Class Actions

• Publication year: 2016

Class Actions

Thomas M. Byrne

Stacey McGavin Mohr

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Class Actions

by Thomas M. Byrne^* and Stacey McGavin Mohr^**

The United States Court of Appeals for the Eleventh Circuit encountered some of the most controversial issues in class action law during 2015, including several that required the court to apply recent United States Supreme Court decisions or to choose sides on issues that have divided the circuit courts of appeal.¹

I. An Even Shadier Grove

Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co.,² an important Erie³ decision issued by a divided Supreme Court, set the stage for the Eleventh Circuit's decision in Lisk v. Lumber One Wood

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Preserving, LLC,⁴ probably the Eleventh Circuit's most significant decision in class action law during 2015. Shady Grove held that the New York class action statute's general prohibition on certification of a class in an action to recover statutorily imposed penalties⁵ does not supplant Rule 23 of the Federal Rules of Civil Procedure⁶ in federal district court.⁷ The Supreme Court could not agree, however, on the ultimate rationale for its decision. A majority of the Court agreed with the late Justice Antonin Scalia's opinion to the extent of its holding that Rule 23 conflicted with the New York statute and the conflict could not be reconciled.⁸ Thus, an issue under Erie Railroad Co. v. Tompkins⁹ and the Federal Rules Enabling Act¹⁰ was presented.¹¹ The Scalia plurality would have held that what matters under the Rules Enabling Act is simply the substantive or procedural nature of the federal rule.¹² In this view, Rule 23 does not abridge a defendant's rights or change a plaintiff's entitlements to relief; it merely alters how the claims are processed. Justice John Paul Stevens concurred in the result but with a narrower rationale.¹³ Justice Stevens opined that application of a federal rule that effectively enlarges or modifies a state-created right or remedy violates the Rules Enabling Act.¹⁴ In his view, however, "[t]he mere fact that a state law is designed as a procedural rule suggests it reflects a judgment about how state courts ought to operate and not a judgment about the scope of state-created rights and remedies."¹⁵ Justice Stevens pointed out that the New York statute applied not only to claims based on New York substantive law but also to claims based on federal law or the law of any other state.¹⁶ "It is therefore hard to see how § 901(b) could be understood as a rule that, though procedural in form, serves the function of defining New York's rights or remedies."¹⁷ Justice Ruth Bader Ginsburg, joined by three other justices,

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would have reversed on the general grounds that Rule 23 and section 901(b) did not conflict and that displacing state law limitations on state-created remedies in a diversity action is, in any event, improper.¹⁸

The Eleventh Circuit in Lisk applied Shady Grove in considering whether a prohibition on consumer class actions found in the Alabama Deceptive Trade Practices Act (ADTPA)¹⁹ —but not in Alabama's civil procedure rules—applied in a federal district court. The case involved a would-be class action brought against a manufacturer of insect-treated wood. On behalf of a putative nationwide class, the named plaintiff asserted an ADTPA claim and a breach of warranty claim.²⁰ The district court granted the manufacturer's motion to dismiss in part because the ADTPA claim could only be brought as an individual claim, which, the court reasoned, meant that there would be no basis under the Class Action Fairness Act²¹ for federal jurisdiction.²²

On appeal, the Eleventh Circuit characterized the case as presenting "a nearly identical issue" to Shady Grove.²³ The court acknowledged that no single rationale attracted five votes in Shady Grove.²⁴ But the court focused on what it saw as Shady Grove's holding—that applying Rule 23 to allow a class action for a statutory penalty created by New York law did not abridge or modify a substantive right and thus did not violate the Rules Enabling Act.²⁵ The court conceded that the New York prohibition on statutory penalty class actions was included in a procedural statute.²⁶ Yet the court dismissed this distinction as unimportant: "[H]ow a state chooses to organize its statutes affects the analysis not at all."²⁷ The court then went on to hold that dismissal of the breach of warranty claim on the pleadings misconstrued Alabama law.²⁸

Lisk represents a substantial extension of Shady Grove. Lisk's premise—that to authorize a federal court in a diversity case to override

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state law limitations on suits in a representative capacity does not modify a substantive right—seems dubious. The litigants, for one, would value a potential class action much differently than an individual action, perhaps dramatically so, depending on the number of class members. The key distinctions that prompted Justice Stevens to concur in the result in Shady Grove, moreover, are absent in Lisk. The ADTPA's limitation on class actions is not found in a general procedural rule or statute but in the ADTPA itself, which limits the scope of the action that may be brought to enforce the rights that it bestows. And the New York procedural rule at issue in Shady Grove applied to claims brought in New York state courts under any statute from any jurisdiction, not simply to claims under the statute creating the substantive right itself. Not surprisingly, several district courts have disagreed with Lisk's approach.²⁹ The holding calls into question, at least, the efficacy of similar limitations on suits in a representative capacity found in many state laws³⁰ and vests a federal procedural rule with a potently preemptive power. Lisk seems likely to promote federal forum shopping, the discouragement of which is a central tenet of the Erie doctrine,³¹ and consequently seems unlikely to be the last word on this issue.

II. Pre-Certification Class Actions

In the decades since the federal class action rule was modernized in 1966,³² courts have struggled with the status of the pre-certification class action. Is it to be treated simply as an individual action, with class allegations ignored until certification? (That is seldom how the litigants view it.) Or is it something more, some hybrid? The issue of the proper characterization of the uncertified class arises frequently: in pre-certification settlements;³³ in pre-certification communications with

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class members;³⁴ in pre-certification discovery issues;³⁵ and in evaluating the validity of any pre-certification action purportedly taken on behalf of putative class members by the would-be class representatives.³⁶

In re Checking Account Overdraft Litigation³⁷ presented the Eleventh Circuit with a pre-certification question, and the court exercised its prerogative under existing case law not to answer it.³⁸ The appeal arose from five putative class actions brought against Wells Fargo Bank claiming that the plaintiffs were unlawfully charged overdraft fees for their checking accounts.³⁹ In a prior decision, the court held that Wells Fargo waived its right to compel arbitration of the named plaintiffs' claims on account of the bank's delay in seeking arbitration.⁴⁰ On remand, the district court took up the question of class certification. Wells Fargo sought to enforce arbitration agreements with the named class members, moving to dismiss their claims in the event the court certified a class. Wells Fargo also opposed class certification on other grounds. Without ruling on class certification, the district court entered an order denying Wells Fargo's conditional motion to dismiss or for a stay pending arbitration, on the grounds that the court had not certified a class, so the unnamed class members had not technically brought any claims against Wells Fargo. Accordingly, the court reasoned that Wells Fargo lacked standing to assert any right against them. Wells Fargo proceeded with an appeal.⁴¹

The Eleventh Circuit agreed that before certification there was no justiciable controversy between Wells Fargo and the unnamed class members.⁴² To the extent that the district court appeared to rule that arbitration of the unnamed class members' claims could not be raised in the future, the court deemed the ruling an impermissible advisory opinion.⁴³ The named plaintiffs argued that the district court's denial

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of Wells Fargo's conditional motion to dismiss should be read as an application of non-mutual collateral estoppel and a holding that Wells Fargo waived its right to compel arbitration as to unnamed class members.⁴⁴ But the Eleventh Circuit rejected this argument because the named plaintiffs lacked standing to advance the argument on behalf of putative class members.⁴⁵ "Whether or not Wells Fargo is precluded from asserting arbitration rights against other individuals has no legal relevance to the named plaintiffs."⁴⁶

The opinion is a rather rigid application of standing rules to a pre-certification class action. The district court appeared inclined to avoid enforcing arbitration rights in any way that could be justified and, accordingly, simply deflected the arbitration question. The Eleventh Circuit's opinion accomplished even less, leaving the litigants just as the court found them. An opinion deciding what appears to be a critical and inescapable question relevant to the class certification decision—namely how many class members are bound by an agreement to arbitrate their individual claims and thus ineligible to participate in a class action—could have moved the litigation towards a resolution.

After remand, the United States District Court for the Southern District of Florida issued an opinion certifying a nationwide class with hundreds of thousands of class members.⁴⁷ On alternative grounds, the district court rejected the bank's argument that numerosity could not be established because absent class members were required by their...