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

Last Thursday, in Morrison v. National Australia Bank (slip op.), the Supreme Court held 8-0 (Sotomayor, J. not participating) that “foreign-cubed” class actions (where the plaintiff, the defendant, and the sale of the security are all located outside the US) did not have sufficient ties to the United States to justify invoking US securities laws. The bulk of Justice Scalia’s majority opinion focused on the question of when one could presume that a law would apply outside the US. (The “presumption of extraterritoriality.”) As a statement of how the US will treat cases that may have international application, this is an important opinion. But, for most class-action practitioners, I think it will prove more just a footnote.

The thing is, Morrison seems to be a comparatively easy case. True “foreign-cubed” class actions—with no discernable connection to the US—are comparatively rare in US courts. In its opinion, the Court of Appeals for the Second Circuit noted that “[t]his is the first so-called ‘foreign-cubed’ securities class action to reach this Circuit,” and the Second Circuit is no stranger to securities class actions.  Even Morrison wasn’t a pure foreign-cubed case at first; it started as a hybrid involving both domestic and foreign-based classes. (The domestic plaintiff’s claims were dismissed under Rule 12(b)(6).) For most plaintiffs’ lawyers, filing a proposed class action involving a foreign plaintiff, a foreign defendant, and foreign conduct would be a long shot from the beginning: assuming the case were tried on the facts, there’s no strong hook to convince an American factfinder to care about the result. Or, as Justice Scalia put it:

Nothing suggests that this national public interest pertains to transactions conducted on foreign exchanges and markets.

So, is there any strategic advice defense lawyers can glean from this case? The case does provide some additional rhetorical cover for defendants. As we know, many class-action plaintiffs’ lawyers advertise themselves as private attorneys-general, whom the courts can rely on when the publicly-appointed cops are too busy or too ignorant to stop corporate wrongdoing. In this case, the Solicitor General (arguing on behalf of the petitioner) made that argument, claiming that unless its securities laws were given extraterritorial application, the US would become like the Barbary Coast, a home base for fearsome pirates. Justice Scalia dismissed this geographic metaphor with one of his own:

While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on the foreign securities markets, some fear it has become the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.

The geographic metaphor gets a little tortured, so to put it in classic movie terms: when a plaintiff invokes the cinematic image of the lone sheriff on a lawless frontier, it’s still worth asking whether he’ll be played by Gary Cooper or Orson Welles.

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A number of legal blogs have already noted a study published last month on attorneys’ ability to predict the outcomes of their cases. Titled “Insight or Wishful: Lawyers’ Ability to Predict Case Outcomes," it found that lawyers systematically overestimate their chances of success in litigation.

The design of the study was elegant. The authors (from Charles Sturt University, University of Gothenburg, John Jay College of Criminal Justice, and the University of California) asked 481 lawyers to predict the success of a matter they were currently working on. (The lawyers gave the matters code names to preserve client confidentiality.) Then, the authors waited. After the matters had been concluded, they went back and asked the lawyers how the cases had gone. Comparing the outcomes to the predictions yielded the result that has prompted all the discussion. In general, the lawyers predicted between 64% and 70% confidence in succeeding at their clients’ goals, but they actually succeeded only about 54% of the time.

This result should not be surprising, even to most attorneys. The profession attracts overconfident personalities. (I don’t know about you, but it seemed at least 75% of my law school class entered expecting to graduate in the top 10%.) Several of the specific findings are particularly interesting. Namely:

• More experienced attorneys are not immune from the effect. In fact, experienced attorneys were as likely to be overconfident as they were to estimate their success correctly.
• Attorneys got overconfident as they got closer to trial. This result makes sense. Leaving aside any investment (financial or emotional) the attorney has made in the case as it progresses, most lawyers refine their case to its most persuasive as they approach trial.  When you're that intent on selling your story, you run the risk of buying into it yourself.
• Looking at reasons why they might not succeed did not affect attorneys' overconfidence. What’s really surprising in this result was that attorneys rarely considered either their client’s culpability or their own comparative abilities as possible reasons they might not succeed.

What does all this have to do with class action strategy? For defendants, it may counsel launching strong challenges against the case earlier rather than later. The logic behind that recommendation: class-action plaintiffs’ lawyers are not immune from these effects. In fact, since they tend to be entrepreneurs who have to sell their partners and clients on a legal theory, they may be even more conditioned to overestimate their chances of success. (Lawyers in the mold of Bill Lerach may be particularly prone to this problem.) As a result, these lawyers are less likely to respond to reasonable settlement offers, or to discovery that reveals flaws in their cases. That means that the feedback they are most likely to respond to will come directly from the court. In other words, strong, early merits challenges are not just a defendant’s best chance to win on the merits, but also to settle on fair terms.

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A little more than six months ago, when I first began this blog, I posted about a tactic that was growing in popularity: filing a motion to deny certification rather than waiting for the plaintiff to file a motion to certify a class.  Which raises the question, when is a motion to deny certification appropriate? Should it be filed after discovery? Or can it be filed earlier?

It really depends on the nature of the arguments the defendant will advance. If the class complaint contains legal flaws in the class, it may be possible to file a motion to strike the class allegations, essentially a rule 12(b)(6) motion to deny certification.

Take the case of John v. National Security Fire & Casualty Co. John was a class action in which the plaintiffs sued their insurance company for systematically under-paying their claims for damages in Hurricane Rita. (The plaintiffs alleged that the insurance company did not account for inflation in the costs of building materials.) The defendant filed a motion to dismiss and to strike the class allegations. Because it found that the class definition was not ascertainable, the court struck the class allegations.

The plaintiffs filed an interlocutory appeal, but the Fifth Circuit upheld the decision, holding:

Where it is facially apparent from the pleadings that there is no ascertainable class, a district court may dismiss the class allegation on the pleadings.

In other words, it is possible to file an early challenge to a class action, provided—like a Rule 12(b)(6) motion to dismiss—the flaws are apparent on the face of the complaint.

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These days, quoting old military strategists is cliché. The movie villain or vacuous i-banker who cites Sun Tzu to sound smart and tough was overused by the mid-1980s. And by the ‘00s, reading the Art of War to look serious just looked sad.  Far too many writers have applied strategists like poor, overworked, Sun Tzu to sales management, real estate, poker, even blogging. And, in doing so, they’ve diluted their effectiveness.

But here's the thing: old military strategists, like Sun Tzu or Carl von Clausewitz, actually have things to say about complex litigation.

Complex litigation (and class actions in particular) involves two large entities marshaling large resources in order to fight a protracted campaign. That campaign will have a number of individual skirmishes (motions to dismiss, depositions, summary judgment, class certification, trial), each of which has larger strategic importance. And determining how to conduct those skirmishes, and how to allocate one's resources in general, requires a constant assessment of one's own strength, one's adversary's position, one's allies' positions (in multiparty litigation), and the probability of various outcomes. The old military strategists wrote about just these problems. Some of what they said clearly doesn't apply to litigation. (For example, I can think of no reason to assemble lawyers in the "tortoise formation.") Still, many of the principles these strategists were considering do have application to modern class-action litigation.

Today, very quickly, we'll look at a concept from Carl von Clausewitz. Clausewitz, a Prussian military officer who played a minor role in repelling Napoleon in 1812 (for which he shows up briefly in Tolstoy’s War and Peace), and who helped unite Prussia. His book On War is largely considered to be one of the seminal works on military strategy. And one of the concepts Clausewitz articulated best was the idea that a strategist needs to know his enemy’s strength of will.

If you want to overcome your enemy, you must match your effort against his powers of resistance, which can be expressed as the product of two inseparable factors, viz. the total means at his disposal and the strength of his will. The extent of the means at his disposal is a matter -- though not exclusively -- of figures, and should be measurable. But the strength of his will is much less easy to determine and can only be gauged approximately by the strength of the motive animating it. Assuming you arrive in this way at a reasonably accurate estimate of the enemy's power of resistance, you can adjust your own efforts accordingly; that is, you can either increase them until they surpass the enemy's or, if this is beyond your means, you can make your efforts as great as possible.

(Emphasis in original).

Determining the "total means at disposal" may not be as easy for the modern lawyers as Clausewitz suggests. (Although it is getting easier.) But you can get a general idea of an adversary's strength by looking at the constraints it faces. What is the manpower of the opposing firm? How many lawyers show up on the pleadings? How much revenue does the opposing firm seem to have?

Strength of will is more difficult to determine, but there are some indicators that can help the analysis. How much money is at stake? Is this a smaller class action that is just making up part of the portfolio for a plaintiffs' firm?  Or is it a larger case on which a plaintiff’s firm could make its reputation?

Using this idea of “strength of will” as a way of approaching their case, defense lawyers can better determine just how long a case might last, and just how expensive it might be to settle.

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Time is the ultimate budget constraint. Even the best of us only gets 24 hours a day. And sometimes, strategic decisions get made without perfect amounts of time. For class-action lawyers, this constraint is particularly clear in “rocket dockets” like the Eastern District of Virginia where deadlines are foreshortened and discovery can be massive.

But while we all have an intuitive feel for how time is a scarce resource for litigators, what does that actually mean when litigating? For one answer, we can look at Ortiz v. Fibreboard Corp., 527 U.S. 815, 863 (1999).

Issued more than a decade ago, Ortiz decided how parties could invoke Rule 23(b)(1)(B) (which governs class actions involving limited funds) in settling a mass tort action. The judges were explicitly considering when one can certify a settlement class when there may be a limited amount of money at stake. Strategically, though, it was the limits on time – not money – that made a difference in the case.

The procedural history is convoluted, but it culminated in the following situation: Fibreboard, an asbestos manufacturer, faced a steady influx of lawsuits; it was also embroiled in a prolonged fight with its insurer over who should pay for those lawsuits. As part of its strategy to limit liability, Fibreboard started talking about a global class settlement with selected plaintiffs’ attorneys. As the Supreme Court described the critical moment:

The settlement negotiations came to a head in August 1993, just as a California state appeals court was poised to decide the validity of the insurance policies. This fact meant speed was important, for the California court could well decide that the policies were worth nothing.

If the policies were worth nothing, then Fibreboard would have no insurance to cover its settlement costs. As a result, the plaintiffs, Fibreboard, and its insurance company hashed out the settlement details at a coffee shop near the courthouse in order to complete it by a midnight deadline.

The trial court, eager for a way to resolve this complex litigation, preliminarily approved the settlement. But once notice was issued, the settlement drew a host of objections – focusing on the use of Rule 23(b)(1) to certify the class (since there was no actual limited fund), and the finding that—despite clear conflicts among subclasses—the settlement passed muster under Rule 23(a). Nonetheless, the trial court gave final approval, and the Fifth Circuit affirmed.

The Supreme Court, however, decided that the clear requirements of Rule 23 took precedence over the realities of settling the case before it became unresolvable.

"the dissent argues that conflicts both within this certified class and between the class as certified and those excluded from it may be mitigated because separate counsel were simply not to be had in the short time that a settlement agreement was possible before the argument (or likely decision) in the coverage case. But this is to say that when the clock is about to strike midnight, a court considering class certification may lower the structural requirements of Rule 23(a) as declared in Amchem, and the parallel equity requirements necessary to justify mandatory class treatment on a limited fund theory.

In other words: somewhere, a clock is always ticking. What's most interesting about this case is not the final decision that a court should not pay attention to a ticking clock, but that both the majority and the dissent recognized that ticking clocks matter to the parties. Because they do. Briefs have deadlines. So do settlements. There is always a ticking clock, and that clock may very well limit the options available to a party, and force some decisions that, had they but world enough and time, the parties would make differently.
 

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With this post, I’ll be kicking off a new, semi-regular examination of the rhetoric that gets used frequently in class actions. What does rhetoric have to do with defending class actions? Like much of the rest of the law, everything. The rhetoric a party adopts helps to frame the issues for the remainder of the case.

One rhetorical tool is the allusion. An allusion can help to crystallize a legal point, making it more clearly and more persuasively than merely stating the rule would, by comparing it to a story that’s already deeply embedded in the judge’s mind.

Class-action defense employs a number of specialized allusions, such as comparing an ill-formed class action to Frankenstein’s Monster. But one of the most prevalent allusions in class-action practice is the plaintiff’s invocation of David and Goliath. The plaintiff will most often invoke this allusion in support of her superiority argument. The central premise is that a class action allows a powerless consumer (the David) to oppose a large, well-funded corporate entity (the Goliath). Or, as Judge Aldisert put it when he dissented in Katz v. Carte Blanche Corp.,

While there is biblical if not historical support for the motion that one David did slay a Goliath, the social desirability of consumer class actions was to insure that a David plaintiff has a Goliath capability against the Goliath propensities of his adversary . . .

So, how does one counter the David versus Goliath trope? The most powerful way to do so is to switch the analogy the plaintiff is trying to set up.

• Suggest that David is not powerless in this case. If the plaintiff is capable of bringing a real lawsuit for substantial damages, he may already have a Goliath capability. And, in many states, legislatures have enacted consumer-protection statutes that are specifically designed to level the playing field. 
• Point out that this David is not fighting alone. Part of the power of the David versus Goliath story is the image of a lone boy facing down a giant warrior. In class-action litigation, there is often another Goliath (like a government agency) standing by specifically to keep the corporate giant in check.

In either case, the key to opposing David-versus-Goliath rhetoric is to bring the judge back to the fact that, in class-action litigation, the David is not stuck with only a rock and a sling. There are a number of other tools he can use, and those are usually superior to the class action.

(Image in public domain, obtained from Wikimedia Commons.)

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Judge Jack Weinstein is no stranger to class actions; he has decided a number of them over the years. And while no one can deny his inventiveness, he has at times drawn criticism for his predisposition for finding judicial solutions to widespread social problems. Judge Weinstein's reputation is part of what makes the case of Ramirez v. Dollar Phone Corp so interesting.

The case itself deals with prepaid calling cards -- which are most often used by low-income immigrants (because they can use the cards for international calls at relatively low rates).

Plaintiffs' central allegation was that: "Law enforcement agencies and researchers investigating the industry have discovered widespread discrepancies between the amount of calling time claimed in advertising and marketing materials, and the calling time actually available to card users."

So the plaintiffs sued for violation of various states' consumer fraud acts, and the defendant moved to dismiss.

It appears from the opinion that--at this point--Judge Weinstein took an unusual step. While the defendants only moved for dismissal, Judge Weinstein converted their motion into a limited summary judgment motion, and then sua sponte denied certification of the class. Once he denied certification, he dismissed the case for lack of subject-matter jurisdiction. (This opinion was issued before the Seventh and Eleventh Circuit ruled that a federal court retains jurisdiction over CAFA cases even after it denies class certification.)

Judge Weinstein held that the patchwork of state laws addressing issue meant that, in this case, individual issues would predominate over common issues. Judge Weinstein tried very hard to limit the case to its specific facts, but he still laid out clear circumstances that would be useful to defense lawyers.

While variations in state laws are ordinarily a predominance problem, Judge Weinstein treated the complications with the proposed class as a superiority problem. Since there is no uniformity among state regulations of calling cards, he reasoned federal government regulation would be superior. What is significant is that, in this particular case, the federal government was not actively regulating the issue in the same way as in some other cases involving findings of no superiority.   Judge Weinstein, recognized this issue, but decided that it was not enough to overcome the problems with the proposed class:

In general it is inappropriate to deny those wronged civilly a fallback court-supervised remedy when the administrative law segment of our justice system has neglected to provide an available superior form of protection. There are, however, instances where the litigation remedy is relatively so inferior as to warrant denying it altogether in the hope that administrative justice will prevail. This is such an instance.

So what can defendants take from this? Sometimes, a "private attorney general" is not enough to overcome a problem facing a vulnerable section of society.  Sometimes, a problem requires government intervention. And sometimes--when the need is clear enough--that argument can convince even the unlikeliest of judges that a class action is not appropriate

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Cardozo Law School professor Myriam Gilles has a new article in the latest issue of the DePaul Law Review, "Class Dismissed: Contemporary Judicial Hostility to Small-Claims Consumer Class Actions."

Provocative title aside, Gilles's article is ostensibly about the ascertainability requirement. That said, it seems remarkably unconcerned with cases that actually discuss ascertainability. (For example, it tries to tie acertainability doctrinally to either predominance or the notice requirement, ignoring those cases where courts have developed ascertainability from numerosity. The article also doesn't concern itself with merits-based classes, even though these classes wind up vexing a number of courts at certification.)

What "Class Dismissed" does do effectively is look at the different rhetorical anchors for class actions. She labels pro-certification thinking as "liberal" and concerning itself with "public law," while anti-certification arguments are more "conservative" and stem from a conception of "private law."

So, shorn of the ideological labels, "Class Dismissed" identifies a pair of rhetorical strategies that plaintiffs and defendants use in the certification debate. Plaintiffs will often stress the "public law" function of a class--how it will deter misconduct and get relief to those who need it. Defendants will stress the fact that a class action is not an attorney-general's parens patriae case; it's a private lawsuit on a large scale, and that means that the court may not take shortcuts just because the plaintiffs' attorneys call themselves "private attorneys general." They will also point out that the Rules Enabling Act requires that a class action not enlarge any substantive rights.

What does this mean for defendants? That it's important to keep what she calls "private law" rhetoric front and center in briefing a class action, most importantly because that rhetoric tends to line up best with the legal doctrine surrounding class actions. There is no question that many people--including judges and juries--can find arguments about deterring or punishing alleged corporate misconduct to be persuasive. If they didn't, there would be few punitive damages awards. But courts are also wary of overstepping their role as arbiters of actual disputes. As a result, they treat class actions as carefully-circumscribed exceptions from the usual rule of one-on-one litigation, and a defendant can rarely go wrong reminding them of the need to do so.

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Back in 2001, Bruce G. Murphy, a California attorney, contacted the San Diego office of then-firm Milberg Weiss. He claimed to have several clients who had bought stock in Tut Systems, a technology company that had announced it was not going to meet its earning estimates for the fourth quarter of 2000. Murphy, who had provided clients for Milberg’s securities class actions before, wanted to know if the firm wished to pursue the case and pay him his customary 10% referral fee.

Four years later, Lerach Coughlin (which had broken off from Milberg) settled a securities class action against Tut Systems. But Lerach did not pay Murphy.

Murphy filed an application for attorneys’ fees in the trial court, claiming that he was contractually entitled to fees for referring clients. The trial court rejected the application. So Murphy appealed the application to the Ninth Circuit, which tersely rejected his arguments. In re Tut Systems, Inc. Securities Litigation,No. 07-16282, 2009 WL 725104 (9th Cir. Mar. 19, 2009)

So what's remarkable about the case? It provides another glimpse into how cases are brought, and the structure of class-action plaintiffs' consortia. Most opinions relating to class actions operate under the legal fiction that class actions, like other litigation, involve an injured plaintiff who seeks out a lawyer and then sues the defendant. In many ways, that fiction is a useful one -- it allows courts to focus on the legal issues of the case, instead of constantly refereeing disputes defendants might raise about whether the class counsel are really acting in their putative client's best interests. (The court will ultimately decide that issue when it decides whether to certify the class.)

But that fiction is not always accurate. Class actions rarely arise from an injured plaintiff seeking out counsel. Instead, counsel finds the basis for a class-action suit, and then searches for clients. And, as Tut Systems fee dispute illustrates, there are different kinds of counsel in the class-action ecosystem. One kind is the Referrer: counsel who may not have much Rule 23 or subject-matter expertise, but who -- for whatever reason -- are good at finding clients. Referrers may have contractual arrangements with counsel who specialize in securities class actions to provide them with possible clients. Despite Bill Lerach's famous pronouncement that class-action litigation requires no clients, clients are essential to a class-action lawsuit. But, as In re Tut Systems indicates, the Referrer faces a number of risks -- simply finding a client and figuring out whether they have a claim may not be enough to eventually earn fees. And, as this case implies, given the intense competition among plaintiffs’ firms, the Referrer may not be able to rely on any contract with the ultimate Class Counsel to collect fees, either.

What’s the lesson here for defendants? The plaintiffs’ side of the case is rarely monolithic. While often the infighting among plaintiffs’ firms won’t affect the defense, it is important to know when disputes may challenge the resolution of a case.

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