The Supreme Court this 2010-11 Term decided an unprecedented four cases dealing with class action issues, and in the process the Court clarified the standards for certification, commented on duplicative class litigation, and again expressed its strong distaste for class action arbitration. But collectively the cases do not represent a clean sweep for either side of the docket; two of the Court’s decisions clearly favor corporate defendants, and two favor plaintiffs. However, in perhaps the two most important the decisions ― Wal-Mart Stores v. Dukes and AT & T LLC v. Concepcion ― the Court sided with corporate defendants, but split 5-4 along conservative and liberal lines, with the liberals losing the day.
Viewing the cases jointly, the Court clearly has made it more difficult to seek class certification generally, but demurred when it had the choice to ratchet up the requirements for specialized Rule 10(b)(5) securities class actions. In so doing, the Court saved the “fraud on the market” presumption for another day, no doubt to plaintiffs’ great relief. On the other hand, the possibility of plaintiffs pursuing classwide relief through arbitration auspices now seems a something of a dead letter. And, in reversing appellate decisions in all four cases, the Court spread its criticisms equally among the Fifth, Eighth, and Ninth Circuits.
The Supreme Court’s Wal-Mart opinion focused on two main issues: (1) whether the Wal-Mart class satisfied the threshold Rule 23(a)(2) requirement for common questions of law or fact, and (2) whether the court properly certified the class under Rule 23(b)(2). All nine Justices joined, in Part III, to agree that the trial court had improperly certified the class under Rule 23(b)(2), which excludes class actions for damages. But the Justices split 5-4 concerning whether the class satisfied the threshold requirement for commonality. Justice Scalia wrote the majority opinion joined by four Justices; Justice Ginsburg wrote a dissent joined by Justices Breyer, Kagan, and Sotomayor, disapproving of Part II of the opinion relating to the standard for threshold Rule 23 (a)(2) commonality. The Court reversed the Ninth Circuit’s affirmation of the class certification.
All nine Justices, however, agreed that the Wal-Mart class was improperly certified under Rule 23(b)(2). Without resolving a prevailing split among the Circuit Courts concerning the proper standard for certifying a Rule 23(b)(2) class that combines injunctive and monetary relief, the Court simply held that a class action may not be certified “where (as here) the monetary relief is not incidental to the injunctive or declaratory relief.” In so doing, the Court followed the test for Rule 23(b)(2) class actions articulated in Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998). The Court, however, did not reach the broader question whether a Rule 23(b)(2) class applies only to requests for injunctive or declaratory relief and does not authorize class certification of monetary claims at all.
In conclusion, the Court rejected the Wal-Mart class action as a “novel project” that interpreted Rule 23 in such a fashion as to violate the Rules Enabling Act, 28 U.S.C. § 2072(b), which prohibits procedural rules from abridging, enlarging, or modifying any substantive right.
The Court’s AT & T Mobility decision follows closely on last Term’s classwide arbitration decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ___ (2010). In that case, the Court determined that where an arbitration agreement is silent on whether classwide arbitration may occur, the clause could not be interpreted to permit classwide arbitration.
In the AT & T Mobility arbitration case, in a 5-4 decision authored by Justice Scalia, the majority’s antipathy toward classwide arbitration has been extended to disallow classwide arbitration where state law would negate a class action waiver in an arbitration agreement. In reaching this conclusion, the Supreme Court held that California’s rule in Discovery Bank v. Superior Court, which largely invalidates class action waivers in arbitration agreements, was pre-empted by the Federal Arbitration Act (F.A.A.).
The majority opinion is highly critical of the Discovery Bank rule, which it views as interfering with arbitration in numerous undesirable ways. In addition, the Court noted that although the Discover Bank rule arguably was limited to adhesive contracts, in practice California courts had greatly expanded the doctrine: “The times in which consumer contracts were anything other than adhesive are long past.”
Much the Court’s opinion is devoted to explaining why the possibility of classwide arbitration interferes with the purpose of arbitration. The Court pointed out that shifting from a bilateral arbitration proceeding to classwide arbitration radically alters important structural matters, including absent class members that necessitate additional different procedures. The Court suggested that arbitrators generally are not familiar with dominant class certification requirements, including the protection of absent class members.
Unlike the Wal-Mart and AT & T cases, the Erica PJ Fund v. Halliburton decision clearly represents a victory for class action plaintiffs involved in securities litigation. In this case a unanimous Court rejected Halliburton’s suggestion to tighten a plaintiff’s pleading burden of proof at class certification, which would have required securities plaintiffs to provide additional proof in order to invoke and rely on the “fraud on the market presumption” in lieu of actual reliance. Just as corporate American must have breathed a sigh of relief in the Court’s Wal-Mart and AT & T decisions, so too must the plaintiffs’ securities’ class action bar have been relieved at the Court’s decision in EPJ Fund.
In a unanimous opinion authored by Justice Roberts (and the shortest of the four class action decisions), the Court answered the simple question whether, in a § 10(b) and Rule 10b-5 securities class action, a plaintiff must prove loss causation in order to obtain class certification with an unqualified “No.”
In so doing, the Court reaffirmed the continuing vitality of the Court’s creation of a rebuttable presumption of reliance based on the fraud-on-the-market theory in Basic Inc. v. Levinson. Thus, the Fifth Circuit’s ruling, that a plaintiff needed to prove loss causation, would prevent a plaintiff from invoking the rebuttable presumption of reliance. Such a rule contravenes Basic’s fundamental premise: that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his or her transaction.
In perhaps the most obscure of the four cases dealing with class action litigation, the Court in Smith v. Bayer Corp. essentially permitted a duplicative class action to proceed to class certification in a West Virginia state court, after a Minnesota federal court had denied class certification in an almost identical class action. Similar to the AT & T Mobility appeal, the Smith case involved considerations of federalism in federal-state class action litigation.
In another unanimous decision authored by Justice Kagan, the Court held that the Minnesota federal district court had exceeded its authority in issuing an injunction to restrain the class certification proceedings in the West Virginia state court. In so doing, the Court hewed to a very narrow application of the Anti-Injunction Act, concluding that the relitigation exception to Act did not apply to permit the Minnesota federal court to interfere with West Virginia state court proceedings.
In this instance, the Court not only narrowly construed the Anti-Injunction Act, but also relied heavily on maxims and precepts relating to the importance of comity between the federal and state court systems, and the appropriate deference and non-interference required by the Anti-Injunction Act. Thus, the Court reiterated that the Anti-Injunction Act admits of only specifically-defined exceptions, and that courts may not enlarge those exceptions by loose statutory construction. Construing the Act’s relitigation exception, the Court noted that this exception authorizes federal courts to issue an injunction against a parallel state proceeding only to prevent state litigation of a claim or issue “that previously was presented to and decided by the federal courts.” This inquiry, in turn, rests on well-recognized concepts of issue and claim preclusion.
Turning to the problem of issue preclusion, the Court indicated that at the outset the preclusive effect of any prior litigation may only be determined by a second court ― in this instance the West Virginia state court. Issue preclusion entails a two part inquiry: (1) the issue the federal court decided must be the same as the one presented in the state court, and (2) Smith must have been a party to the federal litigation or fit within an exception to the general rule against binding nonparties to a litigation. The Court held that the Anti-Injunction Act relitigation exception was inapplicable because the facts failed both tests for preclusion.
Linda S. Mullenix, Class Action Roundup: A Little Something for Everyone, 38 Preview of United States Supreme Court Cases 330 (August 6, 2011).