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February 10, 2012

Ninth Circuit Weighs in on Securities Class Actions

The Litigation News article "Circuits Split on Materiality in Securities Class Actions" looks at the Ninth Circuit's decision in Connecticut Retirement Plans & Trust Funds v Amgen, Inc., which weighs in on whether securities class-action plaintiffs must prove—or merely plausibly allege—the materiality of misrepresentations at the class-certification stage.

Keywords" litigation, class actions, derivative suits, Ninth Circuit, materiality, securities

—Mark D. Taylor, Baker & McKenzie LLP, Dallas

February 6, 2012

Seventh Circuit Affirms Classes in Ross v. RBS Citizens

The Seventh Circuit affirmed the Rule 23(b)(3) certification of two classes of bank employees alleging state overtime violations. Ross v. RBS Citizens, dba Charter One and Citizens Financial Group. No. 10-3848 (Jan. 27, 2012). The district court had certified a class of nonexempt tellers subject to an unofficial policy of denying them overtime pay and a class of branch managers misclassified as exempt because the majority of their time was spent on nonexempt work. The opinion addressed two questions: whether the class-certification order “define[d] the class and the class claims, issues, or defenses” as required by Rule 23(c)(1)(B) and whether the classes satisfied Rule 23(a) commonality after Dukes.

The panel held that the “exact contours of Rule 23(c)(1)(B)” was an issue of first impression in the circuit. It identified three purposes the subsection serves: facilitating interlocutory review of the order, ensuring that class members have notice of the effect of the order, and permitting the parties and the court to prepare a trial plan. Following an earlier decision by the Third Circuit, it held that the proper inquiry was “whether the precise parameters defining the class and a complete list of the claims, issues, or defenses to be treated on a class basis are readily discernable from the text either of the certification order itself or of an incorporated memorandum opinion.” Slip op. at 9. Reviewing for abuse of discretion, the court held that the district court’s order satisfied this standard and that seven questions identified by the defendant as omitted were “merely issues of trial strategy or proof.”

The panel also concluded that the classes met the Dukes requirement for commonality. It noted that the classes were far smaller (the nonexempt class was 1,100) and that no proof of subjective intent was required. It further held that the plaintiffs’ declarations (96 hourly and 24 manager) demonstrated unofficial policies of denying overtime. It concluded that no individualized assessment of job duties was required for the manager class.

Finally, in an interesting footnote, the court rejected the defendant’s argument that it had “a statutory right to present its affirmative exemption defenses on an individualized basis.” Slip op. at 17 n.7. It limited Dukes to equitable damages subject to Wal-Mart’s “statutory right” under 42 U.S.C. § 2000e-5(g)(2)(A) to show that the adverse action was taken for a reason other than discrimination.

Keywords: litigation, class actions, derivative suits, Seventh Circuit, class certification, commonality

—Jocelyn Larkin, Impact Fund, Berkeley, California

February 6, 2012

Denial of Certification Reversed in Messner v. Northshore

In Messner v. Northshore Univ. HealthSystem, No. 10-2514 (7th Cir. Jan 13, 2012), the Seventh Circuit reversed the denial of class certification in an antitrust class action.

Messner v. Northshore Univ. HealthSystem was heard before a Seventh Circuit panel on the plaintiffs’ Rule 23(f) appeal from a denial of class certification. Alleging violations of the Clayton Act and the Sherman Act, the plaintiffs sought to certify a class of individual patients and third-party payors who allegedly paid higher prices for hospital care resulting from a merger between Northshore University HealthSystem and Highland Park Hospital. Id.at 2. The district court denied certification under Rule 23(b)(3), holding that the plaintiffs’ expert did not demonstrate that his methodology could address the issue of antitrust impact on a class-wide basis. The Seventh Circuit disagreed, vacated the district court’s order, and remanded for further proceedings consistent with its opinion.

Keywords: litigation, class actions, derivative suits, class certification, antitrust, Seventh Circuit

—Michael Caesar, Impact Fund, Berkeley, California

January 27, 2012

Court Finally Issues Ruling in Mazza v. American Honda

In a setback for consumers seeking to bring false-advertising class actions under California law, the Ninth Circuit has issued its long-awaited ruling in Mazza v. American Honda, No. 09-55376 (Jan. 12, 2012). The 2–1 decision, authored by Judge Ronald M. Gould, vacated a district court’s order that had certified a nationwide class of consumers suing Honda for false advertising under California’s Unfair Competition Law, False Advertising Law, and Consumers Legal Remedies Act. Although the appeal was argued on June 9, 2010, the Ninth Circuit stayed its decision pending the U.S. Supreme Court’s ruling in Wal-Mart Stores, Inc. v. Dukes, ___ U.S. ___ (2011). The Mazza opinion comes nearly seven months after the Supreme Court rejected certification of a class of 1.5 million employees in its June 2011 Wal-Mart decision.

Mazza concerns Honda’s alleged failure to disclose serious and material limitations of its Collision Mitigation Braking System (CMBS), an optional feature offered on certain Honda Acura models. In 2006, Honda ran television commercials and magazine advertisements featuring the CMBS, which it marketed as a defense against rear-end collisions. But in 2007 and 2008—two-thirds of the three-year class period—Honda limited its CMBS campaign to product brochures, a single consumer magazine, video kiosks at Acura dealerships, and a website designed for Acura owners.

Keywords: litigation, class actions, derivative suits, false advertising, Ninth Circuit, California

—Carlos M. Lazatin Esq. and Eric Chan Esq., O’Melveny & Meyers, LLP

January 18, 2012

Supreme Court: No Right to Court Proceedings under the CROA

In an 8–1 vote, the U.S. Supreme Court concluded in CompuCredit Corp. v. Greenwood, No. 10-948 (U.S. Jan. 10, 2012), that an agreement providing for the arbitration of claims under the Credit Repair Organizations Act (CROA), 15 U.S.C. § 1679 et seq., was enforceable. In so doing, the Court reversed the U.S. Court of Appeals for the Ninth Circuit, which had held that including “You have the right to sue” in the CROA’s mandatory pre-contract disclosures set out in section 1679c(a) evidenced a “clear[]” right to bring CROA claims in court and could not be waived under the CROA’s nonwaiver provision in section 1679f(a).

Keywords: litigation, class actions, derivative suits, Credit Repair Organizations Act, nonwaiver provision

—Matthew M.K. Stein, Skadden, Arps, Slate, Meagher & Flom, LLP

January 10, 2012

Settlement Class Can Include Those Barred by State Law

In a lengthy en banc opinion that largely reaffirms existing circuit case law on Rule 23(b)(3)’s predominance requirement—but emphatically rejects the analysis of a divided panel decision last summer—the Third Circuit has held it permissible under Rule 23 to certify a nationwide settlement class that includes some members whose individual claims would likely be barred by the governing state law. Sullivan v. DB Investments, Inc. [PDF], (3d Cir. Dec. 20, 2011). To hold otherwise, the 7–2 decision said, “would effectively rule out the ability of defendants to achieve ‘global peace’ by obtaining releases from all who might wish to assert claims, meritorious or not.” Slip op. at 66.

Keywords: litigation, class actions, derivative suits, predominance, settlement classes

—Patrick T. Ryan, Montgomery, McCracken, Walker & Rhoads, LLP, Philadelphia, Pennsylvania

December 7, 2011

Seventh Circuit Breaks Ranks on Class-Action Mootness

In the Seventh Circuit, file your motion for class certification at the same time you file your complaint. Otherwise, you risk the defendant picking off your class representative with a settlement offer, thereby mooting the claim. This is the lesson of Damasco v. Clearwire Corp., ___ F.3d ___, No. 10-3934, 2011 WL 5829773 (7th Cir. Nov. 18, 2011).

For practitioners in other circuits, this approach might be unnecessary. The court admitted, for example, that the Third, Fifth, Ninth, and Tenth Circuits appeared to disagree with its holding and that plaintiffs there may move to certify a class after being offered complete relief. But in the Seventh Circuit, complaints coupled with class-certification motions should now be routine.

Keywords: litigation, class actions, derivative suits, Seventh Circuit, settlement, moot claims

—Jocelyn Larkin, Impact Fund; Greg Cook, Balch & Bingham, LLP; and the Hon. Michael B. Hyman, chairs of the Class Actions & Derivative Suits Committee

November 29, 2011

Ninth Circuit: Tie Cy Pres Recipients to Purpose of Case

The Ninth Circuit issued a decision in Nachshin v. AOL, LLC, No. 10-55129 (9th Cir. Nov. 21, 2011), that highlights the importance of a nexus between the underlying purpose of the case and the cy pres recipients.

This case involves the settlement of a putative class action brought by AOL subscribers who alleged that AOL wrongfully inserted footers containing promotional messages into emails sent by AOL subscribers. Because of the difficulty of determining damages, the mediator, a former federal judge, suggested that the limited monetary recovery be distributed cy pres among charities selected by the named plaintiffs and the parties. The district court preliminarily approved the settlement, but two class members objected to the settlement, arguing primarily that the charitable award did not meet the standard for cy pres because the selected charities did not relate to the issues in the case and were not geographically diverse.

The Ninth Circuit agreed with one of the objectors, represented by Ted Frank of the Center for Class Action Fairness, an attorney who regularly files class action objections. First, the court noted that the purpose of the cy pres doctrine was to put unclaimed funds to their next-best use—the aggregate, indirect, prospective benefit of the class. The court highlighted the importance of a nexus between the plaintiff class and the cy pres beneficiaries. When beneficiaries are unrelated to the class and/or claims, “the selection process may answer to the whims and self interests of the parties, their counsel, or the court.” Citing the Ninth Circuit’s previous opinion in Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301 (9th Cir. 1990), the court articulated some guiding principles for evaluating proposed cy pres distributions. The proposed award should address the objectives of the underlying statutes, target the plaintiff class, and provide reasonable certainty that members of the class will benefit.

The prospective donations in this case—to the Legal Aid Foundation of Los Angeles, the Boys and Girls Clubs of Santa Monica and Los Angeles, and the Federal Judicial Center Foundation—failed because the recipients were not related to the objectives of the underlying statutes, because the proposed distribution did not account for the nationwide distribution of the class with two-thirds of the donations going to Los Angeles-based charities, and because the panel found no indication that any plaintiffs, even those in Los Angeles, would benefit from the donations. The court noted that there is no shortage of nonprofit organizations that protect Internet users from fraud, predation, and other forms of online malfeasance actually at issue in this case.

Keywords: litigation, class actions, derivative suits, cy pres recipients, Ninth Circuit

—Jocelyn Larkin of The Impact Fund

October 7, 2011

Answer Not Due Before Motion to Compel Arbitration

In Lamkin v. Morinda Properties Weight Parcel, LLC [PDF], No. 11-4022 (10th Cir. Sept. 19, 2011), an appeal of a breach-of-contract suit, the U.S. Court of Appeals for the Tenth Circuit concluded that a defendant seeking to compel arbitration is not required to file its answer before it can move to compel arbitration and that the contract’s exclusive remedy for contract rescission and the return of the plaintiffs’ earnest money did not nullify the contract’s separate arbitration provision. In doing so, the court rejected the federal district court’s “novel” contrary conclusion on both points.

First, the court concluded that requiring a defendant to file its answer before moving to compel arbitration is a “non-sequitur”; a defendant should not be required to “formally and substantively “engage in the merits of the litigation” before it can “enforce its right not to litigate.” Further, no authority was cited to the court (or by the district court) supporting the proposition that an arbitrable dispute does not exist until the defendant’s answer is filed.

Second, the court determined that the contract’s exclusive remedy did not nullify the contract’s arbitration provision. Although arbitration is a remedy, the court explained it is a remedy in the sense of providing a remedial mechanism, not in the sense of remedying the alleged legal violation. Even though the exclusive remedy (contract rescission and the return of the plaintiffs’ earnest money) resolved the issue of damages, an arbitrator could still determine the separate issue of liability, and “it is no answer to this to say that the court can make that determination,” when that determination is for the arbitrator to make. In addition, here, too, no authority was cited to the court supporting the proposition that an exclusive remedy provision nullified an arbitration provision in the same contract, nor could the court “discern any persuasive reason” for that proposition.

Keywords: litigation, class actions, derivative suits, motion to compel arbitration, breach of contract

—Matthew M.K. Stein, Skadden, Arps, Slate, Meagher & Flom, LLP

September 1, 2011

Third Circuit Affirms Class Certification in Behrend

In 2008, the Third Circuit, in In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305, 317 (3d Cir. 2008), followed the recent nationwide consensus and, vacating class certification, held that “rigorous analysis” of class-certification motions requires “a thorough examination of the factual and legal allegations” and “may include a preliminary inquiry into the merits” of the plaintiffs’ substantive claims. Now, in Behrend v. Comcast Corp., No. 10-2865, 2011 WL 3678805 (3d Cir. Aug. 23, 2011), the Third Circuit has shown that even with heightened scrutiny under Hydrogen Peroxide, antitrust claims may still be certified if the plaintiffs present sufficient evidence that the key questions of antitrust impact and damages are susceptible of common, not individualized, proof.

As a major class-certification opinion after Hydrogen Peroxide, Behrend is instructive for the continuing debate over establishing the line between “merits” and “class certification” questions. The more a question is viewed as a “merits” determination unnecessary to answering a Rule 23 inquiry, the greater the latitude the district judge will have to certify a class. In Behrend, the panel was persuaded that the plaintiffs’ experts had shown that common proof would be used at trial of their substantive claims. No more was required to answer the Rule 23 inquiries, and class certification was therefore affirmed.

Keywords: litigation, class actions, derivative suits, class certification, antitrust, Third Circuit

—Peter Breslauer, Montgomery, McCracken, Walker & Rhoads, LLP

August 11, 2011

Class-Action Waivers Still Questioned in Arbitration

On July 12, 2011, the California Court of Appeal for the Second Appellate District issued a ruling applying the Supreme Court’s recent ruling in AT&T Mobility, LLC v. Concepcion, ___ U.S. ___, 131 S.Ct. 1740 (2011), in the context of an employment suit.

In Concepcion, the Supreme Court held that the Federal Arbitration Act (FAA) preempted a California judicial ruling under which most class-action waivers in arbitration agreements were unconscionable. In Brown v. Ralphs Grocery Co. [PDF], the court of appeal confronted the continued viability of the California Supreme Court’s decision in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), which sharply limited the use of class-action waivers in employment contracts, and whether California judicial rulings precluding waivers of plaintiff’s rights to bring representative actions for civil penalties under California’s Private Attorney General Action of 2004 (PAGA) were preempted by the FAA.

The Brown court sidestepped the question of the continued viability of Gentry, concluding that the plaintiff had failed to meet the necessary evidentiary burden under that case to demonstrate that the class-action waiver was unconscionable. Accordingly, it remains unclear whether California courts will resist the application of Concepcion to employment cases.

With respect to PAGA, the Brown court concluded that the waiver of the plaintiff’s statutory right to bring a representative action was unenforceable. The court held, over a dissent, that Concepcion was inapplicable where the state had specifically granted the plaintiff the right to enforce California’s labor laws on behalf of other employees. The court of appeal’s decision may reflect an attempt by California’s courts to apply Concepcion as narrowly as possible.

The Brown decision will likely be further appealed to the California Supreme Court.

Keywords: litigation, class actions, derivative suits, California, class-action waivers

—Ethan J. Brown, Spillane Weingarten, LLP

July 7, 2011

A Class Must Be Ascertainable to Be Certified

Some courts are increasingly relying on the requirement that a class must be ascertainable before it is capable of being certified. The court in Grimes v. Rave Motion Pictures Birmingham, LLC, 264 F.R. D. 659 (N.D. Ala. 2010), illustrated this concept when it stated that “[a]lthough not explicit in Rule 23(a) or (b), courts have universally recognized that the first essential ingredient to class treatment is the ascertainability of the class.” Id. at 263.

Keywords: litigation, class actions, derivative suits, ascertainability, class certification

—G. Calvin Hayes, Fowler White Boggs, P.A.

June 27, 2011

Federal Courts Can't Enjoin State Courts from Certifying Class

When a federal court denies class certification in a case, can it also enjoin a state court from considering the certification of identical claims? In Smith v. Bayer Corp., No. 09-1205 (U.S. June 16, 2011), the Supreme Court held that unless the same named plaintiff is at issue in both cases and the state and federal class-certification standards are identical, it cannot.

The Supreme Court reversed for two reasons. First, it held that West Virginia’s class-certification rule was not identical to Rule 23. The West Virginia Supreme Court had stated a different approach to predominance inquiries than federal courts allow, and this predominance inquiry is exactly what the MDL court used to knock out the federal class certifications. So, despite the nearly identical texts of the two rules, the “same issue” was not being relitigated—a requirement under the act.

Second, the plaintiff here was not a party to the federal suit and could therefore not be bound by it. The Court explicitly rejected Bayer’s argument that members of uncertified classes qualify as parties in proposed class-action litigation. In other words, before a class is certified, only named plaintiffs may be bound by a court’s ruling. Unnamed, absent class members in proposed or rejected class actions are not bound by the outcome of the litigation.

Keywords: litigation, class actions, derivative suits, class certification, multidistrict litigation

—Matthew T. Heffner, Susman, Heffner & Hurst, LLP

June 21, 2011

Supreme Court Rules for Wal-Mart in Dukes Case

In a 5–4 majority opinion, the Supreme Court reversed the certification of the largest gender-discrimination class action under Title VII of the 1964 Civil Rights Act. Wal-Mart Stores, Inc. v. Dukes No. 10-277, 563 U.S. ___ (2011). In doing so, the Court strengthened the commonality requirements of Rule 23(a) and clarified that Rule 23(b)(2) does not apply to cases where there would be any individualized determinations of money damages.

Rule 23(a)(2) requires a party seeking class certification to prove that the class has common “questions of law or fact.” According to the Court, the common questions must be of central importance to the underlying claims, such that the determination of the truth or falsity of the common contention will resolve an issue that is central to the validity of each one of the claims in one stroke.

Keywords: litigation, class actions, derivative suits, class certification

—Adam Dougherty, partner, and Matthew McCrary, associate, with Baker & McKenzie, Dallas, Texas

June 9, 2011

Proof of Loss Causation Not Needed for Class Certification

In a unanimous decision issued earlier this week in Erica P. John Fund, Inc., v. Halliburton, Co., et al., No. 09-1403, 2011 U.S. LEXIS 4181 (June 6, 2011), the U.S. Supreme Court reversed a Fifth Circuit decision holding that plaintiffs must prove loss causation to certify a class action in securities fraud cases.

The Halliburton decision is notable to the general class-action bar more for what it lacks than what it contains. The Solicitor General, as amicus for the plaintiff, argued that loss causation is a merits issue that stands or falls on a class-wide basis; the Fifth Circuit erred, then, by conducting a merits inquiry that was not tethered to Rule 23 requirements. According to the Solicitor General, the appellate court improperly required the plaintiff to prove its whole case at the class-certification stage. The Supreme Court’s very brief decision barely mentions Rule 23, but instead resolves the question presented on far narrower grounds. Whether this is a relief or a disappointment will, of course, depend on who you talk to.

Keywords: litigation, class actions, Supreme Court, loss causation

—Dawn Goulet, Wexler Wallace, LLP

May 3, 2011

Supreme Court Rejects Discover Bank

On April 27, 2011, in a 5-4 majority opinion by Justice Antonin Scalia, the U.S. Supreme Court held that California’s Discover Bank decision—which essentially said that class-action waivers in arbitration agreements of adhesion were unconscionable—is preempted by section 2 of the Federal Arbitration Act (FAA). AT&T Mobility, LLC v. Concepcion [PDF], No. 09-893, 563 U.S. ___ (2011). Under Discover Bank, California courts had refused to enforce class-action waivers in adhesion consumer contracts.

To the Court, class arbitration is slower than regular arbitration, it requires more formal procedures to bind absent class members, and it increases the risk (in terms of damages after judgment) to defendants faced with class arbitration, which lacks an effective means of review for errors by the arbitrators. Consequently, the Court concludes that the Discover Bank rule interferes with and is inconsistent with section 2 of the FAA by requiring the availability of class-wide arbitration regardless of the parties’ agreement. (The Court acknowledges that the parties could agree to class arbitration as a matter of contract but explains that does not mean it can be required by state law.)

Keywords: litigation, class actions, Discover Bank rule, Supreme Court

—Matthew M.K. Stein, Skadden, Arps, Slate, Meagher & Flom, LLP

February 15, 2011

Derivative Suit Doesn't Prevent Stockholder from Inspecting Records

In King v. VeriFone Holdings, Inc., brought under 8 Del.C.§ 220 for the inspection of books and records, the Delaware Supreme Court considered whether a stockholder who files a derivative suit is precluded from having a “proper purpose” for the inspection of books and records. Reversing the Court of Chancery, the Delaware Supreme Court held that a stockholder can still have a proper purpose to inspect books and records after filing a derivative suit.

The Delaware Supreme Court held that failure to seek books and records before filing a derivative suit may be “ill-advised,” “imprudent,” and “cost-ineffective,” but it is not fatal to a shareholder’s right to seek books and records to investigate corporate mismanagement. The court looked to earlier decisions in Disney, McKesson/HBOC, and CNET as support for the proposition that plaintiffs who had brought derivative suits could still inspect the corporation’s books and records. The court further noted that any restrictions on Section 220’s broad grant of a stockholder’s ability to inspect books and records should be made by the legislature instead of the courts.

Keywords: litigation, class actions, Delaware Supreme Court, Court of Chancery, derivative suit, inspection of books and records

—Andrew M. Farthing, Latham & Watkins, LLP

February 11, 2011

Withdrawal of Class Settlement Approval Is Not Appealable

In McClendon v. City of Albuquerque, the Tenth Circuit held that an order withdrawing the approval of a class settlement does not constitute an appealable order under 28 U.S.C. § 1291.

The plaintiffs alleged that the conditions at an Albuquerque jail were constitutionally deficient because of overcrowding. Subsequent to certification, the parties negotiated settlement agreements in 1997. In 2005, after the prisoners were transferred to a new facility, the parties reached new settlement agreements, superseding the 1997 agreements. The plaintiffs later alleged that the county made a misrepresentation upon which they relied in agreeing to the terms of the 2005 settlement agreements. As a result, the district court withdrew its Rule 23(e) approval of those agreements.

Keywords: litigation, class actions, class settlement approval, Tenth Circuit

—Tarifa B. Laddon, Fulbright & Jaworski, LLP.

January 31, 2011

Opposition to Forum Non Conveniens Motion Not a Proposal for a Joint Trial

In Koral et al. v. Boeing Co., 117 plaintiffs sued Boeing Co. in 29 separate actions in Illinois state court as a result of the 2009 crash of a Turkish airliner built by Boeing in the Netherlands. Boeing removed the cases to federal district court on the basis that the cases constitute a mass action under the Class Action Fairness Act (CAFA).

In affirming the district courts’ decisions to remand, the Seventh Circuit held that removal was premature and that Boeing’s own desire for a joint trial could not support removal under CAFA. Most significantly, the Seventh Circuit held that the plaintiffs’ statement in opposing the forum non conveniens motion fell “just short of a proposal, as it is rather a prediction of what might happen if the judge decided to hold a mass trial.” In so holding, the Seventh Circuit noted the absurdity of a plaintiff’s opposition to a forum non conveniens motion acting as a forfeiture of the chosen forum.

Keywords: litigation, class actions, forum non conveniens, mass action, Seventh Circuit

—Tarifa Laddon of Fulbright & Jaworski, LLP

January 26, 2011

Opt-In FLSA Collective Actions and Opt-Out Class Actions May Coexist

In Ervin vs. OS Restaurant Services Inc., the Seventh Circuit considered for the first time whether employees who institute a collective action under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., may at the same time bring supplemental state law claims as a class action under Federal Rule of Civil Procedure 23. Noting that it was apparently the first court of appeals to address a question that has divided trial courts in the Seventh Circuit and elsewhere, the court held that the two types of aggregate litigation could coexist.

The Seventh Circuit held that “there is no categorical rule against certifying a Rule 23(b)(3) state-law class action in a proceeding that also includes a collective action brought under the FLSA,” and that “[n]othing in the text of the FLSA or the procedures established by the statute suggests either that the FLSA was intended generally to oust other ordinary procedures used in federal court or that class actions in particular could not be combined with an FLSA proceeding.”

—Dawn Goulet of Wexler Wallace, LLP

January 26, 2011

Fifth Circuit Denies Katrina and Rita Settlement Class Certification

In re: Katrina Canal Breaches Litigation, 2010 WL 5128640 (C.A. 5 (La.)), is an appeal by objectors of the district court’s certification of a settlement class of numerous consolidated lawsuits brought on behalf of residents of New Orleans, Louisiana, who suffered harm during the levee breaches during hurricanes Katrina and Rita. The defendants at issue in these settlements were various levee districts and their boards of commissioners. The insurer for the levee districts tendered the limits of insurance for the settlement fund, $21 million. The parties sought to certify a limited-fund mandatory settlement class under Federal Rule of Civil Procedure 23(b)(1)(B). The district court approved the settlement and certified the class. A group of class members objected and appealed to the Fifth Circuit; the court of appeals reversed the district court and denied certification.

The Fifth Circuit, relying heavily on Ortiz v. Fibreboard Corp., 527 U.S. 815, 119 S.Ct. 2295, 144 L. Ed.2d 715 (1999), slammed the settlement for its failure to comply with the procedural safeguards mandated by Ortiz. The court held that one of the essential elements of a limited-fund settlement is that the “claimants [be] identified by a common theory of recovery [and be] treated equitably among themselves.” Id. at 839, 119 S.Ct. 2295. In this case, the settlement did not provide for an apportionment of the proceeds of the settlement between class members who suffered wide-ranging types of injuries and damages. Instead, the settlement passed the buck to a “special master” who would determine how to divide the proceeds between the class members, provided that there were proceeds to divide.

The court also disapproved of the settlement’s failure to disclose that the class members might not receive any direct benefit from the settlement. The 5th Circuit declared the settlement to be unfair and unreasonable because the settlement fund might be completely depleted by the cost of administering the settlement and the notice failed to disclose this possibility. The court also took issue with other portions of the notice that it labeled misleading or borderline misleading: The notice failed to adequately convey that enhanced recovery of costs equals attorneys fees; that instead of money, the class might get the “benefit” of a cy pres distribution; and that the levee districts could contribute more money to the limited fund, but they chose not to do so and relied just on their insurance coverage.

—Alan G. Crone, Kramer + Crone, PLC

January 13, 2011

FJC Issues Class-Action Notice Checklist and Guide

The Federal Judicial Center (FJC) has released two new tools to help judges ensure adequate class-action notice and settlement claims procedures.

The 2010 Judges’ Class Action Notice and Claims Process Checklist and Plain Language Guide will assist judges and practitioners in ensuring that best practices are utilized from precertification notice issues through settlement approval. It covers not only notice content, but also notice planning and methods of dissemination. It also alerts judges to claims process pitfalls. Notably, the need to reach a high percentage of class members is clearly articulated, along with the recommendation that judges receive evidence on the adequacy of notice as planned and actually achieved. A graphical plain language guide demonstrates the different aspects of the “illustrative” notices that the FJC posted several years ago after the 2003 amendment to Rule 23(c)(2).

The FJC also released an updated 2010 Pocket Guide on Class Actions, which contains enhancements to the notice sections and other substantive updates and improvements.

FJC Director Hon. Barbara J. Rothstein led a joint FJC Education and Research Division effort, with now-retired FJC Senior Research Associate Thomas E. Willging and Todd B. Hilsee, a notice expert and principal with The Hilsee Group, LLC, contributing.

—Todd B. Hilsee, The Hilsee Group, LLC

December 15, 2010

Ninth Circuit Holds in Favor of California Newspaper Workers

In Wang v. Chinese Daily News, California-based employees of Chinese Daily News, Inc., a Chinese-language newspaper, sued the company for wage and hour violations under the Fair Labor Standards Act (FLSA) and California law. The district court certified the case as a collective action under the FLSA, certified the state law claims as a class action under Rule 23(b)(2) and alternatively 23(b)(3), and later invalidated state class-action opt-outs. The newspaper appealed after the district court granted judgment to the employees following partial summary judgment, jury, and bench trials. The Ninth Circuit affirmed the judgment.

The court held, among other things, that in a hybrid FLSA collective action/state law class action, a district court can exercise supplemental jurisdiction over state-law claims when there are concurrent FLSA claims, even though there are far fewer class members in the FLSA claim. The court also affirmed the district court’s treatment of opt-outs, holding that the district court could invalidate opt-outs and restrict the employer’s ability to communicate with class members and acted within its discretion when it deferred holding the second opt-out process until after trial on the merits. The Ninth Circuit also affirmed the certification of a wage and hour class action under 23(b)(2) when significant injunctive relief applies to the class as a whole. Finally, the Ninth Circuit also held a claim under California’s unfair business practices law can be predicated on an FLSA violation, and the FLSA does not preempt such a claim.

—Danielle E. Leonard and Altshuler Berzon, chairs of the CADS Employment Subcommittee

December 15, 2010

Seventh Circuit Issues All Writs Act Opinion in Thorogood

The Seventh Circuit issued an opinion concerning the All Writs Act in Thorogood v. Sears, Roebuck, and Co. (No. 10-2407). Suit 1 involved the plaintiff, Thorogood, who sued in Illinois. Sears, the defendant, removed to federal court, and the federal district’s Judge Leinenweber certified the class action.

Thorogood alleged that Sears engaged in deceptive advertising because its Kenmore brand clothes dryer was not made entirely of stainless steel—the front of the drum is made of ceramic-coated mild steel instead. Sears appealed Judge Leinenweber’s decision to certify the class, and, on appeal, the Seventh Circuit decertified, calling the case “a notably weak candidate for class treatment.” (Thorogood at 5.) In particular, the Seventh Circuit held that common issues didn’t predominate because it was inconceivable that class members had a shared understanding of the advertisements. After decertification, Sears made a Rule 68 offer of judgment for $20,000 (even though the maximum damages Thorogood could recover under Tennessee law were $3,000). When the plaintiff refused, Judge Leinenweber dismissed the case because the offer exceeded the amount in controversy and mooted the case. Thorogood appealed, and the Seventh Circuit affirmed the district court’s denial of attorney fees and the dismissal of the suit.

Thorogood’s counsel (Clinton Krislov) found another plaintiff (Murray) and filed another, similar putative class-action suit against Sears in California state court, which Sears promptly removed and argued was barred by issue preclusion. In particular, Sears argued that the issue of whether the class could be certified had already been litigated and determined in the Illinois action. The district court judge in California, Judge Claudia Wilken, initially agreed. The plaintiffs’ counsel then amended the complaint and, according to Judge Wilken, sufficiently differentiated it from the complaint in Thorogood “to avoid the application of collateral estoppel.” (Murray v. Sears, Roebuck, and Co., 2010 WL 3490214, at *4 (N.D. Cal. Sept. 3, 2010)).

Sears returned to the court in the Northern District of Illinois and asked Judge Leinenweber to enjoin the federal court in California from proceeding under the All Writs Act, 28 U.S.C. 1651(a). Judge Leinenweber, however, ruled that Sears could obtain adequate relief by pleading collateral estoppel in the California action. In a harshly worded opinion by Judge Posner, the Seventh Circuit reversed and enjoined class members and class counsel from further pursuing similar class-action suits. Because the issue that was precluded was whether the action could be maintained as a class action, the ruling did not prevent class members from pursuing an individual suit.

The result in this case isn’t surprising, given Judge Easterbrook’s statement in In re Bridgestone/Firestone:

Easterbrook’s statements here and Posner’s statements in Thorogood suggest that collateral estoppel doesn’t always do the trick. Even though issue preclusion should be determined by looking to the law that governed the issue in the first lawsuit (it’s federal law here because the issue in question is whether to certify a class under FRCP 23), courts can come to different conclusions as to whether the issue in question is in fact the “same issue” (as did Judge Wilken in Murray).

These tactics were used somewhat more successfully before CAFA, when state court cases couldn’t be removed to federal courts, and the states could apply their own versions of Rule 23, which were often more forgiving than the federal version. When federal courts are faced with enjoining state courts, they’re restricted by the Anti-Injunction statute, which prohibits injunctions against state proceedings “except as expressly authorized by an Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” Historically, these exceptions have been narrowly construed.

Smith v. Bayer Corp., which is pending before the U.S. Supreme Court, might affect the scope of the Thorogood injunction, although it wouldn’t change the result that Murray’s case cannot proceed. Smith v. Bayer Corp. deals with the classic injunction scenario of whether Baycol plaintiffs can bring a class action in West Virginia state court after the federal judge in the MDL action denied class certification on similar issues. In other words, Smith v. Bayer Corp. addresses whether a federal court can enjoin a state court, not whether a federal court can enjoin another federal court (the primary question in Thorogood). As Posner indicates, Smith may change the scope of the Thorogood injunction, which currently prevents copycat suits in state and federal courts.

—Elizabeth Chamblee Burch, assistant professor of law, Florida State University, College of Law, CADS Mass Torts Subcommittee

December 15, 2010

Eleventh Circuit Reverses Course, Restores Intent of CAFA

In Cappuccitti, et al. v. DirecTV, Inc., No. 09-14107 (11th Cir. 2010), the Eleventh Circuit withdrew the intensely controversial opinion on Class Action Fairness Act (CAFA) jurisdiction that it issued in July. In the original opinion, the court held that the named class representative must meet the $75,000 requirement of diversity jurisdiction—even if the case was filed under the CAFA. This generated immense criticism and petitions for en banc review from both the plaintiff and the defendant. The original opinion also brought into question many actions originally filed under CAFA jurisdiction, including actions consolidated by the MDL panel in the Eleventh Circuit, as well as those removed under CAFA jurisdiction.

The new opinion clearly states that there is no requirement in CAFA that any single plaintiff’s claim exceed $75,000. The court stated that its original “interpretation was incorrect” and that “CAFA’s text does not require at least one plaintiff in a class action to meet the amount in controversy requirement of 28 U.S.C. § 1332(a).” Instead, the court identified three jurisdictional requirements. The amount of controversy must exceed $5 million in the aggregate, the class must contain at least 100 members, and there must be minimal diversity. The court found all three of these requirements met, noting that the case was originally filed in federal court and that the allegation of a demand in the complaint must be accepted if made in good faith and not disproven by a legal certainty. Notably, the court had to compute the number of class members by working backward from the amounts at issue. The court noted in a footnote the possibility that discovery could uncover facts that might “destroy” diversity and “require the district court to dismiss the case.”

Having found jurisdiction, the court moved to the question that generated the appeal—the motion to compel arbitration. Arguably retreating from earlier precedent, the court reversed the denial of DirecTV’s motion to compel arbitration. As an initial matter, the court stated that arbitration agreements are generally enforceable under the Federal Arbitration Act (FAA). Thus, unless compelling arbitration would be unconscionable under controlling state law of contracts, federal courts are to enforce arbitration agreements. Also, to find the arbitration agreement unenforceable under Georgia law, Cappuccitti must show that compelling arbitration would have been unconscionable under the circumstances existing at the time he and DirecTV entered into their contractual agreement. Cappuccitti argued that arbitration would be unconscionable because he would be unable to recover attorney fees and costs in an arbitration proceeding, thereby making his claims virtually worthless. However, DirecTV argued that such attorney fees would be available under Georgia’s Fair Business Practices Act and that Cappuccitti’s decision to omit those claims was irrelevant to the unconscionability analysis. The Eleventh Circuit agreed, vacated the district court’s order denying arbitration, and remanded the case for further proceedings.

—Gregory C. Cook and Thomas R. DeBray, Jr., of Balch & Bingham, LLP

September 20, 2010

Seventh Circuit Takes Aim at Oscar Private Equity Investments

In its August 20, 2010, opinion in Schleicher v. Wendt, No. 09-2154, the Seventh Circuit affirmed the district court’s certification of a securities fraud class action and, in so doing, provided a withering critique of the Fifth Circuit’s approach to certification in securities cases.

Judge Easterbrook began by observing that the defendants’ arguments against class certification (including that a company as large and widely followed as corporate defendant Conseco does not qualify for the fraud-on-the market treatment under Basic v. Levinson) would “end the use of class actions in securities cases.” The panel opinion went on to reject the contentions that, before a class can be certified, the district court must determine that the contested statements actually caused material changes in the stock price and that the plaintiff must prove each element (other than falsity) required to win on the merits.

The defendants had based their argument on the Fifth Circuit’s decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F. 3d 261 (5th Cir. 2007). Dismissing the Fifth Circuit’s “go-it–alone” strategy, Schleicher expressly disagreed that proof of loss causation is essential to class certification. Thus, said Schleicher, Oscar’s requirement of proof of loss causation—which, in the case of simultaneously made false and truthful statements, means plaintiffs must establish how much of the price movement can be attributed to the false statements—is wrong. While Oscar held that Basic permits each circuit to “tighten” the class-certification requirements, the Schleicher court opined that the Oscar approach was at odds with the Federal Rules Committee’s 1966 decision to separate class certification from a decision on the merits.

—Jill Abrams, Abbey Gardy, LLP

Plaintiffs Must Satisfy CAFA and Traditional Diversity Amount-in-Controversy Requirements

In a novel decision concerning diversity jurisdiction over class actions originating in federal court, the Eleventh Circuit recently held that class-action plaintiffs must satisfy not only the elements of the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d), but also the traditional diversity amount-in-controversy requirement, 28 U.S.C. § 1332(a), with respect to at least one named plaintiff. See Cappuccitti v. DirecTV, Inc., ___ F.3d ___, Slip op. at 9, No. 09-14107 (11th Cir. July 19, 2010). Although the court recognized that CAFA substantially expanded federal jurisdiction over class actions, it determined that nothing in CAFA obviated the traditional diversity amount-in-controversy requirement with respect to the named plaintiff. Id. at 4, 10. To the contrary, the Eleventh Circuit found that the traditional amount-in-controversy principle was an “essential requirement of CAFA actions filed originally in federal court.” Id. at 12-13.

 

Read the case note here.

—Andrew C. Glass, partner, and Ryan M. Tosi, associate K&L Gates LLP

Supreme Court to Review Whether FAA Preempts Unconscionability Analysis of Class Waiver

On May 24, 2010, the U.S. Supreme Court granted certiorari in a case likely to determine the fate of countless consumer, employment, and antitrust class actions for years to come. The Court agreed to review the decision by the Ninth Circuit Court of Appeals in Laster v. AT&T Mobility, LLC, 584 F.3d 849 (9th Cir. 2009), which held unconscionable and unenforceable under California law a class-action waiver provision that was part of a cell phone provider’s service agreement arbitration clause. As stated by the petitioner, AT&T Mobility, the Court will consider “[w]hether the Federal Arbitration Act [FAA] preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures—here, classwide arbitration—when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.” AT&T Mobility v. Concepcion, No. 09-893 (U.S. cert. granted May 24, 2010).

The claims in the case arise out of consolidated cases pending against AT&T Mobility (formerly Cingular) and T-Mobile. The plaintiffs allege, among other things, that the cell phone providers violated California consumer protection laws and otherwise engaged in unfair and deceptive practices by charging and collecting sales taxes on cell phones they advertised as “free.” The cell providers moved to stay the cases and to compel arbitration based on the provisions in the cell service agreements entered into by the consumers. The district court and the court of appeals held that the class-action waiver provision of the arbitration clause was unconscionable and unenforceable based on the unconscionability principles set forth in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007) and Discover Bank v. Sup. Ct., 36 Cal. 4th 148, 30 Cal. Rptr. 3d 76 (2005). In essence, both of those cases held that where a class waiver is in effect an exculpatory clause because it would preclude consumer claimants from pursuing their small value claims, it is unconscionable under California law.

Interestingly, the Supreme Court previously had denied certiorari in a case arising out of the same litigation: T-Mobile USA, Inc. v. Laster, 128 S. Ct. 2500 (2008), No. 07-756. In that case, AT&T Mobility took the unusual step of filing an amicus brief opposing a grant of certiorari for its codefendant, arguing that review would be premature and unnecessary given the absence of any conflict among the circuits. The difference in the case just granted review is that AT&T had amended its service agreement with a bill stuffer to provide for a premium payment to a consumer claimant and the payment of attorney fees by AT&T for consumer claims. AT&T argued to the Ninth Circuit and in its petition that these amendments eliminated the disincentives to consumers in filing individual arbitration claims, thus removing that basis for unconscionability under California law. Because the Ninth Circuit rejected this argument, AT&T argued in its petition that a conflict had arisen and that the FAA allegedly preempts California’s unconscionability law.

It is the author’s position that if the Supreme Court decides that the FAA preempts California’s unconscionability law with respect to class waivers, consumer, employment, antitrust, and perhaps even securities class actions will be eliminated, begging the question, “Why have Rule 23?”

—Michael D. Donovan of Donovan Searles, LLC

Court Affirms Largest Gender Discrimination Class Action

In a 6-5 majority decision, the Ninth Circuit affirmed the certification of the largest gender discrimination class-action case ever under Title VII of the 1964 Civil Rights Act. Dukes v. Wal-Mart Stores, Inc., 2010 U.S. App. LEXIS 8576 (9th Cir. 2010). The six female plaintiffs allege that women employed in Wal-Mart stores are paid less than men in comparable positions, despite having higher performance ratings and greater seniority, and receive fewer promotions to in-store management positions while waiting longer for them. Id. at 4-5. The plaintiffs worked at 13 of Wal-Mart’s 3,400 stores and represent a class of more than 1.5 million women employed during the past 10 years. Id. at 163-64. The class encompasses all of the plaintiffs’ claims for injunctive relief, declaratory relief, and back pay, while creating a separate opt-out class encompassing the same employees for punitive damages. Id. at 3.

Initially, the majority ruled, based on the U.S. Supreme Court’s guidance, that district courts are not only at liberty to, but must, perform a rigorous analysis to ensure that the prerequisites of Rule 23(a) have been satisfied. Id. at 16-17 citing Gen. Te. Co. of Sw. v. Falcon, 457 U.S. 147, 160 (1982). While this “does not mean that a district court must conduct a full-blown trial on the merits prior to certification,” it’s clear that “Falcon’s central command requires district courts to ensure that Rule 23 requirements are actually met, not simply presumed from the pleadings.” Id. Continuing 25 years of case law from the Ninth Circuit, the majority concluded that district courts “must sometimes resolve factual issues related to the merits to properly satisfy itself that Rule 23’s requirements are met, but the purpose of the district court’s inquiry at this stage remains focused on” whether Rule 23 requirements are satisfied. Id. at 29-44. In other words, at the class certification stage, district courts are prohibited “from making determinations on the merits that do not overlap with the Rule 23 inquiry, district courts must make determinations that each requirement of Rule 23 is actually met.” Id. at 44-45, 55-57.

Based on this standard, the majority ruled that the plaintiffs satisfied Rule 23(a) and Rule 23(b)(2). Because the district court had significantly analyzed the class certification issues in a lengthy opinion, the majority concluded that the district court “rigorously analyzed” the plaintiff’s four categories of commonality evidence. Id. at 72-75. That evidence included facts concerning company-wide policies of discrimination, expert opinions supporting the existence of that discrimination, expert statistical evidence of class-wide gender disparities, and anecdotal evidence of gender discrimination from 120 class members throughout the country. Id. at 75-76.

Importantly, the plaintiffs presented an expert sociologist who opined that Wal-Mart has and promotes a strong culture based on gender stereotyping. Id. at 76-84. The majority ruled that admitting the sociologist’s opinion wasn’t an abuse of discretion on the part of the district court because it was enough that the expert presented scientifically reliable evidence tending to show common questions of fact concerning a company-wide policy of gender discrimination. Id. at 81-84. While specifically noting that it was “not resolv[ing] this issue here,” the majority further declared that it wasn’t convinced that Daubert has the same application at the class certification stage as it does to expert testimony at trial. Id. at 82-84.

The majority also ruled that the district court’s treatment of the competing statistical evidence demonstrated that the district court followed the correct standard as explained in Falcon and the Ninth Circuit’s earlier cases. Id. at 87. Such evidence included regression analyses for each of Wal-Mart’s 41 regions (each containing about 80 stores) that showed significant disparities between men and women with respect to compensation and promotions. Id. Wal-Mart, in part, challenged these regression analyses because they didn’t concern individual stores, only regions. Id. at 90. The majority, however, ruled that the district court properly rejected a full-blown merits determination. Id. at 90-92. It further ruled that the district court correctly performed a limited examination, only “to the extent necessary,” to conclude that the plaintiffs’ expert opinion was in fact probative of a company-wide policy of discrimination. Id.

Regarding the 120 anecdotal allegations, the majority found no cases suggesting that a plaintiff must submit a certain number of them in support of its class allegation claims. Id. at 106-114. Additionally, it concluded that the district court didn’t rely solely on such anecdotal claims, but properly ruled that they supported class certification along with the other expert and factual evidence presented by the plaintiffs.

The majority certified the class pursuant to Rule 23(b)(2). Rule 23(b)(2) isn’t appropriate for all classes and “does not extend to cases in which the appropriate final relief relates exclusively or predominantly to money damages.” Id. at 122-123 (citing Fed. R. Civ. P. 23(b)(2) advisory committee’s note to 1966 amends). Criticizing and distinguishing the Second Circuit’s “subjective” approach in Molski v. Gleich, 318 F.3d 937, 955 (2nd Cir. 2003) and the Fifth Circuit’s “objective” approach in Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415-16 (5th Cir. 1998), the majority adopted the predominance standard that it concluded the Rule 23(b)(2)’s drafters straightforwardly indicated, saying “Rule 23(b)(2) certification is not appropriate where monetary relief is ‘predominant’ over injunctive relief or declaratory relief.” Id. at 122-128. The court subsequently ruled that Wal-Mart’s evidence didn’t undermine the plaintiffs’ claims that injunctive and declaratory relief predominate because, in part, the plaintiffs’ request for back pay is an uncomplicated, make-whole determination. Id. at 128-137. Unsure whether the plaintiffs’ claims for punitive damages are appropriate under Rule 23(b)(2) or 23(b)(3), the majority remanded the issue back to the district court for further determination. Id. at 137-149. Likewise, it remanded the claims of putative class members who no longer worked for Wal-Mart when the complaint was filed so that the district court could consider whether to certify an additional class or classes under Rule 23(b)(3). Id. at 4.

The majority wasn’t concerned with Wal-Mart’s claims that the district court’s outline of a trial plan will be unmanageable and thereby infringe upon its due process rights. Id. at 149-161. It expressed no opinion regarding Wal-Mart’s objections to the district court’s tentative trial plan (or that trial plan itself) at this stage. Id. at 154. Instead, it noted “there are a range of possibilities—which may or may not include the district court’s proposed course of action—that would allow this class action to proceed in a manner that is both manageable and in accordance with due process, manageability concerns present no bar to class certification here.” Id.

Five judges dissented from the majority’s opinion. They focused their analysis on the absence of “significant proof” that Wal-Mart operated under a general policy of discrimination. Id. at 174-175 citing Falcon at 159 n. 15. In disagreeing with the majority, the dissent opined that Falcon’s “significant proof” standard isn’t dicta, isn’t distinguishable from the Dukes facts even though the Falcon facts involved both current employees and applicants, and doesn’t require the plaintiffs to prove the merits of their claims. Id. at 171-179.

Regarding Rule 23(a), the dissent concluded that the “evidence does not come close to meeting the Falcon requirements for demonstrating commonality and typicality.” Id. at 179-180. It analyzed the plaintiffs’ 120 anecdotes from female employees, statistical evidence, and expert testimony. Id. On its face, the “one anecdote for every 12,500 class members” didn’t support a claim for a company-wide policy. Id. at 180-181. And, according to the dissent, the statistical evidence was no better, in part, because the plaintiff’s statistician focused on regional numbers instead of numbers at Wal-Mart’s individual stores. Id. at 187-193. The dissent further concluded that the district court’s superficial examination of the professor’s statistics was “legal error” because it failed to rigorously analyze the statistics and instead made it Wal-Mart’s burden to prove the statistics were incorrect. Id. at 187-189.

Finally, and importantly, the dissent proclaimed that the district court committed further legal error by failing to test the reliability of the expert opinion provided by Wal-Mart’s sociological expert, who opined that Wal-Mart’s subjective decision-making is “susceptible to unconscious discriminatory impulses.” Id. at 193. The district court denied Wal-Mart’s motion to strike, while noting that district courts shouldn’t apply the full Daubert gatekeeping standard at the class certification stage. Id. at 195. The dissent asserted that that district should have explicitly considered whether such evidence was scientifically reliable instead of only considering whether the evidence was so flawed as to lack sufficient probative value to assess whether class certification was appropriate. Id. at 198-199. Ultimately, the dissent concluded that the plaintiffs’ evidence inadequately bridged the gap between the six plaintiffs’ claims of individual discrimination and a class-wide claim of company-wide discrimination. Id. at 199-200.

Regarding the majority’s certification of the class under Rule 23(b)(2), the dissent complained of two key errors made by the district. Id. at 201-202. First, it failed to consider whether it could protect Wal-Mart’s substantive rights, such as its rights to raise affirmative defenses to the plaintiffs’ individual claims and claims for damages, in the class action context. Id. at 201-214. Second, it failed to properly analyze whether the proposed class should even be certified under Rule 23(b)(2)—where “final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” Id. at 215-217. The dissent accused the majority of making both errors. The dissent determined that Wal-Mart’s rights couldn’t be protected and that the class shouldn’t have been certified under Rule 23(b)(2) because the class members presented too many individualized questions and their request for monetary damages raised too many due process concerns for Wal-Mart. Id. at 220-224.

The Dukes decision is significant because it explicitly articulates the proper standard of review that district courts in the Ninth Circuit must apply—specifically, that they must conduct a rigorous analysis of the class certification elements and go beyond the pleadings. The decision also permits those district courts to make determinations on the merits so long as they overlap with the Rule 23 inquiry, but prohibits them from making determinations on the merits that don’t overlap with the Rule 23 inquiry.

The decision is also significant because it explicitly critiques the Second and Fifth Circuits’ predominance tests and adopts its own. Namely, it holds that Rule 23(b)(2) certification isn’t appropriate where monetary relief is “predominant” over injunctive relief or declaratory relief.

Finally, the Dukes decision is significant because it falls short of the Seventh Circuit’s recent and important decision in Am. Honda Motor Co. v. Allen, 600 F.3d 813 (7th Cir. Ill. 2010), which requires district courts to perform full Daubert analyses of proposed experts at the class certification stage.

With the apparent split in circuits on the predominance and Daubert standards, and the historic scope of the certified class in Dukes, it should come as no surprise that Wal-Mart recently announced it will appeal the Ninth Circuit’s decision to the U.S. Supreme Court.

—Adam T. Dougherty, a partner, and Teresa H. Michaud, an associate, in Baker & McKenzie, LLP’s Dispute Resolution Section.

Statute of Limitations for Securities Claims Clarified: Vioxx Class Action Not Barred

The Supreme Court's decision in Merck & Co. Inc. v. Reynolds resolved three important issues concerning the application of the statute of limitations for securities-fraud actions.

How Much Evidence Is Enough for Class Certification?

The 2010 Section of Litigation Annual Conference in New York, April 21-23, 2010, is fast approaching, and the Class Actions and Derivative Suits Committee will be presenting three exceptional programs: “Global Class Actions: Lasting Peace or Ticking Time Bombs?”; “Twombly v. Conley—The Fight of the Century”; and “How Much Evidence Is Enough for Class Certification?”

“How Much Evidence Is Enough for Class Certification?” will cover the “dueling” experts who are playing an increasingly important role in class certification, as courts now scrutinize expert testimony—and even make credibility determinations—as part of the class decision.

Professor Linda Mullenix of the University of Texas will moderate a panel that includes Third Circuit Chief Judge Anthony Scirica, Lloyd Constantine of Constantine Cannon LLP, and Cari Dawson of Alston & Bird LLP and will show how the new evidentiary standards play out at class-certification hearings. Margaret Lyle of Jones Day will serve as program chair.

Because of its guidance on the application of the Rule 23 standard for class certification, the Third Circuit’s In re Hydrogen Peroxide Antitrust Litigation opinion, authored by Chief Judge Scirica, may be the most influential decision relating to class actions since the Supreme Court’s 1997 decision in Amchem Prods., Inc. v. Windsor. The Hydrogen Peroxide decision, which extends the rigorous analysis required under Rule 23 to expert opinion, is also recognized as the leading case on the use of experts at the class-certification stage. It holds that courts may, and should, weigh conflicting expert testimony as part of their class-certification analysis.

Daubert standards for experts offered at the class-certification stage continue to evolve in courts across the country. Only rarely do courts now refuse to consider any challenges to expert testimony offered in support of class certification. Some courts test expert opinion only to ensure that it’s not fatally flawed, while others apply a full-blown Daubert analysis to the expert testimony offered by both sides.

The program will explore how trial lawyers are confronting the challenges and opportunities presented by the new standards for evidence, when making the case for or against class certification.

For registration information, click here. Register by April 2, 2010, to receive a discounted registration rate.

—Greg Cook and Lynda Grant are the chairs of the Class Actions and Derivative Suits Committee.

Is Email Notice Enough?

The class-action bar has debated the question of email notice for some time. A recent decision by the Ohio Court of Appeals appears to indicate that email notice, at least where mail is available, may not be sufficient.

In West v. Carfax, Inc., No.2008-T-0045 (Ohio App. 11 Dist. Dec. 24, 2009), certain class members appealed the trial court's approval of settlement of the underlying class action, which related to alleged violations by Carfax of the Ohio Consumer Sales Practices Act. The objecting class members argued that the settlement did not take reasonable steps to provide individual notice to all class members. Here, the notice comprised three parts: 1) individual email notice to purchasers in the Carfax database; 2) publication in Investor's Business Daily and USA Today; and 3) publication of notice on Carfax and class counsel's websites. Evidence was presented that the settlement administrator could have provided Carfax with mailing addresses for class members. The court determined that notice was defective, stating that "Courts have required notice by mail in class actions when the names and last known addresses of customers were available from a defendant's own business records." Id. at *3 (internal citation omitted). In this case, Carfax had vehicle identification numbers (VINs) for each car upon which it created its signature reports, and a notice expert testified that Carfax could have provided addresses from this "VIN" information.

—Amy Steindorff, Balch & Bingham LLP, Birmingham, AL

The Seventh Circuit Holds That Federal Courts Retain Jurisdiction under CAFA after Class Certification Is Denied

The Seventh Circuit (Posner, J.) became the second federal circuit to hold that jurisdiction under the Class Action Fairness Act (CAFA) continues if class certification is denied, in Cunningham Charter Corp. v. Learjet, Inc., No. 09-8042. The Eleventh Circuit reached the same conclusion last year in Vega v. T-Mobile USA, Inc., 564 F.3d 1256 (11th Cir. 2009). District courts had been split on the issue.

CAFA generally creates federal diversity jurisdiction over certain class actions where there is diversity between one member of the class and any defendant. The question presented in Cunningham was whether jurisdiction under CAFA continued if it later turned out that the case could not be maintained as a class action. Relying on the language of the statute, the Seventh Circuit answered in the affirmative. The Seventh Circuit did caution that even cases filed as class actions would not be subject to CAFA jurisdiction if their basis for being filed as a class action or for pleading CAFA's other requirements were frivolous.

—Ethan J. Brown, Latham & Watkins LLP, Los Angeles, CA

Ninth Circuit Reverses Denial of Class Certification in Two Recent Decisions

In Rodriguez v. Hayes et al., No.08-56156, the Ninth Circuit reversed a district court's denial of class certification, concluded that none of the alleged bars to class relief raised by the respondents prevented certification, and held that the class met the requirements of Rule 23. The petitioner sought a writ of habeas corpus on behalf of himself and a class of aliens detained in the Central District of California for an extended time without a bond hearing while engaged in immigration proceedings. The Ninth Circuit acknowledged that members of the proposed class were detained under different statutes and were at different points in the removal process and, thus, did not raise identical claims. However, in finding that the Rule 23(a) elements were satisfied, the court noted that the class members raised similar constitutionally based arguments and were alleged victims of the same practice. The petitioner sought certification under Rule 23(b)(2), which requires that the primary relief sought is declaratory or injunctive. The Ninth Circuit indicated Rule 23(b)(2) does not require courts to examine the viability of class members' claims, "but only to look at whether class members seek uniform relief from a practice applicable to all of them." It is sufficient to meet the requirements of Rule 23(b)(2), that class members complain of a pattern or practice that is generally applicable to the class as a whole.

Similarly, in United Steel v. ConocoPhillips Co., No. 09-56578, the Ninth Circuit reversed and held that the district court abused its discretion when it assumed, for the purposes of Federal Rule 23 certification analysis and without any separate inquiry into the merits, that the plaintiffs' legal theory would fail. The district court concluded there could be no assurances that the plaintiffs would prevail on their theory, and if the plaintiffs did not prevail the court would be faced with the possibility of numerous future mini-trials. As such, the district court determined there was "an insurmountable barrier to class certification," and that Rule 23(b)(3)'s predominance requirement could not be satisfied. The Ninth Circuit noted that in determining the propriety of a class action the question is whether the requirements of Rule 23 have been met. Rule 23 does not give a court authority to conduct a preliminary inquiry into the merits of a suit to determine whether it may be maintained as a class certification. The Ninth Circuit then indicated the district court not only judged the validity of the plaintiffs' claims, but did so using a nearly insurmountable standard—concluding that merely because it was not assured the plaintiffs would prevail on their primary legal theory, the theory was not an appropriate basis for the predominance inquiry. In remanding the case, the Ninth Circuit noted that while the district court may not put the plaintiffs to preliminary proof of their claims, it does require sufficient information to form a reasonable judgment and may request the parties to supplement the pleadings with sufficient material to allow an informed judgment on each of the Rule 23 requirements.

—Jeffrey D. Gardner, Roshka DeWulf & Patten PLC, Phoenix, AZ

Securities Class Actions Settlements: 2008 Review and Analysis

Cornerstone Research issues report showing that the value and number of federal securities class settlements declined in 2008.

Stay Under Federal Arbitration Act Held Inapplicable Where Agreement Containing the Arbitration Clause and Prohibition on Class Acts Was Unconscionable

On March 24, 2009, Judge Thomas P. Griesa of the Southern District of New York denied the defendants’ motion to stay a class action and to compel the plaintiff to arbitrate his claims in Fensterstock v. Education Finance Partners, 08 Civ. 3622(TPG).

The plaintiff alleged  that the defendant’s improper determination of the portion of a loan payment should be applied to principal versus interest results in a hidden penalty on the loan because it causes the principal to be repaid more slowly than it should be.

The subject promissory note requires arbitration if claims brought under any theory of law and includes a prohibition against class actions. Finding that the stay requirement of the Federal Arbitration Act (relating to cases brought in federal court) is inapplicable where an agreement is deemed unconscionable, the court applied California law (as provided in the promissory note) and determined that the promissory note was unconscionable under the three elements set forth in Discover Bank v. Superior Court, 36 Cal. 4th 128, 162-63 (2005), namely (1) if the waiver is found in a consumer contract of adhesion;(2) in a setting in which disputes between the parties predictably involve small damage amounts; and (3)it is alleged that the party with superior bargaining power has carried out a scheme to purposely cheat large numbers of consumers out of small amounts of money.

New York Court holds that Relationship Between Absent Class Members and Class Counsel Different than Typical Attorney Client Relationship

A recent New York Supreme Court case held that an absent class member is not entitled to the files of co-lead counsel accumulated during the course of two consolidated federal class actions, nor was the absent class member entitled to attorney work product. Wyly v. Milberg Weiss Bershad and Schulman, LLP, 2007 WL 4533380 (NY Supr., App. Div., Dec. 27, 2007). After a federal court approved a settlement and an award of attorneys' fees and dismissed the case, a class member filed a collateral attack on the settlement by filing a special proceeding in state court seeking a judgment directing class counsel to turn over its files. The hearing court granted the petition and directed class counsel to turn over the files finding that generally a client has full access to those files at the conclusion of the attorney/client relationship.

The appellate court reversed the lower court and rejected the argument that an absent class member was entitled to the same range of rights and privileges that a traditional client was entitled to-especially after the case was closed. The Wyly court stated that it has been observed by courts and commentators alike, that the relationship between appointed counsel and an absent class member in a class action differs substantially from that found in a traditional attorney/client relationship.

Although the court acknowledged that an absent class member is entitled to some of the benefits of an attorney/client relationship, such as the right to privileged communications with class counsel and the prohibition against attempts by defendants' counsel to communication with him, he has no right to direct the course of the litigation, testify at trial, participate in discovery or dismiss class counsel. The court noted that if a more traditional attorney/client relationship was sought, the absent class member was free to hire his own individual counsel or opt out of the class action altogether if he was unsatisfied with his limited role.

In order to avoid the unduly burdensome potential, even after the end of litigation, that would result from a multitude of requests from absent class members for counsel's entire file, the court adopted a requirement that absent class members establish their entitlement to class counsel's file on a case-by-case basis.

Two Recent Class Certification Appeals Were Decided with Opinions that Are Likely to Echo Beyond the Particular Cases

In In re New Motor Vehicles Canadian Export Antitrust Litig., __ F.3d __, 2008 WL 820822 (1st Cir. Mar. 28, 2008), a divided First Circuit panel vacated the order certifying a class of indirect purchasers and remanded the case back to the district court. As noted by Judge Torruella in his dissenting opinion, the majority’s opinion blurs the boundaries between class certification and summary judgment, __ F.3d __, 2008 WL 820822, at *23, and is likely to encourage district courts to defer decisions on class certification until discovery is complete.

The First Circuit characterized the plaintiffs’ theory of injury (and damages) as “novel and complex,” __ F.3d __, 2008 WL 820822, at *18, which therefore required a more “searching injury” to test whether the plaintiffs could use common proof to establish its viability. __ F.3d __, 2008 WL 820822, at *17. Although discovery had not been completed at the time of the initial class certification decision, discovery has now been completed, and the First Circuit therefore remanded the case back to the district court for further findings. The district court is to consider how the plaintiffs’ theory of injury and damages is likely to play out at trial – to give the court a better sense of whether common proof could establish injury and damages. __ F.3d __, 2008 WL 820822, at *20. This decision questions the value of bifurcating class- and merits-related discovery, a practice that is likely to be curtailed, at least in subsequent antitrust cases brought in the First Circuit.

In McLaughlin v. American Tobacco Co., ___ F.3d ___, 2008 WL 878627 (2d Cir. Apr. 3, 2008), the Second Circuit reversed a decision certifying a class of smokers who brought a RICO-based fraud case alleging that cigarette manufacturers had deceptively marketed “light” cigarettes as being healthier (or less dangerous) as “full flavored” cigarettes.  The Second Circuit’s opinion sheds light on the applicability of securities fraud cases to consumer fraud actions, and on the use of fluid recovery to aggregate plaintiffs’ claims.

Contrasting plaintiffs in securities fraud cases to those bringing consumer fraud cases, the Second Circuit noted that plaintiffs in a consumer case cannot necessarily rely on the presumption that the market operates efficiently. Here, the court noted, the class members may have chosen to purchase light cigarettes for any number of reasons, not necessarily due to the defendants’ marketing campaign. ___ F.3d ___, 2008 WL 878627, at *5. The court also noted that the plaintiffs’ individual levels of awareness and knowledge would also preclude a presumption of reliance that would enable the plaintiffs to prove causation through common evidence. ___ F.3d ___, 2008 WL 878627, at *5-*6.

The court also rejected the plaintiffs’ proposal to prove collective damages on a classwide basis, which would generate an aggregate pool from which individual plaintiffs would claim their share. The court noted that such a system of “fluid recovery” has been prohibited in the Second Circuit since Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1008 (2d Cir. 1973).  ___ F.3d ___, 2008 WL 878627, at *11. The court reaffirmed that the type of aggregate determination proposed would violate both the Rules Enabling Act and the Due Process Clause, as bearing “little or no relationship to the amount of economic harm actually caused by defendants.” Id.

Subprime Mortgage Litigation Study

Navigant Consulting, Inc., released a study on February 14, 2008, that shows the number of subprime-related cases filed in federal courts are dramatically outpacing the savings-and-loan (S&L) litigation of the early 1990s.

According to the Navigant study, the number of subprime-related cases filed in 2007 already equals half of the total 559 S&L cases handled by the Resolution Trust Corporation (RTC) over a multiple-year period. The subprime numbers represent only federal court filings.