The recognition of U.S. 'opt-out' class actions in China.

Author:Conzatti, Andrea

TABLE OF CONTENTS I. INTRODUCTION II. FEDERAL RULE OF CIVIL PROCEDURE 23(B) (3): A GENERAL OVERVIEW OF "OPT OUT" CLASS ACTIONS A. The Issues Entailed in the Recognition of U.S. "Opt Out" Class Actions in Foreign Jurisdictions B. The Issue as Perceived by U.S. Courts: From Bersch to Vivendi and Alstom III. THE OBSTACLES TO "OPT OUT" CLASS ACTION RECOGNITION IN CONTINENTAL EUROPE IV. U.S. "OPT OUT" CLASS ACTIONS AND CHINA A. China's Legal Background and Constitution: (Few) Similarities and (Many) Differences with Continental Europe B. How Would U.S. "Opt Out" Class Actions be Tested by the Chinese Legal System ? And How Would They Fare? C. Does the Chinese Legal System Contemplate Multiparty Litigation Schemes or Mechanisms Similar to U.S. "Opt Out" Class Actions? V. CONCLUSION I. INTRODUCTION

In the past decades, as the epicentre of the financial world slowly drifted away from the Atlantic towards the Pacific, the trends in global investments and market transactions have seen the People's Republic of China (the PRC) rise as a key player on the international stage. Becoming a member of the World Trade Organization, as well as a recipient of consistently increasing foreign direct investments, China has welcomed both legal and financial reforms that have enabled the country to rank as one of the leading economies in today's world. (1)

Although China-bound deals no longer represent anything of a surprise, the increase in the opposite flow in investments (from China towards the European Union and the United States) is becoming ever more apparent. The economic growth propelled by Deng Xiao Ping's "Open Door" Policy and by the ensuing amendments to China's Constitution and legal framework have allowed China to grow as a country on one hand, while granting private entities and individuals--on the other--the opportunity to raise funds sufficient to become more actively involved on the global stage. (2) As a consequence, China's government and several Chinese individuals and corporate entities have started stretching back across the Pacific, viewing the United States as a fundamental trade partner and American companies as sound targets for their investments. (3)

More specifically, the rising interest shown by Chinese investors in the U.S. market may be highlighted, amongst other things, by the quantity and frequency of U.S. debt purchases carried out by the Chinese government itself. According to a note issued by the U.S. Department of the Treasury on December 17, 2012, (4) the People's Republic of China is currently the largest major foreign holder of U.S. treasury securities, counting on treasury securities for about U.S. $1,160 billion.

With a persistently rising number of corporations and nationals seeking growth opportunities in the United States, and with a rapidly increasing amount of transactions being negotiated and closed, the likelihood of controversies or disputes arising between Chinese actors and their counter-parties is also on the upswing.

This is particularly true if one considers large, public deals where parties trade high-yielding yet extremely volatile securities. During the financial crisis and global meltdown that hit capital markets in the recent past, U.S. courts saw a rapidly increasing number of securities fraud cases brought before them. (5) Moreover, as most cases involved a large number of injured parties and were targeted at similarly situated defendants (such as hedge funds, investment management firms, accounting firms, and custodian banks), it was often the case that--in lieu of bringing a myriad of individual claims against the same defendants at the same time--class action complaints were filed instead. (6)

The use of class actions in securities fraud cases is not unknown in the United States, and there is ample literature concerning the use of such litigation scheme in an American context. (7) Especially during the recent financial crisis and the years immediately preceding it, however, U.S. courts--and, more precisely, the District Court for the Southern District of New York, where a relative majority of securities fraud class actions are filed (8)--have been required not only to rule on the merits of the claims alleged by a given class of plaintiffs, but also to answer questions concerning class certification. In recent cases, the Southern District of New York has taken on the issue as to whether non-U.S, class members should be allowed to take part in a class action or not. Due to its peculiar nature and characteristics, the courts seemed to be concerned that a judgment (or settlement) entered following a Federal Rule of Civil Procedure 23(b)(3) class action (the so-called "opt out" class action) might not be deemed as binding on foreign class members by the courts in their countries of provenience. (9) Fearing, amongst other things, that a non-U.S, class member might act opportunistically and file a second claim in its home jurisdiction, the Southern District has asked plaintiffs to show that courts in the class members' home countries would likely acknowledge and grant preclusive effects to their decision in order for them to take part in the action. (10)

While several scholars have focused their attention on assessing whether an "American style" (11) class action would be recognized amongst courts in continental Europe and the United Kingdom, despite the unprecedented upsurge in capital flows moving from the People's Republic of China towards the United States, few have considered the issue vis-a-vis prospective future Chinese class members. (12)

This Article seeks to provide a specific answer to that question, aiming at understanding whether a U.S. "opt out" class action would be granted res judicata effect by courts in China and, consequently, whether Chinese investors active in the United States would likely be comprised within the certified class (or not) by the New York Southern District Court in such an action.

Section II below provides both a general overview of Federal Rule of Civil Procedure 23(b)(3) and an analysis of the issues linked to the certification of foreign class members in "opt out" class actions through a review of three securities fraud cases filed with the District Court for the Southern District of New York. Section III addresses the doubts shared by a majority of scholars in continental Europe as to the likelihood that EU courts might recognize decisions entered following "opt out" class actions, clarifying the key reasons grounding such broadly held opinion. Section IV compares the current Chinese legal system to continental European jurisdictions, tracing possible similarities and distinctions between the two systems and re-framing the question at issue under a Chinese law perspective.

It is possible that Chinese courts may follow an approach that differs from that of their European equivalents in answering the question raised by the Southern District of New York. However, based on the analysis and considerations carried out in the above mentioned Sections, this Article concludes that, at present, it appears that Chinese courts would unlikely grant res judicata effects to a decision entered by a U.S. court in an "opt out" class action judgment. Therefore, given the posture recently adopted by the Southern District in such regard, Chinese class members would unlikely be considered within a given class, absent further action on their part.


    1. The Issues Entailed in the Recognition of U.S. "Opt Out" Class Actions in Foreign Jurisdictions

      The purpose underlying this Article is not to introduce a thorough review of the law applicable to class actions in foreign jurisdictions, or to provide a detailed description of the mechanisms underlying the recognition of U.S. class actions in general. Rather, the point at issue is whether a particular kind of class action, the so-called "opt out" class action, is likely--or unlikely--to be recognized in a foreign jurisdiction, and what consequences--if any--may derive therefrom. (13) The certification of such type of action is governed, under U.S. law, by Federal Rule of Civil Procedure 23(b)(3), which includes the basic requirements to be satisfied in order for a class action to be maintained and for a class to be certified. (14) Under Rule 23(b) (3), a class representative (also known as a lead plaintiff) is allowed to bring a suit on behalf of other similarly situated individuals or institutions. (15) Participation in a class under Rule 23(b)(3) may thus essentially be passive as, in general, the lead plaintiff would be the only member of the class actively participating in the case. (16) A class action is usually sanctioned where "the class is so numerous that joinder of all members is impracticable" and there are "questions of law or fact common to the class." (17)

      A class action filed under Rule 23(b)(3) is known as an "opt out" class action in that (as hinted by the language set forth in a following sub-section of Rule 23) members of a given class may ask to be excluded from the class of plaintiffs by notifying the court in charge of the proceedings of such decision. (18) In turn, unless members of a given class affirmatively ask to be excluded from the class within a given time frame, they are bound by the final judgment entered by the competent U.S. court, whether favorable or unfavorable to them. (19)

      Thus, parties wishing to participate in an "opt out" class action are not required to take affirmative action to join the class; vice versa, if a party falls within the definition of a certified "class," in an "opt out" class action it is automatically considered to be a part of the class, (20) unless such party expressly requests exclusion from it.

      Opting out may be consistent with a party's litigation strategy as, amongst other things, such action would grant said party the opportunity to pursue its...

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