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

Rule 68 offers of judgment have been controversial in class action practice for quite some time. Proponents of the tactic believe that it offers a valuable means of limiting frivolous lawsuits: where there are really only a few affected claimants, an offer of judgment can force them to face up to the costs of meritless class allegations. Opponents believe that corporate defendants would rather buy off potential claimants one by one than face a class-action lawsuit. Circuit courts of appeal had split on whether the tactic could actually moot a class action.

Genesis Healthcare Corp. v. Symczyk, in which a nurse appealed the dismissal of her FLSA collective action after the defendant made an offer of judgment and then moved to dismiss her case as moot, seemed to offer a solution to the longstanding question of whether the offer of judgment is a valid defense tactic in class actions. In the opinion that came out last week, Justice Thomas, writing for a 5-Justice majority, allowed the tactic in the case before the Court, but seemingly limited it for the time being. Specifically, he held that

In the absence of any claimant's opting in [to the proposed collective action], respondent's suit became moot when her individual claim became moot, because she lacked any personal interest in representing others in this action.

If you believe that reasoning sounds like the Court did not intend its opinion to reach Rule 23 class actions, you are correct. The Court immediately rejected any attempt to use Rule 23 cases to support a wider ruling in Symczyk:

But these cases are inapposite, both because Rule 23 actions are fundamentally different from collective actions under the FLSA, see Hoffmann-La Roche Inc., 493 U. S., at 177-178, 110 S. Ct. 482, 107 L. Ed. 2d 480 (SCALIA, J., dissenting), and because these cases are, by their own terms, inapplicable to these facts.

(Emphasis added.) The Court did, however, include some language that suggests it might find Rule 68 offers of judgment appropriate when made to Rule 23 named plaintiffs. First, it pointed out that settling a collective action early does not deprive additional claimants of any rights to bring lawsuits:

While settlement may have the collateral effect of foreclosing unjoined claimants from having their rights vindicated in respondent's suit, such putative plaintiffs remain free to vindicate their rights in their own suits.

Second, Justice Thomas responded to Symczyk's argument that "picking off" a named plaintiff in a collective action would frustrate the efficiency justifications for a collective action, as they had been articulated for class actions in Depsoit Guaranty National Bank v. Roper. In general, he rejected the argument on its logic, but he also include a footnote that implied Roper may no longer be good law:

Because Roper is distinguishable on the facts, we need not consider its continuing validity in light of our subsequent decision in Lewis v. Continental Bank Corp., 494 U. S. 472, 110 S. Ct. 1249, 108 L. Ed. 2d 400 (1990).

That footnote sounds like an invitation to revisit the issue. Based on Justice Kagan's spirited dissent, it will likely be another contentious debate.

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 It's a busy week for me, so here's just a brief rundown of two opinions vacated and remanded from the US Supreme Court:

RBS Citizens NA v. Ross (7th Cir. 2012). (More here.)  The Seventh Circuit affirmed certification of a wage-and-hour case, despite what it conceded was a less-than-optimal order certifying the class. RBS appealed to the Supreme Court to ascertain how the certification fit in with the Dukes commonality standard. The Supreme Court vacated and remanded the case in light of its opinion in Comcast Corp. v. Behrend.

Whirlpool Inc. v. Glazer (6th Cir. 2012). The Sixth Circuit affirmed certification, holding that the district court did not have to investigate proximate cause of moldiness, and that “unharmed” class members might have a viable common overpayment theory. Whirlpool appealed to the Supreme Court seeking clarification on the role of the merits inquiry in certification. Like with Ross, the Supreme Court vacated and remanded in light of Behrend.

Now it's usually difficult to pin down the Court's exact position in cases like these, since it might think Behrend has a direct bearing on these cases, or it might just be clearing its docket. But at this point it is certainly safe to say that Behrend's reinforcement of the predominance standard is going to have an effect on the certification debate in 2013.

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Yesterday, the Supreme Court issued its opinion in Comcast Corp. v. Behrend, the antitrust case which commentators (including me) had expected would finally resolve the question of whether a trial court must apply the Daubert evidentiary standard to expert testimony in a certification debate.  It turns out we were wrong. Due to a procedural defect below (Comcast had not objected to the admissibility of the expert's testimony in the trial court), the Court ultimately did not decide the Daubert issue. But it did issue an opinion that, while limited, provides some help to defendants at certification.

Behrend in a nutshell: The plaintiffs filed a class action accusing Comcast of monopolizing the market for cable services in Philadelphia, driving up prices. (This was a violation of Section 2 of the Sherman Act.) During the certification debate, they offered expert testimony that showed the effects of four different practices on cable prices, although the report did not disaggregate those effects. The trial court certified a class based on only one of the four challenged practices, referred to as "overbuilding," in which the company provided more infrastructure than demand supported, driving prices down and keeping out competitors. When Comcast objected that plaintiffs had not provided classwide evidence that overbuilding had led to the price increases they challenged, the lower court held that the expert report was sufficient to serve as classwide proof, and delving any further would be an impermissible merits inquiry. The Third Circuit affirmed.

The majority, in a brief 5-4 opinion, began from the premise it articulated most recently in Dukes, that class actions require a rigorous inquiry that may overlap with the merits. While Dukes discussed the commonality standard of Rule 23(a),

[t]he same analytical principles govern Rule 23(b). If anything, Rule 23(b)(3)’s predominance criterion is even more demanding than Rule 23(a).

(Emphasis added.)  It then held that a plaintiff's theory must remain consistent enough that the class certified will reflect the actual case tried, including the theory of damages:

at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case, particularly with respect to the alleged anticompetitive effect of the violation.

(Internal quotation omitted.) This, held the Court, was where the lower courts had gone wrong. They had certified a class based on an expert opinion that did not actually match the theory of the case the class would be allowed to pursue. Moreover, the lower court had punted on the question of whether the expert's method made sense at all:

The Court of Appeals simply concluded that respondents “provided a method to measure and quantify damages on a classwide basis,” finding it unnecessary to decide “whether the methodology [was] a just and reasonable inference or speculative.” Under that logic, at the class-certification stage any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be. Such a proposition would reduce Rule 23(b)(3)’s predominance requirement to a nullity. 

(Emphasis added, internal citation omitted.)

This is not the last we've heard of the Daubert debate. As the dissent points out, before it learned that the admissibility question had been waived, the Court had reformulated the question on appeal specifically to address the admissibility of expert testimony. I would guess that the Court will remain vigilant for an opportunity to further clarify what expert testimony can support certification. Meanwhile, defendants can use the Court's discussion here to good advantage when challenging classes where individualized issues predominate.

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Yesterday, the Supreme Court issued its opinion in Standard Fire Insurance v. Knowles.  The question the Court faced in this case was whether a plaintiff may avoid removal of a class action under CAFA by stipulating that the case is worth less than $5 million, the statutory amount-in-controversy requirement.

The Knowles opinion--which was unanimous--provides a straightforward answer. As Justice Breyer put it:

As applied here, the statute tells the District Court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the definition of Knowles’ proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case. The District Court in this case found that resulting sum would have exceeded $5 million but for the stipulation. And we must decide whether the stipulation makes a critical difference.

In our view, it does not. Our reason is a simple one: Stipulations must be binding. … The stipulation Knowles proffered to the District Court, however, does not speak for those he purports to represent.

That is because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.

(Emphasis added) In other words, until a class is certified, a named plaintiff is just an individual plaintiff, not the head of some mystical entity known as a class.

Knowles, combined with a few other cases, like Bayer and Shady Grove, shows that the Supreme Court is slowly coming to a coherent vision of what a class action is. That vision is helpful for defendants, less so for current plaintiffs. The Supreme Court is envisioning the class action as a procedural aggregation device, rather than a corporate deterrent or a trust-like entity. This is good news for defendants, who have traditionally argued that the class action is a rule-based joinder device that should not confer any special treatment onto the named plaintiff.

Disclosure: I was on a team that assisted Ted Frank of the CCAF in filing its amicus brief in this case. 

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The Supreme Court has handed down its first class-action related opinion of the 2012-13 Term, Amgen Inc. v. Connecticut Retirement Plans & Trust Funds. And while that opinion represents a loss for the defendants in the specific case, it's not as big a problem for securities defendants in general.

Amgen involved an alleged securities fraud committed by Amgen Inc., a biotechnology company. As the Ninth Circuit's opinion lays out the alleged misstatements:

First, Amgen supposedly downplayed the FDA's safety concerns about its products in advance of an FDA meeting with a group of oncologists. Second, Amgen allegedly concealed details about a clinical trial that was canceled over concerns that Amgen's product exacerbated tumor growth in a small number of patients. Third, Amgen purportedly exaggerated the onlabel (that is, for FDA-approved uses) safety of its products. And fourth, Amgen allegedly misrepresented its marketing practices, claiming that it promoted its products solely for onlabel uses when it in fact promoted significant off-label usage, in violation of federal drug branding statutes.

Amgen moved to dismiss the case, but lost that motion. The plaintiffs then moved for certification, relying on the fraud-on-the-market theory to demonstrate classwide reliance. Amgen opposed, arguing in part that the plaintiffs had not shown that the alleged misstatements were material (a requirement the Supreme Court appeared to impose in Basic, Inc. v. Levinson). The problem was, materiality was both a "prerequisite" for fraud-on-the-market and an essential element of a 10b-5 claim. So the question the litigants (and the Court at argument) struggled with was: when do you have to prove materiality? At class certification, or on the merits?

Justice Ginsburg's opinion is remarkably clear, from the beginning:

Contrary to Amgen’s argument, the key question in this case is not whether materiality is an essential predicate of the fraud-on-the-market theory; indisputably it is. Instead, the pivotal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members” as the litigation progresses. Fed. Rule Civ. Proc. 23(b)(3). For two reasons, the answer to this question is clearly “no.”

(Emphases added.)  The first reason the Court cited was that materiality must meet an objective "reasonable investor" standard, which will not vary from class member to class member. The second reason, however, is the one that shows why the Amgen opinion should not cause securities defendants too much heartburn:

there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating. Because materiality is an essential element of a Rule 10b–5 claim, see Matrixx Initiatives, 563 U. S., at ___ (slip op., at 9), Connecticut Retirement’s failure to present sufficient evidence of materiality to defeat a summary-judgment motion or to prevail at trial would not cause individual reliance questions to overwhelm the questions common to the class.

(Emphasis added.) In other words, because of the "reasonable investor" standard for materiality, there was never a hope of showing variations there to begin with. The defendant's hope was always in just showing that materiality did not exist. And, if the defendant can do that, it can win the case outright.
In other words, what the Supreme Court did here was to remove one option for the defendant to challenge materiality. Before Amgen, the defendant could challenge materiality at four points during the litigation:

• during a motion to dismiss (decided on a 12(b)(6) standard, but with some assistance from the PSLRA, which requires plaintiffs to plead specific facts supporting loss causation);
• during a motion for summary judgment (decided on a "no contested material facts" standard);
• during class certification (decided on a standard that ranged between "burden of persuasion" and "preponderance of the evidence" depending on the jurisdiction); or
• during trial (decided on a "preponderance of the evidence" standard).

Now, the class certification challenge is gone, but the others remain. There are sound strategic reasons to want a challenge at the certification stage, but nothing prevents the defendant from filing a summary judgment motion before certification if it believes it can win the materiality issue cleanly.
So while, at first blush it appears the Court has taken away a certification argument for the defense, what it has really done is to remind the defendant that when it has a strong merits argument to make, it should do so.

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On Monday, the Supreme Court heard arguments in two different class actions, united by a common problem.

The first, Comcast Corp. v. Behrend, asked whether a trial court should hold plaintiffs to the Daubert standard for expert testimony at class certification, a question that has divided federal circuits for several years. Due in part to a difficult record below (Comcast had not actually registered a Daubert objection), the Justices argued back and forth about whether there was an issue to decide at all, and, if so, what it was. At one point, Justice Kagan remakes in frustration:

I am still in search of a legal question that anybody disagrees about here.

Taking a slightly different tack, Justice Kennedy questioned whether one can even impose a standard for the admissibility of evidence like Daubert on a trial judge who will simultaneously decide admissibility (which requires looking at evidence to determine its worth) and finding facts (judging the probity of the evidence):

the judge doesn't really have a gate -- what do you call it, a gatekeeper function here. There is no--there's no jury. And if the judge admits the evidence and if it turns out that that doesn't meet the standard of reliability, then he can exclude it.

I don't--I don't see why the judge has to say: All right, now first I'm going to do Daubert, and next I'm going to do whether this is reliable. This is just a magic words approach, it seems to me.

(Emphasis added.)  Meanwhile, Justice Scalia, like many lawyers, struggled with the threshold issue of how to pronounce "Daubert":

I never know how to say it. Is it [DAW-bert] or  [Doe-BEAR]?

While it's usually a fool's game to determine from the arguments which way the Court is leaning, it is remarkable that a number of Justices on both sides (including Kennedy, Scalia, Alito, Sotomayor, and Kagan) questioned whether a Daubert inquiry is necessary to a judge-conducted certification hearing.  In my limited experience, consensus like that at argument can imply consensus in chambers as well.

The second case, Amgen Inc. v. Connecticut Retirement Plans & Trust Funds (previously), asked whether a securities class-action plaintiff must demonstrate that the defendant's misstatements were material at the class certification stage (because the fraud-on-the-market theory many plaintiffs rely on requires a demonstration of materiality) or only at trial (where materiality is an element of the claim).

This question--when materiality is itself material to a securities class action--frustrated the Court so much that Justice Scalia suggested the solution may be to overrule the original fraud-on-the-market case, Basic Inc. v. Levinson:

If you have the same question, then maybe we shouldn't have this fraud-on-the-market theory. Because the whole purpose of it is--is to--to assume that--that the whole class was--was damaged and relied--because you can rely on an efficient market. But you can only rely on an efficient market where there has been a material misrepresentation. So maybe we should overrule Basic because it was certainly based upon a theory that--that simply collapses once you remove the materiality element.

(Emphasis added.)  Despite Justice Scalia's bold proposal, I'd say it is unlikely the Court will use Amgen as grounds to overrule Basic. That said, the argument does not provide a lot of clues as to which way most of the Justices lean. Justice Scalia seemed concerned about postponing the materiality inquiry given its likely effect on settlement; Justices Kagan and Sotomayor appeared more interested in whether materiality really needs to be decided before the merits.

Despite the disparate subject matters, there is a common thread to these two cases. Each asks what facts really need to be decided before a class action may be decided. And that makes them well worth watching this Term. Taken individually, these are technical questions that each arise only in certain kinds of class actions. But taken together, the Court may well make an important statement about the role of factual inquiry for class certification. And as class-action lawyers know, that factual inquiry dictates a number of tactical issues, from the extent of discovery to settlement posture.
 

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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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 Dreaded deadline doom on a few projects (and some actual paying work) means that, unfortunately, today's post will have to be light on original content.  

Fortunately, Judge Posner has an excellent review of Justice Scalia's new book up at The New Republic, so I can just direct you there.  It's classic Posner, and includes one of the most lucid critiques I've read on originalism:

The decisive objection to the quest for original meaning, even when the quest is conducted in good faith, is that judicial historiography rarely dispels ambiguity. Judges are not competent historians. Even real historiography is frequently indeterminate, as real historians acknowledge. To put to a judge a question that he cannot answer is to evoke “motivated thinking,” the form of cognitive delusion that consists of credulously accepting the evidence that supports a preconception and of peremptorily rejecting the evidence that contradicts it.

Not strictly class-action strategy, but still well worth your time.

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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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Last month, I received a flurry of email from various people who wanted to point me towards Mark Herrrman's column on Above the Law, "Torpedoing Class Actions." In that column, Herrmann reviewed Martin Redish's 2009 book Wholesale Justice, which argues that class actions are an unconstitutional delegation of state power to private lawyers. He also called class-action defense lawyers "derelict" and asked "Where is the practicing bar?" when it comes to advocating Redish's arguments.

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Those who argue that AT&T v. Concepcion killed the class action must be having an interesting January. Two of the more significant cases so far this year--Compucredit Corp. v. Greenwood (2012) and D.R. Horton, Inc. v. Cuda (NLRB 2012), have involved similar questions about when a defendant can move to compel arbitration in a class action.

But wait, I hear you ask. Didn't Concepcion decide that issue last year? Well, like with most legal questions, the answer is yes and no. Concepcion held that general statements about state unconscionability law cannot trump the dictates of the Federal Arbitration Act. But it left open the question of whether a federal statute could supplant § 2 of the FAA. Both of these lawsuits test that opening: CompuCredit involves the Credit Repair Organizations Act (CROA), and D.R. Horton involves the Fair Labor Standards Act (FLSA).

In CompuCredit, the plaintiffs alleged that the defendant had misrepresented its ability to rebuild card-users' credit, as well as the effective credit limits on its accounts. CompuCredit had moved to compel arbitration, but the district court had denied the motion, and the Ninth Circuit had affirmed.

The Ninth Circuit adopted the following line of reasoning, urged upon us by respondents here: The disclosure provision gives consumers the "right to sue," which "clearly involves the right to bring an action in a court of law." Because the nonwaiver provision prohibits the waiver of "any right of the consumer under this subchapter," the arbitration agreement— which waived the right to bring an action in a court of law— cannot be enforced. 

The flaw in this argument is its premise: that the disclosure provision provides consumers with a right to bring an action in a court of law. It does not.

(Internal citations omitted.) The plaintiffs also relied on the fact that the CROA contained a number of references to lawsuits, and specifically to class actions. They argued that these mentions demonstrated Congress intended to allow a right to a class action in this case. The Court disagreed:

These references cannot do the heavy lifting that respondents assign them. It is utterly commonplace for statutes that create civil causes of action to describe the details of those causes of action, including the relief available, in the context of a court suit. If the mere formulation of the cause of action in this standard fashion were sufficient to establish the "contrary congressional command" overriding the FAA, valid arbitration agreements covering federal causes of action would be rare indeed. But that is not the law.

(Emphasis added, internal citation omitted.)

By contrast, in D.R. Horton, the NLRB held that the right to bring a class or collective action cannot be waived by an arbitration clause. Is that consistent with CompuCredit?

Probably. D.R. Horton involved allegations that the defendant had misclassified building superintendents as exempt from the FLSA. The plaintiff, Michael Cuda, filed a classwide arbitration, and D.R. Horton moved to dismiss, because its arbitration clause did not allow for collective action. Accepting the defendant's logic, the judge dismissed the claim.

The NLRB reversed, explaining:

Section 7 of the NLRA vests employees with a substantive right to engage in specified forms of associational activity. It provides in relevant part that employees shall have the right "to engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection …"

And it went on to observe that

The Board has long held, with uniform judicial approval, that the NLRA protects employees' ability to join together to pursue workplace grievances, including through litigation.

Section 7 does not specifically mention class actions. But the NLRB decided that, because it did specifically allow for concerted action to protect employees, that class-action litigation fell within the scope of the statute as drafted.

These forms of collective efforts [including class actions] to redress workplace wrongs or improve workplace conditions are at the core of what Congress intended to protect by adopting the broad language of Section 7. Such conduct is not peripheral but central to the Act's purpose.

(Emphasis added.) In other words, the NLRA specifically stated that the parties had a right to use collective action (which had been interpreted to include class actions) to improve their working conditions. The substantive right to use a class action came from the statute itself.

So what can defense lawyers take from this? So long as the federal statute at issue does not specifically provide a right to bring a class actions, it will still be worth including arbitration clauses where appropriate, and moving to enforce those clauses.

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

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

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

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

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

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

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

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

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

Predominance focuses only on defendant's conduct:

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

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

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

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

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

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

and

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

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

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

(Emphasis added.)

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

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

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

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

(Emphasis added.)

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

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

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

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

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

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

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

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

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

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

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

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

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 My apologies for posting late this week; I'm suffering from a little jet lag. I spent yesterday in Virginia at the annual conference for the American College of Court Business Judges, where John Beisner and I were presenting a number of developments in class action litigation.  Today I'm England, and by tonight, I will be in the Hague for the 5th Annual Conference on the Globalization of Class Actions and Mass Litigation, where Paul Karlsgodt (of ClassActionBlawg) and I will be eagerly taking notes.  

Before John and I presented on Monday, we were treated to a panel discussing the ALI's recently-finalized Principles of the Law of Aggregated Litigation. Victor Schwartz (long hailed as the "intellectual guru of the wrongdoers of America") moderated, and Professors Troy McKenzie and Charles Silver, and the Hon. William Highberger, discussed the development of the Principles. Among the highlights:

• The ALI Principles have featured in several prominent class-action opinions in the past year, including Smith v. Bayer Corp. in the Supreme Court, and Gates v. Rohm & Haas Co. in the Third Circuit.
• While Wal-Mart Stores, Inc. v. Dukes did not explicitly cite the Principles, it relied heavily on the late Richard Nagareda's work on divisible and indivisible remedies and the nature of common questions, as did the Principles.
• The Principles have proven to be more stringent about cy pres relief than much of the case law, which may have influenced the Fifth and Ninth Circuits in their recent restrictions of when cy pres may be used.
• The evolution of the Principles through its draft forms reflect a desire to minimize gamesmanship, including the removal of a number of examples discussing medical monitoring (which often does not lend itself to class treatment), a de-emphasis of subclasses to prevent any gamesmanship in class proposals (by, say, proposing a massive class, but having a subclass as a fallback position), and the deletion of a discussion of using a company's principal place of manufacture in conflict-of-law analysis (because conflicts of law involves substantive--rather than procedural--questions).
• Certain of the Principles endorse changes in the law, rather than just restating it. Most notably, §§ 2.10 (which recommends allowing opt-ins where possible, or "aggregation by consent), and 3.17 (which would allow plaintiffs to give informed "advance consent" to settlement agreements, facilitating mass tort settlements).

Overall, the Principles are still new enough that most lawyers don't cite them very frequently when briefing mass or class actions. However, the judges in the audience seemed pretty enthusiastic about the analysis. Make of that what you will.

Given my travel and conference schedule this week, there'll be no post tomorrow.  But join me on Friday for the first set of highlights from the Globalization conference.  Safe travels to those who'll be there.  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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... that my entry in the SCOTUSblog symposium on class actions is up: "The Class Action is Alive and Kicking." 

The entire symposium is well worth a read so far; some very interesting ideas from various lawyers and academics.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commonality means not common questions, but common answers.

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

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

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

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

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

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

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

(Internal citations omitted.)

And what does this mean for class-action litigation?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, according to the Court,

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

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

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

In other words:

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

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

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

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

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

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

Justice Stevens began his opinion by noting that

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

(Internal quotations omitted.)

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

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

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

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

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

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

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

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A few weeks ago, I mentioned that the Supreme Court had begun to hand down its class-action cases for the term. I was wrong. It actually delivered another opinion a month ago that, despite sitting on my desktop, I had forgotten. And that's something I ought to correct.

The case, Matrixx Initiatives, Inc. v. Siracusano, arose out of an alleged securities fraud. According to the plaintiffs, Matrixx Initiatives, Inc. (in the person of three of its executives) withheld reports of a possible link between its cold remedy Zicam and a condition known as anosmia, or loss of the sense of smell. Specifically, the plaintiffs alleged that, starting in 1999, Matrixx had received calls from doctors who had reported "clusters" of patients who used Zicam and suffered anosmia. (Even under more rigorous conditions than self-reporting, cluster samples tend to lack the precision required for statistical significance.)

Matrixx convinced the district court to dismiss the complaint by arguing that clusters are not significant enough to reach the standard of materiality under § 10 of the Securities Exchange Act, and that the plaintiffs had not pled that the defendants had scienter under the PSLRA. The Second Circuit reversed, and Matrixx appealed to the Supreme Court.

The Court faced two questions, both of which arise primarily in securities class actions. First, does an omission of data that is not statistically significant count as material? Second, is recklessness enough to fulfill the PSLRA's scienter requirement?

It didn't struggle with either question. Justice Sotomayor wrote for a unanimous court. First, the Court held that data does not have to be statistically significant to be material.

As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation. We note that courts frequently permit expert testimony on causation based on evidence other than statistical significance. We need not consider whether the expert testimony was properly admitted in those cases, and we do not attempt to define here what constitutes reliable evidence of causation. It suffices to note that, as these courts have recognized, "medical professionals and researchers do not limit the data they consider to the results of randomized clinical trials or to statistically significant evidence."

(Internal citations omitted.) Justice Sotomayor concluded that since

medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.

The Court did try to set some limit on the materiality of any adverse events. It noted that adverse event reports are "daily events" for pharmaceutical manufacturers. So the real question was not whether there had been an adverse event report, but how a reasonable investor would treat the "total mix" of information at that time.

The Court also briefly discussed scienter. Given plaintiffs' allegations that Matrixx had hired a consultant and convened a "panel of physicians and scientists" to help it respond to the reports of anosmia,

[t]he inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions.

So what does this ruling mean for defense lawyers? First, it should guarantee continued business. Efforts to limit its reach aside, the Court's ruling provides an opening for enterprising plaintiffs' counsel to file securities-fraud cases based on isolated events, so long as they argue that the events changed the total mix of information available to an investor. The ruling also means that lawyers will have to pay extra attention to how their clients conduct investor relations. The more aggressive the investor-relations strategies, the more likely plaintiffs will be able to paint a picture that the company thought a given event indicated something meaningful, leading to an inference of scienter.

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Today, the Supreme Court began to roll out its class-action opinions. And first up, it has decided AT&T Mobility LLC v. Concepcion. In a 5-4 opinion authored by Justice Scalia (Thomas concurring), the Court held that § 2 of the Federal Arbitration Act preempted California's Discover Bank rule, which "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable."

A number of sources are painting this as the end of the class-action as we know it. So, time to shut down the blog? Hardly. There are many, many class actions, even consumer class actions, that will survive this ruling. (Taco Bell, for example, does not rely on arbitration clauses when it sells its Enchirito. It's not clear whether one must sign a health waiver.)

So what exactly did the Court rule?

The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

To support this ruling, Justice Scalia's opinion explores exactly what procedures are required to bind absent class members to a classwide verdict. In particular,

First, the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.

...

Second, class arbitration requires procedural formality. The AAA’s rules governing class arbitrations mimic the Federal Rules of Civil Procedure for class litigation. And while parties can alter those procedures by contract, an alternative is not obvious. If procedures are too informal, absent class members would not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent absent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class. At least this amount of process would presumably be required for absent parties to be bound by the results of arbitration.

(Internal citations omitted.) In other words, the Supreme Court ruled that a classwide arbitration is likely to be ineffectual. For it to have the benefits of a class action, it must sacrifice the informality that makes arbitration appealing. For it to have the benefits of arbitration, it must sacrifice the protections we afford absent class members.

What does this mean for class-action lawyers going forward? There are a couple of consequences. First--and hardly surprising--we're likely to see more defendants that use form contracts build in arbitration provisions.

Second, we're likely to see plaintiffs' lawyers try some innovative challenges to arbitration provisions. The Supreme Court held that a blanket rule against arbitration provisions is preempted by the FAA, but left open the possibility that a court might find a specific arbitration provision unconscionable if it does not comply with other steps designed to ensure that contracts of adhesion respect consumers' rights. (See footnote 6 for the specific language.)

Third, the Court's discussion of the difference between arbitration and class actions--in particular its emphasis on the need for adequate representation to bind absent class members--gives defense lawyers further ammunition in challenging inadequate plaintiffs. (It may also provide a hint on how the Court may rule on the Rule 23(b)(2) issue in the other closely-watched class action on its docket.)

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

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

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

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

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

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 This week, we're going to address one of the longest-standing debates in class-action litigation: How much may a court delve into the merits of a class action when deciding certification?

Plaintiffs often argue "not at all." Defendants often argue "as much as necessary." (Though not always; when defendants file motions to strike class allegations, they argue that the court need not look at the merits at all to decide a class is not appropriate.) Both arguments stem back to a single 1974 Supreme Court opinion: Eisen v. Carlisle & Jacquelin. 

Eisen was a class action filed by odd-lot traders on the NYSE, challenging the monopoly that a pair of brokerages (one of which was Carlisle & Jacqueline) held over odd-lot trades. The Supreme Court opinion concerned the question of whether the plaintiff or defendant was responsible for paying the costs of notice in a class action.

Originally, the Southern District of New York both certified a class and held that the defendant was responsible for the costs of notice. It based its decision not on a Rule 23 analysis, but on its judgment that the plaintiff odd-lot traders would likely prevail in the lawsuit. (In other words, it treated the proposed class action like a proposed injunction.)

The Second Circuit reversed the imposition of costs. And, in affirming that reversal, the Supreme Court held:

that petitioner must bear the cost of notice to the members of his class. The District Court reached the contrary conclusion and imposed 90% of the notice cost on respondents. This decision was predicated on the court's finding, made after a preliminary hearing on the merits of the case, that petitioner was "more than likely" to prevail on his claims. Apparently, that court interpreted Rule 23 to authorize such a hearing as part of the determination whether a suit may be maintained as a class action. We disagree.

We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. Indeed, such a procedure contravenes the Rule by allowing a representative plaintiff to secure the benefits of a class action without first satisfying the requirements for it. He is thereby allowed to obtain a determination on the merits of the claims advanced on behalf of the class without any assurance that a class action may be maintained. This procedure is directly contrary to the command of subdivision (c) (1) that the court determine whether a suit denominated a class action may be maintained as such "[a]s soon as practicable after the commencement of [the] action . . . ." ...

In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met. Additionally, we might note that a preliminary determination of the merits may result in substantial prejudice to a defendant, since of necessity it is not accompanied by the traditional rules and procedures applicable to civil trials. The court's tentative findings, made in the absence of established safeguards, may color the subsequent proceedings and place an unfair burden on the defendant.

(Internal quotations omitted, emphasis added.)  So, the proscription against merits inquiries is not against any look at the merits of the case where they overlap with the certification question, it's against deciding class certification based on one's opinion of how the case will turn out. If deciding whether a class is certifiable requires a court to probe behind the pleadings or to decide whether a given expert's testimony is admissible, then a court may--and in some cases must--make those decisions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

...

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

(Internal footnotes omitted.)  

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

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

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

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

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

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

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

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

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

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

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

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

The Court took on the case, in part to

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

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

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

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

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

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

(Internal footnotes and quotation omitted.)

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

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

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

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

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Yesterday, the Supreme Court heard oral argument on Concepcion v. AT&T, which posed the question of whether the Ninth Circuit had properly disregarded AT&T's consumer arbitration clause as unconscionable because it did not allow classwide arbitrations. As I mentioned yesterday, much of the advance reporting and commentary (with a few exceptions) painted the argument as the harbinger of an apocalyptic battle over the future of the consumer class action.

The reality was more sedate. Most reports on the argument (which Slate's Dahlia Lithwick described as "some kind of hideous jargon spill in the Gulf of Mexico") have stressed that the Court treated this primarily as an issue of federalism, specifically when to interfere with state law. Justice Scalia, usually considered the one of the most conservative (and therefore both pro-business and pro-state) Justices, focused his questioning heavily on issues of federalism. Specifically, he asked:

Are we going to tell the State of California what it has to consider unconscionable?

Justice Kagan--appointed by former University of Chicago Law School (go Maroons!) colleague President Obama and therefore expected to be pro-consumer--appeared to agree with Scalia's analysis:

It may be a good unconscionability doctrine or it may be a bad unconscionability doctrine, but it’s the state’s unconscionability doctrine.

Justice Alito (aided by some questions from Chief Justice Roberts) focused more on whether unconscionability can properly include unfairness to parties not currently before the court:

Traditional unconscionability in California and elsewhere focuses on unfairness to the party who is before the tribunal. So here it would be unfairness to the Concepcions, rather than unfairness to other members of the class who are not before the court.

What does this mean for the future of arbitration clauses? Several studies have shown that the more questions the Justices ask of a side, the likelier it is to lose.  In this case, at least according to published news reports, counsel for AT&T had to answer more and tougher questions than Deepak Gupta of Public Citizen, counsel for the respondent. While some of the questions Justices Alito and Roberts asked indicate a possible line of argument for upholding AT&T's arbitration clause, the early money would favor an opinion affirming the Ninth Circuit. Given that Circuit's reputation, that would make this opinion truly noteworthy. Of course, the Court will have the last word sometime in Spring 2011.

NOTE - This entry has been corrected.  It originally misidentified Public Citizen as "Public Justice." 

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Today, the United States Supreme Court hears oral argument in Concepcion v. AT&T, a case on appeal from the Ninth Circuit concerning whether the Federal Arbitration Act preempts states like California from requiring arbitration clauses to allow for classwide arbitration. (The venerable SCOTUSBlog has an excellent roundup of the issues and briefing.)

I'm not interested in pre-gaming the argument. (Although if I were a betting man, I'd lay odds on the Roberts Court finding in favor of AT&T.) I'm more interested in the rash of stories and op-eds (like this one from Vanderbilt Professor Brian Fitzpatrick) that make claims like

If the case is decided the way many observers predict, it could end class-action litigation in America as we know it.

You could say I'm biased. Class actions form the foundation of my practice. I write a blog about class-action strategy (and welcome to it). I just published a book on how to litigate class actions.  But it's simply not true that class actions will disappear if the Supreme Court rules in favor of AT&T on this issue.

Here are the assumptions that inform my conclusion. Class actions are big business for many attorneys. And class action lawyers are endlessly resourceful. The Private Securities Litigation Reform Act did not kill securities class actions. Nor, despite similar warnings, did the Class Action Fairness Act end consumer class-action litigation.

Does this mean that I think that Concepcion will have no effect on class actions? Hardly. If the Supreme Court rules in favor of AT&T, defendants will have a powerful tool for making sure that plaintiffs' attorneys can't gin up minor complaints into bet-the-company litigation. It will be more difficult to bring certain kinds of consumer class actions; most notably the kind where the claims do not describe harms consumer care about. (How do we know when consumers don't care? They don't bother to claim their money. For many consumer class-action claims, the response rate is very low--between 2 and 20 percent. This is one of the reasons why cy pres relief is so popular among plaintiffs' lawyers, and so controversial otherwise.)

But reducing the number of low-merit consumer class actions does not mean there will be no consumer class actions; there are many consumer class actions where there is no contract (and hence no arbitration clause) at issue. Nor does it mean that there will be no way for wronged consumers to get redress. Among other methods:

• Many companies provide voluntary customer-satisfaction programs.
• Many companies will be providing attractive bilateral arbitration provisions. (AT&T's covered most costs, and provided a $7,500 bonus to consumers who got more than AT&T had first offered.)
• State consumer-protection laws that offer attorneys' fees still exist. (So do lemon laws.)
• State and federal consumer-protection agencies exist.

Moreover, there are a number of different kinds of class actions that an arbitration clause likely would not apply to. Among those are:

• Consumer class actions that do not involve form contracts.
• Various antitrust class actions.
• Securities class actions.
• Environmental class actions.
• Civil rights class actions.
• Labor and employment class actions.

I don't believe I live in a world where corporations can do no wrong. Some can and do; and deterring wrongdoing is a noble policy goal. But I also don't live in a world where all class-action plaintiffs' lawyers selflessly bring only meritorious claims. Many don't; and those claims do nothing to deter actual wrongdoing. Finding the proper balance between under- and over-deterrence of corporate misconduct is not easy. It's a game of constant adjustment, and no matter which way the Supreme Court rules in Concepcion, either plaintiffs or defendants will have some adjusting to do. But if the Supreme Court rules in favor of AT&T, class actions will not disappear. It will just be harder to bring the kinds of class actions that will provide little actual relief for the class. And, if I were a betting man, I'd lay money on the side that says that even then, there will still be consumer class actions for me to defend.

UPDATE (12 November 2010) - Welcome Overlawyered readers!  If you haven't already, please also check out Ted Frank's post at Point of Law, which very lucidly covers similar points.  Also, look here for a brief postgame analysis of the argument.

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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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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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