Judicial review of class certification applications - the compelling case for a merits-based gate-keeper analysis.

Author:Cohen, Roy Alan
Position:Conning the IADC Newsletters

This article originally appeared in the February 2009 IADC Class Actions and Multi-Party Litigation Committee Newsletter.

  1. Introduction

    In this time of economic crisis and challenge to corporate America, more than ever the defeat of class action certification applications is a critical and strategic imperative. While class action legislation has had some impact, the fact of the matter is that class action filings will test corporate legal departments and their defense lawyers over the next several years as plaintiffs' counsel look for new and innovative ways to aggregate claims. For over thirty years, certain dicta in the Supreme Court's decision in Eisen v. Carlisle & Jacquelin, (27) has served as a barrier to considering the substantive factual and legal merits at the class certification stage of the litigation. However, an increasing number of courts have recognized the importance of lifting the veil and examining the merits of the alleged claims during class certification briefing and hearings. This trend, and the policy considerations supporting it, is an essential and important development that brings the judicial gate-keeper function where it belongs in potential "bet-the-company" class action litigation.

  2. Setting the Class Certification Stage

    In Eisen, the plaintiff filed suit against several brokerage firms alleging violations of securities and antitrust laws. While plaintiff's potential damages amounted to approximately seventy dollars, he sought to serve as the class representative for millions of similarly situated individuals. After a long, protracted procedural fight, the Second Circuit denied class certification. A secondary issue was which party should bear the cost of providing notice to potential claimants.

    The Supreme Court's focus was on whether the plaintiff's claims satisfied the requirements of Rule 23, with the majority of its focus on the notice provisions. The district court had previously conducted a preliminary hearing into the merits and determined that the plaintiff was "more than likely" to prevail on the merits. As a result, the court apportioned ninety percent of the cost of providing notice to the defendants. It was this action of the district court that prompted the Supreme Court to state that "there is nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action." (28) The Court based its decision on the principle that the plaintiff should not receive the benefits of class certification until he satisfies the requirements of Rule 23.

    Since the plaintiff repeatedly stated that he would not bear the cost of providing notice under Rule, the Court did not actually need to reach a decision on the certification of the class. Instead, the Court remanded with instructions to dismiss the class as presently defined. Nothing in the Eisen decision actually related to the requirements of Rule 23 (a) or (b). Instead of reading Eisen to reject preliminary inquiries into the merits that are unrelated to the criteria of Rule 23, many courts read Eisen as standing for the proposition that all inquiries into the merits were off limits.

  3. Judicial Focus on the Right Approach

    Plaintiffs' counsel regularly argued that courts must accept the allegations as pled and certify the class based on the allegations as long as they met the Rule 23 criteria, and everything else could be resolved at a later time. The problems with this approach were obvious to everyone. The sheer costs associated with the class certification process would lead to settlements in even poor to borderline cases simply because it was cheaper to settle than litigate the case through the merits phase. This trend created much of the...

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