Opinion

IN THE SUPREME COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 03-0505

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Citizens Insurance Company of

America, Citizens, Inc., Harold Riley, and Mark Oliver, Petitioners,

v.

Dr. Fernando Hakim Daccach,

on behalf of himself and all others similarly situated, Respondent

════════════════════════════════════════════════════

On Petition for Review from the

Court of Appeals for the Third District of

Texas

════════════════════════════════════════════════════

Argued October 21,

2004

Justice Wainwright delivered the

opinion of a unanimous Court as to sections I-III and V-VIII; the opinion of the

Court as to sections IV-A, IV-C, and IV-D, joined by Justice Hecht, Justice O’Neill, Justice

Green, Justice Johnson,

and Justice Willett; and a

concurring opinion as to section IV-B, joined by Justice Johnson.

Chief Justice Jefferson filed a

concurring opinion, joined by Justice

Brister and Justice

Medina.

In this

interlocutory appeal petitioners challenge a trial court’s order certifying a

worldwide class. Dr. Fernando Hakim Daccach, the class’s representative, alleges

that petitioners Citizens Insurance Company of America (CICA), Citizens, Inc.,

Harold E. Riley, and Mark A. Oliver (collectively Citizens) sold securities from

Texas to nonresidents without complying with the registration requirements of

the Texas Securities Act. The court of appeals modified the class definition and

affirmed the trial court’s certification of the class. 105 S.W.3d 712 . Because

we conclude the trial court did not consider the effect of res judicata on the

adequacy of the class representative, the superiority of litigating this case as

a class action, the typicality of claims within the class, and the predominance

of common issues over individual issues, we decertify the class and remand the

case to the trial court for further proceedings consistent with this

opinion.

I. Background

Citizens,

Inc. and its wholly-owned subsidiary CICA are Colorado corporations with their

principal places of business in Austin, Texas. Riley and Oliver are officers and

directors of Citizens, Inc. Citizens sells life insurance policies (CICA

policies) through foreign insurance agents exclusively to persons outside of the

United States. The purchasers reside in over thirty-five countries including the

United States. The CICA policies allow policyholders to assign policy dividends

and other benefits to offshore trusts. The trusts use the assigned dividends and

other benefits to purchase common stock in Citizens, Inc. Each year since 1996

there have been approximately 30,000 CICA policies in effect, with each

policyholder paying an average annual premium of around $2,000. Id.

at 717. At least seventy‑five percent of these policyholders have assigned

their policy dividends and other benefits to the offshore trusts. Id.

The CICA

policies are not registered with the Texas State Securities Board, Texas

Department of Insurance, nor any other regulatory body in the United States,

although the common stock purchased with policy dividends is listed on the

American Stock Exchange. Similarly, neither Citizens nor its salespersons have

registered with any regulatory body in Texas or elsewhere in the United States.

Citizens also asserts that the CICA policies are not subject to regulation in

the countries in which the policyholders reside.

On August 6,

1999, Delia Bolanos Andrade and Luis Martin Tapia Alberti, both residents and

citizens of Colombia, South America, filed a class action against Citizens in

Texas state court. The original petition alleged several causes of action

related to the CICA policies, including (1) violations of the Texas Deceptive

Trade Practices Act, (2) breach of contract, (3) fraud, (4) fraud in the

inducement, (5) negligent misrepresentation, (6) breach of the duty of good

faith and fair dealing, (7) violations of the Texas Insurance Code, (8)

equitable reformation of the policies, (9) conspiracy to plan and implement this

scheme, and (10) unjust enrichment and the imposition of a constructive trust.

On December 15, 2000, the class plaintiffs filed a second amended original

petition to add a cause of action under the Texas Securities Act for selling

securities in this state without first being registered. See Tex. Rev. Civ. Stat. arts. 581-12A,

581-33A(1). [1] By this time seven new plaintiffs had

been added to the lawsuit, including Daccach.

On June 29,

2001, Daccach filed a motion for class certification in which he sought

designation as the class representative and alleged against Citizens only one

class claim: selling or offering securities from Texas in the form of the CICA

policies without registering with the Texas Securities Board. See Tex. Rev. Civ. Stat. arts. 581-12A,

581-33A(1), 581-33D(1), D(3). Daccach expressly disclaimed any intention to

pursue the other causes of action in the class suit. In the sixth amended

petition, filed the same day as the first amended motion for class

certification, the other plaintiffs pled the original claims against Citizens as

individuals, not as class representatives. The trial court has not ruled on

Daccach’s motion to sever the class claims.

Challenging

Daccach’s motion for class certification, Citizens argued that Texas law should

not apply to this worldwide class action and that Daccach’s abandonment of

claims defeats certification prerequisites. In response, Daccach presented

alternate choice of law analyses all of which directed the application of Texas

law, but none of his theories analyzed the laws of other jurisdictions.

After

conducting a four‑day hearing, the trial court granted Daccach’s motion in a

twenty‑page class certification order. The order’s nine‑page trial plan

identified four class‑wide issues to be resolved at trial: (1) whether a CICA

Policy is a “security” pursuant to the Securities Act (including the question of

whether the CICA policies fall within an insurance exception to the Securities

Act); (2) whether Citizens sold or offered for sale the CICA policies from

Texas; (3) the calculation of the statutory remedy pursuant to the Securities

Act; and (4) attorney’s fees. The order defined the class as follows:

The Class

consists of all persons, who, during the Class Period (August 6, 1996 through

the date the Class is certified): (1) purchased a CICA Policy and executed an

assignment to a trust for the purchase of Citizens, Inc. stock, or (2) paid any

money that, pursuant to a CICA Policy and assignment to a trust, was for the

purchase of Citizens, Inc. stock, or (3) were entitled to any cash benefits from

a CICA Policy that, pursuant to a CICA Policy and assignment to a trust, were

for the purchase of Citizens, Inc. stock. Specifically excluded from the Class

are all persons who, within the time period established by the judgment, do not

surrender their CICA Policies and take the other actions required to obtain the

relief awarded by the Court.

Citizens

brought an interlocutory appeal challenging the trial court’s certification

order. See Tex. Civ. Prac. &

Rem. Code § 51.014(a)(3). Citizens argued that the trial court abused its

discretion in granting Daccach’s motion for class certification. First, Citizens

challenged the adequacy of the trial court’s class definition. Second, it argued

that the trial court failed to conduct a proper choice of law analysis to

determine whether common issues predominate over individual issues. Third,

Citizens argued that the trial court failed to adequately establish the class

certification prerequisites. The court of appeals rejected all three points,

holding that: the class definition, after a one-word modification, precisely

ascertains the class members; [2] the trial court was not required to

engage in a “most significant relationship” choice of law analysis; and the

trial court did not abuse its discretion by finding that the class certification

requirements had been met. 105 S.W.3d at 729-30 .

Citizens then

petitioned this Court for review. Specifically, Citizens contends that the court

of appeals erred in (1) affirming the certification of an improper fail-safe

class, whose members are not presently ascertainable, and eviscerating material

defenses; (2) not applying the “most significant relationship” test to resolve

choice-of-law issues; (3) determining that common legal and factual issues

predominate despite that calculating attorney’s fees will be an overwhelming

task requiring the discovery and resolution of circumstances surrounding life

insurance sales in over fifty foreign jurisdictions; (4) affirming that a class

action is superior to individual claims despite the fact that certification

requires dismissal of ten of the eleven original claims and that this is not a

negative value suit; [3] (5) agreeing, without explanation,

that the trial court will be able to implement the statutory remedy of

rescission even though the beneficial interests of the policies are held in

offshore trusts not parties to this case; (6) affirming that Texas Rule of Civil

Procedure 42(a)’s typicality requirement was met despite the presence of a

statute of limitations defense against the class plaintiff and the class

plaintiff’s dismissal of ten of the eleven originally alleged claims; and (7)

holding that previously asserted, and now abandoned, individual claims of class

members would not be barred by res judicata, thereby reading Rule 42 as an

exception to the Court’s transactional approach to claim preclusion. We granted

Citizens’ petition for review.

II. Jurisdiction

Section

51.014(a)(3) of the Texas Civil Practice and Remedies Code allows the

interlocutory appeal of class certification orders. Although interlocutory

appeals are generally final in the courts of appeals, this Court has

jurisdiction over an interlocutory appeal if the court of appeals “holds

differently from a prior decision of another court of appeals or of the supreme

court.” Tex. Gov’t Code

§§ 22.001(a)(2), 22.225(b)(3), (c). [4] “[T]wo decisions hold differently or

conflict when the rulings in the two cases are so far upon the same state of

facts that the decision of one case is necessarily conclusive of the decision in

the other.” Henry Schein, Inc. v. Stromboe , 102 S.W.3d 675, 687 (Tex.

2002) (internal quotation marks omitted) (citing Christy v. Williams , 298

S.W.2d 565, 567 (Tex. 1957)).

In

Intratex Gas Co. v. Beeson , we held that the trial court abused its

discretion by certifying a fail-safe class. 22 S.W.3d 398 (Tex. 2000). A

fail-safe class is a class bound only by a judgment for the plaintiffs. Id.

at 402 . In such a case, “[a] determination that the defendant is not liable

. . . obviates the class, thereby precluding the proposed class members from

being bound by the judgment.” Id. at 405 . We rejected that outcome

because Rule 42(b) was never intended to be an exception to res judicata.

In this case,

the court of appeals held that the class’s claim under the Texas Securities Act

met the predominance requirements of Rule 42 even if the class abandoned other

potential claims to meet that requirement. The court explained: “‘Clients who

have claims not raised in this class action because the claims are unsuitable

for class treatment can bring those claims on an individual basis, and res

judicata will not bar those claims because absent class members had no

opportunity to litigate those issues in this lawsuit.’” 105 S.W.3d at 725

(quoting Sullivan v. Chase Inv. Servs. of Boston, Inc. , 79 F.R.D. 246,

265 (N.D. Cal. 1978)). The court of appeals’ creation of a special exception to

established principles of claim preclusion conflicts with this Court’s holding

in Beeson . Accordingly, we have jurisdiction over this appeal.

III. General Certification Requirements

All class

actions must satisfy four prerequisites: (1) numerosity—the class is so numerous

that joinder of all members is impracticable; (2) commonality—there are

questions of law or fact common to the class; (3) typicality—the claims or

defenses of the representative parties are typical of the claims or defenses of

the class; and (4) adequacy of representation—the representative parties will

fairly and adequately protect the interests of the class. Tex. R. Civ. P. 42(a); see also Sw.

Ref. Co. v. Bernal , 22 S.W.3d 425, 435 (Tex. 2000). In addition, a class

action must satisfy at least one of the requirements in Rule 42(b). Here Daccach

argues the class action satisfies Rule 42(b)(3), [5] which requires that “questions of law

or fact common to the members of the class predominate over any questions

affecting only individual members” and that class treatment be “superior to

other available methods for the fair and efficient adjudication of the

controversy.” Rule 42 contains a list of nonexhaustive factors to aid a court in

determining if (b)(3) certification is appropriate:

(A) the

interest of members of the class in individually controlling the prosecution or

defense of separate actions; (B) the extent and nature of any litigation

concerning the controversy already commenced by or against members of the class;

(C) the desirability or undesirability of concentrating the litigation of the

claims in the particular forum; (D) the difficulties likely to be encountered in

the management of a class action.

Tex. R. Civ. P. 42(b)(3).

In

Bernal , we explained that to properly apply the certification

prerequisites, a trial court must perform a “rigorous analysis.” 22 S.W.3d at

435. And to correctly determine these certification issues, a certifying court

must “understand the claims, defenses, relevant facts, and applicable

substantive law.” Id. This understanding requires a choice of law

analysis at the outset anytime there is an issue of which of several

jurisdictions’ laws should govern a case. Compaq Computer Corp. v.

Lapray , 135 S.W.3d 657, 672 (Tex. 2004) (“[Variations in the laws of

multiple jurisdictions] ‘may swamp any common issues and defeat predominance.’”

(quoting Castano v. Am. Tobacco Co. , 84 S.W.3d 734 , 741 (5th Cir.

1996))). The threshold question, therefore, is whether the trial court conducted

a proper choice of law analysis and correctly decided that Texas law governs

this class suit. Compaq , 135 S.W.3d at 741 .

IV. Choice of Law

A. Plain Language of Section 12

“[W]hen

ruling on motions for class certifications, trial courts must conduct an

extensive choice of law analysis before they can determine predominance,

superiority, cohesiveness, and even manageability.” Id. This analysis

arms the court with information necessary to determine if questions of law or

fact common to the members of the class will predominate over any questions

affecting only individual members. See Tex. R. Civ. P. 42(b)(3). Common

questions of law may not predominate if class members’ claims are not governed

by the same law. Schein , 102 S.W.3d at 695-99 . Here, Daccach, as class

representative, bears the burden of showing that Texas law applies to the

class’s claim. Compaq , 135 S.W.3d at 672 .

Daccach

alleges that the defendants violated the Texas Securities Act by offering or

selling securities from Texas without registering with the Texas Securities

Board. He argues that the Texas Securities Act directs the application of Texas

law notwithstanding the presumed interests of the forums in which the plaintiffs

reside. He explains that the defendants were Texas residents doing business in

Texas at all relevant times. Daccach argues that an analysis of other

jurisdictions’ laws is unnecessary because (1) Citizens is estopped from arguing

the applicability of foreign laws because of its previous position that the CICA

policies were not subject to foreign regulation, and (2) the registration

provision of the Texas Securities Act directs the application of Texas law in

this case, rendering unnecessary a comparison of other potentially applicable

jurisdictions’ laws.

Citizens

argues that the pleadings show that the dispute implicates interests of over

thirty-five jurisdictions where the putative class members reside. Citizens

asserts that, at a minimum, the pleadings require the trial court to conduct an

extensive analysis of potential conflicts among other jurisdictions’ laws and

determine which jurisdiction has the most significant relationship to the class

claim. See Restatement (Second)

of Conflicts of Laws § 6 (1971). Citizens contends that failing to do so

violates the Due Process Clause of the U.S. Constitution. See Phillips

Petroleum Co. v. Shutts , 472 U.S. 797, 812 (1985).

In the class

certification order, the trial court concluded:

The Class

Plaintiff has asserted only one cause of action for which he seeks class

certification, that is, violations of the Texas Securities Act. At the

certification hearing, the Class Plaintiff presented evidence of numerous

activities of the Defendants in Texas relating to the CICA policies.

Accordingly, the Court concludes that for purposes of class certification, Texas

law applies.

The court of

appeals held that under section 6(1) of the Restatement (Second) of Conflict of

Laws, Texas law applies because the Texas statute directs that it apply. 105

S.W.3d at 723-24 .

As an initial

matter, we reject Daccach’s estoppel argument. We have explained that “[a] court

may not accept ‘on faith’ a party’s assertion that no variations in [other

jurisdictions’] laws exist.” Compaq , 135 S.W.3d at 672-73 . The court must

determine which substantive law governs the case. See Shutts , 472 U.S. at

820 (“plaintiff’s desire for forum law is rarely, if ever controlling”);

Tracker Marine, L.P. v. Ogle , 108 S.W.3d 349, 352 (Tex. App.—Houston

[14th Dist.] 2003, no pet.). Which jurisdiction’s substantive law governs is

ultimately a question of law for the court. Compaq , 135 S.W.3d at

672 .

Daccach

pleads a single cause of action on behalf of the class: Citizens violated

section 12 of the Texas Securities Act that requires dealers in Texas who offer

or sell securities to register with the Texas Securities Board. See Tex. Civ. Stat. arts. 581-12A,

581-33A(1). No one disputes that Citizens was doing business in Texas and

physically present in Texas when it sold the CICA policies to class members.

Texas has a

strong interest in regulating the sale of securities in and from the state. The

Section 12 registration provisions indemnify investors victimized by violations

of the Texas Securities Act, encourages compliance with its regulatory and

disclosure provisions, creates an incentive for its private enforcement, and

guards the integrity of the state’s securities industry by protecting resident

sellers who operate in compliance with the law. See Tex. Civ. Stat. art. 581-33 cmt.

background–1977; Rio Grande Oil Co. v. State , 539 S.W.2d 917, 921 (Tex.

Civ. App.—Houston [1st Dist.] 1976, writ ref’d n.r.e.) (“A state is damaged if

its citizens are permitted to engage in fraudulent [securities] practices even

though those injured are outside its borders.”); see also Unif. Sec. Act–1956 , § 414(a)-(f) cmt.

3, 7C U.L.A. 941 (2006) (noting that state Blue Sky laws are also intended to

prevent use of a state as a base of operations to defraud persons in other

states); Joseph C. Long, The Conflict of Laws Provisions of the Uniform

Securities Acts or When Does a Transaction “Take Place in the State?” , 31

Okla. L. Rev. 781 , 784 (1978);

Louis Loss, The Conflict of Laws and the Blue Sky Laws , 71 Harv. L. Rev. 209 , 225 n.50 (1957);

Jack E. McClard, The Applicability of Local Securities Acts to Multi-State

Securities Transactions , 20 U. Rich.

L. Rev. 139 , 142 (1985). Because the class lawsuit only alleges Citizens’

failure to register with the Texas Securities Board before allegedly offering

and selling securities from Texas, Section 12 governs under any conflict of law

principles that might apply.

Absent unique

statutory circumstances, trial courts must conduct the extensive choice of law

analysis described in Compaq before making a certification decision.

Compaq , 135 S.W.3d at 672 . In Compaq , the class alleged a Uniform

Commercial Code breach of an express warranty claim occurring in all fifty

states. See id. at 672-73 . We held that the trial court erroneously

applied Texas law after a cursory review and failed to analyze the relevant law

of each state. However, a claimed failure to register as a dealer before

offering or selling securities is different. Securities offered or sold in

multiple states may be subject to the registration requirements of each state in

which an offer or sale is made. See Lintz v. Carey Manor, Ltd. , 613

F.Supp. 543, 550 (D.C. Va. 1985); Michael A. Hanzman, The Reach of State Blue

Sky Laws—A Potentially Dangerous Trap for the Unwary Practitioner , 63 Fla. B.J. 16 , 19 (1989) (“[J]ust as one

transaction can violate both federal and state law simultaneously, it can

violate several blue sky laws simultaneously.”); see also 69A Am. Jur. 2D Securities

Regulation § 18 (2006) (stating more broadly than held here that “all of the

blue sky laws of all the jurisdictions apply to the transactions which are

within the bounds of the statute”). Multiple registration requirements of

multiple states may govern the dealer’s conduct and give rise to several

statutory violations. See Chrysler Capital Corp. v. Century Power Corp. ,

1992 WL 163006 (S.D.N.Y. 1992) (unpublished); Simms Inv. Co. v. E.F. Hutton

& Co. , 699 F.Supp. 543, 545 (M.D. N.C. 1988) (“The court has firmly

concluded that the securities laws of two or more states may be applicable to a

single transaction without presenting a conflicts of laws question.”) ; see

also Unif. Sec. Act–1956 , §

414(a)-(f) cmt. 3, 7C U.L.A. 941 (2006); Joseph C. Long, 12 Blue Sky Law §§ 3.01 n.2.2, 3.02[1]

n.13 (rev. ed. 1988); Louis Loss &

Joel Seligman , Fundamentals of

Security Regulation 92–94 (3d ed. 1989); McClard, 20 U. Rich. L. Rev. at 141. Thus, a claim

based on the failure to register with the Texas Securities Board before offering

or selling securities from Texas does not present a classic conflict of laws

problem. We do not hold that the Texas Securities Act directs the application of

the Texas Blue Sky laws [6] in every securities case involving

facts touching Texas or its residents. The question is one of legislative intent

as to the particular provision at issue, subject to constitutional limitations.

We recognize

that violations of other securities laws, such as those based on

misrepresentation, may well be subject to a different analysis. See Tracker

Marine, L.P. , 108 S.W.3d at 359 ; Loss, 71 Harv. L. Rev. at 209 (indicating that

unlike registration requirements, presumably the conflict of laws rules for

anti-fraud aspects of the blue sky laws are not too different from “the rules

for common-law deceit or rescission”). But those types of claims are not raised

here.

The

concurrence would require a thorough comparison of the laws of the jurisdictions

implicated by the pleadings, even though the only claim at issue is that Texas

residents offered or sold securities from Texas without registering with the

Texas Securities Board. The concurrence asserts that the Court’s choice of law

determination “risks making Texas a magnet forum for national and international

class actions.” __ S.W.3d __, __. We do not hold, contrary to the concurrence’s

indication, that a class may gain application of Texas law by simply suing in

Texas on a Texas statute or on any Texas Blue Sky provision. It is the rare

class suit in which a Texas court reaches a permissible conclusion on choice of

law without an extensive analysis.

The

concurrence also argues that the Court allows “the simple institution of a

multistate class suit” to create a “substantial threat to our constitutional

system of cooperative federalism.” Id. at __ (quoting 4 Herbert B. Newberg & Alba Conte, Newberg

on Class Actions § 13.37 (4th ed. 2002). As explained, the filing of suit

in Texas is not the basis for the choice of law determination. The determinative

question is not where the class suit was filed, but, under principles of

statutory interpretation, whether the resident defendants’ actions in Texas

constitute conduct the Legislature intended to regulate. This holding offends

neither the U.S. Constitution nor principles of federalism.

Further, the

concurrence fails to explain the parameters of its approach. Which of the other

jurisdictions’ laws may govern the failure to register in Texas? Which

jurisdictions’ laws should be studied and compared to Section 12(A), the only

claim alleged? Neither the pleadings nor the class definition assert the

violation of the common law or another jurisdiction’s statute prohibiting the

sale of securities to or from Texas by a resident dealer not registered in

Texas. We do not compel plaintiffs in individual suits to plead the violation of

all potentially applicable laws, yet the concurrence would impose that burden on

class plaintiffs. Daccach was not required to present a global overview of

potentially applicable securities registration laws to pursue a claim against

Citizens for selling or offering securities in or from Texas as an unregistered

dealer. See Irving L. Faught & Z. Faye Martin Morton, Recent

Developments in Securities Law: USA 2002—Something Old, Something New . . . ,

60 Consumer Fin. L.Q. Rep. 58, 60

(2006); Larry Kramer, Choice of Law in Complex Litigation , 71 N.Y.U. L. Rev. 547 , 549 (1996); Larry

Kramer, Rethinking Choice of Law , 90 Colum. Law Rev. 277, 284–87 (1990)

(reasoning that the choice of law analysis of the class’s claim should not be

evaluated differently than it would be if brought by an individual). The trial

court correctly concluded that the Texas Securities Act applies to this

suit.

B. The Restatement Approach

In the

alternative, the registration requirement in the Texas Securities Act contains a

statutory directive compelling the application of Texas law. This Court uses the

analysis described in the Restatement (Second) of Conflicts of Laws to resolve

choice of law issues and select the particular substantive issue that governs a

case. See Hughes Woods Prods., Inc. v. Wagner , 18 S.W.3d 202, 203-04

(Tex. 2000); Schein , 102 S.W.2d at 696-99. Section 6 of the Restatement

provides:

(1)

A court, subject to constitutional restrictions, will follow a statutory

directive of its own state on choice of law.

(2)

When there is no such directive, the factors relevant to the choice of the

applicable rule of law include

(a)

the needs of the interstate and international systems,

(b)

the relevant policies of the forum,

(c)

the relevant policies of other interested states and the relative interests of

those states in the determination of the particular issue,

(d)

the protection of justified expectations,

(e)

the basic policies underlying the particular field of law,

(f)

certainty, predictability and uniformity of result, and

(g)

ease in the determination and application of the law to be applied.

Restatement (Second) of Conflicts of

Laws § 6 (1971).

The

Restatement identifies a framework many courts follow when deciding which

jurisdiction’s law applies. The first question is whether the particular

substantive law is subject to a clear choice of law determination by the

Legislature of the forum state. See Marmon v. Mustang Aviation , 430

S.W.2d 182 (Tex. 1968). If there is such a directive, a court examines the

directive in light of constitutional limitations that might preclude application

of the local law. If answering the first two inquiries does not resolve the

issue, a court can apply the forum law if it does not conflict with the laws of

other interested jurisdictions. See Compaq , 135 S.W.3d at 672 . If

variation in the laws of several interested jurisdictions creates a conflict,

then courts will apply the significant relationship guidelines of Section 6(2)

and any other specific sections applicable to the substantive law at issue.

See Hughes Woods Prods. , 18 S.W.3d at 205 ; see, e.g. , Restatement (Second) of Conflicts of Laws

§ 192 (1971) (relating to the validity or rights created by life

insurance contracts).

Under this

hierarchy, the factors in section 6(2) of the Restatement do not come into play

if there is statutory guidance that the law is intended to govern the

transaction. For instance, when the Fifth Circuit applied this analysis to

project Texas’ choice of law rule for pendant state claims, it declined to look

to the “most significant relationship” guidelines when a Texas statute provided

clear choice of law guidance, and held that “‘a court should only resort to the

§ 6 guidelines in the absence of either a valid contractual agreement between

the parties regarding the applicable law, or a local statutory provision

controlling the disposition of the choice of law question.’” Sommers Drug

Stores Co. v. Corrigan , 883 F.2d 345, 353 (5th Cir. 1989) (emphasis added)

(quoting Am. Home Assurance Co. v. Safeway Steel Prods. Co. , 743 S.W.2d

693, 697 (Tex. App.—Austin 1987, writ denied)). An examination of the provision

of the Texas Securities Act at issue shows whether the Texas Legislature

intended to direct the application of that provision to the facts alleged in

this case.

The sole

violation of law alleged by the class is embodied in sections 33A and 12(A) of

article 581 of the Texas Securities Act concerning liability of sellers of

securities who fail to register in Texas. The relevant precedent from this Court

guides the determination of whether Section 12 contains a directive from the

Legislature to apply Texas law, even though some acts may have occurred outside

Texas. In Marmon , we stated:

Unless the

intention to have a statute operate beyond the limits of the state or country is

clearly expressed or indicated by its language, purpose, subject matter, or

history, no legislation is presumed to be intended to operate outside the

territorial jurisdiction of the state or country enacting it. To the contrary,

the presumption is that the statute is intended to have no extraterritorial

effect, but to apply only within the territorial jurisdiction of the state or

country enacting it, and it is generally so construed. An extraterritorial

effect is not to be given statutes by implication.

430 S.W.2d at

187 (citations omitted); see 73 Am. Jur. 2D Statutes

§ 250 (2006). [7] Determining if the extraterritorial

reach of Section 12 is “clearly expressed” or otherwise “indicated by its

language, purpose, subject matter, or history” begins with the language of the

provision. See Marmon , 430 S.W.2d at 187 .

The Texas

Legislature prohibited the offer or sale of a security “in this state” by any

company or person, who has not previously complied with the requirement to

register as a securities dealer or satisfied a dealer, security, or transaction

exemption from registration. Tex. Civ.

Stat. arts. 581-12(A), 581-33A. The requirement in Section 12 to register

before making offers or sales “in this state” attaches to both offers and sales

of securities and includes both offers or sales from persons in Texas to

nonresidents and those from out-of-state sellers to Texas residents. See

__ S.W.3d at __, n.6. Therefore, section 12 requires that persons and companies

register or satisfy an exemption from registration before making offers or sales

of securities from locations in Texas to out-of-state purchasers. See

generally Ennetex Oil & Gas v. State , 560 S.W.2d 494 (Tex. Civ.

App.—Texarkana 1977, writ ref’d n.r.e.); Rio Grande , 539 S.W.2d 917 .

The Texas

Securities Board, empowered to administer the securities laws, determined in its

rules that section 12 of the Texas Securities Act governs “an offer or sale from

Texas.” 7 Tex. Admin. Code §

139.7 . Section 139.7, entitled “Sale of Securities to Nonresidents,” provides

that “[a]n issuer or selling agent who makes an offer or sale from Texas, by any

means . . . is a dealer and must comply with the dealer registration

requirements of the Securities Act.”

This

interpretation of Section 12 is supported by the purpose of Texas Blue Sky laws.

The commentary to Article 581-33 reiterates the long-standing purposes of the

provision: to indemnify investors victimized by violations of the Texas

Securities Act, encourage compliance with the Act’s regulatory and disclosure

provisions, and create incentives for its private enforcement. Tex. Rev. Civ. Stat. art. 581-33 cmt.

background–1977. Given the nature of securities transactions, achieving these

purposes will ultimately require that the Act apply to situations that involve

some out-of-state activities, as when an unregistered dealer in Texas sells

securities to a nonresident.

The history

of choice of law concerns arising in the subject matter of securities also

supports our interpretation of the language of Section 12. The first Blue Sky

laws were promulgated in 1910. Julian M. Meer, The Texas Securities Act—1957

Model: Facelift or Forward Look? , 36 Tex. L. Rev. 429 , 430 (1957). By 1957,

every state except Delaware and Nevada had enacted some form of Blue Sky law to

regulate securities transactions. Louis Loss, The Conflicts of Laws and the

Blue Sky Laws , 71 Harv. L. Rev.

209 , 225 (1957); Meer, 36 Tex. L.

Rev. at 430. Also by 1957, it had become apparent that courts were

struggling to apply “traditional but unsuitable [common law] choice-of-law

concepts” to the nationwide scheme of securities regulations. Loss, 71 Harv. L. Rev. at 248. Professor Louis

Loss, the primary draftsman of the Uniform Securities Act of 1956, reported that

Blue Sky decisions on choice of law in the securities arena “def[ied]

generalization.” Id . at 216. The Eighth Circuit Court of Appeals referred

to the “bewildering state of affairs in the case law governing transactions

which crossed states lines.” Kreis v. Mates Inv. , 473 F.2d 1308, 1311

(8th Cir. 1973). Professor Loss explained why:

When a

whole area of “public” law owes its very existence to legislation, it is not

merely anomalous that so important a segment of the area is left to the chance

application of conflict-of-law concepts developed by the common law in quite

different contexts; it would be amazing if the result were a reasonably

satisfactory geographical allocation of the statutes. . . [T]he one solution to

the multifarious and vexatious problems of the conflict of laws which no blue

sky state has thus far adopted is the codification route.

Loss, 71 Harv. L. Rev. at 248.

Ultimately,

the drafters of the Uniform Act rejected citizenship or residence within a

particular state as the policy base for application of the Uniform Act to

particular transactions. Joseph C. Long,

12 Blue Sky Law § 4:2

(rev. ed. 1988). Instead, they elected a territorial base as the foundation for

the choice of law decision, requiring that a transaction have some physical

nexus or acts within the state whose securities statute was alleged to govern.

Id. The Uniform Act’s approach is that a statute governs a transaction

and claims arising from it if wrongful acts in the transaction occurred “in this

state.” Id . § 4:1. The Restatement elaborates:

The court

should give a local statute the range of application intended by the legislature

when these intentions can be ascertained and can constitutionally be given

effect. If the legislature intended that the statute should be applied to the

out-of-state facts involved, the court should so apply it unless constitutional

considerations forbid.

Restatement (Second) of Conflicts of

Laws § 6(1) cmt.(b) (1971). Choice of law in this area of the Blue Sky

laws is now primarily a matter of statutory interpretation, except, of course,

for those states that have not legislated choice of law instructions. See

Benjamin v. Cablevision Programming , 499 N.E.2d 1309, 1316 (Ill. 1986)

(reasoning that whether the Illinois Securities Act applied to a sale of a

security from Illinois to a California purchaser was a question of statutory

construction, and holding that statutory language referencing an offer or a sale

“in this state” indicated the application of the Illinois securities statute);

see also 69A Am. Jur.

2 d Securities Regulation §

18 (2006) (In the area of securities transactions, state Blue Sky laws

apply to the transactions which “are within the bounds of the statute.”).

The Texas

Securities Act was adopted substantially from the Uniform Securities Act. See

Tex. Rev. Civ. Stat. art.

581-33, cmt. background–1977 (noting that enactment of article 581-33 in 1963

was a modification of the Uniform Act). The Texas Legislature incorporated part

of the Uniform Securities Act in Texas Blue Sky laws, including an important

term of art in the particular substantive provision at issue here—“in this

state”—used in connection with mandates to comply with specified regulatory

requirements, like dealer registration. [8]

Based on the

language, purpose, subject matter, and history of the Texas Blue Sky laws and

the Uniform Securities Act, and the registration requirements in particular, we

conclude the Texas Legislature intended section 12 of the Texas Securities Act

to prohibit the unregistered sale of securities from Texas, even when the

purchasers are nonresidents. This approach does not mean that the Texas

Securities Act directs the application of the Texas Blue Sky laws in every

securities case involving facts touching Texas or its residents. The question is

one of legislative intent as to the particular provision at issue, subject to

constitutional limitations. See, e.g. , Yadlosky v. Grant Thornton

L.L.P. , 197 F.R.D. 292, 301 (E.D. Mich. 2000) (stating, in reference to the

misrepresentation provisions of the Michigan Blue Sky law, that “it appears

application of Michigan law to all of the 2811 investors would be contrary to

the policies of other state ‘blue-sky’ laws”).

C. Constitutional

Limitations on State Regulation of Extraterritorial Conduct

The trial

court must also determine whether the Texas statute meets constitutional

requirements before it is applied to extraterritorial conduct. [9] Due process requires that the

application of Texas law be neither arbitrary nor fundamentally unfair. See

Shutts , 472 U.S. at 818-19, 822 . Although the Constitution imposes “modest

restrictions” on the application of a forum state’s substantive law to conduct

that occurs, at least in part, outside of the state, to constitutionally select

a forum state’s law to apply to a class action, the state must have “a

significant contact or significant aggregation of contacts” to the claims

asserted by each member of the plaintiff class. Allstate Ins. Co. v.

Hague , 449 U.S. 302, 313 (1981); see also Travelers Health Ass’n

v. Virginia , 339 U.S. 643, 649 (1950); Shutts , 472 U.S. at 818 . These

constitutional limitations apply to choice of law determinations in class suits.

See Shutts , 472 U.S. at 821-22 .

Citizens

contends that because the court of appeals chose to apply section 6(1) of the

Restatement in lieu of the most significant relationship test, the court’s

choice of law analysis did not satisfy the constitutional due process guarantee

that the application of Texas law be neither arbitrary nor fundamentally unfair.

Texas has an interest in transactions involving the purchase and sale of

securities. The constitutional question in this case, then, is whether Texas has

sufficient contacts with the class members’ transactions to satisfy

constitutional due process.

In his

pleadings and summary judgment evidence presented to the trial court, Daccach

alleges that all defendants are Texas residents, Citizens maintains its

principal place of business in Texas, advertising and sales materials were

created and sent from Texas, a significant portion of the activities related to

the marketing and creation of the instruments happened in Texas, and Citizens

devised, implemented, and administered the securities “scheme” in Texas.

Although Daccach admits that none of the class members are from Texas, he

maintains that all CICA policies were sold from Texas. Citizens does not contest

that these activities occurred in Texas, but only argues that these activities

do not constitute the “sale” of a “security” in Texas. Citizens’ argument

relates to a contested fact issue set for trial and does not controvert the

facts alleged. Because Texas has a significant aggregation of contacts to the

business activities alleged to have occurred within the state, we conclude that

the application of Section 12 to this lawsuit falls comfortably within the

constitutional constraints on the extraterritorial application of Texas laws.

Making this determination does not resolve whether Citizens actually “sold” a

“security” from Texas within the meaning of the Texas Securities Act; that is a

matter to be determined on the merits.

To obtain

class certification, we require an “extensive analysis” of choice of law.

Compaq , 135 S.W.3d at 672 . Here, Daccach alleges only that Citizens

violated Article 581–33(A) by selling securities in or from Texas without

registering as a dealer. No choice of law question is presented. The trial court

was required to determine whether the application of the Texas statute at issue

met constitutional requirements when applied to the allegations. The trial court

did not abuse its discretion in determining that there was a significant

aggregation of contacts with Texas to apply Article 581–33(A) constitutionally.

Therefore, for different reasons, we affirm the court of appeals’ holding that

the trial court properly determined that Texas law governs.

D. Impact of Contacts with other Jurisdictions

At this point

we return to the reason for the choice of law scrutiny—to provide the context

for a court’s rigorous analysis of the certification requirements. See

id. at 672-73 . The court must ensure that the class representative is

adequately representing the rights of absent class members in all aspects of the

class litigation. The class representative’s burden in this regard stems from

the Due Process Clause, which demands “that the named plaintiff at all times

adequately represent the interests of the absent class members.” Shutts ,

472 U.S. at 812 (citing Hansberry v. Lee , 311 U.S. 32, 42-43, 45 (1940)).

Thus, in this case, where there is a significant aggregation of contacts with

Texas to apply Texas law constitutionally, the fact that other jurisdictions are

implicated by the pleadings raises an issue of adequacy of representation. In a

worldwide case like this, where a class representative abandons or chooses not

to allege certain claims, including claims that may exist in other

jurisdictions, the potential effect of claim preclusion on absent class members

raises concerns about the prerequisites of predominance, superiority,

typicality, and adequacy. If other jurisdictions’ laws could apply to the

transaction, even though only a Texas violation is alleged, the class members

who could assert those causes of action may be barred from later pursuing them

in a different lawsuit. The laws of other interested jurisdictions may provide

certain class members more beneficial remedies or causes of action arising from

the same subject matter of the lawsuit. We therefore address the effect of res

judicata or claims preclusion on later litigation of claims not alleged or

abandoned and how the risk of preclusion may affect class

certification.

V. Res Judicata and Claim Abandonment

In the court

of appeals, Citizens challenged the trial court’s class certification by arguing

that because Daccach abandoned all claims but the Texas Securities Act claim,

he was not an adequate representative of the class, common issues did not

predominate over individual issues, a class action was not superior to other

methods of adjudication, and Daccach improperly seeks to resolve a single issue

instead of the entire controversy. The court of appeals rejected Citizens’

arguments, explaining that the Texas Securities Act claim was the entire

controversy in itself and that certification was still appropriate even if other

claims existed. 105 S.W.3d at 725 . Specifically, the court of appeals affirmed

the trial court’s certification order despite Daccach’s abandonment of numerous

claims because “‘[c]lients who have claims not raised in this class action

because the claims are unsuitable for class treatment can bring those claims on

an individual basis, and res judicata will not bar those claims because

absent class members had no opportunity to litigate those issues in this

lawsuit.’” Id. (quoting Sullivan v. Chase Inv. Servs. of Boston,

Inc. , 79 F.R.D. 246, 265 (N.D. Cal. 1978)).

Citizens

contends this holding amounts to a special exception to established principles

of claim preclusion, and therefore, contradicts our holdings in Intratex Gas

Co. v. Beeson , 22 S.W.3d 398, 405 (Tex. 2000), and Southwestern Refining

Co. v. Bernal , 22 S.W.3d 425, 432 (Tex. 2000). Relying on Henry Schein,

Inc. v. Stromboe , Citizens adds that res judicata precludes litigation of

previously abandoned class claims arising out of the same transaction, and

therefore, defeats class certification because Daccach’s willingness to abandon

claims to the detriment of absent class members undermines the prerequisites of

predominance, superiority, typicality, and adequacy. See 102 S.W.3d 675,

695 (“[I]t is not clear that a class action is superior . . . if it necessitates

that plaintiffs give up substantial rights, nor is it clear that the willingness

. . . to forego consequential damages is typical of the other 20,000 class

members.”).

Daccach

admits that for the class suit he abandoned all but the Texas Securities Act

claim because the abandoned claims were not suitable for class treatment.

Daccach contends, however, that because these claims were procedurally barred by

Rule 42§s certification requirements, res judicata will not preclude subsequent

litigation of the claims that cannot be litigated through diligence in this

class action. See Barr v. Resolution Trust Corp. ex rel. Sunbelt Fed.

Sav. , 837 S.W.2d 627, 631 (Tex. 1992). For the following reasons, we agree

with Citizens and conclude that the trial court erred in certifying the class

without considering the adequacy of the class representative in light of the res

judicata effect of the class representative’s decision to abandon claims.

A. Res Judicata

Generally,

res judicata prevents a plaintiff from abandoning claims and subsequently

asserting them when the claims could have been litigated in the prior suit.

Jeanes v. Henderson , 688 S.W.2d 100, 103 (Tex. 1985); see also State

& County Mut. Fire Ins. Co. v. Miller , 52 S.W.3d 693, 696 (Tex. 2001).

For res judicata to apply, there must be: (1) a prior final judgment on the

merits by a court of competent jurisdiction; (2) identity of parties or those in

privity with them; and (3) a second action based on the same claims that were

raised or could have been raised in the first action. Amstadt v. U.S. Brass

Corp. , 919 S.W.2d 644, 652 (Tex. 1996). The doctrine seeks to bring an end

to litigation, prevent vexatious litigation, maintain stability of court

decisions, promote judicial economy, and prevent double recovery. Barr ,

837 S.W.2d at 629 ; Jeanes , 688 S.W.2d at 105 .

Under the

transactional approach followed in Texas, a subsequent suit is barred if it

arises out of the same subject matter as the prior suit, and that subject matter

could have been litigated in the prior suit. Barr , 837 S.W.2d at 631 . We

explained in Barr that “a final judgment on an action extinguishes the

right to bring suit on the transaction, or series of connected transactions, out

of which the action arose.” Id. at 631 (citing Restatement (Second) of Judgments §

24(1) (1982)). Determining the scope of the “subject matter” or “transaction” of

the prior suit requires “an analysis of the factual matters that make up the

gist of the complaint, without regard to the form of action.” Id . at 630.

This should be done pragmatically, “‘giving weight to such considerations as

whether the facts are related in time, space, origin, or motivation, whether

they form a convenient trial unit, and whether their treatment as a trial unit

conforms to the parties’ expectations or business understanding or usage.’”

Id . at 631 (quoting Restatement

(Second) of Judgments § 24(2) (1982)). “Any cause of action which arises

out of those same facts should, if practicable, be litigated in the same

lawsuit.” Id . at 630.

B. Class Actions

Texas Rule of

Civil Procedure 42 was adopted in 1941 and patterned after Federal Rule of Civil

Procedure 23. Ford Motor Co. v. Sheldon , 22 S.W.3d 444, 452 (Tex. 2000).

Rule 42 was fully revised in 1977 to conform to the 1966 federal amendments.

Thus, we rely on our precedents and persuasive federal decisions and authorities

interpreting current federal class action requirements. Id . (citing

RSR Corp. v. Hayes , 673 S.W.2d 928, 931-32 (Tex. App. _ Dallas 1984, writ dism’d)).

Rule 42 is a

form of joinder, a procedural mechanism established to increase judicial economy

and efficiency for suits with parties too numerous for conventional joinder.

See Gen. Tel. Co. of the Sw. v. Falcon , 457 U.S. 147, 155 (1981)

(discussing Federal Rule of Civil Procedure 23); Hansberry v. Lee , 311

U.S. at 42-43 (“[t]he class suit was an invention of equity to enable it to

proceed to a decree [when parties are so numerous as to make joinder] in

conformity to usual rules of procedure . . . impracticable”); see also

Beeson , 22 S.W.3d at 404 (citing 5 James Wm. Moore et al., Moore’s Federal

Practice § 23.02 (3d ed. 1999)); 7A Charles Alan Wright et al., Federal Practice

and Procedure § 1751 (3d ed. 2005). Rule 42 is intended to eliminate or

reduce the threat of repetitive litigation, prevent inconsistent resolution of

similar cases, and provide an effective means of redress for individuals whose

claims are too small to make it economically viable to pursue them in

independent actions. Sheldon , 22 S.W.3d at 452 (citing The American Law Institute, Report:

Preliminary Study of Complex Litigation 35 (1987)). Although intended to

be an efficient device, “there is no right to litigate a claim as a class

action.” Sheldon , 22 S.W.3d at 452-53 . A Texas court may certify a class

action only if the plaintiff satisfies the requirements of Rule 42. Id.

at 453 .

Moreover,

nothing mandates that a plaintiff pursue a remedy through the procedures of Rule

42. It is the plaintiff who chooses to resolve a claim through the class action

mechanism. Though perhaps inefficient, every claim fit for class certification

could be litigated outside the confines of Rule 42, just as every claim not

suitable for class treatment must be. Thus, despite their unique procedural

requirements, class actions provide no greater substantive rights than other

procedural mechanisms of litigation. See Bernal, 22 S.W.3d at 432 (“[O]ur

procedural rules do not permit the form of the proceeding to determine whether

substantive legal principles will control.”); see also Rules Enabling

Act, 28 U.S.C. § 2072 (b) (2000) (stating that the Federal Rules of Civil

Procedure shall not “abridge, enlarge or modify” preexisting rights). Class

certification under Rule 42 was never meant to be an exception to res judicata,

Beeson , 22 S.W.3d at 405 , or to exist “in some sort of alternative

universe outside our normal jurisprudence,” Bernal , 22 S.W.3d at 432 .

Basic principles of res judicata apply to class actions just as they do to any

other form of litigation. Cooper v. Fed. Reserve Bank of Richmond , 467

U.S. 867, 874 (1984); Bernal , 22 S.W.3d at 432 ; see also Matsushita

Elec. Indus. Co. v. Epstein , 516 U.S. 367, 377-79 (1996). Accordingly, we

hold that claims not pursued, or abandoned, in a class suit seeking damages that

proceeds to final judgment on other claims arising from the same subject matter

are subject to preclusion from relitigation by the principles of res judicata.

Although it

has not unequivocally decided the preclusive effect on subsequent actions of a

final judgment in a class suit, the United States Supreme Court has acknowledged

the same approach. In Hansberry and Ben-Hur, the Supreme Court

indicated that a judgment in a class suit with an adequate representative may

bind absent members of a class. See Hansberry v. Lee , 311 U.S. at 42

(holding that a prior decree in a class suit did not bind a class member because

the named plaintiff did not adequately represent the interests of the class of

property owners); Supreme Tribe of Ben-Hur v. Cauble , 255 U.S. 356,

363-67 (1921) (specifically holding that a federal district court had

jurisdiction of a class action); see also Smith v. Swormstedt , 57

U.S. 288, 303 (1853) (“[A] court of equity permits a portion of the parties in

interest to represent the entire body, and the decree binds all of them the same

as if all were before the court.”); Geoffrey Hazard, Jr. et al., An

Historical Analysis of the Binding Effect of Class Suits , 146 U. Pa. L. Rev. 1849 , 1925-26 (1998).

The Court further stated that it is permissible to hold that a judgment rendered

in a class suit would be res judicata as to members of the class, and the

Fourteenth Amendment does not compel a different rule for conclusiveness of the

judgments in class suits. Hansberry , 311 U.S. at 42 .

This approach

has been challenged as unfair to absent class members who do not opt out and are

bound by the final judgment. The argument continues that these absent members

should be entitled to pursue individual claims in the same or other forums if

their class claims are unsuccessful. We view the matter in a fundamentally

different light, allowing individual choice by the plaintiffs with their

consequent ramifications, to govern the litigation in class suits as in other

suits. We do not dictate how litigants should structure their cases or which

legitimate legal strategies they will pursue. We simply emphasize that legal

consequences attach to tactical and strategic decisions in class actions as in

other lawsuits. For instance, outside of class action suits, litigants tailor

their actions to seek positive results from proceedings. Parties often decide to

drop claims to achieve a desired objective: to enter a particular forum or

venue, to avoid removal to federal court, to avoid expense for claims with

little likelihood of success, to refrain from opening evidentiary doors harmful

to client or case, or to focus the case on claims most likely to be successful.

Similarly, a class may decide to pursue certain claims, abandon some, or not

plead others. In the context of class actions this is not per se inappropriate,

but a class representative must be aware that there are consequences associated

with such a decision that could undermine certification. For example, a specific

issue may involve too little commonality to allow for a class to survive the

predominance requirements. See Bernal , 22 S.W.3d at 435 . Having given

putative class members the opportunity to choose, however, we will ordinarily

hold class actions to the same res judicata standards as other forms of

litigation, including enforcing the preclusion on abandoned claims which could

have been litigated in the suit.

C. Could the Claims have been Litigated ?

Daccach

concedes that res judicata applies equally to class actions. He contends,

however, that the claims he abandoned are procedurally barred from litigation in

the class action by Rule 42, and therefore, res judicata cannot apply to

preclude subsequent litigation of the claims that cannot be litigated through

diligence in this class action suit. See Barr , 837 S.W.2d at 631 (“A

subsequent suit will be barred if it arises out of the same subject matter of a

previous suit and which through the exercise of diligence, could have been

litigated in a prior suit .” (emphasis added)). To achieve certification

despite his abandonment of class claims, Daccach argues for a rule that would

preclude later litigation of only those causes of action that could have been

certified in the prior class action. For reasons we explain, we decline to adopt

Daccach’s proposed rule.

Most courts

agree with Daccach’s concession that the basic principles of res judicata apply

to class actions. See Cooper , 467 U.S. at 874 (and authorities cited

therein); Hansberry , 311 U.S. at 42 ; Ben-Hur , 255 U.S. at 367 ;

Beeson , 22 S.W.3d at 405 . However, only a few cases can be read to

support Daccach’s contention that only claims that could have been brought in a

class action will be barred from subsequent litigation. One line of cases,

followed by the court of appeals below and two other Texas courts of appeals,

holds that under Federal Rule of Civil Procedure 23(c)(4), or identical Texas

Rule of Civil Procedure 42(d), parties may bring or maintain a class action with

respect to specific issues and will not suffer the preclusive effect of res

judicata for those claims not actually litigated as unsuitable for class

treatment. See, e.g. , Sullivan , 79 F.R.D. at 265 (holding that

splitting claims that are amenable to class treatment is “perfectly appropriate”

in order to realize the savings of resources of courts and parties that Rule 23

is designed to facilitate); Compaq Computer Corp. v. Lapray, 79 S.W.3d

779, 793 (Tex. App.—Beaumont 2002), rev’d on other grounds , 135

S.W.3d 657 (Tex. 2004); Microsoft Corp. v. Manning , 914 S.W.2d 602, 610

(Tex. App.—Texarkana 1995, writ dism’d); see also 5 Herbert B. Newberg & Alba Conte, Newberg

on Class Actions §16.22 (4th ed. 2002). The reasoning is based on Federal

Rule of Civil Procedure 23(c)(4)(A) and Texas Rule of Civil Procedure 42(d)(1):

“an action may be brought or maintained as a class action with respect to

particular issues.” Some commentators characterize this approach as a

“sophisticated transactional approach” that limits the basic transactional

approach of res judicata and “includes trial convenience in its calculus.” 18A

Charles Alan Wright et al., Federal

Practice and Procedure § 4455 (2d ed. 2002) (suggesting the approach is

supported by Section 24(2) of the Restatement (Second) of Judgments, which

requires that a “transaction” must “be determined pragmatically, giving weight

to such considerations as whether the facts are related in time, space, origin,

or motivation, whether they form a convenient trial unit , and whether

their treatment as a unit conforms to the parties’ expectations” (emphasis

added)).

Daccach

suggests his proposed rule is consistent with Texas jurisprudence on res

judicata, relying on some of our cases not involving class actions:

Pustejovskey v. Rapid-Am. Corp. , 35 S.W.3d 643, 651 (Tex. 2000); Getty

Oil v. Ins. Co. of N. Am. , 845 S.W.2d 794, 801 (Tex. 1992). [10] These cases are factually and legally

distinguishable. In Pustejovskey , we addressed “whether a plaintiff may

bring separate actions for separate latent occupational diseases caused by

exposure to asbestos.” 35 S.W.3d at 644 . In addressing the single action rule as

a species of res judicata, Justice Gonzales noted that “the transactional

approach set out in Barr does not necessarily penalize a plaintiff for

not bringing a claim arising out of the same facts that nonetheless could not

have been litigated in the initial action.” Id . at 651. But one of the

reasons we adopted a separate accrual rule in that case—and, by implication, the

reason the claim could not have been litigated in the prior action—was that the

damage-causing injury had not yet been discovered. Id . at 652. In this

case we are not faced with latent injuries giving rise to claims that could not

have been litigated in a prior action due to lack of discovery. The claims in

this case were discovered or discoverable and then abandoned by Daccach to try

to achieve class certification.

In Getty

Oil , we held that a third party’s claim against a tortfeasor’s insurers was

not precluded by prior litigation against the tortfeasor because, under the “no

action” clause of the insurance policy and Texas Rule of Civil Procedure 38(c),

the third party could not sue the insurer until there was a judgment against the

tortfeasor. 845 S.W.2d at 801 . Res judicata did not bar the second suit because

the third party was contractually precluded from litigating the claim in the

prior suit. No similar contractual agreement or rule governs in this case.

Daccach also

relies on the following statement made by the Fifth Circuit: “If the court

rendering judgment lacked subject-matter jurisdiction over a claim or if the

procedural rules of the court made it impossible to raise a claim, then it is

not precluded.” Browning v. Navarro , 887 F.2d 553, 558-59 (5th Cir. 1989)

(citing Restatement (Second) of

Judgments § 26(1)(c) (1982)); see also Montgomery v. Blue Cross &

Blue Shield of Tex. Inc. , 923 S.W.2d 147, 150 (Tex. App.—Austin 1996, writ

denied) (citing Browning , 887 F.2d at 558-59 ). Similarly, the

United States Supreme Court cited the Restatement (Second) of Judgments,

which states that a second action arising from the same facts may be brought if

“[t]he

plaintiff was unable to rely on a certain theory of the case or to seek a

certain remedy or form of relief in the first action because of the limitations

on the subject matter jurisdiction of the courts or restrictions on their

authority to entertain multiple theories or demands for multiple remedies or

forms of relief in a single action . . . .”

Thomas v.

Wash. Gas Light Co. , 448 U.S. 261 , 283 n.29 (1980) (quoting Restatement (Second) of Judgments §

61.2(c) (Tent. Draft No. 5, 1978)); see also Gunnells v. Healthplan Servs.,

Inc. , 348 F.3d 417, 432 (4th Cir. 2003) (rejecting contention that

plaintiffs’ individual direct claims would be barred because a class action, “of

course, is one of the recognized exceptions to the rule against

claim-splitting”) (citing 18 James Wm.

Moore et al., Moore’s Federal Practice § 131.40[3][e][iii] (3d ed.

1999)); Restatement (Second) of

Judgments § 26(1)(c) (1982). We are not persuaded by this

argument.

First, the

issue in Browning and Montgomery was whether the original

decision-maker had subject matter jurisdiction to adjudicate the claim sought to

be relitigated in district court. In Browning , the court barred

litigation of a subsequent fraud claim because the bankruptcy court had subject

matter jurisdiction to hear the claim in the prior suit by the party. 887 F.2d

at 558-59 . In Montgomery , the plaintiff was not barred from litigating

extra-contractual claims because the administrative agency that presided over

the prior suit did not have jurisdiction to hear those claims. 923 S.W.2d at

150 . These rulings turned on a lack of jurisdiction and do not inform our

reasoning in this case because rule 42 of the Texas Rules of Civil Procedure

does not affect a trial court’s subject matter jurisdiction.

Second, we do

not believe section 26(1)(c) of the Restatement speaks to the class action

context. Nothing forces plaintiffs seeking damages into a class suit. They may

decide to opt out and pursue their claims individually with separate counsel or

decide that the size of the claim does not justify the cost of pursuing it. On

the other hand, plaintiffs may choose to litigate their claims under Rule 42

because it provides a more efficient and perhaps less expensive means of

litigating certain claims. It is the class representative’s choice to seek

certification, and the putative class members’ decision not to opt out of the

class, that restricts their ability to rely on certain theories of recovery that

are unsuitable for class treatment. Any restrictions that class action

requirements place on a trial court’s ability to entertain specific theories of

recovery in a class suit arise solely because of the choice to seek class

certification. By this choice class members may put at risk their ability to

litigate certain other claims not suitable for class treatment. These

restrictions follow the individual decisions of the class members and are

distinct from the jurisdictional restrictions that may be placed on a bankruptcy

court or administrative agency, to which we believe section 26(1)(c) of the

Restatements (Second) of Judgments more appropriately applies.

We also are

unpersuaded that an exception from res judicata principles for claims abandoned

as unsuitable for class treatment is supported by the asserted precedent from

the United States Supreme Court. In Cooper v. Federal Reserve Bank of

Richmond , the Supreme Court announced that general principles of res

judicata apply in class actions, but nevertheless determined that for the Title

VII claims brought in a class suit under rule 23 of the Federal Rules of Civil

Procedure, certain plaintiffs were not barred from subsequently bringing

individual discrimination claims. 467 U.S. 867 (1984). Four employees sought

certification of a class of employees alleged to have been discriminated against

by a bank that engaged in “policies and practices” of racial discrimination in

violation of Title VII Section 1981. Id . at 869-70. Upon receiving

notice, six other employees joined the class. Id . at 870-71. After a

trial in which all named plaintiffs testified, the district court found the bank

had engaged in a pattern and practice of racial discrimination for certain

levels of employees, but found as to other levels of employees that the

discrimination was not pervasive enough to order relief. Id . at 870-72.

The six joining class members moved to intervene to allege that each had been

individually denied promotions for discriminatory reasons. Id . at 872.

The motions were denied, and five of the six employees then filed a separate

action against the Bank alleging violations of Section 1981. Id . On

interlocutory appeal of the separate action, the federal circuit court concluded

the doctrine of res judicata precluded the plaintiffs from maintaining their

individual race discrimination claims because they were bound by the judgment in

the class action. See EEOC v. Fed. Reserve Bank of Richmond , 698 F. 2d

633 , 674 (4th Cir. 1983). The U.S. Supreme Court reversed.

The Court

began by stating “[t]here is of course no dispute that under elementary

principles of prior adjudication a judgment in a properly entertained class

action is binding on class members in any subsequent litigation.” Cooper ,

467 U.S. at 874 . The holding that basic principles of res judicata apply to

class actions was part of a lengthy discussion of the “crucial difference

between an individual’s claim of discrimination and a class action alleging a

general pattern or practice of discrimination.” Id . at 876. The

suggestion is that a class claim for a pattern or practice of discrimination

involves factual issues distinct from those in a class member’s individual

discrimination lawsuit. Id . at 876-77. The Court also expressly noted

that the district court “pointedly refused to decide the individual claims” of

the plaintiffs now seeking adjudication of the claims in a separate action.

Id . at 881. According to the Court, therefore, the court of appeals erred

in attaching preclusive effect to the class action because it was not

dispositive of the individual claims alleged in the separate action. Id .

at 880.

We read

Cooper not as an exception to res judicata but as an application of its

elements—a subsequent claim might not be barred if it does not involve the same

factual issues that were litigated in the prior class action, a situation that

can arise in the unique context of Title VII pattern and practice litigation.

See, e.g. , Munoz v. Orr , 200 F.3d 291, 307 (5th Cir. 2000) (“We

note that the failure of proof on the class claim does not bar all individual

class members from bringing their own suits, provided that they do not base

their claims solely on issues already adjudicated in this action and that they

can show individualized proof of discrimination.”) (citing Cooper , 467

U.S. at 880 ); Allison v. Citgo Petroleum Corp. , 151 F.3d 402 , 425 n.23

(5th Cir. 1998) (distinguishing Cooper and stating that a subsequent

disparate impact class action will be barred by res judicata and collateral

estoppel because it will inevitably contain the same factual issues as were

litigated in the pattern or practice class action); see also Marshall

v. Kirkland , 602 F.2d 1282, 1298 (8th Cir. 1979) (pre- Cooper case

indicating that subsequent individual discrimination claims will not be

precluded because the issues were not actually litigated in prior class action

and there was no notice to the b(2) class that such claims might be waived);

Tobias Barrington Wolff, Preclusion in Class Action Litigation , 105 Colum. L. Rev. 717 , 727 (2005) (arguing

that the result in Cooper “may represent the correct rule in a Title VII

class action, [but] it does not flow inevitably from an application of basic

claim preclusion principles”).

In addition,

we find it significant that the U.S. Supreme Court emphasized the district

court’s pointed refusal to decide the plaintiff’s individual claims.

Cooper , 467 U.S. at 881 . It would hardly seem appropriate to bar

subsequent litigation of a dispute that a prior court refused to decide. In this

respect, we find Texas Rule of Civil Procedure 42(d) instructive.

Rule 42(d)

provides that “an action may be brought or maintained as a class action with

respect to particular issues.” The rule, like its federal counterpart, “is a

housekeeping rule that allows courts to sever the common issues for a class

trial.” Castano v. Am. Tobacco Co. , 84 F.3d 734 , 746 n.21 (5th Cir.

1996). But, while we agree that Rule 42(d) allows a trial court to consider

certifying a class whose representative has abandoned or split claims, we

decline to take the further step of excepting a final judgment in such a class

action from the principles of res judicata. Class members may be precluded from

asserting those claims in subsequent individual litigation if they arose from

the same transaction or subject matter and could have been litigated in the

prior suit. See Barr , 837 S.W.2d at 631 . Aggregation of claims in an

appropriate class action is a more efficient way to resolve numerous disputes at

once. However, efficiency is defeated if the tactfully structured dispute that

is finally resolved in class suits may be relitigated in the same or other

forums.

We caution,

also, that Rule 42(d) cannot be used to manufacture compliance with the

certification prerequisites. See Castano , 84 F.3d at 745 n.21 (“A

district court cannot manufacture predominance through the nimble use of

[Federal Rule of Civil Procedure 23(c)(4)].”). As explained below, the splitting

or abandoning of certain claims may affect certification of the class in other

ways.

D. Effects on Certification

The different

procedural posture of the Cooper case raises another important issue.

There the Court was faced with an interlocutory appeal of the actual subsequent

claims being asserted, as opposed to this case in which we are asked to

predetermine the preclusive effect of claims that may or may not be asserted in

later litigation. In the only other case in which the United States Supreme

Court has addressed res judicata in the class action context, a dissenting

justice noted that “[a] court conducting an action cannot predetermine the res

judicata effect of the judgment; that effect can be tested only in a subsequent

action.” Matsushita Elec. Indus. Co. v. Epstein , 516 U.S. 367, 396 (1996)

(Ginsburg, J., concurring in part and dissenting in part) (citing 7B Charles Alan Wright et al ., Federal Practice and Procedure § 1789

(2d ed. 1986)). We generally agree with this maxim, but hasten to address a due

process concern that this temporal distinction may raise.

Some courts

have applied the principles of res judicata, but refused to hold that subsequent

claims would be precluded due to a lack of adequate notice to class members

regarding the claims being litigated in the class action. See, e.g. ,

Wright v. Collins , 766 F.2d 841,847 (4th Cir. 1989) (no preclusion because

no notice); Aspinall v. Phillip Morris Cos. , 813 N.E.2d 476 , 488-89 n.19

(Mass. 2004) (allowing member of class certified on economic damages theory to

pursue individual claim for personal injury not suitable for certification in

part because no “opt-out” provisions in state rules). The same reasoning has

been the basis for court holdings that mandatory class actions for injunctive

relief certified under Federal Rule of Civil Procedure 23(b)(2) cannot preclude

subsequent individual claims for damages, even if based on the same events.

See Hiser v. Franklin, 94 F.3d 1287, 1291 (9th Cir. 1996); Fortner v.

Thomas , 983 F.2d 1024, 1031 (11th Cir. 1993); Brown v. Ticor Title

Insurance Co. , 982 F.2d 386 (9th Cir. 1992); Norris v. Slothouber,

718 F.2d 1116, 1117 (D.C. Cir. 1983); Johnson v. Gen. Motors Corp., 598

F.2d 432 , 437-38 (5th Cir. 1979) (finding that due process requires notice to

absent class members before individual monetary damages could be barred and,

though an absent class member could be bound by the res judicata effect of a

Rule 23(b)(2) class action judgment as to injunctive or declaratory relief, he

could not be barred from pursuing his individual monetary claim); Coleman v.

Gen. Motors Acceptance Corp. , 220 F.R.D. 64, 80-84 (M.D. Tenn. 2004); In

re Jackson Lockdown/MCO Cases, 568 F.Supp. 869, 888-89 (E.D. Mich. 1983);

Jahn ex rel. Jahn v. ORCR, Inc. , 92 P.3d 984, 985 (Colo. 2004) (en banc).

Although we are not faced here with a b(2) class, notice and due process still

demand our attention.

To have

preclusive effect a prior judgment cannot be “constitutionally infirm.”

Kremer v. Chem. Constr. Corp. , 456 U.S. 461, 482 (1982). Due process

requires “that the named plaintiff at all times adequately represent the

interests of the absent class members,” as well as “notice plus an opportunity

to be heard and participate in the litigation.” Shutts, 472 U.S. at 812 ;

see also Tex. R. Civ. P .

42(a)(4); Amchem Prods., Inc. v. Windsor , 521 U.S. 591 , 625‑26 (1997). We

noted as much in Compaq Computer Corp. v. Lapray , where we stated that

due process may require that class members be given notice of the class action

and an opportunity to opt out and preserve claims that a class representative

has abandoned. 135 S.W.3d 657, 668 (Tex. 2004); see also Gen. Motors Corp. v.

Bloyed , 916 S.W.2d 949, 953 (Tex. 1996) (“The United States Supreme Court

has made it clear that due process requires adequate representation of the

interests of absentee class members that the judgment will bind.”). Although a

certifying court cannot precisely predetermine the res judicata effect of a

class action, it initially must protect the due process rights of absent class

members by ensuring that the class representative adequately represents their

interests. See Epstein v. MCA, Inc. , 179 F.3d 641, 648 (9th Cir. 1999)

(“[A]bsent class members’ due process right to adequate representation is

protected not by collateral review, but by the certifying court initially, and

thereafter by appeal within the state system and by direct review in the United

States Supreme Court.”).

Some courts

have reconciled the tension between the trial court’s inability to predetermine

res judicata and its burden to protect class members’ due process rights by

requiring the trial court to assess the “risk” that uncertified claims may be

forever barred. See Clark v. Experian Info. Solutions, Inc. , No. Civ. A.

8:001217-24, 2001 WL 1946329 , at *4 (D.S.C. Mar. 19, 2001) (stating that

offering only some claims for class certification when other, more lucrative

claims could not be certified “defeats adequate representation since it places

absent class members at the risk of having other claims forever barred by res

judicata”); Zachery v. Texaco Exploration & Prod., Inc. , 185 F.R.D.

230, 243 (W.D. Tex. 1999) (assessing the risk of abandoned monetary claims that

members of the b(2) pattern-and-practice class may face in trying to bring later

individual claims); Thompson v. Am. Tobacco Co. , 189 F.R.D. 544, 550-51

(D. Minn. 1999) (refusing to certify because the “possible prejudice to class

members” resulting from claim preclusion in the future “is simply too great”);

Feinstein v. Firestone Tire & Rubber Co. , 535 F. Supp. 595, 606

(S.D.N.Y. 1982) (refusing to certify class action for economic losses where

plaintiffs also had personal injury claims because of significant risks that

class members would “later [be told] that they had impermissibly split a single

cause of action”); Millett v. Atl. Richfield Co. , No. Civ. A. CV-98-555,

2000 WL 359979 , at *9 (Me. Super. Ct. Mar. 2, 2000) (explaining that asserting

claims for injunctive relief while leaving personal injury claims unraised

places class members at risk of subsequent claim preclusion defense); Small

v. Lorillard Tobacco Co., Inc. , 679 N.Y.S.2d 593, 601-02 (N.Y. App. Div.

1998) (stating that paring down class claims to avoid certification problems

creates impermissible “risk” of adverse preclusive effect). We agree with this

approach.

A class

representative’s decision to abandon certain claims may be detrimental to absent

class members for whom those claims could be more lucrative or valuable,

assuming those class members do not opt out of the class. Abandoning such

claims, or claims “reasonably expected” to be raised by class members, could

undermine the adequacy of the named plaintiff’s representation of the class.

See City of San Jose v. Super. Ct. of Santa Clara County , 525 P.2d 701,

711-13 (Cal. 1974). But see Regions Bank v. Lee , 905 So.2d 765, 772-73

(Ala. 2004) (rejecting adequacy challenge based on effect of res judicata

because abandoned claims would involve a different cause of action against a

different defendant than that involved in the class action). We hold, therefore,

that Texas Rule of Civil Procedure 42 requires the trial court, as part of its

rigorous analysis, to consider the risk that a judgment in the class action may

preclude subsequent litigation of claims not alleged, abandoned, or split from

the class action. The trial court abuses its discretion if it fails to consider

the preclusive effect of a judgment on abandoned claims, as res judicata could

undermine the adequacy of representation requirement. See Wolff, 105

Colum. L. Rev at 722 (“[T]he

preclusion inquiry would sometimes reveal significant obstacles to class

certification . . . .”).

A trial court

could, however, determine that the risk of preclusion is not high enough to

refuse certification. For instance, the abandoned claims may be insignificant,

unlikely to succeed in any proceeding, or not valuable. Some abandoned claims

may be alleged against different defendants or may not be ripe for litigation,

in which case res judicata would not apply. But, because we hold class actions

seeking damages to the same res judicata standards as other forms of litigation,

including enforcing the preclusion on abandoned claims which could have been

litigated in the suit, it is critical that putative class members be given

adequate notice and an opportunity to exclude themselves from the class form of

proceeding so that they may preserve individual claims that may otherwise be

barred from subsequent litigation. See Richard A. Nagareda,

Preexistence Principle and the Structure of the Class Action , 103 Colum. L. Rev. 149 , 216 (2003)

(contending that the ability to opt out respects the rights of class members to

control their claims). [11]

Under Rule

42, notice must be given to the class, and class members given an opportunity to

opt out, before the trial court addresses the merits of the class claims. See

Bally Total Fitness Corp. v. Jackson , 53 S.W.3d 352, 360 (Tex. 2001) (Owen,

J. dissenting); see also Am. Pipe & Const. Co. v. Utah , 414 U.S. 537 ,

548 (1974) (explaining that Federal Rule of Civil Procedure 23 was amended to

avoid “one‑way” intervention issue arising when class members were not

identified before court made decisions going to merits). To properly protect

absent class members, a trial court must rigorously analyze Texas Rule of Civil

Procedure 42’s prerequisites prior to sending any necessary class notice, as

this analysis will likely affect the class definition and requisites for the

notice. McAllen Med. Center, Inc. v. Cortez , 66 S.W.3d 227, 232 (Tex.

2001). Rule 42 sets out the following requirements for notice in a b(3) class

action:

For any

class certified under Rule 42(b)(3), the court must direct to class members the

best notice practicable under the circumstances, including individual notice to

all members who can be identified through reasonable effort. The notice must

concisely and clearly state in plain, easily understood language: (i) the nature

of the action; (ii) the definition of the class certified; (iii) the class

claims, issues, or defenses; (iv) that a class member may enter an appearance

through counsel if the member so desires; (v) that the court will exclude from

the class any member who requests exclusion, stating when and how members may

elect to be excluded; and (vi) the binding effect of a class judgment on class

members under Rule 42(c)(3).

Tex. R. Civ. P. 42(c)(2)(B).

Ultimately, to certify a class in which the representatives have abandoned

claims in favor of pursuing certain class claims, raising a risk of preclusion

for absent class members, effective notice must be given to these absent members

of an identified class regarding the preclusive effect that may attach to their

individual claims. The unnamed members may then exercise independent judgment

and chose to remain in the class or opt out.

VI. Class Definition

Citizens

challenges the court of appeals’ approval of the class definition on grounds

that the definition fails to identify a presently ascertainable class from

objective criteria and creates a “fail-safe” class. Citizens specifically points

to the definition’s exclusionary language, which it contends creates a future

contingency that grants each plaintiff a post-judgment opportunity to exclude

himself from the class.

A class is properly defined only if its members are presently ascertainable by

reference to objective criteria. Intratex Gas Co. v. Beeson , 22 S.W.3d

398, 403 (Tex. 2000). A class cannot be defined by subjective criteria or

require analysis of the merits of the case. Id. A class definition that

“rests on the paramount liability question” is not based on objective criteria

because “the trial court has no way of ascertaining whether a given person is a

member of the class until a determination of ultimate liability as to that

person is made.” Id. at 404 . In other words, the class is defined as

members who succeed on the ultimate liability question. Such a “fail‑safe class”

is also impermissible because it binds members only by a judgment favorable to

them but not by a judgment favorable to the defendants. Id. at 405 .

The trial

court’s certification order defined the class as follows:

The Class

consists of all persons, who, during the Class Period (August 6, 1996 through

the date the Class is certified): (1) purchased a CICA Policy and executed an

assignment to a trust for the purchase of Citizens, Inc. stock, or (2) paid any

money that, pursuant to a CICA Policy and assignment to a trust, was for the

purchase of Citizens, Inc. stock, or (3) were entitled to any cash benefits from

a CICA Policy that, pursuant to a CICA Policy and assignment to a trust, were

for the purchase of Citizens, Inc. stock. Specifically excluded from the Class

are all persons who, within the time period established by the judgment, do not

surrender their CICA Policies and take the other actions required to obtain the

relief awarded by the Court.

Because the

exclusionary language of the trial court’s class definition partially defined

the class by actions taken after the judgment, it failed to create a class that

could be objectively ascertained before judgment. Id. at 403-04 . Although

the contours of the class did not “rest on whether the CICA policies qualify as

securities or whether the policies were in fact sold or offered for sale from

Texas,” and thus was not invalid as a traditional “fail-safe” class, it did

however allow putative class members to essentially opt out of the suit after

the judgment and thus escape the binding effect of the judgment. This class

definition was improper.

The court of appeals revised the definition, substituting the word “remedy” for

the word “Class” in the definition’s last sentence:

Specifically excluded from

the remedy are all persons who, within the time period established by the

judgment, do not surrender their CICA Policies and take the other actions

required to obtain the relief awarded by the Court.

105 S.w.3d 722

n.7 (emphasis added). We conclude that this corrects the defective class

definition. This sentence simply states what is true is any case: a litigant, or

in this case, a class member, may elect not to exercise a right to a remedy

rendered in a judgment. Instead, it reiterates the obvious fact that even in the

event of a favorable judgment, a class member may elect to keep his or her

policy and decline the remedy. Regardless, the class member would still be bound

by the judgment.

VII. Attorney’s Fees

Citizens

argues that the class’s claim for attorney fees involves individual questions of

fact because the statute allows recovery if “the court finds that the recovery

would be equitable in the circumstances.” Tex. Rev. Civ. Stat. art. 581-33D(7).

The class claim—that Citizens offered or sold securities in or from Texas

without registering with the Texas Securities Board—implicates Citizens’ overall

business scheme. The class makes no allegation of conduct varying from buyer to

buyer with regard to this claim. We agree with the court of appeals that because

“the heart of the dispute turns only on whether the jury decides [whether] the

CICA policies constitute securities and whether they were sold from Texas,”

attorney’s fees could be awarded based on Citizens’ marketing conduct in

general.

VIII. Conclusion

As part of a

trial court’s rigorous analysis for certification of a Rule 42(b)(3) class, a

trial court must assess all of Rule 42’s requirements with awareness of res

judicata’s preclusive effect on abandoned claims. See Bernal , 22 S.W.3d

at 435 . Although we hold that res judicata principles are applicable in class

suits and could bar claims abandoned by the class representative, we do not

dictate how plaintiffs should structure their case or which legitimate legal

strategies they will pursue. We simply note that legal consequences attach to

tactical and strategic decisions in class actions as in other lawsuits. While it

is not per se inappropriate to abandon claims or for the trial court to certify

a specific-issue class, the requirements of class certification must still be

met. As we have cautioned above, a class representative’s abandonment of claims

can affect the class representative’s ability to satisfy these requirements.

Here the trial court failed to evaluate Rule 42’s prerequisites in light of the

claims abandoned by the class representative. Therefore, we reverse the court of

appeal’s affirmance of the trial court’s class certification order, decertify

the class, and remand the case to the trial court for further proceedings

consistent with this opinion. Tex. R.

App. P. 60.2( d).

________________________________________

J. Dale

Wainwright

Justice

OPINION DELIVERED : March

2, 2007

[1] Article 581-33A(1) of the Texas Securities Act

provides:

A person who offers or sells a security in violation of

Section 7, 9 (or a requirement of the Commissioner thereunder), 12, 23C, or an

order under 23A or 23-2 of this Act is liable to the person buying the security

from him, who may sue either at law or in equity for rescission or for damages

if the buyer no longer owns the security.

Tex. Rev. Civ.

Stat. art. 581-33A(1). Section 12A states

“no person, firm, corporation or dealer shall, directly or through agents, offer

for sale, sell or make a sale of any securities in this state without first

being registered as in this Act provided.” Id. art.

581-12A.

[2] The court of appeals modified the last sentence of the

class definition by substituting the word “remedy” for the word “Class.” 105

S.W.3d at 721-22 .

[3] A negative value suit is one in which the stakes to

each member are too slight to repay the cost of suit. Sw. Ref. Co. v.

Bernal , 22 S.W.3d 425, 439 (Tex. 2000).

[4] In 2003, the Legislature amended sections 22.225(b) and

(d) to give this Court jurisdiction over interlocutory appeals of orders

certifying or refusing to certify a class. See Act of June 2, 2003, 78th

Leg., R.S., ch. 204, § 1.02, 2003 Tex. Gen. Laws 847 , 848-49. The amendments

apply to petitions filed on or after September 1, 2003. Act of June 2, 2003,

78th Leg., R.S., ch. 204, § 23.02(a), (d), 2003 Tex. Gen. Laws 847 , 898-99.

Because Citizens filed its petition for review in June 2003, the amendments do

not govern our jurisdiction in this case. See Hoff v. Nueces , 153 S.W.3d

45 , 48 n.2 (Tex. 2004).

[5] On July 31, 2002, the trial court certified the class

pursuant to Rule 42(b)(4). Effective January 1, 2004, however, the Court deleted

as unnecessary subparagraph (b)(3) from Rule 42 and substituted in its

place—with minor changes not pertinent here—former subparagraph (b)(4). Tex. R. Civ. P. 42 cmt.–2003. Our

references here are to current subparagraph (b)(3), which includes former

subparagraph (b)(4).

[6] The term “Blue Sky laws” was used by Justice McKenna

writing for the U.S. Supreme Court in Hall v. Geiger-Jones Co. , 242

U.S. 539 (1917). He stated: “The name that is given to the law indicates the

evil at which it is aimed, that is . . .’speculative schemes which have no more

basis than so many feet of “blue sky”‘; or, as stated by counsel in another

case, ‘to stop the sale of stock in fly-by-night concerns, visionary oil wells,

distant gold mines and other like fraudulent exploitations.’“ Id . at

550. Thus, Blue Sky laws were promulgated by states to protect investors from

nefarious securities schemes.

[7] In a similar fashion, the commentary to section 6 of

the Restatement provides the following:

b. Intended range of application of

statute. A court will rarely find that

a question of choice of law is explicitly covered by statute. That is to say, a

court will rarely be directed by statute to apply the local law of one state,

rather than the local law of another state, in the decision of a particular

issue. On the other hand, the court will constantly be faced with the question

whether the issue before it falls within the intended range of application of a

particular statute. . . . If the legislature intended that the statute should be

applied to the out-of-state facts involved, the court should so apply it unless

constitutional considerations forbid. On the other hand, if the legislature

intended that the statute should be applied only to acts taking place within the

state, the statute should not be given a wider range of application. . . .

When the statute is silent as to its range of application, the intentions of

the legislature on the subject can sometimes be ascertained by a process of

interpretation and construction.

Restatement (Second) of

Conflicts of Laws § 6(1) cmt. b (emphasis

added). While we generally agree with this comment, the emphasized sentence does

not fully explain the approach we follow in Texas to determine the

extraterritorial affect of Texas statutes. See Marmon , 430 S.W.2d at

182 .

[8] The words “in this state” first appeared in Texas

securities statutes in 1925 in a registration provision substantially different

from the current version. Tex. Rev. Civ.

Stat. arts. 579-600. In 1935, the words “in this state” were used in a

securities registration provision more similar to the current version. Act of

April 16, 1935, 44th Leg., R.S., ch. 100, _ 2, 1935 Tex. Gen. Laws 255 , 256-59. The language of

current Section 12 was adopted in very similar form in 1955, then re-adopted in

its current form as section 12 of the Texas Securities Act of 1957.

[9] The U.S. Supreme Court has identified two primary

constitutional limitations on the application of a state’s substantive law to

conduct occurring, at least in part, outside the state—the Due Process Clause

and the Interstate Commerce Clause. Shutts , 472 U.S. at 818-22 ;

Travelers Health Ass’n v. Virginia , 339 U.S. 643, 649 (1950). Citizens

only raises a due process violation.

[10] We reject the argument predicated on Van Dyke v.

Boswell, O’Toole, Davis & Pickering that the class could circumvent this

conclusion by obtaining a severance of its Texas Blue Sky claim into a separate

action. 697 S.W.2d 381, 384 (Tex. 1985).

[11] Because counsel and class representatives may have

little or no interest in seeing absent class members opt out of a class, the

trial court ensures that notice is effective under Texas Rule of Civil Procedure

42(c)(2)(B). See Linda S. Mullenix, No Exit: Mandatory Class Actions

in the New Millennium and the Blurring of Categorical Imperatives , 2003

U. Chi. Legal F. 177 , 245 (2003)

(lamenting that opt-out claimants may be “fungible hostages” in a “class action

game”).