Following up on our recent coverage of Mississippi ex rel. Hood v. AU Optronics Corp., my colleague Archis Parasharami had the opportunity to discuss the subject with Colin O’Keefe of LXBN. In this brief video interview, Archis discusses some of the class action issues that the Supreme Court is confronting now or may confront in the future.
We’ve blogged before about plaintiffs’ attempts to circumvent the “mass action” provisions in the Class Action Fairness Act of 2005 (“CAFA”), which allow defendants to remove to federal court certain cases raising “claims of 100 or more persons that are proposed to be tried jointly.” 28 U.S.C. § 1332(d)(11)(B)(i). To evade removal, creative plaintiffs’ lawyers have subdivided their mass actions into parallel cases of fewer than 100 persons each. Some courts have gone along with the charade. See, e.g., Scimone v. Carnival Corp., No. 13-12291 (11th Cir. July 1, 2013); Abrahamsen v. ConocoPhillips, Co., 503 F. App’x 157, 160 (3d Cir. 2012); Anderson v. Bayer Corp., 610 F.3d 390, 392 (7th Cir. 2010); Tanoh v. Dow Chem. Co., 561 F.3d 945, 950-51 (9th Cir. 2009).
The fight over removal in these gerrymandered mass actions often boils down to one key question: whether the parallel cases are “proposed to be tried jointly.” If so, CAFA permits removal.
Recognizing this point, the plaintiffs in these cases frequently remain coy about—or outright deny—an intent to try the parallel mass actions jointly. But they often go right up to the edge, urging the same state trial court to resolve threshold issues in the cases together—or even simply to consolidate the state-court actions outright. Then, these plaintiffs say, CAFA’s mass-action removal provision doesn’t apply because they say that they have had the claims “consolidated or coordinated solely for pretrial proceedings.” 28 U.S.C. § 1332(d)(11)(B)(ii)(IV) (emphasis added).
But not all courts are falling for this effort to elevate form over substance.
We have frequently chronicled the ongoing efforts of the plaintiffs’ bar to circumvent the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (FAA) requires the enforcement of parties’ agreements to resolve their disputes through individual arbitration rather than class or collective proceedings. One of the most prominent efforts to evade Concepcion has been the National Labor Relations Board’s ruling in D.R. Horton (pdf), which declared that the right of employees to engage in “concerted activities” under Section 7 of the National Labor Relations Act (NLRA) trumps the FAA and requires that employees be allowed to bring class actions (either in court or arbitration). The Board also pointed to the Norris-LaGuardia Act, which provides that employees “shall be free from the interference, restraint, or coercion of employers” in “concerted activities.” In the NLRB’s view, any business subject to the Board’s jurisdiction (and that includes most private-sector businesses) that requires its employees to agree to resolve disputes through individual arbitration has engaged in an unfair labor practice and faces the threat of agency action.
Numerous plaintiffs seeking to invalidate arbitration provisions in employment agreements have claimed that the Labor Board’s D.R. Horton decision establishes the invalidity of arbitration provisions that include a class waiver, but virtually every court to consider the question has declined to follow the NLRB’s lead. Yesterday, in an important decision for employers nationwide, the Fifth Circuit invalidated the Board’s decision, holding in DR Horton, Inc. v. NLRB (pdf) that the NLRB’s position is inconsistent with the FAA. In overturning the Board’s order, the Fifth Circuit noted its agreement with “[e]very one of our sister circuits to consider the issue,” each of which “has either suggested or expressly stated that they would not defer to the NLRB’s rationale, and held arbitration agreements containing class waivers enforceable.” Slip op. at 25 (citing Richards v. Ernst & Young, LLP (9th Cir.), Sutherland v. Ernst & Young LLP (2d Cir.), and Owen v. Bristol Care, Inc. (8th Cir.)). (Our colleague Andy Pincus will be arguing this issue in the Ninth Circuit later this week in Johnmohammadi v. Bloomingdale’s, Inc. on behalf of the U.S. Chamber of Commerce; a PDF of our amicus brief in that case is available here.)
Law Seminars International is once again holding its annual class actions conference in Chicago on December 9 and 10. As in past years, the organizers have put together a great group of speakers to address the most recent developments affecting class actions . For my part, I am looking forward to speaking on an issue we cover frequently on the blog: the impact of arbitration on class-action litigation.
A copy of the conference’s agenda is available here. If any of the blog’s readers plan to attend the conference (or will be in Chicago during that time), I would love to hear from you.
For the second time in two weeks, the Supreme Court’s denial of certiorari in a class action case—this time, Martin v. Blessing—has garnered significant attention because of a separate statement by a Justice concerning the denial of review.
In Martin, the petitioner challenged the policy of one federal judge in the Southern District of New York to condition appointment of class counsel on the agreement by that counsel to “make every effort to assign * * * this matter [to] at least one minority lawyer and one woman lawyer with requisite experience.” Specifically, in Martin—an antitrust class action against Sirius XM Radio—Judge Baer specified that class counsel “should ensure that the lawyers staffed on the case fairly reflect the class composition in terms of relevant race and gender metrics.”
After the class action against Sirius settled, some objectors appealed Judge Baer’s approval of the settlement—and specifically, his order regarding the diversity of class counsel. The Second Circuit held that the objectors lacked standing because “they never contend that class counsel’s representation was actually inferior” to the representation that would have been provided absent a diversity mandate.
One of those objectors—represented by Ted Frank of the Center for Class Action Fairness—filed a petition for certiorari seeking review of the Second Circuit’s holding that he lacked standing to challenge Judge Baer’s order regarding class counsel’s staffing of the case.
The Supreme Court denied review. But Justice Alito took the unusual step of issuing a separate statement respecting the denial of certiorari (pdf) in an effort to dissuade Judge Baer (and other judges) from imposing a diversity requirement for appointed class counsel.)
Justice Alito explained that the “uniqueness of” Judge Baer’s “practice weighs against review by this Court, but the meaning of the Court’s denial of the petition should not be misunderstood.” That is because, in Justice Alito’s view, it is not only “doubtful that the practice in question could survive a constitutional challenge,” but also likely that the practice runs afoul of Federal Rule of Civil Procedure 23(g), which regulates the appointment of class counsel.
According to Justice Alito, because “any deviation from the criteria” in Rule 23(g) for selection of class counsel “may give rise to suspicions of favoritism,” it “would be intolerable if each judge adopted a personalized version of the criteria set out” in the rule. Justice Alito acknowledged that Rule 23(g) has a catch-all allowing the district court to consider “any . . . matter pertinent to counsel’s ability to fairly and adequately represent the interests of the class.” But from his perspective, it “seems quite farfetched to argue that class counsel” could not do so “unless the race and gender of counsel mirror the demographics of the class.” And he opined that Judge Baer’s rule would be impossible—or at least very expensive—to administer in cases in which the demographics of the class were unknown.
Finally, Justice Alito closed by warning that, although “we are not a court of error correction,” if “the challenged appointment practice continues and is not addressed by the [Second Circuit], future review may be warranted.” That’s about as clear a shot across the bow as you can get from a single Justice.
Incidentally, the denial of review in Martin v. Blessing brings the objector’s lawyer, Ted Frank of the Center for Class Action Fairness, to 0-2 in seeking Supreme Court review this term. (We’ve discussed the Court’s earlier denial of Ted Frank’s cert. petition seeking review of the cy pres component of the Facebook class action.) But in each loss, a Justice has issued a separate statement intimating that the lower court had erred. That’s pretty remarkable.
It’s always worth a look when a federal judge steps down from
Olympus the bench to act as an ordinary mortal litigant. Class action aficionados in particular should not miss Alison Frankel’s report for Reuters, discussing a remarkable objection by Chief Judge Kozinksi and his wife to approval of a class settlement in a case in which he happens to be a class member.
While the U.S. Supreme Court and federal courts of appeals have in recent years demanded rigorous scrutiny before authorizing certification of class actions, the Supreme Court of Canada has charted a different course. In a trio of recent decisions in antitrust class actions, Canada’s high court rejected key U.S. precedents on the scope and nature of class actions, forcing companies to defend against the same types of allegations under distinctly different legal regimes on each side of the border.
The three cases decided by the Canadian court, which all involved allegations of price-fixing, are:
- Pro-Sys Consultants Ltd. v. Microsoft Corporation (pdf), relating to Microsoft operating systems;
- Infineon Technologies AG v. Option Consommateurs (pdf), involving DRAM computer chips; and
- Sun-Rype Products Ltd. v. ADM (pdf), concerning high-fructose corn syrup.
In each case, plaintiffs had filed a class action in Canada on the heels of a similar class action filed in the United States. The Supreme Court of Canada addressed four issues that have been critical to antitrust class actions on both sides of the border, and deviated in several places from the path charted by the U.S. Supreme Court.
Indirect Purchasers May Sue Under Canada’s Antitrust Law
In Pro-Sys, the Supreme Court of Canada ruled that a defendant is generally precluded from asserting a passing-on defense in an antitrust class proceeding (i.e., the Court largely adopted the U.S. Supreme Court’s ruling in Hanover Shoe). But Canada’s court rejected the U.S. Supreme Court’s Illinois Brick rule that bars indirect-purchaser suits under federal antitrust law, and held instead that an indirect purchaser may assert a cause of action under Canada’s Competition Act. In concluding that an indirect-purchaser class action may be certified in the common-law provinces in Canada—i.e., those other than Quebec—the Court echoed Justice Brennan’s dissent in Illinois Brick, concluding that “the same policies of insuring the continued effectiveness of the [antitrust] action and preventing wrongdoers from retaining the spoils of their misdeeds favor allowing indirect purchasers to prove that overcharges were passed on to them.”
The Pro-Sys Court acknowledged the potential risk of double recovery when parallel claims are brought by direct and indirect purchasers, either as part of the same action or in multiple jurisdictions. But the Court noted that “legislation restricts individual recovery for damages for violations to just two years,” making it impractical for potential Canadian indirect plaintiffs to sit on their claims until resolution of an earlier direct purchaser suit. Where multiple suits are brought, a defendant may present evidence of the potential for overlapping recovery to the trial judge, who may modify any damage award accordingly.
In Infineon, the Supreme Court of Canada held that similar principles apply under Quebec’s civil-law regime. Accordingly, indirect-purchaser class actions also may be filed in that province.
Canada Does Not Require Rigorous Analysis Of Class Certification Requirements Prior To Certifying A Class
In Pro-Sys, the Supreme Court of Canada addressed the “rigorous” approach to class certification that the U.S. Supreme Court has reiterated is necessary under Federal Rule of Civil Procedure 23—most recently in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend. The Canadian court rejected the U.S. approach.
To the contrary, the court held that a plaintiff seeking class certification in Canada’s common-law provinces does not need to prove with evidence at the class-certification stage that the class-certification requirements are met, nor does the court need to resolve “conflicting facts and evidence at the certification stage.” Rather, in Canada a would-be class representative need only adduce a “credible” or “plausible” methodology to prove the issues of loss and liability on a class-wide basis.
More specifically, in an antitrust class action, “the methodology must offer a realistic prospect of establishing loss on a class-wide basis so that, if the overcharge is eventually established at the trial of the common issues, there is a means by which to demonstrate that it is common to the class.” The methodology must be “grounded in the facts” and “there must be some evidence of the availability of the data.”
But the Canadian court did not give a completely free pass to plaintiffs at the class-certification stage. Instead, the court suggested, certification remains “a meaningful screening device” (including the requirement that an expert’s methodology offer a “realistic prospect” of establishing class-wide loss).
In Infineon, the Supreme Court of Canada held that the standard for class certification in Quebec is even lower because the evidentiary burden is “less demanding” under the Civil Code. In a total departure from U.S. precedent, a Quebecois plaintiff must present merely an “arguable case that an injury was suffered”—and need not do so by presenting expert testimony. In fact, “presentation of expert evidence is not the norm at the [class-action] authorization stage in Quebec.” (Defense lawyers in Quebec tell us that class-action trials are far more common than they are here; this comparatively loose approach to class certification may explain why.)
Canadian Courts May Exercise Jurisdiction Over Companies Alleged To Be Part Of Foreign-Based Conspiracies.
Another significant aspect of the Canadian high court’s decision in Infineon was the conclusion that Quebec courts could exercise jurisdiction over companies accused of entering into price-fixing arrangements outside of Canada, so long as there is some indication of injury or “economic damage” to a consumer in Quebec.
Similarly, in Sun-Rype, the Court ruled that if plaintiffs adequately allege that defendants conduct business in Canada, make sales in Canada, and conspire to fix prices on products sold in Canada, Canadian courts could adjudicate the claims regardless of where the challenged conduct had taken place. As the Court put it: “The respondents have not demonstrated that it is plain and obvious that Canadian courts have no jurisdiction over the alleged anti-competitive acts committed in this case.”
Some Good News On Ascertainability In Canada?
The Supreme Court of Canada did refuse to approve certification of a class action in one of the three cases. In rejecting class treatment for the indirect-purchaser class action in Sun-Rype, the court focused on the plaintiffs’ failure to establish “some basis in fact” that an identifiable class existed. In particular, the plaintiffs in Sun-Rype did not offer any evidence to show that two or more persons could prove that they purchased a product actually containing high-fructose corn syrup during the class period.
This holding parallels a recent trend in U.S. courts of taking Rule 23’s ascertainability requirement seriously—with the most prominent examples being the Third Circuit’s recent decisions in Hayes and Carrera—decisions we have previously discussed in some detail. That said, it does not appear that the inquiry is as stringent in Canada as it is in Hayes and Carrera; although those U.S. decisions rejected the use of self-identification alone as a means of demonstrating the existence of an identifiable class in those cases, the Canadian Sun-Rype decision may leave that door open.
While the full impact of these rulings will become apparent only over time—and future litigation—some implications already are clear. As an initial matter, plaintiffs’ lawyers are likely to be emboldened by these rulings. Indirect-purchaser suits are now expressly permitted in Canada. It will be easier to certify class actions in Canada than the U.S. now that the Canadian high court has expressly rejected the type of “rigorous analysis” mandated by the U.S. Supreme Court in Dukes and Comcast. And foreign defendants with no presence in Canada may be required to defend competition class actions in Quebec, and possibly other provinces, that are filed by plaintiffs alleging that they suffered losses in those jurisdictions that were caused by a price-fixing scheme entered into entirely outside Canada.
More generally, these decisions may lead Canada’s class-action system to see more litigation progress further along towards trial as fights that previously took place at the class-certification stage now get pushed down the road to summary judgment or trial. When it comes to class actions—like the Winter Olympics—our neighbor to the north is one to watch.
Earlier today, the U.S. Supreme Court granted review in Halliburton Co. v . Erica P. John Fund, No. 13-317, to address an important question affecting securities class actions: whether the “fraud-on-the market” presumption created by the Court in Basic, Inc. v. Levinson remains viable in light of new developments—both in economic thinking and in the marketplace—over the 25 years since Basic was decided.
Where did the fraud on the market presumption come from? Here are the basics (pun intended). The vast majority of securities fraud class actions are brought under a private right of action that was not created by Congress but rather implied by the courts from Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which the SEC promulgated under that provision. In these cases, the plaintiff must plead and prove (among other things) that the defendant misrepresented or omitted a material fact in connection with the purchase or sale of securities.
Typically—and certainly at common law—a plaintiff who alleges fraud must show that he or she relied on that misrepresentation or omission. And reliance is an element of a Section 10(b) fraud claim too.
But in 1988, the Supreme Court held in Basic, by a 4-2 vote (with three Justices not participating), that reliance may be presumed across an entire proposed class based upon the so-called efficient market “hypothesis”: “that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business,” and “[m]isleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.” Stated another way, the Basic majority assumed that transactions in an efficient market essentially take public statements (or misstatements) into account, regardless of whether the plaintiff or class members actually heard or acted upon the statements. The consequence—for 25 years—has been that in securities fraud class actions, plaintiffs need not prove actual reliance unless the defendant can rebut the fraud-on-the-market presumption, something that happens only rarely.
Today’s grant of review in Halliburton will allow the Court to take a second look at the presumption. The Court will analyze whether economic learning over the past 25 years has undermined Basic’s foundation based on economic theory, or whether the Basic dissent (written by Justice White on behalf of himself and Justice O’Connor) was correct in warning that the four Justices in the majority had “embark[ed] on a course that [they do] not genuinely understand, giving rise to consequences [they] cannot foresee.”
We’ll have more to say about the merits of the fraud-on-the-market presumption as the Halliburton case progresses. But we wanted to address a claim we are already hearing in the hours since the Court granted review: that rejection of the fraud-on-the-market doctrine would harm investors by depriving them of an essential remedy that provides protection against fraud.
To begin with, if plaintiffs must actually prove reliance—as is true of fraud-based class actions in other contexts—it certainly will not be as easy for the plaintiffs’ bar to bring securities class actions as it is now. That is because under current law the reliance element of a Section 10(b) action is essentially presumed out of existence in virtually all cases.
But the idea that these class actions actually benefit investors—as opposed to lawyers—is simply wrong. As many academics—law professors, economists, or both—have recognized, the securities class-action system is fundamentally broken. Perhaps most significant, because a corporation is owned by its shareholders, the effect of a settlement in a securities class action is to require the current set of shareholders to pay the settlement amounts to past shareholders, with a substantial portion of that settlement deducted for attorneys’ fees to the plaintiffs’ lawyers. And the current shareholders are also forced to pay the costs of defending that litigation, including very sizeable attorneys’ fees and e-discovery costs.
Adding to these concerns is the long history of abusive securities class actions. Nearly two decades ago, Congress reacted to the record of abusive shareholder litigation by enacting the Private Securities Litigation Reform Act. While the PSLRA made some welcome changes to the system, the abuses did not end; instead, they simply took on different forms.
Thus, as Professor Adam Pritchard has put it, “[s]ecurities fraud class actions are a ‘pocket shifting’ exercise for shareholders. . . . [T]he dollars paid in these suits come from the corporation, either directly in the settlement or indirectly in the form of premiums for insurance policies. . . . Shareholders effectively take a dollar from one pocket, pay about half of that dollar to lawyers on both sides, and then put the leftover change in their other pocket.” According to a commentary in BusinessWeek, “there is widespread agreement among legal scholars that [shareholder] class actions make little economic sense and are anemic deterrents to fraud.”
The plaintiffs’ bar seems set to argue that fraud-on-the-market must be maintained—whether it makes economic sense or not—to avoid what some claim would be “the end of securities class actions.” But that line of argument will force the plaintiffs’ bar to justify its assertion that these lawsuits actually provide a net benefit to investors. Given the large number of academic commentators who agree upon the fundamental irrationality of securities class actions—and the harm they inflict on investors—that is going to be a very high mountain for the plaintiffs’ bar to climb.
This past March, the Supreme Court asked the Solicitor General to weigh in as to whether two rather technical questions about ERISA stock-drop actions are worthy of the Court’s attention. See Fifth Third Bancorp v. Dudenhoeffer, No. 12-751. The Solicitor General filed his brief (pdf) yesterday. Sidestepping the technical questions, he asked the Court to intervene on a different (and highly significant) question: whether ERISA plan fiduciaries are entitled to a presumption that they have acted prudently in permitting plan participants to invest in their own company’s common stock.
With the Solicitor General’s recommendation, the Supreme Court is highly likely to grant certiorari. And with the questions reformulated by the Solicitor General, this case stands either to sound the death knell for stock-drop class actions or to start a frenzied wave of such cases.
Stock-drop cases often arise as siblings to securities fraud class actions. When a company’s stock price falls precipitously, some plaintiffs’ lawyers scramble to identify corporate statements and omissions that might be responsible. Meanwhile, other plaintiffs’ lawyers focus on the company’s retirement plans. Many companies offer employees an ownership interest in their company, either through a freestanding Employee Stock Ownership Plan (an “ESOP”) or as an ESOP investment option in a participant-directed savings plan (a “401(k) plan”). When securities-fraud plaintiffs allege that corporate officers have violated the securities laws, ERISA plaintiffs will often allege that retirement plan fiduciaries acted imprudently by permitting plan participants to invest in a flawed product.
But Congress encouraged the creation of ESOPs by excluding them from certain ERISA requirements. See, e.g., 29 U.S.C. §§ 1104(a)(2), 1106(b)(1), 1107(d)(6)(a). Thus, allegations that plan fiduciaries should have shielded plan participants from investing in their own companies are in tension with Congress’s special treatment of ESOPs. To resolve that tension, the Third Circuit, in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), held that “an ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision.” Six other circuits have followed suit and recognized presumptions (with some differences on the details of how the presumptions operate).
The Solicitor General has urged the Court to hold that “courts should not apply a presumption that an ESOP fiduciary has acted prudently at any stage of the proceedings.” If the Court agrees with the Solicitor General, then plaintiffs’ lawyers will have new avenues for litigating perceived securities violations—avenues not limited by recent procedural reforms directed at securities actions. But if the Court recognizes a robust presumption, then such actions may appear far less desirable.
The Court is expected to consider the petition in Dudenhoeffer at its December 13 conference, with an order to issue sometime thereafter. If the Court grants certiorari, the case will likely be heard during the current term, with a decision on the merits expected by June 2014.
As I have previously blogged, my colleagues and I have filed certiorari petitions in two significant cases affecting class-action litigation, Sears Roebuck & Co. v. Butler (pdf) and Whirlpool Corp. v. Glazer (pdf). The petitions challenge decisions that bless broad class actions on behalf of largely uninjured purchasers of front-loading washing machines whose product-defect claims depend on the particular model purchased, the purchaser’s use and care of the machine, and numerous other purchaser-specific determinations.
Last week, in an unusually strong outpouring of support, twelve different organizations filed nine different amicus briefs asking the Supreme Court to grant review in these two cases. Among other compelling arguments, the amicus briefs made two interesting points that put these class actions in context.
First, most manufacturers and many retailers have established product-warranty programs that are effective alternatives to broad purchaser class actions. These warranty programs operate on an opt-in principle that targets those who actually have problems with the product. And these programs quickly resolve any problems with a product by providing repairs or replacements at little or no cost to the purchaser. An unwieldy class action on behalf of mostly uninjured purchasers is no improvement on—indeed, would significantly interfere with—these warranty programs.
Second, the principal alleged defect in the washing machine cases—moldy odors resulting from residue that supposedly builds up because the machines use less water and lower temperatures—is tied directly to government-mandated water and energy efficiency improvements. Beginning in 2004, Department of Energy regulations started requiring aggressive efficiency increases for washing machines. In turn, manufacturers undertook groundbreaking product-innovation efforts, including the development of front-loading machines. Those machines provide significant efficiency gains, are highly rated by third-party organizations, and are popular with customers. Yet front-loading washing machines have now become the center of massive class-action litigation against every manufacturer.
As these amici arguments illustrate, there are powerful practical and policy reasons that the Supreme Court should review the class certification rulings in the washing-machine cases.
For interested readers, here are copies of the amicus briefs:
- Chamber of Commerce of the United States, Business Roundtable, and the National Association of Manufacturers
- DRI—The Voice of the Defense Bar
- Product Liability Advisory Council
- Washington Legal Foundation and International Association of Defense Counsel
- Association of Home Appliance Manufacturers
- Pacific Legal Foundation
- Retail Litigation Center
- TechAmerica and TechNet