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Class Action Countermeasures Discussions of the Strategic Considerations Involved In Class Action Defense

Classic Cases – Eisen v. Carlisle & Jacqueline

Posted in Certification

 This week, we’re going to address one of the longest-standing debates in class-action litigation: How much may a court delve into the merits of a class action when deciding certification?

Plaintiffs often argue "not at all." Defendants often argue "as much as necessary." (Though not always; when defendants file motions to strike class allegations, they argue that the court need not look at the merits at all to decide a class is not appropriate.) Both arguments stem back to a single 1974 Supreme Court opinion: Eisen v. Carlisle & Jacquelin

Eisen was a class action filed by odd-lot traders on the NYSE, challenging the monopoly that a pair of brokerages (one of which was Carlisle & Jacqueline) held over odd-lot trades. The Supreme Court opinion concerned the question of whether the plaintiff or defendant was responsible for paying the costs of notice in a class action.

Originally, the Southern District of New York both certified a class and held that the defendant was responsible for the costs of notice. It based its decision not on a Rule 23 analysis, but on its judgment that the plaintiff odd-lot traders would likely prevail in the lawsuit. (In other words, it treated the proposed class action like a proposed injunction.)

The Second Circuit reversed the imposition of costs. And, in affirming that reversal, the Supreme Court held:

that petitioner must bear the cost of notice to the members of his class. The District Court reached the contrary conclusion and imposed 90% of the notice cost on respondents. This decision was predicated on the court’s finding, made after a preliminary hearing on the merits of the case, that petitioner was "more than likely" to prevail on his claims. Apparently, that court interpreted Rule 23 to authorize such a hearing as part of the determination whether a suit may be maintained as a class action. We disagree.

We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. Indeed, such a procedure contravenes the Rule by allowing a representative plaintiff to secure the benefits of a class action without first satisfying the requirements for it. He is thereby allowed 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. This procedure is directly contrary to the command of subdivision (c) (1) that the court determine whether a suit denominated a class action may be maintained as such "[a]s soon as practicable after the commencement of [the] action . . . ." …

In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met. Additionally, we might note that a preliminary determination of the merits may result in substantial prejudice to a defendant, since of necessity it is not accompanied by the traditional rules and procedures applicable to civil trials. The court’s tentative findings, made in the absence of established safeguards, may color the subsequent proceedings and place an unfair burden on the defendant.

(Internal quotations omitted, emphasis added.)  So, the proscription against merits inquiries is not against any look at the merits of the case where they overlap with the certification question, it’s against deciding class certification based on one’s opinion of how the case will turn out. If deciding whether a class is certifiable requires a court to probe behind the pleadings or to decide whether a given expert’s testimony is admissible, then a court may–and in some cases must–make those decisions.