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

 It turns out that Elizabeth Chamblee Burch is not the only law professor currently worried about adequacy in securities class actions. Boston University law professor David H. Webber has an article in the Northwestern University Law Review on The Plight of the Individual Investor in Securities Class Actions.

While Professor Burch was concerned with whether or not institutional investors were adequate representatives on their own, Professor Weber is more concerned with whether they can ever represent individual investors. In particular, he sees three conflicts that may be insurmountable:

1. Derivatives trading. Institutional investors tend to engage in derivatives trading; individual investors less so. Derivatives trading may mean that institutional investors do not suffer the same losses as individual investors, or face the same risks. More importantly, it may subject them to unique defenses, such as a lack of reliance. (Basic, Inc. v. Levinson did not do away with the reliance requirement in securities fraud, it just allowed a court to presume reliance from stock price. If a derivatives trader has not relied on the stock price …)
2. Governance reforms. Webber notes that institutional investors are more likely to seek corporate governance reforms as part of their settlements. And, as he points out, if an investor accepts governance reform as part of a settlement package, it is usually in exchange for less overall money. Institutional investors who are repeat players may very well prefer the governance reform. Individual investors may prefer the cash.
3. Merger class actions. Finally, institutional investors are far more likely to be on both sides of a merger transaction, a situation that may well disqualify them from representing a class challenging the approval of a merger.

Professor Webber's proposed solution is to pair up individual investors with institutional investors. (Which is not too far off from Professor Burch's "plaintiff group" proposal.) But his critique, especially when coupled with Professor Burch's, and with the circularity problem in securities class actions, raises the question of whether securities fraud cases are appropriate for class treatment after all. Meanwhile, however, his specific discussions of the problems with institutional investors can provide defense lawyers with additional ammunition to fight certification in less meritorious cases.

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Northside Chiropractic doctor Michael Dubick made the mistake of--after a cold call from salesmen--buying advertising space in Yellowbook. He negotiated for a certain kind of advertisement, but the published ad looked nothing like what he had asked for, and lacked even basic information about his business (like his name). So he sued, and added class allegations to his complaint. Yellowbook also listed his advertisement under "Massages - Non-Therapeutic," a possible crack about chiropractors at best, and solicitation of a whole different kind of client at worst.

So Dr. Dubick filed a class action against Yellowbook, and moved for certification. (Northside Chiropractic Inc. v. Yellowbook, Inc., 2012 U.S. Dist. LEXIS 122827 (N.D. Ill. Aug. 29, 2012).) Dubick's proposed class was a textbook example of a fail-safe class, including all those who:

(a) after being beguiled and misled by Yellowbook sales personnel with false promises and material misrepresentations;

(b) were fraudulently induced to make purchases of Yellowbook print display advertising, with placement of advertising in one or more Yellowbook directories distributed within the State of Illinois;

(c) signed sales agreements or contracts containing terms substantially similar to those signed by the named Plaintiffs;

(d) made complaints or claims concerning Yellowbook's failure to properly publish and provide the requested advertising services that conformed to advertising requirements that were agreed upon by such persons and Yellowbook; and

(e) were denied full refunds, or appropriate compensation for the damages sustained as a result of Yellowbook's failures and misconduct.

(Emphases added.)  Yellowbook quite rightly argued that the class was not ascertainable, and the court agreed (adding a good discussion of the policy justifications for an ascertainability requirement). But it also went on to explain why even an amended class definition would not save the class:

• The plaintiff did not prove numerosity. Dr. Dubick pointed to evidence that Yellowbook received more than 10,000 complaints. But, as the court pointed out, there were no numbers showing how many complaints related to his specific claims that he had been promised a Early Decision Incentive Award that turned out to be valueless.
• The plaintiff did not prove commonality. Another set of claims Dr. Dubick advanced involved Return-On-Investment calculations that Yellowbook's sales reps used to persuade potential buyers. Dr. Dubick heard these calculations in his sales pitch, but, as the court pointed out, he could not prove that others heard or relied on them.
• The plaintiff did not prove typicality. Since the class definition was overbroad, including anyone "misled or beguiled," it would include all kinds of alleged misrepresentations, not just those that Dr. Dubick had heard.
• The court expressed some misgivings about adequacy of counsel (most notably that they had "plainly misinterpret[ed] Walmart v. Dukes," but held that these "concerns do not rise to the level that would disqualify counsel as inadequate."

What can defense counsel take from this opinion? Lots. But most importantly, it's an excellent reminder of a point I tried to make in the Strafford CLE on ascertainability several weeks ago. If there are flaws in the class definition, they often indicate larger flaws with the class proposal.

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Typicality tends to be a useful, if not always used, way of framing various class action issues. Its primary purpose is to ensure that the class action is really a representative lawsuit rather than just an individual case with pretensions. Given the rulings on typicality so far, it's worth asking how defendants might argue it more effectively.

Ten Cases to Bring You Up to Speed:

• Randall v. Rolls-Royce Corp., 637 F.3d 818, 821 (7th Cir. 2011).
• Daffin v. Ford Motor Co., 458 F.3d 549 (6th Cir. 2006).
• Deiter v. Microsoft Corp., 436 F.3d 461, 466–67 (4th Cir. 2006).
• Beck v. Maximus, Inc.,457 F.3d 291, 296 (3d Cir. 2006).
• Sprague v. Gen. Motors Corp., 133 F.3d 388, 399 (6th Cir.1998).
• Peviani v. Natural Balance Inc., 2011 WL 1648952 (S.D. Cal. May 2, 2011).
• Noel v. Hudd Distribution Services, Inc., 2011 U.S. Dist. LEXIS 21480 (D.S.C. March 2, 2011).
• Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011).
  
• Wiener v. Dannon Co., 255 F.R.D. 658 (C.D. Cal. 2009).
• In re Welding Fumes Prods. Liability Litig., 245 F.R.D. 279, 304 (N.D. Ohio 2007).

Further Reading:

• There really hasn't been any scholarship that focuses on the typicality requirement in class actions.

Questions to Consider:

• Why hasn't there been any scholarship that focuses on the typicality requirement in class actions?
• A number of courts have held that "factual differences" between claims does not mean typicality does not exist. If that is the case, how dissimilar must a claim be before the typicality is lacking?
• Given the adequacy and commonality requirements, is typicality a necessary finding?

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 I've written before about the uses to which defense counsel can put a well-taken named plaintiff deposition. And, once again, an opinion has come along that showcases just how important the named plaintiff deposition is as a weapon to defeat class certification.

The case, Burns v. Bayer Corp., 2012 U.S. Dist. LEXIS 33183 (S.D. Ill. Mar. 13, 2012), is part of the Yaz multi-district litigation (which previously yielded an extremely useful motion to strike opinion). Yaz is an oral contraceptive, and the FDA has also approved it for use in treating acne and premenstrual dysphoric disorder. It has not yet approved the use of Yaz for alleviating less severe premenstrual symptoms (e.g., "that time of the month"), although some doctors have prescribed it for that purpose. The majority of the Yaz MDL cases have alleged that Yaz has some nasty side effects.

Unlike those cases, the Burns case--which was brought only under California law--attacked Yaz's advertising. Ms. Burns sought to represent a class of

All consumers residing in the State of California who were exposed to Defendant's Ads and purchased their prescription for YAZ for the first time, during the period of time between August 20, 2007 and January 26, 2009.

(Emphasis in original.) And her allegations--which included a claim under California's False Advertising Law--accused Bayer of selling Yaz at an unfair premium by marketing it as a PMS palliative for women using contraceptives. Given California's pro-plaintiff consumer laws, I'd guess that plaintiffs thought they had a strong case for class certification. The false advertising law, for example, does not require evidence of reliance, which would significantly reduce the number of individualized issues plaintiffs might face in proving their claims.

Despite these natural advantages to the case as plaintiffs' counsel pled it, the court denied certification. And its reasons relied heavily on the deposition of the named plaintiff.

First, the court decided that the class was not ascertainable, even though plaintiffs offered an "objective" method of determining membership by asking each class member whether she had seen one of the advertisements, and whether she had bought Yaz.

[T]here is no objective way to determine who saw the complained of television advertisements. Instead, class membership would depend on the subjective and often unreliable vagaries of human memory. The record in the instant case exemplifies the problems that would arise in assessing actual exposure. The putative class representative, Frances Burns, initially claimed that prior to obtaining a prescription for YAZ in January 2008, she viewed the "Balloons" and "Not Gonna Take It" television advertisements. However, during her deposition, Ms. Burns testified that she couldn't "recall specifically" which television advertisements she viewed or exactly when she viewed them. Further, Ms. Burns' description of the advertisements she viewed prior to January 2008, indicates that she never saw the "Balloons" advertisement.

(Citations omitted, emphasis added.)

Second, the court found that the named plaintiff's deposition testimony indicated that she was not typical of the class as her counsel had defined it.

Plaintiff's UCL and FAL claims do not require a showing of reliance. Rather, plaintiff must show that the fraudulent conduct was "likely to deceive" a reasonable consumer. This standard is subject to common proof if the actionable conduct was both uniform and material. Thus, materiality is a relevant factor in the Court's class certification analysis. In the instant case, plaintiff claims that she suffered from and sought treatment for premenstrual symptoms. The putative class, however, includes women who did not suffer from PMS or premenstrual symptoms, who did not require treatment for PMS or premenstrual symptoms, and/or who took oral contraceptives for the sole purpose of birth control. For these plaintiffs, the subject of the allegedly fraudulent advertisement campaign would not have been material. Plaintiff's claims are not typical of these putative class members.

(Citations omitted, emphases added.)

And finally, the court looked closely at the Ms. Burns's deposition testimony about how she became involved in the case.

The plaintiff and proposed class representative, Frances Burns, is a citizen of California. Ms. Burns is a "good friend" of and works with Aimee Lambert, the wife of Richard Lambert, one of the class attorneys. Ms. Burns became involved in this litigation after having a conversation with Ms. Lambert. During that conversation, Ms. Lambert told Ms. Burns about this litigation and informed her that her husband was having difficulty locating a suitable class representative.

(Citations omitted, emphasis added.) The court found that this "good" friendship with counsel's wife meant Ms. Burns could not serve as an independent representative of the proposed class.

In the instant case, the disputed relationship does not rise to the level of a familial relationship and Ms. Burns and class counsel are not direct business associates. Nonetheless, the close relationship between Ms. Burns and counsel's wife raises serious concerns as to Ms. Burns's adequacy to represent the instant class. Given that the potential recovery for plaintiffs is minimal compared to the potentially high amount of attorneys' fees that may be awarded, Ms. Burns may be more concerned with helping to maximize the monetary return of her "good friend" and co-worker (counsel's wife) than with her duty to zealously advocate on behalf of the class' interests. This is the type of situation that creates a conflict of interest. Considering this, the Court finds that Ms. Burns is not sufficiently independent of class counsel and does not satisfy the adequacy of representation prong.

(Citations omitted, emphasis added.) 

The court also engaged in a lengthy and thorough analysis of the elements of each California claim to show that individual issues predominated over common ones. However, since it had found that the class was not properly defined, and that the named plaintiff was neither typical nor adequate, these findings were not strictly necessary to its denial. (On the other hand, they do strengthen its opinion, and ensure compliance with Rule 23(c)(1)(B).)

The lesson for defense counsel here is a simple, but very compelling one. Pay close attention to the deposition of the named plaintiff, in particular, what she heard, what she thought, and how she knows class counsel. In this case, the deposition of Ms. Burns was the best evidence Bayer had to defeat certification.

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

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

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

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

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Last week, the Sixth Circuit affirmed a trial court's decision striking class allegations where a proposed nationwide class would necessarily invoke the laws of fifty different jurisdictions. (Russell Jackson has an excellent writeup of the opinion here.) There is no question the opinion is a useful one for defendants. And, since it's the first appellate opinion on a motion to strike in decades, it may be time for an overview of where the motion to strike class allegations stands today.

In the past year, a large number of motions to strike have been filed. (I count at least 25 reported opinions on early challenges to the certifiability of classes.) How have those motions turned out?
Ten of those opinions denied the motion to strike outright as premature, without further analysis.

• Clerkin v. Mylife.com, Inc., 2011 U.S. Dist. LEXIS 96735 (N.D. Cal. 2011) ("Defendants fail to identify any authority permitting the use of a motion to dismiss for failure to state a claim to contest the suitability of class certification.").
• Eliason v. Gentek Building Prods., Inc., 2011 U.S. Dist. LEXIS 94032, *7 (N.D. Ohio Aug. 23, 2011) ("While raising possibly valid concerns, Defendants' arguments on class certification are premature. Whether the commonality requirement has been demonstrated cannot be determined until discovery has taken place and choice of law provisions applied.").
• Garcia v Lane Bryant, Inc., 2011 U.S. Dist. LEXIS 125484 (E.D. Cal. Oct. 31, 2011). (Grants motion to dismiss, denies MTS because "Although Defendants' motion is unopposed, dismissal of Plaintiffs' class allegations at this stage of the proceeding is premature. Although class allegations may be wholly insufficient[,] compliance with Rule 23 is not to be tested by a motion to dismiss for failure to state a claim.") (internal quotations omitted).
• Ginardi v. Frontier Gas Servs, LLC, 2011 U.S. Dist. LEXIS 89504, *11-12 (E.D. Ark. Aug. 10, 2011) ("Plaintiffs are correct that it is premature to strike the class action allegation.").
• Kas v. Mercedes-Benz USA, LLC, 2011 U.S. Dist. LEXIS 127581 (C.D. Cal. Oct. 31, 2011) ("Nevertheless, we will defer final decision pending a more robust briefing at the class certification stage.").
• Martin v. Ford Motor Co., 765 F. Supp. 2d 673 (E.D. Pa. 2011) ("Since the Motion to Strike filed by Defendant is premature, the merits of this argument will not be addressed at this stage of the case.").
• P.V. v. School Dist. of Philadelphia, 2011 U.S. Dist. LEXIS 125370 (E.D. Pa. Oct. 31, 2011) ("unless the parties have completed discovery and at least one party has moved for class certification, a court very rarely has the information necessary to conduct the 'rigorous analysis' inherent in the class certification decision.").
• Rivellio v. Penn State Fed. Credit Union, 2011 U.S. Dist. LEXIS 99668 (M.D. Pa. Sep. 6, 2011) ("The Court is not convinced that this case is one of the "rare few where the complaint itself demonstrates that the requirements for maintaining a class action cannot be met."").
• Rogers v. Capital One Servs., LLC, 2011 U.S. Dist. LEXIS 17064 (D. Conn. Feb. 19, 2011) ("a defendant may move to strike class allegations prior to class certification proceedings "if the inquiry would not mirror the class certification inquiry and if resolution of the motion is clear."").
• Vlachos v. Tobyhanna Army Depot Fed. Credit Union, 2011 U.S. Dist. LEXIS 69725 (M.D. Pa. Jun. 29, 2011) ("The Court will not address the merits of the argument because the motion to strike is premature at this stage, as the plaintiff has not yet moved for class certification.").

Three denied motions to strike on their merits, usually because the plaintiff had made sufficient allegations to support a class action.

• Alegations of commonality - NBL Flooring, Inc. v. Trumball Ins. Co., 2011 U.S. Dist. LEXIS 110518 (E.D. Pa. Sep. 27, 2011) ("These allegations speak to a blanket course of conduct that may apply to all insureds.").
• Denies because of plausible allegations - Perrin v. Papa John's Int'l, Inc., 2011 U.S. Dist. LEXIS 22957, *18-19 (E.D. Mo. Mar. 8, 2011) (""Plaintiff may or may not succeed in proving his claims with respect to other drivers, but at this stage of the case he has set forth sufficient facts to support a plausible allegation of an under-reimbursement [*19] large enough to support a claim that Defendants did not reasonably approximate the delivery drivers' expenses."")
• Plaintiff had standing - Ralston v. Mortg. Inv. Group, Inc., 2011 U.S. Dist. LEXIS 102945 (N.D. Cal. Sep. 12, 2011) ("The fact that some class members purchased their loans from originators other than MIG does not deprive Ralston of standing to assert claims on their behalf").

Two denied motions to strike as moot, since the courts granted concurrent motions that disposed of the case.

• Eldee-K Rental Props., LLC v. DirecTV, Inc., 2011 U.S. Dist. LEXIS 132981 (N.D. Cal. Nov. 17, 2011). Court granted concurrent motion to dismiss.
• Ass'n of N.J. Chiropractors v Aetna, Inc., 2011 U.S. Dist. LEXIS 67718 (D.N.J. Jun. 20, 2011). Denies as Court granted concurrent motion to compel arbitration.

And finally, the remainder of the courts have granted motions to strike. And they have done so for various reasons. Among them, they have ruled that

The class was not ascertainable.

• Bradley v. Mason, 2011 U.S. Dist. LEXIS 64877 (N.D. Ohio Jun. 20, 2011) ("First, the existence of the class must be pleaded and the limits of the class must be defined with some specificity.").
• Bauer v. Dean Morris, L.L.P., 2011 U.S. Dist. LEXIS 100399 (E.D. La. Sep. 7, 2011) - struck class allegations where merits-based class definition
• Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011) ("Plaintiffs' proposed class definition is fatally flawed because the Court cannot determine its individual members without reviewing the evidence relative to each KCDC inmates' incarceration, which would amount to a merits-based inquiry of each individual's claim.").

Variations in state law precluded certifiable class.

• Pilgrim v. Universal Health Card, LLC, 2011 U.S. App. LEXIS 22715, *4 (6th Cir. 2011) ("the district court held, because each class member's claim would be governed by the law of the State in which he made the challenged purchase, and the differences between the consumer-protection laws of the many affected States would cast a long shadow over any common issues of fact plaintiffs might establish. That judgment is sound and far from an abuse of discretion …"). 
• Plaisance v. Bayer Corp., 275 F.R.D. 270 (S.D. Ill. 2011) [] ("In the instant case, defendants have identified numerous facial deficiencies in the class allegations; no amount of time or discovery can cure these deficiencies.").

From the pleadings, the class lacked commonality

• *Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011) ("to resolve the legal issue presented the Court must delve into the specific facts of each inmate's incarceration and the medical needs relative to that inmate.")

From the pleadings, the class lacked typicality

• Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011) ("The Sixth Circuit has held that where the plaintiffs' claims depends on each individual's unique interactions with the defendant, the typicality requirement is lacking. That is certainly the case here.") (internal citation omitted).
• Wright v. Family Dollar, Inc., 2010 U.S. Dist. LEXIS 126643 (N.D. Ill. Nov. 30, 2010) ("These defenses, unique as to plaintiff and any other manager in the putative class, prevent plaintiff from establishing typicality and therefore from showing that she will be able to maintain a class action.").

From the pleadings, the class lacked adequacy.

• Wright v. Family Dollar, Inc., 2010 U.S. Dist. LEXIS 126643 (N.D. Ill. Nov. 30, 2010) ("it is clear from the complaint that the putative class is permeated by conflicts of interest").

From the pleadings, the class lacked predominance.

• Bauer v. Dean Morris, L.L.P., 2011 U.S. Dist. LEXIS 100399 (E.D. La. Sep. 7, 2011) - (struck class allegations where individual issues concerning liability, affirmative defenses, and damages apparent from pleadings).
• Bevrotte v. Caesars Ent. Corp, 2011 U.S. Dist. LEXIS 114463 (E.D. La. Oct. 4, 2011) (individual issues of causation and damages would predominate; class not superior to individual litigation).

So, what can defense counsel take from this? First, the trend on motions to strike is becoming more favorable. More courts are willing to entertain these motions on their merits. (You may notice the majority of the denials come from only a few jurisdictions.) And the first appellate court to decide this issue has (correctly, I would argue) found that if the issue is a purely legal one or can be decided from the pleadings, then there is no reason to rule on it sooner rather than later.

Second, those courts that are granting motions to strike are granting them on various grounds. This is also good news, as it provides defendants with precedent for further motions to strike.

And finally, at least if one credits the opinions in Pilgirm and Plaisance, most plaintiffs don't seem to have any strong counter-arguments to a well-argued motion to strike. The best they can argue is that the motion is premature, and discovery is necessary for a rigorous analysis. And, in certain cases, that will be true. But in many more--like when plaintiffs propose nationwide classes that require applying the laws of fifty different states--there will be no discovery that will change the analysis a court must engage in.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 Depositions are one of the most important parts of class discovery. (And for many lawyers, they're also the most fun.) Since so few class actions go to trial, a deposition of a named plaintiff is when the defense lawyer finally gets to act like a lawyer on TV, confronting the named plaintiff with evidence, poking holes in poorly-constructed stories or arguments. But how much of the named plaintiff deposition is mere theatrics and how much is useful for actually defeating certification? For an excellent example of well-deployed depositions, let's look at a recent FLSA case: Lugo v. Farmer's Pride, Inc., 2010 U.S. Dist. LEXIS 88139 (E.D. Pa. Aug. 25, 2010).

The substantive allegations in the case involve "doffing and donning" (a nickname for FLSA cases alleging that plaintiffs were not paid for time spent putting on and taking off work clothes. In this case, Farmer's Pride owned a chicken-processing plant in Pennsylvania. In order to work in various departments of the plant, workers had to wear various items of protective clothing, including smocks, hair and beard nets, safety glasses, hearing protection, and protective sleeves. (Failure to do so could result in disciplinary action.)

Farmer's Pride moved to decertify the collective action, arguing that "donning and doffing" practices varied by department within its plant, by individual worker's routines, and by compensation scheme (there were two different compensation schemes, one in place until 2007, one in place afterward). The plaintiffs argued that Farmer's Pride had overstated the differences.

But, because Farmer's Pride had relied heavily on deposition testimony from the named plaintiffs and other plant employees, the plaintiffs had a hard time convincing the court that these differences were inconsequential. How did Farmer's Pride use the depositions?

• It used them to question the plaintiffs' ability to testify on others' behalf (typicality). "Defendant also questions the ability of Marco or Caba to speak to the practices and experiences of other hourly production workers, identifying statements in prior deposition testimony by Marco that she did not have knowledge of these facts ( and noting Caba's admission at the evidentiary hearing that she was "not paying attention to what other people [were] doing." (Internal citations omitted.)
• It used them to question the named plaintiffs' credibility (adequacy). "Defendant contends that the inconsistencies present in Marco and Caba's testimony are indicative of a more pervasive problem in the testimony that both named and opt-in plaintiffs have offered over the course of this litigation. In support, defendant points to multiple instances where named or opt-in plaintiffs have provided inconsistent testimony or have admitted to inaccuracies in prior testimony or discovery responses." (Internal citations omitted.)
• And it used them to question plaintiffs' counsel's credibility (adequacy of counsel). "Defendant also offers the testimony of Hasaan Hargett, a former plaintiff in this lawsuit and current hourly production worker at defendant's plant, who detailed at the evidentiary hearing how the facts in the interrogatory response submitted on his behalf were inaccurate, despite the fact that he brought these inaccuracies to the attention of plaintiffs' counsel prior to submission. According to defendant, these numerous contradictions betray an attempt by plaintiffs to manufacture a level of similarity that is not in fact present, and undermine any notion that their testimony can be considered representative in this case."" (Internal citations omitted.)

The defendant's strategy worked; the Court found that the inconsistencies among the testimony of various class member meant that the named plaintiffs' testimony could not stand in for the testimony of other class (or collective action) members.  In its words:

[T]hough plaintiffs tout the testimony of these plaintiffs as representative, neither Marco nor Caba provided a reliable basis which would warrant the Court's acceptance of their own personal facts as applying to others; rather, the Court finds that the record as a whole does not support the conclusion that their particular experiences were shared by all plaintiffs, or reflected a common practice or policy of defendant. Lastly, as defendant has effectively demonstrated, the testimony offered by plaintiffs in general is plagued by inconsistencies that diminish its reliability and show the importance of cross-examination of each plaintiff.

(Internal quotations omitted, emphasis added.) What's the lesson we can learn from this case? No matter how redundant it may seem, be thorough in asking about each class member's experience. The more specifically class members testify about their own individual experiences, the more evident it will become that a class may not be appropriate.

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

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

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

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

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

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

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

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

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

(Internal citations omitted.)

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

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

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

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

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

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

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

As for too narrow:

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

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

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

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

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