NON-FEDERAL QUESTION CLASS ACTIONS: RECENT DEVELOPMENTS AND STRATEGIES

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1 AMERICAN BAR ASSOCIATION: SECTION OF BUSINESS LAW COMMITTEE ON BUSINESS AND CORPORATE LITIGATION SUBCOMMITTEE ON CLASS AND DERIVATIVE ACTIONS SPRING MEETING 2005: NASHVILLE NON-FEDERAL QUESTION CLASS ACTIONS: RECENT DEVELOPMENTS AND STRATEGIES RENAISSANCE HOTEL, WEST BALLROOM THURSDAY, MARCH 31, :30 A.M. TO 10:30 A.M. Patrick T. Clendenen, Esq. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Program Chair Kevin M. McGinty, Esq. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Moderator Kathryn E. Barnett, Esq. Lieff, Cabraser, Heimann & Bernstein, LLP Speaker Joseph Ianno, Jr., Esq. Carlton Fields, P.A. Speaker Michael C. Flynn, Esq. Senior Vice President and Senior Counsel World Savings Speaker Marsha Rabiteau, Esq. Vice President and Assistant General Counsel The Hartford Financial Services Group Speaker

2 OUTLINE OF RECENT DEVELOPMENTS IN NON-FEDERAL QUESTION CLASS ACTIONS KEVIN M. MCGINTY 1/ MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. I. Congress and the Supreme Court are establishing new rules governing the exercise of federal court jurisdiction over non-federal question class actions. A. The rules for when litigants may have access to the federal courts for state law class actions are being standardized. 1. The Supreme Court will resolve a circuit split on the question of when existing laws permit the exercise of diversity jurisdiction over class actions. 2. Congress is poised to enact the Class Action Fairness Act of 2005, which will ensure federal court jurisdiction over the largest multi-state class actions. B. Existing precedent has created obstacles to the exercise of federal court jurisdiction in state law class actions. 1. Absent a well-pleaded question of federal law, federal court jurisdiction has hinged on satisfying the requirements for diversity jurisdiction under 28 U.S.C Before 1990, the exercise of diversity jurisdiction in a class action required that each class member have a claim in excess of the minimum statutory amount in controversy. a. A class action satisfies the diversity of citizenship requirement so long as all named plaintiffs are diverse from all named defendants, even if the proposed class, as certified, includes residents of a state in which defendant resides, is incorporated or has a principal place of business. See Supreme Tribe of Ben Hur v. Cauble, 255 U.S. 356 (1921). b. Paradoxically, the Supreme Court required strict adherence to the amount in controversy requirement of 1332, holding in Zahn v. International Paper Co., 414 U.S. 291, 301 (1973), that a federal court could not exercise jurisdiction over a non-federal question class action unless the individual claim of every member of 1/ Mr. McGinty is a Member in the Boston office of Mintz Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Mr. McGinty chairs the firm s Class Action Working Group of the Firm s Litigation Section. 2

3 the plaintiff class satisfied the minimum amount in controversy required under 28 U.S.C The 1990 adoption of the supplemental jurisdiction statute, 28 U.S.C. 1367, provided a basis for expanding jurisdiction over class actions. a. Section 1367 codified pendent or ancillary federal court jurisdiction over related state law claims or interested parties that were not otherwise independently subject to federal court jurisdiction. b. Section 1367 and its legislative history are silent as to any intention to alter the jurisdictional requisites for class actions. c. Nonetheless, the plain language of 1367, can be read to permit the exercise of federal jurisdiction over absent class members who fail to meet the amount in controversy requirement of 1332 but possess related claims, 2/ thereby overruling Zahn. 4. Section 1367 gave rise to a circuit split on the question of whether Congress had overruled Zahn. a. In Free v. Abbott Laboratories, Inc., 529 U.S. 333 (2000), an equally divided panel of the Supreme Court affirmed without opinion the decision of the Fifth Circuit in the case of In re Abbott Laboratories, 51 F.3d 524 (5th Cir. 1995). (1) The Fifth Circuit held that 1367 permitted removal to federal court of a state law class action in which, pursuant to Louisiana law, the named plaintiffs alone satisfied the amount in controversy requirement under / See 51 F.3d at 529. (2) Because split decisions of the Supreme Court do not constitute binding precedent, the Supreme Court s ruling in Abbott Laboratories left the fundamental question whether 1367 overruled Zahn unresolved. 2/ The text of 1367 states that federal courts have subject matter jurisdiction over state law claims: 28 U.S.C. 1367(a). 3/ that are so related to claims in the action within [the federal court s] original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties. The court concluded that, under Louisiana law, the plaintiffs claimed right to payment of attorneys fees inured to the benefit of the named plaintiffs, with the result that the claimed entitlement to fees yielded an amount in controversy in excess of the $50,000 limit then applicable under 28 U.S.C See id. at

4 b. In the wake of Abbott Laboratories a split developed among the federal circuits as to whether 1367 overruled Zahn. (1) Six circuits concluded that 1367 permits federal jurisdiction over nonfederal question class actions where fewer than all class members satisfy the 1332 amount in controversy requirement. 4/ (2) Three circuits have held that 1367 did not overrule Zahn, 5/ while a fourth has leaned in that direction in a case concerning non-class action claims of joint plaintiffs in a personal injury case. 6/ C. The Supreme Court has elected to resolve the split by deciding the standard for the exercise of diversity jurisdiction in non-federal question class actions. 1. In October 2004 the United States Supreme Court granted certiorari in Allapattah Svcs., Inc. v. Exxon Corp., 333 F.3d 1248 (11th Cir. 2003), petition for reh g en banc denied, 362 F.3d 739 (11th Cir. 2004), cert. granted sub nom. Exxon v. Allapattah Svcs., Inc., No (S. Ct. Oct. 12, 2004), in which the Eleventh Circuit held that 1367 overruled Zahn. 7/ 2. By its decision, the Supreme Court is poised to resolve the split that has grown in the years since the first time the Court considered the issue in Abbott Laboratories. 3. The adoption of the Class Action Fairness Act of 2005, which will permit federal jurisdiction over claims with an aggregate value in excess of $5,000,000 (see discussion below), will not moot this question. a. The Class Action Fairness Act only applies to actions commenced after its enactment and, therefore, will not apply to Allapattah and other pending cases. 4/ See Olden v. LaFarge Corp., 383 F.3d 495, (6th Cir. 2004); Allapattah Servs., Inc. v. Exxon Corp., 333 F.3d 1248, 1254 (11th Cir. 2003); Rosmer v. Pfizer, Inc., 263 F.3d 110, 117 (4th Cir. 2001); Gibson v. Chrysler Corp., 261 F.3d 927, 938 (9th Cir. 2001); Stromberg Metal Works, Inc. v. Press Mech., Inc., 77 F.3d 928, 931 (7th Cir. 1996); In re Abbott Labs., 51 F.3d at / See Trimble v. Asarco, Inc., 232 F.3d 946, (8th Cir. 2000); Meritcare, Inc. v. St. Paul Mercury Ins. Co., 166 F.3d 214, 221 (3d Cir. 1999); Leonhardt v. Western Sugar Co., 160 F.3d 631, 640 (10th Cir. 1998) 6/ See Ortega v. Star-Kist Foods, Inc., 370 F.3d 124 (1st Cir. 2004) (in a personal injury suit in which the injured plaintiff s claim satisfied the amount in controversy requirement, emotional distress claims of family members of injured plaintiff could not be heard in federal court under 1367 where such claims did not meet the $75,000 threshold). 7/ The Court also granted certiorari to review the First Circuit s decision in Ortega. See Ortega v. Star-Kist Foods, Inc., No , Order granting writ of certiorari (S. Ct. Oct. 12, 2004). 4

5 b. Cases that fall below the $5,000,000 aggregate liability threshold in the Class Action Fairness Act will continue to raise the same questions that are raised by Allapattah and the other 1367 cases. 4. Argument cases on the 1367 cases will be heard on the March 1, 2005, with a decision likely to be rendered within the two months following the argument. D. The Class Action Fairness Act of The Class Action Fairness Act will enact jurisdictional and substantive reforms for class action litigation in federal courts. 2. Jurisdictional reforms: a. The act will amend 28 U.S.C to permit the exercise of federal court jurisdiction over state law class actions and mass actions 8/ where at least one defendant is diverse from at least one plaintiff and the aggregate amount in controversy for all would-be class members is at least $5,000,000. See id., 4 (inserting amendments to 28 U.S.C. 1332). b. There will be exceptions for cases in which classes consist primarily of residents of a single state. (1) A court may, in the interests of justice looking at the totality of the circumstances, decline to exercise jurisdiction if between one-third and twothirds of the class members and the primary defendants are citizens of the state in which the action was originally filed, based on consideration of: (a) Whether the claims asserted involve matters of national or interstate interest; (b) Whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States; (c) Whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction; (d) Whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; (e) Whether the number of citizens of the state in which the action was originally filed in all proposed plaintiff classes in the aggregate is 8/ A mass action is an action brought in a jurisdiction that does not permit class adjudication in which the claims of dozens or even hundreds of plaintiffs concerning a single occurrence or set of occurrences are joined together in a single lawsuit. 5

6 substantially larger than the number of citizens from any other state, and the citizenship of the other members of the proposed class is dispersed among a substantial number of states; and (f) Whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed. (2) Courts must decline to exercise jurisdiction in cases in which at least 2/3 of the class members are citizens of the state in which the action was filed and: (a) At least one defendant is a citizen of that state, the case concerns state law and no other action has been filed in the previous three years; or (b) The primary defendants are citizens of the state in which the action was filed. c. Claims concerning securities and corporate governance are excluded from the jurisdiction conferred under the amended d. Any defendant may remove a class action, even if the defendant is a resident of the state in which the action is filed, without the consent of any other defendant. See id., 5 (inserting 28 U.S.C. 1453). 3. Substantive reforms: a. Restrictions on coupon settlements. See id., 3(a) (inserting 28 U.S.C. 1712): (1) A coupon settlements is one in which relief is paid to class members in the form of coupons rather than cash. (2) Plaintiffs attorneys fees will be limited whenever there is a coupon settlement. (a) Contingent fee recoveries by class counsel in a coupon settlement will be limited to a percentage of the value of the coupons redeemed. (b) If fees are not contingent fees, the fee recovery will be based on hours reasonably expended on the matter. (3) Courts may, in their discretion, receive expert testimony on the value of coupons and other relief distributed to the class. (4) Unclaimed coupons may, at the discretion of the court, be redirected to a charity, but still may not be used to calculate attorneys fees. (5) Potential impact: 6

7 (a) These provisions are meant to discourage the use of coupon settlements in circumstances calculated to yield a low level of redemption by class members, such that class members would receive little or no benefit. (b) This provision may frustrate attempts by defendants to reduce settlement and litigation costs by buying off class counsel with a settlement that costs little in the way of actual class recovery yet generates a significant fee award for the plaintiffs attorneys. b. Courts may not award larger settlements to members of the class based on their geographic proximity to the court. See id., 3(a) (inserting 28 U.S.C. 1714). c. Any settlement that would require payments by plaintiff class members that would result in a net loss to class members requires an express finding that nonmonetary benefits substantially outweigh the loss. See id., 3(a) (inserting 28 U.S.C. 1715). (1) This responds to an unusual but well publicized case, Hoffman v. BancBoston Mortgage Corp., No. CV (Ala. Cir. Ct. Jan. 24, 1994), in which plaintiffs counsel obtained a settlement refunding to class members allegedly excessive amounts held in mortgage escrow accounts. (a) The court deemed the economic benefit to the class from the settlement to be the amount of the decrease in the mortgage escrow and awarded attorneys fees to class counsel equal to a percentage of that amount. (b) The attorneys fees were paid through deductions from the class members escrow accounts before the refund of the allegedly excessive escrow amounts. (c) The fee deductions exceeded the benefit to class members. (i) (ii) The actual benefit to the class was only the time value of the money held by the mortgage lender because 100% of the excess cushion would have been returned to class members at the time their mortgages were repaid. The economic value of that amount was less than the amount of fees deducted. (2) In the unlikely event that fees recovered directly from class members exceed the value of the class s recoveries, the proposed 1712 would require additional scrutiny of the settlement. d. Notification of government officials, see id., 3(a) (inserting 28 U.S.C. 1713). 7

8 (1) Within ten days of filing any class action settlement in federal court, defendants must provide notice of the proposed settlement to certain state and federal officials. (a) Notice must be sent to the Attorney General of the United States or, for banks, to the applicable federal or state banking regulator. (b) Notice must also be sent to any state official with primary responsibility for regulation or licensing of the defendant. (2) The notice must apprise the government officials of the following information: (a) The complaint; (b) The notice of any scheduled judicial hearing in the class action; (c) The proposed or final notification to class members; (d) The terms of the proposed settlement, together with any settlement agreement; (e) Any final judgment or notice of dismissal; (f) If feasible, the names of class members who reside in each state and the estimated proportionate share of the claims of such members to the entire settlement to that state s appropriate State official, or a reasonable estimate of the number of class members residing in each State and the estimated proportionate share of the claims of such members to the entire settlement; and (g) Any written judicial opinion relating to settlement or dismissal of the action. II. Other recent developments in the law governing jurisdiction over class actions. A. Standing And Mootness 1. A class action claim can become moot where the defendant has discontinued the challenged practice. See Smook v. Minnehaha County, 340 F. Supp. 2d 1037 (D.S.D. 2004). a. The plaintiff class of detainees at the county juvenile detention center protested the facility s standard practice of asking detainees to state their religious preference. b. At summary judgment, defendants established and plaintiffs conceded that the facility had discontinued the practice. 8

9 c. In the absence of actual damages, the discontinuance of the practice, and the absence of evidence that the practice would recur eliminated any actual controversy between the parties rendered the claim moot. Smook, 340 F. Supp. 2d at A defendant cannot moot the claims of a class merely by offering relief to the named plaintiff. See Weiss v. Regal Collections, 385 F.3d 337 (3d Cir. 2004). a. The Third Circuit addressed for the second time in three years the question whether a defendant in a Fair Debt Collection Practices Act ( FDCPA ) case can moot an action brought as a class action by making an offer of judgment under Fed. R. Civ. P. 68 that provides to the named plaintiff the maximum relief to which that individual is entitled under the statute. See Colbert v. Dymacol, Inc., 302 F.3d 155 (3d Cir. 2002) (holding that such an offer of judgment would moot the claims of the class), order vacated, 305 F.3d 1256 (3d Cir. 2002), appeal dismissed as improvidently granted, 344 F.3d 334 (3d Cir. 2003). b. In Weiss, the panel held that application of Rule 68 is strained when an offer of judgment is made to a class representative. Id. at 344. c. Allowing defendants to pick off a representative plaintiff with an offer of judgment less than two months after the complaint is filed may undercut the viability of the class action procedure, and frustrate the objectives of this procedural mechanism for aggregating small claims, like those brought under the FDCPA. Id. d. Accordingly, the court concluded that the Rule 68 offer would not moot any class claims and that the named plaintiff could seek certification of a plaintiff class that would relate back to the circumstances as they existed upon the filing of the complaint. See id. at B. Aggregation And Diversity Jurisdiction. 1. See discussion above concerning the Supreme Court grant of certiorari in Exxon v. Allapattah Servs, Inc., No , and Ortega v. Star-Kist Foods, Inc., No In Olden v. LaFarge Corp., 383 F.3d 495 (6th Cir. 2004), the Sixth Circuit became the ninth of the thirteen federal Courts of Appeals to rule on the issue. The Sixth Circuit joined the majority of circuits in holding that 1367 did overrule Zahn v. International Paper Co., 414 U.S. 291, 301 (1973) and, therefore, permitted a plaintiff class to aggregate its claims to satisfy the minimum amount in controversy. See 383 F.3d at

10 III. 3. Federal trial courts have to satisfy themselves that the relevant claims, whether aggregated or standing alone, satisfy the minimum amount in controversy under See Samuel-Bassett v. Kia Motors Am., Inc., 357 F.3d 392 (3d Cir. 2004). a. Because defects in subject matter jurisdiction are not waivable, a court may raise and address the amount in controversy on appeal, even if that issue is not raised by any of the parties. b. In Samuel-Basset, the Third Circuit, however, raised sua sponte the question whether removal under 1332 had been proper in the first place and directed the parties to brief the issue on appeal. c. Finding that the trial court had engaged in insufficient fact finding on the question whether the named plaintiff satisfied the jurisdictional minimum, the court vacated the class certification order and remanded to the trial court for finding of further facts and a determination of the propriety of subject matter jurisdiction under See Samuel-Bassett, 357 F.3d at 403. C. Supplemental Jurisdiction And Permissive Counterclaims 1. In Jones v. Ford Motor Credit Co., 358 F.3d 205 (2d Cir. 2004), Second Circuit held that 1367 permits the trial court, in its discretion, exercise of supplemental jurisdiction over permissive counterclaims. 2. The court further held that the decision to exercise such discretion would depend on the outcome of class certification and, therefore, could not be addressed until after that issue had been resolved. See Jones, 358 F.3d at Class-Based Arbitration. A. Arbitration after Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003). 1. The United States Supreme Court concluded that, in the absence of an express contractual provision permitting arbitration of disputes as a class, the arbitrator is empowered to resolve the question whether arbitration as a class action is appropriate. Id. at Not surprisingly, this ruling spawned numerous state and federal court decisions addressing the contours of parties contractual right to pursue class arbitration. B. Enforcement of clauses forbidding class arbitration. 1. A contractual prohibition on collective labor arbitration was unconscionable under federal and Texas law. See Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 301 (5th Cir. 2004). 10

11 IV. 2. Because federal and state law encourages arbitration, courts will not invalidate arbitration clause that forbids arbitration as a class action. See Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159, (5th Cir. 2004). C. The effect of silence in an arbitration agreement as to the availability of class action arbitration. 1. Silence in an arbitration agreement as to the availability of collective arbitration is no longer a ground for finding such a clause unconscionable. See Bess v. DirecTV, Inc., 351 Ill. App. 3d 1148, 815 N.E.2d 455 (2004). 2. Absent prohibitory language in the arbitration agreement, the arbitrator has the authority to decide whether a class should be certified. See In re Wood, 140 S.W.3d 367, (Tex. 2004). The Class Certification Decision. A. Merits Analysis As Element Of Class Certification Decision. 1. The failure of the district court to make inquiry beyond the pleadings at the class certification stage may render a decision to certify a class defective. In Gariety v. Grant Thornton, LLP, 368 F.3d 356, 361, 365 (4th Cir. 2004). 2. In cases alleging patterns or practices of discrimination, courts have consistently looked beyond the pleadings to make class certification determinations, and appropriately did so where statistical evidence outside pleadings was relevant to the certification decision. See Cooper v. Southern Co., 390 F.3d 695 (11th Cir. 2004); see also Bacon v. Honda of Am. Mfg., Inc., 370 F.3d 565 (6th Cir. 2004) (determining at certification stage that plaintiffs failed to produce enough evidence to show commonality and could not establish subjective decision-making processes). 3. See In re Initial Public Offering Sec. Litig., 2004 WL at *18 (S.D.N.Y. Oct. 13, 2004) (courts have a duty to take evidence on the question whether Rule 23 is satisfied and that it would be error to presume that plaintiffs allegations are true. ). B. Class Definition 1. Where an ambiguity in the class definition makes it difficult to ascertain the membership in the class by objective criteria, the proper judicial response is to modify the class definition to cure the ambiguity, not to refuse to certify an otherwise appropriate class. Chiang v. Veneman, 385 F.3d 256, 268 (3d Cir. 2004). 2. Perfect ascertainability of the membership of the class is not required at the class certification stage. See In re Initial Public Offering Sec. Litig., 2004 WL at *25 - *28 (S.D.N.Y. Oct. 13, 2004) (rejecting argument that the classes were not 11

12 sufficiently ascertainable from objective criteria insofar as the classes would have to be defined to exclude purchasers in initial public offerings who were privy to the scheme to defraud; the court concluded that and that investors with knowledge of the fraud who could be stricken from the class in subsequent proceedings) C. Rule 23(a) Requirements 1. Numerosity: a. Where a party argues that the size of a proposed settlement class is not too large to impede class administration of a settlement class, the party is estopped from arguing the contrary in proceedings in the same case directed toward certification of a class for trial. See Carnegie v. Household Int l, Inc., 376 F.3d 656, (7th Cir. 2004). b. The numerosity requirement is relaxed for injunctive claims, and plaintiffs may rely on the reasonable inference future claimants are sufficiently numerous that joinder is otherwise impracticable. See Sueoka v. United States, 101 Fed. Appx. 649, 653, 2004 WL (9th Cir. 2004). 2. Commonality. a. The Rule 23(a) commonality requirement imposes on the party seeking certification the minimal burden to show the existence of issues common to all class members. b. It is not as demanding a burden as that under Rule 23(b)(3), which requires a showing that common issues not only exist, but also predominate. c. Accordingly, a court cannot treat the satisfaction of Rule 23(a)(2) as sufficient grounds to find that common issues predominate for purposes of Rule 23(b)(3). See Robinson v. Texas Auto. Dealers Assoc., 387 F.3d 416, 421 (5th Cir. 2004). 3. Adequacy. a. A class representative in a securities class action is not inadequate simply because of his or her lack of familiarity with the facts concerning the alleged fraud. See Gariety v. Grant Thornton, LLP, 368 F.3d 356, (4th Cir. 2004). b. Representatives of a proposed settlement class that purports to compromise claims that are already the subject of a certified trial class in a separate action can be challenged on adequacy grounds where they have failed to present evidence that the proposed settlement reasonably compromises the claims that are the subject of adversary litigation in the previously certified class action. See Smith v. Sprint Communications Co., L.P., 387 F.3d 612, (7th Cir. 2004). 12

13 4. Typicality. a. Class representatives in an action alleging discriminatory failure to promote African American employees do not satisfy the typicality requirement of Rule 23(a) where the two representatives were not eligible for promotions based on their personal choices (like whether to apply for promotions or to move laterally) and objective criteria of promotion in their department. See Bacon v. Honda of Am. Mfg., Inc., 370 F.3d 565, (6th Cir. 2004). b. Where class representatives seek certification of a multi-state class asserting state law claims, the trial court should analyze the impact of the laws of the multiple jurisdictions and the amenability of such laws to the claims asserted before concluding that the class representatives claims are typical of those of class members residing in other states. See State of West Virginia v. The Honorable John T. Madden, -- S.E.2d --, No , 2004 WL (W.Va. December 2, 2004) (Publication page references are not available for this document). D. Requirements For Non Opt-Out Or Mandatory Classes. 1. Federal Rule 23(b)(1) -- Limited Fund Classes and Classes To Avoid Inconsistent Adjudications. a. A class action against the federal government seeking disgorgement of interest and return of improper expense deductions on currency and cash cost bonds was not an action for money damages and, therefore, was maintainable under Rule 23(b)(1)(A). See Sueoka v. United States, 2004 WL at *4 (9th Cir. May 5, 2004). b. The unusual question whether a trial court had appropriately certified a mandatory defendant class under Rule 23(b)(1) was presented to the Tenth Circuit in In re Integra Realty Res., Inc., 354 F.3d 1246 (10th Cir. 2004). There, the Court of Appeals ruled that Rule 23(b)(1)(B) permitted certification of the mandatory defendant class because proceeding individually against the defendants would result in a dispositive determination in the very first case brought See id. at The Tenth Circuit rejected the argument that due process required that defendants have the right to opt out of the defendant class because of the lack of personal jurisdiction over absent defendant class members. Although the Supreme Court has held that notice and the right to opt out are the minimum due process requirements to bind plaintiff class members residing outside of the forum state to state law class actions seeking money damages, see Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), the Tenth Circuit concluded that Shutts would not 13

14 bar a mandatory class in a federal action seeking primarily equitable relief. See Integra, 354 F.3d at Federal Rule 23(b)(2) -- Classes Seeking Injunctive Relief. a. In a class seeking mixed monetary and equitable relief, it was appropriate to certify the class under Rule 23(b)(2) and to permit notice and opt out in order to ameliorate potential prejudice to class members with substantial claims for monetary relief. See In re Monumental Life Ins. Co., 365 F.3d 408, (5th Cir. 2004). b. Manageability concerns are proper elements to consider when certifying a Rule 23(b)(2) class. See Shook v. El Paso County, 386 F.3d 963, (10th Cir. 2004). c. A request for monetary damages in an employment discrimination action made certification of a class under Rule 23(b)(2) inappropriate. See Cooper v. Southern Co., 390 F.3d 695, 720 (11th Cir. 2004). E. Federal Rule 23(b)(3) -- Classes Seeking Money Damages. 1. Commonality, Predominance and Superiority Generally. a. Where evidence of individual negotiations would be required to resolve a material in a case, such individualized issues will predominate and preclude class certification. See Robinson v. Texas Auto. Dealers Assoc., 387 F.3d 416, (5th Cir. 2004). b. The predominance requirement of Rule 23(b)(3) was not met where individualized proof would be required to establish the amount of damages as to each class member and whether each class member could take advantage of the fraudulent concealment doctrine to extend the limitations period. See Piggly Wiggly Clarksville, Inc. v. Interstate Brands Corp., 100 Fed. Appx. 296, 297, , 2004 WL (5th Cir. 2004). c. In class action alleging a scheme to defraud patrons of gambling casinos by the advancement of poker and video slot machines, individual issues of reliance on the purported fraud precluded class certification. See Poulos v. Caesar s World, Inc., 379 F.3d 654, (9th Cir. 2004). 2. Certification of Contract Claims a. Individualized questions of fact predominated for class asserting claims arising from physicians contracts with managed care organizations due to the absence of a single form contract and the need to prove the services provided under the 14

15 contracts and, more significantly, the need to adduce into evidence each and every request for reimbursement submitted, the amount received, the amount deserved, and the insufficiency of the HMOs reasons for denying payment. See Klay v. Humana, Inc., 382 F.3d 1241, V. Settlement of Class Actions. A. Settlement Classes After Amchem And Ortiz 1. In Amchem Prod. Inc. v. Windsor, 521 U.S. 591, 117 S. Ct (1997) and Ortiz v. Fibreboard Corp., 527 U.S. 815, 119 S. Ct (1999), the United States Supreme Court rejected two attempts to certify settlement classes disposing of asbestos liability claims due to the failure of those cases to satisfy the class certification requirements of Rule 23. a. In Amchem, the Supreme Court vacated the proposed global asbestos liability settlement because the absent class members were not adequately represented due to conflicts among various subclasses in the settlement and because the court below failed adequately to consider each of the prerequisites for certification under Rule 23(b)(3). Amchem, 521 U.S. at , 117 S. Ct. at b. In Ortiz, the Court vacated certification of a limited-fund settlement class under Rule 23(b)(1)(B), because the limited fund was the result of negotiations conducted during the course of the litigation and not on any finite limitations on responsible parties ability to pay for the settlement. Id., 527 U.S. at , 119 S. Ct. at Since the decisions in Amchem and Ortiz, federal and state courts have applied closer scrutiny to the certification of classes for settlement purposes. B. Recent decisions concerning propriety of proposed class settlements. 1. Evaluation of the fairness of a settlement under Rule 23(e) required the court to consider five separate factors: The relative strengths of the plaintiffs case in comparison to the proposed settlement; Class counsel s recommendation, taking into account the adequacy of representation; The reaction of the class members, taking into account adequacy of notice; Fairness to the whole class; and the ability of the defendants to withstand greater judgment, taking into account whether the defendant is a private or public entity. See Berkley v. United States, 59 Fed. Cl. 675, (2004). 15

16 2. Where liability had already been established in prior statewide class action, the trial had improperly approved settlement in favor of a proposed nationwide class because the court had failed to conduct a rigorous analysis on the merits that took into account the liability established in the prior case. See Smith v. Sprint Communications Co., L.P., 387 F.3d 612, (7th Cir. 2004). 3. A trial court properly modified the settlement of a national diet drugs class action to permit class members with rights to pursue individual tort claims to opt out at any subsequent point in time at which the settlement fund becomes insolvent. See In re Diet Drugs (Phentermine/Fenfluramine/Dexfenfluramine) Prods. Liab. Litig., 385 F.3d 386, (3d Cir. 2004). C. Enforcement Of Settlement Terms And Notice 1. A settlement is not invalid due to the failure to establish that all members of the class have received actual notice of the settlement because notice satisfies due process when it is reasonably calculated, under all circumstances, to apprize interested parties of the pendency of the action and afford them an opportunity to present their objections. See In re Integra Realty Res., Inc., 354 F.3d 1246, 1260 (10th Cir. 2004). 2. In a proceeding concerning modification of settlement agreement, parties could not challenge the adequacy of the disclosure of the settlement terms as set forth in the original notice of settlement. See In re Diet Drugs (Phentermine/Fenfluramine/ Dexfenfluramine) Prods. Liab. Litig., 385 F.3d 386, (3d Cir. 2004). D. Cy Pres And Coupon Settlements. 1. Cy pres settlements. a. Where it is difficult or impossible to deliver disgorged proceeds of a defendant s alleged wrongdoing to those who have been affected by the defendant s conduct, courts have borrowed the concept of cy pres from the law of trusts. (1) The cy pres doctrine permits a court to redirect the proceeds of a trust to a new purpose where the original purpose specified by the grantor of the trust can no longer be achieved. (2) In class action law, cy pres settlements direct amounts paid by defendants for the benefit of class members who would be difficult or expensive to locate to some charitable purpose that is reasonably related to the rights that the class action sought to vindicate. b. Recent cy pres decisions. 16

17 (1) A cy pres settlement was improper where the proposed settlement related to the allegedly wrongful conduct directed toward a minority of the class, while no recovery whatsoever was provided with respect to the claims of the majority of the class members, whose claims would be extinguished without providing for any payment or disgorgement by the defendant. See Mirfasishi v. Fleet Mortgage Corp., 356 F.3d 781, (7th Cir. 2004). (2) In a lawsuit seeking recovery for various classes of victims of the Holocaust and their survivors, the court rejected requests for cy pres distribution of unclaimed funds for use in educational grants, stating that a better use of the funds would be to track down individuals who were entitled to restitutionary payments. In re Holocaust Victim Assets Litig., 311 F. Supp. 2d 407, Coupon settlements. a. See discussion above concerning coupon settlement provisions of the Class Action Fairness Act. 17

18 View From the Plaintiffs Side Strategies in Case, Plaintiff and Forum Selection Kathryn E. Barnett Lieff, Cabraser, Heimann & Bernstein, LLP 3319 West End Avenue, Suite 600 Nashville, TN (615) I. The Basics: Fed. R. Civ. P. 23(a) One or more members of a class may sue or be sued as representative parties on behalf of all only if: (1) the class is so numerous the joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, (4) the representative parties will fairly and adequately protect the interest of the class. Federal Rule of Civil Procedure 23(a) A. Numerosity No strict numerical test In re American Medical Systems, Inc., 75 F.3d 1069, 1079 (6th Cir. 1996) Senter v. General Motors Corp., 532 F.2d 511, 522 (6th Cir.) cert denied 429 U.S. 870 (1976) Generally less than 21 inadequate, more than 40 adequate Cox v. American Cast Iron Pipe Co., 784 F.2d 1546, 1553 (11th Cir.) cert denied 479 U.S. 883 (1986) Generally 25 is a benchmark Wright, Miller 7 Kane, Federal Practice and Procedure: Civil 2d 1762 at But classes have been certified with as few as 18 Cypress v. Newport News General & Nonsectarian Hospital Ass n, 375 F.2d 4th Cir. 1967) B. Commonality Key: this is qualitative, not quantitative In re American Medical Systems, Inc., 75 F.3d 1069, 1079 (6th Cir. 1996) Baby Neal for and by Kanter v. Casey, 43 F.3d 48, 56 (3rd Cir. 1994) Jenkins v. Raymark Industries, 782 F.2d 468, 472 (5th Cir.) 18

19 C. Typicality Tends to merge with commonality, Sufficient relationship between the injury to the representative plaintiff and the conduct impacting the class, making class treatment economical General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157, n.13 (1982) In re American Medical Systems, Inc., 75 F.3d 1069, 1079 (6th Cir. 1996) D. Fair and adequate representation Named representative common interests with the unnamed class members No antagonistic interests Qualified counsel In re American Medical Systems, Inc., 75 F.3d 1069, 1083 (6th Cir. 1996) Senter v. General Motors Corp., 532 F.2d 511, 525 (6th Cir.) cert denied 429 U.S. 870 (1976) II. The Basics: Fed. R. Civ. P. 23(b) 23(b)(1) the prosecution of separate actions by or against individual members of class would create a risk of (a) inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class (b) adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or would substantially impair or impede their ability to protect their interests the 23(b)(2) Or, the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole, (must seek predominantly injunctive/declaratory relief non-opt out class) 23(b)(3) questions of law or fact common to the class members predominate over any questions affecting only individual members, and a class action is superior to other available methods for the fair and efficient adjudication of the controversy Superiority: The interest of members of the class in individually controlling the prosecution or defense of separate actions, The extent a nature of any litigation concerning the controversy already commenced by or against members of the class, 19

20 The desirability or undesirability of concentrating the litigation of the claims in the particular forum, and The difficulties likely to be encountered in the management of a class action III. Case Selection (how do I know it when I see it?) A. Numerosity If it is a great class case, but only has 35 members, the juice may not be worth the squeeze Larger individual damages, smaller the class can be to justify investment For instance, if you are interested in particular pharmaceutical: how big is market share, how many people take it, over what period of time has it been on market, what percentage of consumers likely to have adverse event Or, if looking at brake defect: how many cars are potentially impacted? how long has defective brake been installed? how many are likely still on the road? what is percentage of failure? Sources of information: Website of defendant Governmental agencies, like the NHSTA, FDA, insurance commissioner Newspaper and professional periodicals Dunn & Bradstreet, SEC and other public filings, Industry experts B. Ascertainability: Need to be able to identify the members by public information or the defendants records Think: If I can get a class certified, how would I propose to give notice to class members? C. Common factual issues Defendant treating people the same Same contractual provisions Same product, negative side-effect or risk Some other uniform practice 20

21 Predatory lending, consumer fraud Packing : In the course of financing or refinancing, adding additional products, insurance Flipping : Refinancing at terms that are worse and ultimately strip the property of equity Abusive Credit card practices Late posting of payments Setting unreasonable dates, times for payment deadlines Add on products without express consent, free trial period Balance transfer offers: bait and switch no interest Sources of information: Suspected defect: check ATLA Exchange database for similar suits, problems and ATLA list serves Bankruptcy records NHTSA/FDA records of incidents Professional periodicals, reports, studies, AG s office Court filings, legal periodicals for individual cases on same issue D. Common issues of law For multi-state or national classes, NEED: Federal statutes Common law claims that are universal, such as unjust enrichment Breach of uniform contractual provisions Simple, straightforward negligence *For state wide only class, this is much less problematic Examples: compare: violation of federal statutes regarding labeling of pharmaceuticals vs. Unjust enrichment in money paid for pharmaceutical vs. reliance of consumers on marketing materials, representations about product benefits E. What every judge fears: Manageability Think of how you would prove your case in a class trial, and how handle calculation of damages. The defendants will always argue that this is just too much for the Court s limited resources 21

22 F. The Right Plaintiff Someone who has suffered what everyone else in the class has suffered Who does not have individual issues Someone who can make a good class representative Stable No prior criminal history No mental illness No unique elements to claim IV. PITFALLS: What to Avoid A. Insolvent defendant How do you find out? GOOD PARALEGAL Company website Newspapers, articles Can do through Lexis or Westlaw Dunn & Bradstreet, EDGAR database with SEC, Better Business Bureau, Secretary of State B. Individual issues that may predominate Reliance Misrepresentation Fraud Emotional distress damages Causation, predisposing medical conditions C. Other suits already filed Case Stream, PACER, but can only search by court Newspapers Plaintiffs lawyers web sites V. You Have Your Case and Your Plaintiffs Where to File? Every court is different need local lawyer to help in decisionmaking Don t assume State Court is a panacea Find and evaluate location of each defendant and your best plaintiffs Carefully review forum substantive law and choice of law jurisprudence Consider likely jury pool -relationship if any with defendants -preconceptions about defendants 22

23 -level of income, education vs. those in class VI. New Legislation: Federal Jurisdiction got Interstate Class Actions (2) The district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs, and is a class action in which (A) any member of a class of plaintiffs is a citizen of a State different from any defendant; (3) A district court may, in the interests of justice and looking at the totality of the circumstances, decline to exercise jurisdiction under paragraph (2) over a class action in which greater than one-third but less than two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the State in which the action was originally filed based on consideration of-- (A) whether the claims asserted involve matters of national or interstate interest; (B) whether the claims asserted will be governed by laws of the State in which the action was originally filed or by the laws of other States; (C) whether the class action has been pleaded in a manner that seeks to avoid Federal jurisdiction; (D) whether the action was brought in a forum with a distinct nexus with the class members, the alleged harm, or the defendants; (E) whether the number of citizens of the State in which the action was originally filed in all proposed plaintiff classes in the aggregate is substantially larger than the number of citizens from any other State, and the citizenship of the other members of the proposed class is dispersed among a substantial number of States; and (F) whether, during the 3-year period preceding the filing of that class action, 1 or more other class actions asserting the same or similar claims on behalf of the same or other persons have been filed. (4) A district court shall decline to exercise jurisdiction under paragraph (2)-- (A)(i) over a class action in which-- (I) greater than two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed; (II) at least 1 defendant is a defendant-- 23

24 (aa) from whom significant relief is sought by members of the plaintiff class; (bb) whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class; and (cc) who is a citizen of the State in which the action was originally filed; and (III) principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed; and (ii) during the 3-year period preceding the filing of that class action, no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons; or (B) two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed. (5) Paragraphs (2) through (4) shall not apply to any class action in which-- (A) the primary defendants are States, State officials, or other governmental entities against whom the district court may be foreclosed from ordering relief; or (B) the number of members of all proposed plaintiff classes in the aggregate is less than 100. (6) In any class action, the claims of the individual class members shall be aggregated to determine whether the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs. (9) Paragraph (2) shall not apply to any class action that solely involves a claim-- (A) concerning a covered security as defined under 16(f)(3) of the Securities Act of 1933 (15 U.S.C. 78p(f)(3)) and section 28(f)(5)(E) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(f)(5)(E)); (B) that relates to the internal affairs or governance of a corporation or other form of business enterprise and that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized; or (C) that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b(a)(1)) and the regulations issued thereunder). 24

25 Removal of Non-Federal-Question Class Actions Under Diversity and Supplemental Jurisdiction By Joseph Ianno and Mac McCoy CARLTON FIELDS, P.A. INTRODUCTION The United States Supreme Court s 1973 decision in Zahn v. International Paper Co., 414 U.S. 291, 9 and Congress subsequent enactment in 1990 of the federal supplemental jurisdiction statute, 28 U.S.C. 1367, 10 have sparked a nearly fifteen-year firestorm of debate among federal courts regarding the exercise of federal subject matter jurisdiction in non-federal-question class actions. Specifically, the issue has evolved into whether federal courts may properly exercise supplemental jurisdiction over the claims of putative class members who do not satisfy the amount-in-controversy requirement under 28 U.S.C. 1332(a) 11 where at least one named 9 In brief, the Supreme Court held in Zahn that [e]ach plaintiff in a rule 23(b)(3) class action must satisfy the jurisdictional amount, and any plaintiff who does not must be dismissed from the case one plaintiff may not ride in on another s coattails. 414 U.S. at 302 (quotation and citation to lower court omitted). 10 Section 1367 provides in relevant part: [I]n any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties. 28 U.S.C. 1367(a). The statute also contains exceptions to supplemental jurisdiction for certain types of proceedings, but class actions under Fed. R. Civ. P. 23 are not included within those exceptions. See id. at 1367(b). 11 Section, 1332 provides in relevant part: (Continued on next page) 25