiffs’ statistical expert. A 3-judge panel upheld the certification. Wal-Mart asked for en banc reconsideration, leading to this opinion.

The Ninth Circuit’s slip opinion is 137 pages, 95 of which constitute the majority opinion. Given the procedural history of the case, as well as the presence of concurrences and an impassioned dissent, the opinion is not a model of clarity. Nonetheless, the trial court reached a few basic conclusions that will likely occupy class-action lawyers.

• First, it reaffirmed the need for a “rigorous analysis” of Rule 23’s requirements, one that may overlap with the merits of a given case.
• Second, it upheld certification of class claims – including for “back pay” – under Rule 23(b)(2).
• Third, it held that a court may rely on a plaintiff’s statistical evidence to find commonality, even if that evidence is contested by the defendant.
• The Ninth Circuit did not rule on whether the proposed trial plan violated Wal-Mart’s due process rights. But it did speak approvingly of the trial in Hilao v. Estate of Marcos – a class action from the 1990s brought by a class of Filipino torture victims that relied heavily on statistical evidence – as one way to bring a class trial.

What does this opinion mean for class-action strategy?

• Plaintiffs are likely to continue to seek certification under Rule 23(b)(2) when possible, which means that defendants should become well-versed in the “cohesiveness” requirement.
• Specific Daubert-based challenges to questionable statistics are more important than ever.
• And defendants (particularly in the Ninth Circuit) would do well to review opinions on how courts have conducted classwide trials in the past.

While I have no inside knowledge on whether Wal-Mart intends to appeal this decision, the fact that it comes from the Ninth Circuit means there is a stronger-than-usual chance that the Supreme Court will grant certiorari to address the issues.

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 Officially, I'm still on hiatus.  (Although the author-reviewed copy edits for The Class Action Playbook went in to the publisher yesterday.)  But today's article in the Wall Street Journal: "Lawyers Wrestle Over Driver's Seat in Litigation Against Toyota" deserves a brief post, if only to highlight some of the unusual qualifications plaintiffs' lawyers are touting in their applications to get lead counsel status on what they believe to be a very high-reward case.  Among other accomplishments that might make for a good lead counsel:

• Daniel Becnel Jr. donated a kidney to his brother, and can still work amicably with his ex-wife.
• Mike Eidson once got the key to Miami Beach.  
• Anita Jaskot speaks Polish, and is single.  
• Richard Arsenault knows Arianna Huffington, Kenneth Starr, former President Bill Clinton, and the late President Gerald R. Ford.

All of these facts were disclosed in the lawyers' applications to Judge Selna.  What do these personal tidbits tell us?  One, in the words of Hollywood screenwriter William Goldman, "Nobody knows anything."  Each of these lawyers is guessing at what might set them apart in a crowded field, but at the end of the day, that's all they can do -- guess.  Two, people will brag on some strange things.

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