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

Today's case is a perfect illustration of the difference between tactics and strategy, or, more accurately, between litigation strategy and litigation grand strategy. As you may remember, a tactic is a plan to accomplish a specific short-term goal within a larger conflict. (A defendant may have the strategy of defeating certification to minimize litigation risk; one tactic will be to file a motion to strike class allegations.) A strategy (win this case by defeating certification) should also fit into a grand strategy (keep the defendant safe from meritless lawsuits by making sure courts enforce Rule 23 properly) that can include a number of larger moves, including planning for appeals and even lobbying for legislative change.

Last Thursday, the Seventh Circuit decided an appeal in Ross v. RBS Citizens, N.A. that represents a tactical (and even strategic) loss for the specific defendant, but was still a grand strategic win for defendants.

Ross was a wage-and-hour case, asserting claims under the Fair Labor Standards Act and the Illinois Minimum Wage Law.) The plaintiffs alleged that RBS had denied them overtime pay. The lower court certified the class, and RBS appealed.

Interestingly, RBS appealed solely on the grounds that the Court had not followed Rule 23(c)(1)(B), which requires a court to issue

An order that certifies a class action must define the class and the class claims, issues, or defenses, and must appoint class counsel under Rule 23(g).

In this case, RBS argued, the court had not adequately defined the class. (A side issue that came up during the appeal was whether the lower court had properly found commonality, since the Supreme Court arguably changed the standard in its Dukes opinion.)

To "define" a thing or concept is "to state precisely or determinately [its boundaries]; to specify" or "[t]o frame or give a precise description" of a thing. Oxford English Dictionary (2d ed. 1989). According to the Rule, those things to be defined in a certification order include the "class and the class claims, issues, or defenses. . . ." Fed. R. Civ. P. 23(c)(1)(B) (emphasis added). The above elements occur in a conjunctive, undifferentiated list, indicating that the requirement to "define" the "class claims, issues or defenses" is identical to the requirement to define the "class" itself within a given certification order. Id. Furthermore, the use of the definite article "the" before "class claims, issues, or defenses" connotes comprehensiveness and specificity, rather than illustrative or partial treatment, in defining those aspects of class action certification.

(Second emphasis added, quoting Wachtel v. Guardian Life Ins. Co. (3d Cir. 2006).)  Based on that reasoning, the Seventh Circuit held

that the appropriate substantive inquiry for Rule 23(c)(1)(B) is "whether the precise parameters defining the class and a complete list of the claims, issues, or defenses to be treated on a class basis are readily discernible from the text either of the certification order itself or of an incorporated memorandum opinion."

In this case, the Seventh Circuit found that the lower court had in fact met that burden. While it admitted "there might be some room for the district court to have drafted a clearer certification order," it found the order clear enough. (An important side note is that it made this finding in part by relying on the old common-law maxim of expressio unius est exclusion alterius: the lower court's list of issues to be tried on a class basis was complete and exclusive; everything else was an individual issue.) But the opinion offers an important tool for defendants at the same time. Frequently, lower courts certify cases because they have not thought through how the claims will actually be tried, and may therefore elide important individualized defenses to claims. But Rule 23(c)(1)(B) requires them to address each of these issues in turn, a requirement that should cut down on incorrect certifications.

So the end result of the individual case is that the defendants here lost. But, at the same time, the Seventh Circuit, joining the First and the Third, gave defense counsel an important tool to make sure that the lower court is considering all of the issues before it. What's the lesson defense counsel can take away from this? Tactically, it makes sense to remind courts that they must come up with an order that contains a clear statement of how they will treat all of the classwide claims, issues, and defenses. On a larger scale, it always makes sense to keep the court to the text of Rule 23; in the long run, that will continue to cut down on flawed certification orders.

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Just before the Christmas holiday, the Third Circuit (meeting en banc) issued an opinion approving a classwide settlement in an antitrust case. The en banc opinion is unusual. (Any en banc opinion is.) But in this case, the opinion is unusual not just because it represents a break from routine, but because of how it reaches its result.

The case is Sullivan v. DB Investments, the culmination of litigation against South African diamond giant De Beers. The primary allegation in the underlying lawsuit was that De Beers had exploited its market dominance to inflate the price of rough diamonds, which would inflate the price of diamonds down the line. De Beers got sued by both direct purchasers and indirect purchasers (in this case: jewelers, other middlemen, and consumers).

The case was not really litigated. De Beers suffered a default judgment because it refused to recognize the jurisdiction of the US courts. It then negotiated a classwide settlement with the plaintiffs' counsel.

The district court approved the settlement, despite the fact that the settlement implicated the antitrust laws of 50 states. (Many state antitrust laws do not allow indirect purchasers to recover for antitrust claims.) Several objectors appealed, arguing that the settlement could not be fair if it allowed people without a legal claim to recover the same amounts as class members who did have solid legal claims. A split panel of the Third Circuit reversed the trial court. Then an en banc panel vacated that opinion and granted an en banc rehearing.

The result was Sullivan. On the surface, the holding (approving a classwide settlement that includes people without a legal claim) may seem unusual, but the fact that the court was approving a settlement class might explain its willingness to overlook the fact that many of the class members would not have been entitled to recover if they had brought their claims in the courts of their home states.

The en banc panel's justification of that holding was more adventurous however, and it has led to some pronouncements that frankly, are just--well, bizarre is the best way to put it. In particular, Sullivan makes a number of statements that flat-out disagree with the Supreme Court's class-action jurisprudence, most notably its definitive statement on class-action settlements Amchem Products, Inc. v. Windsor. Among those statements:

Variations in state law that are outcome-determinative do not predominate over common issues:

the objectors argue that the existence of substantive variations in the state antitrust laws underlying the Indirect Purchaser damages claims should preclude a court from finding that common issues affecting the class as a whole predominate. They also urge that differences among state consumer protection and unjust enrichment laws would likewise preclude a finding of predominance. Our dissenting colleagues focus on this issue as well, and adopt a specific requirement that every class member has “some colorable legal claim” in order for a district court to certify a class. In our view, this requirement would result in a radical departure from what Rule 23 envisions and what our precedent demands, and it founders for many reasons.

(Emphasis added, internal citations omitted.) The Fifth Circuit disagrees, as does the Second. And so did the Third Circuit in Georgine v. Amchem Products, Inc. (which became Amchem).

Predominance focuses only on defendant's conduct:

Our precedent provides that the focus of the predominance inquiry is on whether the defendant’s conduct was common as to all of the class members, and whether all of the class members were harmed by the defendant’s conduct.

The Supreme Court disagreed in Wal-Mart Stores, Inc. v. Dukes. And to see the extent of that disagreement, here is Justice Ginsburg's characterization of that very issue from her dissent:

The Court gives no credence to the key dispute common to the class: whether Wal-Mart's discretionary pay and promotion policies are discriminatory. "What matters," the Court asserts, "is not the raising of common 'questions,'" but whether there are "[d]issimilarities within the proposed class" that "have the potential to impede the generation of common answers." … The Court's emphasis on differences between class members mimics the Rule 23(b)(3) inquiry into whether common questions "predominate" over individual issues.

(Emphases added, internal citations omitted.)  In short, while Justice Ginsburg disagreed that the commonality requirement should focus on dissimilarities within the class (as opposed to defendant's conduct), she (and her three dissenting colleagues) took it as read that the predominance inquiry did look at dissimilarities.

Courts should not look at whether class claims could survive a motion to dismiss:

An analysis into the legal viability of asserted claims is properly considered through a motion to dismiss under Rule 12(b) or summary judgment pursuant to Rule 56, not as part of a Rule 23 certification process.

and

Class certification and motions to dismiss involve two distinct (and different) standards, and the former does not permit as extensive an inquiry into the merits as the latter does.

(Emphasis added.)  Compare the Supreme Court's holding in Amchem:

The predominance requirement stated in Rule 23(b)(3), we hold, is not met by the factors on which the District Court relied. The benefits asbestos-exposed persons might gain from the establishment of a grand-scale compensation scheme is a matter fit for legislative consideration, but it is not pertinent to the predominance inquiry. That inquiry trains on the legal or factual questions that qualify each class member's case as a genuine controversy, questions that preexist any settlement.

(Emphasis added.)

Choice-of-law inquiries are not appropriate for class certification:

Moreover, district courts undertaking the scrupulous review of state laws could not ensure the validity of each individual claim without first settling upon the precise state law governing each of the putative class members’ claims. This choice-of-law analysis would be particularly difficult in a nationwide class action where an array of factors beyond the residence of the class members must be considered, including, inter alia, the location of the parties and the purchased items, and the place of contracting and performance. See generally Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 467 (3d Cir. 2006). The Seventh Circuit rightly noted that “choice-of-law issues in nationwide class actions are rarely so uncomplicated that one can delineate clear winning and losing arguments at an early stage in the litigation”; “the legal uncertainty resulting from the complicated choice-of-law issues” would unduly complicate the process for establishing predominance under Rule 23. Mirfasihi v. Fleet Mortg. Corp., 450 F.3d 745, 750 (7th Cir. 2006). As a result, many courts find it “inappropriate to decide choice of law issues incident to a motion for class certification.”

(Emphasis added)  The Supreme Court clearly disagreed with this premise in Phillips Petroleum v. Shutts (which, oddly, the Third Circuit did not cite). To wit:

the [choice-of-law] calculus is not altered by the fact that it may be more difficult or more burdensome to comply with the constitutional limitations because of the large number of transactions ....

(Emphasis added.)

The fairness of a class settlement does not depend on the viability of different class members' claims:

only by engaging in the type of fact-intensive merits and choice-of-law analyses that we have rejected could a district court attempt to assay the varying strengths and weaknesses of asserted state claims. We can find no support in our case law for differentiating within a class based on the strength or weakness of the theories of recovery. Accordingly, we decline to require such an analysis.

According to the Supreme Court in Amchem, this statement is factually incorrect. The Third Circuit has in fact differentiated based on theories of recovery:

The Court of Appeals next found that "serious intra- class conflicts preclude[d] th[e] class from meeting the adequacy of representation requirement" of Rule 23(a)(4). Ibid. Adverting to, but not resolving charges of attorney conflict of interests, the Third Circuit addressed the question whether the named plaintiffs could adequately advance the interests of all class members. The Court of Appeals acknowledged that the District Court was certainly correct to this extent: "'[T]he members of the class are united in seeking the maximum possible recovery for their asbestos-related claims.' " Ibid. (quoting 157 F.R.D., at 317). "But the settlement does more than simply provide a general recovery fund," the Court of Appeals immediately added; "[r]ather, it makes important judgments on how recovery is to be allocated among different kinds of plaintiffs, decisions that necessarily favor some claimants over
others." 83 F.3d, at 630.

In short, it appears that the en banc opinion did not consider much of the relevant Supreme Court jurisprudence on the issues facing it.  

Many of these strange statements make a lot more sense if they are limited to either (1) specific kinds of antitrust cases, or (2) settlement-only classes. They're still debatable--Amchem, for example, dealt with a settlement-only class--but they at least have an underlying logic that a court might be reluctant to interfere with an agreement between parties. In fact, Judge Scirica's concurrence specifically spells out that this was a settlement-only class, and therefore would not face many of the manageability problems that plaintiffs might face were they to take the case to trial. The majority appeared to agree with this conclusion in at least one part of its opinion. When evaluating the fairness of the settlement, it explicitly stated that

although the size and variety of issues implicated in this nationwide class action do not present an obstacle to certification of a settlement class, there is a significant risk that such a class would create intractable management problems if it were to become a litigation class, and therefore be decertified. Accordingly, we agree with the District Court that the considerable risk of maintaining the class action through trial weighed in favor of settlement.

(Internal quotations omitted.) And, in several places, it stressed the fact that this was an antitrust class action as well, and that antitrust cases are more susceptible to certification under certain circumstances.

Given the confusion sown by the majority opinion, the fact that many statements seem to contradict the Supreme Court's class-action jurisprudence, and the circuit splits this opinion opens, it would seem to be ripe for a certiorari petition. (Of course, it is always difficult to predict whether the Supreme Court will grant certiorari in cases like these.)

Meanwhile, given the en banc panel's sporadic attempts to limit the reach of its holding (however confusing in the context of the opinion itself), there are two strategies defense lawyers can employ when plaintiffs in the Third Circuit inevitably cite this opinion:

1. Point out that the opinion is limited to settlements (and where appropriate, more specifically to antitrust settlements), and
2. Quote the Supreme Court. In a contest between the Third Circuit and the Supreme Court, the Court wins. At least, it usually does.

(Thanks to Glenn Lammi for suggesting the first case of the year.)

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 This was a busy year for class-action jurisprudence. Clearly, most of the Supreme Court cases had some effect on class action practice. But the district and appellate courts also rendered a host of rulings this year that significantly affect class-action practice. Despite what a number of academics and plaintiffs' lawyers have claimed, the class action is not dead.  That said, it's probably true, to quote plaintiff's lawyer Daniel Girard, that while the "death of the class action" is overstated, the "Golden Age of the private attorney-general" is over. There were so many interesting opinions in the past year, with so many implications, that it was hard to identify just ten. Consequently, I've cheated a little. The final two entries actually comprise four cases which, taken as pairs, indicate a couple of new trends to watch out for.

1. Wal-Mart Stores Inc. v. Dukes (S. Ct.) - Whether you think it killed the class action or not, Wal-Mart Stores, Inc. v. Dukes (called "Wal-Mart" by some, "Dukes" by others) was the runaway most important case of the year for class-action practitioners. It clarified an ongoing debate about whether Rule 23(b)(2) could be used for money damages (it can't), it finally provided a standard for Rule 23(a)(2) (a common question must have a common answer), and it finally put to bed a common misreading of Eisen that had justified ignoring inconvenient facts when certifying class actions. Those all make it the most significant decision of the year, even before you get to the press hype.
2. AT&T Mobility v. Concepcion (S. Ct.) - Concepcion is the other case that has been accused of killing the class action (sometimes on its own, sometimes in conjunction with Dukes.) It hasn't managed that feat, but it has sent what one plaintiffs' attorney called "a seismic change" through class-action practice. While we're still feeling the aftershocks it's clear that it is now more difficult to bring "creative" consumer claims that are governed by clear purchase contracts; and certain individualized employment disputes are also finding their way into arbitration rather than class actions. And that's before we get into the Supreme Court's discussion of exactly what due process requires from aggregated litigation.
3. Pilgrim v. Universal Health Card, LLC (6th Cir.) - This case, the first appellate opinion to address the motion to strike class allegations at the pleading stage, has made the tactic truly viable. For years, class-action defendants have faced down multi-state classes that they knew from prior experience could not get certified. And yet, because courts were reluctant to rule on the viability of these class actions before discovery, defendants faced long and expensive discovery just to get to a legal issue that required no additional facts. Pilgrim marks the first time that an appellate court has recognized that determining whether variations in state law predominate over other issues does not require discovery, it just requires an analysis of the laws in question.
4. Klier v. Elf Atochem Inc. (5th Cir.) - Thought that cy pres relief was a no-brainer in your class action settlement? Think again. Joined later in the year by the Ninth Circuit's opinion in Nachsin v. AOL, LLC, Klier finally bridles the runaway use of cy pres relief to dress up less valuable class actions. The fact that it also provided a stark critique of the always-problematic medical-monitoring class action was just a bonus.
5. Smith v. Bayer Corp (S. Ct.) - Significant" does not have to mean "pro-defendant." In Smith, the Supreme Court held (abrogating the Seventh Circuit's Thorogood opinion last year) that a defeat at class certification does not preclude another class member from bringing the same class action somewhere else. It based this decision on the eminently logical reason that, until a case has been certified as a class action, it is just an individual plaintiff's case. (That same logic underlies the Seventh Circuit's recent re-affirmation that one can moot a class action before certification.)
6. Erica John Fund v. Halliburton (S. Ct.) - Similarly, securities defendants were perfectly happy with the Fifth Circuit's requirement that a plaintiff demonstrate loss causation when certifying a securities class under a "fraud on the market" theory, even if that requirement could not be found in the text of Rule 23. The Supreme Court, in a short, well-reasoned, and unanimous opinion, definitively closed off that particular line of argument.
7. In re Bluetooth Headsets Products Liability Litigation (9th Cir.) - The Ninth Circuit's rejection of a problematic class-action settlement (the class got nothing, the attorneys got $850,000) imposed a common-sense "proportionality" requirement on class counsel fees, recognized that segregation of the fee request from the rest of the settlement does not eliminate perverse incentives for class counsel, and required a cross-check for lodestar-based fees.
8. Judge Alsup's Class Settlement Checklist - Judge Alsup has handled a number of class actions in his few years on the bench. And this was the year that he developed a standing order that lays out what he expects from any classwide settlement, before negotiations may even have begun. It's an outstanding idea, and it provides excellent guidance to plaintiffs and defendants about what they can and can't accomplish in a settlement in his court. While I may not agree with all of his analysis, I can't fault his attempt to create certainty in the negotiation process.
9. In re Aqua Dots Products Liability Litigation (7th Cir.) & Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan (6th Cir.) - The Sixth and Seventh Circuits both faced the question of how to handle class actions that, while they might benefit the plaintiff and the plaintiffs' lawyers, would do no one else any good. Judge Easterbrook of the Seventh Circuit pointed out that while it is logical to say that a class action duplicating a voluntary recall is not a good idea, it doesn't exactly fall under the text of superiority. So instead, he held that a plaintiff who brings a redundant class action is inadequate. The Sixth Circuit, faced with a class action that might benefit the class but would in the process hurt other citizens of Michigan, simply held it not superior to other methods of resolving the controversy (including individual lawsuits).
10. CE Design v. King Architectural Metals (7th Cir.) & Creative Montessori Learning Centers v. Ashford Gear LLC (7th Cir.) - In a pair of opinions this year, Judge Posner seemed single-handedly determined to restore integrity to the class action. In CE Design, he held that a named plaintiff who has credibility problems cannot serve as an adequate class representative. In Creative Montessori, he held that class counsel who have engaged in deceptive methods to prosecute their class action are not adequate class counsel. The message behind these two cases seems clear: everyone in a class action is expected to be on the up-and-up, not just the defendants.

In making this list, I had to leave off a number of significant developments in class action practice. Taco Bell tried a risky but successful PR strategy this year. The Second Circuit held that subclasses might require their own counsel. The federal appellate courts have split--even after Dukes--on how to treat expert testimony. 2011 was an interesting time for class actions. Perhaps uniquely so. It will be interesting to see how each of these developments shakes out in 2012.

[Note - edited after publication to fix a formatting error and an unfinished sentence.]

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 Pickett v. Iowa Beef Processors was a lawsuit between cattle producers and a beef processing company. Cattle producers sold their cows in two ways: on the cash market (also known as the "spot market") and using forward contracts. The cash market was riskier, but also potentially more profitable. The forward contracts were safer, but also made less money for the producers. So some of the producers sued Iowa Beef Processors, alleging that their use of forward contracts was a deceptive business practice. (Specifically, they alleged a violation of the Packers & Stockyards Act, an antitrust statute which regulated the meat industry.)

The trial court (in the Middle District of Alabama) originally denied certification, because the plaintiffs had not met the typicality or adequacy requirements. The plaintiffs narrowed their class and sought reconsideration, offering expert testimony that an econometric model could determine most of the liability and damages issues. This time, the court certified the class. At that point, Iowa Beef Processors appealed.

The Eleventh Circuit began by noting that Rule 23(a)(4)'s adequacy requirement exists in part to guard against conflicts within the class.

Thus, a class cannot be certified when its members have opposing interests or when it consists of members who benefit from the same acts alleged to be harmful to other members of the class.

In this case, because the class action sought to prohibit forward contracts, it set up a conflict between those cattle producers who had used the device and those who had relied exclusively on the spot market.

Thus, the class includes those who claim harm from the very same acts from which other members of the class have benefitted. Moreover, in addition to damages, Plaintiffs seek an injunction that would prohibit IBP from using such purchasing arrangements in the future. Such an injunction would impose a significant restriction on the way these producers do business.

(Emphases added.)  So the Eleventh Circuit reversed the certification, because this conflict among the class would preclude any finding of adequacy.

In addition to being an excellent example of an intra-class conflict, Pickett also provides the first glimpse of a line of logic that shows up later in Pipefitters Local 636 Insurance Fund v Blue Cross Blue Shield of Michigan. It's always worth looking at the effects of a potential class action. Here, the proposed class action would have meant long-term harm to the producers. In Pipefitters, the class action would have harmed the elderly of Michigan. Class actions are cases large enough to effect massive and long-term changes. Sometimes those changes are for the best. Often, they have harmful effects on some members of the class, or on third parties.

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Regular readers know that I usually average two posts a week here, discussing a case on Tuesday, and offering a think piece on Thursday. But a case came down the other day that justifies switching up the schedule. The case is Creative Montessori Learning Centers v. Ashford Gear LLC, and the issue is under what circumstances a court may find class counsel inadequate to represent a class.

Creative Montessori is a Telephone Consumer Protection Act case; the TCPA prohibits the sending of "junk faxes" or "blast faxes" to recipients without their consent. Because it allows for damages of $500 per fax (which can be trebled), it's a juicy target for some plaintiffs' firms.

One of those plaintiffs' firms was Bock & Hatch LLC. (Bock & Hatch was also the firm that brought the CE Design case.) The firm got hold of a list of possible faxes and recipients from a "blast fax" company (a company that sent out the faxes in batches to numbers it had collected). It had promised the company confidentiality when it obtained the list, but its plan was to use the list to file more than 50 class actions. To get clients, it sent letters (addressed from another involved firm, Anderson + Wanca) to various companies that read:

during our investigation, we have determined that you are likely to be a member of the class. You might not remember receiving the junk faxes, but if the lawsuit is successful, you would receive compensation (up to $1,500) for each junk fax sent. We would like to discuss this issue with you. Please call me [telephone number].

Creative Montessori Learning Centers retained the firm, even though it had no evidence that it had actually received the fax at issue in the case.

During the debate over certification, Ashford Gear argued that the lawyers of Bock & Hatch were not adequate class counsel because of the underhanded means by they obtained their list, and because of the misleading statements they used to recruit clients. The trial court ruled that, while the firm's actions displayed a lack of integrity, the proper remedy was discipline by the Illinois bar. It also ruled that the firm's conduct did not affect its ability to represent a class.

The Seventh Circuit, in an opinion by Judge Posner, disagreed.  Judge Posner began by observing that class counsel have a fiduciary duty to absent class members.

Class counsel owe a fiduciary obligation of particular significance to their clients when the class members are consumers, who ordinarily lack both the monetary stake and the sophistication in legal and commercial matters that would motivate and enable them to monitor the efforts of class counsel on their behalf.

Based on that fiduciary duty, he observed that

When class counsel have demonstrated a lack of integrity, a court can have no confidence that they will act as conscientious fiduciaries of the class.

Finally, he addressed the lower court's treatment of a finding of lack of adequacy as a disciplinary issue rather than a criterion for class certification.

To suggest as the district court did that “only the most egregious misconduct” by class counsel should require denial of class certification on grounds of lack of adequate representation was bad enough. To rule that only the most egregious misconduct “could ever arguably justify denial of class status,” as the court went on to hold, would if taken literally condone, and by condoning invite, unethical conduct. Misconduct by class counsel that creates a serious doubt that counsel will represent the class loyally requires denial of class certification.

(Emphasis added.)  In doing so, Judge Posner acknowledged some prior precedent that had gone easier on class counsel, but pointed out that those cases had been decided before the issue of class counsel misconduct had become "acute."

This is a significant opinion. Usually, defendants are reluctant to proffer--and courts are reluctant to entertain--challenges to the adequacy of counsel. This reluctance stems from an assumption that, while usually implicit, the district court had announced explicitly: that somehow denying class certification operated as a punishment for class counsel. But even if--as many judges (including Posner) have observed--class counsel are the real actors in a class action, they are not supposed to be the primary beneficiaries of the litigation. Instead, the real beneficiaries are supposed to be the absent class members. Judge Posner's opinion here called out that assumption and showed that it can get in the way of the real purpose of class actions, which is compensating absent class members who have been harmed.
 

[Note: This post was edited on 14 December to correct some information, based on a communication from Brett Levin of Stephen J. Schlegel, Ltd., one of the defense firms in the case.]

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Like many health-minded individuals, Norma Rothman has shopped at GNC stores.  And, like many others, she has bought items there with her credit card.  And, like many consumers everywhere, she didn't like it when the cashier allegedly asked her for her ZIP code when she made her purchase.  Unlike many consumers, Ms. Rothman tried to turn this momentary dissatisfaction into a class action, alleging that GNC had violated the Song-Beverly Credit Card Act and California's infamous § 17200.  (Song-Beverly class actions have become very popular in California since its Supreme Court ruled that requesting a ZIP code can violate the Act.)

How unlike other consumers was Ms. Rothman?  Very.  When a trial court for the Central District of California denied her motion for class certification, it found that her class was overboard, lacked numerosity and commonality, and that, since she may have been the only person harmed in the manner she alleged, she was neither a typical nor adequate class representative.  (For those of you keeping score, that means she did not demonstrate any of the Rule 23(a)(4) requirements.)

The case was argued by a colleague of mine, Susie Germaise from McGuire's Los Angeles office, joined by Brad Funari and Laura Lange in Pittsburgh, so I'm not going to linger on commentary.  Instead, I will simply offer my congratulations for an outstanding win, and thank them for making the briefing available for others to read.  (Motion for class certification here, opposition here, reply brief here.)

Have a happy (and nutritious) Thanksgiving, everyone.  And come back Friday for another post.

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For fourteen years, from 1970 to 1984, more than 150,000 people bought stock in Petro-Lewis and its limited partnerships. Late in that period, the price of gas declined, and Petro-Lewis had to borrow money to to pay out distributions. In 1984, it announced that it was in severe financial straits, and cut its distributions by half, a move that resulted in a number of lawsuits, including Kirkpatrick v. JC Bradford & Co. 

In that class action, the plaintiffs alleged that JC Bradford had violated the securities laws by misleading investors in Petro-Lewis about its financial condition. At the class certification hearing, JC Bradford argued (1) that individualized issues predominated because the plaintiffs would have to prove reliance, and (2) that the named plaintiffs were not adequate. The trial court denied certification, relying on both of these grounds. The plaintiffs appealed.

The Eleventh Circuit held that denying certification based on predominance was error (mainly because of the same logic that motivated Basic Inc v Levinson).  

And then the court turned to adequacy. It conceded that

As the district court aptly noted, a potential class is entitled to more than "blind reliance upon even competent counsel by uninterested and inexperienced representatives."

(Emphasis added.)  And it observed that

Several district courts thus have properly denied class certification where the class representatives had so little knowledge of and involvement in the class action that they would be unable or unwilling to protect the interests of the class against the possibly competing interests of the attorneys.

(Emphases added.)  But it also argued that that the named plaintiffs did not have to demonstrate "to any particular degree" their vigor in pursuing class claims. Obviously, the court reasoned, a class would "be better served if the named plaintiffs fully participate in the litigation," but realistically class counsel is usually far more motivated to pursue claims than class members are. While it conceded that this created a "potential for abuse," it concluded, that

in securities cases such as these, where the class is represented by competent and zealous counsel, class certification should not be denied simply because of a perceived lack of subjective interest on the part of the named plaintiffs unless their participation is so minimal that they virtually have abdicated to their attorneys the conduct of the case.

Because the adequacy of the named plaintiffs was a mixed question of law and fact, the court did not reverse the trial court's adequacy finding. Instead it just remanded the case so that the trial court could make a finding according to the appropriate standard.

(Incidentally, there is one other feature of Kirkpatrick that is likely to become important. In footnote 6, the court also held that

The presence of arbitration agreements is relevant for another factor in determining the suitability of class treatment on the 10b-5 claims. ... Those purchasers whose 10b-5 claims are subject to arbitration thus could not be considered members of the class. In ruling on the motion for class certification, the district court did not determine whether the potential class members not subject to arbitration would be sufficient to satisfy the numerosity requirement of Rule 23(a)(2). The court should make this determination on remand.

Given the newfound emphasis on arbitration agreements, it is likely that, in a number of cases, classes where many members would be subject to arbitration clauses may lack numerosity.)

Kirkpatrick has a mixed legacy as a case. Defendants quite rightly cite it to demonstrate that one cannot completely abdicate a case to plaintiffs' counsel. And they also cite it to point out that one key feature to adequacy is the ability of the class representative to stand up to her lawyers when their interests diverge. The court did hold that one can largely look to the zeal and vigor of plaintiffs' counsel, instead of the plaintiff, but it specifically limited that holding to securities cases like the one before it.  And, as we know, particularly since the PSLRA was enacted, securities cases involve a much more searching inquiry into the adequacy of plaintiffs' counsel than other class actions.

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My regular Tuesday post will be up tomorrow (Classic Cases - looking at Kirkpatrick v. JC Bradford Co.).  But Russell Jackson has an excellent writeup of a recent Sixth Circuit opinion that affirms a motion to strike class allegations based on state law variations.  

Go.  Read.  

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Today's piece of "classic" scholarship is by Linda Mullenix, Professor of Law at the University of Texas. Published in 2004, Taking Adequacy Seriously: The Inadequate Assessment of Adequacy in Litigation & Settlement Classes, 57 Vand. L. Rev. 1687 (2004), took an in-depth look at the routine under-enforcement of Rule 23(a)(4)'s adequacy requirement.

To put the case simply, courts pay lip service to the concept of adequate representation but fail to robustly engage in any meaningful inquiry to establish the existence of such adequate representation. For judges, the adequacy inquiry usually is the least-rigorously examined requirement for certification, either for litigation or for settlement classes. Instead, courts routinely wave their blessings over class counsel and proposed class representatives and presumptively make findings of adequacy on nonexistent or scant factual showings.

(Emphases added.)  Mullenix attributes much of this under-enforcement to the fact that many courts focus on whether counsel is adequate rather than the class representative herself.

Because most courts historically and reflexively believe that the most important thing is the presence of competent counsel (the Newberg view), there is a general feeling of apathy toward class representative issues. In short, courts seem perfectly willing to ignore even the most clueless class representatives.

And, as Mullenix points out, that reliance on the adequacy of counsel can be a problem, because the same courts often do not probe into the adequacy of counsel, except in a superficial, check-the-resume way.

In reality, most courts routinely, reflexively, and presumptively certify proposed class counsel as adequate without a sufficiently probing inquiry. In the modern literature, one has to look long and hard to find cases in which class counsel have been deemed inadequate to represent the class.

(Mullenix points out that class counsel often do not face rigorous inquiry into adequacy because both courts and defense lawyers hesitate to call the adequacy of lawyers on the other side into question. And in general, this unwillingness to throw mud at opposing counsel is a feature, not a bug, in our civil litigation system.) There are a few exceptions, like Judge Baer's decision that "adequate counsel" in a securities case should come from diverse firms.  But even there, Judge Baer's order focused on a box to check, rather than the conduct of the firms themselves.

Mullenix offers one primary reform: require cross-examination of the class representative at the certification hearing, so that the court can make an adequate record of its own impressions of the adequacy of the named plaintiff.

While there are a few exceptions to this trend of under-enforcement now, for the most part, it appears to have continued. Many courts simply do not look at the adequacy of the class representative (or, failing that, class counsel) quite as closely as they could. And this is unfortunate, because a more rigorous inquiry into adequacy inquiry would have at least three salutary effects:

(1) It would cut down on lawyer-driven cases where there was no real harm. If class counsel can't find a named plaintiff who is sufficiently motivated to educate herself on what happened and actually communicate with her lawyers, that's a very good sign that the case is about a technical issue unattached to any harm rather than an actual injury that requires compensation. (Betty Dukes would likely pass this test, as would Dora Surowitz.)

(2) It would reinforce the finality of class settlements. Currently, it is possible to challenge a class settlement after the fact by challenging the adequacy of representation. This means that class settlements in jurisdictions that do not pay attention to adequacy are--in the long run--worth less than in jurisdictions that do pay attention to adequacy. But since there is systematic under-enforcement, mostly what it means is that class action defendants cannot trust the finality of the deals they do make.

(3) It would cut down on the kinds of settlements that draw objections. If there is an active named plaintiff involved, it is less likely counsel will be able to get away with coupons, illusory "injunctive relief," or exorbitant attorneys' fees. Of course, this may very well be one of the reasons that adequacy is not enforced that vigorously. When you get right down to it, most parties involved in class-action settlements--including courts--do not want to see a settlement derailed just because the lawyers have asked too much.

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 Dora Surowitz, a seamstress and a widow, was a Polish immigrant with very little English. In 1957, she bought about $2,000 of Hilton stock, on the advice of her son-in-law, Mr. Brilliant. (Yes, his real name. Phi Beta Kappa from Columbia, Harvard Law School. But really, with that name, could he have done anything else?) In fact, Hilton bought the stock for her, using her money, and bought some for himself and his family using his own money.

Five years later, Mrs. Surowitz got a notice from Hilton that it was buying back its own stock. Because she wanted to understand the notice, she took it to Mr. Brilliant. Something in the notice disturbed him, and he began investigating. He was joined by Mr. Rockler, who had been his colleague at the Nuremburg war crimes trials. (Did we mention Mr. Brilliant worked at Nuremburg?) Their investigation--which included a meeting with Hilton's lawyers--uncovered a complicated fraud at the corporation. Mr. Brilliant went home, explained the fraud to his mother-in-law, and asked her to sign a letter to Hilton protesting the conduct, which she did.

Later that year, Hilton refused to send out a dividend. Mrs. Surowitz went to her son-in-law for an explanation, and he told her more about the fraud, and asked if she would be willing to sue Hilton. She was. Mr. Rockler served as her lawyer.

Hilton's lawyers--like any good class-action defense team--took Mrs. Surowitz's deposition. At that point, it became clear that she spoke next to no English, understood very little about the fraud itself, and really had just relied on Mr. Brilliant for her understanding of the case. Hilton moved to dismiss, claiming the complaint was a sham because Mrs. Surowitz's verification of the complaint (in compliance with then-Rule 23) was false. Mrs. Surowitz appealed, and the appellate court affirmed. She appealed again, and the Surpreme Court granted certiorari and then reversed the dismissal. As Justice Black's opinion put it:

Rule 23 (b) was not written in order to bar derivative suits. Unquestionably it was originally adopted and has served since in part as a means to discourage "strike suits" by people who might be interested in getting quick dollars by making charges without regard to their truth so as to coerce corporate managers to settle worthless claims in order to get rid of them. On the other hand, however, derivative suits have played a rather important role in protecting shareholders of corporations from the designing schemes and wiles of insiders who are willing to betray their company's interests in order to enrich themselves. And it is not easy to conceive of anyone more in need of protection against such schemes than little investors like Mrs. Surowitz.

So why call this case a classic? Particularly in a blog called Class Acton Countermeasures? Two reasons.

First, Surowitz v. Hilton Hotels Corp. is the original source of the oft-cited proposition that a named plaintiff's ignorance of the case does not make her inadequate. And there is no denying the influence of the line of cases that held so since. After all, many courts have reasoned, if a Polish seamstress with little English and little understanding of a complex fraud can bring a derivative suit, who are we to say that this named plaintiff cannot be an adequate class representative?

But second, and more important, the actual case shows just how far afield courts have taken the original holding. Here are some things to consider about the Supreme Court's holding in Surowitz:

• Surowitz was not a holding about adequacy. Leaving aside the fact that this case predated the 1966 Amendments that made Rule 23 what it is today, Hilton's lawyers did not challenge Mrs. Surowitz's adequacy to represent a class as we understand that today. They challenged her right to bring a lawsuit at all. The Supreme Court was reviewing a motion to dismiss, not a motion for class certification.
• Mrs. Surowitz was not recruited by plaintiffs' counsel. One of the primary concerns in Surowitz was whether the case was a strike suit. And the question there was whether Mrs. Surowitz was just a stand-in for her attorney. The Court found that, on the facts, she wasn't. And those facts were not related to her knowledge of the suit. Instead, they were related to the fact that she had held the stock for years, had approached her son-in-law, who had then found her an attorney. Those facts today would raise eyebrows only because they tend to be so rare. These days, it is well-acknowledged that class-action attorneys recruit plaintiffs. (And that is why, today, ignorance is a greater concern.)
• There was no concern that the attorneys would sell out the shareholders. In fact, Hilton conceded that the attorneys were working in good faith, and that they were not simply holding the company up for a quick settlement. It argued that those facts were irrelevant. But, in the intervening forty-five years, those have become the relevant facts. Today, we ask whether a named plaintiff is adequate to represent a class because we know that there will be times in the litigation (such as settlement) when the attorneys will face overwhelming temptation to act in their own interests rather than those of the class.  And we want the named plaintiff to be able to stand up to the attorney when that happens. On the record in Surowitz, there was little concern that Mrs. Surowitz would not do so. If she relied on anyone, it was her son-in-law, who was not her attorney. And she had discovered the problem and taken the first steps to investigate it. Do we have the same confidence in a named plaintiff who has been recruited by an attorney and knows only what her attorney has told her?

So yes, Surowitz is a classic case, but it's a misunderstood classic. While plaintiffs and courts often cite it as holding that an ignorant plaintiff can be an adequate class representative, what it really held was that an ignorant plaintiff, relying on lawyers who had demonstrably acted in good faith, was entitled to bring a complaint under Rule 23. In the intervening forty-five years, however, the facts about class-action litigation have changed. And it is worth pointing out those changes to courts when plaintiffs' counsel argue that their hand-picked, pliable named plaintiffs are adequate class representatives.

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I've written before about the inventiveness of plaintiffs counsel when it comes to tobacco and class actions. And Xavier v. Philip Morris USA, 2011 U.S. Dist. LEXIS 42335 (N.D. Cal. Apr. 18, 2011), represents a new chapter in the ongoing tobacco wars.

Xavier was a class acton brought by smokers who were not suffering from any adverse health effects--yet. The named plaintiffs sought to certify a class of

asymptomatic Marlboro smokers and recent quitters who are more than fifty years old and have at least a twenty-pack-year smoking history.

What does twenty-pack-year mean? It represents the number of packs per day multiplied by the number of years the habit persisted, so a twenty-pack-year history could be a pack a day for 20 years, 2 packs a day for 10 years, or some other combination that added up to roughly 146,000 cigarettes. The plaintiffs sought medical monitoring.

Judge Alsup (of Class Settlement Checklist fame) immediately tied the ascertainability problem to the issue of preclusion.

If a class definition includes a requirement that cannot be proven directly, and that depends instead upon each putative class member's feelings and beliefs, then there is no reliable way to ascertain class membership. Without an objective, reliable way to ascertain class membership, the class quickly would become unmanageable, and the preclusive effect of final judgment would be easy to evade.

(Emphasis added.)  In this case, the class was not ascertainable, because determining class membership would require delving into class members' memories of their own conduct:

Thus, while the arithmetic total of an individual's Marlboro-smoking history is an "objective" question, it remains a question, and its answer depends on each individual's subjective estimate of his or her long-term smoking habit. Unlike in many cases, there are no defendant records on point to identify class members. There is no reliable way in which smokers themselves could document their long-term smoking histories.

(Emphasis in original.) Nor would the problems with class members' memories be the only issue in determining class membership. As Judge Alsup explained:

The memory problem is compounded by incentives individuals would have to associate with a successful class or dissociate from an unsuccessful one. Plaintiffs argue that individuals "have little reason to lie given the lack of pecuniary gain" but this order finds to the contrary. For example, long-term smokers of other cigarette brands and long-term smokers who have smoked fewer than 146,000 cigarettes may desire medical monitoring and be tempted to free-ride on relief granted in this action.

Since the class was not ascertainable using objective measures, Judge Alsup denied certification. His opinion is a useful one. In addition to explaining the importance of ascertainability to absent class members, he also expands the analysis a little by pointing out that an "objective" definition needs to rest on reliable data. If class membership relies solely on memory, and there is incentive to fudge, then the membership criteria is not really objective.

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 Phillips Petroleum v. Shutts involved a lawsuit by a class of gas royalty owners (folks who own the rights to income from gas produced on land) against an oil company. The royalty owners brought their class action in Kansas state court, alleging that Phillips Petroleum had not paid them on time, and so they were owed interest on their royalty payments.

The Kansas state court certified a class of 33,000 royalty owners. The debate over certification bore some similarity to modern debates, but also some startling differences. Phillips basically made two arguments against certifying a class. First, it argued that a Kansas court could not exercise jurisdiction over out-of-state class members. Second, it argued that a Kansas court could not apply Kansas law to those members' claims, and applying the laws of fifty states would be unmanageable.

The Court, in an opinion by Justice Rehnquist, held rejected Phillips's first argument. After an extensive discussion of personal jurisdiction (invoking every 1L's favorite Civ Pro opinion, International Shoe Co. v. Washington, the Court concluded that

the protection afforded the plaintiff class members by the Kansas statute [governing class actions] satisfies the Due Process Clause. The interests of the absent plaintiffs are sufficiently protected by the forum State when those plaintiffs are provided with a request for exclusion that can be returned within a reasonable time to the court.

In other words, under the right circumstances, a state court could certify a nationwide class. (Before CAFA, this holding had a huge effect on litigation, resulting in a flood of state-court nationwide class actions.)

But while the Court rejected Phillips's first challenge to certification, it gave more credence to the second. The plaintiffs made a number of arguments to try to keep all of the claims under Kansas law, among them that, essentially, Phillips had created a "common fund" in Kansas when it had delayed payments, and that the royalty owners all expected Kansas law to apply to their claims. The Court rejected each of these justifications, and held that:

Given Kansas' lack of "interest" in claims unrelated to that State, and the substantive conflict with jurisdictions such as Texas, we conclude that application of Kansas law to every claim in this case is sufficiently arbitrary and unfair as to exceed constitutional limits.

As a result, when courts today look at certifying nationwide classes based on state-law claims, they first engage in a choice-of-law inquiry to determine which laws should apply to each class members' claims. But even leaving aside this legacy of class-action choice-of-law rules (which, in itself would qualify Shutts as a "classic case"), there are a few other parts of the opinion that are still useful for modern class-action defense lawyers.

First, the Shutts Court's reasoning about the "expectation" of which law to apply is one that still has relevance, in particular, every time a plaintiff argues for imposing a single state's law to certify a nationwide class, particularly when arguing for applying the law of the defendant's home state.

Second, the Court helped to explain why it is that defendants often seem to be the only ones that care about the interests of absent class members; it's because of the way Rule 23 is structured:

The court and named plaintiffs protect [the absent class member's] interests. Indeed, the class-action defendant itself has a great interest in ensuring that the absent plaintiff's claims are properly before the forum. In this case, for example, the defendant sought to avoid class certification by alleging that the absent plaintiffs would not be adequately represented and were not amenable to jurisdiction.

(Emphasis added.) That's some handy language for the next time the plaintiff responds to a valid argument with rhetoric involving foxes and chicken coops.

In the end, Shutts is one of the more thoughtful opinions on how class actions can (and should be) tried. While it's often used solely as a quick citation supporting the need for a choice-of-law inquiry, Justice Rehnquist's opinion offers quite a bit more to the attentive defense attorney.

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The last few weeks have been exceptionally busy for appellate decisions involving class actions. In addition to Judge Easterbrook's In re Aqua Dots opinion, the Sixth Circuit's Pipefitters opinion, the Second Circuit's Literary Works opinion, and the Ninth Circuit's reversal of the Bluetooth settlement, the Third Circuit has offered up a pair of opinions involving predominance and common evidence. In one, Behrend v. Comcast Corp., a panel appeared to limit the reach of In re Hydrogen Peroxide on expert evidence, affirming certification of an antitrust case again the cable provider in part because it held that a Daubert inquiry is not necessary at class certification. In the other, Gates v. Rohm & Haas Co., a different panel affirmed the denial of certification of an environmental class action. In doing so, it appeared to follow Hydrogen Peroxide in requiring a "rigorous analysis" of expert proof, even if the parties themselves had stipulated no Daubert hearing would be necessary.

In general, Gates is an extremely useful opinion for defendants. Leaving aside its implicit analysis of the Daubert issue (which is likely to be hotly contested for some time to come), the Third Circuit made a number of other statements explaining just how difficult it can be to demonstrate either cohesiveness (for a Rule 23(b)(2) class) or predominance (for a Rule 23(b)(3) class).

I blogged about this case last year when the trial court denied certification. So, since it remains applicable, I'll repeat the factual summary from there.

Gates is an environmental case, in which the plaintiffs sued Rohm & Haas for polluting the water and air around Ringwood, Illinois with chemicals including vinylidene chloride, a known carcinogen. The plaintiffs sued for violations of CERCLA and state law, and sought damages for medical monitoring and damage to property. The proposed class action – like many environmental class actions – would turn on questions of causation, which can pose a number of thorny individualized issues in toxic torts. So, in addition to seeking damages, the plaintiffs sought an injunction compelling Rohm & Haas to set up a medical monitoring regime.

The district court refused to certify a class, finding that the Rule 23(b)(2) class lacked "cohesiveness" and the 23(b)(3) class lacked predominance. The plaintiffs appealed.  The Third Circuit affirmed. Among its holdings:

The "cohesiveness" requirement for Rule 23(b)(2) is more stringent than the predominance requirement for Rule 23(b)(3).

As all class members will be bound by a single judgment, members of a proposed Rule 23(b)(2) injunctive or declaratory class must have strong commonality of interests.

The Third Circuit also noted that

Commentators have noted that certification requirements under Rule 23(b)(2) are more stringent than under (b)(3).

The plaintiffs could not rely on proof of a composite, "average" class member to establish factual predominance.

Plaintiffs cannot substitute evidence of exposure of actual class members with evidence of hypothetical, composite persons in order to gain class certification. … Averages or community-wide estimations would not be probative of any individual's claim because any one class member may have an exposure level well above or below the average.

Nor could plaintiffs use regulatory standards as shortcuts for common proof.

Although the positions of regulatory policymakers are relevant, their risk assessments are not necessarily conclusive in determining what risk exposure presents to specified individuals. … Thus, plaintiffs could not carry their burden of proof for a class of specific persons simply by citing regulatory standards for the population as a whole.

In short, the Third Circuit came out definitively against using some of the various shortcuts plaintiffs have employed to convince courts to certify a class despite the lack of actual common proof. As both a taxonomy of these shortcuts, and an explanation of why they don't work, this is a good opinion for class-action defense lawyers to keep in their toolkit.

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 Superiority (which requires a court to find "a class action is superior to other available methods for fairly and efficiently adjudicating the controversy") is an often-overlooked area of Rule 23, perhaps because these days, it comes with a nice long, non-exhaustive list of factors to consider, including:

(A) the class members' interests in individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.

After all, what litigant (or court) doesn't love slogging through a nice long list?

But, nice long list aside, superiority is an extremely valuable tool in a class-action defense lawyer's kit. Why? Because, when you get down to it, superiority encodes an important policy choice into Rule 23: when a plaintiff is suing for money damages, a class action should not be the court's first choice for resolving the dispute. The court should look to see whether other ways of solving the problem (individual cases, government action) work first.  And it should also look to see whether the class action will do more harm than good.

One recent case, Pipefitters Local 636 Insurance Fund v Blue Cross Blue Shield of Michigan (6th Cir. 2011), illustrates just how useful the superiority requirement can be when wielded properly.

The plaintiffs in Pipefitters sued Blue Cross because, for three years, it had imposed a fee (called the "other-than group" subsidy, or OTG subsidy) on group health customers. The fee helped subsidize the care of out-of-group insureds, such as retired people living on fixed incomes. One of the key merits questions was whether Blue Cross had been acting as an ERISA fiduciary at the time it imposed the fee. Despite the fact that determining whether Blue Cross's fiduciary status required looking at its individual Administrative Service Contracts with each client, the trial court certified a class under Rule 23(b)(3).

Blue Cross appealed. And, in an unusual twist, it was joined by the Michigan Commissioner of the Office of Financial and Insurance Regulation, which filed an amicus brief explaining that certifying a class against Blue Cross could result in "significant, negative financial ramifications to Michigan's senior citizens" because a victory might result in the inability to subsidize older non-group insureds.

The Sixth Circuit reversed the certification on two grounds. Procedurally, it pointed out that the trial court had not based its opinion on sufficient facts. Substantively, it held that a class action was not superior in this case. Specifically, it offered three reasons why the proposed class action would not be superior. First, the proposed class was simply unmanageable.

[T]he district court here would be required to conduct individualized inquiries into the ASC terms and funding arrangements of each ASC customer. That means looking at the contract terms and funding arrangements of 550 to 875 class members. Given the necessary number of individual inquiries, a class action cannot be a superior form of adjudication.

Second, the potential damage awards were large enough to justify individual litigation.

[T]he potential damage awards do not support a finding of superiority. The Fund alone claimed damages in excess of $280,000, and the record indicates that the possible awards of other class members exceed this amount. These are not the types of awards that would preclude individual class members from seeking relief through litigation.

But most important (and most interesting),

The Commissioner contends that, as a result, if the case were to proceed as a class action, BCBSM would potentially be forced to stop collecting more than $100 million dollars annually, which could result in higher premium rates for insured customers or in a reduction in Medigap coverage and a dramatic increase in premium rates for Michigan's senior citizens. The serious financial repercussions to Michigan's elderly population further support a conclusion that a class action is not a superior method of resolving the Fund's allegation.

The Sixth Circuit justified this view by citing an old Third Circuit case, Katz v. Carte Blanche Corp., 496 F.2d 747, 760 (3d Cir. 1974), that had held that a court could consider whether the class action was good for the "public at large." There is a certain logic to this argument. After all, if class action plaintiffs' lawyers want to hold themselves out as quasi-public servants who supplement publicly-accountable attorneys-general, then it would make sense to look at the effect their actions have on the public at large.

So what can defense lawyers learn from this case? Never assume that a class action is the best way of resolving a dispute. Class-action critics have often complained that plaintiffs' lawyers file big cases without considering the bigger picture of how they will affect policy. Pipefitters indicates that courts may actually listen to those arguments.

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I don't often rush to post news of a new opinion, but when I open my inbox to find multiple emails telling me something new and big has happened, that's a different story. And yesterday, I had a number of people telling me about a new opinion out of the Seventh Circuit: In re Aqua Dots Products Liability Litigation.

Russell Jackson wrote about this case last year, when the district court issued its opinion. The case concerned a child's toy called Aqua Dots, which was basically colored beads that, when you added water, would fuse together into whatever design you had arranged. The problem was, Aqua Dots looked a lot like candy. So much so that some kids swallowed them, and were put into brief comas. As soon as Aqua Dots found out, they recalled the product. But, sure as Thanksgiving is followed by Christmas shopping, the recall was followed by a class action.

The District Court had a hard time understanding how a class action would be superior to the recall, so it declined to certify the proposed class on superiority grounds. The plaintiffs appealed. The Seventh Circuit affirmed the result in an opinion by Judge Easterbrook. As he put it:

It is hard to quarrel with the district court’s objective. The lower the transactions costs of dealing with a defective product, the better. The transactions costs of a class action include not only lawyers’ fees but also giving notice under Rule 23(c)(2)(B). Notice may well cost more, per kit, than the kits’ retail price—and could be ineffectual at any price, since most purchases were anonymous. The court can’t send each buyer a letter. Notice would be by publication, yet the recall was widely publicized. Why bear these costs a second time? The Consumer Products Safety Commission has not expressed dissatisfaction with the recall campaign or its results, and the record does not contain any evidence of injury to children after the recall was announced. Spin Master believes that most of the 400,000 kits not returned in the recall were used before the recall began and that few, if any, defective kits remain in consumers’ hands. Consumers whose children used their kits are not members of the proposed class, so a public notice of a class action could be expensive yet pointless.

(Emphasis added.) Despite Judge Easterbrook's initial sympathy, he took issue with the fact that the trial court had departed from the text of Rule 23. (While the judge had held that the class action was not superior, he had not identified what kind of adjudication it would be superior to. Judge Easterbrook held that the voluntary recall of Aqua Dots was a resolution, but not an adjudication.) And, as Judge Easterbrook pointed out, the Supreme Court has made it clear that the text of Rule 23 controls over any individual policy preferences:

A district court is no more entitled to depart from Rule 23 than it would be to depart from one of the Supreme Court’s decisions after deeming the Court’s doctrine counterproductive. Rule 23 establishes a national policy for the Judicial Branch; individual district judges are not free to prefer their own policies. The Court made this point twice in its most recent Term. See Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011); Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011).

(Emphasis added.)  Here's where the opinion gets really interesting. Because while Judge Easterbrook held that the trial court could not depart from the text of Rule 23, he found another textual source for the court's holding.

Instead of departing from the text of Rule 23(b)(3), the district court should have relied on the text of Rule 23(a)(4), which says that a court may certify a class action only if “the representative parties will fairly and adequately protect the interests of the class.” Plaintiffs want relief that duplicates a remedy that most buyers already have received, and that remains available to all members of the putative class. A representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests.

(Emphases added.)  In other words, when a plaintiff files a class action that basically duplicates a voluntary action that the defendant has already taken, she may not have come up with an inferior method, but she is an inadequate representative of the class, in part because she appears to be prizing her attorneys' best interests over those of the class.

I'd usually close up by asking how a defendant can use an opinion like this, but in this case I don't think I really need to add anything.

(Hat tip to Ted Frank and David Appelbaum.)

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 Culver v. City of Milwaukee dealt with allegations of race discrimination--specifically, a white man who claimed he had been denied a job application at the Milwaukee police department because it was not accepting white males the year he applied. The trial court certified his proposed class (which consisted both of white men who had allegedly been denied applications and white men who might have been passed over because of changes in exam scoring to favor minorities). A year later, Culver got a different job, with which he was content, thus mooting his claim. Five years after that, a different trial judge decertified the class because Culver was not an adequate class representative. Culver appealed.

Judge Posner began his opinion by noting that

The class action is an awkward device, requiring careful judicial supervision, because the fate of the class members is to a considerable extent in the hands of a single plaintiff (or handful of plaintiffs, when, as is not the case here, there is more than one class representative) whom the other members of the class may not know and who may not be able or willing to be an adequate fiduciary of their interests. Often the class representative has a merely nominal stake (Culver has no stake), and the real plaintiff in interest is then the lawyer for the class, who may have interests that diverge from those of the class members. The lawyer for the class is not hired by the members of the class and his fee will be determined by the court rather than by contract with paying clients. The cases have remarked the danger that the lawyer will sell out the class in exchange for the defendant's tacit agreement not to challenge the lawyer's fee request.

He then stated that Rule 23

tries to minimize the potential abuses of the class action device in two principal ways, first by insisting that the class be reasonably homogeneous, and second by insisting that the class representative be shown to be an adequate representative of the class.

In this case, the largest problem was that the two classes Culver sought to certify were mutually exclusive. White men who had received no job application at all would offer very different proof than those who had sat for an entrance exam, and then had their test scores changed after the fact. Oddly, Culver's counsel, rather than finding a representative of the second proposed class, insisted that both classes be represented by the same person. (This might have been, as Posner noted, because "no member of the class has any interest beyond that of a curious onlooker in pursuing this litigation.")

At this point, Posner became extremely candid:

For purposes of determining whether the class representative is an adequate representative of the members of the class, the performance of the class lawyer is inseparable from that of the class rep- resentative. This is so because even when the class representative has some stake (unlike Culver), it is usually very small in relation to the stakes of the class as a whole, magnifying the role of the class lawyer and making him (or in this case her) realistically a principal. Indeed the principal. When we said earlier in this opinion that “Culver has done nothing to move the case forward except to file a flurry of frivolous motions” and remarked “the lack of energy with which he [Culver] has performed his function of class representative” and that the courts and Congress had refused as yet to rule that “the requirement that a class action, like any other suit, have a plaintiff is to be dropped and the class lawyer recognized as the true plaintiff,” realists reading this opinion no doubt sniggered. All Culver's moves in this suit were almost certainly the lawyer's. Realistically, functionally, practically, she is the class representative, not he.

(Italicized emphasis in original.)  The Culver opinion has proven long-lived precisely because of this candor. In addition to providing a typically lucid explanation of why the adequacy requirement is so important (a fact that is often overlooked in the rush to certify classes or approve settlements), Judge Posner also explained, in simple terms, how class actions really operate. He unmasks the fiction that the named plaintiff is in any way in charge of a class-action lawsuit as just that--a fiction. A number of scholars, judges, and legal reformers have continually wondered what can be done to solve the so-called "agency problem" in class actions. In many ways, the Culver opinion reinforces that there is a simple, easily-enacted solution: enforce the adequacy requirement. If the named plaintiff is truly an adequate representative of the class, then we should not have to worry about whether or not he can stand up to his lawyer when her interests diverge from the class's.

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 Defendant class actions are rare beasts. Rule 23 clearly authorizes them, but plaintiffs rarely file them, and defense counsel rarely encounter them. (I've only seen one or two in the wild myself.)

An article by law professor Francis X. Shen that appeared in the Denver University Law Review, The Overlooked Utility of the Defendant Class Action, notes that only about 177 class actions have ever been reported. Professor Shen argues that this comparative rarity doesn't reflect a difficulty in using the device so much as it does a misunderstanding of its usefulness.

What is a defendant class action, anyway? Simply put, it's a class action where, instead of joining a number of plaintiffs with a single representative, the plaintiff joins a number of defendant with a single representative. A defendant class action has to meet the same Rule 23 requirements as a plaintiff class action. And therein lies the problem. A defendant class action requires an adequate class representative. And most defendants have no interest in serving as a representative for a class of similarly-situated defendants. A proposed representative that doesn't want the job is not adequate; a proposed representative that does want the job is arguably even less so.  Moreover, in a Rule 23(b)(3) class action, most defendants would likely exercise their right to opt out.

As a result, most defendant classes are brought under Rule 23(b)(1). (Professor Shen's empirical analysis confirms this, the largest group of defendant class actions were constitutional challenges, which could be brought under the "inconsistent rulings" provision of Rule 23(b)(1). These constitutional challenges also benefit from the fact that the defendants--usually government personnel--have a strong incentive to clarify certain rules about how they should act; they're not personally on the hook for damages.) And, because of the due process concerns involved with imposing injunctions against people who can't defend themselves, courts are very reluctant to certify defendant classes under Rule 23(b)(2).

Despite these crushing disadvantages, Professor Shen believes that the defendant class action would be useful in cases where coordinating defendants is difficult. As he puts it:

The crux of my argument is that it is more likely for this mid-size group to overcome collective action problems when they are on the defendant side. The reason for this logic is straightforward; on the defendant side, parties do not have to initiate the proceedings.

This analysis sounds odd enough--do defendants really suffer from collective action problems in cases like these? But when Professor Shen provides examples of what he means, it's clear that he's not really envisioning a Rule 23 class action as it exists under United States law. Professor Shen offers two hypothetical cases:

1. RIAA lawsuits against downloaders, and
2. securities class actions against corporations and corporate personnel.

The first hypothetical demonstrates the problem with trying to bring a Rule 23(b)(3) defendant class. What young music downloader wouldn't opt out of an RIAA class action given the chance?

As for the second hypothetical, Professor Shen believes it would enhance deterrence in cases of corporate misconduct:

To the extent that it was not just a few "bad apples," but instead is in part driven systematically by certain kinds of corporate cultures, we want a legal device that can possibly change those cultures. A defendant class action might do that. In operation, if future members of a firm knew that they could be held liable (as a defendant class member) for any harm caused by the firm, it seems more likely that they would stand up to their bosses when asked to do illegal tasks.

Of course, nothing currently prevents lawyers currently from naming many individual defendants in securities cases involving "certain kinds of corporate cultures." And other firm personnel already know they will suffer for any harm caused by the firm: they will lose their jobs, and have to explain their tenure at the previous firm when looking for more employment. By contrast, if they're sued for damages in a defendant class, what will prevent them from opting out of any additional liability?

Professor Shen views this as a "system design" problem. In other words, he argues for changing the rules of the defendant class action to allow for drafting defendants into a defendant class, possibly applying a presumption of liability against them to give them an incentive to litigate, and possibly assessing a "litigation tax" to make sure they contribute to the costs of defense. He does concede that

It remains to be seen, for instance, how the proposed tools of system design will hold up in practice.

Amen to that.

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Class definitions can be extremely difficult for plaintiffs. In addition to holding that merits-based class definitions cannot support certification, courts have begun to hold that some definitions are simply too broad. Overbroad definitions usually are symptomatic of other problems with the proposed class.

Want an example? Take the case of Kemblesville HHMO Center LLC v. Landhope Realty Co., 2011, U.S. Dist. LEXIS 83324 (E.D. Pa. Jul. 28, 2011). Kemblesville concerns the dispersion of methyl tertiary-butyl ether (MTBE), a gasoline additive that helps reduce harmful automobile emissions, but which can contaminate groundwater under the wrong circumstances.

In Kemblesville, the plaintiffs sued based on a theory that the presence of MTBE in a few sites surrounding a gas station diminished the value of property out to a 2,500-foot (roughly, half-mile) radius. (They referred to this as the "stigma class," because the reduced property values would come from the stigma of being located near the contamination.) The plaintiffs asked the court to certify a class of all property owners within that radius.

The court began by noting the burden plaintiff carries in arguing for certification, and the fact that "[t]he requirements set out in Rule 23 are not mere pleading rules."  It also articulated why overly broad class definitions are not a good idea.

"The class must be sufficiently identifiable without being overly broad. Overbroad class descriptions violate the definiteness requirement because they include individuals who are without standing to maintain the action on their own behalf."

(Emphasis added, internal citations and quotation omitted.) The plaintiffs tried to avoid any overbreadth by claiming that the relationship between the alleged contamination and the geographic boundary of their class was a "merits issue." (This was an extremely odd choice. A number of courts have held that a class definition is fatally flawed if it requires a determination on the merits to decide who is in the class. While technically, the only merits question here was whether the plaintiffs' "objective" definition was reasonable, invoking the specter of a merits inquiry still seems self-defeating.) Nevertheless, the court disagreed.:

Plaintiffs' proposed class includes properties simply because they exist, irrespective of any actual connection to Defendants' activities. The Court does not at this stage require Plaintiffs to adduce definitive evidence about the specific amount and effect of MTBE dispersion. However, to enable this Court to conclude that there is a reasonable relationship between the relevant MTBE release and the proposed class area, Plaintiffs need to adduce some evidence of dispersion that indicates MTBE may have traveled, or will ever travel, near a radius of 2,500 feet.

Finally, the court also found a numerosity problem that stemmed from the overbreadth of the class.

However, because this class definition is too overbroad, I cannot accept Plaintiffs' numerosity argument. Plaintiffs have failed to provide evidence that MTBE contamination is present throughout the class area.
…
According to Plaintiffs, many properties are in contaminated or soon-to-be contaminated areas. However, that estimate is purely speculative, and conclusory allegations do not satisfy Rule 23(a)(1)'s numerosity requirement.

(Emphasis added.)  So what can defense lawyers take from this ruling? Don't be afraid to challenge an overly broad class definition. Even if it looks "objective," if a class sweeps too many potential members in, determining who is actually entitled to relief will require individualized inquiries. That is not merely a problem with predominance or commonality; it can also be a problem with the definition itself.

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One of the key issues that many (including me) assumed would be resolve in Wal-Mart v. Dukes was the question of what kind of Daubert inquiry would be necessary at the class certification stage.

The 1993 case Daubert v Merrell Dow Pharmaceuticals, Inc., involved a challenge to the longstanding "general acceptance" test for scientific evidence articulated by the D.C. Circuit Court of Appeals in Frye v. United States. The litigation in Daubert concerned infants suffering from birth defects that allegedly resulting from their mothers' use of the anti nausea drug Bendectin. After extensive pretrial discovery, Merrell Dow moved for summary judgment because no evidence existed demonstrating Bendectin to be a human teratogen (that is, a substance that causes birth defects). Merrell Dow attached an affidavit by a toxicology expert stating that the scientific literature on Bendectin showed no teratogenic effects. The plaintiffs countered Merrell Dow's expert testimony with expert testimony of their own. Despite the conflicting testimony, the trial court granted summary judgment for Merrell Dow because the methods the plaintiffs' expert employed were not sufficiently established to receive general acceptance; the Ninth Circuit affirmed on appeal.

The Supreme Court held that the enactment of the "more liberal" Federal Rules of Evidence superseded the Frye "general acceptance test," and remanded the case. However, the Daubert Court offered the District Court further guidance. It ventured several "observations" to consider in determining the admissibility of scientific evidence that later courts have adopted as required, namely:

1. whether the methodology can be proven wrong (its falsifiability);
2. whether the method has undergone publication and peer review;
3. the method's known or potential rate of error; and even
4. whether the method enjoys general acceptance.

(Courts are also supposed to determine how well the evidence "fits" the subject matter, but they often enforce this prong less rigorously.)

Heading into the Supreme Court's opinion, there was a clear circuit split as to whether to engage in a full Daubert inquiry during class certification. The Fourth and Ninth Circuits (in Brown v. Nucor Corp. and Dukes) had held that a Daubert inquiry was premature at class certification. The Second, Third, and Seventh Circuits had held that a court should check the qualifications of any experts, including anything up to a full Daubert inquiry.

The Supreme Court declined to address the issue directly. But the majority opinion did strongly hint at how the issue should be resolved:

The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings. We doubt that is so.

(Internal citation omitted.)

Now, the Eighth Circuit has become the first appellate court to weigh in post-Dukes. And it has decided that the Supreme Court's hint was only a hint.

In re Zurn-Plex Plumbing Products Liability Litigation involved allegedly defective plumbing systems. (The brass fittings used to join pipes were allegedly ""doomed to leak within warranty" because of a phenomenon known as stress corrosion cracking.) The plaintiffs sued for breach of warranty, negligence, and violation of consumer fraud statutes. During the course of the pretrial litigation, the defendants moved to strike the testimony of two plaintiffs' experts. The trial court denied the motions, and then, based in part on those experts' testimony, it certified a Minnesota-only class for the negligence and breach-of-warranty claims.

The defendants appealed, but to no avail. The Eighth Circuit treated the Court's hint as dicta, and decided there was no reason to conduct at full Daubert inquiry at the certification stage. Instead, it held that the trial court's "focused inquiry" was sufficient:

The district court charted a middle course between the positions urged by the parties. After reviewing the evidence that had been produced, the court concluded that a full and conclusive Daubert inquiry would not be necessary or productive at this stage of the litigation, particularly since the expert opinions could change during continued discovery. The court instead conducted a focused Daubert inquiry to assess whether the opinions of Dr. Staehle and Dr. Blischke, based on their areas of expertise and the reliability of their analyses of the available evidence, should be considered in deciding the issues relating to class certification.

What does this mean for defense counsel? It means that the applicability of Daubert to certification proceedings is still a live issue. And that means that we are likely to see more expert evidence of questionable validity used to support certification motions. After all, in a class action, settlement--not trial--is plaintiffs' preferred endgame. And certified classes create "hydraulic pressure" to settle even questionable claims. So long as courts decline to test plaintiffs' expert testimony before certifying a class (particularly where it relates to the common issues in the class), plaintiffs will continue to use questionable testimony to buttress questionable claims.

(Hat tip to Jessie Kamens of BNA for drawing this case to my attention.)

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 There is no question that Wal-Mart Stores, Inc. v. Dukes will be the most-cited case in class-action practice for years to come. But before Dukes, Amchem Products, Inc. v. Windsor was the Supreme Court's definitive announcement of its interpretation of Rule 23 standards.

What's interesting about the case is that it involved a class-action settlement. The Windsor (before, Georgine) case was never supposed to be litigated. Instead, it was a settlement class. The proposed settlement class was a response to the asbestos litigation crisis (courts in the 1990s had been swamped by personal injury claims related to asbestosis), and was supposed to "achieve global settlement of current and future asbestos-related claims."

So, after a series of asbestos cases were consolidated, attorneys for both sides began negotiating a global settlement. As the Court described the proposed settlement document:

[I]t proposed to settle, and to preclude nearly all class members from litigating against CCR companies, all claims not filed before January 15, 1993, involving compensation for present and future asbestos-related personal injury or death.An exhaustive document exceeding 100 pages, the stipulation presents in detail an administrative mechanism and a schedule of payments to compensate class members who meet defined asbestos-exposure and medical requirements.

As one might expect, the proposed settlement drew a lot of objections from multiple sources. The objectors challenged the lack of an inflation adjustment (which meant that older claimants would be compensated less), the low compensation levels to many class members, and the inclusion of claims for medical monitoring. They also objected "strenuously" to the adequacy of the class representatives (not surprising, given the vastness of the class and the willingness to throw in just about every claim possible).

Despite the objections, the trial court approved the settlement. The Third Circuit reversed, based solely on the issue of certification. The settling parties appealed to the Supreme Court, which granted certiorari.

Given the number of issues at stake (the parties had sought certification under several provisions of Rule 23), the Court began with a number of definitive statements of class certification requirements. Among them, for Rule 23(b)(1)(A):

Rule 23(b)(1)(A) "takes in cases where the party is obliged by law to treat the members of the class alike (a utility acting toward customers; a government imposing a tax), or where the party must treat all alike as a matter of practical necessity (a riparian owner using water as against downriver owners).

And, for Rule 23(b)(3):

In the 1966 class-action amendments, Rule 23(b)(3), the category at issue here, was "the most adventuresome" innovation. Rule 23(b)(3) added to the complex-litigation arsenal class actions for damages designed to secure judgments binding all class members save those who affirmatively elected to be excluded.

(Internal citations omitted.) The Court noted that plaintiffs (and sometimes defendants) had become more inventive in their uses of the class action device over the years.

"In the decades since the 1966 revision of Rule 23, class-action practice has become ever more "adventuresome" as a means of coping with claims too numerous to secure their "just, speedy, and inexpensive determination" one by one. See Fed. Rule Civ. Proc. 1. The development reflects concerns about the efficient use of court resources and the conservation of funds to compensate claimants who do not line up early in a litigation queue."

The Court also held that settlement status was relevant to certification, but the fact that a case was settling did not mean that a court could ignore all of the Rule 23 requirements. Instead:

Confronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, see Fed. Rule Civ. Proc. 23(b)(3)(D), for the proposal is that there be no trial. But other specifications of the Rule--those designed to protect absentees by blocking unwarranted or overbroad class definitions--demand undiluted, even heightened, attention in the settlement context. Such attention is of vital importance, for a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold.

The Court then held that, in this case, the parties had been too adventuresome. On their own, the personal-injury asbestos claims required inquiries into causation for each injury that would predominate over any common issues. And, given the kitchen-sink nature of the claims the parties had included, the individual issues had only compounded. The court also found that the parties could not demonstrate adequacy. As it put it:

The adequacy inquiry under Rule 23(a)(4) serves to uncover conflicts of interest between named parties and the class they seek to represent.

In this case, ether was a clear, irreconcilable conflict between injured and exposure-only plaintiffs:

In significant respects, the interests of those within the single class are not aligned. Most saliently, for the currently injured, the critical goal is generous immediate payments. That goal tugs against the interest of exposure-only plaintiffs in ensuring an ample, inflation-protected fund for the future.

And, finally, the Court offered a suggestion that has yet to get any real traction:

The argument is sensibly made that a nationwide administrative claims processing regime would provide the most secure, fair, and efficient means of compensating victims of asbestos exposure. Congress, however, has not adopted such a solution. And Rule 23, which must be interpreted with fidelity to the Rules Enabling Act and applied with the interests of absent class members in close view, cannot carry the large load CCR, class counsel, and the District Court heaped upon it.

The proposal for an administrative solution to mass-tort claims like asbestos is an interesting one that deserves more discussion. And, in this Thursday's post, we'll look at one academic's efforts to address just that issue.

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 Sometimes, a case will come along that illustrates clearly a number of the different strategic choices that lawyers have to make when defending class actions. In Lightfoot v. District of Columbia, 2011 U.S. Dist. LEXIS 1983 (D.D.C. Jan. 10, 2011), a group of former District employees sued the District of Columbia, "challenging the policies and procedures that the District applied to terminate, suspend, and modify disability compensation benefits." (It appears they were largely represented by students at George Washington University, as well as lawyers from a prominent DC firm working pro bono.) Over the course of a decade of litigation (involving a number of dispositive motions, a certification hearing, and at least one trip to the DC Circuit Court of Appeals), the District of Columbia was able to whittle the case down to a single issue: whether the District had terminated disability benefits without proper notice.

Seven years before the current opinion, the trial court had certified a class of former District employees. It then ordered the parties to compile a list of the class members. The composition of the list (which at times included as many as 5,000 and as few as 500 members) became a large source of disagreement over the intervening five years, sparking discovery fights and at least one change in the class definition to exclude members who would be precluded from recovering by a recently-passed statute.

In 2007, the defendants moved to decertify the class. While the court denied the motion, it did order the parties to come up with a final class list, a process it admitted later "was a tortured one and consumed substantial time and resources of the parties and this Court." Once the list was completed, the plaintiffs filed a motion for summary judgment, which finally provided a clear picture of how they intended to prove their case. At that point, the defendants moved again to decertify the class, arguing that it was not bound together by common issues.

This time, the court agreed with the defendants. While it conceded that commonality was supposed to be a simple inquiry, it said that, in this case the inquiry had been complicated by plaintiffs' "amorphous" common issues. As the court put it:

Plaintiffs ... seek to conflate a wide variety of practices and impute them to the class as a whole by collecting them under a single, unilluminating umbrella of "systemic" failures. That is, lurking behind the rather vague and conclusory statement that Defendants had a "policy and practice of failing to provide members of the Plaintiff class Due Process" lies a wide variety of more discrete and particularized practices that could conceivably serve as the foundation for municipal liability.

...

This is because Plaintiffs have [the commonality inquiry] backwards. The question is not whether a constellation of disparate but equally suspect practices may be distilled from the varying experiences of the class; rather, Plaintiffs must first identify the "policy or custom" they contend violates the dictates of procedural due process and then establish that the "policy or custom" is common to the class.

(Emphasis added, internal citations omitted) There's certainly room to ask whether the district court could have reached some of these conclusions earlier. (And, at least for purposes of commonality, the Supreme Court's Dukes opinion might guide it going forward.) But the more important lesson here is that, if a defendant believes a class was wrongly certified, it makes sense to continue to challenge the certification ruling. Facts become clearer, laws and understandings of facts change.

So what can defendants learn from this case? There are actually three:

First, time is often on the side of the defense. The longer a class action takes, the longer a court has to acclimate itself to the various issues that make the case unworkable; also the more likely that external events (like the passage of a statute) will interfere with plaintiffs' original plan. But playing for time can come with heavy costs. It can involve complying with costly discovery, and engaging in extensive (and expensive) motions practice. Most defendants, particularly in the past few years, would prefer to resolve cases quickly than to wait around for something to happen that might help their case.

Second, motions practice is extremely helpful for class-action defendants. While plaintiffs will often argue that continued motions are designed to stall and harass, Lightfoot shows the real reason they're valuable to defendants: they continually expose the manageability problems in a class proposal that plaintiffs would prefer to gloss over until they've achieved a classwide settlement.

Finally, especially in the wake of Dukes, it is always worth challenging commonality. In the past, few class actions had progressed far enough for courts to see why commonality was an important requirement. But in the past few years, cases like this, Brown v. RJ Reynolds Co., and Dukes have painted vivid examples of the problems that occur when courts do not pay attention to commonality early in.

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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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 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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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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 As a class action lawyer (and one who defends class actions, no less), I often face the problem of explaining to friends and family exactly what I do all day. The cases themselves are often interesting, but the way we lawyers go about defending them--by mastering the arcana of one of the Federal Rules of Civil Procedure--can seem hopelessly dry. And that is why, at times, I have comforted myself with the (hollow, I admit) consolation that at least I'm not an ERISA lawyer.

Except, of course, that ERISA can spawn class-action lawsuits as well. Some simply challenge a plan administrator's decisions in administering employees' retirement benefits. But, more and more frequently, plaintiffs' lawyers are filing ERISA "stock-drop" cases, which go after the same alleged frauds challenged in securities class actions, but use ERISA plan beneficiaries as plaintiffs instead of individual or institutional investors.

The combination of Rule 23 and ERISA is enough to send many experienced lawyers into fits of anxiety or ennui, but Vanderbilt law student Lauren Fromme has bravely stepped in to explain the workings of the ERISA stock-drop suit in her comment "Unreliable Securities for Retirement Income Security: Certifying the ERISA Stock-Drop Class."

Let me say first, Fromme has written an outstanding student note, not so much for its final prescription (which I'll admit is intriguing), but for its careful exploration of a burgeoning trend in securities class actions. Fromme begins by identifying the key differences between a securities case and an ERISA stock-drop suit, namely:

First, most 10b-5 lawsuits are governed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which provides for an automatic discovery stay and heightened pleading requirements. Mirroring Federal Rule of Civil Procedure 9(b), the PSLRA requires that 10b-5 claimants plead "loss causation" and "state with particularity" facts creating a "cogent and compelling inference" that the defendants acted with intent to deceive. ERISA claims, however, are not covered by PSLRA, and Federal Rule of Civil Procedure 26 is the sole guidance for discovery. Without the additional requirements of PLSRA and Rule 9(b), ERISA plaintiffs need only plead facts creating a "plausible" inference of causal connection under Federal Rule of Civil Procedure Rule 8(a), making it easier to survive a motion to dismiss. Second, Rule 10b-5 plaintiffs must show that the defendants acted with scienter, which is a wrongful state of mind requiring at least a showing of recklessness, while ERISA requires only a showing of negligence. Third, Rule 10b-5 only allows for the recovery of damages as defined by the loss resulting from the defendant's misstatements. Remedies under ERISA, however, may exceed the plaintiffs' damages, including lost profits and other equitable relief restoring the benefit plan for losses. Finally, Rule 10b-5 defendants are defined broadly by their relationship to any fraudulent misstatements, while ERISA defendants must be plan fiduciaries.

(Emphases added, internal footnotes omitted)

As Fromme points out, the largest obstacle to certifying an ERISA stock-drop class is the treatment of the investors' reliance on the alleged misrepresentations. Reliance matters in ERISA suits (which seek restitution to a firm's retirement plan) because most plans are defined-contribution plans, rather than defined benefit plans. As a result, participants choose their own investments, and bear the risk of those investments working out or not. (Courts certify ERISA suits under all three subsections of Rule 23(b), but Fromme argues causation matters even in Rule 23(b)(1) or (b)(2) suits to the extent defendants can demonstrate that a representative plaintiff is atypical of the class because she relied on a misrepresentation no one else did.) ERISA suits are not suits under 10b-5, so it is unclear that the Basic rule that allows plaintiffs to presume reliance is in effect.

Fromme's proposal to fix this apparent contradiction is to require "some reliance":

the plan participants collectively in an ERISA section 502(a)(2) claim can be likened to a single plaintiff asserting a claim under Rule 10b-5. All of the plan participants might not rely on the fiduciary's misstatements, but as long as some participants rely there will be actual causation. This is similar to a single 10b-5 plaintiff, for example, who detrimentally relies in part on the corporate officer's misstatements, in part on her own intuition, and in part on the recommendations of a friend. As long as the plaintiff in this 10b-5 case can demonstrate the detrimental reliance on the material misstatements, her reliance on the other aspects of the security should not matter. Therefore, to establish liability in an ERISA section 502(a)(2) claim, all that the plaintiffs must show is that some of the plan participants relied on the material misstatements. Only some reliance will be enough to cause harm to the plan as a whole.

Fromme's proposal is interesting, although it raises some questions about how it would play out in practice. Does a plan participant who did not rely on a misstatement have standing to offer evidence of others' reliance? Will this create a greater focus on cherry-picking class representatives, which may raise adequacy problems? Nonetheless, this is an outstanding piece of student scholarship, and well worth a read by anyone who defends securities class actions.

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 In July 1969, General Telephone Company of the Southwest hired Mariano Falcon, a Mexican-American, as part of minority recruitment effort. Falcon maintained a good employment record until, "[i]n October 1972 he applied for the job of field inspector; his application was denied even though the promotion was granted several white employees with less seniority." Dissatisfied with being passed over, Falcon filed a charge with the Equal Employment Opportunity Commission, which promptly granted him a right-to-sue letter.

Falcon filed his lawsuit as a class action, alleging discrimination not just in General Telephone's promotion practices (sensible, since he had been passed over for promotion), but also in its hiring practices. After General Telephone responded to his interrogatories, Falcon moved to certify a class of all employees or potential employees. (This was an "across the board" challenge to Falcon's employment practices, a tactic that the Fifth Circuit allowed at the time.)

The trial court certified the class without conducting a hearing. It then conducted a trial of the liability issues, which resulted in a finding of that General Telephone had discriminated against Mexican-Americans in its hiring--but not its promotion--decisions. Both sides appealed the ruling; General Telephone because the hiring claim had been certified, and Falcon because his hadn't been.

The Supreme Court granted certiorari "to decide whether the class action was properly maintained on behalf of both employees who were denied promotion and applicants who were denied employment." In an 8-1 opinion , (Chief Justice Burger concurred in part and dissented in part), it held that the answer was "no."

Justice Stevens began his opinion by noting that

The class-action device was designed as an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only. Class relief is peculiarly appropriate when the issues involved are common to the class as a whole and when they turn on questions of law applicable in the same manner to each member of the class. For in such cases, the class-action device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [class member] to be litigated in an economical fashion under Rule 23.

(Internal quotations omitted.)

Justice Stevens's opinion primarily addressed the problem that Falcon's claim was not the cause of action certified for class treatment. As a result, he was an atypical class representative.

We have repeatedly held that a class representative must be part of the class and possess the same interest and suffer the same injury as the class members.

(Internal quotations omitted.)  In fact, Justice Stevens held

Conceptually, there is a wide gap between (a) an individual's claim that he has been denied a promotion on discriminatory grounds, and his otherwise unsupported allegation that the company has a policy of discrimination, and (b) the existence of a class of persons who have suffered the same injury as that individual, such that the individual's claim and the class claims will share common questions of law or fact and that the individual's claim will be typical of the class claims.

The Court also found that the trial itself showed class treatment wasn't appropriate.

Instead of raising common questions of law or fact, respondent's evidentiary approaches to the individual and class claims were entirely different. He attempted to sustain his individual claim by proving intentional discrimination. He tried to prove the class claims through statistical evidence of disparate impact. Ironically, the District Court rejected the class claim of promotion discrimination, which conceptually might have borne a closer typicality and commonality relationship with respondent's individual claim, but sustained the class claim of hiring discrimination. As the District Court's bifurcated findings on liability demonstrate, the individual and class claims might as well have been tried separately.

Falcon is particularly important right now given that the Supreme Court is deciding Wal-Mart v. Dukes. The composition of the Court has changed, so this case does not provide a guide to how the current Court will rule on Dukes. But both parties relied on Falcon in their briefing, so it is particularly important to remind ourselves how the Court has ruled in previous employment class actions. Just because the plaintiff has alleged discrimination does not mean that he has alleged a claim that can be established with classwide proof.

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Greg Mortenson turned a passion for mountain-climbing and an interest in helping the women of Central Asia into a multimillion dollar charitable foundation and a bestselling book. The book, Three Cups of Tea, tells the story of how his failed attempt to scale K2 (considered one of the hardest peaks in the world) led to his founding a charity to build schools in Central Asia.

But since the time that Mortenson's book hit the bestseller list, a number of people (including former supporter John Krakauer) have raised serious questions about whether Mortenson was telling the truth in Three Cups of Tea, and whether he has conducted his charity work properly. Last month, the CBS newsmagazine 60 Minutes aired a less-than-flattering segment on the controversy. Soon after that, a pair of Montana state lawmakers filed a class action against Mortenson and his charity, the Central Asia Institute. 

The complaint asserts claims for fraud, deceit, RICO violations, breach of contract, and unjust enrichment. Many of these claims are hard to certify. In particular, fraud-based claims (here, fraud, deceit, and RICO) will require individual proof of reliance for each class member.

What do I mean by "individual proof of reliance"? In this case, all one needs to do is look at the comments to the 60 Minutes article:

"I just started reading Three Cups of Tea a few weeks ago. None of what 60 Minutes is saying seems particularly shocking or surprising to me. For example, it probably does cost that much more to promote a book in the U.S. than it does to build 100 schools in Pakistan. I found the story to be engaging and inspiring, but also suspected all along that some of the facts were distorted to make the story flow better."

"After reading the book I was impressed that someone would have the courage and faith to do what he claims to have accomplished, even if only some of it is true, it was a remarkable acheivement. "

"While I had some caveats while reading Mr. Mortenson's book (3 Cups), I nevertheless am essentially disgusted by the assumptions and arrogance of outside entities (going in well after the fact) that expect all transactions and processes in places like mountainous Pakistan and Afghanistan to have proceeded along idealistic and unreal American "standards" - which don't exist, anyway. Who do they think they're kidding?"

"I'll reserve judgment on Greg Mortensen, at least for now. Success isn't permanent. Failure is not fatal. I'll continue to recommend his books for the lessons learned, and I'll wait to see how Greg Mortensen's legacy plays out."

Assuming each of these commenters bought the book they read, each one is a member of the proposed class. And none of these class members believe they were deceived. There are many reasons to buy a non-fiction book; some may be looking for the most truthful account possible of a story, but some may in fact buy a book knowing it's likely to contain bias or even outright falsehood. Whoever Mortenson's attorney is, she could spend some quality time harvesting comments like these to show that proving liability will require different evidence for each putative class member.

Moreover, the fact that this lawsuit was filed by a pair of Montana lawmakers implies that this lawsuit may be more about scoring political points than about repairing any particular damage. (Legislators have many, varied reasons for filing lawsuits, not all of which will line up with consumers' interests.)

It may be that the plaintiffs' lawyers here are not looking to certify a full class. Given the severity of the negative publicity that has attached to Mortenson, they're likely banking on turning the lawsuit into a quick settlement. Authors and publishing houses rely heavily on publicity for their marketing, which means that they're unlikely to want to risk too much bad publicity.

No matter how this lawsuit turns out, however, it forms the latest example of the literary class action--and we can certainly expect to see more of these in the future.

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I've talked before about the problem of circularity in securities class actions. Briefly put:

[A] securities class action takes money from the firm, and pays it to the shareholders, minus costs and attorneys' fees. The hitch is that the firm is owned by the shareholders, which means that the attorneys have just taken money from the shareholders' property and handed it to them directly, while taking a one-third cut for themselves.

At the time, I pointed out that while the circularity critique may suggest that securities class-acton plaintiffs are inadequate the moment they bring a lawsuit, courts were unlikely to give that argument much credit. Villanova professor Richard Booth, however, has authored a working paper that refines the argument, and shows why securities class actions may actually cause adequacy problems in language most courts will understand. Booth notes that there are two kinds of investors: diversified investors that actively manage their portfolios in some way, and more passive "buy-and-hold" investors. diversified investors are far less likely to buy and hold investments. Instead, they tend to be "actively managed," trading investments based on a number of factors in an attempt to beat the returns the market offers. Most importantly, even a diversified investor with a stable strategy will buy and sell individual stocks as it rebalances its portfolio. As a result, a diversified investor--and many, if not most, investors are diversified--is just as likely to gain from a securities fraud (selling the stock when its value is still inflated) as it is to lose. Under those circumstances, as Booth describes it, securities class actions operate as a redundant insurance policy.

Moreover, because the diversified investor has shielded itself from any large individual loss that comes from a buy-and-hold strategy, they are more likely to prefer derivative lawsuits to class actions. Why? Because in a derivative class action, the vast majority of the money recovered goes back into the corporation, rather than out to the original buyers of the stock. Booth also points out that attorney fees tend to be lower in derivative actions, effectively reducing the "lawyer tax" on any recovery. Or, as Booth himself puts it:

Undiversified investors are likely to favor class actions. Diversified investors are likely to oppose class actions and favor derivative actions. Although undiversified investors would not object to a derivative action in principle, they might object because the derivative recovery would reduce the class recovery. In other words, each group opposes what the other favors. Investors who stand to gain more from a class action will want their representative plaintiff (and lawyer) to maximize their claim by downplaying or indeed ignoring any evidence of derivative claims. The remainder of investors will want a zealous derivative plaintiff (and lawyer) to maximize derivative claims.

(Emphasis added)  Booth's working paper suggests three strategies for the lawyer defending a securities class action:

• Aim discovery at the plaintiff's investment strategy. If the plaintiff in a securities class action actively manages its assets, then it is far less likely to have suffered a significant loss. If it pursued a buy-and-hold strategy for the stock, it may not be an adequate or typical representative of those investors who more actively manage their assets. (Many defense lawyers already ask about investment strategy as a matter of course, but a reminder never hurts.)
• Argue derivative actions are superior to class actions. I've discussed superiority in securities class actions before, but Booth's analysis reinforces the point: a securities class action may not be the best way of recovering investment losses. In fact, a derivative lawsuit--because it generates less in fees and puts the money back into the corporation itself--offers natural advantages over a class action.
• Argue adequacy. One of the strongest strands of adequacy doctrine is the discussion of intra-class conflict. If the defendant can generate evidence that shows that the named plaintiff does not actually represent the investment strategies of a significant percentage of the class--and in fact may be actively undermining others' investment strategies--that is strong evidence that an irreconcilable class conflict exists.

These tactics are hardly radical; in fact, they're based on common sense about how people actually invest. Unfortunately, as the circularity critique highlights, common sense is not always so common in the realm of securities class actions.

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Many defense lawyers get particularly impassioned about adequacy in class actions; and I'm no exception. After all, adequacy ensures (or at least it is supposed to ensure) that a real plaintiff with a real injury--as opposed to lawyer with a LEXIS/NEXIS account and a hunger for fees--is bringing the case. In a recent article for the George Washington Law Review Texas Law Professor Patrick Woolley takes a look at adequacy from a different angle. He argues that when a court examines adequacy in a proposed class action, it should be looking at whether it has personal jurisdiction over the absent class members.

[W]hile considerations of efficiency and efficacy may play a role at the margins, personal jurisdiction is not about the efficiency and efficacy of litigation. Rather, as I discuss below, the law of personal jurisdiction imposes serious external constraints on the law of class actions to safeguard important legal values quite apart from the efficiency and efficacy of class litigation.

(Internal footnotes omitted) Professor Woolley's proposed reform is a stark one:

Absent class members should be deemed to waive their adequacy objections by failing to raise them in the class proceeding only if the class court (1) has authority to require absent class members to appear for the purpose of litigating their adequacy objections and (2) exercises that authority. Critics of collateral attack have often assumed that a class court with jurisdiction to hear the class claims has jurisdiction to bind absent class members on the adequacy of class representation. But as I explain in detail below, the class court has authority to require an absent class member to raise adequacy objections in the class proceeding on pain of waiver only if the class member has minimum contacts with the forum sovereign and has received process-like notice requiring an appearance. In the absence of these standard jurisdictional requisites, a class court has only "limited and conditional" jurisdiction over absent class members. In other words, "the court has power to enter a judgment against an absent class member on the basis of adequate representation, but no power to compel an absent class member to appear in the forum to contest adequate representation or anything else."

(Emphasis added, internal quotations and footnotes omitted.) Professor Woolley argues that a close reading of the Supreme Court's opinion in Phillips Petroleum Co. v. Shutts--the opinion that established that courts may exert jurisdiction over out-of-state class members if it affords them the right to opt out of a class--"makes clear that the Court never suggested that a failure to opt out is sufficient to establish jurisdiction."

This is not an abstract debate; if a class member was not adequately represented, she may bring a new lawsuit based on the same allegations. In effect, Professor Woolley is arguing for making class actions opt-in instead of opt-out. And adequacy plays a very important role in determining the preclusive effect of a class action. (In fact, when you get down to it, this is what many preclusion debates are about: was the opt-out procedure good enough in a given case?)

But while, in general, Professor Woolley's argument makes some intuitive sense, it leaves open too many questions about specifics. For example, what is "process-like notice"? And does Rule 23 really require "persuasive evidence" of consent to each class action? If class actions required consensus, they'd be next to useless for resolving large-scale judicial debates.

As a defense lawyer, I'm obviously sympathetic to the idea that absent class members should have a real role in class-action litigation: allowing for a more active role helps prevent the filing of class actions that exist only for lawyers to extract settlements from defendants. But if a court certifies a class, it specifically considers the adequacy of the class representatives, and it does so in its role as a fiduciary to the class. Beefing up the adequacy requirement at certification makes a great deal of sense. Doing so only on the back end means compromising the finality that that provides defendants with some benefit from the device.

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Lately, there's been a lot of discussion in the class-action world about commonality. Which is why it's so refreshing to see the Fifth Circuit take on a case where the defendants argued predominance under Rule 23(b)(3).

The case--Madison v. Chalmette Refining--is a toxic tort case. As Judge Edith Jones, writing for the Fifth Circuit, describes the facts, the Chalmette Refinery, which processes petroleum, released an amount of petroleum coke dust that migrated over to the nearby Chalmette Battlefield while a number of students and parents were watching a reenactment of the Battle of New Orleans. The parkgoers filed a class action, seeking damages for a variety of personal injury claims.

The trial judge orally granted plaintiffs' motion for class certification, without having heard any evidence. The defendant appealed. During the briefing period, the district court issued its written order offering some supplemental analysis explaining why it believed plaintiffs had met their Rule 23 burden.

The Fifth Circuit disagreed; its primary reason for doing so was that the plaintiffs had offered no specific facts to back up their claim that common issues predominated in the litigation. And, in her opinion reversing the trial court, Judge Jones provided clear guidance--worth quoting at length--about how specific a plaintiff must be when demonstrating predominance:

"Determining whether the plaintiffs can clear the predominance hurdle set by Rule 23(b)(3) requires district courts to consider "how a trial on the merits would be conducted if a class were certified." Sandwich Chef of Texas, Inc. v. Reliance Nat'l Ins. Indem. Co. This, in turn, "entails identifying the substantive issues that will control the outcome, assessing which issues will predominate, and then determining whether the issues are common to the class," a process that ultimately "prevents the class from degenerating into a series of individual trials." O'Sullivan. Determining whether the superiority requirement is met requires a fact-specific analysis and will vary depending on the circumstances of any given case.

...

In stark contrast to the detailed trial plans in Watson and Turner, the district court simply concluded that "[t]he common liability issues can be tried in a single class action trial with any individual issues of damages reserved for individual treatment." The district court failed to consider whether this case could be "streamlined using other case management tools, including narrowing the claims and potential plaintiffs through summary judgment, [or] facilitating the disposition of the remaining plaintiffs' claims through issuance of a [pre-discovery] order."

...

The court failed to identify "the substantive issues that will control the outcome, assess[] which issues will predominate, and then determin[e] whether the issues are common to the class." Bell Atlantic. Absent this analysis, "it was impossible for the court to know whether the common issues would be a 'significant' portion of the individual trials," Castano, much less whether the common issues predominate. The opinion is also silent as to the relevant state law that applies to Plaintiffs' claims and what Plaintiffs must prove to make their case."

(Emphasis added, internal citations reduced to hyperlinks.) Judge Jones's opinion is a strong reminder of a fundamental principle of class-action law: to get a class certified, plaintiffs must be able to explain how the class trial will proceed. Basic as this requirement is, it is the primary weakness of many plaintiffs' class certification motions.

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 In the last few years, statutory non-disclosure have become more common among class-action filings. They allow the plaintiffs to assert fraud-like claims that can arouse public (or judicial) sympathy, without necessarily having to worry about proving individualized reliance the way they would if they had alleged a common-law fraud claim.

A recent case, Noel v. Hudd Distribution Services, Inc., 2011 U.S. Dist. LEXIS 21480 (D.S.C. March 2, 2011), provides one tactical roadmap for defending against these kinds of claims. In Noel, the plaintiffs brought claims against a truck leasing company, claiming that it charged them for insurance premiums and certain cell phone charges without disclosing them first as required by federal law. True to form, the plaintiffs asserted a number of pseudo-fraud claims, couched as "disclosure" violations. In this case, those claims incldued:

1) declaratory judgment action seeking declarations from the court that defendants have violated the Truth-in-Leasing Act in multiple respects; 2) damages for Truth-in-Leasing Act violations (insurance charge-backs); 3) damages for Truth-in-Leasing violations (cell phone charge-backs); 4) injunctive relief; 5) breach of contract (insurance-charge backs); 6) breach of contract (cell phone charge-backs); 7) breach of the covenant of good faith and fair dealing; and 8) misrepresentation.

Faced with these kinda-sorta fraud allegations, the defendants took the plaintiffs' depositions. And they promptly discovered that the two named plaintiffs each would have difficulty proving that they had been even kinda-sorta defrauded by the alleged non-disclosure.

Yates stated that he read portions of the lease agreements but that he did not read the insurance-related appendix. Noel did read his leases and knew that Defendants were authorized to make certain insurance-related deductions from his compensation and how the number was calculated.

In other words, one plaintiff hadn't even read the section where the disclosure should have gone. The other had, and understood what the defendants were doing perfectly well. Neither of these plaintiffs could claim they were misled. One knew better, and the other didn't know enough.

As a result, the defendants opposed certification, arguing that--because they could not demonstrate that they had read or were misled by the allegedly fraudulent statements--the named plaintiffs were not typical of the remainder of the class. The court agreed.

Plaintiffs' testimony offers no basis to infer whether members of the absent class read their leases, understood the terms, or ultimately cared about those terms. Because Plaintiffs themselves cannot establish that they were misled or harmed by MDSI's allegedly deficient disclosures, they cannot claim to be typical of other class members they seek to represent.

So what can defendants learn from this case? First, always do the due diligence on a claim: serve interrogatories aimed at the elements of the claim, and focus in the deposition on how the named plaintiff will prove her claim. And second, don't forget to defend against the real claim in the case. Regardless of how much a plaintiff tries to mask it, if she is alleging a fraud case, she will still have to prove, in some fashion, the elements of fraud.

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It's a situation familiar to many class-action defendants: a plaintiff files a complaint with, say, ten causes of action. But, by the time the case reaches the certification stage, she's voluntarily dismissed nine of them--including the ones that actually address the alleged harm--in favor of an attenuated theory that she thinks stands the best chance of getting certified. (For example, a case that's clearly about fraud somehow morphs into a breach-of-contract case; or a tort case about an alleged safety defect becomes a breach-of-express-warranty case specifically disclaiming any future physical injuries.) No individual plaintiff in her right mind would assert this claim in an individual lawsuit; among other things, doing so would preclude her from later asserting her stronger claim. But this is, of course, not an individual lawsuit, it is a proposed class action.

Usually, defendants sigh and begin researching the caselaw on adequacy, preparing to argue that any plaintiff who would abandon perfectly logical (but not certifiable) claims in favor of a riskier streamlined claim is not doing her absent class members any favors. In fact, she is selling the potentially valid claims of her fiduciaries (the absent class members) in exchange for a chance at certification.

Now, Professor Edward F. Sherman of the Tulane Law School has proposed an alternative argument in his article in the George Washington Law Review, "Abandoned Claims” in Class Actions: Implications for Preclusion and Adequacy of Counsel.

Like many academic articles, this one isn't afraid of taking the long way around to get to its point. So it provides brief discussions of the Supreme Court's ruling in Cooper v. Federal Reserve Bank of Richmond, the Fifth Circuit's recent ruling in McClain v. Lufkin Industries, Inc., and a line of Texas state-law cases on preclusion. But, toward the end of the article, Professor Sherman begins to make some interesting points about preclusion and abandoned claims. Most notably, he recommends:

a court should make a determination as to whether the omitted claims are likely to be of importance to the class and whether the risk of preclusion is high enough to refuse certification. The practice of some plaintiffs' attorneys of shotgunning all possible claims into a complaint should not establish that none of those claims can ever be omitted or else there would be inadequate representation. Multiple causes of action can be repetitious and overlapping, and class counsel should have some leeway in structuring a class action to be the most efficient and effective vehicle to serve the interests of the class. In the cases that find that abandoning claims is inadequate representation, there are hints that courts are particularly concerned with strategic abandonment no matter how important those claims might be to some class members. Paring down a class action so that it can be certified should not in itself be considered inadequate representation. It is often in the interests of the class members to do just that, particularly where there is little likelihood, in the absence of a class action, that class members can and will pursue the claims in individual suits. In (b)(3) class actions, a certifying court is required to find that "a class action is superior to other available methods for the fair and efficient adjudication of the controversy," which includes whether the class members are interested "in individually controlling the prosecution or defense of separate actions." A similar determination that there is little likelihood that class members will want to sue individually on omitted claims might be required should class certification be opposed on the basis of abandoning claims.

(Emphasis added, internal footnotes omitted.) This reasoning suggests that perhaps defendants should try opposing plaintiffs who abandon claims on superiority, as well as adequacy, grounds. After all, if class members can do better by asserting individual lawsuits, then that's what they should be doing, rather than waiting for a class representative without an actual theory to recover on their behalf.
 

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 Last week, while the legal world was abuzz over the Supreme Court argument on Wal-Mart v. Dukes, Judge Posner was quietly putting the finishing touches on Randall v. Rolls Royce, which provides his own take on some of the same issues.

As in Dukes, the plaintiffs sought to represent a class of women who alleged gender discrimination under Title VII. As in Dukes, they alleged that, because they were women, they had received less money for comparable work, and were passed over for promotions within the company. As in Dukes, they sought certification under Rule 23(b)(2), while seeking monetary relief in the form of "back pay." However, unlike the Dukes plaintiffs, the Randall plaintiffs only sought to represent 500 women, so this was hardly "too big to certify." 

The lower court denied certification, holding that the plaintiffs had not demonstrated commonality, typicality, or adequacy (there were conflicts within the class), and that certification of a class seeking monetary relief was not appropriate under Rule 23(b)(2). So the plaintiffs appealed under Rule 23(f).

Judge Posner began his opinion by noting one of the strategic quirks about this Rule 23(f) appeal. Rolls Royce had solid defenses to most of plaintiffs' claims; so it would behoove it not to oppose certification, because in the very likely event a certified class lost, it would never face another gender discrimination claim from the class members for any conduct through 2011. Judge Posner also spent a paragraph on the plaintiffs' conflict of interest (one also present in the Dukes class): since some class members were in management they'd be defendants in other class members' claims.

Having dealt with those issues, Judge Posner turned to Rule 23(b)(2). As he noted:

Class action lawyers like to sue under that provision because it is less demanding, in a variety of ways, than Rule 23(b)(3) suits, which usually are the only available alternative.

So, like in Dukes, the question became whether the plaintiffs could seek certification under Rule 23(b)(2) when they were also seeking back pay. According to Judge Posner, they could not.

To read “injunctive” in the rule to mean “equitable” is to become mired in sticky questions of differentiating between “legal” and “equitable” actions—and such questions abound. See, e.g., Medtronic, Inc. v. Intermedics, Inc. We can avoid the mire by recognizing that Rule 23(b)(2) class actions are limited to cases in which “final injunctive relief or corresponding declaratory relief” is appropriate, rather than extending to all cases in which any kind of equitable relief is sought.

...

As this case illustrates: calculating the amount of back pay to which the members of the class would be entitled if the plaintiffs prevailed would require 500 separate hearings. The monetary tail would be wagging the injunction dog.

...

The proper approach in this case would thus have been for the plaintiffs to seek class certification under Rule 23(b)(3)—which requires full notice so that class members can opt out if they want to bring an independent suit for damages or other monetary relief—but to ask for injunctive as well as monetary relief.

The plaintiffs also argued, in the alternative, that they should be allowed to substitute new class representatives (using intervention under Fed. R. Civ. P. 24) should the court find the originals inadequate. But Judge Posner held that, in this case, that would not be an option.

It would go too far to suggest that unless substitution for the original named plaintiffs is sought as soon as a substantial challenge to certification is made, the district judge is justified in denying it. Such a rule might involve constant interruptions of the proceeding—procedural hiccups—as nervous class action counsel tried to add new class representatives every time the defendants raised an objection to certification. But it was obvious from the outset that these named plaintiffs faced a serious chal- lenge to their status as class representatives. And with the entire class in one location (a single plant in Indiana), class counsel had ample opportunity to sift through potential named plaintiffs before deciding on Randall and Pepmeier. Intervention shouldn’t be allowed just to give class action lawyers multiple bites at the certification apple, when they have chosen, as should have been obvious from the start, patently inappropriate candidates to be the class representatives.

With the exception of the substitution question, this case provides a possible road map for the Supreme Court's decision in Wal-Mart v. Dukes. Wal-Mart raised the same adequacy issues in its brief, and the same Rule 23(b)(2) arguments. Size of the class aside, the facts of the case are remarkably similar to the Dukes class. Whether the Supreme Court will follow that road map, of course, remains to be seen.

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Yesterday was the long-anticipated oral argument in Wal-Mart v. Dukes.  I've attached a copy here.  Overall, the Justices were clearly prepared for the argument, although they--like almost everyone else--had trouble keeping all of the facts straight.  A few highlights:

• Justices Ginsburg, Kagan, and Sotomayor took an early lead in questioning Ted Boutrous (who argued for Wal-Mart).  
• Boutrous was clearly having a good day.  He had command of almost all of the facts, and was able to subtly correct various Justices at different points when they got lost in the weeds.
• Justices Kennedy and Scalia each had problems with the coherence of plaintiffs' underlying theory.  As Justice Kennedy put it: "your complaint faces in two directions. Number one, you said this is a culture where Arkansas knows, the headquarters knows, everything that's going on. Then in the next breath, you say, well, now these supervisors have too much discretion. It seems to me there's an inconsistency there"
• Awarding "back pay" under Rule 23(b)(2) seemed to cause most Justices heartburn.  Justice Ginsburg called it "a very serious problem in this case."  
• Several Justices, including Sotomayor and Scalia, had trouble accepting the legitimacy of the proposed statistical proof.

So where does that leave the case?  The "more question" rule doesn't provide much guidance in this case.  But it does appear that the Justices were wrestling with the questions of how to prove commonality and whether 23(b)(2) certification is appropriate.  If I had to predict, I'd say that Wal-Mart's probably in better shape than the plaintiffs at this point.  Of course, we'll find out in June.

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King Architectural Metals manufactured metal building components, which it needed to sell. It made the mistake of faxing an advertisement to CE Design. It probably seemed like a good idea at the time. CE Design was a small, Chicago-area civil engineering firm, and it had checked a box in the Blue Book of Building and Construction (a directory of building-industry firms) that indicated it was OK to contact it with advertisements. But it also had a sideline in Telephone Consumer Protection Act class actions. It filed at least 150 of them, and its president had testified in at least 20 of those.

In the course of his deposition in the case, the company president (John Pezl) testified that he had not authorized King to contact CE Design; hard to believe given the Blue Book listing. So King opposed class certification on the grounds that CE Design was not typical of class members who had not consented, and that the discrepancy in Pezl's testimony made him an inadequate class member.

The district court certified the class anyway, so King appealed to the Seventh Circuit, which reversed. Judge Posner wrote the opinion. In doing so, he focused in on one requirement that does not get much attention--typicality--and one that does--adequacy. And he explained the importance of enforcing the typicality requirement:

A class is disserved if its representative's claim is not typical of the claims of the class members, for then if his claim fails, though claims of other class members may be valid, the suit will at the least be delayed by the scramble to find a new class representative. Alternatively, a class representative's atypical claim may prevail on grounds unavailable to the other class members, leaving them in the lurch.

He also explained why credibility is important to a named plaintiff's adequacy.

A named plaintiff who has serious credibility problems or who is likely to devote too much attention to rebutting an individual defense may not be an adequate class representative.

CE Design's Blue Book listing made it atypical of class members who had not consented to communication by fax. And Pezl's inconsistent testimony compounded the problem, ensuring that any classwide trial would focus on his credibility rather than the claims of the class.

While the opinion is helpful for challenging adequacy and typicality, Judge Posner did end the opinion with a warning note for defendants.

We don't want to be misunderstood, however, as extending an invitation to defendants to try to derail legitimate class actions by conjuring up trivial credibility problems or insubstantial defenses unique to the class representative. Serious challenges to typicality and adequacy must be distinguished from petty issues manufactured by defendants to distract the judge from his or her proper focus under Rules 23(a)(3) and (4) on the interests of the class, as emphasized in Dubin v. Miller, 132 F.R.D. 269, 272 (D. Colo. 1990), where the judge, while decertifying the class, remarked that "few plaintiffs come to court with halos above their heads; fewer still escape with those halos untarnished. For an assault on the class representative's credibility to succeed, the party mounting the assault must demonstrate that there exists admissible evidence so severely undermining plaintiff's credibility that a fact finder might reasonably focus on plaintiff's credibility, to the detriment of the absent class members' claims."

Warning aside, the opinion is still useful for defendants.  It provides clear explanations of the typicality requirement and the "unique defense" aspect of both typicality and adequacy.  This is why the deposition of the named plaintiff is so important: it allows the defendant to determine whether it's worth taking the risk to challenge the named plaintiff's credibility.  

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A group of Florida landowners sued Raytheon Company, accusing it of contaminating their groundwater by improperly disposing of hazardous waste. The plaintiffs put up an expert who testified that he could construct a statistical model that would demonstrate liability and damages on a classwide basis.  Raytheon put up its own experts, who argued that plaintiffs' method of defining the affected area was not consistent with "applicable professional standards," and that their expert's statistical method was unsound as well.  

The district court threw up its hands.  Declaring 

[i]t is not necessary at this stage of the litigation to declare a proverbial winner in the parties' war of the battling experts or dueling statistics and chemical concentrations

it certified the proposed class, and left the Daubert question for trial.

Raytheon appealed.  The Eleventh Circuit--in an opinion not designated for publication--reversed the trial court. Its primary reason to do so was 

Here, in its Rule 23 analysis, we find that the district court erred as a matter of law by not sufficiently evaluating and weighing conflicting expert testimony on class certification. It was error for the district court to decline to declare a proverbial, yet tentative winner. The Plaintiffs are required to prove, at the class certification stage, more than just a prima facie case, i.e., more than just a pretty good case.

Here the district court refused to conduct a Daubert-like critique of the proffered experts's qualifications. This was error. As we have noted, a district court must make the necessary factual and legal inquiries and decide all relevant contested issues prior to certification. The district court has not determined facts, from the often conflicting evidence, sufficient to determine whether class certification is or is not appropriate. The court erred in granting class certification prematurely. Tough questions must be faced and squarely decided. Such tough questions were side-stepped by the district court in this case. That was error.

The Eleventh Circuit remanded the case for further proceedings, and declined to express an opinion about whether certification would ultimately prove appropriate.  

It's interesting that the Eleventh Circuit has chosen not to publish the opinion.  It relied heavily on the Seventh Circuit's opinion in American Honda Inc. v. Allen, and this ruling aligns it with the Second and Third Circuits as well. And this opinion would put the Eleventh Circuit opposite the Ninth's opinion in Dukes v. Wal-Mart.  Since the Supreme Court is hearing that case next week, it's entirely possibly that, rather than picking a winner itself, the Eleventh Circuit decided to hedge its bets.

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If you'll forgive the second piece of self-promotion in a week: the Washington Legal Foundation (which keeps the always-interesting Legal Pulse blog) has just published a Legal Opinion Letter evaluating several of the arguments in favor of overturning the 9th Circuit's Dukes v. Wal-Mart decision, written by yours truly.  

I'll be participating in a briefing for the WLF on this issue in a few weeks (specific details when I get them), and another one a few days later for the American Constitution Society.   

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See, here's the thing. Russell Jackson stole my case. The Seventh Circuit decided an important case on the limits of Rule 23(b)(2)--Kartman v. State Farm Mutual Auto Ins.--and I set it aside to blog about today. But Jackson's great writeup covers everything I wanted to.  

And here's the other thing. There have been a lot of good writeups of class actions lately.  To wit:

• Drug & Device Law reported on Sergeant Benevolent Ass'n Health & Welfare Fund v. Sanofi-Aventis U.S. LLP in the Eastern District of New York.  The court denied certification to a RICO class because proof of reliance would be too individualized.  
• Jackson also wrote up a case in the Eastern District of Pennsylvania, Powers v. Lycoming Engines, that held that applying the law of a manufacturer's residence to a multi-state class action violated due process.  
• Gilbert Brosky of the Employment Class Action Blog reports on a decertification of an FLSA class action of Home Depot assistant managers based on the variations among managers' duties.  
• And Paul Karlsgodt reviews a recent article on whether class-action notices comply with Rule 23.  (Many of them don't.)

I usually don't like just to point you to what other people have written on class actions (that's what my Twitter feed is for).  But every once in a while, it's worth taking one post of mine to point out a bunch of really good posts by others.

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2011 has produced a number of class actions that have caught the attention of the news media. The class action against Taco Bell, for example, made headlines for the innovation involved in the defendant's PR strategy. The class action against former President Carter capitalized on a novel theory and a famous defendant. Now, a plaintiffs' firm has brought a lawsuit against the Dallas Cowboys on behalf of those ticketholders who didn't get the seats they thought they would at the Superbowl. This appears to be a PR-based class action, much like the ones against Taco Bell and Jimmy Carter. What does I mean by that? Much of the value of each of these lawsuits comes from the threat of adverse publicity rather than the risk of certification. And this case is no exception.
To bring this lawsuit, the plaintiffs had to argue that the NFL's apology offer (triple the ticket price) wasn't enough to make them legally whole. And that creates a number of problems for certifying that class. Based on the Amended Complaint [UPLOAD here are a few:

• Plaintiffs who overpaid for their tickets are suing the wrong people. One of the plaintiffs' complaints is that they paid far more than the ticket price for their tickets. That means they bought from scalpers. So a court will likely find the NFL's refund of triple the ticket price to be more than fair. If the class member paid more than that, he needs to talk to his hookup. (This hurts their two breach-of-contract claims, it also hurts their fraud claims.)
• The plaintiffs are seeking the wrong damages for a class action. They claim in the complaint that this includes travel costs to the Superbowl, and "disappointment and frustration." But the law does not usually award these kinds of damages for breach of contract claims. (The technical term for these kinds of damages is "consequential damages.") And, if it did, it would require the kind of individualized proof (how disappointed was each person) that makes a class action very hard to try. If they just want the ticket price, well, the NFL has already offered three times that.
• Courts don't like fraud class actions. Class actions need common proof. Most fraud cases can't provide that. Instead, to prove fraud, you have to prove that you personally relied on a false statement. Proving that reliance is next to impossible on a classwide basis, which is why most courts do not certify fraud claims.
• Rich ticketholders don't make great class-action plaintiffs. Class actions exist to protect the little guy. They're supposed to aggregate a lot of small claims that people could not bring on their own. But here, plaintiffs like Mr. Dolabi may be out as much as $100,000 (the price he paid for his seat license). If he stayed at a hotel, it likely wasn't a Motel 8. These guys aren't the little guys, these are the guys who spend literally tens of thousands of dollars on football tickets. They can afford to bring their own lawsuits, may compromise their ability to demonstrate superiority.

Based on several news items, it seems clear that plaintiffs' counsel is looking for a quick settlement. But a quick settlement tends to favor the lawyers rather than the class. If there is a settlement in this case, it will be interesting to see how much it improves on the original offer that the NFL made.

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 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.

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On Tuesday, the Supreme Court heard argument in Smith v. Bayer Corp. The argument featured very active participation by the justices. The argument  featured several very interesting moments:

Plaintiffs' argument focused primarily on whether a collateral estoppel ruling on class certification deprives putative class members of due process.

JUSTICE SOTOMAYOR: [Y]ou're really arguing that due process requires the same treatment, essentially, of notice and an opportunity to be heard that we are giving to a substantive decision that blocks a future member from pursuing his or her claim, correct?
MR. MONAHAN: Yes, very similar, Your Honor. I mean, in this circumstance -- I mean, these rights are provided. These procedural rights, once they are created, are being provided, and they can't be taken away without due process.

Justice Sotomayor exhibited some realism about the stakes of the case.

MR. MONAHAN: Well, this particular procedural right is very closely connected -- I mean, one of the main purposes of a class action is to level the economic playing field and to enable people with small individual claims to aggregate them in order to seek justice. Without those --
JUSTICE SOTOMAYOR: Actually not true. The 16 plaintiff here received the same thing. The issue is how much money the lawyers are going to receive, really, because plaintiff gets their attorney's fees, gets a statutory violation amount, which is going to be the same whether it's in a class action or an individual action, so it's really not the plaintiff who stands to win.

The defendant drew a smart distinction between individualized liability and individualized damages.

JUSTICE KAGAN: If you look at Rezulin, if you compare to it some Eighth Circuit cases, there seems to be a difference in at least tone, shall we say, about the extent to which a finding is required that common issues predominate.
MR. BECK: I think that, actually, Judge Davis took into account the difference in tone, and he 8looked very carefully at Rezulin, and he said that what Rezulin was focusing on was individual questions of damages, which defendants often argue is enough so that individual questions predominate, individual questions of reliance, which we also often argue mean that individual questions predominate. But he said this is different, because this is, in order to prove liability, they've got to establish individual injury, which means, on a person-by-person basis, either that they were harmed by the drug or that the drug didn't work to lower their cholesterol as -- as it was supposed to, and they have to show that whatever the violation of the Consumer Fraud Act was is causally linked there.

Plaintiffs often try to characterize questions of liability as questions of damages, so that they may invoke precedent that says individualized damages questions don'y necessarily preclude certification. Defense counsel provides a textbook response to this common tactic.

Justice Kagan posed an interesting question about whether the Anti-Injunction Act should apply to class certification decisions.

JUSTICE KAGAN: Mr. Beck, the relitigation exception of the Anti-Injunction Act speaks in terms of judgments. Why is the denial of class certification a judgment?

In Baycol, the order denying class certification also granted summary judgment, so this question was not an issue. But this may be a question in other cases. There are arguments on both sides. An order denying certification does not technically end the case, but it may effectively do so.

As several commentators have already noted, it's very difficult to predict how the Court will rule in a given case, although the question rule would predict a decision for Bayer.  The opinion will be out later this term.

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 I hope everyone had a good Martin Luther King Day. Given the holiday, it seemed appropriate to highlight another classic case: Hansberry v. Lee. 

Oddly, given its importance to class actions litigation, Hansberry is not a class action itself. The case arose out of a restrictive covenant barring African-Americans from buying land in certain areas of Chicago. The Hansberries, an African-America family (which included future Raisin in the Sun playwright Lorraine Hansberry) moved into a neighborhood governed by the covenant. The Lees sued, arguing that 95% of the homeowners in the neighborhood had signed the restrictive covenant. The Hansberries challenged the 95% number. When the Lees argued that the fact was res judicata from another suit (Burke v. Kleiman, 277 Ill. App. 519.), the Hansberries replied that they had not been parties to that lawsuit. The Illinois Supreme Court held that the Burke case was a class action, and so the Hansberries should be bound by its ruling. The Hansberries appealed to the US Supreme Court.

The Supreme Court began its opinion by reasoning that

It is a principle of general application in Anglo-American jurisprudence that one is not bound by a judgment in personam in a litigation in which he is not designated as a party or to which he has not been made a party by service of process. A judgment rendered in such circumstances is not entitled to the full faith and credit which the Constitution and statute of the United States, and judicial action enforcing it against the person or property of the absent party is not that due process which the Fifth and Fourteenth Amendments require.

(Internal citations omitted.) The only exception the Court identified was the emerging equitable doctrine allowing for class lawsuits. And, since the Illinois Supreme Court had called Burke a class action, the Court asked just what makes a class action binding on subsequent parties.

It is familiar doctrine of the federal courts that members of a class not present as parties to the litigation may be bound by the judgment where they are in fact adequately represented by parties who are present, or where they actually participate in the conduct of the litigation in which members of the class are present as parties, or where the interest of the members of the class, some of whom are present as parties, is joint, or where for any other reason the relationship between the parties present and those who are absent is such as legally to entitle the former to stand in judgment for the latter.

(Internal citations omitted.) Given those criteria, the Court held that Burke did not constitute a class for litigation purposes.

It is one thing to say that some members of a class may represent other members in a litigation where the sole and common interest of the class in the litigation, is either to assert a common right or to challenge an asserted obligation. It is quite another to hold that all those who are free alternatively either to assert rights or to challenge them are of a single class, so that any group, merely because it is of the class so constituted, may be deemed adequately to represent any others of the class in litigating their interests in either alternative. Such a selection of representatives for purposes of litigation, whose substantial interests are not necessarily or even probably the same as those whom they are deemed to represent, does not afford that protection to absent parties which due process requires.

(Emphasis added, internal citations omitted.) So what can class action defense lawyers take from this case? The purpose of the adequacy requirement is to ensure that the class has been represented well enough that it may be bound by the judgment. Plaintiffs' lawyers--and plaintiffs--often lose sight of that purpose; instead they argue that adequacy is satisfied so long as there are no glaring conflicts. But that's not the case. Adequacy requires a searching inquiry because that is the best way to protect the interests of the class.

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Last Friday, the Supreme Court granted certiorari in Archdiocese of Milwaukee Supporting Fund, Inc. v Halliburton Co. This is the fourth certiorari grant this term for a class action.

So what's the issue in this case? Loss causation. In securities cases, plaintiffs are often allowed to rely on a theory called "fraud on the market," which requires the court to presume that shareholders relied on any false information that was introduced to an efficient securities market. The "fraud on the market" theory is a powerful tool for class action plaintiffs. When applied, it makes certification of a class much easier than otherwise.

Since certification changes the litigation (making it far more likely that a defendant will settle a meritless claim), the Fifth Circuit has held that a plaintiff must prove "loss causation" (that the alleged falsehoods, once revealed, actually caused the stock price to fall) by a preponderance of the evidence before a court may certify a class. (The Fifth Circuit has not gone rogue on this issue: the Supreme Court has issued several opinions on loss causation over the last five years.) On its face, it's a reasonable doctrine. Loss causation forms the basis of many strong securities class actions. (Indeed, former plaintiffs' lawyer Bill Lerach had boiled the theory down to a chart he would pull out in settlement discussions.)

In Archdiocese of Milwaukee Supporting Fund, Inc., the Fifth Circuit was faced with a securities case against energy conglomerate Halliburton. The plaintiffs had alleged that a number of misrepresentations -- including an understatement of asbestos litigation liability and an overstatement of the benefits of a merger -- had artificially inflated the price of Halliburton's stock; once they were revealed, the plaintiff shareholders lost money.

In the district court, Halliburton had opposed certification (and won) by arguing that the plaintiffs had not met their burden of proving loss causation, because Halliburton had disclosed a number of negative news items at the same time as it revealed that it had misrepresented the information the plaintiffs had pointed to. As a result, the plaintiffs could not prove that the misrepresentations had caused the stock to drop.

The plaintiffs appealed, arguing that they should not have to prove fraud at certification, but the Fifth Circuit affirmed the trial court.

Plaintiff argues that the district court misapplied our precedent, how ever, because it incorrectly required Plaintiff to prove actual fraud at the class certification stage. Plaintiff asserts that this requirement runs afoul of our recent decision in Flowserve. We do not agree with the Plaintiff's reading of Flowserve or its characterization of the district court's opinion.

...

Even if it were possible to say that the prior statements were more than erroneous expectations, both the October 4, 1999 announcement and the analyst reports contained multiple pieces of negative news. This required Plaintiff to "demonstrate that there is a reasonable likelihood that the cause of the decline in price is due to the revelation of the truth and not the release of the unrelated negative information." This showing of loss causation is a "rigorous process" and requires both expert testimony and analytical research or an event study that demonstrates a linkage between the culpable disclosure and the stock-price movement." That's what plaintiffs didn't do.

(Internal footnotes omitted.)  

At this stage, before the parties have briefed the issues, predicting what the Court will do is next to impossible. But it's worth noting that the "loss causation" doctrine has drawn fire from a number of academics as requiring a decision on the merits at certification. And the degree to which a court may inquire into the merits of a class action at certification has proven controversial over the last decade. Given the Court's interest in this issue, however it chooses to clarify the standard, it will have a large effect on securities class actions. Stay tuned.

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 When the Supreme Court granted certioriari in Dukes v. Wal-Mart Inc., the Vanderbilt Law Review grabbed a number of law professors who study mass torts and asked them to contribute essays to its En Banc feature. One of these--Richard Nagareda's Common Answers for Class Certification--was one of the most interesting articles published in 2010. Several of the other contributions also posed some interesting questions, among them Alexandra Lahav's The Curse of Bigness: The Optimal Size of Class Actions. 

Lahav doesn't really address the question she asks in the title; she offers no verdict on the optimal size of a class action (unless the answer is "as big as you can make them"). For the most part, she focuses on how courts could use the promise of probabilistic evidence to justify certifying classes for litigation. But the introduction to her essay poses an interesting rhetorical issue: when arguing about class actions, does the size of the lawsuit matter?

There's no question that many press outlets, when covering Dukes, focused on the fact that it was the largest civil-rights lawsuit to be certified.  After all, the size of the lawsuit is something the average reader understands immediately. And there is no question that courts often call attention to the size of class actions, both when granting certification and when denying it.

As Lahav correctly points out, there is no doctrinal limit on how large a class action may grow. (Rule 23(a)(1)--the numerosity requirement--does establish on how small one may shrink.) Instead, most lawyers use size as a proxy for one of the other Rule 23 requirements. Plaintiffs use the size of the class to bolster their arguments that a class action is superior to other forms of resolving a given dispute. For example, as the the Fifth Circuit put it in Jenkins v. Raymark Industries, when a class is large enough, it may be

superior to the alternative of repeating, hundreds of times over, the litigation of the state of the art issues with, as that experienced judge says, ‘days of the same witnesses, exhibits and issues from trial to trial.’

Defendants, on the other hand, often use size as a shorthand for heterogeneity (as they did in Dukes). As Lahav puts it:

The statements about the size of this class action appeal to an intuition that the court’s ability to provide individualized justice is inversely proportional to the size of the class action.

And, to the extent that a larger class is more likely to encompass various different kinds of claimants, that rhetoric can be useful. Defendants also may point out that the larger a class is, the more likely that it may pressure defendants into settling claims that have no merit, just to avoid the possibility of ruinous liability.

So does the size of a class matter? It depends on why the party is invoking it.

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 Since it's the end of the year, it's worth taking a look back at what were the most significant class-action decisions of 2010. What do I mean by significant? A significant case does not have to be well-reasoned, or pro-defense, just one that will have an effect on class-action practice. Some of these are not cases I wrote about, either because I was conflicted out of doing so, or someone else got there first and said what I would have said. Also, the decision itself had to be a significant one, which is why Concepcion v. AT&T (which is important primarily because the Supreme Court has decided to review it) is not on the list this year. It will almost certainly qualify in 2011. This year, the cases are, in no particular order:

1. Morrison v. Australian National Bank (S. Ct.) -- Before the Supreme Court's opinion, it was unclear whether a plaintiff with no connection to the United States could still bring a class action in a US court. Now, this burgeoning and lucrative sideline of cases is likely extinct.
2. Shady Grove Orthopedic Assocs. v. Allstate Ins. Co. (S. Ct.) -- In this case, the Supreme Court decided a comparatively narrow question: do state statutory class-action bans trump Rule 23? Nonetheless, the strong language the Court used in deciding Rule 23 wins out over state statute--in particular its analysis of the Rules Enabling Act--has broader applications.
3. Dukes v. Wal-Mart Inc. (9th Cir.) -- In affirming certification of a large, diverse class of women who claim to have suffered sex discrimination, the Ninth Circuit placed itself at the center of a number of debates about class-action procedure. The popular characterization that the class was "too big to certify," while technically inaccurate, does capture a number of the criticisms of the Ninth Circuit's opinion. And the decision also prompted a strong academic response.  Now that the Supreme Court has granted certiorari, this case will likely also be one of the most significant decisions of 2011.
4. Cappuccitti v DirecTV (11th Cir.)  -- When a panel of the Eleventh Circuit originally held that at least one class-action plaintiff must assert a claim exceeding $75,000 even for removal under the Class Action Fairness Act, both plaintiffs and defendants scratched their heads. The panel quickly corrected itself, but the case is still significant for two reasons: (1) it completely clarified CAFA's reach, and (2) it strengthened the legitimacy of the federal courts in ruling on class-action issues.
5. In re Mercury Interactive Corp. (9th Cir.) -- Objectors play an important role in keeping class settlements honest. As a result, they are often viewed as an obstacle by plaintiffs, defendants, and courts that are trying to clear a complex case off a court's docket. The Ninth Circuit's opinion in this case confirmed that Rule 23(h), which allows for a right of objection, has teeth, and may not be abrogated by scheduling a hearing to preclude knowledgeable objections.
6. In re Gilden Activewear Securities Litigation (S.D.N.Y.) Judge Baer's order requiring that class counsel field a racially and sexually diverse litigation team drew strong criticism from a number of circles, but also took plaintiffs' claims to litigate on behalf of the public to their logical conclusion. While Judge Baer found counsel adequate in this case, he has opened a new debate on what it means to be "adequate class counsel."
7. American Honda Motor Company, Inc. v Allen (7th Cir.) -- Courts have occasionally certified classes based on unreliable expert testimony because they were reluctant to rule on the merits of an expert's opinion before trial. The Seventh Circuit's holding that "when an expert's report or testimony is critical to class certification ... a district court must conclusively rule on any challenge to the expert's qualifications or submissions prior to ruling on a class certification motion" should help to put an end to that practice.
8. UFCW Local 1776 v. Eli Lilly & Co. (2d Cir.) -- One of the largest problems plaintiffs face in bringing class actions is demonstrating that they can resolve complex issues of causation on a classwide basis. Sometimes plaintiffs attempt creative workarounds when they cannot prove causation on a classwide basis, such as arguing fraud on the market, "excess price theory," or "quantity effect theory." The Second Circuit held that plaintiffs cannot take shortcuts in demonstrating causation.
9. Avritt v. Reliastar Life Ins. (8th Cir.) -- In order to avoid the problems reliance can cause for proving fraud claims on a classwide basis, a number of plaintiffs have begun asserting fraud claims as breach-of-contract claims instead, citing the duty of good faith and fair dealing. The Eighth Circuit's opinion here effectively breaks down this new tactic and shows why it does not avoid the individualized issues at the heart of a fraud-related case.
10. Thorogood v Sears Roebuck & Co. (7th Cir.) - A plaintiffs' lawyer I know called this one of the "greatest self-inflicted wounds" in the plaintiffs' bar. The Eighth Circuit had laid out may of the same points in its Baycol opinion, but Judge Posner's opinion here leaves little doubt as to when a defendant may use the All Writs Act to block copycat class actions.

Coming up on Thursday, the 10 Most Interesting Class-Action Articles of 2010.
 

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Florida State law professor Elizabeth Chamblee Burch is the latest to weigh in on the problem of how to make sure class actions are adequately governed.  In an forthcoming article from the Vanderbilt Law Review, she asks what makes an optimal lead plaintiff in a securities class action.

Burch focuses on the the difficulties raised by what she refers to as plaintiffs' law firms "courting process," particularly the use of "pay to play" practices and investment monitoring agreements.  Her discussion of these issues is worth quoting at length:

After the PSLRA, plaintiffs’ law firms sought to maintain their competitive advantage by courting large institutions, developing repeat relationships with them, and encouraging them to serve as lead plaintiff. Law firms’ courting process may involve “pay-to-play” practices where plaintiffs’ law firms contribute to the political campaigns of those selecting counsel for public or labor pension funds and lobbying the officials who control public pension funds. Lobbyists encourage pension funds to serve as lead plaintiff and to then select the lobbyist’s law-firm employer as lead counsel. These practices forge repeat relationships and inhibit competition in ways that lack merit and transparency. And because other eligible institutions like banks, mutual funds, and insurance companies maintain commercial relationships with the defendants or defendants’ customers, public and union pension funds are the institutions that typically take on the lead-plaintiff role.

Law firms’ courting process also involves “portfolio monitoring,” where the law firm keeps abreast of the institution’s holdings and notifies it whenever it suffers a significant enough loss that it could serve as the lead plaintiff in a related class action. Portfolio monitoring is a preexisting contractual relationship between the lead plaintiff and class counsel. Preexisting relationships typically give courts pause, particularly when counsel has no relationship with other class members and no subclassing exists. But most courts find free portfolio monitoring in exchange for retaining the law firm unproblematic; they look for something more, like long-term friendships or familial relationships.Although courts have been slow to recognize it, portfolio monitoring is both widespread and troubling. The few courts who agree reason that the practice “creates a clear incentive for [the law firm] to discover ‘fraud’ in the investments it monitors” and thereby “fosters the very tendencies toward lawyer-driver litigation that the PSLRA was designed to curtail.” Plus, regularly depending on the same law firm makes it unlikely that institutions will bargain for lower attorneys’ fees or monitor trusted counsel. To be fair, some pension funds, such as MissPERS, use plaintiffs’ firms for free investment monitoring, but rely on multiple law firms and guarantee none that it will be selected as lead counsel. On one hand, portfolio monitoring is commendable—it encourages institutional investors to get involved, enforces substantive rights, and may uncover and deter fraud. But on the other, ongoing business relationships between the lead plaintiff and counsel appear improper, may cause counsel to maximize the institutional lead plaintiff’s return to the class’s detriment, and may encourage counsel to litigate in ways that establish favorable precedent for the institution.

(Emphases added.)  Burch has several suggestions for addressing these issues. Her most interesting is to recommend that securities class actions should be headed by plaintiff groups rather than lone plaintiffs, so long as the group reflects the diversity of the class.

Ideally, group members represent the class’s diverse interests such that when each member pursues her own self-interest, the group resembles a microcosm of the whole class.

Burch is not blind to the problems that plaintiffs' groups can pose. Nor is she a lone voice advocating for diversity. That said, she tends to be optimistic about how diverse stakeholders may interact in overseeing a class action. 

Put simply, class counsel should consult and take direction from the lead-plaintiff group on matters that implicate members’ values and litigation objectives or affect the case’s merits in much the same way that an attorney consults with her client in individual litigation. In short, if lead plaintiffs are to adequately represent class members’ interests, monitor the lawyers, and minimize agency costs, then, consistent with the PSLRA’s goal of increasing client control, they should have more decision-making authority.

While it would be helpful to know whether Burch is advocating a doctrinal or legislative reform (in other words, should courts just start enforcing this proposal, or does Congress need to amend the PSLRA?), the policy arguments she raises can prove useful for securities defense lawyers. At the very least, they exemplify a trend of continued concern about the adequacy of securities lead plaintiffs, and provide several examples of why one should not assume that institutional investors are always adequate lead plaintiffs.

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 With the growing trend of federal appellate courts enforcing district courts' "rigorous analysis" of class certification requirements, the danger of a class action getting certified on insufficient facts has diminished. But that hardly means that plaintiffs will always provide enough facts to justify certification. Take the case of Botehlo v. Hawaii, 2010 U.S. Dist. LEXIS 16936 (D. Haw. 2010).

The plaintiffs in Botehlo were prison inmates, both pre-trial detainees and convicts. They protested the conditions of their confinement, which allegedly included sleeping on the prison floor, being denied access to toilets, and lack of personal hygiene materials. After the plaintiffs filed their complaint, both sides stipulated to an administrative process that would involve placing evidence in front of a court-appointed Special Master. When those discussions broke down, the plaintiffs filed a motion to certify a class.

While the plaintiffs submitted one affidavit from their counsel, they submitted no other evidence. And the court noticed.

Finally, apart from Mr. Seitz's affidavit, there is no evidence for this Court to review and determine whether class certification is appropriate, particularly for the time period after August 2005. Although class certification is within the discretion of the court, the district court must still base its decision to certify on evidence.

(Emphasis added.)  The court also listed out other kinds of evidence that the plaintiffs could have submitted.

[E]xamples from other district courts show the type of evidence that parties might submit in furtherance of a motion to certify class. In Von Collin v. County of Ventura, the Central District of California certified a class of inmates who had been restrained by a "pro-straint" chair. 189 F.R.D. 583, 585 (C.D. Cal. 1999). Plaintiffs submitted documentation that the chair was used approximately 377 times over a 18-month period, and provided analysis of why the chair was used, jail incident reports, inmate monitoring logs, and forensic medical records. Id. at 590-95. The analysis showed: (1) the number of inmates processed during an 18-month period; (2) the number of times inmates were subjected to the alleged confinement during that period; (3) the reasons for each use of the alleged confinement; and (4) the length and number of times each inmate was subjected to the alleged confinement. Id. at 595-96. In Cartwright v. Viking Industries, Inc., the plaintiffs sought to certify a class of residents who installed Viking Series 3000 window products. 2009 U.S. Dist. LEXIS 83286, 2009 WL 2982887 (E.D. Cal. Sept. 14, 2009) (slip opinion). The plaintiffs presented evidence of one-million window product sales during the class period coupled with expert testimony providing the number of windows in an average residence. 2009 U.S. Dist. LEXIS 83286, 2009 WL 2982887, at *5. This allowed the court to conclude that windows were installed in approximately 50,000 residential units during the class period and joinder of these parties would be impracticable. Id. And in Amalgamated Transit Union Local 1309, AFL-CIO v. Laidlaw Transit Services, Inc., the plaintiffs sought to certify a class of bus operator employees for alleged meal and rest period violations. 2009 U.S. Dist. LEXIS 7171, 2009 WL 249888 (S.D. Cal. Feb. 2, 2009) (slip opinion). The plaintiffs submitted 12 declarations of class members in support of their motion.

As a result, the district court in this case refused to certify the class. What can defense counsel learn from this? It's still well worth challenging the factual basis of certification. If the plaintiffs have not provided enough facts to support certification of a class, courts are more prepared than ever to deny their request.

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 In a decision that has already garnered massive press coverage and commentary the Supreme Court yesterday granted certiorari in the case that will be known as Wal-Mart v. Dukes. The 9th Circuit's opinion affirmed certification of the largest-ever employment class action. (Too large, in Wal-Mart's opinion.)

The Supreme Court will not review all of the issues involved in the petition for certiorari. It has limited itself to Wal-Mart's Question 1 (roughly: when can plaintiffs seek Rule 23(b)(2) certification for a class seeking money damages), and has ordered briefing on an additional question:

"Whether the class certification ordered under Rule 23(b)(2) was consistent with Rule 23(a)."

So what does all this mean? In the short term, not too much. Argument is in the spring, the opinion is expected sometime mid-summer. Through that time, Ted Olson's team at Gibson Dunn & Crutcher, Brad Seligman's team at The Impact Fund (not to mention many, many, amici) have their work cut out for them. There may also be some increased motion to stay activity in labor class actions. Defense counsel are going to want to stay litigation in case the Court rules that 23(b)(2) class actions cannot support monetary damages like those the plaintiffs seek. Plaintiffs' counsel are likely to fight hard against those stay requests; any classes they can certify (and get through Rule 23(f) review) before the Dukes decision comes out will be difficult to reverse.

Longer-term, it's difficult say at this point. Court-watching is even more like Kremlinology than plaintiff-watching. The fact that the Court has eschewed the various statutory and Constitutional arguments the defendants raised indicates that it may be more interested in narrowing the scope of any decision it issues. (Although the Rule 23(b)(2) issue is controversial enough.) But the fact that the Court has ordered briefing on the separate question of whether the certified class met the Rule 23(a) requirements (numerosity, commonality, typicality, and adequacy) indicates that Wal-Mart's general framing of the class as simply too large to certify may have some traction.

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Two cases in the past few years involved a similar issue, but opposite outcomes. In the first, Murray v. GMAC Corp., the defendant argued that a family that had brought fifty Fair Credit Reporting Act lawsuits were "professional plaintiffs," and therefore inadequate to represent a class.  The Seventh Circuit, in an opinion by Judge Easterbrook, held that that the plaintiffs' "professional" status did not disqualify them from being adequate class plaintiffs. By contrast, in Gordon v. Virtumondo, Inc., the Ninth Circuit held that an individual plaintiff who set up an email account in order to collect emails that violated the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act of 2003 was a professional plaintiff who lacked standing to sue even on his own behalf.

What's the difference between these two cases? Law student Brandon Murrill has an explanation, which he lays out in his Note The Business of Suing: Determining When a Professional Plaintiff Should Have Standing to Bring a Private Enforcement Action. As he puts it:

Despite superficial differences, professional plaintiffs like Gordon are members of a species of litigant—a species with a few defining characteristics. First, and most importantly, professional plaintiffs are professional, meaning that they are in the business of bringing lawsuits with the primary aim of winning large sums of money. They and their lawyers may claim to have other goals, such as fighting for the underrepresented “little guy” against powerful interests, but these goals remain secondary considerations to the ultimate goal of collecting damages.

Second, professional plaintiffs often play a role in bringing about the injuries that serve as the foundation for their lawsuits, al- though some play a more active role than others. One example is the professional plaintiff with a disability suing under the ADA who actively scours local businesses for obscure, technical violations to serve as the basis for a cause of action.

Murrill suggests that the best solution to the professional plaintiff problem is legislative: he recommends that states should adopt stricter standing requirements. But his Note also suggests a way for defense counsel to counter professional plaintiffs.  According to Murrill, the key difference between an acceptable and unacceptable plaintiff is the presence of a self-inflicted injury. It's one thing to be litigious, and another to have a business interest in bringing lawsuits. In one case, the plaintiff is experienced (and likely unpleasant). In the other, the plaintiff has a close business relationship with his attorney, one that leads him to expose himself to harm and likely compromises his ability to adequately represent a class. If the defense focuses on the professional's relationship with his attorney and the lengths he will go to further that relationship, it should be able to demonstrate that he lacks the independence to stand up to his business partner on behalf of a class of amateurs.

TAGS - adequacy FCRA

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 Two weeks ago, when discussing Professor Miller's article on differences in contract law, I remarked that there has been no appellate opinion that looked at the individualized factual issues that arise in breach of contract cases where the plaintiff has alleged a violation of the implied duty of good faith and fair dealing. Turns out I was wrong.

In fact, the Eighth Circuit, in Avritt v. Reliastar Insurance Co., recently affirmed a denial of certification in a case where the duty of good faith and fair dealing was a primary issue.

An annuity is a low-risk, low-return investment. Basically, the investor pays into a fund, the fund earns interest, and then the fund pays back out in a series of installments at a later date. In this case, the Avritt plaintiffs alleged that one of Reliastar's annuities credited interest on recent deposits higher than it did on older deposits. They claimed that, because the higher interest rate captured the investors' attention, paying more than one interest rate constituted a bait-and-switch. The plaintiffs asserted claims under the Washington and California consumer-protection acts, but the meat of their claims was their breach-of-contract claim. They tried to convince the trial court that Reliastar's had breached its annuity contract because it had stated that it would only charge rates approved by its board, and there was no indication the board had approved these two separate rates. They also claimed that Reliastar had violated the duty of good faith and fair dealing.

The plaintiffs did not fare well on their breach of contract claims. The trial court (and the appellate court), expressed grave doubts about plaintiffs' proposed interpretation of the contract. But, more damning, the Eighth Circuit held that, even if plaintiffs had alleged a viable interpretation, deciding what the contract actually said would raise too many individualized issues to justify certification.

Assuming that the Avritts' interpretation of the contract is plausible, however, the existence of two or more reasonable interpretations opens the door for extrinsic evidence about what each party intended when it entered the contract. In addition to extrinsic evidence about Northern's intent, Reliastar would be entitled to introduce evidence about how the contract was explained in various sales discussions and whether each purchaser's understanding of the contract was consistent with the theory the Avritts now advance. Thus, Reliastar's liability to the entire class for breach of contract cannot be established with common evidence.

(Emphasis added, internal citations omitted.)

Nor was the Eighth Circuit any kinder to plaintiffs' good-faith-and-fair-dealing claim; it held that that, too, raised a number of individualized factual issues.

The duty of good faith and fair dealing, however, "arises only in connection with terms agreed to by the parties," and therefore does not create "a free-floating duty of good faith unattached to the underlying legal document." Applying these principles, the district court correctly determined that evidence of the representations made to each purchaser and the understanding that they attached to the contract would be essential to establishing liability.

(Emphasis added, internal citations omitted.) And that means that plaintiffs' allegations about good faith and fair dealing were subject to individualized evidence.

The court also denied certification of plaintiffs' deceptive-trade practices claims. But the important parts of this case, from a defense perspective, are the arguments it provides for defending contract class actions. As breach-of-contract class claims become more popular, it's vital that defense counsel recognize what individualized issues are implicated. Avritt identifies a number of individualized issues that the defense should not ignore.

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If I may draw on my (necessarily narrow) experience as a class-action litigator, a rising number of class actions are asserting nationwide contract claims, and specifically claims for the breach of the duty of good faith and fair dealing. I could speculate on the reason for that (new class-action theories come into vogue; there has been no judicial opinion thoroughly examining whether a good-faith claim can be certified on a nationwide basis), but I'm really just mentioning it to explain why, as a defense lawyer, I'm glad to see Geoffrey Miller's  latest article in the Cardozo Law Review: "Bargains Bicoastal: New Light on Contract Theory."

Miller is a consummate empiricist, which makes him a great resource for class-action defense lawyers. Where other professors look at doctrine or theory, Miller usually zeroes in on data. In this article, he starts from one data point--more corporations choose New York law for their choice-of-law clauses in contracts--and asks why that might be so. His findings are particularly interesting to lawyers who defend multi-state class actions:

This Article ... compares New York and California across a range of contract law issues. As would be expected, the laws are similar in broad outline. Each state respects freedom of contract and each recognizes other social and moral objectives that occasionally trump private agreements. Each state’s law grows out of a dialectic process in which competing values are reconciled in different settings. Yet a closer analysis reveals substantial differences in tone and substance. New York and California are close siblings—children of the common law and a shared legal and political tradition. But they are far from identical twins.

The differences between New York and California contract law turn out to align with the formalist-contextualist distinction in contract theory. New York judges are formalists. Especially in commercial cases, they have little tolerance for attempts to re-write contracts to make them fairer or more equitable, and they look to the written agreement as the definitive source of interpretation. California judges, on the other hand, more willingly reform or reject contracts in the service of morality or public policy; they place less emphasis on the written agreement of the parties and seek instead to identify the contours of their commercial relationship within a broader context framed by principles of reason, equity, and substantial justice.

(Emphasis added.)  Why does this matter to class action defendants? Because it shows, in concrete fashion, why Judge Posner was right that "nuance can be important," even in contract law.

Class-action plaintiffs who bring contract claims often quote Judge Tjoflat's statement in Klay v. Humana that

A breach is a breach is a breach, whether you are on the sunny shores of California or enjoying a sweet autumn breeze in New Jersey.

Miller, by demonstrating why more corporations choose New York law to govern their contracts, provides a thorough examination of how these two states apply many of the same principles in completely different ways. In the process, he shows that, depending on the place, a breach may not be a breach; it may be a valid rejection of a contract against public policy, or a violation of the duty of good faith, or any number of other things.  And that is a valuable starting point for someone defending a multi-state class acton.

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 In Basic, Inc. v. Levinson, the Supreme Court recognized a rebuttable presumption of fraud on the market for securities-fraud cases. That presumption allowed for certification of a number of securities class actions. Plaintiffs since have taken that presumption and tried to apply it to various other sets of facts, most notably tobacco (although that attempt was ultimately unsuccessful) and drug marketing (also unsuccessfully). But the fact that class-action plaintiffs keep arguing for this presumption means that it's important for defense counsel to understand the theory underlying it.

So let's look at the actual Basic case. Basic, Inc. made chemical refractories for the steel industry. It became the subject of a merger bid. During the time it was talking with its merger partner, it made several statements denying that it was in merger talks. (Why do this? Announcing a merger would have put the company into play, wreaking havoc with its stock price, and jeopardizing the impending merger.) Once Basic publicly announced the merger, some of its shareholders filed a class action, claiming they had been harmed because they had sold shares after its denials depressed the stock price, and before it suspended trading in anticipation of the merger.

The trial court certified a class (presuming that the plaintiffs relied on Basic's public statements), but then granted summary judgment to Basic. The Sixth Circuit reversed the summary judgment, but affirmed the certification of the class. At that point, Basic filed a petition of certiorari to the Supreme Court.

The Court took on the case, in part to

determine whether a person who traded a corporation's shares on a securities exchange after the issuance of a materially misleading statement by the corporation may invoke a rebuttable presumption that, in trading, he relied on the integrity of the price set by the market.

In doing so, the Court set out its statement of the fraud-on-the-market theory. As abridged:

The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business.... Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.... The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations ...

The modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face transactions contemplated by early fraud cases, and our understanding of Rule 10b-5's reliance requirement must encompass these differences ...

In drafting that Act, Congress expressly relied on the premise that securities markets are affected by information, and enacted legislation to facilitate an investor's reliance on the integrity of those markets ... Recent empirical studies have tended to confirm Congress' premise that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations. ...

Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.

(Internal footnotes and quotation omitted.)

As one might expect, allowing a presumption of reliance under any circumstances is hardly a defense-oriented ruling. However, in the limited circumstances of the Basic case (a freely-traded market for securities, where public information rapidly translated into changes in stock price), the holding makes economic sense. More importantly, Basic's actual holding provides defense lawyers with several avenues of opposing class certification.

First, it limits "fraud on the market" to securities markets, where information is freely disseminated. That means that markets for consumer goods, for example, are not subject to fraud on the market theories, and plaintiffs will still have to prove individual reliance in cases like these. In fact, few markets have the characteristics that allow for a Basic presumption.

Second, it provides a way to argue against even securities fraud cases. The Court held that the Basic presumption is rebuttable. That means that if the defendant can show why it is that the alleged misrepresentation did not cause (or could not have caused) the harm, the plaintiff is not entitled to the presumption.

Fraud class actions are not going away any time soon. As a result, it is fair to expect that plaintiffs will try to avoid the problems of proving reliance on fraudulent statements any way they can. If for no other reason than that, the Basic presumption will remain an important piece of legal doctrine for class-action lawyers for some time to come.

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Paul Karlsgodt over at ClassActionBlawg.com has an outstanding post up that outlines his thinking on when (and how) a defendant should challenge the certifiability of a class.  He explicitly recognizes that 

[T]here is also an art to defending class actions, and part of the art is in knowing whether to challenge class certification at each available opportunity. Of course, because this is about the art and not the science, there is no single answer to this question, but below I have tried to sketch out some of the possible considerations in making the decision to use various different procedural devices at different phases of the litigation.

(Emphasis in orginal.)  The general advice that follows is a very helpful summary of the different opportunities to challenge the certification of a class.  

I'd quibble with only two aspects of his post: (1) Paul and I have slightly differing opinions on the usefulness of the motion to strike class allegations.  (2)  I would really have liked to see his take on whether to file a motion to deny certification (a rare, but increasingly useful strategic option).  

But these are quibbles.  What Paul has done here is what co-author Brian Anderson and I were aiming at with The Class Action Playbook: he's given an excellent summary of each opportunity to challenge a class, and set out his views of the risks and benefits to each challenge.  

Go, read it for yourself.  I assure you, it's time well-spent.  

[Dislcosure: Paul gave this blog an early boost, and provided a very nice review of the Playbook.]

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The tactic is more common that one might imagine: when plaintiffs file their motion for certification, they may include an expert report from a noted law professor, testifying that their case is ideally suited for certification under Rule 23. Now, on one side of the certification debate, you have practicing lawyers zealously representing their client, and on the other, a ostensibly neutral expert in civil procedure. How can a defendant effectively oppose a motion like this?

By excluding the expert, which is easier than it first appears. Take the case of Walsh v. Principal Life Insurance Co., 266 F.R.D. 232 (S.D. Iowa 2010). In this ERISA class action, the plaintiff alleged that the the defendants had violated the statute by persuading her (after letting her go from her job) to roll over her 401(k) [http://en.wikipedia.org/wiki/401(k)] contributions in order to buy their "proprietary" investment products.

To support her motion for class certification, the plaintiff offered two experts: Robert Klonoff, Dean of Lewis & Clark Law School in Oregon, and Mark Johnson, a "sought-after speaker on the topic of ERISA and benefits plans." She offered each expert to testify about how the case had met the standards of Rule 23. The defendants challenged the admissibility of both experts' testimony. They did not question their expertise on ERISA or Rule 23. (Nor could they credibly. Dean Klonoff, for example, is the author of Class Actions and Other Multi-Party Litigation in a Nutshell, and co-author of the casebook Class Actions and Other Multi-party Litigation: Cases And Materials.). But they did point out that both experts had been offered to testify about a legal conclusion: whether certification was appropriate in this case. And that is the one area for which expert testimony is not admissible because it cannot help the court. The court largely agreed:

"[E]xpert testimony on legal matters is not admissible. Matters of law are for the trial judge, and it is the judge's job to instruct the jury on them." S. Pine Helicopters, Inc. v. Phoenix Aviation Managers, Inc., 320 F.3d 838, 841 (8th Cir. 2003) (citing United States v. Klaphake, 64 F.3d 435, 438-39 (8th Cir. 1995)); see also Burkhart v. Washington Metro. Area Transit Auth., 112 F.3d 1207, 1213, 324 U.S. App. D.C. 241 (D.C. Cir. 1997) ("Each courtroom comes equipped with a 'legal expert' called a judge."). In distinguishing admissible testimony from inadmissible testimony, the task for the Court is to ask whether the expert's opinions bear on some factual inquiry or whether they bear solely on the legal conclusions that are urged. In other words, "an expert may offer his opinion as to facts that, if found, would support a conclusion that the legal standard at issue was satisfied, but he may not testify as to whether the legal standard has been satisfied." 

(Internal quotations left in to preserve the Burkhart parenthetical.) The court did find that Johnson had made some factual observations about ERISA plans, so it allowed his testimony for that limited purpose.  Then it denied plaintiff's motion for certification, because the question of how the defendants persuaded each class member was necessarily individualized.

So what's the takeaway in this case? When faced with an "expert" on Rule 23, remember: "Each courtroom comes equipped with a 'legal expert' called a judge." And his is the only opinion that matters.

[Full disclosure: Dean Klonoff very generously provided a blurb for The Class Action Playbook (first under Editorial Reviews).]

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 I've written before about the the growing defense tactic of filing early challenges to class certification. Last week, Law360 reporter Leigh Kamping-Carder reported on the trend. (Subscription required.) While she interviews a plaintiff's attorney (who wonders if everyone went to the same seminar), the most interesting part is the interviews with defense attorneys about the strategic concerns involved in filing a motion to strike. 

"If you can resolve class issues before conducting discovery, that's tremendously advantageous to a defendant,' [Dykma Gossett PLLC attorney J. Kevin] Snyder said. "As a defense lawyer doing mostly defensive class actions, you're always looking for ways to save your clients money," he added.

On the other hand, the lawyers Kamping-Carder interviews also express concern about the disadvantages to moving early. Leaving aside the mixed success rate with motions to strike, they worry about what happens if the court denies the motion:

"Then you've basically just given the plaintiffs a road map of what you're going to say," as well as a month to take discovery to oppose your best arguments," [Venable LLP partner Daniel B.] Chammas said.

If the motion backfires and defendants lose, they have a court on record holding that the case should proceed as a class action, [Mannatt Phelps & Philips attorney Brad W.] Selling said."

In general, I would say that excessive caution about motions to strike class allegations is not necessary. If the defendant frames it properly, as a challenge to flaws that are apparent on the face of the complaint , then the effect of a denial are the same as a denial of a motion to dismiss. The defendant will not have given away its strongest fact-based arguments, and a denial of arguments based on plaintiff's allegations is not likely to hold that the plaintiff is entitled to certification as a matter of law. At the same time, the motion to strike gives the defendant a chance to prime the court to think about the difficulties involved in certifying a class. Like all of these lawyers advised, one should only move to strike class allegations when one has strong arguments; but assuming the defendant has not asserted weak arguments, the benefits of moving to strike class allegations largely outweigh the risks.

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In re Hydrogen Peroxide was an antitrust class action. Hydrogen peroxide is a chemical that is often used a bleach for pulp and paper. In this case, the plaintiffs, all purchasers of hydrogen peroxide and other chemicals, sued their suppliers, alleging that the defendants had sold them more expensive chemical grades when less expensive ones would have been sufficient.

Following extensive discovery, 3 plaintiffs moved to certify a class of direct purchasers of hydrogen peroxide, sodium perborate, and sodium percarbonate, over an eleven-year class period. In support of class certification, plaintiffs offered the opinion of an economist. Defendants, opposing class certification, offered the opinion of a different economist. Defendants separately moved to exclude the opinion of plaintiffs' economist as unreliable under Daubert v. Merrell Dow Pharmaceuticals, Inc. Concluding plaintiffs' expert's opinion was admissible and supported plaintiffs' motion for class certification, the District Court certified a class of direct purchasers of hydrogen peroxide, sodium perborate, and sodium percarbonate under Fed. R. Civ. P. 23(b)(3).

The defendants appealed, claiming that the district court had erred when it found that common issues predominated over individualized issues. The Third Circuit found that the trial court had committed three errors:

First, it had wrongly held that it could not inquire into the merits of plaintiffs' claims where they affected the certification inquiry.

An overlap between a class certification requirement and the merits of a claim is no reason to decline to resolve relevant disputes when necessary to determine whether a class certification requirement is met. Some uncertainty ensued when the Supreme Court declared in Eisen v. Carlisle & Jacquelin, that there is "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." Only a few years later, in addressing whether a party may bring an interlocutory appeal when a district court denies class certification, the Supreme Court pointed out that "the class determination generally involves considerations that are 'enmeshed in the factual and legal issues comprising the plaintiff's cause of action.'" As we explained in Newton, Eisen is best understood to preclude only a merits inquiry that is not necessary to determine a Rule 23 requirement.

(Internal citations omitted.)

Second, the district court had wrongly presumed that-when in doubt--it should err in favor of certifying an antitrust class action:

the District Court reasoned, "it is well recognized that private enforcement of antitrust laws is a necessary supplement to government action. With that in mind, in an alleged horizontal price-fixing conspiracy case when a court is in doubt as to whether or not to certify a class action, the court should err in favor of allowing the class." These statements invite error.

(Internal citations omitted.)

And finally, the district court had wrongly put off resolving the "battle of the experts" until trial, even though the experts disagreed about whether a class should be certified in the first place.

Expert opinion with respect to class certification, like any matter relevant to a Rule 23 requirement, calls for rigorous analysis. It follows that opinion testimony should not be uncritically accepted as establishing a Rule 23 requirement merely because the court holds the testimony should not be excluded, under Daubert or for any other reason. Under Rule 23 the district court must be "satisfied" or "persuaded" that each requirement is met before certifying a class. Like any evidence, admissible expert opinion may persuade its audience, or it may not. This point is especially important to bear in mind when a party opposing certification offers expert opinion. The district court may be persuaded by the testimony of either (or neither) party's expert with respect to whether a certification requirement is met. Weighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands.

(Internal citations omitted.)

The Third Circuit was not the only (or even the first) court to find that the "rigorous analysis" required for class certification might require an inquiry into the merits. But it was the one to explain most clearly how various courts had misread Eisen to prohibit any merits inquiry whatsoever. And it also explained in very succinct terms why a court must look into the merits of an expert's testimony if that will bear on whether it is appropriate to certify a class. Because of the clear way in which it describes how each of these factual inquiries is necessary to certification, In re Hydrogen Peroxide has earned the designation of Classic Case.

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 On Monday, I reported on the passing of Vanderbilt Professor Richard Nagareda. Given the widespread recognition of his contributions to studying aggregated litigation, it seemed appropriate to revisit one of his better articles: Aggregation and Its Discontents: Class Settlement Pressure, Class-Wide Arbitration, and CAFA, which originally appeared in the Columbia Law Review in 2006. 

In this article, Professor Nagareda took three debates over class-action practice -- (1) do class actions create undue settlement pressure? (2) can arbitration clauses override the use of the class-action device?; and (3) did the passage of CAFA threaten to abrogate the Supreme Court's holding in Klaxon v. Stentor Electric Manufacturing Co. (1941) that federal courts must apply state choice-of-law principles -- and used them to ask a broader question posed by class-action practice:

When should the law become concerned, as a normative matter, that the affording or withholding of aggregation is not a matter of mere procedural format but amounts instead to an unauthorized, back-door method of reform for substantive rights?

After a careful examination of the (then-) state of the law for each of these issues, Professor Nagareda came to the following conclusion:

The debates over class settlement pressure, waivers of class-wide arbitration, and CAFA each pose questions about the relationship between aggregate procedure and substantive law. In these high-stakes disputes, one side or the other seeks to characterize the availability of aggregation as merely a cosmetic matter, whereas the opposing side seeks to probe its practical effects. Interestingly enough, plaintiffs and defendants make different arguments along these lines in different settings.

The law should cut through the advocacy on both sides by situating all three debates along a common metric of institutional authority. Each is ultimately a debate over when the affording or the withholding of aggregation is not merely a matter of procedural format, but also a way to alter substantive law.

Each of Professor Nagareda's questions has gradually been answered by the evolution of class-acton doctrine and civil procedure doctrine. While undue settlement pressure is always a concern, defendants have been handed better tools (like the much-used Iqbal ruling) with which to minimize the in terrorem effect of large but meritless cases. The Supreme Court has granted certiorari to hear the Concepcion case, which should provide an answer to whether arbitration clauses can preclude classwide consumer litigation in certain circumstances. And, while the Shady Grove decision did not directly address the clash between CAFA and Klaxon, it does provide guidance for how federal class-action rules should interact with state substantive law.

That said, there's still a great deal that class-action lawyers can take from this article. First, Professor Nagareda did an outstanding job of picking apart the tactics that underlay each side's approach to these three issues. There is a reason that this article is generally considered seminal.

Second, Professor Nagareda identifies an important rhetorical technique, which is the sliding scale each side employs in characterizing the effect of class-action rulings. In essence, the bigger the change a side wants, the more likely they are to gloss it as "cosmetic." Class-action defense lawyers have long known that one of the best ways to show a court the problems with a class proposal is to focus on how the case would actually be tried.  Professor Nagareda brought both scholarly rigor and intellectual honesty to bear on how that argument plays out under various circumstances.  

And finally, Professor Nagareda's article provides an excellent reminder that there is much to be said for standing back from the nitty-gritty of the rules at times and asking the larger question of what each of your arguments actually means. As he illustrates here, sometimes the answer really will be surprising.

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 A number of courts have held that Rule 23(a)(4)'s adequacy requirement mandates two inquiries:

(1) whether there are irreconcilable conflicts of interest between the class representative and the absent class members, and
(2) willingness and ability of the representative to take an active role in and control the litigation and to protect the interests of absentees.

The law on what constitutes a conflict of interest is well-developed. But what does "willingness and ability" mean? The Eighth Circuit recently shed some light on the question in the course of deciding an appeal in a civil-rights lawsuit, Rattray v. Woodbury County.

In 2006, Maureen Rattray was arrested for misdemeanor driving under the influence. While processing her after arrest, Woodbury County officials subjected her to strip and cavity searches. Rattray sued, and, eight months after filing her original complaint, she requested leave to amend her complaint to add class allegations because discovery had revealed Woodbury County had a policy of subjecting arrestees to strip searches. Six months later, Rattray filed a motion for class certification.

Woodbury County opposed the motion. As one might expect, it argued that individualized issues predominated over common issues. But it also argued that she was an inadequate class representative. Specifically, it

challenged Rattray's assertion that she did not move for class certification earlier because she did not learn of the blanket strip search policy until discovery. Paragraph 40 of Rattray's initial complaint, according to the County, showed that Rattray was aware of the policy when she filed the complaint. While not questioning the capabilities of Rattray's counsel, the County argued that the delay in moving for class certification suggested that Rattray did not meet Rule 23(a)(4)'s requirement that the class representative would "fairly and adequately protect the interests of the class."

The district court accepted the County's argument, noting that the six-month delay between the filing of the amended complaint and the motion to certify indicated that Rattray lacked the necessary zeal to represent a class, and her counsel lacked the necessary experience.

Rattray appealed, arguing that the "many depositions" and "hundreds of pages of documents" her discovery efforts had unearthed indicated that she was willing and able to pursue a class action. But the Eighth Circuit was unconvinced. As it put it:

Rattray's failure to move to certify with alacrity undermines confidence in the zeal with which she would represent the interests of absent class members. A failure of the putative class representative to assure the court that it will vigorously pursue the interests of class members is a sufficient basis to deny certification.

So what can we learn from this case? In some cases, adequacy requires timely action. If a plaintiff drags her heels in prosecuting a class action, that may serve as evidence that she is not an adequate class representative.

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Many apologies for providing you all with just a linkdump for my Tuesday entry, but I'm lying in bed with a triple-digit fever.  Still, there are certainly other legal blogs that do a thoughtful job of covering class-action issues, and I'm lucky that several of them have great entries right now.

• Justice Scalia has stayed a Louisiana state court ruling requiring tobacco companies to pay into a $241 million dollar "quit smoking" fund.  His reason: it's "significantly possible" that the Court may overturn the decision on constitutional grounds.  Specifically: “the extent to which class treatment may constitutionally reduce the normal requirements of due process is an important question.”  [SCOTUSblog]
• The Second Circuit has held, in a divisive 2-1 split, that the Alien Tort Claims Act (ATCA) does not apply to corporations. This should have a huge effect on international human-rights class actions.  [Mass Tort Defense]
• Wal-Mart's certiorari petition asking the Supreme Court to review the Ninth's Circuit's Dukes v. Wal-Mart opinion has drawn a number of high-powered amicus briefs.  [WSJ Law Blog]

Come back again on Thursday, when regular content should resume.

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All too often, courts and class-action litigants take the question of commonality for granted.  But, when framed properly, the question of commonality can provide a court with the tools necessary to engage in a truly rigorous analysis of a proposed class.

In his recent essay "Common Answers for Class Certification," noted professor Richard Nagareda takes the Ninth Circuit's recent Dukes decision and uses it as a platform to discuss what commonality really means in the context of a class action. In doing so, he provides an excellent analysis of how defense counsel can frame the question of commonality for courts deciding certification. As he puts it:

This Essay spotlights the crucial conceptual error in Dukes: its premise that the raising of common “questions” suffices for class certification. Properly understood, class certification does not turn upon the mere raising of common questions by way of expert submissions or any other form of evidence. Class certification instead turns on the capacity of a unitary proceeding to yield common answers.

Nagareda also points out that courts taking the alternative approach--looking only at whether the question is common, not whether they advance the litigation with common answers--are not wilfully misreading Rule 23.

The Dukes court acts on an understandable impulse—one whereby the format for adjudication inevitably would synchronize with the aggregate character of the allegations on the merits, at least when those allegations rise to the level of presenting a triable case.

Ultimately, Nagareda locates the issue in the fact that most courts are more used to determining issues on the merits than deciding class certification.

The fundamental problem with Dukes consists of the court’s confusion between the class certification determination and the most familiar type of pre-trial ruling that regulates the respective roles of the court and the fact finder at trial: summary judgment. On the Ninth Circuit’s account, the two are intertwined, such that the court regards itself as duty-bound not to withhold class certification when the plaintiffs have put forward a triable case as to the existence of a company-wide policy of discrimination on Wal-Mart’s part. Yet it is only if such a policy of nationwide scope exists that Wal-Mart has acted “on grounds that apply generally to the class,” so as to make appropriate relief “respecting the class as a whole” within the meaning of Rule 23(b)(2)—the basis for the Dukes certification.

In other words, a common question is not common unless the answer applies to the entire class no matter how it is decided.

What can defense lawyers take from Nagareda's analysis? It's always worth reminding the court of how a class trial would actually proceed. Walking the court through how it would have to decide questions on the merits can highlight where supposedly common questions aren't actually common at all.

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 Adequacy can be a difficult concept to get one's head around. And, as a result, courts and parties have found a number of different ways to frame the question of whether a named plaintiff is an adequate class representative. They can look at whether the named plaintiff knows enough about the case to oversee her counsel (although some courts are sometimes reluctant to disqualify a plaintiff on these grounds). Courts can also ask whether the plaintiff has enough independence from counsel to oversee them when their interests may diverge from the class's.   And sometimes courts can just look at the personal character of the named plaintiff. 
Another way of framing the issue is to look at whether the named plaintiff is committed to protecting the interests of the class. What do I mean by "committed"? Take the case of Buettgen v. Harless, 263 F.R.D. 378 (N.D. Tex. 2009). Buettgen was a securities case, involving allegations that the defendants had, through various misrepresentations, artificially inflated the stock price of phone directory company Idearc, Inc. A number of different plaintiffs filed class actions against Idearc and its officers, including a group of individual investors calling themselves the "Buettgen Group," another group of individual investors calling themselves the "Lyman Group," and two institutional funds, one Swiss and one American.

Each of these four plaintiffs filed a motion to be considered as lead plaintiff for the consolidated class actions, a position that carries with it control of the litigation, and a larger share of fees for plaintiffs' counsel. The court, in deciding the motions, pointed out that the Private Securities Litigation Reform Act (PSLRA):

"requires a court to presume that the most adequate plaintiff is the person or group of persons that:
(1) filed the complaint or a motion in response to a notice;
(2) has the largest financial interest in the relief sought by the class; and
(3) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.
Id. § 78u-4(a)(3)(B)(iii)(I).

This presumption can be rebutted only by proof offered by a class member that the presumptively most adequate plaintiff:
(aa) will not fairly and adequately protect the interests of the class; or
(bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.
Id. § 78u-4(a)(3)(B)(iii)(II)."

In this case, all four plaintiffs had filed the appropriate motions. The court ranked the plaintiffs by the size of their losses (the Buettgen Group had sustained the largest loss, followed by the Swiss fund, the Lyman Group, and the American fund). But when the court looked at each plaintiff's adequacy, the analysis got more difficult. The Swiss fund was vulnerable to unique defenses, and therefore not adequate. But the Court also expressed reservations about the two investor groups, because neither was cohesive enough to represent the class. (Why would cohesiveness matter? Because if a group is not cohesive, then it is likely that it was put together by plaintiffs' counsel to meet the "largest financial interest" prong of the PSLRA, implying that the counsel controlled the plaintiffs.) As the court observed:

"[T]he Buettgen Group fails to present evidence that the members of the group have ever communicated in a meaningful way. For example, instead of explaining how they are prepared to work together to manage this litigation on behalf of the proposed class, the Buettgen Group submitted essentially boilerplate certifications discussing their stock purchases and alleged losses. ... Additionally, the Buettgen Group's motion is undermined by the group's invitation to the Court to hand-pick one of its constituents to serve as lead plaintiff if the Court deems the Buettgen Group inappropriate. Buettgen Group Such a willingness to abandon the group only suggests how loosely it was put together. ...
Likewise, the Lyman Group suffers from the same grouping issues that apply to the Buettgen Group. The Lyman Group consists of two individuals that provided similar boilerplate certifications as the Buettgen Group. Also, the Lyman Group states, "if the Court is inclined to appoint only one Lead Plaintiff, each of the Movants moves in the alternative for appointment individually as Lead Plaintiff." As stated above, when a group shows willingness to abandon the group the Court is lead to believe the group was only loosely put together. "

(Internal quotations and citations omitted, emphasis added.)

What does this ruling mean for defendants? It provides another way of looking at adequacy of named plaintiffs. If the named plaintiffs are not sufficiently committed to the litigation to talk to each other, then it is unlikely that they can oversee their counsel independently. And that is a good reason to find them to be inadequate class representatives.

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 In the world of class actions, case brought under the Federal Labor Standards Act (FLSA) stand apart from other class actions. Unlike a standard Rule 23 class action, the plaintiff in an FLSA action has the option of filing a class action under Rule 23, a collective action under the FLSA, or both.

What is a collective action? Like a class action, a plaintiff in a collective action trades individual control over her lawsuit for the economies of scale and the bargaining leverage that come with group litigation. But FLSA collective actions follow different procedural rules than Rule 23 class actions, ones generally considered more permissive. FLSA certification usually occurs in two parts. First, in the "notice stage," the trial court decides whether it should notify other “similarly situated” employees who might wish to opt in to the litigation. If the court decides in favor of notice (and with it, conditional certification), it informs the putative class members with a court-ordered notice and gives them an opportunity to opt into (not out of) the class. After any other plaintiffs opt in, discovery commences. After discovery is complete, the defendant can move for decertification. If the court decertifies the proposed opt-in class action, it dismisses the opt-in plaintis without prejudice to reasserting their claims individually.

This more permissive procedure means that employment actions under the FLSA have become a growth industry for plaintiffs' lawyers. And the difference in procedure means that the strategies for opposing certification are different. So how does one oppose an FLSA action? Shook Hardy lawyers William C. Martucci and Jennifer Oldvader have published an article in the Kansas Journal of Law & Public Policy answering just that question. (The cite, for those interested, is 19 Kan. J.L. & Pub. Pol'y 433.) And they have several strong proposals for opposing the increasingly-common practice of filing concurrent Rule 23 class actions and FLSA collective actions:

• Attack the "common scheme or plan" allegation. "One way of gathering such evidence is to collect declarations from other employees, who can provide vital information on compensation and time-clock policies as well as how these policies are put into practice." If the declarations show that the "policy" was implemented in different ways at different times by different people, a court will have a harder time certifying a class.
• Argue that enough discovery has occurred to allow for heightened certification standard. "Generally, the rationale behind the "lenient" conditional certification standard is that a plaintiff has not had time to conduct any discovery at the conditional certification stage. However, where discovery has occurred, a defendant may be able to successfully argue that a heightened standard of review is more appropriate."
• Argue the conflict between collective action and class action. "When faced with the possibility of an opt-in FLSA collective action and an opt-out state law class action, a defendant may be able to successfully argue that a district court should decline to exercise supplemental jurisdiction because the state law class action predominates over the FLSA collective action."

Martucci and Oldvader focus their article on "off the clock" actions where plaintiffs are allegedly not paid for time they worked (as opposed to misclassification actions, where plaintiffs are denied overtime because their job does not qualify for it). But their tactical advice is sound. For attorneys looking to defend these kinds of cases, this is essential reading.

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The final "classic case" for now, Sprague v. General Motors Corp. involved an alleged violation of the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs had sued GM claiming that it had not provided them with the fully "paid up" lifetime healthcare benefits it had promised when it convinced them to take early retirement. The trial court certified a class of 50,000 early retirees, and declined to certify a class of 34,000 general retirees. GM appealed the certification of the early retiree class, and the plaintiffs appealed the denial of certification of the general retiree class. The Sixth Circuit reversed the certification, and affirmed the denial of certification--a complete victory for the defendant. In doing so, it made several important holdings about commonality and typicality:

Commonality. As the court pointed out, a common issue had to have some level of specificity. (An issue discussed here before.) Otherwise, every mass lawsuit would meet the commonality requirement, simply because the question "are class members residents of the Milky Way Galaxy?" would be a common issue.

It is not every common question that will suffice, however; at a sufficiently abstract level of generalization, almost any set of claims can be said to display commonality. What we are looking for is a common issue the resolution of which will advance the litigation.

In other words, a common issue must be a common material issue.

Reliance.  The court also held that, because GM made different statements to different retirees, their ERISA claims were not suitable for class treatment.

GM's statements to the early retirees were not uniform. Among other things, the statements varied (1) based on the person making the representation, (2) based on the particular special early retirement pro- gram that applied, (3) from facility to facility, and (4) from time to time. Given the wide variety of representations made, there must have been variations in the early retirees' subjective understandings of the representations and in their reliance on them. Some retirees might have interpreted GM's statements to mean that their benefits were vested. Others might have understood that their benefits were subject to change. Some early retirees might have relied on GM's statements about health care benefits, while for others the statements might have made no difference at all in the decision to retire early.

Like the Fifth Circuit in Castano, the court here came up with a succinct description of the largest problem with classes that require a finding of reliance.

Typicality.  The most quoted part of the Sprague opinion involved typicality. The court held that plaintiffs had not met the typicality requirement because proving their claims would not prove the claims of the other class members. As the court put it:

In pursuing their own claims, the named plaintiffs could not advance the interests of the entire early retiree class. Each claim, after all, depended on each individual's particular interactions with GM-and these, as we have said, varied from person to person. A named plaintiff who proved his own claim would not necessarily have proved anybody else's claim. The premise of the typicality requirement is simply stated: as goes the claim of the named plaintiff, so go the claims of the class. That premise is not valid here.

(Internal citations omitted.)

The primary lesson defendants can derive from Sprague is a simple one: when possible, frame issues to show the court how resolving them will not advance the litigation for the whole class. After all, the point of allowing a class action to proceed is that proving the plaintiff's case will prove the class's case as well. If that underlying premise is false, then a class action is not appropriate.

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Castano v. American Tobacco Co. (5th Cir. 1996)  involved a class of smokers, their estates, and their survivors arrayed against what was becoming a classic corporate villain: the tobacco companies.

Like in In re Rhone-Poulenc Rorer, the atmospherics favored the plaintiffs. Tobacco companies had already lost credibility in the court of public opinion. And the plaintiffs wisely took advantage of various embarrassing documents by asserting nine fraud-, warranty-, and tort-based causes of action, all based on the tobacco companies' allegedly inflicting the "injury of nicotine addiction" on a generation of smokers. Faced with a class that probably included friends and family on one side, and what appeared to be mustache-twirling villains on the other, the district court certified the class.

Of course, as lawyers might take for granted today, a nationwide personal-injury class asserting a number of fraud-based claims might be largely sympathetic, but it would not result in a workable trial. Since (like in Rhone-Poulenc Rorer) there was no Rule 23(f) that allowed for interlocutory appeals, the defendants sought appellate review under 28 U.S.C. § 1292(b).

In reversing the certification, the Fifth Circuit provided a number of observations that still carry great weight today:

Variations in state law matter. According to the Fifth Circuit,

The district court erred in its analysis in two distinct ways. First, it failed to consider how variations in state law affect predominance and superiority. Second, its predominance inquiry did not include consideration of how a trial on the merits would be conducted.

The Fifth Circuit provided a claim-by-claim analysis of material differences. It also held that differences in available affirmative defenses were material.

Fraud claims are extremely difficult to certify.  The Fifth Circuit also observed:

The court's treatment of the fraud claim also demonstrates the error inherent in its approach. According to both the advisory committee's notes to Rule 23(b)(3) and this court's decision in Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880 (5th Cir.1973), a fraud class action cannot be certified when individual reliance will be an issue. The district court avoided the reach of this court's decision in Simon by an erroneous reading of Eisen; the court refused to consider whether reliance would be an issue in individual trials.

(Footnote omitted.)  Defense lawyers continue to rely on that reasoning today when plaintiffs propose massive classes based on individual frauds.  

Large-value claims make for poor class actions.  The Fifth Circuit also noted that, as had been apparent for some time, there was real money in tobacco cases.

[I]ndividual damage claims are high, and punitive damages are available in most states.The expense of litigation does not necessarily turn this case into a negative value sut, in part because the prevailing party may recover attorneys' fees under many consumer protection statutes.

As a result, it would be very difficult to prove that the proposed class action was superior to an individual case for a plaintiff who had suffered actual harm.

So what's the takeaway for Castano? Many defense lawyers consider this one of their "go-to" cases for predominance and superiority analysis. And for a lucid explanation of why a rigorous analysis is necessary before certifying a class, few cases are better.

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Noted plaintiffs’ lawyer Elizabeth Cabreser has an article in a recent issue of the Denver University Law Review, Apportioning Due Process: Preserving the Right to Affordable Justice. The article is notable for several reasons, but mostly because Cabreser uses it to tell a story that supports the rhetoric plaintiffs' lawyers invoke when moving to certify a class. To wit:

• Due process is expensive.
• Primarily because corporate defendants use procedure as an attrition weapon. (Also, hourly billing encourages defendants to work a "thousand plodding hours" instead of "one brilliant one.")
• The Class Action Fairness Act (CAFA) just makes the problem worse. The passage of CAFA has sent class actions to a bottlenecked federal judiciary, further delaying relief to people who desperately need it.

It's a well-written article that strives to accomplish two goals at once. First, Cabreser tells a story about due process, and one likely to have intuitive appeal to judges.

At the same time, she's building a case for the superiority of class actions over other ways of resolving disputes. If litigation is so expensive, and the claims are so small, then the only solution must be a class action. Right?

Maybe not. In her discussion of how to make justice more affordable for individuals, Cabreser ignores a number of other methods individuals have of challenging large corporations over smaller claims. Those include:

• Small claims court.
• Arbitration. Corporations often have arbitration clauses in their contracts with individuals. And, often, those clauses state that the corporation will cover the costs of the arbitration. Sometimes, they even provide a premium for the consumer if the corporation fights the arbitration and loses. It's small wonder that class-action plaintiffs' firms don't like arbitration, because it often precludes large-fee class actions.  But the fact that arbitration won't pay a Lieff Cabreser's fees hardly makes it an unattractive option for most consumers.
• Statues that authorize attorneys' fees.

What can we take away from this? First, this is an excellent example of plaintiffs’ rhetoric supporting class actions. Second, when plaintiffs start talking about how a class action is the only possible alternative, it’s time for defendants to get suspicious. Class actions may sometimes be the best solution to a widespread problem, but they are rarely the only one.

(One final note: careful readers will observe that the entries this week are a little briefer than usual. That’s because I’m on vacation. Expect more “classic cases” and quick summaries of interesting articles throughout August.)

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 I'm going to try a new semi-regular feature, which is to provide summaries of some of the seminal cases on which class-action defendants frequently rely. Instead of focusing on the tactics that led to these rulings, I'll be highlighting the most commonly-used passages, as well as some that may be wrongly overlooked.

We'll start this out with In re Rhone-Poulenc Rorer (7th Cir. 1995). In re Rhone-Poulenc Rorer involved a particularly difficult set of facts: a proposed class of HIV-positive hemophiliacs sued a group of drug companies that manufactured blood solids. Because the companies did not know enough about how HIV was spread, they had not screened properly for the disease, and had inadvertently infected the members of the class. (The hemophiliacs needed blood solids to provide the clotting factor that their blood lacked.) The plaintiffs sought certification of a class asserting two theories, a conventional negligence theory (the drug companies should have had better screening procedures for HIV), and a more inventive "serendipity" negligence theory (had the drug companies done a better job of screening against Hepatitis B, they would also have caught the HIV-infected blood).

The trial court certified the proposed class. Since Rule 23(f) (allowing for interlocutory appeals of class certification orders) did not yet exist, the defendants sought a writ of mandamus from the Seventh Circuit. A panel of the Seventh Circuit led by then-Chief Judge Richard Posner granted mandamus and reversed the certification order. In doing so, it made the following observations that have proven useful to defendants:

Certified classes create intense pressure to settle.

Suppose that 5,000 of the potential class members are not yet barred by the statute of limitations. And suppose the named plaintiffs in Wadleigh win the class portion of this case to the extent of establishing the defendants' liability under either of the two negligence theories. It is true that this would only be prima facie liability, that the defendants would have various defenses. But they could not be confident that the defenses would prevail. They might, therefore, easily be facing $25 billion in potential liability (conceivably more), and with it bankruptcy. They may not wish to roll these dice. That is putting it mildly. They will be under intense pressure to settle.

The law of negligence varies from state to state.

The law of negligence, including subsidiary concepts such as duty of care, foreseeability, and proximate cause, may as the plaintiffs have argued forcefully to us differ among the states only in nuance, though we think not, for a reason discussed later. But nuance can be important, and its significance is suggested by a comparison of differing state pattern instructions on negligence and differing judicial formulations of the meaning of negligence and the subordinate concepts.

Or, as Posner put it, quoting Oliver Wendell Holmes,

"The common law is not a brooding omnipresence in the sky, but the articulate voice of some sovereign or quasi sovereign that can be identified." The voices of the quasi-sovereigns that are the states of the United States sing negligence with a different pitch.

(Internal citations omitted.)

Courts must be careful when bifurcating a class action.

Bifurcation and even finer divisions of lawsuits into separate trials are authorized in federal district courts. And a decision to employ the procedure is reviewed deferentially. However, as we have been at pains to stress recently, the district judge must carve at the joint.

(Internal citations omitted.)  How does one tell an improper bifurcation?

The first jury will not determine liability. It will determine merely whether one or more of the defendants was negligent under one of the two theories. The first jury may go on to decide the additional issues with regard to the named plaintiffs. But it will not decide them with regard to the other class members. Unless the defendants settle, a second (and third, and fourth, and hundredth, and conceivably thousandth) jury will have to decide, in individual follow-on litigation by class members not named as plaintiffs in the Wadleigh case, such issues as comparative negligence -- did any class members knowingly continue to use unsafe blood solids after they learned or should have learned of the risk of contamination with HIV? -- and proximate causation. Both issues overlap the issue of the defendants' negligence.

So what are the primary takeaways from In re Rhone-Poulenc Rorer? Defendants should make sure they put the plaintiff to their burden. Rushed state law analyses and underdeveloped trial plans are not enough.

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Commonality is rarely the subject of much discussion in class certification. The plaintiff often treats it as a perfunctory hurdle, subsumed into the more difficult questions of predominance (under Rule 23(b)(3)) or cohesiveness (under Rule 23(b)(2)).  But, much like numerosity, commonality is a requirement that may reward careful scrutiny when a defendant opposes class certification.

In Gaston v. Exelon Corp., 247 F.R.D. 75 (E.D. Pa. 2007), a group of African-American employees sued their employer for engaging in various policies (including its promotion and compensation decisions) that they claimed violated Title VII. They sought to represent a class of employees

who have been or may be subjected to Exelon's challenged policies and practices that deny Black exempt employees equal opportunity …

Exelon filed a motion to strike class allegations, which the court granted in part, ruling that no 23(b)(2) class was possible. When the plaintiffs later moved to certify a Rule 23(b)(3) class, the court actually found a number of problems with plaintiffs' class proposal. The class definition was not ascertainable. The named plaintiffs were subject to unique defenses, making them inadequate and atypical representatives. But the fundamental problem the court found was that the proposed common issues were not common.

In fact, the court took a Goldilocks-like approach to commonality (that is, if Goldilocks hadn't liked the baby bear's stuff either). It found that the proposed common issues were either too broad, too narrow or just plain irrelevant. What do I mean by too broad? As the court put it:

[P]laintiffs' first proposed question is “whether PECO's performance evaluation policy or practices negatively impact Class members.” Id. Were a question of this sort suitable to demonstrate commonality, that requirement would become a puff of smoke. Plaintiffs could simply propose the ques- tion “has employer discriminated against class mem- bers” and always meet the commonality requirement. Obviously, something more is necessary.

As for too narrow:

Other supposedly common questions that plaintiffs identify apply only to a small fraction of the proposed class. The question “whether Class members are less likely to be promoted into intermediate- or high-level salary grades than are otherwise-similar White employees,” for example, only applies to class members who were eligible for a promotion into those grades.

And finally, the court found that the remaining common questions had no bearing on the case itself.

Other questions, such as “whether Class members are less likely to be in high-level salary grades,” are simply irrelevant to a Title VII suit. As we discussed above, it is not sufficient for plaintiffs merely to identify a disparity in the representation of black employees in higher salary grades. They must also identify a pattern or practice of employment decisions during the class period that has resulted in this disparity.

What does this analysis mean for defendants? Despite the traditional view that commonality is a low hurdle for the plaintiff to clear, it is still worth challenging when the only common questions have nothing to do with the heart of the case.

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One of the strongest justifications for class actions is that they address large social wrongs that would otherwise go unremedied. But can there be a wrong that is simply too large for a class action to handle it properly? Something truly huge, like apartheid or genocide.

Some plaintiffs' lawyers, like Hausfeld LLP, say no. In fact, the Hausfeld firm has staked its business model on that view.

Unfortunately, in most cases, the answer is probably yes. Some issues, like genocide or other large-scale human-rights violations, may simply be too complex to attack on a classwide basis in an American courtroom.

For example, take the case of Presbyterian Church of Sudan v. Talisman Energy, 226 F.R.D. 456 (S.D.N.Y. 2005). The proposed class definition hints at the scope of the problem into which the plaintiffs sought to insert the Southern District of New York. They asked to represent:

All non-Muslim, African Sudanese inhabitants of blocks 1, 2 or 4 or Unity State … [the “Class Area”] at any time during the period January 1, 1997 to June 15, 2003 [the “Class Period”], who were injured during that period by acts of the Sudanese military or allied militia constituting genocide, extra-judicial killing, enslavement, forced displacement, attacks on civilians constituting war crimes, confiscation and destruction of property, torture or rape.

The plaintiffs alleged that the defendants—Talisman Energy and the state of Sudan—

collaborated in a joint military strategy of ethnic cleansing against the plaintiffs for the purpose of creating a secure buffer zone that facilitated the development and exploitation of oil reserves …

The plaintiffs sought relief under the Alien Tort Claims Act (which allows foreign nationals to bring lawsuits in the US under certain circumstances), and requested certification under both Rule 23(b)(2) and Rule 23(b)(3).

The court held that the 23(b)(2) request, which simply asked for the creation of a "constructive trust," was

an ill-disguised claim for damages. Consequently, the plaintiffs' request is precisely the sort of sham request for injunctive relief that the Second Circuit has stated cannot support a Rule 23(b)(2) certification.

In deciding whether to certify a Rule 23(b)(3) damages class, the court rehearsed a number of different approaches. It noted that the vast majority of ATCA classes had never reached certification, and of the three that had been certified, none were under Rule 23(b)(3). It examined the closest analogous class actions it could find—toxic torts, mass accidents, products-liability cases—and noted that certification of these classes was rare as well. Ultimately, the court held that, while there were “certainly important common issues to be resolved at trial,” causation would likely require an individualized inquiry.

The plaintiffs will have to show with respect to each individual class member that the injuries for which they are claiming damages were actually caused by the Campaign. Given that Talisman intends to show that warfare persisted through much of the Class Period between shifting, protean factions of rival rebel groups based loosely on tribal affiliations, and that such warfare included attacks on villages in the Class Area, proximate causation of each attack will be a hotly contested issue.

ATCA class claims raise a host of complex issues, none of which are easy to resolve at any level. They often involve delicate questions of international relations. They can pose a public relations problem for companies that do not handle the issues properly. And they raise valid and difficult questions of conscience for individual employees. But, addressing these issues, even just by deciding liability for historical injuries, is enormously complex. If the American executive branch—which is in charge of foreign policy—has yet to find an effective solution to these tragic problems, it’s hardly surprising that the courts have not, either.

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When drafting its Principles for Aggregated Litigation, the American Law Institute considered a novel idea.  instead of applying the law of each of the fifty states to a multi-state class action based on state law (as the Supreme Court had long held was required by due process), a court could instead apply the "average" state law, determined averaging the probability a defendant would be held liable under each jurisdiction substantive law.

The ALI ultimately rejected the proposal. But Harvard Law professor David Rosenberg, joined by 3L Luke McCloud, thinks that courts should actually adopt the proposal when deciding whether to certify a class.

So what's their pitch?

The rejection of the average law solution is profoundly mistaken. It stems from the prevailing view among courts and commentators that the nature of the governing law and businesses‟ understanding and response to it at the time of the underlying conduct is the same regardless of whether the contemplated activity involves an intrastate or interstate risk. Our principal contribution is a basic, straightforward point: the average of the differing state laws is in reality the actual law that in fact ultimately governs the choice a business will make and expresses the choice the multiple states involved expect and presumably want the business to make regarding whether and how safely it should engage in activities involving interstate risk.

(Footnotes omitted.)

The authors make an intriguing theoretical argument, but it's woefully incomplete. Without diving too deep, a few of the questions it leaves unanswered:

Who decides what the "average law" is? Given the novelty of the proposal, a plaintiff who just argues "Well, we'll use average state law," is going to have to show that the proposal works in practice. And part of that will be showing the court that it is possible to apply average state law in both a fair and efficient way.  Deciding the best "average" will likely require as much work from the court as crafting an "Esperanto" jury instruction.  

Does the authors' model account for changes in law? As any practicing lawyer can tell you, each new case issued in a state court changes the odds of proving liability, sometimes subtly, sometimes less so. It's certainly possible for a mathematical model to account for changes in information, but it's not something the authors account for here.  And accounting for changes will inevitably complicate the model.

What about Shady Grove? This is the doctrinal objection, and it's a huge one. Because Rule 23 gets its legal force from the Rules Enabling Act, it cannot change the substantive rights of the parties. As the Supreme Court reaffirmed this year:

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

Using the law actually applicable to a given claim is at the very least a "rule of decision," if not a full-fledged substantive right.

There are other possible flaws with the authors' proposal (for example, there may well be Seventh Amendment implications). But the fact that Rosenberg and McCloud did not account for the clear dictates of class action law is reason enough that federal courts will likely steer far clear of it.

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

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

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

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

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

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

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

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

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

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

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

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For the defendant, lead-plaintiff motions in class actions can often seem like a small sideshow to the real litigation. (Indeed, in many kinds of class actions, where only a single firm or consortium has brought a lawsuit, the lead-plaintiff motion may only be pro forma.) For plaintiffs however – particularly securities plaintiffs – lead-plaintiff motions lie somewhere between corporate merger and bloodsport. The consequences to winning or losing these motions can have effects for years, and the efforts to win have landed more than one attorney in ethical trouble, and sometimes prison.

But how important is the lead-plaintiff motion really? NYU Professor Stephen Choi offers one look (based on a survey of lead-plaintiff motions between 2003 and 2005) in a working paper entitled Motions for Lead Plaintiff in Securities Class Actions. His conclusion? Getting appointed lead plaintiff is still critically important to plaintiffs’ attorneys, primarily because it allows them to command higher fees.

Professor Choi also found that plaintiffs’ counsel – particularly experienced attorneys with lots of repeat interactions with co-counsel – will enter into side deals to determine who will be lead plaintiff, and with it, lead plaintiffs’ counsel. As a result, the plaintiffs with the largest losses are not always appointed lead plaintiff, and their attorneys are often able to command higher fees for fewer hours worked.

What use is Professor Choi’s study to the securities class-action defendant? The paper does provide valuable intelligence on how plaintiffs' counsel operate, something that defendants always need more of.  But, more importantly, Professor Choi’s data suggests a possible argument at class certification. His data on fees and hours worked can operate as a rough proxy for client supervision. If there is evidence that plaintiffs’ counsel cut a side deal to determine who would be lead plaintiff (for example, if an investor with larger losses stepped aside to allow another investor represented by a larger firm to be lead plaintiff), that may indicate that the lead plaintiff does not have the independence to adequately oversee its attorneys. In that case, the defendant may argue that the named plaintiff is not an adequate representative of the class.

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Antitrust class actions can be tough cases for defendants. By their nature, cases against alleged monopolists lend themselves well to David-versus-Goliath rhetoric. But, just as difficult, a number of the fundamental questions in antitrust class actions can only be decided after a “battle of the experts” that costs a great deal of money and may alienate judges who – like many lawyers – went to law school because they didn’t like math. So how can defendants rein in meritless antitrust class actions?

Kelly Bozanic, a fellow at Penn State’s Dickinson School of Law, has written a working paper that offers one solution. Her main argument, which is not of much help to practitioners, is that the court should “rigorously consider” antitrust standing at the class-certification stage. Of course, a court already must rigorously consider all Rule 23(a) requirements before certifying a class. And it would seem clear that a plaintiff who lacks antitrust standing would be either an atypical or inadequate class representative. At minimum, she will be subject to the “unique defense” of lack of antitrust standing. (In fact, one would expect to see a number of pre-certification summary judgment motions on the issue of antitrust standing.)

But Bozanic’s argument suggests a more interesting point: a wrongful certification of an antitrust class (or even just certification of an overbroad class) could lead to overenforcement, which would chill otherwise competitive conduct. To the extent that is true (and demonstrable), a defendant may argue that the class action against it is not superior because it would chill legitimately competitive conduct. (There’s a related argument also worth making – where a government agency like the Department of Justice Antitrust Division or Federal Trade Commission has investigated possible antitrust violations, certifying a class on top of that enforcement may also be considered overdeterrence.) Of course, to make that argument clearly to the court, the defendant may need the help of one of those high-priced experts.
 

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University of Pittsburgh Law Professor Rhonda Wasserman has posted a working paper to the Social Science Research Network (SSRN) with the weighty title “Transnational Class Actions and Interjurisdictional Preclusion.”  While it spends a great deal of time reviewing the current state of the literature on preclusion in class actions and class-action regimes in other countries (both useful surveys to have), the paper asks a simple but important question for class-action defendants: If a defendant settles a class action involving more than one country’s citizens, can it enforce the agreement against all of the class members?

This is not an abstract question. Multi-national class actions are becoming more common.  And for many defendants, the one benefit of class-action litigation is that it offers a degree of finality that one cannot find in individual litigation, and only rarely in mass torts.

To answer that question, Wasserman reviews a report of the British Institute of International and Comparative Law, which surveyed the preclusion doctrines of various European countries, including (among others) the United Kingdom (England and Wales), Germany, France, and Romania. As Wasserman reports, the Institute comes to three conclusions:

• Claim preclusion in Europe is “quite a bit narrower than the transactional test that is applied widely in the United States.” In particular, European courts are less likely to give preclusive effect to classwide settlements.
• “[A]bout half of the participating European countries do not accord their judgments issue preclusive effect.”
• “[A] review of the European class action and collective action vehicles reveals a deep reluctance to bind those who neither commence litigation in their own name nor affirmatively choose to opt in.”

What does this mean for class-action defendants? It actually has two implications, both equally important:

First, a defendant looking to settle a multi-national class action should be very sure of the preclusion doctrines in the countries where it may seek to enforce any settlement agreements.

But second, a multi-national class action may not be superior to other forms of litigation, because it may not resolve the dispute for various members of the class.
 

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As a few other blogs have noted, last week Justice Souter emerged from semi-retirement to write an opinion on a Rule 23(f) petition. While a new opinion from a former Supreme Court justice is – by itself – newsworthy, it also provides an important tactical lesson for defendants briefing certification.

In Gintis v. Bouchard Transportation Co., Inc., 2010 WL 617395 (1st Cir. Feb. 23, 2010) (Souter, J.).the plaintiffs brought a proposed class action for property damage caused when a fuel barge struck an offshore reef, spilling 98,000 barrels of oil across 90 miles of Massachusetts coastline. The defendants admitted they were negligent in causing the spill, although they did not concede liability to any individual property owners. The Massachusetts government took charge of the cleanup efforts, supervising a “Unified Command” consisting of the Coast Guard, the commonwealth’s Department of Environmental Protection, the defendants, and an unnamed “Licensed Site Professional.” The Command used a common methodology for cleaning the spill, dividing the coastline into segments and categorizing them by the degree of oil contamination. When the plaintiffs (all of whom owned property on the affected coastline) moved for class certification, the trial court declined, relying heavily on a previous case in the jurisdiction.

The First Circuit Court of Appeals reversed. Technically, its ground for doing so was that the lower court had not engaged in a “rigorous analysis” of the certification motion, but Justuce Souter also suggested “plaintiffs presented substantial evidence of predominating common issues.”

What were those issues?  Some were specific to the case, like the defendant’s admission of negligence, and the plaintiffs’ announced intent to use Command records to prove their claims.  But others appear to stem directly from the defendant’s arguments. Among them were the defendants’ announcement that it would oppose admitting the Command records into evidence:

Bouchard's very opposition to the use of the arguably helpful records seems to promise that most or all cases, if individually litigated, would require repetitious resolution of an objection by Bouchard that is common to each one of them. Bouchard's position, in other words, apparently guarantees a crucial common issue of great importance in the event of individual litigation.

and their announced intention to oppose common expert testimony:

Bouchard's effort to discredit this approach apparently portends a fight over admissibility and weight that would be identical in at least a high proportion of cases if tried individually.

What’s the defendant’s lesson from this? It is not enough to just challenge plaintiff’s common proof. The defendant must make an affirmative showing why individualized issues will predominate over common issues.
 

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Are courts making class certification too easy for defendants to oppose? San Francisco law professor Joshua P. Davis (this one, not this one) and Berger & Montague shareholder Eric Cramer argue just that in an forthcoming article in the Rutgers Law Journal, “Of Vulnerable Monopolists?: Questionable Innovation in the Standard for Class Certification in Antitrust Cases.”

The article critiques those appellate decisions – most notably In re Hydrogen Peroxide Antitrust Litigation – that have ruled that a court “must make whatever factual and legal inquiries are necessary and must consider all relevant evidence and arguments presented by the parties” in deciding certification. Davis and Cramer make four arguments against the use of limited merits inquiries: (1) certification standards need to be looser, not more stringent; (2) heightening the certification standard may violate the Seventh Amendment; (3) forcing an early inquiry into classwide evidence forces an inquiry into (at least in antitrust cases) issues irrelevant at trial; and (4) making the certification standards tighter constitutes a “back-door change” to Rule 23.

Davis and Becker’s arguments are all interesting, if flawed. But (3) is the argument a defendant is most likely to see in class-certification briefing. Davis and Becker argue that delving into contested facts at class certification:

“could effectively force plaintiffs to prove something relevant to “the merits” at class certification that they would not need to prove on “the merits” at any other stage in the case, including at trial. The inquiry into common impact is at times framed as addressing whether plaintiffs can show with class-wide evidence that all or virtually all class members suffered at least some harm. In reality, however, as long as harm is reasonably widespread across the class, it is highly unlikely that the issue of the proportion of the class that suffered harm — for example, whether 60%, 75%, or 99% of the class members paid overcharges — would even come up at a class trial.”

(Emphasis in original, footnote omitted.) According to Davis and Becker, plaintiff’s counsel won’t bring up non-injured class members because they’re irrelevant, and the defense will have no reason to because the plaintiff has conceded they weren’t harmed. So why address these class members at certification?

The largest flaw with this argument is that it assumes that a class trial is identical to an individual trial. But it’s not. Unlike an individual trial, a class trial isn’t necessarily finished when the jury renders a verdict. A class action exists to provide relief to the members of the class. If the class contains both injured and uninjured members, then the trial must include a claims process to separate the injured from the uninjured. And that process is one that class members (who need it for relief), the defendant (for whom it will decide the total liability) and the court (which cares about the administration of justice) all do care about. So even in antitrust cases, the predominance inquiry is central to how the court conducts the entire trial. If a plaintiff advances Davis and Becker’s argument, a defendant can profitably point out that the claims process is only irrelevant if the plaintiff does not care whether injured class members receive relief.

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There is no avoiding the fact that class actions are complicated. They involve large numbers of claimants, an extra set of procedural rules, and often invoke complex federal statutes like CERCLA. As a result, all parties find briefing class certification to be challenging.

So it’s a good thing we have LaBaouve v. Olin Corp., 231 F.R.D. 632 (S.D. Ala. 2005). According to the 53-page, 112-footnote opinion, LaBaouve was a monster of a case, involving allegations of mercury contamination in an Alabama town, reams of scientific evidence, and complex questions of standing and causation. Even the best advocates would have a hard time distilling this case down to its essence. So, as he sifted through the voluminous briefing to decide class certification, Judge William Steele offered some very sound advice about what not to do when briefing a complex case.

• Leave no argument behind.

“Particularly in a case of this magnitude, a litigant's interest is best served not by raising every conceivable argument (no matter how implausible or unpersuasive), but by judiciously identifying and pressing the stronger arguments while leaving the weaker ones behind.”

The defense had no shortage of arguments, including strong challenges to both predominance (causation was particularly individualized) and ascertainability (the class definitions were fuzzy at best), which is why the court was surprised it challenged the plaintiffs on easy-to-meet numerosity:

“Defendants' insistence on contesting Rule 23(a)(1)'s applicability … is one of the more obvious examples of needless detours imposed upon this Court by both sides' ‘slash-and-burn,’ ‘object-to-everything’ strategy.”

• Use lots and lots (and lots) of exhibits.

The parties may have thought that the more evidence they each presented, the better; the court disagreed. Noting that the hearing exhibits, placed on top of each other, would dwarf then-Houston Rockets center Yao Ming, it observed that

“the parties may not, by the simple expedient of dumping an undifferentiated mass of evidentiary material into the record, shift to the Court the burden of identifying evidence supporting their respective positions.”

• Cite the cases that support you, no matter what.

General Telephone Co. of the Southwest v. Falcon, a 1982 Supreme Court opinion that established the “rigorous analysis” standard for class certification, is one of the definitive precedents in class-action practice. So the court was perfectly reasonable when it held that

“To the extent that plaintiffs rely on pre-Falcon authorities in support of a more liberal or lenient standard than the ‘rigorous analysis’ required by the Supreme Court, the Court declines to adopt them here.”

• Subtlety is for losers.

Trial lawyer Max Kennerly recently advised lawyers to always write angry briefs, but never file them. Judge Steele would agree:

“Plaintiffs' briefing of the history of events at the Olin facility frequently lapses into vituperative disparagement of defendants. For example, plaintiffs deride Olin's "corporate greed" and "arrogance," lambast its "profits over people corporate philosophy," accuse it of hiring a contractor "who enjoyed Olin's brand of deceit," characterize Olin as an "unrepentant polluter," and lament that "[t]here is no end to Olin's misconduct." Such inflammatory rhetoric may be appropriate in a closing argument to a jury; however, it is distracting and unhelpful in the context of a class certification brief.”

(Citations omitted.)

Briefing class certification is always difficult, and there’s no right way to do it. Ask ten class-action lawyers, you may get ten valid approaches; so long as they don’t include anything on this list.

Know of any other bad briefing habits? Mention them below in the comments.

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Typicality “tends to merge” with adequacy and commonality in class certification briefing. As a result, it can sometimes be hard to get one’s arms around exactly how to attack typicality. The most popular formulation for defendants is “as goes the claim of the named plaintiff, so go the claims of the class.”  But what does that mean?

A case from last year – Wiener v. Dannon Co., 255 F.R.D. 658 (C.D. Cal. 2009), provides a good example of an effective typicality argument.

Dannon sells yogurt, which it markets as healthy. In 2008, the plaintiff sued Dannon, alleging that it had breached its express warranty to its consumers and violated the California consumer-protection laws by marketing three brands – Activia, Activia Light, and DanActive – as scientifically or clinically “proven” to help with digestive health and the immune system. (Like many plaintiffs, Wiener used the breach of express warranty and California’s consumer-protection claims as a means of sidestepping the problem of proving individual reliance in a common-law fraud claim.)

The problem: the plaintiff, Wiener, had bought Activia, but not Activia Light or DanActive yogurts. (A second named plaintiff had bought DanActive, but not the other two brands, but he was dismissed with prejudice earlier in the litigation.)

When the plaintiff moved for certification, Dannon argued that the named plaintiff was not typical or adequate because she had not bought two of the three products at issue in her lawsuit. While the court found that the plaintiff had established numerosity, commonality, and adequacy under Rule 23(a), and predominance and superiority under Rule 23(b)(3), it found that the fact that the plaintiff had not bought two of the three products for which she was suing made her atypical.

In cases involving a variety of products, courts, emphasizing that different products have different functions and different consumers, have held that a named plaintiff that purchased a different product than that purchased by unnamed plaintiffs fails to satisfy the typicality requirement of Rule 23(a)(3).

This was not a complete victory for the defendant. While Dannon won this certification motion, the court gave plaintiff’s counsel leave to substitute in another class representative if possible. Still, in the subsequent year, there has been no other reported decision on this case, which suggests that maybe plaintiff’s counsel could not find a typical class representative.

So what can we learn from this case? The defendant serve discovery (either interrogatories or requests for admission) to make the named plaintiff has bought all of the products at issue. If not, the defendant has a strong argument that the named plaintiff is not typical of the proposed class.

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Last month, when the Florida SBA held its “beauty contest,” a number of plaintiffs’ firms put their internal workings on display in the hopes of securing its business. At the time, I noted that many of these firms offered investment monitoring services to their clients. In return for this free “investment monitoring,” the investor presumably would make the plaintiff’s firm its counsel in any securities-fraud suits it ended up filing.

Described that way, the monitoring agreement sounds like a win-win. The institutional investor gets a watchdog, and the plaintiff’s firm gets a potential lead plaintiff. The Southern District of New York (no stranger to securities class actions) saw it differently.

In Iron Workers Local No. 25 Pension Fund v. Credit-Based Asset Servicing & Securitization, LLC, plaintiffs represented by two different firms – Bernstein Litowitz and Coughlin Stoia – competed to be named lead plaintiffs for a securities class action. During the course of determining which fund should be lead plaintiff,

the Court was made aware of an arrangement between the Iron Workers Fund and its counsel, Coughlin Stoia Geller Rudman & Robbins LLP ("Coughlin Stoia"), that cast in doubt the adequacy of the Fund to serve as lead plaintiff in any event. … As Dennis Kramer, the Fund's administrator, testified:

Q. [by the Court] ... what you've chosen to enter into, as I understand it, is a contract where the monitoring counsel will also be the counsel who represents you if a lawsuit is brought, is that right?
A. [by Mr. Kramer] Yes, that's true.
Q. And the only way they get paid is if they bring such a lawsuit and recover, is that right?
A. Correct.

Going far beyond any traditional contingency arrangement of which the Court is aware, this practice, on its face, creates a clear incentive for Coughlin Stoia to discover "fraud" in the investments it monitors and to recommend to the Fund's non-lawyer administrator (and, through him, to the trustees) that the Fund, at no cost to itself, bring a class action lawsuit. In other words, the practice fosters the very tendencies toward lawyer-driver litigation that the PSLRA was designed to curtail.

(Internal citation omitted, emphasis added.) The court invited further briefing on adequacy, as well as on the ethical implications of the agreement. While the briefing cited several cases in which courts had commented favorably on the monitoring agreements (and an affidavit condoning the practice by ethics guru Geoffrey Hazard), the court remained unconvinced, and awarded lead plaintiff status to Bernstein Litowitz’s client. (The court noted that Bernstein Litowitz also offered investment monitoring, but did so without the same explicit quid pro quo.)

Investment monitoring agreements are still common. And most plaintiffs’ firms prize their reputations for integrity as critical for winning lead counsel slots, so they’re likely to try to avoid the appearance of conflict. But, that said, the S.D.N.Y.’s unease suggests that defense counsel may find ammunition for opposing class certification if they probe further into the nature of the monitoring agreement in each case.

 

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In a class action, the named plaintiff is supposed to be an adequate representative of the proposed class. While a number of courts have pointed out that the idea that the named plaintiff drives the litigation is largely a legal fiction, it remains a fiction integral to Rule 23. So, given what does it take to disqualify the named plaintiff from serving as an adequate class representative?

One answer is lack of credibility. In Davidson v. Citizens Gas & Coke Utility, 238 F.R.D. 229 (S.D. Ind. 2006), the named plaintiffs alleged that the defendant required all candidates for promotion to take a test known as the Work Competency Assessment, and that the test was biased against African Americans. Plaintiffs’ counsel made a last-minute addition of two plaintiffs to represent a proposed subclass of job applicants (as opposed to just promotion applicants).

When plaintiffs moved for class certification, the defendants challenged their adequacy because, in deposition testimony, each of the two newly-added named plaintiffs admitted to having felony records that included convictions for theft or burglary (both crimes related to honesty). In addition, one of the two new plaintiffs had lied about his felony record on his application. The defendant argued that the named plaintiffs’ lack of credibility made them inadequate class representatives. The court agreed, stating

personal characteristics, such as the credibility and integrity of a putative class representative, have a direct bearing on their ability to adequately represent absent members of the class. Problems of credibility, when sufficiently serious, can prevent a named plaintiff from being certified as a class representative. While we acknowledge that functionally the plaintiffs' attorney is most often the true driving force behind the representation of the class, the named representatives are still required to be more than window dressing or puppets for class counsel. A putative class representative's lack of credibility should not be allowed to significantly detract from the case. A representative must, at the very least, be trustworthy enough to protect the interests of the class by working to pursue a remedy which benefits the class as much as it does counsel.

(Internal quotations, citations, and footnotes omitted, emphasis added.)

Many defense counsel, when taking depositions of the named plaintiffs, treat the questions about personal background as perfunctory. It is worth remembering that the named plaintiff’s character may actually have a bearing on whether he can adequately represent the proposed class.

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Martin Redish is back in the news. In the past week, he’s been written up in Forbes and the ABA Journal, as well as a series of associated blog posts by academics like Elizabeth Chamblee Burch. The Forbes profile – which kicked off the coverage – quotes him as saying that the rights held by class action litigants:

are individually held rights … What a lot of class action scholars and proponents have done--quite cleverly, I must say--is engage in a sort of alchemy to transform individual rights into collective rights.

The Forbes profile doesn’t focus on any particular work of Redish’s, although the discussion of cy pres relief recalls his forthcoming article on “Cy Pres Pathologies,” and Chamblee Burch uses it to highlight his latest book: Wholesale Justice: Constitutional Democracy and the Problem of the Class Action Lawsuit. But the Forbes headline (“Are Class Actions Unconstitutional?”), which has generated much of the buzz, presumably refers to Redish’s argument that the Rules Enabling Act (which gives authority to the Federal Rules of Civil Procedure) is unconstitutional because it violates Article III’s “case and controversy” requirement and the nondelegation doctrine. (For those playing along at home, Redish makes this argument at pp. 73-85.)

Redish predicts that his proposals will fall on “deaf ears.” He’s likely right – not because those proposals are unsound (or even invalid), but because very few lawyers would argue that the Rules Enabling Act (and with it, the entire structure of the federal rules) is unconstitutional. The typical class-action defendant – which is usually a corporation familiar with the benefits and drawbacks of litigation – is unlikely to want to bring the entire temple down on top of itself, no matter how much it might dislike the effects of Rule 23. And a settlement objector – most often a moonlighting plaintiff’s attorney – is even less likely to want to undermine the entire class-action structure. Nor is Congress likely to un-delegate responsibility for the Rules of Civil Procedure anytime soon.

Does this mean Redish’s work is useless? Hardly. There’s always value in going back and kicking the tires on people’s assumptions; no one wants a constitutional blowout at high speeds. But even more importantly, Redish at his best is gimlet-eyed about the disconnects between the legal fictions that accompany the class action and the realities of how class awards and class settlements get administered. While Redish’s approach to these disconnects is largely theoretical, it provides an excellent starting point for some more grounded legal attacks on meritless class actions.


 

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 Despite the amount of time defense counsel spend handling class actions, one aspect often continues to frustrate analysis – plaintiffs’ counsel. Studying how plaintiffs’ counsel operate in class actions (which is, of course, essential to opposing them in individual litigation) can sometimes feel like Kremlinology, or reading tea leaves. Since plaintiffs’ counsel have a strong interest in presenting their best possible face to the world – and defendants often feel strong distrust of plaintiffs’ PR – defense counsel risk predicting the moves of a caricature, rather than a fully-fleshed opponent.

Fortunately, a number of academics have begun to examine the ways in which plaintiffs’ counsel interact, find clients, and build their cases. One of the more prolific scholars of class-action practice, Stephen Choi, has teamed with longtime co-author A.C. Pritchard and judicial clerk Drew T. Johnson-Skinner to perform an analysis of “pay to play” practices among plaintiffs’ counsel and state pension funds. 

As Choi and company describe it, since the passage of the Private Securities Litigation Reform Act (which heavily favors institutional investors over individual investors as class representatives, on the theory that they are more likely to be independent of class counsel):

Most of the institutional investors that have agreed to serve as lead plaintiffs have been government-sponsored pension funds. Many of these funds are managed directly by politicians, such as state comptrollers, who must campaign to retain their current positions, or may have designs on higher offices. Alternatively, these funds are managed by political appointees, who typically owe their position to the state’s governor. The presence of political influence over these funds naturally raises the question of whether law firms are making political contributions to the politicians who wield that influence in order to enhance their chances of being selected to represent the pension funds. Simply put, are law firms buying lead counsel status with campaign contributions, i.e., do class action lawyers pay to play?

(Emphasis added.) Their conclusion? Yes. Class-action lawyers do. And firms that appear to win their work as a result of “pay to play” practices generally receive higher attorneys’ fees than those that don’t.

So what are the strategic implications of this finding? For defendants, Choi and company’s analysis implies that it's worth serving discovery exploring the various relationships plaintiffs’ counsel may have had, even with larger institutional investors. Commentators (and courts) had previously presumed that institutional investors would be more adequate than smaller clients because they had the incentive to oversee counsel (because they had a larger stake in the litigation), and the investing knowledge required to do it effectively. However, Choi and company's analysis implies that pension funds that accept “pay to play” contributions may lack the financial independence to oversee class counsel. If they lack that independence, they may not be adequate fiduciaries of the interests of the class. And that's a powerful argument against certifying a class.

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In their article “Robbing Peter to Pay Paul: The Conflict of Interest Problem in Sibling Class Action”, 21 Georgetown Journal of Legal Ethics 1195 (2008), Richard Stuhan and Sean Costello have come up with a novel argument against multi-front class actions. Recognizing that plaintiffs' counsel will often file multiple, single-state class actions in different states, the authors argue that doing so presents a conflict of interest. They call this the “Sibling Class Action” problem. Like parents, they claim, plaintiffs’ counsel shouldn’t favor one sibling class over another. As a result, they argue, counsel representing more than one class in different courts must be inadequate counsel to at least one of those classes.

Most plaintiffs would argue that individual plaintiffs are entitled to choose their counsel. But, Stuhan and Costello argue, counsel are only human:

The rub, however, is that the class lawyer will always have a favorite, whether she admits it or not, and one class will be treated better than the others, whether it is obvious or not.

That rub, they argue, translates into a real class conflict:

[s]imply stated, a lawyer who pursues sibling class actions cannot maximize the benefit to one class without reducing the benefit to another of the sibling classes. The class action lawyer in such circumstances is “robbing Peter to pay Paul.”

Even worse, they argue, that conflict is insurmountable

By bringing multiple sibling class actions, the class action lawyer has created a structural conflict that cannot be surmounted or cured. The conflict arising from the sibling rivalry presumptively renders the lawyer inadequate by putting her in a situation where she must trade off the interests of one class against those of another class.

It’s a powerful argument, but it’s not likely to get much use. From a strategic standpoint, then, plaintiffs have a simple workaround, one many have used in coordinated state-only class actions. Basically, class counsel join a "consortium" of counsel. Each law office heads up the class action in their state. The others are on the complaint as "of counsel." At that point, each class has separate "lead counsel," which presumably is allowed its "favorite child," and there is no apparent conflict.

Does that mean that there's no real conflict?

No -- it may still very well be that only one firm is in charge of the consortium, and that firm may favor one lawsuit over another. But a defendant will have a hard time proving that in court.
 

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One of the peculiar frustrations of class-action defense is that one occasionally encounters a case that, while it might survive a motion to dismiss, could never be certified as a class. Other times, the defendant discovers evidence early in a case that supports the same conclusion. In those cases, what can the lawyer do but grit her teeth and start in on (or keep pushing through) the long expensive process of discovery?

Well, she could file a motion to deny certification. In an appellate opinion handed down in July, the Ninth Circuit expressly held that a defendant can start the class certification briefing process instead of the plaintiff.

The case, Vinole v. Countrywide Home Loans, Inc., involved a wage-and-hour class action filed against Countrywide. The plaintiffs sought to represent a class of "External Home Loan Consultants" (semi-independent salespeople paid by commission), alleging they had been wrongfully denied the opportunity to earn overtime.

However, declarations from a number of Consultants showed that the time they spent working -- both in and out of the office -- varied greatly.  Armed with this strong evidence against certification, Countrywide decided to take the offensive. Three months before discovery closed, it filed a motion to deny certification.

The plaintiffs responded with an argument that has strong intuitive appeal. The question wasn't ripe yet; in fact, the motion was procedurally improper because they hadn't moved to certify a class. Turning the certification process on its head, plaintiffs argued, would lead litigants into "troubling new territory." (The plaintiffs weren't reckless. They also presented some evidence they would have used in their certification motion, although the court noted that they made a "strategic choice" to limit that evidence.)

While the plaintiffs' argument may have had strong intuitive appeal it ran up against the text of Rule 23.  The trial court held -- and the Ninth Circuit affirmed -- that:

Nothing in the plain language of Rule 23(c)(1)(A) either vests plaintiffs with the exclusive right to put the class certification issue before the district court or prohibits a defendant from seeking early resolution of the class certification question. The only requirement is that the certification question be resolved '[a]t an early practicable time.' The plain language of Rule 23(c)(1)(A) alone defeats Plaintiffs' argument that there is some sort of 'per se rule' that precludes defense motions to deny certification[.]

The Ninth Circuit also pointed out that while a motion to deny was unusual it was hardly new; cases stretching back to 1972 showed defendants moving either to strike class allegations, or deny certification. Having established the propriety of the motion to deny, the Ninth Circuit went on to affirm the denial of certification, based largely on those declarations.

What's the lesson we can learn from this case? In class actions, like in boxing, sometimes the best defense is a good offense.

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