Class Actions In the U.S. European Capital Markets Law Conference Bucerius Law School Howard Rosenblatt 6 March 2009 Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. Copyright 2009 Latham & Watkins. All Rights Reserved.
Introduction to Class Actions Two Main Components (1) Representative One or more plaintiffs who serve as class representatives and who represent the interests of all class members. (2) Aggregate Claims of a number of individuals heard together in a single lawsuit. 2
Purposes of A Class Action Provides incentives to bring small claims that would otherwise be impracticable for individuals to bring. Prevents multiplicity of actions involving common questions. Reduces the risk of inconsistent judgments. Promotes judicial economy. Conserves the parties resources. 3
Class Action Disadvantages Extreme costs involved to manage class actions, especially those involving complex claims. Cases effectively brought by lawyers rather than real plaintiffs. Tends to drag on and may be difficult to settle given the nature of the number of parties and claims. If class is certified, the risks of going to trial can be too extreme. 4
Requirements for the Maintenance of Federal Class Actions (continued) Fed. R. Civ. P. 23(a) Rule 23(a)(1): Numerosity. The size of the class is so large that joinder is impracticable. Rule 23(a)(2): Commonality. There are questions of law or fact common to the class. Rule 23(a)(3): Typicality. The claims or defenses of the class representatives are typical of the claims or defenses of the class. Rule 23(a)(4): Adequacy. The representative parties will fairly and adequately protect the interests of the class. 5
Requirements for the Maintenance of Federal Class Actions (continued) Fed R. Civ. P. 23(b) Rule 23(b)(1): Designed to avoid prejudice to the defendant or absent class members if individual actions were filed. Rule 23(b)(1)(A): There is a risk that separate actions would result in inconsistent decisions and incompatible standards of conduct. Rule 23(b)(1)(B): There is a risk that separate actions would adversely affect absent class members or substantially impair their ability to protect their interests. 6
Requirements for the Maintenance of Federal Class Actions (continued) Fed. R. Civ. P. 23(b)(2) Opposing party has refused to act on grounds that apply generally to the class. Injunctive or declaratory relief would therefore be appropriate. 7
Requirements for the Maintenance of Federal Class Actions (continued) Fed. R. Civ. P. 23(b)(3) Most comprehensive section of Rule 23(b). Common questions of law or fact predominate over individual questions and a class action is the superior method for adjudication. 8
Requirements for the Maintenance of Federal Class Actions (continued) Fed. R. Civ. P. 23(b)(3) Considerations: Rule 23(b)(3)(A): The class members' interests in individually controlling the prosecution or defense of separate actions. Rule 23(b)(3)(B): The extent and nature of any relevant litigation of class members. Rule 23(b)(3)(C): The desirability of concentrating the litigation of the claims in the particular forum. Rule 23(b)(3)(D): The difficulties in managing a class action. 9
Differences With Rule 23(b)(3) Class Actions Rule 23(b)(3) class actions differ from Rule 23(b)(1) and Rule 23(b)(2) class actions in the following ways: (1) Notice of any class certification ruling to class members is mandatory. (2) Notice must be sent to each individual class member who can be identified through reasonable effort. (3) Absent class members have the right to exclude themselves (opt out) from the class and from the judgment. 10
Securities Class Actions Common Challenges Opposing motions for class certifications, particularly in securities actions, usually centers on the typicality and predominance requirements. Typicality - Representative s personal claim usually differs from the others class members based on: (1) The dates of purchase and sale of securities. (2) Transaction size. (3) Degree of reliance on misleading statements. Predominance - Reliance sometimes viewed as an individual issue. 11
Fed. R. Civ. P. 23(c): Class Certification Orders At an early practicable time, a court must determine whether to certify the action as a class action. Any order granting a motion for class certification must define the class and the class claims, issues, or defenses. It must also appoint class counsel. 12
The Class Action Fairness Act (CAFA) Expanded jurisdiction of federal courts to hear class actions in most cases where there is not complete diversity. Effect: Now only minimum diversity is required (i.e., at least one plaintiff is a citizen of a different state from that of any defendant). Also expanded jurisdiction of federal courts to actions where the combined amount in controversy is in excess of $5 million. Previously, each individual plaintiff s claim for damages had to exceed the jurisdictional minimum of $75,000. 13
CAFA (continued) Purposes: (1) Reduces forum-shopping by expanding jurisdiction to minimal diversity actions. (2) Increases ability of plaintiffs to bring class actions in federal court. Limitations: Does not apply to certain class actions, including those in which there are fewer than 100 members of the proposed class. 14
Impact of CAFA Increase In Number of Diversity Class Actions The Impact of the Class Action Fairness Act of 2005 on the Federal Courts: Third Interim Report, Federal Judicial Center (April 2007) The Impact of the Class Action Fairness Act of 2005 on the Federal Courts: Third Interim Report, Federal Judicial Center (April 2007) 15
Impact of CAFA Increase In Number of Diversity Class Actions (In Ten Districts With the Largest Number of Class Actions) The Impact of the Class Action Fairness Act of 2005 on the Federal Courts: Third Interim Report, Federal Judicial Center (April 2007) 16
Impact of CAFA Increase In Number of Diversity Class Actions (by Nature of Suit) The Impact of the Class Action Fairness Act of 2005 on the Federal Courts: Third Interim Report, Federal Judicial Center (April 2008) 17
State Class Actions Many states have adopted class action rules similar to the federal rules. Some states (such as California) adopt slightly different civil rules concerning class actions. Where class actions are litigated depends on the nature of the claims involved (state law claims versus federal question claims). Exception: A federal district court is the exclusive forum for securities fraud actions. 18
Coordination of Federal Class Actions for Pre-Trial Purposes Class actions, especially those involving antitrust or securities claims, may be filed in multiple forums nationwide. Judicial Panel on Multidistrict Litigation (JPML) can transfer related pending federal cases to a single forum for pre-trial proceedings. Single forum decides threshold issues, including class certification, and coordinates discovery. Effect: no longer necessary to travel throughout the country to various forums to litigate a number of class actions. 19
Federal Class Action Complaint Requirements Identification of the Parties Statement Relating to Subject Matter Jurisdiction Federal Question Diversity Complete diversity: (1) none of the class representative are from the same state as any of the defendants; and (2) any one class member s claim is at least $75,000. Minimal diversity (CAFA requirements) Statement Relating to Personal Jurisdiction Claims Must contain allegations relating to the grounds for maintaining a class action (Rules 23(a) and (b)). Local rules may contain additional requirements. Claim for Relief 20
Securities Class Actions Complaint Requirements - Private Securities Litigation Reform Act (PSLRA) PSLRA imposes additional qualifications on lead securities action plaintiffs. Encourages the appointment of institutional investors as lead plaintiffs (i.e., creates a presumption in favor of the shareholder with the largest financial interest). 21
Securities Class Actions Practical Effects of the PSLRA Heightens pleading requirements. The complaint must state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind, such as when and where the statement was made and by whom. (Tellabs, Inc. v. Makor Issues & Right, Ltd., 551 U.S. 308 (2007)). Investors cannot proceed with a securities class action unless they have facts that strongly suggest a deliberate fraud. Complaint must identify the statement(s) alleged to be misleading. Complaint must identify the reason why the statement is misleading. If pleading on information and belief, the complaint must state with particularity all facts on which that belief is formed. 22
Securities Class Actions Practical Effects of the PSLRA (continued) Each plaintiff seeking to serve as a class representative must sign a certificate indicating that, among other things, he has reviewed the complaint and is willing to serve as a class representative. Plaintiff must cause to be published a notice in a business publication advising members of the purported class within 20 days after the filing of the complaint. 23
Discovery Defined Discovery is part of the pre-trial litigation process during which each party requests information and documents from the other side in an attempt to ascertain pertinent facts relevant to their claims or defenses. Discovery devices generally include depositions, interrogatories, requests for admission, and document production requests. 24
Class Action Discovery Certification vs. Merits Discovery Discovery in large class actions, such as securities and antitrust class actions, often proceeds in phases: First phase: Limited to certification issues, including the number of class members, existence of common questions, the representative s ability to represent the class, etc. Second phase: Merits discovery. Deferred until it is certain a case will proceed as a class action. 25
Limited Discovery Before Certification Limits on discovery = a defendant s dream. Whether to limit discovery to phases, i.e., issues relating to certification vs. merits, is within the court s discretion. Phased discovery may prevent abuses that occur in merits discovery process (such as massive amounts of and time-consuming discovery). Limited discovery relating to certification issues ensures that merits discovery is deferred until it is certain the class action can proceed. 26
Discovery Against Absent Class Members Usually not permitted. Rule 33 (interrogatories) and Rule 34 (requests for production of documents) apply to parties only. Courts do not interpret absent class members as parties within the meaning of Rule 23. Thus, absent class members are not subject to discovery unless by court order. 27
Special Rules Relating to Discovery In Securities Class Actions PSLRA provides that all discovery must be stayed when a motion to dismiss a private securities fraud action is pending. Purposes: (1) Prevents plaintiffs from filing premature or baseless lawsuits. (2) Prevents discovery abuse, such as fishing expeditions and enormous costs. 28
Federal Class Action Settlements The court must approve class action settlements. The court must direct notice of settlement in a reasonable manner to all class members who would be bound (Rule 23(e)(1)). If the settlement proposal would bind class members, the court may approve it only after a fairness hearing (Rule 23(e)(2)). Any class member may object to a court-approved settlement proposal. 29
CAFA Class Action Settlement Requirements Notice must be served no later than 10 days after a proposed settlement is filed in court. State officials may interview or object to the settlement within 90 days. 30
Class Action Settlements Types of recovery (1) Monetary (2) Coupons (3) Injunctive or declaratory relief Cy pres distribution: When a balance of recovery remains after individual distribution to class members, the parties may agree, subject to court approval, to distribute the remaining funds for the indirect benefit of the class (such as to charitable organizations like legal aid organizations and pro bono organizations). 31
Class Actions Provide the Potential For Extremely Large Settlements! Particularly in antitrust class actions. Example: Folding carton price-fixing litigation yielded $200 million in class recoveries back in 1979! In re Folding Carton Antitrust Litigation, 84 F.R.D. 245 (N.D. Ill. 1979). 32
SUMMARY OF CLASS ACTIONS IN THE U.S. Governing Law Federal Class Actions: (1) Federal Rule of Civil Procedure 23. (2) CAFA. (3) Securities Class Actions: PSLRA. State Class Actions: State civil rules relating to class actions are similar to federal class action rules in many cases. 33
SUMMARY OF CLASS ACTIONS IN THE U.S. (continued) Specific pleading requirements (heightened pleading requirements under PSLRA for securities class actions). Phased discovery in many cases by court order (certification before merits discovery). Limitations on discovery due to the PSLRA (discovery stayed in securities class actions when motion to dismiss is filed). Class action settlements must be approved by the court. 34
Thank you. Howard Rosenblatt howard.rosenblatt@lw.com +32.2.788.6219 35