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.