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

I haven't commented much about the Supreme Court's class action docket so far, largely because this year I was more focused on--in my own small way--trying to influence what it would be.  But now that my particular efforts are done, I thought I would focus on each of the cases before the Court this Term.  I don't feel comfortable talking much about Standard Fire Ins. Co. v. Knowles, which addresses plaintiffs' use of stipulations that limit class recovery to less than CAFA's $5 million amount-in-controversy threshold, since I was on a team that assisted Ted Frank of the CCAF in filing its amicus brief.  

However, several law students alerted me to a pair of student notes touch on the issues in the case, and there's no reason I can't share those with you.  

First up, Front-End Fiduciaries: Pre-Certification Duties and Class Conflict by Nick Landsman-Roos of Stanford Law School.  Landsman-Roos provides a good overall discussion of fiduciary duty, with a focus on binding stipulations.  His primary argument: 

When an action potentially prejudices or does prejudice a substantive legal right of ab- sent class members, an attorney should have an opportunity to offer a good faith defense—that the course of conduct was undertaken in a good faith belief that it would maximize the class’s recovery. That defense, in turn, can be evaluated in terms of whether it is legitimate, genuine, or pre-textual.

(Emphasis added.)

Next, An Illusion of Sacrifice: The Incompatibility of Binding Stipulations in CAFA Cases by Ryan S. Killian of Pepperdine Law School.  Killian takes a hard-line stance against binding stipulations:

For reasons theoretical, legal, and practical, the right answer is the most extreme. Judges should impose a per se rule against giving effect to any purported binding stipulations. The theoretical reasons for such a rule have their basis primarily in agency theory. The legal reasons flow naturally from considerations of due process and the obligatory rigorous inquiry into Rule 23(a)(4)’s adequacy requirement. The practical reasons stem from considerations of complex litigation and efficiency.

(Emphasis added.  Internal footnote omitted.)

As good student notes should, these both provide all the background one needs to follow along on the Knowles argument.

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 As most of you following class action-related news know by now, the Supreme Court has granted certiorari to review another class action decision: the Ninth Circuit's recent opinion in Connecticut Retirement Plans & Trust Funds v. Amgen, Inc.  (Hat tip to Paul Karlsgodt of the reliably great ClassActionBlawg for getting the scoop.) As usual, SCOTUSblog has all of the relevant documents.

The issue in this case, is whether a court must decide whether an allegedly fraudulent statement is material before it applies the fraud-on-the-market presumption from Basic, Inc. v. Levinson. As the certiorari petition puts it:

The courts of appeals are split, however, on the question whether plaintiffs must also prove, for class certification, an additional predicate to the fraud-on-the-market theory— that the alleged misrepresentation was material. The courts of appeals also are split on the related question whether a defendant may, at the class certification stage, present evidence rebutting the applicability of the fraud-on-the-market theory.

But I want to focus, briefly, on a few other things this certiorari petition does, because it's an excellent example of how to get an issue in front of the Court. After all, to get a certiorari petition heard, one has to (1) convince a Supreme Court clerk to pull the petition out of the cert pool (think "slush pile"), and (2) attract the votes of at least four of nine justices who have a lot of other issues to decide. And, much as I would love to think otherwise, most of the justices of the Supreme Court are probably not as fascinated by class action issues as Paul or myself. (This same logic applies to 23(f) petitions, which are themselves an attempt to convince a busy federal appellate court to review an issue it doesn't have to.) So what does this cert petition do right?

It establishes stakes for the Court. By linking the resolution of securities class actions to the settlement rate, the petition provides a concrete bad outcome if the issue is not heard--settlement of meritless claims. But it also contrasts the Ninth Circuit's handling of the issue to a recent Supreme Court opinion:

None of the reasons given by the Ninth Circuit for treating the materiality predicate differently from the efficient-market and public-statement predicates has merit. To the contrary, the Ninth Circuit’s reasoning contravenes this Court’s precedents, including Basic and Erica P. John Fund.

It explains why the circuit split matters. There's a nice reference to the percentages of securities class actions filed in various circuits, which shows that the vast majority are now filed in circuits with different interpretations of this rule.

This circuit split is entrenched and mature. Moreover, with the Ninth Circuit having entered the fray, the split now involves courts of appeals for circuits that account for a substantial majority of securities fraud litigation. In 2010 and 2011, 74% and 73% (respectively) of all securities fraud class actions were filed in the Second, Third, Fifth, Seventh, and Ninth Circuits.

The statistics are a nice touch. They hammer home just how chaotic it would be to have an inconsistent rule in a large sector of class action litigation.

It explains why certiorari is appropriate now. As the brief points out

Now that the Second, Third, Fifth, Seventh, and Ninth Circuits have resolved the questions presented for their respective circuits, the likelihood that the is- sues will be presented again in a discretionary Rule 23(f) appeal is necessarily low. Courts of appeals gen- erally grant permission for a Rule 23(f) appeal only when the district court’s class certification order presents an important question of class-action law that is unsettled within the circuit …

Remember that percentage of securities filings? That plays in here as well. Since the vast majority of securities filings are in courts that have already decided the issue, the petitioners argued that there would likely not be another chance for the Supreme Court to hear this issue.

What's the takeaway? It's a simple one, but extremely important and often forgotten: know your audience. Want to get the Supreme Court's attention? Show them why the opinion endangers one of their recent holdings, and why it won't get reviewed unless they take it now.

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 At the DePaul symposium a few weeks back, Professor Suja Thomas argued that the Supreme Court should not take on "oddball" cases, because the outlying facts make for decisions that are too sweeping. (She's made this argument before about Iqbal and Twombly, so you don't have to wait for the DePaul Law Review's Symposium Issue to get the basics.)

As I've mentioned before, Professor Thomas is no fan of oddball cases. She argues that:

the Supreme Court and some scholars, including Professor Richard Epstein, have justified the new standard on the basis of the costs in Twombly, an “oddball” case—with massive costs and significant asymmetry of costs—and have not shown that the new standard should apply transsubstantively to cases that do not have such costs, including typical employment discrimination cases. This Essay also shows that Iqbal, while different than Twombly in types of costs, is similarly “oddball” in nature. Moreover, this Essay argues that, despite the lack of significant justification for why the new standard should apply transsubstantively, and also contrary to a prediction of Professor Epstein, the new standard will likely have a revolutionary impact on cases, without the same types of costs as Iqbal and Twombly, including employment discrimination cases.

In other words, what Professor Thomas doesn't like about oddball cases is that the extreme facts drive results that she believes undermine good legal rules.

While she didn't write in direct response to Professor Thomas, Professor Suzanna Sherry has produced an essay (to appear in the Supreme Court Review) that takes this argument head on: Hogs Get Slaughtered at the Supreme Court. Professor Sherry's argument starts from an interesting premise: the reason that the Supreme Court made the sweeping rulings it did in Concepcion and Dukes is not because the majority was necessarily pro-business or anti-plaintiff, but because the lower court (in this case, the Ninth Circuit) had overreached in each case.

And these two cases are not isolated tragedies; they provide a window into a larger problem. Rule 23 turns class counsel into powerful private attorneys general and tempts them to raise the stakes. It allows plaintiffs’ lawyers to chart a course not only for their own clients, but for future litigants. If that course is ill-advised – as it is when the lawyers have incentives, as they often do, to frame issues broadly for the “big win” – the consequences can be disastrous for those future litigants.

If anything, the largest flaw with Professor Sherry's argument is that it's incomplete: hogs don't just get slaughtered on the plaintiff's side. As the Halliburton and Smith v. Bayer decisions show, defendants who push radical arguments (and the appellate courts that endorse them) can also get reversed quite easily.  (Although in those cases, there is more likely to be a client that constrains the attorneys from going too far afield.)

I'd say that in this debate, Professor Sherry has the better end. Oddball cases provide oddball results because they take the rules as they stand, and bring them to absurd results, and courts do not like absurd results. From a policy standpoint, that means that while Professor Sherry's position--courts that want to preserve current good rules shouldn't overreach--has practical policy implications, Professor Thomas's position--the Supreme Court should allow oddball results to stand to preserve otherwise good rules--really doesn't.

More importantly, Professor Sherry's approach provides some valuable advice for defense (and plaintiff's) counsel, particularly when arguing on appeal: don't get greedy. Appellate litigation, like class action litigation, is a long game . An decisive win at the motion to dismiss is a great outcome, but a defendant who structures their strategy to aim solely for that is likely to face avoidable strategic problems if going all in doesn't work out. On the other hand, planning carefully, and encouraging the court to make a series of well-grounded rulings that lead to a decision defensible on appeal? That's your jackpot.

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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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