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

Geoffrey Miller is one of the few law professors out there who consistently investigates real empirical questions about class actions. He's published on the role of objectors in class-action settlements, the use of non-pecuniary relief, and even the effect of judicial review on settlement rates. So when Miller comes out with a policy proposal--as he does in a recent article in the University of Illinois Law Review, it's worth paying attention to what he says.

Miller starts from the premise that "something is wrong with settlements." (If one were glib, one could say that his critique proves that something is right with settlements. Nobody's pleased with them.) His proposed solution? The preliminary judgment. As Miller proposes it, at any point, a party could move the court to declare whether it believed the plaintiff could establish her case by a preponderance of the evidence currently available.

A preliminary judgment is simply a tentative assessment of the merits of a case or any part of a case, based on the same sorts of information that the courts already consider on motions for summary judgment. The difference between a preliminary judgment and a summary judgment is that the court, in a preliminary judgment, would not be limited to deciding issues with which no reasonable jury could disagree. Instead, the court would provide its own provisional judgment on the merits of the case based on the information provided by the parties. A preliminary judgment, once given, would convert into a final judgment after the expiration of a reasonable period of time - say, thirty days. Any party against whom a preliminary judgment is issued, however, would have the right to object prior to the expiration of the period (with or without explanation), in which case the judgment would be vacated and the case would proceed according to ordinary rules of procedure. Like other threshold rulings, the preliminary judgment would then have no preclusive effect in the continuing litigation.

(Internal footnote omitted.)  According to Miller, this "preliminary judgment" would offer more information to the parties than a ruling on other preliminary motions--presumably because it would apply the same decision rule that applies at trial. He also believes it would reduce litigation costs.

In reality, while the motion for preliminary judgment would likely prove another useful tool, there is no reason to believe that it would be immune from the strategic behavior prompted by other versions of preliminary motions. Preparing a motion for preliminary judgment would not be costless. Defendants would have strong incentives to file early preliminary judgment motions, much as they already do with other preliminary motions. (This analysis would hold true whether one believes that defense counsel file early motions to rid themselves of frivolous cases, to frame the remainder of the litigation, or simply to run up their hourly bills.)

The lesson Miller's analysis suggests is a simple one, and one that this blog has advocated for some time now: Challenge both certification and merits as early as possible. While this isn't quite the same as getting a "preliminary judgment," the same advantages Miller touts operate. Each side gets an early look at the merits of the case. If the case lacks merit, the court should recognize the strength of the defendant's arguments and dismiss it (or at least strike the class allegations). If the case has some merit, better the defendant learn that as early as possible.

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Followers of this blog have probably noted (and probably with some chagrin) that I rarely discuss just-released cases, because I'm more interested in what we can learn about the strategies in a case than breaking the latest legal news. This case, though, is different, because last week the Eleventh Circuit released an opinion on jurisdiction under the Class Acton Fairness Act (CAFA) that is baffling in large part because it ignores the ways in which parties actually litigate a class action.

In the recently-decided Cappuccitti v. DirecTV (11th Cir. Jul. 19, 2010), the Eleventh Circuit dismissed a class action for lack of subject-matter jurisdiction under CAFA.

As part of its reasoning, it held that at least one plaintiff must allege more than $75,000 in damages:

While § 1332(d) may have altered § 1332(a) to require only minimal diversity in CAFA actions, there is no evidence of congressional intent in § 1332(d) to obviate § 1332(a)’s $75,000 requirement as to at least one plaintiff.

(Citation omitted.) 

How did the court reach that conclusion?  Plaintiffs Renato Cappuccitti and David Ward sued DirecTV, Inc., claiming that DirecTV wrongfully charged its subscribers fees for cancelling their subscriptions prior to the subscriptions’ expiration. They brought suit in federal court under CAFA (both plaintiffs were Georgia residents, DirecTV is a California corporation, and the amount in controversy exceeds $5 million). DirecTV moved to dimiss and to compel arbitration. The district court refused to compel arbitration, and partially dismissed the plaintiffs' claims. DirecTV appealed the denial of arbitration.

The Eleventh Circuit never reached the arbitration question. Instead, it held that it lacked subject-matter jurisdiction over the case because neither of the plaintiffs had alleged a claim worth more than $75,000. As the opinion puts it:

in a CAFA action originally filed in federal court, at least one of the plaintiffs must allege an amount in controversy that satisfies the current congressional requirement for diversity jurisdiction provided in 28 U.S.C. § 1332(a). Such a conclusion is compelled by the language of § 1332 as well as the general principle that federal courts are tribunals of limited jurisdiction whose power to hear cases must be authorized by the Constitution and by Congress.

The Eleventh Circuit based its holding on a reading of several cases interpreting the "mass action" provisions of CAFA.  But it also worked from the assumption that its job is to reduce the number of class actions filed in federal court:

If we held that § 1332(a)’s $75,000 requirement for an individual defendant did not apply to § 1332(d)(2) cases, we would be expanding federal court jurisdiction beyond Congress’s authorization. We would essentially transform federal courts hearing originally-filed CAFA cases into small claims courts, where plaintiffs could bring five-dollar claims by alleging gargantuan class sizes to meet the $5,000,000 aggregate amount requirement. While Congress intended to expand federal jurisdiction over class actions when it enacted CAFA, surely this could not have been the result it intended.

This reasoning is puzzling, because the vast majority of federal class actions aggregate smaller claims. In fact, much of the federal court's Rule 23 jurisprudence is based on the benefits that derive from allowing plaintiffs to aggregate small-dollar claims. (It also ignores footnote 12 of the Supreme Court's Allapattah opinion, and its own opinion in Evans v. Walter Industries, Inc., each of which accept that the $5 million aggregate requirement replaced the $75,000 individual requirement.)

With the issuance of the Cappuccitti opinion, the Eleventh Circuit has made itself an outlier on CAFA jurisdiction.  (Placing it in opposition to the Second, Third, Fifth, Sixth, Seventh, Eighth, and Tenth, Circuits)  Given the odd result of the Cappuccitti opinion, it is likely that plaintiffs who wish to keep cases out of federal court will file them in Georgia, Florida, and Alabama.  Defendants should prepare themselves accordingly.  

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Multi-district litigation is becoming more and more common in class actions, and has added another strategic dimension to the cases.

For plaintiffs it adds the question of which law firm should lead the consolidated litigation.
 And, as should be clear by now, that is no small question for plaintiffs.

But the other issue it complicates--for both sides--is forum-shopping. Forum-shopping tends to be unavoidable in class-action litigation.  For plaintiffs, forum-shopping usually involves choosing the best possible mix of favorable law, favorable judges, favorable demographics, and potential interference from other plaintiffs' firms. [For a fuller discussion of the factors plaintiffs consider in forum-shopping, be sure to check the Class Action Playbook, coming out in September.] For defendants, forum-shopping is often limited to the question of whether to remove a case or not.

But, once the question of consolidating multiple cases into multi-district litigation arises, those questions get reopened, and the field of possible choices expands to include any federal district court. While the Judicial Panel on Multidistrict Litigation (JPML) should only consolidate cases that share "common issues," few guidelines constrain where it may assign a consolidated case. Since the specific court chosen can have a material effect on how the case gets conducted, what factors does the JPML take into account?

Margaret Wilson (of Vanderbilt University) and Tracey George (of the Federal Judicial Center) have set out to answer that question. In their recent paper "Deciding Who Decides: Consolidating Multidistrict Litigation," they set out to test whether any factors about the case--or the panel--influenced the assignment of MDL cases. Their conclusion?

As the model shows only two factors are statistically significant in their relationship to the assignment of a case. Higher numbers of recommendations for a district and those districts currently represented on the Panel were more likely to receive a transfer.

(Emphasis added.)  Not only were the districts represented on the Panel more likely to receive the transferred case, it was the judges on the Panel who were most likely to oversee those cases.

Judges who take senior status are statistically less likely to be assigned the MDL, all else being equal. Judges who previously served as Chief Judge, however, and current JPML judges were all statistically significantly more likely to be assigned the MDL.

This result has a certain logic to it. Judges are likely to know the resources of their own districts, and may also be likely to decide they are best qualified to handle a multi-district case.

What are the implications of this finding? If a defense lawyer finds itself arguing before the JPML, it may make sense to argue for the most favorable district represented on the Panel as the best destination. At the very least, doing so may constitute a good backup plan.

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

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

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

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

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

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

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 ... to provide a brief update on the Supreme Court's decision yesterday in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., which held that, unless there is a specific contractual basis to do so, one party cannot force another to submit to classwide arbitration.  

Since the decision involves a firm client (which had retained a team headed by firm colleague Amy Manning), I'm going to refrain from the usual tactical analysis.  Instead, I'll simply reprint the firm's press release, and wish Amy and the rest of the McGuireWoods team congratulations on a job well done.  

Supreme Court Rules in Favor of McGuireWoods Client
in Landmark Class Action Arbitration Case

CHICAGO – McGuireWoods LLP announced that it has secured a victory before the U.S. Supreme Court on behalf of firm clients Jo Tankers B.V. and Jo Tankers Inc. In a 5-3 decision in Stolt-Nielsen S.A. et al v. AnimalFeeds International Corp., No. 08-1198, 559 U.S. ___ (2010), the court addressed the key question of whether parties can be compelled to submit to class arbitration where the arbitration clause is silent on the issue of class treatment. In the decision, the court held that “a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

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That’s the question posed by a student note coming out from the Hastings College of Law in July. And the answer, according to author Joshus Stadler, is “No.”

Stadler’s primary argument is that the class action has its roots in equity, and was conferred its current status by the Rules Enabling Act, which does not enlarge or constrict any substantive rights. Since the Seventh Amendment only allows for jury trials for causes of action that existed in common law at the time of its adoption (generally, 1791), and the class action was given its modern status as a procedural device under the Rules Enabling Act, Stadler argues that there is no Seventh Amendment guarantee for a jury trial in a class action.

Stadler’s argument has to overcome a few obstacles. (Most notably, the Seventh Amendment applies to “Suits at common law,” which implies substantive causes of action instead of procedural devices. One can file a class action asserting a common-law cause of action like breach of contract, but there is not – nor has there ever been – a suit for “class action” as a cause of action.) But if it is correct, it would have significant strategic ramifications for class-action defense lawyers. In many cases, class-action defendants have expressed valid concerns about placing a lawsuit with bet-the-company stakes into the hands of a single, twelve-person jury. In others, however, defendants have successfully defeated class certification by pointing out either the Seventh Amendment concerns implicated by a plaintiff’s proposed trial plan, or the difficulties that would arise from instructing a jury in the laws of the various states implicated by proposed class action. 

Stadler’s argument is worth a read for another reason. It’s the second time in the last year that someone has attacked the legitimacy of the class action device by looking at its roots in the Rules Enabling Act. (The first was Martin Redish’s discussion of whether the class action is constitutional in general.) Stadler may have been influenced by Redish (though his one cite to the professor is not to his class-action work). Regardless, it’s worth noting this trendlet in the legal academy: there may be an emerging generation of students who wind up questioning the legitimacy of the class action on constitutional rather than policy grounds.

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Debra Lynn Bassett recently published a discussion of the preclusive effect of class actions in the Brigham Young University Law Review. Her thesis is aimed at the theoretical justifications for allowing class actions to have preclusive effect, most of which she finds severely wanting. In general, her discussion does not have much practical use; it’s aimed instead at reforming class-action policy.

However, Lynn Bassett does highlight one important issuefor practitioners.

Despite the Court's insistence on "adequate representation" as a prerequisite, the actual meaning and scope of the term remains surprisingly elusive. Although it is clear that adequate representation may be challenged at any stage of a class action, and that adequate representation is a prerequisite both for class certification and for a binding judgment, the meaning of the term itself is unclear. Perhaps necessarily, most of the Supreme Court's guidance on adequate representation addresses failure-what is insufficient to constitute adequate representation. The Court has found adequate representation lacking in situations involving intraclass conflicts of interest, as illustrated in Hansberry, Amchem, and Ortiz. And the Court has found adequate representation lacking when courts have not rigorously scrutinized class actions to ensure that the protections of Rule 23 have been satisfied.

(Internal footnotes omitted.)

When a defendant first challenges a class action, there is a strong temptation to challenge adequacy of the named plaintiff. However, a class action can only have preclusive effect (either on the merits or in denying certification) if the class was adequately represented. Given Ms. Lynn Bassett’s analysis and recent opinions, it is clear that the defendant should be careful about challenging adequacy if it hopes to enjoy the preclusive effect of any later decisions in the case. In particular, should the defendant defeat certification in federal court, that decision is binding unless it depends on the plaintiffs’ lack of adequacy.

There are still strong reasons to challenge the adequacy of a named plaintiff in a particular case. (The strongest is that the named plaintiff would not serve as an adequate class representative, a particularly important problem if the defendant is considering settling.) However, it is important for the defendant to think through whether it plans on settling or fighting a class action as early as possible – doing so may dictate the specific responses the defendant makes in responding to a motion for certification.
 

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The Supreme Court issued an opinion in Shady Grove Orthopedic Associates v. Allstate Insurance Company yesterday.

The case stemmed from a class action that had been filed in New York state. The class action arose after a woman was injured in a car accident. She was treated by Shady Grove Orthopedic Associates (the plaintiff). To pay for the treatment, the woman assigned her insurance benefits to Sahdy Grove. Shady Grove submitted the claim, but Allstate paid it late, and did not pay the required 2% interest on the overdue benefits. So Shady Grove filed a class action on behalf of everyone to whom Allstate had refused interest on their benefits.

Allstate moved to dismiss the claim, invoking a New York statute (NY Civ. Prac. Law Ann. § 901(b)) that prohibited class actions for statutory penalties. Accepting this reasoning, the federal trial court dismissed the claim for lack of subject matter jurisdiction: since § 901(b) prohibited the class action, all that was before the court was a $500 claim, too little in controversy to allow for diversity jurisdiction. Shady Grove appealed, and, after the Second Circuit affirmed, appealed to the Supreme Court.

The majority (in an opinion by Justice Scalia) began from the premise that

Rule 23 provides a one-size-fits-all formula for deciding the class-action question.

Based on that premise (and an analysis of the consequences of allowing substantive state law to deprive federal plaintiffs of the benefit of the federal rules) the majority held the New York prohibition on penalty class actions could not prevent a New York plaintiff from bringing a class action in federal court.

The majority was careful to set out the limits of its holding:

Contrary to the dissent’s implication, we express no view as to whether state laws that set a ceiling on damages recoverable in a single suit, see App. A to Brief for Respondent, are pre-empted.

The majority was also realistic about the strategic consequences of the decision, specifically, that some plaintiffs might file class actions in federal court to get around state prohibitions of certain kinds of class actions.

We must acknowledge the reality that keeping the federal-court door open to class actions that cannot proceed in state court will produce forum shopping. That is unacceptable when it comes as the consequence of judge-made rules created to fill supposed ‘gaps in positive federal law. … But divergence from state law, with the attendant consequence of forum shopping, is the inevitable (indeed, one might say the intended) result of a uniform system of federal procedure.

But while this opinion represented a defeat for Allstate in the specific litigation, it did provide at least one tool for defense lawyers. In holding that a state law could not override Rule 23, the Supreme Court reaffirmed that the class action is a procedural device – not a substantive right, and that class members would still have to prove all of the elements of their claims as they would in an individual lawsuit.

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.

That analysis alone makes this a case that most class-action defendants will want to study.
 

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Certain kinds of class actions – those predicated on technical violations of a federal statute like the Fair Debt Collection Practices Act (“FDCPA”) – provide a steady revenue stream for some plaintiffs’ lawyers, while plaguing some defendants. It can be difficult to oppose certification of these suits, because technical statutory violations may not be associated with many variations in proof. It becomes easier to defend these suits when the plaintiffs don’t do the work of establishing that the violation actually occurred.

Take the case of DeKoven v. Plaza Associates, Nos. 09-2016 & 09-2249 (7th Cir. Mar. 17, 2010). In DeKoven, several plaintiffs sued Plaza Associates, a debt-collection agency, arguing that a settlement letter it had sent to various debtors was confusing, and likely to mislead the debtors into believing that the offer it contained was their last chance to settle their debts. If true, that allegation would constitute a violation of the FDCPA.

In order to demonstrate that the letter was confusing, the plaintiffs hired an expert to interview 160 shoppers in a suburban shopping mall outside Chicago. The expert showed the shoppers a “control letter” that the plaintiffs claimed was less confusing, and the letter that was actually sent.
The defendant, Plaza Associates, moved for summary judgment, arguing that the plaintiffs’ survey evidence suffered from a number of defects. The trial courts granted both motions, and the plaintiffs appealed.

The panel, in an opinion written by Judge Richard Posner, engaged in a thorough analysis of the survey the plaintiffs had submitted, and found it wanting. The panel’s problems with the survey included:

• “the control letter was no good”;
• the sample size was not representative of the population, but just convenient to the sampler;
• the plaintiffs omitted an option in the survey for “don’t know/not sure,” making the survey responses even more confusing;
• “we don’t think [the survey] proves anything.”

Noting that “[s]uits under the Fair Debt Collection Practices Act have repeatedly come to grief because of flaws in the surveys conducted by plaintiffs’ experts,” the Seventh Circuit affirmed the grants of summary judgment. The lesson here for the defendants is simple: don’t forget to challenge the plaintiffs’ classwide evidence. If the class is not susceptible to common proof, then any attempts to massage evidence to make it apply to the entire class may very well render it inadmissible.
 

[Disclosure: Back in law school, I used to do academic research for Judge Posner.]

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Vanderbilt law professor Richard Nagareda has written an essay for the DePaul Law Review entitled "1938 All Over Again?: Pre-trial as Trial in Complex Litigation."  For the most part, this essay is a 30,000-foot view of litigation that emphasizes “cost imposition” (academic-speak for the idea that each party might try to drive up the other party’s costs).

Professor Nagareda’s analysis is still preliminary in places. (For example, in order to make his story of a chronological evolution work, he claims that class-action law became “distinctive” in 2006 with the In re Initial Public Offering opinion, in which the Second Circuit, like the Seventh Circuit five years before, and the Supreme Court nineteen years before that, held that a court deciding a class-certification motion must conduct a “rigorous analysis.” Most practitioners I know would call the 2009 Vinole decision in the Ninth Circuit a more recent development that better fits his thesis.)  However, much as a good essayist should, Nagareda lays out a though-provoking story about how the law has changed over time. According to him:

• Pre-trial litigation has evolved to allow defendants to challenge (and the court to evaluate) the merits of a claim at earlier stages, much like the pre-1938 code-pleading regime under the Federal Rules of Civil Procedure.
• That evolution has included class actions, which courts examine now with more rigor than they used to.
• The increased rigor stems largely from concerns about costs. Parties care about the costs of litigation and the uncertainty associated with a jury trial; in class actions, plaintiffs will exploit these concerns for maximum settlement value.
• As a result, courts should consider resolving early dispositive motions in more nuanced ways than just a binary grant or denial.

Much of Nagareda’s argument may sound obvious to practitioners. Parties (and, increasingly, courts) care about the costs associated with pre-trial litigation. And courts often rely on partial rulings or accompanying opinions to signal to the parties their chances of prevailing on later motions (which, one might argue, provides robust pricing information). But the story Nagareda tells here is a good reminder to defendants: federal civil procedure has evolved to enable defendants to challenge meritless claims earlier and more often; there is every reason to take advantage of that opportunity.

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Class actions rarely go to trial, so it’s rare to learn anything from published decisions about how a class action gets tried. However, in Pierce v. County of Orange, the Ninth Circuit had to grapple with several evidentiary issues unique to class action. In Pierce, several prisoners in Orange County’s prison system filed a class action that challenged a number of prison practices, including an alleged deprivation of opportunities for exercise, limitation of prisoners’ access to common areas, and restrictions on their ability to practice religion. The cases were consolidated, certified for class treatment under Rules 23(b)(2) and (b)(3), and eventually tried in a six-day bench trial. (Was that too little time to try plaintiffs’ claims? The appellate court said no.)

The appellate court ruled on a few evidentiary issues that affect defendants.

• It affirmed the exclusion of survey evidence that the plaintiffs had collected. (However, in doing so, it ruled that since two other experts relied on the survey, the exclusion of the evidence was harmless.)
• It allowed the defendant to rely on the statements of absent class members to challenge the named plaintiffs’ testimony.
• It also upheld the decertification of the Rule 23(b)(3) damages class, leaving only the injunctive relief class.

The most interesting of these rulings from a strategic standpoint is the admission of the statements of absent class members. The defendants tried to enter the evidence as adverse party interest statements, an exception to the hearsay doctrine under Rule 801(d)(2). The plaintiffs argued that doing so was not allowable because the absent class members were not representatives of the class – so they could not be parties. The Ninth Circuit ultimately ruled that

For an absent member of a Rule 23(b)(2) class to be treated as a party-and, hence, as a party representative of the class as a whole-for Rule 801 purposes there must be some mechanism to ensure that he or she will represent the interests of the class.

…

On July 1, 2004, plaintiffs disclosed the identities of forty-five inmates they expected to have testify regarding prison conditions. At least eighteen of the twenty-four statements that the County sought to introduce under Rule 801(d)(2) were taken from detainees on that list. We are satisfied that, on the facts of this case, reliance on statements by detainees who had been disclosed by plaintiffs' counsel as potential witnesses adequately protected the class from the risk of having the class's interests undermined by unrepresentative class members.

So what’s the lesson for defendants? First, statements of absent class members at trial are likely hearsay, and need to be treated as such. But, if the defendant can get them admitted, absent-class-member statements can be powerful evidence against supposed classwide problems.

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Since the Supreme court set out its “plausible claim” pleading standard in Ashcroft v. Iqbal last year, there has been a flurry of commentary – in law reviews and online – about the wisdom and the policy implications of the decision and its immediate predecessor, Bell Atlantic v. Twombly. The latest entry into that debate comes from Professor Robin Effron of Brooklyn Law School, who has written an article on The Plaintiff Neutrality Principle: Pleading Complex Litigation in the Era of Twombly and Iqbal (forthcoming from the William and Mary Law Review).

Effron’s primary concern is that a broad application of Twombly and Iqbal might lead to full-fledged Rule 23 inquiry at the motion to dismiss. (This is unlikely. Even if a defendant preempts a plaintiff’s motion for class certification, a comprehensive motion to deny will still require some discovery record. Iqbal’s plausibility standard may enhance a motion to strike or deny certification applying a Rule 12(b)(6) standard, but there – like in a motion to dismiss – courts will likely allow well-pled complaints to survive unless they have insurmountable legal defects.)

The more interesting part of the paper from a tactical standpoint is Effron’s concern with costs. The cost of litigation was not an explicit concern in Iqbal, but it was in Twombly. As Effron describes:

The Court repeatedly referred to the costs of litigation, especially the purportedly high cost of discovery in antitrust class actions as a factor in turning an increasingly critical eye to the factual sufficiency of the pleadings. This aspect of the Twombly opinion suggests that courts are to look not only at the plausibility of the allegations in the complaint, but the relationship between the plausibility of the allegations and the cost of discovery. The higher the cost of litigation, in other words, the more plausibility the court ought to demand from a complaint.

(Emphasis in original.) This suggests at least one rhetorical tactic for the motion to dismiss. A defendant may wish to remind the court of the very high costs involved in allowing a class action to proceed past the motion to dismiss stage. Most courts are very aware that, should they dismiss a claim (or compel arbitration), they may deny a plaintiff access to the courts.  But, on the other side, when courts allow overly vague or outright implausible claims to proceed, they are authorizing an incredibly costly venture each time with little to no factual basis, which defies Rule 1's admonition to ensure a "just, speedy, and inexpensive determination of every action and proceeding." There is every reason for a defendant to remind the court of that issue when moving to dismiss complex litigation.
 

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For practitioners, clauses in consumer contracts that require consumers to arbitrate smaller claims rather than bring large-scale class actions have been a hot issue for several years. Defendants (and their counsel) like these clauses because, when they work, they can reduce a bet-your-company class action back to a manageable individual claim. Class-action plaintiffs (and their counsel) tend to dislike the clauses for the same reason.

In general, the debate surrounding class-action arbitration clauses centers on whether a given clause – which is usually part of a take-it-or-leave-it consumer contract – is unconscionable because the consumer had no chance to negotiate it. And while defendants can win this debate, they can lose it just as easily.

However, one federal district court case from 2007 shows how a defendant can craft an arbitration clause that may allow it to take advantage of this low-cost alternative to class actions, even in a generally pro-plaintiff jurisdiction like the Ninth Circuit, applying consumer-friendly law like Washington state’s. In Carideo v. Dell, Inc., the plaintiffs sued Dell alleging that it sold them defective laptops. Dell invoked its arbitration clause, which the trial court upheld.

The plaintiffs moved for reconsideration. In denying that motion, the trial court found that plaintiffs could still vindicate their claims in arbitration because:

• the individual amount in controversy was $1,300 to $1,700, large enough to justify a day in front of an arbitrator;
• the arbitration forum (the NAF) did not provide for confidential awards, which meant that later plaintiffs would benefit from these first arbitrations;
• there was enough freely-available evidence (including internet complaints) for the plaintiffs to make a persuasive factual case without expending lots of costs; and, most importantly
• Dell agreed to pay all of plaintiffs’ arbitration costs in excess of the initial $25 filing fee.

Since the end result was that arbitration would be less expensive (and less time-consuming) than bringing a suit in court, the court refused to find the arbitration clause substantively unconscionable. Nor, since the arbitration clause provided a genuine means of redress, did the court find the clause procedurally unconscionable, even though it noted the take-it-or-leave-it nature of the contract.

So what does this mean for defendants? For those that might consider arbitration clauses to reduce the risk from class actions, it may make sense to reduce the barriers to arbitrating the claims. There is at least some evidence that people prefer informal dispute resolution to litigation.  Assuming in general the products are sound, the potential liability from a handful of arbitrations – even including costs – is far less than the cost of litigating a class-action suit brought by an entrepreneurial plaintiff’s lawyer, or an extremely disgruntled consumer, even if the suit is dismissed early in. And, even if the case were to proceed as a class action, the presence of a realistic arbitration program available at the outset would be a strong argument that class litigation was not superior to individual litigation.
 

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Often, when a defendant receives a class-action complaint, its first reaction is to see whether or not there are grounds to dismiss the action. (For defendants in federal court, that impulse is particularly acute since the Supreme Court handed down its opinion in Ashcroft v. Iqbal, which demonstrates little tolerance for purposely vague pleadings.) If the motion to dismiss succeeds, then the action goes away. But even if a complaint survives a motion to dismiss, the defense may still have achieved a valuable victory by setting up the eventual denial of class certification.

Take the 2008 case of In re FEMA Trailer Formaldehyde Products Liability Litigation, 2008 WL 5423488 (E.D. La. Dec. 29, 2008), a proposed class action in multi-district litigation alleging that various manufacturing defendants had built emergency trailers for victims of the devastating 2005 Hurricanes Katrina and Rita that exposed them to unsafe levels of the chemical preservative formaldehyde. Plaintiffs alleged causes of action for negligence, strict liability, and breach of warranty. The defendants moved to dismiss several of the plaintiffs’ claims that were brought under varying state laws, a motion the trial court denied. Later, however, when ruling on class certification, the court referred back to its decision on the motion to dismiss in finding that the named plaintiffs were not typical of the proposed class, in part because of the legal variations among the claims of various class members. In doing so, the trial court specifically stated that these legal variations were 

evident in the Court’s Order and Reasons [on the Motion to Dismiss], wherein the Court analyzed these claims in considerable detail according to the laws of the applicable states.

Courts are rarely this explicit about how their rulings on motions to dismiss may inform their decisions whether to certify a class. But there is little doubt that proffering valid legal arguments, even when they do not prevail at the motion-to-dismiss stage, can influence the court’s thinking when it later decides whether to certify a class. (Psychologists and behavioral economists refer to this effect as “framing.”) Sifting through complicated choice-of-law analyses or individualized allegations about statutes of limitations can help convince a court that a full-fledged class trial of individualized claims will be more work than it can adequately manage. Plaintiffs – who control the choice of forum, the complaint, and often even media contacts – have a number of powerful framing tools at their disposal. There’s no reason for the defendant to ignore those tools in its kit.

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Class actions don't necessarily look like emotional contests from afar, but they can be. Plaintiffs' counsel is risking work and capital with no certain return on their investment. The defendant has been placed in high-stakes litigation based on what appear (to it) to be baseless allegations. As a result, it can be hard for each side not to take things personally. But how hard should a defendant hit back against unscrupulous plaintiffs' counsel? Especially if – from the defendant's standpoint – they all look unscrupulous?

I can't think of another question that begs so much for the answer "it depends." But there is at least one clear set of circumstances out there.

In Hamm v. TBC Corp., the defendant sought sanctions against plaintiff’s counsel for soliciting plaintiff’s counsel for a collective action under the Fair Labor Standards Act. (The FLSA, 29 U.S.C. § 216(b), authorizes “collective actions.” They’re similar to Rule 23 class actions, but plaintiffs opt in instead of opting out, and the process favors certification more than Rule 23.)

According to the Magistrate Judge’s summary of the sanctions hearing, an employee of a tire company got a call on his cell phone. The woman on the other end of the line identified herself as working for plaintiff’s counsel, said she got his number from another employee, and explained that her firm was suing the tire company for unpaid overtime earned when employees worked through their lunch breaks, and asked if he’d like to join the lawsuit. The employee declined the offer. (According to the court, he said the allegations were “bull****.”)

That was when the defendant filed its motion for sanctions. The court took the charges seriously enough to hold two hearings, one of which included live testimony from a number of witnesses. The defendants put on four employees, each of whom claimed he was called by the same woman, who turned out to be a paralegal at the plaintiff’s firm. Plaintiffs tried to explain the calls away as a misunderstanding. They assured the court that they had a strict no-solicitation policy, and said that the calls were really just their attempt to investigate the class claims before filing.

The court believed the defendants. It pointed out several inconsistencies in testimony, and noted that the Southern District of Florida accounted for 28.7% of all FLSA cases, which it considered powerful circumstantial evidence that the volume was attorney-driven. As a result, it ordered sanctions against the plaintiff’s firm.

Despite its success, this is not a tactic every defendant should try. The defendant here was fighting on extremely favorable terrain. Florida has a strict no-solicitation rule. Plaintiff’s counsel made some serious tactical blunders when briefing the case. And there was compelling circumstantial evidence that plaintiff’s counsel had violated this rule before.

So what's the lesson here?

1. If you're going to attack opposing counsel, make sure you are flawless on the law and the facts
2. If you are flawless on the law and the facts -- don't shy away from holding your opponent to the rules of the game

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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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