Suppose that you’re a trial court considering a motion for class certification.  And suppose that the parties present you with two competing statutory interpretations.  One legal standard permits the case to be adjudicated with common evidence.  And the other standard would require  individualized inquiries.  What should you do?  Should you decide what the law is and then see whether the putative class claims can be tried in a single trial?

The surprising answer of the California Court of Appeal is in Hall v. Rite Aid Corp. (pdf) is “No.”  Hall appears to conclude that commonality and predominance need not be established under the correct substantive legal standards.  Rather, if the plaintiffs propose a legal standard dispensing with individualized inquiries, the very question whether that standard applies is a common issue supporting class certification.

Hall is another decision in a growing series of “suitable seating” cases addressing a California Industrial Welfare Commission Wage Order that requires employers to provide employees with “suitable seats when the nature of the work reasonably permits the use of seats.” The plaintiffs in Hall—cashier-clerks who divided their time between check-out counters, stockrooms, and sales floors—construed the Order to require seats to be provided to every employee for every task where providing seats would be reasonable. In particular, the plaintiffs contended that Rite Aid had a duty to provide a seat to any employee who worked at a check-out counter for any period of time, even if for much of that time the employee would not be able to perform the job while sitting.  Rite Aid, in contrast, contended that the duty to provide a seat depended on the employee’s duties as a whole, so that the Order would not require providing a seat to an employee working at a check-out counter if the employee worked mostly at tasks where seating was inappropriate, or if check-out duties would not allow the employee to sit most of the time.  Thus, under plaintiffs’ legal theory, any failure to have a seat at a check-out counter was a violation requiring no further inquiry, while under Rite Aid’s theory such a failure would violate an employee’s rights only under certain, largely individualized circumstances.

Agreeing with Rite Aid’s view of the substantive law, the trial court decertified a class.  The San Diego-based Court of Appeal reversed.  In its view, the disputed legal elements of the plaintiffs’ claim were themselves common legal issues supporting class certification.  According to that court, deciding exactly what the law required the plaintiff had to prove in common was an impermissible predetermination of the action’s merits, and thus fell afoul of the California Supreme Court’s decision in Brinker Restaurant Corp. v. Superior Court.

True, Brinker had disapproved a “free-floating inquiry into the validity of the complaint’s allegations” at the class certification stage.  Yet the California Supreme Court also recognized that when “legal issues germane to the certification inquiry bear as well on aspects of the merits, a court may properly evaluate them”; indeed, [t]o the extent the propriety of certification depends on disputed threshold factual or legal questions, a court may, and indeed must, resolve them.”

It seems to me that, when one interpretation of a Wage Order would require resolution of myriad individualized issues, and the other interpretation would permit the same issues to be resolved in common, the “propriety of certification” under Brinker would depend on the correct legal standard.  Not so, according to the Hall court, which viewed the very dispute over the legal standard as a common issue supporting class certification.

The Hall opinion would seem to allow a plaintiff to obtain class certification simply by advancing a theory of liability that omits inherently individualized elements such as causation and injury, on the ground that the validity of the plainly erroneous legal theory could be determined on a class-wide basis.  And the Hall approach raises significant unanswered questions.  The opinion suggests that defendants—especially employers whose policies are challenged—should want threshold legal questions to be decided after class certification so that the entire class is bound by the result.  But if class counsel is wrong about the legal theory, and in fact the legality of the employer’s policy depends on individual circumstances, does the entire class lose because the class plaintiff’s overbroad theory fails, even though some or even many class members would have valid claims under the proper, more individualized standard?  That might create adequacy and due process problems, elevating the interests of the class-action lawyers over those of their clients.  But if determination of the legal issue on a class basis instead simply results in decertification of the class, allowing new actions under the correct theory, then it makes no sense to defer the decision as to what, exactly, plaintiffs must prove through common evidence.

The issue surfaced indirectly in the California Supreme Court’s recent unanimous decision in Duran v. US Bank NA (pdf), which we recently discussed.  Duran rejected the use of questionable statistical sampling that swept away individualized issues and defenses in a wage-and-hour class action.  The Court’s evaluation of the class-certification and trial-management issues hinged on a view of the governing law under which an employee’s exempt status under the overtime laws hinged on whether the employee actually spent more than half-time carrying out duties that were exempt (there, sales outside the employer’s facility).  Justice Liu’s concurring opinion suggested a possible legal test—different from the Court’s view—that would turn on the employer’s reasonable expectations about the balance of exempt or nonexempt activity within a particular job classification, not on the employees’ actual work practices. If that test correctly stated the obligation, Justice Liu suggested, the application of the exemption could be determined as a common issue without the need for statistical sampling. Hall raises the troubling possibility that a litigant could seek to avoid individualized issues by restating the governing legal test along the lines of Justice Liu’s concurrence in Duran, and then claim that the choice between Justice Liu’s formulation and the formulation adopted in the Court’s opinion itself was a common issue of law.   In my view, such an approach would be inconsistent with Duran and Brinker.

 

A recent decision denying certification of a securities-fraud class action underscores that plaintiffs must prove with evidence that they satisfy the requirements of Federal Rule of Civil Procedure 23, not merely allege that they do so or promise that they can.

The decision in In re Kosmos Energy Limited Securities Litigation arose from a class action filed in the Northern District of Texas by plaintiffs challenging certain statements made in connection with the defendant’s initial public offering (“IPO”). The court denied the plaintiff’s motion to certify a putative class of stock purchasers.

In its opinion, the court provided a useful overview of class-certification law, explaining that courts have moved “away from the presumptively pro-plaintiff view” of class actions that had prevailed decades ago. The court explained that “[g]oing forward, the clear directive to plaintiffs seeking class certification—in any type of case—is that they will face a rigorous analysis by the federal courts, will not be afforded favorable presumptions from the pleadings or otherwise and must be prepared to prove with facts—and by a preponderance of the evidence—their compliance with the requirements of Rule 23” (emphases added)

The court concluded that the plaintiff had failed to provide evidence establishing that it would be an adequate class representative or that common issues of law or fact would predominate over individualized ones. The plaintiff had attempted to rest in large part on allegations in the complaint and broad statements in dicta in past decisions. The court didn’t buy it.

The court first explained that “adequacy is the plaintiff’s burden to prove—not the defendant’s burden to disprove.” The court also criticized the plaintiff’s declaration attesting in impossibly vague terms that she had “reviewed” the pleadings and “supervised” her lawyers. As the court put it, “this type of generic detail is really no detail at all, for it provides naught by which to assess [the plaintiff’s] credibility, her knowledge about the underlying facts of the case, or how much of what she has stated may have been prompted by counsel. Indeed, any potential class representative in any securities case could make almost identical assertions.”

With respect to predominance, the court concluded that the plaintiffs were effectively asking for an assumption that securities class actions are certifiable. That “assumption,” the court explained, was “ill-founded.” The court also emphasized that “[w]hile Defendants offered a 107-page Expert Report demonstrating the need for individual inquiries into investor knowledge, Lead Plaintiff offered no proof from which to draw an inference that individual inquiries may not be required if the Court were to certify this putative class . . . .”

This decision is good news for businesses—and not just in the context of securities-fraud class actions. True, those suits are subject to heightened pleading requirements set forth in the Private Securities Litigation Reform Act (“PSLRA”). But the court’s denial of class certification rested on fundamental principles arising from Rule 23 itself, which applies to all class actions in federal court.

Plaintiffs routinely bring consumer class actions under statutes that allow only consumers—not businesses—to bring claims, or that are limited to transactions solely for personal or household purposes. See, e.g., Electronic Funds Transfer Act, 15 U.S.C. § 1693a(2); Real Estate Settlement Procedures Act, 12 U.S.C. § 2606(a)(1); California’s Consumer Legal Remedies Act, Cal. Civ. Code § 1780. But in some cases, the “consumer” requirement can be the Achilles’ heel for class certification. If it is difficult to determine whether a particular customer is a “consumer” without individualized inquiries, a proposed class action may flunk the predominance, ascertainability, and manageability requirements for class certification.

For example, in a recent zip-code class action, Leebove v. Wal-Mart Stores, Inc., the retailer was accused of improperly requiring customers paying by credit card to provide their phone numbers and addresses in violation of California’s Song-Beverly Credit Card Act. But that statute creates a private right of action only for a “natural person to whom a credit card is issued for consumer credit purposes.” Cal. Civ. Code § 1747.02(d). Business entities and people who use corporate credit cards are not eligible to sue.

That fact was crucial for defeating class certification in Leebove. As the court explained, “before liability could be established with respect to each class member, individualized proof regarding whether each class member’s credit card was issued as a consumer or as a business card would have to be produced.” Although the court also identified other defects in the proposed class, the need for mini-trials as to whether each class member qualified as a “consumer” under the statute was key to the court’s holding that the plaintiffs had failed to establish predominance.

There should be many other opportunities to make this kind of argument either in opposing a motion for class certification or in moving to strike class allegations at the very outset of the case. Here are some ideas (and helpful authority):

  • If the class is defined to include only consumers, does the need for individualized inquiries into whether a purchaser qualifies as a consumer or a business render the class non-ascertainable? See, e.g., Walewski v. Zenimax Media, Inc., 502 F. App’x 857, 861 (11th Cir. 2012).
  • Alternatively, is the class overbroad because it includes businesses? See, e.g., Mazur v. eBay Inc., 257 F.R.D. 563, 567 (N.D. Cal. 2009).
  • Or is the question whether the putative class member qualifies as a consumer so individualized as to either defeat predominance or make a classwide trial unmanageable? See, e.g., Kennedy v. Natural Balance Pet Foods (pdf), 361 F. App’x 785, 787 (9th Cir. 2010); Johnson v. Harley-Davidson Motor Co. Group, LLC (pdf), 285 F.R.D. 573, 583 (E.D. Cal. 2012); Ballard v. Branch Banking & Trust Co., 284 F.R.D. 9, 13-16 (D.D.C. 2012); Ewert v. eBay Inc., 2010 WL 4269259, at *9 (N.D. Cal. Oct. 25, 2010).
  • Finally, if the named plaintiff himself or herself arguably is not a “consumer” under the applicable law, are his or her claims typical of those of the absent class members? See, e.g., Aberdeen v. Toyota Motor Sales, U.S.A. (pdf), 2009 WL 7715964, at *6 (C.D. Cal. June 23, 2009), aff’d in relevant part, 422 F. App’x 617 (9th Cir. 2011).

 

At its conference on January 10, the Supreme Court can get serious about fixing consumer class actions. The Justices should take up that challenge, because it will consider two certiorari petitions that seek review of class certifications—involving alleged “moldy odors” in high-tech front loading washing machines—that are prime examples of what has gone wrong with the lower federal courts’ application of Rule 23. We’re somewhat biased: along with our partner Steve Shapiro and our co-counsel at Wheeler Trigg, we represent the petitioners in Whirlpool Corporation v. Glazer, No. 13-431, and Sears, Roebuck & Co. v. Butler, No. 13-430; copies of our cert petitions are available here, and our reply is available here (pdf).

But we and our clients are by no means alone in thinking that these cases present excellent vehicles for the Justices to bring more rigor and fairness to the application of Rule 23(a) and (b)(3). A bevy of amici has filed briefs in support of certiorari, explaining to the Court why the technology industry, appliance and other manufacturers, retailers, and U.S. businesses in general need the Court to intervene. Commentators too have seen in these cases the chance for the Supreme Court to clean up the class action mess. See, for example:

  • this op-ed in the Wall Street Journal by Governor John Engler, President of the Business Roundtable (subscription required);
  • this editorial in the Washington Examiner;
  • this article in the New York Law Journal by Michael Hoenig (subscription required); and 
  • this piece by Desmond Hogan and Erica Songer in InsideCounsel

In Whirlpool, plaintiffs allege that Whirlpool front-loading washing machines have a design defect that makes it possible for the machines to produce moldy odors. In Sears, the plaintiffs allege that Kenmore-brand washers made by Whirlpool have the same design defect and that some also have a manufacturing defect that on occasion may produce a false error code. In both cases, the alleged odor and error-code issues have manifested for only a tiny portion of purchasers—less than five percent according to Whirlpool and Sears service records and independent surveys by Consumer Reports. Yet the Sixth Circuit in Whirlpool approved certification of a class of all Ohio residents who bought 21 differently designed washing machine models. And the Seventh Circuit did the same in Sears for a class of buyers of 27 different models in six different States, the relevant laws of which vary. Over the course of the class period not only did the design of the machines change, but so did the instructions given to consumers to protect against any moldy odors. Individual owners used their machines differently, cared for them differently, and operated them in varied conditions.

As we explain in our briefs, both courts of appeals ignored a raft of individualized issues that make it impossible for plaintiffs to satisfy the class-certification requirement that common issues predominate over individual ones. Only class-member-specific inquiries could determine the crucial questions of whether any particular buyer experienced the alleged issues with moldy odors or error codes at all, whether the alleged defect or other factors caused any such issues, whether the buyer followed care and use instructions, whether problems manifested during the warranty period, whether the buyer requested and received adequate warranty service, and whether any damages resulted from any alleged defect (among other questions). And the fact that the certified classes are filled with uninjured buyers fatally undermines constitutional standing to litigate the class claims and threatens to unfairly dilute the rights of the few class members who may actually have injuries.

The harms caused by the decisions of the Sixth and Seventh Circuits are not limited to the violence those decisions have done to Rule 23’s requirements. Indeed, the adverse social and economic consequences of certification of these sorts of cases cannot be overstated. The introduction of front-loading washers reflected years of innovation to improve water- and electrical-efficiency in response to regulatory mandates. Independent testing shows that front-loading washers perform very well both on those measures and on cleaning capability. Yet every manufacturer of front-loading washers is now the subject of class actions across the Nation.

Massive class action litigation of this sort is immensely costly. Those costs end up being absorbed by consumers. Class suits over products that for the vast majority of owners perform as advertised undermine the generous warranty programs that manufacturers and retailers offer to quickly address problems actually experienced by individual customers. And they deter innovation. Any manufacturer must think twice before creating an innovative product when the reward is an onslaught of class litigation. What technologically advanced new product does not have glitches or sporadic issues? That is what warranty programs are designed for—to keep customers happy and coming back despite the likelihood of teething troubles in advanced, innovative products that make all our lives better.

Of course, the Supreme Court has tried before to bring more rigor to Rule 23 analysis—but many lower federal courts have ignored the message. Take the Sears case, in which the Seventh Circuit thumbed its nose at a litany of Supreme Court precedents. After the Supreme Court GVR’d the Seventh Circuit’s initial certification decision in light of Comcast Corp. v. Behrend, Judge Posner seemed perplexed about why his ruling had been vacated. Despite the GVR, he concluded that there was “no possibility” that the holding in Comcast could apply. And although the Supreme Court in Wal-Mart Stores, Inc. v. Dukes ruled that “common answers,” not “common questions,” are the key to satisfying the Rule 23(a) commonalty requirement, Judge Posner wrote that asking for “common answers” would place too “heavy” a burden on plaintiffs to justify certification. And why the stretch to certify? Because, in his view, individual claims would be too “meager” to make “suing worthwhile.” But that “ends-justifies-the-means” rationale for class actions runs counter to the Supreme Court’s repeated teachings that substantive law cannot be modified to pave the way for employing the class device.

What explains this flouting of precedent? The Seventh Circuit’s realpolitik approach recognizes that once cases are certified they tend to “quickly settl[e]” without any adjudication of the merits and using some mechanical “schedule of damages”—a result the Seventh Circuit deemed “efficient” (never mind that the Supreme Court repeatedly has identified blackmail settlements as a problem, not a solution). Indeed, the Court has again and again admonished that “[t]he class action is ‘an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only’”—as the Court said in both Dukes and Comcast. For that reason, Court said just last Term in American Express Co. v. Italian Colors Restaurant that Rule 23’s stringent requirements should “in practice exclude most claims” from class treatment; but federal trial and appeals courts still treat those requirements as authorizing class certification of “most claims.” So long as that departure from precedent continues, class actions will effectively impose a tax on every American, with the only beneficiaries being the plaintiffs’ bar, as a recent empirical study our colleagues conducted documents. Granting certiorari and reversing certification in the washer cases would go a long way indeed to putting the class action device back on track.

Former interns used to get revenge against their employers by writing tell-all blog posts and memoirs. Now, they’re lending their names to plaintiffs’ lawyers, who then file wage-and-hour class or collective actions alleging that interns must be paid like hourly employees.

The unpaid internship is among the hottest areas in wage-and-hour litigation. Two of the more noteworthy cases—that so far have come out in opposite ways—are currently pending in the Southern District of New York: Glatt v. Fox Searchlight Pictures and Wang v. Hearst Corporation (pdf).

In Fox Searchlight, former interns from the film Black Swan alleged that they had been misclassified and should have been paid as “employees.” Judge William Pauley held that the interns were employees and, therefore, Fox Searchlight was liable for violating minimum wage and overtime laws. The court also granted the interns’ motion for class certification.

By contrast, in Wang v. Hearst Corp., Judge Harold Baer denied the plaintiffs’ motions for summary judgment and class certification. Judge Baer found that a genuine issue of fact existed as to whether the interns were employees and that a determination of liability would require individual analysis of what the interns did and what benefits they received.

Last month, the Second Circuit granted interlocutory review of both decisions. The Second Circuit’s ultimate rulings should provide employers with further clarity concerning the law surrounding internship programs.

In the meantime, one (presumably unintended) effect of such lawsuits is to scare employers into shuttering their internship programs altogether in order to avoid the risks and costs associated with potential litigation. For example, after being targeted by a wage-and-hour class action, Condé Nast—of The Devil Wears Prada fame—recently discontinued its coveted internship program, which was famously a stepping stone into the publishing, fashion, and entertainment worlds.

Companies that do choose to continue their internship programs should confirm that they have properly classified their employees in compliance with the Fair Labor Standards Act and applicable state laws. Some employers may assume that the classification (such as exempt, independent contractor, or unpaid intern) that they give to an employee is determinative. But it turns out that courts generally give little weight to an employer’s classification.

Where should employers look? In the context of determining whether a person may be properly considered to be an unpaid intern, the Department of Labor recommends (pdf) that courts consider:

  • whether the internship is similar to training which would be given in an educational environment; 
  • whether the internship experience is for the benefit of the intern; 
  • whether the intern displaces employees; 
  • whether the employer that provides the training derives any immediate advantage from the activities of the intern; 
  • whether the intern is entitled to a job at the conclusion of the internship; and 
  • whether the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Companies that have been threatened with (or are already facing) a wage-and-hour lawsuit on behalf of interns may try to use the case-by-case, individualized nature of the Department of Labor’s multi-factor balancing test to defeat certification of any putative class or collective action. Interns at the same company often have very different experiences, depending upon their duties and the employees who are supervising them. Those differences could derail class or collective treatment in a particular lawsuit.

Companies may also consider asking Congress to take an interest. It turns out that, under the relevant law and regulations, Congressional interns are excluded from the FLSA’s coverage (and so the government is spared similar class actions.) Many Hill interns have described their unpaid experiences as extraordinarily valuable; perhaps the same logic might apply in the business context.

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:

Today, Mayer Brown filed a pair of certiorari petitions that challenge efforts by two federal appellate courts to narrow the Supreme Court’s recent class-action decisions in Comcast Corp. v. Behrend and Wal-Mart Stores, Inc. v. Dukes to tickets good for a single ride only. The Supreme Court previously remanded both cases for reconsideration after Comcast, but both courts of appeals reinstated their decisions. The certiorari petitions explain why those decisions are wrong: both putative class actions are beset by individual liability and damages questions and are filled with uninjured class members.

In one case, Sears, Roebuck and Co. v. Butler (pdf), Sears challenges a Seventh Circuit decision allowing class actions to proceed based upon an allegation that Kenmore-brand front-loading clothes washers have a design defect that causes musty odors and a manufacturing defect that produces false error codes. In an opinion by Judge Posner, the Seventh Circuit ruled that the supposed efficiency of a class trial on the supposedly common “defect” issue justified class certification, even though only a small minority of class members experienced musty odors or false error codes, the suit raises numerous individual questions, claims are brought under the laws of six different states, and the supposedly common question would not yield common answers.

In the other case, Whirlpool Corporation v. Glazer (pdf), Whirlpool challenges a Sixth Circuit decision allowing a class action on behalf of Ohio residents based on allegations that Whirlpool front-loading clothes washers have a design defect that can cause moldy odors and that Whirlpool did not adequately warn buyers about the defect. The Sixth Circuit swept aside the many individual liability questions—including whether a class member was among the small percentage who experienced any moldy odors—by using a “premium price theory” never recognized by Ohio law that assumes that every purchaser paid a uniform overcharge regardless of the purchaser’s actual experience with the washer. One point is especially worthy of note: Even though the Supreme Court had vacated and remanded the original Sixth Circuit decision in light of Comcast, the Sixth Circuit’s opinion on remand focused far more heavily on a different Supreme Court precedent, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, from the securities class action context.

These cases are of obvious importance to the growing number of suits seeking to litigate supposed product defects on behalf of all purchasers when the alleged defects have only manifested in a relative handful of products owned by a small fraction of putative class members. More broadly, the cases present the Supreme Court with an opportunity to clarify the confusion wrought by the Sixth and Seventh Circuit’s decisions over how to properly apply Comcast, Wal-Mart, and the Court’s other class-action decisions.

Class-action lawyers on both sides of the “v.” have been debating the impact of the Supreme Court’s decision earlier this year in Comcast Corp. v. Behrend. Last week, the D.C. Circuit delivered its answer in In re Rail Freight Fuel Surcharge Antitrust Litigation, the most significant opinion thus far to address Comcast. As the D.C. Circuit put it in a unanimous opinion by Judge Brown, “[b]efore [Comcast v.] Behrend, the case law was far more accommodating to class certification under Rule 23(b)(3).” But Comcast places that case law in doubt: When class certification rests on expert economic testimony—which is increasingly the case—“[i]t is now clear . . . that Rule 23 not only authorizes a hard look at the soundness of statistical models that purport to show predominance—the rule commands it” (emphasis added). That powerful holding makes the Rail Freight decision especially important for defendants opposing class certification.

Continue Reading D.C. Circuit Overturns Certification of Antitrust Class Action and Requires Reconsideration in Light of Comcast Corp. v. Behrend

It’s not all that often that a federal court of appeals reverses an order granting class certification in an unpublished opinion—much less the Ninth Circuit. But a panel of that court just did so last week in holding that a district court erred in certifying a class of workers because of Kuwait’s statute of repose. Lee v. ITT Corp., No. 12-35375 (9th Cir. July 24, 2013).

The plaintiffs, who worked in Kuwait for ITT Corporation, brought a class action alleging overtime-pay claims on behalf of all individuals working in Kuwait for ITT or its subsidiaries under a particular contract. The district court for the Western District of Washington agreed that the law of Kuwait governed the substance of the plaintiffs’ claims, but believed that Washington’s six-year statute of limitations applied rather than the one-year Kuwait statute of repose. Applying the longer, six-year period would mean that none of the putative class members’ claims were untimely.

The Ninth Circuit reversed, concluding that while Washington allows an “escape hatch” to avoid another jurisdiction’s “substantially different” statute of limitations when the claimant lacked “a fair opportunity to sue,” that principle did not apply to statutes of repose. Moreover, the panel concluded, there was nothing unfair about applying the Kuwaiti statute of repose, as the one-year period is similar to the amount of time many U.S. states allow for certain kinds of claims, some absent class members had stated that they were aware of the claims during the one-year period, and the named plaintiffs themselves had been able to bring suit during the one-year time frame.

Perhaps most significant, the Ninth Circuit pointed out that it could not tell “how many class members would be affected by applying the Kuwaiti statute” of repose, and therefore vacated the class-certification order.

The difference between a statute of repose and a statute of limitations was critical to the resolution of the appeal. As one of my colleagues discussed in a recent blog post, statutes of repose create an absolute right to be free from liability, whereas statutes of limitations sometimes can be tolled (for example, under the American Pipe doctrine). This case, of course, involved a statute of repose. Accordingly, the fact that the named plaintiffs had sued within the one-year deadline did not stop the clock for absent class members.

The decision also seems to indicate that class certification will be difficult when a statute of repose creates an absolute bar to liability for certain putative class members, because individualized inquiries will be necessary to determine whether any particular class member had timely asserted his or her claim.

In Section 10(b) securities-fraud cases based on affirmative misrepresentations, a class action cannot be certified unless investor reliance is presumed under the fraud-on-the-market theory of Basic, Inc. v. Levinson, 485 U.S. 224 (1988). In Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court ruled that a plaintiff does not need to establish loss causation at the class-certification stage in order to invoke the fraud-on-the-market presumption. On remand from that ruling, Halliburton argued that it should be permitted to rebut that presumption and defeat the request for class certification with evidence that the alleged misrepresentations had no impact on Halliburton’s stock price. Based largely on the Supreme Court’s intervening decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), the Fifth Circuit rejected Halliburton’s argument, holding that price impact is not properly considered at the class-certification stage. Erica P. John Fund, Inc. v. Halliburton Co. (pdf), — F.3d —-, 2013 WL 1809760 (5th Cir. Apr. 30, 2013).

The Fifth Circuit acknowledged that when the Supreme Court adopted the fraud-on-the-market presumption of reliance in Basic, it made the presumption rebuttable. The Fifth Circuit likewise recognized that establishing that a misrepresentation had no price impact would rebut the presumption of reliance by severing the link between the alleged misrepresentation and the price paid by the plaintiffs. The Fifth Circuit further noted that, even though Halliburton offered its price-impact evidence only for rebuttal purposes, such evidence also could be probative on the market-efficiency, public-statement, and materiality elements of the fraud-on-the-market presumption.

Despite this settled law, the Fifth Circuit understood Amgen to make questions about price impact off limits at the class-certification stage. The Supreme Court held in Amgen that immateriality is not a proper ground for refusing to presume reliance at the class-certification stage because it turns on objective evidence common to the class and is an element of securities fraud. As a result, the Court reasoned, a lack of materiality would lead to judgment for the defendant rather than individual inquiries that would defeat class certification.

The Fifth Circuit concluded that price impact should be treated like materiality. Proof of price impact is common class-wide evidence, in the court’s view. And, even though price impact itself is not an element of a securities-fraud claim, the court ruled that proof that there was no price impact would mean that a plaintiff could not establish loss causation—which is an element of securities fraud. Thus, a victory for Halliburton on price impact, the court explained, “will not result in the possibility of individual claims continuing.” As the Fifth Circuit understood Amgen, those conclusions meant that “Halliburton’s price impact evidence does not bear on the question of common issue predominance, and is thus appropriately considered only on the merits after the class has been certified.”

The Fifth Circuit’s ruling represents an unfortunate misreading of the Supreme Court’s troubling Amgen decision. Under these decisions, the limited fraud-on-the-market inquiry at the class-certification stage is a slender reed on which to presume reliance for class certification purposes and thereby allow sprawling and coercive securities-fraud class actions. From my perspective, this is all the more reason to reconsider whether the economic and other premises of the fraud-on-the-market presumption of reliance are faulty, as four Justices suggested in Amgen.