In the 1990s, a group of attorneys sued a number of securities broker-dealers nationwide. They alleged that the broker-dealers had executed a number of securities orders at the "National Best Bid and Offer" (NBBO) price–which would provide a customer with the lowest available ask or the highest available bid for a security–an industry-wide practice at the time. Broker-dealers operate under a "duty of best execution," which requires them to "use reasonable efforts to maximize the economic benefit to the client in each transaction." The plaintiffs accused the broker-dealers of violating that duty by executing orders at the NBBO price instead of the examining other feasible alternatives. Since broker-dealers had used NBBO on literally hundreds of millions of transactions, the proposed class action meant big money.
The broker-dealers had lost a motion to dismiss. However, when the plaintiffs moved for certification, the trial court denied it. The plaintiffs appealed pursuant to the newly-enacted Rule 23(f). The Third Circuit affirmed the trial court. The Third Circuit’s opinion contains three notable discussions.
First, because Rule 23(f) had only just come into being, it discussed the standards for bringing an interlocutory appeal under the Rule.
If granting the appeal … would permit us to address (1) the possible case-ending effect of an imprudent class certification decision (the decision is likely dispositive of the litigation); (2) an erroneous ruling; or (3) facilitate development of the law on class certification, then granting the motion would be appropriate. But these instances should not circumscribe our discretion; there may also be other valid reasons for the exercise of interlocutory review. Again, we emphasize that the courts of appeals have been afforded the authority to grant or deny these petitions “on the basis of any consideration that the court of appeals finds persuasive.
(Emphases added, internal quotation omitted.) These standards are largely similar to most other circuits’.
Second, the court addressed plaintiffs’ argument that the district court had improperly engaged in a merits evaluation when it found that plaintiffs could not prove economic loss using classwide proof. In doing so, it articulated a standard that is now accepted by the majority of circuits:
As the Court concluded in Livesay, class certification may require courts to answer questions that are often enmeshed in the factual and legal issues comprising the plaintiff’s cause of action. … In reviewing a motion for class certification, a preliminary inquiry into the merits is sometimes necessary to determine whether the alleged claims can be properly resolved as a class action. This is such an instance. We must probe beyond the surface of plaintiffs’ allegations in performing our review to assess whether plaintiffs’ securities claims satisfy Fed.R.Civ.P. 23’s requirements.
(Emphasis added, internal citations, quotations, and footnote omitted.)
The court also found that plaintiffs could not prove economic loss on a classwide basis. The plaintiffs had attempted to invoke Basic Inc. v. Levinson to argue that the court should presume classwide injury much as it presumes classwide reliance in securities cases. The court, however, disagreed:
"Because claims may take on several forms, proving economic loss on a common basis is a fact-specific inquiry. We find no support in the case law for presuming economic injury for purposes ofin Rule 10b-5 claims absent indication that each plaintiff has suffered an economic loss.
In assessing the question of economic loss, it is important to bear in mind how the facts here differ from those in a typical action. Unlike a "fraud-on-the-market" claim, this case does not involve a misrepresentation or omission that decreased the value of a security. Furthermore, unlike excessive over-pricing policy claims, this case does not involve a practice that necessarily harmed investors across the class.In this case, defendants allegedly executed trades solely at the NBBO price. Depending on the facts of each trade, the NBBO listed price may or may not have provided a class member with the best price. Therefore, economic loss to the plaintiffs cannot be presumed by the purchase or sale of a security at the NBBO price, and we will not presume it across the class.
(Emphasis added, internal citations omitted)
In sum, Newton provided guidance on three issues on which defendants still rely heavily: when an interlocutory appeal is appropriate, how much a court may look at the merits in evaluating class certification, and the extent to which a court may examine variations in "damages" to determine whether individual issues predominate. Any one of those might qualify it as a "classic case." The combination of all three ensures that this opinion will be cited for years to come.