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

It has been a while since I've tried to extract some strategic insight from sources other than the law, which means that a post on extra-legal strategy is probably overdue. In this case, I'm going to turn back to military strategist Carl von Clausewitz. (For more on Clausewitz, click here.) In particular, I want to focus on one of Clausewitz's most innovative concepts in On War: the problem of friction. As Clausewitz defines it, friction is the part of

Everything in war is very simple, but the simplest thing is difficult. The difficulties accumulate and end by producing a kind of friction that is inconceivable unless one has experienced war.

Economists might call these accumulated difficulties "transaction costs," but doing so doesn't quite capture the fact that a central feature of friction is the difficulty anticipating how it will manifest. Or, as Clausewitz himself puts it:

This tremendous friction, which cannot, as in mechanics, be reduced to a few points, is everywhere in contact with chance, and brings about effects that cannot be measured, just because they are largely due to chance. One, for example, is the weather. Fog can prevent the enemy from being seen in time, a gun from firing when it should, a report from reaching the commanding officer. Rain can prevent a battalion from arriving, make another late by keeping it not three but eight hours on the march, ruin a cavalry charge by bogging down the horses in mud, etc.

The same kinds of issues arise in litigation. Trials, for example, are not immune to weather delays. But these are hardly the only issues that constitute friction. An associate may hand over the wrong files in discovery. Or a partner may get cited for contempt after insulting a judge, changing the makeup of the team and giving a law firm extra personnel headaches. Or bad luck may strike a jury just before it renders a verdict. These kinds of twists are not foreseeable, but they have very real effects on litigation.

In many ways, this is the artful part of legal strategy. Coming up with a plan to defend (or prosecute) a case isn't necessarily that difficult. But anticipating and accounting for friction, and adapting to unknown frictions as they arise, that's what separates competent litigators from great ones. Or, as Clausewitz himself put it:

Friction is the only concept that more or less corresponds to the factors that distinguish real war from war on paper.

So how does one account for friction? Ironically, one of the best ways to do so is to plan out what one can in advance. It's generally easier to modify a plan on the fly than it is to simply react to events as they arise. And a well-thought-out strategy will often take into account what happens if key events go wrong, or key assumptions turn out to be untrue. If one's attention and energy will be occupied with friction once a case starts, it's particularly useful to have taken care of as much of the easy stuff as possible.
 

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Defendants face a dilemma when dealing with absent class members. On the one hand, they often have valuable information about a case, either as sources for variations that would defeat certification or as trial witnesses. On the other hand, plaintiffs will vigorously oppose any contact with absent class members, even if it is for a proper business purpose (like, say, responding to customer inquiries), as an improper attempt to either influence or harass members of the proposed class. So how should defendants handle taking discovery of absent class members?

Carefully. Today's case, Antoninetti v. Chipotle, Inc., 2011 U.S. Dist. LEXIS 54854 (S.D. Cal. May 23, 2011), was an ADA class action. The plaintiffs alleged that Chipotle denied them the ability to see their food being prepared because they were unable to stand (presumably the counters blocked their lines of sight). To support their class certification motion, the plaintiffs declarations from 41 witnesses, each of whom plaintiffs had identified as witnesses in their supplemental disclosures.

Chipotle sought to take the depositions of 20 of those witnesses. When the plaintiffs refused to allow the depositions, Chipotle sought an order from the court. The plaintiffs' opposition to that motion used all of the arguments traditionally used against discovery of absent class members:

Plaintiff contends this Court should not grant Chipotle leave to depose unnamed class members because: (1) Chipotle has failed to show the necessity of such discovery, (2) Chipotle has failed to show the relevance of such discovery, and (3) Chipotle's proposed deposition questions are designed to confuse, mislead and discourage class participation.

The court's decision to allow the depositions turned on the fact that, by signing declarations and agreeing to be witnesses, these absent class members had "injected themselves into the litigation on two fronts." The court also noted that taking discovery of absent class members who are customers is different than taking discovery of class members who are employees.

The Court notes that under certain circumstances depositions of absent class members could have a chilling effect on their willingness to be part of the class. However, that concern has little impact in this case for several reasons. First, the proposed deponents are not employees of Chipotle; rather, they are customers. Therefore, they are not under the pressure employees would face being deposed by their employer. Chipotle cannot directly or impliedly threaten the putative class members with loss or reduction of employment or some other adverse action affecting the work environment. Indeed, a case can be made that Chipotle is more dependent on the putative class members than they are dependent on Chipotle. In fact, part of Chipotle's motivation is to maintain or restore its corporate image with the demographic represented by the putative class members.

(Emphasis added.) Finally, the court pointed out that Chipotle had agreed to limit each deposition to an hour, and had submitted its proposed questions in advance for court approval. (The court very helpfully included those questions as an appendix to its opinion, providing budding defense lawyers with a list of questions that have passed muster in at least one case.)

The lesson defense lawyers can take from this case is a simple one: if you want to take the depositions of absent class members, be prepared to show why they're relevant to your class certification opposition, and be prepared to accept appropriate limits on the questions you ask.

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 "Hey man, I don't practice law. I talk on the phone." -- Richard Scruggs, on federal wiretap

This week, Class Action Countermeasures introduces another regular feature: book reviews. Once a month, I'll be reviewing a book that has some relation to class action litigation. The primary purpose of the review will be to determine what class-action lawyers can learn that will assist them in formulating class-action defense strategies. (I've done this once or twice before.) First up is The Fall of the House of Zeus: The Rise and Ruin of America's Most Powerful Trial Lawyer, by Curtis Wilkie.

The Fall of the House of Zeus tells the story of Richard Scruggs. Scruggs began his career as a trial attorney in Pascalouga, Mississippi. He became one of the most financially successful attorneys in the country by extracting huge settlements from both the asbestos and tobacco industries. And he ended his career as a felon, convicted for attempting to bribe a judge.

Early in his introduction, Wilkie describes his subject as:

a remarkable story of personal treachery, clandestine political skullduggery, enormous professional hatred within the legal community, a zealous prosecution--all with ramifications that extended to high levels in Washington.

Wilkie delivers on that promise. The book is a fascinating portrait of Mississippi backroom politics, the plaintiffs' trial bar, and a single man wrestling with the effects of sudden wealth and gradual drug addiction. While the book is definitely sympathetic towards Scruggs, it whitewashes neither the crimes he committed nor his motives for doing so.

That said, the title of the book is a misnomer: by his own admission, Scruggs was no "trial lawyer." He was first and foremost a dealmaker whose most common tactics included:

• making large campaign contributions to various judges and prosecutors in Mississippi; and
• coordinating plaintiffs' counsel on large cases, including paying a number of lawyers not to interfere with his litigation.

Scruggs arguably was not even effective in his chosen role. Some of what he did to extract large settlements was either unethical or outright illegal:

• He bought documents from whistleblowers in at least two cases. (He bought 1,500 pages from a Brown & Williamson paralegal in the tobacco litigation; and paid the Rigsby sisters to be "consultants" so he could use their documents against State Farm in Katrina-related litigation.)
• He paid hush money to lawyers and politicians (including some no-interest loans) in order to cover up some of his conduct.
• And, of course, he famously tried to bribe a judge.

As a result, the litigation tactics Wilkie does describe largely involve setting up large, profitable agreements rather than trying to establish facts in a court of law.

• Scruggs consolidated cases that linked "a few strong cases with hundreds of lesser claims" as a means of inducing settlements from large defendants.
• He used smaller cases as "discovery engines" for larger planned litigation.
• And he passed along documents he did uncover to prosecutors to fuel investigations that would maximize the pressure on defendants to settle.

Ultimately, as Wilkie tells it, Scruggs's dealmaking was his undoing. Many of his alliances split up over the division of fees. And the crime that ultimately sent him to jail--trying to bribe a judge--arose from an effort to influence litigation over one of his fee agreements.

So what can defense lawyers learn from this book? The primary lesson is that--far more than most defense lawyers--class action plaintiffs' practice involves multiple fronts. Plaintiffs who follow Scruggs's model must coordinate with local officials, other lawyers who want a share of their action, the local press, and local politicians. (This lines up with the extensive email traffic Scruggs exchanged with the Rendon Group.) Moreover, plaintiffs lawyers may not always engage in direct tactics. Scruggs extracted large settlements by doing just about everything BUT the traditional practice of law. Clearly, not every plaintiffs' lawyer will follow the Scruggs model, but as Scruggs's career--and Wilkie's account of it--show, the backroom dealmaker fills an important niche in the ecology of the plaintiffs' bar.

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 In the 1990s, a group of attorneys sued a number of securities broker-dealers nationwide. They alleged that the broker-dealers had executed a number of securities orders at the "National Best Bid and Offer" (NBBO) price--which would provide a customer with the lowest available ask or the highest available bid for a security--an industry-wide practice at the time. Broker-dealers operate under a "duty of best execution," which requires them to "use reasonable efforts to maximize the economic benefit to the client in each transaction." The plaintiffs accused the broker-dealers of violating that duty by executing orders at the NBBO price instead of the examining other feasible alternatives. Since broker-dealers had used NBBO on literally hundreds of millions of transactions, the proposed class action meant big money.

The broker-dealers had lost a motion to dismiss. However, when the plaintiffs moved for certification, the trial court denied it. The plaintiffs appealed pursuant to the newly-enacted Rule 23(f). The Third Circuit affirmed the trial court. The Third Circuit's opinion contains three notable discussions.

First, because Rule 23(f) had only just come into being, it discussed the standards for bringing an interlocutory appeal under the Rule.

If granting the appeal ... would permit us to address (1) the possible case-ending effect of an imprudent class certification decision (the decision is likely dispositive of the litigation); (2) an erroneous ruling; or (3) facilitate development of the law on class certification, then granting the motion would be appropriate. But these instances should not circumscribe our discretion; there may also be other valid reasons for the exercise of interlocutory review. Again, we emphasize that the courts of appeals have been afforded the authority to grant or deny these petitions “on the basis of any consideration that the court of appeals finds persuasive.

(Emphases added, internal quotation omitted.) These standards are largely similar to most other circuits'.

Second, the court addressed plaintiffs' argument that the district court had improperly engaged in a merits evaluation when it found that plaintiffs could not prove economic loss using classwide proof. In doing so, it articulated a standard that is now accepted by the majority of circuits:

As the Court concluded in Livesay, class certification may require courts to answer questions that are often enmeshed in the factual and legal issues comprising the plaintiff's cause of action. ... In reviewing a motion for class certification, a preliminary inquiry into the merits is sometimes necessary to determine whether the alleged claims can be properly resolved as a class action. This is such an instance. We must probe beyond the surface of plaintiffs' allegations in performing our review to assess whether plaintiffs' securities claims satisfy Fed.R.Civ.P. 23's requirements.

(Emphasis added, internal citations, quotations, and footnote omitted.)

The court also found that plaintiffs could not prove economic loss on a classwide basis. The plaintiffs had attempted to invoke Basic Inc. v. Levinson to argue that the court should presume classwide injury much as it presumes classwide reliance in securities cases. The court, however, disagreed:

"Because claims may take on several forms, proving economic loss on a common basis is a fact-specific inquiry. We find no support in the case law for presuming economic injury for purposes ofin Rule 10b-5 claims absent indication that each plaintiff has suffered an economic loss.
In assessing the question of economic loss, it is important to bear in mind how the facts here differ from those in a typical action. Unlike a "fraud-on-the-market" claim, this case does not involve a misrepresentation or omission that decreased the value of a security. Furthermore, unlike excessive over-pricing policy claims, this case does not involve a practice that necessarily harmed investors across the class.In this case, defendants allegedly executed trades solely at the NBBO price. Depending on the facts of each trade, the NBBO listed price may or may not have provided a class member with the best price. Therefore, economic loss to the plaintiffs cannot be presumed by the purchase or sale of a security at the NBBO price, and we will not presume it across the class.

(Emphasis added, internal citations omitted)

In sum, Newton provided guidance on three issues on which defendants still rely heavily: when an interlocutory appeal is appropriate, how much a court may look at the merits in evaluating class certification, and the extent to which a court may examine variations in "damages" to determine whether individual issues predominate. Any one of those might qualify it as a "classic case." The combination of all three ensures that this opinion will be cited for years to come.

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Today, the Supreme Court issued its much-anticipated opinion in Wal-Mart v. Dukes.

For those who like to skip ahead to the end to figure out whether their side won, the Court ruled in favor of Wal-Mart. That said, the real winner was the late Professor Richard Nagareda, whose articles on commonality clearly influenced Justice Scalia's majority opinion.

In ruling for Wal-Mart, the Court issued two holdings: it held (5-4) that the plaintiffs had not met their burden on proving commonality, and (unanimously) that the plaintiffs could not certify a class for money damages under Rule 23(b)(2).

Now, what does the decision itself mean? Obviously, lawyers will be poring over the opinion in the coming months to tell us just that. But here are some highlights from the opinion.

Commonality means not common questions, but common answers.

Their claims must depend upon a common contention—for example, the assertion of discriminatory bias on the part of the same supervisor. That common contention, moreover, must be of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

The "rigorous inquiry" required for class certification is a factual inquiry.

Rule 23 does not set forth a mere pleading standard. A party seeking class certification must affirmatively demonstrate his compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.

Plaintiffs must bring individualized monetary claims under Rule 23(b)(3).

[W]e think it clear that individ- ualized monetary claims belong in Rule 23(b)(3). The procedural protections attending the (b)(3) class— predominance, superiority, mandatory notice, and the right to opt out—are missing from (b)(2) not because the Rule considers them unnecessary, but because it considers them unnecessary to a (b)(2) class.

Statistical proof will not cure all problems with a proposed class.

The Court of Appeals believed that it was possible to replace such proceedings with Trial by Formula. A sample set of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised by a master. The percentage of claims determined to be valid would then be applied to the entire remaining class, and the number of (presumptively) valid claims thus derived would be multiplied by the average backpay award in the sample set to arrive at the entire class recovery—without further individualized proceedings. We disapprove that novel project. Because the Rules Enabling Act forbids interpreting Rule 23 to abridge, enlarge or modify any substantive right, a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims.

(Internal citations omitted.)

And what does this mean for class-action litigation?

It means we're likely to see more robust challenges to commonality at the certification stage. It also means that we're likely to see fewer class actions pitched as seeking "injunctive relief" when what the plaintiffs (and their lawyers) really want is money damages. Combined with the Court's other class-action decisions this term, it seems clear that the limits of the class action are more sharply defined, which defense attorneys can use to protect their clients from spurious class actions.
 

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Earlier today, the Supreme Court issued its opinion in Smith v. Bayer Corp. In a unanimous opinion authored by Justice Kagan, it held that a federal court cannot enjoin a state court from re-litigating a class action that had been denied certification in federal court. In doing so, it barred a tactic that defense lawyers had been using for some time: invoking the Anti-Injunction Act to bar state-court relitigation of class actions. And defense lawyers sighed and began to slump their shoulders like Charlie Brown ...

... which, as it turns out, is not necessary. Because while the Court may have ruled that a federal court cannot enjoin a state court from retrying the class certification debate, its reasoning provides powerful arguments against doing so as a regular practice. 

First, the  Court based its decision in part on the fact that West Virginia's class-action law sharply departs from federal law. (In particular, West Virginia courts had criticized various parties for invoking federal cases as authority.) Most states, however, including Florida, Illinois, Maryland, Tennessee, and Texas, have held that, because their state-class action rules are modeled on Rule 23, federal authority is at least persuasive. As a result, plaintiffs will have to think twice before re-filing a class action in state court. (There are even better reasons for them to think twice, discussed below.)

Second, the Court held that Smith was not precluded from re-asserting his claim because he was not a party to the previous action. Given this understanding of class actions as joinder devices (as opposed to "entities"), the Court's result makes perfect sense. By the time the second case had been filed, it was clear that Smith was not a party to the first case. Only former named plaintiff George McCollins was. The Court's clear statement that absent members of an uncertified class are not parties has application in a number of other debates where plaintiffs' counsel try to convince courts to perform actions on behalf of an uncertified class.

In these circumstances, we cannot say that a properly conducted class action existed at any time in the litigation. Federal Rule 23 determines what is and is not a class action in federal court, where McCollins brought his suit. So in the absence of a certification under that Rule, the precondition for binding Smith was not met. Neither a proposed class action nor a rejected class action may bind nonparties.

It would appear, then, that in the rhetorical debate over whether a class action is an entity or a joinder device, the Court has come down clearly on the latter side. In general, that is good news for defendants.

Finally, the Court provided a strong rationale for why an injunction would not be necessary. And, in doing so, it sent lower courts a strong signal that it expects them to respect other courts' denials of certification:

And to the extent class actions raise special problems of relitigation, Congress has provided a remedy that does not involve departing from the usual rules of preclusion. In the Class Action Fairness Act of 2005 (CAFA), 28 U. S. C. §§1332(d), 1453 (2006 ed. and Supp. III), Congress enabled defendants to remove to federal court any sizable class action involving minimal diversity of citizenship. Once removal takes place, Federal Rule 23 governs certification. And federal courts may consolidate multiple overlapping suits against a single defendant in one court (as the Judicial Panel on Multi-District Litigation did for the many actions involving Baycol). See §1407. Finally, we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.

(Emphasis added.) In other words, if counsel did try the transparent tactic of filing a new, identical class action in state court, the defendant could remove it and then move to strike class allegations on comity grounds.

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If not, I have a post up on the excellent OUPblog about it, pitched more toward the educated layperson.   

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 As both plaintiffs and defendants get more sophisticated, the problem of how to litigate mass torts grows more complicated. In particular, both litigants and courts struggle with the question of when a verdict should have preclusive effect in mass tort litigation, and when it should not. Before he passed away last year, Vanderbilt law professor Richard Nagareda made some progress on this question in Embedded Aggregation in Civil Litigation, an article for the Cornell Law Review. As Nagareda put it:

Each instance involves what this Article labels as a situation of “embedded aggregation.” In each, a doctrinal feature of what is ostensibly individual litigation—the scope of the right of action asserted, the nature of the remedy sought, or the character of the alleged wrong—gives rise to demands for the suit to bind nonparties in some fashion, above and beyond the ordinary stare decisis effect that any case might exert. An aggregate dimension, in short, is “embedded” doctrinally within what appears to be an individual lawsuit. That aggregate dimension, in turn, gives rise to demands for binding effect of a commensurately aggregate scope.

(Emphasis added.)  Nagareda looked at three types of litigation in particular. First, he examined the uses of offensive collateral estoppel in FOIA litigation. (Several courts have declined to apply one information-seeker's victory against a government agency to collaterally estop the agency from opposing anyone else seeking the same information.) Second, he examined the policy arguments over punitive damages. (Lawyers often argue for punitive damages based on company policies or histories of bad behavior, which necessarily imports actions that would give rise to other litigation.) Finally, he looked at the controversial Vioxx settlement. (Vioxx settled a large number of personal-injury claims with "inventory settlements," where plaintiffs' counsel had to agree to settle cases on behalf of all their clients to qualify.)

Based on these three examples, Nagareda concluded that:

Contrary to some voices in the literature, this Article contends that the constraints on class certification elaborated over decades of real-world experience are not hypertechnical bugaboos. Rather, they stem ultimately from a well-taken notion of “preclusive symmetry”—an insistence that the plaintiff class ought not to be positioned to wield the bargaining leverage of a class-wide trial without, at the same time, affording to the defendant the assurance of a commensurately binding victory were the defendant, rather than the plaintiff class, to prevail on the merits.

This is not to say that aggregation of some kind is never the solution to these problems of embedded aggregation. However, Nagareda identified three factors that might influence courts to allow some kind of aggregate preclusive effect in litigation. Those are:

• "Standing." Standing here does not mean constitutional standing, just whether the party suing the defendant was the party actually harmed. (So, for example, a plaintiffs that seeks punitive damages for acts that didn't harm her is probably not entitled to them.)
• Divisibility of remedy.  Nagareda's analysis here seems similar to the one used for Rule 23(b)(1). He asked whether "the court could, as a practical matter, afford [the proposed remedy] to the plaintiff at hand without affecting the application or availability of the same remedy to other persons who are non-parties to the plaintiff’s lawsuit."
• Is the wrong widespread? In other words, is it something that would apply to a large number of people, like a design defect or a failure to warn?

Nagareda ultimately argues that these kinds of "embedded aggregation" cases call for some "hybridized" form of aggregation. Unfortunately, Nagareda's description of "hybridized" aggregation is somewhat vague. But it does identify several lines of thought that defendants should be aware of: either because they may yield some interesting settlements proposals (like in the Vioxx cases) or because they foreshadow arguments that plaintiffs' counsel will use in future mass torts.

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Today's opinion, Doe v. Match.com, 2011 U.S. Dist. LEXIS 56567 (C.D. Cal. May 25, 2011), involves a plaintiff and a defendant who made the same mistake: prizing an immediate tactical move over the internal consistency of their positions. For the plaintiff, the inconsistency came from an attempt to turn an unquestionably horrific individual incident into a class action. For the defendant, it came from the desire to win each individual motion without considering the effect on its larger strategy.

The facts that the Jane Doe plaintiff alleged in her complaint are, without a doubt, horrific. Ms. Doe had subscribed to Match.com, a popular dating service. She met a man through the service who turned out to be a serial sexual predator (he had six prior convictions for sexual battery), who raped her. Doe pressed charges against her attacker and cancelled her subscription.

After canceling her account, Doe filed a lawsuit against Match.com. Instead of seeking damages for the horrible thing that happened to her, her lawyer made the case a class action that alleged Match.com's failure to screen for sexual predators put its other subscribers at risk. To support this story of customers in imminent danger, Doe's lawyer moved to enjoin Match.com from signing up any new subscribers until it implemented some kind of predator screening.

Match.com removed the case to federal court, where it defeated the plaintiff's motion for a temporary restraining order. During the hearing, Doe informed the court that she had cancelled her subscription. Based on that information, the court expressed doubts that Doe had actually suffered a cognizable injury that could be cured by future screening. (If she was no longer using the service, she was not in danger of meeting future predators through it.)

So, to protect the class-action part of her complaint, Ms. Doe subscribed for another six months. When Match.com moved to dismiss the case for lack of Article III standing, she argued that, since she was again a subscriber, she was in danger of meeting future predators.

The court, however, was not convinced by the tactic:

Here, Plaintiff has presented no evidence that she plans to use Defendant's services to meet other users. In fact, Plaintiff has stated that she only re-subscribed because "it came to my attention that I needed to be a member of Match to file a class action suit in Federal Court. . . ." Plaintiff's counsel also represents that Plaintiff has not answered any e-mails inquiring of her availability for dates since the alleged assault. Thus, the undisputed facts of the case at bar show a more tenuous likelihood of future injury than those in Lyons or Lujan.

...

Plaintiff's statements suggest that she does not intend to use Defendant's services for future dates, diminishing the possibility that she could suffer any injury caused by Defendant's failure to screen for sexual offenders.

(Emphasis added, internal citations omitted.)  The opinion sounds like a win for Match.com, except for one thing: because the case had not originally been filed in federal court, moving to dismiss on jurisdictional grounds (and Article III standing is a jurisdictional doctrine) did not eliminate the case. Instead of dismissing the case with prejudice, the district court simply remanded it to the Los Angeles Superior Court.

What can defense counsel learn from this case? Consistency is important for every party in litigation. Just as a court is unlikely to believe that someone who tactically re-subscribes to a service with no intention of using it is in danger of further harm, it's not likely to be sympathetic to a defendant who removes a case to federal court only to attack its right to be there once it arrives.

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 My colleague Samantha Thompson has written a post for McGuireWoods's government-investigations group blog Subject to Inquiry on Erica John Fund v. Halliburton.  It's a good summary, and worth a read.  

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One of the earliest questions a defendant must face when litigating a class action is whether to fight or settle. Most lawyers worth their salt would advise their clients to look at the costs of litigating the case, and balance that against the expected payout (damages discounted by the probability of losing), perhaps taking into account the likelihood that the settlement will encourage the particular plaintiffs' firm to sue again. In a recent article titled Law in the Shadow of Bargaining: The Feedback Effect of Civil Settlements, Duke Law School professor Ben Depoorter suggests a few other reasons why defendants might think twice before settling large cases.

Depoorter identifies many of the same settlement pressures that we know defendants already face.

For instance, idiosyncratic settlements are more probable when a disputant is concerned with maintaining a professional reputation. A party may be able to exploit a defendant’s need to avoid the negative attention of court proceedings and induce settlement offers that exceed legally available remedies. Concerns with the “headliner effect” of a dispute may thus lead to settlement outcomes that are above the expected value of the case at trial.

What Depoorter points out is that settlements themselves create precedent.

First, prior settlements exert “peer pressure” on similarly situated parties, effectively weakening their position in comparable disputes. Innovative settlements serve as benchmarks to ambitious lawyers, making plain- tiffs in future disputes more demanding and thus more reluctant to accept settlements below those that parties in prior settlements received.

Second, due to their noncoercive nature, settlements may frame the normative outlook on particular claims or disputes. A novel legal claim for tort compensation might be considered outrageous at first, but will be perceived as less extraordinary if it has been gratified by a prior concession in a settlement agreement. As a settlement precedent reduces the apparent unreasonableness of any claim, it becomes harder for similarly situated parties to contest similar claims in future cases. Judges, for instance, may interpret settlement precedents as expressive statements regarding the appropriateness of compensation. Once a novel legal claim for tort compensation has been gratified by a similar concession in a private settlement agreement, parties will perceive future claims as less extraordinary.

How do lawyers find out about other settlements? People talk, and they observe. It's human nature. So, given large law firms (where, leaving aside firewalls, lawyers can share shoptalk safely) and the extensive informal networks plaintiffs use, news of settlements can disseminate more quickly than it did even ten years ago. Technology helps, too. Organizations like the plaintiffs' bar's American Association for Justice will report on public settlements, and even blogs critical of sweetheart settlements (like this one, Russell Jackson's, or the Center for Class Action Fairness) report on individual settlement agreements, including the amounts the class receives and the amounts the lawyers got paid.

What does this mean for defense lawyers? It means that it's always a good idea to consider settlement offers within the larger context of the client's goals. There is often strong pressure on defendants to settle a given case--as many courts have recognized, class actions create a skewed incentive to settle. But unless the client is truly a company facing a single, one-off case, its settling one class action on favorable terms may very well create leverage for the next plaintiffs to file a complaint.

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 If you'll permit a little more shameless self-promotion, The Class Action Playbook is now available on Kindle.  

So if you've been sitting in court, wishing you had a lightweight, searchable edition of a class-action treatise you could use to impress the judge (or your clients), wish no more.  

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Late last year, the Eleventh Circuit ruled on the preclusive effect of a state-certified class action in federal court.  The Federalist Society very kindly asked me to comment on it for their online journal Engage.  It turned out to be a really interesting project, because what started out as an opinion about preclusion turned out to be more about the nature of commonality.  Here's a quick preview of the argument:

While at first glance Brown addresses the preclusive effect of the Engle class action, the real question the Eleventh Circuit wrestled with was the scope of Rule 23(b)(3)’s predominance inquiry. Neither the Middle District of Florida nor the Eleventh Circuit refused on principle to apply the findings of the Florida jury; instead, they found themselves unable to apply those findings because they lacked enough facts to understand what issues the jury had actually (or necessarily) decided.

You can head on over to the Engage website to read the rest.

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It's June, which means the Supreme Court is issuing a spate of opinions to finish out its 2010-11 term. Yesterday, the Court announced its opinion for Erica John Fund v. Halliburton. It's a short opinion, and a unanimous one. (Chief Justice Roberts wrote the opinion for the 9-0 Court.)

As you may remember, this case concerns an alleged securities fraud. The plaintiffs had alleged that Halliburton understated its asbestos litigation liability and overstated the benefits of a proposed merger. Once the truth came out, the price of Halliburton's stock dropped. When the plaintiffs moved for class certification, Halliburton argued that they could not show that the misrepresentations actually caused the loss. The trial court denied certification, and the Fifth Circuit affirmed.

I noted when the Court granted certiorari that the Fifth Circuit's opinon had drawn fire from academics for requiring an early merits inquiry. The Court did not address that criticism directly. Instead, it focused on defining loss causation.

The question presented in this case is whether securities fraud plaintiffs must also prove loss causation in order to obtain class certification. We hold that they need not.

The Court discusses how its opinion in Basic, Inc. v. Levinson (which allows a court to presume reliance where an efficient securities market exists) establishes the standard for determining causation at the class certification stage.

It is undisputed that securities fraud plaintiffs must prove certain things in order to invoke ’s rebuttable presumption of reliance. It is common ground, for example, that plaintiffs must demonstrate that the alleged misrepresentations were publicly known (else how would the market take them into account?), that the stock traded in an efficient market, and that the relevant transaction took place “between the time the misrepresentations were made and the time the truth was revealed.”

However, according to the Court,

The Court of Appeals’ requirement is not justified by Basic or its logic. To begin, we have never before mentioned loss causation as a precondition for invoking Basic’s rebuttable presumption of reliance. The term “loss causation” does not even appear in our Basic opinion. And for good reason: Loss causation addresses a matter different from whether an investor relied on a misrepresentation, presumptively or otherwise, when buying or selling a stock.

(Emphasis added.) The Court calls the kind of causation represented by reliance "transaction causation." In other words, did the misrepresentation cause the buyer to buy?

Loss causation, by contrast, requires a plaintiff to show that a misrepresentation that affected the integrity of the market price also caused a subsequent economic loss. As we made clear in Dura Pharmaceuticals, the fact that a stock’s “price on the date of purchase was inflated because of [a] misrepresentation” does not necessarily mean that the misstatement is the cause of a later decline in value. We observed that the drop could instead be the result of other intervening causes, such as “changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events.” If one of those factors were responsible for the loss or part of it, a plaintiff would not be able to prove loss causation to that extent. This is true even if the investor purchased the stock at a distorted price, and thereby presumptively relied on the misrepresentation reflected in that price.

In other words:

Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.

What's the likely effect of this opinion? For most circuits, which did not observe the loss causation requirement, not much. The opinion largely reaffirms the status quo. In the Fifth Circuit, we're likely to see an uptick in class action filings, and certifications of securities class actions.

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This week, we begin a new feature at Class Action Countermeasures. Much as I occasionally look at classic class-action cases, I'm also going to look at classic scholarship once per month. That scholarship will have to have some connection to class actions or other kinds of aggregated litigation. And I'll be mining these articles for what they can tell us about the modern class action.

First up, a Harvard Law Review Note from 1955, titled The Challenge of the Mass Trial. This Note is occasionally credited with influencing the 1966 Advisory Committee's revisions to Rule 23, which created what we consider to be the modern class action.

The increased frequency of mass litigation due to the large scale on which American social and economic activities are organized has had a pronounced impact on the judicial system. A train crash or an antitrust prosecution, for example, may involve hundreds of claims or litigants, and courts on both trial and appellate levels may be faced with a choice between separate trials with the possibility of considerable expense and delay or a single trial with the risk of prejudice to one or more of the parties. Terming this “an acute major problem in the current administration of justice,” a committee of federal judges has recently set forth suggestions to assist the court in its conduct of mass trials without a jury. This Note will focus upon the mass single trial or consolidated action in which a jury is being used, and it will outline methods of procedure which may be available to the trial judge in dealing with mass litigation.

(Internal footnotes omitted.)

According to the Note, there are three possible elements to a mass trial: "multiple parties, multiple issues, and complex fact situations." These elements create obvious case management difficulties. Leaving aside the time (and expense) it takes to try multiple, complicated factual issues involving multiple parties, trying them in front of a jury runs a very high risk of hopelessly confusing the jurors. As the Note author observed:

Finally, the sheer volume of the single mass trial multiplies the possibility of error beyond that found in the ordinary trial, particularly in criminal cases, where there is always the danger of guilt by association.

(Emphasis added.)  The Note also contains a discussion of what may be the first modern mass trial, Gwathmey v. United States, in which the

appellate court concluded that the trial court had abused its discretion and had denied the defendants due process of law since, under the circumstances, the jury could not possibly have had an informed opinion.

Gwathmey continues to be a useful precedent for those facing mass tort cases, where mass trials are still a possibility under certain circumstances, and so where defendants still must be wary for how trying complex cases may prejudice their rights.

The Note also makes a number of suggestions about how to improve mass trials; among them:

1. allowing jurors to take notes;
2. allowing for consolidation of issues;
3. using a "model trial" (bellwether trial) to work out issues for subsequent plaintiffs; and
4. using a commission rather than a jury to find facts.

What is particularly interesting is how many of these proposed improvements are still good ideas today, 55 years later. While the Note itself was written before the modern revisions to Rule 23, it's surprisingly applicable to modern mass torts. And that makes it one of the earliest examples of classic class-action scholarship.

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