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

In 1998, the class action plaintiffs' firm Milberg Weiss filed sued Computer Associates for violating the federal securities laws by lying about its revenues in order to increase its stock price. In a perfectly unremarkable development, it was appointed co-lead counsel of the consolidated class. (Various firms had filed a total of eleven complaints.) Over the next four years, the pressure on Computer Associates mounted. Thirteen more complaints were filed, and the US Attorney's office (EDNY) and SEC launched a joint investigation of the firm.

So Computer Associates decided to settle the case. After seven months of mediation with the plaintiffs, it announced a settlement where class members would receive 5.7 million shares of stock in the company, then valued at around $140 million. Counsel's fee was 1.4 million shares, valued at approximately $35 million. (One might ask whether a settlement like this either (1) counts as a coupon settlement, or (2) created problems by diluting current shares, but neither of those was raise by the parties, who were all interested in the settlement going through.) By the end of 2003, the court had approved the settlement; there were no objectors.

Four months later, several Computer Associates executives pled guilty to conspiracy to commit securities fraud and obstruction of justice; the firm admitted that its executives had engaged in a multi-billion dollar fraud and coverup, and it restated an additional $2.2 billion in earnings. In addition, the Wall Street Journal reported that Computer Associates had withheld 23 boxes of documents during class-action discovery.

At this point, several of the class-action plaintiffs asked Milberg Weiss to vacate the certification order under Rule 60(b), because they had been deprived of essential information in the 23 boxes. Milberg Weiss declined to do so. So the plaintiffs proceeded on their own. After three years of litigation and discovery, the court dismissed the Rule 60(b) motion, in part because it wished to protect the "finality which a settlement is intended to produce." (It also noted that these plaintiffs had not objected to the settlement at the time.)

At that point, the disgruntled class members filed a malpractice action against Milberg Weiss and others in New York state court, alleging legal malpractice and breach of fiduciary duty. The lawyer-defendants responded by asking the E.D.N.Y. for an injunction against the malpractice action under the All Writs Act and Anti-Injunction Act, defending the settlement approval and the dismissal of the 60(b) motion. The E.D.N.Y. issued the injunction, and the plaintiffs appealed.

Which brings us to this week's case, Wyly v. Milberg, in which the Second Circuit affirmed the injunction. For those interested in the minutiae of the All Writs Act and Anti-Injunction Act, the court held that it could not uphold the injunction under the "in aid of jurisdiction" prong of the All Writs Act, because the court lacked in personam jurisdiction, and the mere connection with a class action was not enough to invoke any of the known exceptions to that rule:

We have never held that a district court's involvement in complex litigation justifies, without more, issuance of an injunction "in aid of" the court's jurisdiction, and we decline to create such a rule here.

Instead, the Second Circuit turned to the "relitigation" exception to the Anti-Injunction Act, which required it to conduct a preclusion analysis of the malpractice case. After determining that res judicata (claim preclusion) did not apply, it reasoned that

Before applying the elements of issue preclusion to this case, we begin with a preliminary observation about the Appellees' argument. In the course of the federal class action litigation, the District Court did not "actually decide" whether the Appellees committed legal malpractice; that claim was not presented, and therefore the Court had no reason to address malpractice as such. The Appellees' issue-preclusion argument is focused not on whether the District Court previously adjudicated a malpractice claim, however, but on whether the Court resolved one of the elements of a malpractice claim--namely, counsel's deficient performance.

(Emphasis in original.)  And it found that the Settlement Order had in fact established that the attorneys had acted in a reasonable manner, precluding a finding that could establish malpractice.

The Settlement Order held, inter alia, that the global settlement of the 1998 and 2002 class actions was "fair, reasonable[,] and adequate," and that class counsel was entitled to an award of fees that the District Court found to be "fair and reasonable." Whether an award of "fair and reasonable" attorneys' fees necessarily decides the deficient-performance prong of a legal malpractice claim is an issue of first impression in this Circuit. We conclude that the deficient-performance prong of New York's legal malpractice rule is identical to the reasonable-performance issue that the District Court decided as a necessary component of the Settlement Order.

(Internal footnote omitted.)  Since the lower court had found counsel to be adequate, and had also found that its performance merited its requested fee, there was no way another court could find that counsel had committed malpractice.

It is possible that the circumstances that gave rise to this case may come up again sometime. But that's not the reason for defense lawyers to focus on it. (After all, here, the defense had pulled off a coup: settling the case for less than it might be worth after the conclusion of a criminal investigation.) Instead, here are four other reasons this case is important for defense lawyers:

1. The full record is fascinating reading, and offers a lot of between-the-lines looks at how a large securities plaintiff's firm operates.
2. The Second Circuit's "relitigation" reasoning may have application in other cases where plaintiffs seek a second bite at the apple in state court. Defendants are often interested in finality, and this is a case that offers some help in achieving that in litigation.
3. We often talk about how plaintiffs in class actions are only nominal, and it is the attorneys who really run the cases.  This case is a stark example of just what that divorce between plaintiff and attorney can mean in a class action.
4. The case is an important reminder that if you do not challenge adequacy of counsel or the level of attorneys' fees when they first arise, you may be precluded from doing so later, when it really matters.

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 Last week, there were two appellate opinions, one from the Seventh Circuit and one from the Tenth, that are worth some attention. They're worth discussing together as well, because while only one is really helpful for defendants, both discuss different conceptions of how to argue comity in class actions.

The first is Smentek v. Dart (7th Cir. 2012). Smentek was a class action filed on behalf of Illinois prisoners who had been denied dental care in violation of the due process clause. It was the third of its kind. How did that happen? In the first two class actions, various trial judges of the Northern District of Illinois had denied certification. Not so the third, who granted it. As Judge Posner noted in the Seventh Circuit's opinion:

We don't understand why all three cases were not assigned to the same judge. Besides the usual advantages of consolidation, it would have avoided the problem that has precipitated the appeal in this case, because a single judge would not be of different minds about three identical lawsuits.

Given the Supreme Court's opinion last year in Smith v. Bayer Corp., the defendant could not ask for an injunction preventing any further class actions from being filed, nor could it argue that a new class action was barred by collateral estoppel. But it could, as the Court had directed, ask the new court to, in the interest of judicial comity, deny certification. Foolproof strategy, right?

As it turns out, not in the Seventh Circuit. The trial court did not take comity into account. Nor, according to Judge Posner, should it have.

The version of comity announced in dictum in Smith v. Bayer Corp. is novel. It does not involve the mutual respect of sovereigns or quasi-sovereigns and it does not appear to be limited to cases in which parallel suits are pending in different courts (or before different judges) of the same sovereign. … The Supreme Court's opinion cites no authority for the extension of the doctrine of comity to mere disagreement between federal judges, and despite the reference to expecting "federal courts to apply principles of comity to each other's class certification decisions" (emphasis added), the Court seems really to have been thinking about cases involving federal-state comity, of which Smith v. Bayer Corp. was one.

(Emphasis added.)  The primary problem Judge Posner saw was that, to provide the doctrine with any preclusive effect would simply render it collateral estoppel by another name, an avenue that the Supreme Court had already closed off.

True, the effect of the doctrine of comity, when it is successfully invoked, is preclusive. But unlike res judicata, it is a doctrine that does not require but merely permits preclusion, except (as we're about to see) when it governs choice of forum. The mandatory comity for which the defendants in our case contend is just another name for collateral estoppel.

Judge Posner, no fan of repetitive class actions (remember, he authored several opinions disapproving of it in Thorogood v. Sears, Roebuck & Co.), conceded that this left open a distinct issue of judge-shopping, one that his colleague Judge Easterbrook had identified long ago in In re Bridgestone/Firestone. In Posner's words:

Not that there isn't a serious problem of judge shopping in the disordered realm of class action litigation, a problem well illustrated by this case and its two predecessors taken all together. Without a rule of preclusion, class action lawyers can do what the lawyer here (and the lawyer in Thorogood) did: keep bringing identical class actions with new class representatives until they draw a judge who is willing to certify the class.

So, at this point, it appears that the Supreme Court's admonition to respect previous denials of certification is of persuasive value only, which means that it is helpful only so long as the court is not inclined to certify a class in the first place, which is to say not helpful at all. At least Judge Posner's opinion spells out the problem in stark terms, of which one might hope other courts will take notice.  

The second case is Winzler v. Toyota Motor Sales U.S.A., Inc. (10th Cir. 2012). In this case, the plaintiff sued for an injunction requiring essentially requiring a recall of Toyota Corollas that allegedly stalled without warning. After she filed the complaint, Toyota moved to dismiss because the plaintiff had not suffered a stalling incident herself, and therefore had not incurred any injury. ("No-injury" class actions are common in products liability.) The trial court granted the motion.  Toyota also noted that a NHTSA investigation was underway. By the time the plaintiff filed her appeal, Toyota had announced a recall, and it had argued to the Tenth Circuit that the recall mooted the plaintiff's claims.  (This particular formulation of mootness is referred to as "prudential mootness.")

The Tenth Circuit found merit in Toyota's position. Like Judge Easterbrook did in Aqua Dots, the Tenth Circuit expressed concern about the fact that suing on top of a recall would add transaction costs that would benefit only the plaintiffs' lawyers.

Our intervention would, as well, surely add new transaction costs for Toyota and perhaps reduce the incentive manufacturers have to initiate recalls (as Toyota did here), all while offering not even a sliver of additional relief for Ms. Winzler and members of the class she seeks to represent. Perhaps the lawyers would benefit if this would-be class action labored on through certification, summary judgment, and beyond. But it's hard to see how anyone else could.

But the Tenth Circuit was not just concerned that suing when an administrative recall was available would add transaction costs. It also worried that initiating a redundant action through the courts would undermine the comity between branches of government:

To hold otherwise -- to allow a case to proceed simply because there happen to be differences between the remedial process a coordinate branch has selected and those we might choose - would not only require us to ignore the reality that there's often no one single right way to go about providing equitable relief to an injured party. It would also require us to ignore the reality that there are nearly always (if not always) some differences between Executive, Legislative and Judicial remedial procedures given how differently the three branches operate: by regulation, legislation, and decree. To presume deficiency from difference would no doubt go a long way, as well, toward spelling the end of prudential mootness doctrine and the comity it is supposed to afford our coordinate branches.

At that point, it affirmed the lower court's dismissal of the case.

So, what can we draw from these two different treatments of the concept of "comity"? Comity as a standalone concept is not a particularly helpful one: as Judge Posner points out, the doctrine of comity really only applies to separate sovereigns. However, comity also has a looser meaning, one that asks courts to respect other governmental bodies, even if they stem from the same sovereign power. And here, comity is at the very least a useful rhetorical device. It reminds the court that it is not the only available means of relief; and that some litigation is simply a waste of time and money. Of course, since comity is not mandatory, what a court chooses to do with that information remains entirely up to it.

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For those unfamiliar with Ronald Coase, he is the 101-year-old Nobel Laureate who laid a number of the foundations for law and economics when he published his Nature of the Firm (which explained why people would use corporate forms instead of just contracts) and Problem of Social Cost (which explained why law should seek to minimize transaction costs).

In 1988, Professor Coase turned his formidable intellect to another question that had vexed legal scholars for some time: why is blackmail illegal? As Professor Coase pointed out, the central paradox of blackmail is that it makes it illegal to threaten to do something (reveal facts that would embarrass or harm someone) that is perfectly legal to actually go out and do. In other words, if I know something embarrassing about, say Russell Jackson, it is perfectly OK for me to reveal those facts on this blog. But it is not OK for me to ask Russell to buy me an expensive dinner in exchange for not revealing those facts. Why is that?

Professor Coase's solution--no surprise--draws on his previous work about minimizing transaction costs. He starts from the principle that:

It is obviously undesirable that resources should be devoted to bargaining which produces a situation no better than it was previously.

Based on that principle, Professor Coase argued that blackmail transactions do not provide any benefit to the victim (since he is in the same state as before), but do impose a cost.

It is not difficult to understand why people feel this way. A blackmailer threatens to do something which will harm his victim unless he is paid a sum of money or receives some other benefit,and by emphasizing the unpleasant consequences for the victim of not meeting his demands (or even inventing them, as in the "Mr. A. Case"), he endeavours to extract as much as he can from him. It may be objected that this is exactly what happens in business negotiations. And this is correct. But the situations are not identical. The demands made by a businessman are constrained by the competition of other businessmen, by the fact that the party threatened is likely to have a good idea of whether the threat has to be taken seriously and by the adverse effects on future business of being difficult in negotiating. ...

Business negotiations (which may also cause anxiety) either lead to a breakdown of the negotiations or they lead to a contract. There is,at any rate, an end. But in the ordinary blackmail case there is no end. The victim, once he succumbs to the blackmailer, remains in his grip for an indefinite period.

(Emphasis added.) In other words, the real problem here is not the threat, it is the fact that there is no way for the blackmail victim to put an end to the threat. Paying once does not guarantee that

The logic of Coase's blackmail argument extends to class action defense. Let's leave aside for the moment the common argument that some class actions are no more than legalized extortion. Here are two other ways in which the argument might apply, both of which will be familiar to readers of this blog.

The Aqua Dots case: A manufacturer comes across a consumer issue. It attempts to solve that issue through voluntary action (sometimes while cooperating with government agencies). Despite its voluntary action, an entrepreneurial plaintiffs' lawyer demands to be cut in for some nominal "improvement" to the relief, plus an attorneys' fee. So the manufacturer faces the choice of paying the counsel a fee to go away, or adding the cost of litigation to the cost of remedying the problem in the first place. (Judge Easterbrook solved this by deciding that a plaintiff who would simply piggyback on a voluntary recall is not an adequate representative of the class.)

The Thorogood case: Plaintiff files a class-action lawsuit on questionable grounds. Defendant defeats it. Plaintiff files again in a new jurisdiction. Plaintiff writes a letter pointing out to the defendant that there are many jurisdictions left to file in, and defending lawsuits is costly. So the defendant faces the choice of paying plaintiff or facing multiple lawsuits until one wins. (The Supreme Court has decided this issue by encouraging courts to follow the practice of judicial comity, respecting other denials of class certification for the same subject matter. It's an open question still how successful this solution will be.)

This is why "blackmail" is a problem. It's a bargain for a promise not to do something. And that's what makes it analytically useful for class actions, because class actions can be viewed as an attempt to extract concessions in exchange for a promise not to sue, or at least a promise not to sue again.

From the defendant's standpoint, that's part of what makes them a bad deal. Signaling a willingness to bargain in that fashion just opens one up to more and more attempts to make similar deals.

Using the rhetoric of blackmail, while attractive, is unlikely to persuade some judges that there is a real problem.  But using the logic behind prohibiting blackmail makes a great deal of sense: most courts can sympathize with the fact that some litigation does not actually promote any public benefit. And, if that is the case, there are real questions as to whether the lawsuit is really worth the court's resources.

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

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

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

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

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

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

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

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

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

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

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

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

Based on these three examples, Nagareda concluded that:

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

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

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

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

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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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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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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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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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 Paul Karlsgodt of Classactionblawg.com got there first (in a post that should win "Title of the Month" hands-down), but Judge Posner's opinion yesterday denying rehearing (and announcing there will be no en banc rehearing) in Thorogood v. Sears Roebuck & Co. is still worth an extra post.  Not just because Judge Posner discusses the results of an informal poll of the panel's wives, not just because he cites a YouTube link of Simon Cowell, and not just because the ever-irreverent Above the Law is likely to feature the opinion as a classic benchslap.    

The primary reason to read the opinion is because it so thoroughly documents both the strategic choices plaintiffs' counsel may make, and the strategic incentives they face.  Some of this discussion is all the more credible because it comes from counsel's inadvertent disclosures:

Krislov says that “Sears’ resort to this Circuit for the preclusive shot is transparent forum shopping, looking for this Court’s derisory view of the claim to influence it into binding all class  members nationwide, because the Ninth Circuit’s standards are decidedly more favorable to plaintiffs’ claims.” This is what is known as chutzpah, since Krislov brought his copycat suit in California because, as he says unguardedly, “the Ninth Circuit’s standards are decidedly more favorable to plaintiffs claims.”

And some of the discussion is just the result of Judge Posner's typically prodigious research:

Krislov is concerned with harsh language in our opinion, but overstates the case when he decries “characterization of plaintiff class action lawyers as inherently corrupt and motivated primarily to sell out the class in order to gain large fees.” What we said was that the structure of class actions under Rule 23 of the federal rules gives class action lawyers an incentive to negotiate settlements that enrich themselves but give scant reward to class members, while at the same time the burden of responding to class plaintiffs’ discovery demands gives defendants an incentive to agree to early settlement that may treat the class action lawyers better than the class. Class action attorneys have an “inherent motivation” to enrich themselves at the expense of the class (and with the connivance of defendants), but motivation is not a synonym for action; any actual corruption or selling out is gauged case by case. The Boling letter is some indication that the present case is such a case. 

The criticisms in our opinion of the tactics employed by some class action lawyers are not criticisms made by judges alone, let alone by judges of the Seventh Circuit alone or members of this panel alone.

(Extensive citations omitted.)  I'll leave you with one further quote from the opinion, which comes after the extensive string cite I cut: 

Want more?  There is plenty more ...

Go, read the opinion.  It's a perfect starting point for understanding the strategic incentives plaintiffs' lawyers face.

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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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