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Class Actions & Derivative Suits

The Rule 23 Subcommittee's April 2015 Proposal on Issue Classes

By Paul G. Karlsgodt and Jacqueline K. Matthews – June 2, 2015


"Issue certification," or certification of one or more discrete issues of law or fact as opposed to certification for an entire claim or case, has been an available procedural tool for decades, having been introduced as part of the 1966 overhaul of Rule 23 of the Federal Rules of Civil Procedure as what is now Rule 23(c)(4). However, issue certification was a tool that was seldom used in class action litigation until recent years, notably in the "moldy washer" decisions by the Sixth and Seventh Circuit Courts of Appeals in In re Whirlpool Corp. Front-Loading Washer Products Liability Litigation, 722 F.3d 838 (6th Cir. 2013), and Butler v. Sears, Roebuck & Co., 727 F.3d 796 (7th Cir. 2013).


Debate about issue certification has often centered around whether it is necessary to establish that the common issue to be certified predominates over other issues in the case. In other words, to justify issue certification in a case in which monetary relief is sought, does the plaintiff need to show that all of the elements of class certification under Rule 23(b)(3) are satisfied? The Rule 23 Subcommittee's April 2015 report suggests that the circuit courts of Appeals may be heading toward a consensus that predominance is not a requirement, though some room for debate remains. The subcommittee has suggested a possible change to the rule intended to clarify that predominance is not a requirement to the certification under Rule 23(c)(4) if the other requirements of Rule 23(a) and Rule 23(b)(3) are met. In addition, the subcommittee suggests a corresponding change to Rule 23(f) that would allow for interlocutory appeal of the decision on the merits of the certified issue.


This article summarizes the history of the "issue certification" rule, its application by the courts, and the proposed changes suggested by the Rule 23 Subcommittee. We examine the proposed changes and raise potential practical issues arising out of the rule as currently drafted and interpreted by the courts, and as the Rule 23 Subcommittee has suggested it might be revised.


History of Issue Certification under Rule 23(c)(4)
Under the original version of Rule 23, courts lacked the ability to subdivide a putative class action into subclasses or to certify particular issues for class treatment. This resulted in a large number of dismissals of suits that necessitated individual inquiries in some areas but otherwise satisfied the requirements for class certification. The 1966 amendments to the Federal Rules of Civil Procedure introduced what is now Rule 23(c)(4) and the concept of "issue classes": particular issues that may be certified for class treatment, while leaving the remaining issues in the case to be resolved on an individual basis. The committee note for the 1966 amendments provided an example: "[I]n a fraud or similar case the action may retain its 'class' character only through the adjudication of liability to the class; the members of the class may thereafter be required to come in individually and prove the amounts of their respective claims."


Court Treatment of Issue Certification Historically
In the past, courts have appeared reluctant to bifurcate class actions into common and individualized issues. Although Rule 23(c)(4) permits certification of issue classes on the court's own initiative, few courts opted to do so. This reluctance appeared largely driven by concerns over tension between the issue classes expressly permitted by Rule 23(c)(4) and the requirement of Rule 23(b)(3) that, in actions certified under that section, common questions must predominate over individual inquiries. Courts were split over the issue of whether predominance must be satisfied for the entire action before any particular issue might be certified under Rule 23(c)(4). The tension between the two rules featured prominently in the Fifth Circuit's decision of Castano v. American Tobacco Co.:


A district court cannot manufacture predominance through the nimble use of subdivision (c)(4). The proper interpretation of the interaction between subdivisions (b)(3) and (c)(4) is that a cause of action, as a whole, must satisfy the predominance requirement of (b)(3) and that (c)(4) is a housekeeping rule that allows courts to sever the common issues for a class trial. Reading rule 23(c)(4) as allowing a court to sever issues until the remaining common issue predominates over the remaining individual issues would eviscerate the predominance requirement of rule 23(b)(3); the result would be automatic certification in every case where there is a common issue, a result that could not have been intended.


84 F.3d 734, 745 n.21 (5th Cir. 1996) (emphasis added) (citations omitted).


This Castano holding was cited by the Fifth Circuit as recently as 2005. Corley v. Orangefield Indep. Sch. Dist., 152 F. App'x 350, 355 (5th Cir. 2005).


More recently, however, the Second Circuit expressly rejected Castano in In re Nassau County Strip Search Cases, 461 F.3d 219, 226 (2d Cir. 2006), holding that the Fifth Circuit's approach would render Rule 23(c)(4) a nullity, as certification of issue classes would never be permissible. In so holding, the Second Circuit recognized its agreement with the Ninth Circuit, which had previously held that, "[e]ven if the common questions do not predominate over the individual questions so that class certification of the entire action is warranted, Rule 23 authorizes the district court in appropriate cases to isolate the common issues under Rule 23(c)(4)(A) and proceed with class treatment of these particular issues." Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir. 1996). See also Smilow v. Sw. Bell Mobile Sys., Inc., 323 F.3d 32, 41 (1st Cir. 2003); Gunnells v. Healthplan Servs., Inc., 348 F.3d 417 (4th Cir. 2003).


Recent Circuit Court Decisions
Issue classes have received more attention recently following the Supreme Court's decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), which held that where damages were incapable of being determined through class-wide proof, individual damages inquiries would overwhelm the common questions and certification of the entire action was thus inappropriate. In dissent, Justices Ginsberg and Breyer, joined by Justices Sotomayor and Kagan, noted that problems with class-wide proof of damages could be avoided by appropriate use of Rule 23(c)(4) to sever damages from issues of liability, thereby preserving class treatment for at least a portion of the action. Id. at 1437 (Ginsberg and Breyer, JJ., dissenting).


Circuit courts appear to have taken the dissent's suggestion to heart, as a number of recent decisions have involved certification of issue classes. Beginning with the Sixth and Seventh Circuits in Whirlpool and Butler, certification of liability-only classes were reinstated following the Supreme Court's order vacating and remanding those certification decisions for reconsideration in light of Comcast. See Whirlpool, 722 F.3d 838 (6th Cir. 2013); Butler, 727 F.3d 796 (7th Cir. 2013). Those courts found no inconsistency between Comcast's prohibition of complete certification where damages could not be proven class-wide and certification of liability-only classes under Rule 23(c)(4). The First, Second, and Ninth Circuits have all followed suit, expressing that Comcast does not prevent certification of liability-only classes. See In re Nexium Antitrust Litig., 777 F.3d 9, 21, 23 (1st Cir. 2015); Roach v. T.L. Cannon Corp., 778 F.3d 401, 405 (2d Cir. 2015); Jimenez v. Allstate Ins. Co., 765 F.3d 1161, 1167–68 (9th Cir. 2014).


Even the Fifth Circuit has retreated from its hard-line position in Castano against issue certification, stating that after Comcast, Rule 23(b)(3)'s predominance requirement can still be met if the proceedings are structured to establish "liability on a class-wide basis, with separate hearings to determine—if liability is established—the damages of individual class members." In re Deepwater Horizon, 739 F.3d 790, 817 (5th Cir. 2014).


However, even if predominance with regard to the case as a whole is not a barrier, issue classes will not be appropriate in all cases. In Gates v. Rohm, 655 F.3d 255, 273–74 (3d Cir. 2010), the Third Circuit upheld a district court's denial of a liability-only issue class where the issues of liability and damages were inextricably linked and there could be no clean delineation of common and individual proceedings. The Third Circuit based its analysis on the factors set out in the American Law Institute's Principles of Aggregate Litigation, which direct courts to consider, inter alia, the overall complexity of the case; the efficiencies to be gained by granting partial certification in light of realistic procedural alternatives; and the kind of evidence presented on the issue or issues certified and potentially presented on the remaining issues, including the risk subsequent triers of fact will need to reexamine evidence and findings from resolution of the common issue or issues.


Analysis of the Proposed Rule Changes


Clarification that predominance is not a prerequisite to 23(c)(4) certification. In light of the history of tension between the predominance requirement and the availability of issue classes, the Rule 23 Subcommittee has proposed a small alteration to Rule 23(b)(3) to clarify that predominance (though not Rule 23(b)(3)'s superiority requirement) is subject to Rule 23(c)(4):


(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, subject to Rule 23(c)(4), and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.


The subcommittee also suggested that a committee note encourage courts to consider factors (A) through (D) of Rule 23(b)(3) (speaking to manageability of class actions) in deciding whether issue certification is "appropriate" under Rule 23(c)(4).


Commentary on the proposed change. The subcommittee has correctly recognized that issue certification is a growing trend in the lower courts and therefore that Rule 23(c)(4) is a good candidate for possible revision. However, the changes proposed in the subcommittee's April 2015 report raise some concerns.


One potential issue created by the proposed revision is in its subtlety. It is not clear enough what "subject to Rule 23(c)(4)" means in the context of Rule 23(b)(3) certification, and that language is likely to result in litigation about the phrase's meaning. Does it mean that predominance must still be considered but that Rule 23(c)(4) must also be considered? Is it intended to truly exclude predominance as a factor altogether in a case involving issue certification? If the subcommittee's goal is to make clear that predominance is not a prerequisite to Rule 23(c)(4) certification, then it seems that a better solution would be to revise Rule 23(c)(4) to state definitively that if a class action is certified under this subsection (c)(4), predominance shall not be a requirement.


Another issue is in the placement of the new language within Rule 23(b)(3). It leaves uncertainty about the standards to be applied to issue certification if the plaintiff seeks certification of a class seeking injunctive relief, which would ordinarily fall within Rule 23(b)(2), or in any of the situations described in Rule 23(b)(1). If changes are to be made to the portions of the rule dealing with issue certification, it would be useful from a practitioner's perspective to have more clarity on the applicability of the rule in those contexts.


Still another potential issue is that the change doesn't resolve uncertainty about what exactly Rule 23(c)(4) is supposed to be, which is something the lower courts have had to struggle with for decades. Is it simply a tool that can be employed in resolving one of the types of class actions specified in Rule 23(b)? Or does it create an entirely separate type of class action? This problem arises in part due to the provision's placement in subpart (c) rather than in subpart (b) (Types of Class Actions). Removing predominance as a requirement would suggest that issue certification is a new "type" of class action, something that also seems to be supported by the treatment of the rule by circuit courts of appeals in recent years. This trend militates in favor of moving the entire section to subpart (b), so that it would become subpart (b)(4) rather than (c)(4), and then deleting current (c)(4).


An even more fundamental issue is the premise that removing predominance as a barrier to issue certification, without additional clarification in the rule itself, is a good idea in the first place. The question of predominance creates a quandary when considering issue certification. Certainly, as the Second Circuit observed in In re Nassau County Strip Search Cases, if courts require the common issue to predominate generally over other issues in the case, then Rule 23(c)(4) becomes a procedure with little practical usefulness. However, the flip side of that coin is that eliminating the predominance requirement in Rule 23(c)(4) could have the practical effect of rendering Rule 23(b)(3) obsolete because courts would be free in every putative class action to simply certify any discrete common issues and ignore the question of whether common issues predominate over individualized ones. For this reason, treating the question of predominance as an all-or-nothing proposition could create a Catch-22 that threatens to undermine the efficiency and fairness purposes of Rule 23.


Courts facing this issue in the past have evaluated the usefulness of issue certification by examining whether resolution of one or more common issues would "materially advance the litigation." E.g., McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 234 (2d Cir. 2008). This concept may provide the best substitute for predominance, making it a good candidate for express inclusion in the rule.


Where individual lawsuits are likely to be filed and pursued regardless of whether a class is certified, certification of a common issue may very well advance the litigation. On the other hand, where the litigation is only likely to exist at all if certification in some form is granted, or where issue certification does not significantly reduce the costs or complexity of the individual issues to be tried separately, then issue certification has no practical value other than giving plaintiffs' attorneys additional settlement leverage by prolonging litigation that otherwise would not exist. Notably, however, even a settlement in a case that involves significant variation in injury and damages often raises the due process concerns discussed in the Supreme Court's Amchem decision, another topic addressed in the subcommittee's April 2015 report. See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997); Rule 23 Subcommittee Report 11–20, in Agenda Book for Advisory Committee on Civil Rules, Washington, D.C., April 9–10, 2015, at 243–297.


Allowing immediate appeal of common issue determination. The subcommittee's second proposed change is to allow for a permissive interlocutory appeal of the determination of an issue certified for class treatment, building on the existing interlocutory appeal of class certification decisions under Rule 23(f):


(f) Appeals. A court of appeals may permit an appeal from an order granting or denying class-action certification under this rule, or from an order deciding an issue with respect to which [certification was granted under Rule 23(c)(4)] {a class action was allowed to be maintained under Rule 23(c)(4)} [if the district court expressly determines that there is no just reason for delay], if a petition for permission to appeal is filed with the circuit clerk within 14 days after the order is entered. * * *


The use of brackets and braces in the proposed rule change suggest several choices for the amended wording of the rule (referencing the various permutations of language used in Rule 23 to describe class certification).


Commentary on the proposed change. From a practitioner's perspective, having an avenue for interlocutory appeal of a decision on a key issue affecting an entire class of litigants sounds like a good idea, and expanding a right to appeal sounds like a good counterpart to a rule that is intended to make it easier to obtain trial court rulings on issues affecting large groups of people in the first place. However, the discretionary nature of the proposed rule could result in it being an illusory provision in many cases, given the general aversion by many appellate courts to "piecemeal" appeals. E.g., Sumitomo Copper Litig. v. Credit Lyonnais Rouse, Ltd., 262 F.3d 134, 140 (2d Cir. 2001). Indeed, in the few years after Rule 23(f) itself was added, studies showed that the courts of appeals were extremely reluctant to grant review.


The proposed rule includes several different options being tested by the subcommittee, including a possible requirement similar to Rule 54(b), which requires the district court to certify the issue before it can be appealed. Given the difficulties in obtaining appellate review when only one level of discretion is required, adding this extra level of discretion could very well result in the rule having almost no usefulness as a practical matter.


Conclusion

Preliminary nature of recommendations. The subcommittee was quite frank in its report that it "has only recently turned its attention" to the issues underlying the proposed changes to Rule 23(c)(4) and 23(f), and as a result, the proposed changes represent only a "conceptual sketch" of any changes that might ultimately be adopted. And in both cases, the subcommittee expressed some doubt that the changes "would serve an actual need." To address this doubt, the subcommittee has invited comment on the current experience of class action litigants when issue classes are certified: Does the "mop up" activity that occurs after the common issue is resolved "consume such substantial time and energy that an interlocutory appeal should be allowed to protect against waste?" If the court declines to proceed with resolution of the individual issues, preferring to have class members bring individual suits, "how is a final appealable judgment entered in such cases?" "What notice is given to class members to initiate further proceedings?" Without empirical answers to these questions, it is difficult to assess the efficacy of the proposed changes.


Possible alternative approach to the subcommittee's proposed change to Rule 23(b)(3). One way around the problems entailed by an all-or-nothing approach to predominance would be to introduce a new factor unique to Rule 23(c)(4) certification that considers some of the same implications as predominance does for Rule 23(b)(3) certification but that takes into account the practical realities facing a court in deciding whether to grant certification under the rule. Rather than thinking about whether the common issue predominates, the courts should evaluate whether the resolution of the common issue will help to materially advance or simplify both the litigation before the court and any other litigation that might be filed by putative class members. There is a good body of decisional law from which these standards can be extracted. The new subsection (b)(4) might look something like the following:


(4) The court finds that one or more common issues of fact or law are presented, the resolution of which will materially advance the litigation, and class treatment of the common issue or issues is superior to other methods for fairly and efficiently adjudicating the controversy. The matters pertinent to these findings include:


(A) the class members' interests in individually controlling the prosecution or defense of separate actions of the common issue(s);


(B) the extent and nature of any litigation concerning the common issues already begun by or against class members;


(C) the desirability or undesirability of concentrating the litigation of the common issues in the particular forum;


(D) the likely difficulties in managing a class action of the issue or issues;


(E) the type of claim(s) and issue(s) in question;


(F) the overall complexity of the case;


(G) the efficiencies to be gained by granting partial certification in light of realistic procedural alternatives;


(H) the substantive law underlying the claim(s), including any choice-of-law questions it may present and whether the substantive law separates the issue(s) from other issues concerning liability or remedy;


(I) the impact partial certification will have on the constitutional and statutory rights of both the class members and the defendant(s);


(J) the potential preclusive effect or lack thereof that resolution of the proposed issue class will have;


(K) the repercussions certification of an issue(s) class will have on the effectiveness and fairness of resolution of remaining issues;


(L) the impact individual proceedings may have on one another, including whether remedies are indivisible such that granting or not granting relief to any claimant as a practical matter determines the claims of others;


(M) the kind of evidence presented on the issue(s) certified and potentially presented on the remaining issues, including the risk subsequent triers of fact will need to reexamine evidence and findings from resolution of the common issue(s); and


(N) the complexity, effort, and expense of resolving the issues on a common basis as weighed against the likely complexity, effort, and expense that will be required of the parties, absent class members, and the court if common issues are tried on an individual basis, including consideration of whether the common issues are likely to be tried at all in other proceedings.


In this approach, the "predominance" language of Rule 23(b)(3) is replaced by the phrase "the resolution of which will materially advance the litigation," a phrase drawn from the Second Circuit's decision in McLaughlin v. American Tobacco Co., 522 F.3d 215, 222, 234 (2d Cir. 2008). The phrasing in McLaughlin allows for greater flexibility by the trial court in considering issue certification but does not completely throw out the idea that the court should weigh the importance of any common issues against the individual issues presented in the case. Factors (A) through (D) generally track the similar factors in Rule 23(b)(3) but are tailored to the issue certification context. Factors (E) through (L) are adopted from the ALI's Principles of Aggregate Litigation, which the Third Circuit cited favorably in Gates. Factor (M) is proposed to emphasize the fact that issue certification is not appropriate where it is unlikely to streamline or simplify issues either in the case before the court or in other cases that would actually be filed in the absence of a class action mechanism.


Of course, this proposal, like the subcommittee's report itself, is merely an idea for a starting point in the discussion.


Keywords: litigation, class actions, issue class, issue certification, interlocutory appeal, Rule 23, amendment proposals


Paul G. Karlsgodt is a partner in BakerHostetler's Denver, Colorado, office. Jacqueline K. Matthews is a litigation associate in the firm's Columbus, Ohio, office.


 
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