In Re: Prudential Insur.

Opinions of the United

1998 Decisions States Court of Appeals

for the Third Circuit

7-23-1998

In Re: Prudential Insur.

Precedential or Non-Precedential:

Docket 97-5155,97-5156,97-5217,97-5312

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Recommended Citation

"In Re: Prudential Insur." (1998). 1998 Decisions. Paper 169.

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Volume 1 of 2

Filed July 23, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 97-5155, 97-5156, 97-5217 & 97-5312

IN RE: PRUDENTIAL INSURANCE COMPANY

AMERICA SALES PRACTICE LITIGATION AGENT ACTIONS

RICHARD P. KRELL, MDL transfer, N.D. Ohio,

DNJ Civil Action No. 95-6062

v.

PRUDENTIAL INSURANCE COMPANY OF AMERICA

Richard P. Krell, as well as Objectors

Elizabeth Bajek, Amanda Bajek,

Helen Bartsch, Mark Ciconte,

Raymond Dolce, Margaret Dolice,

Louise Duggan, Peter Duggan,

Charles Duncan, Mary Howe, Mary Krell,

William Morris, Diana Racer, Thomas Racer,

Gweneth Reidel, The Estate of Carl J. Scalzo,

Marie Scalzo, Terry Sligar, Alice Smith,

Jerry Smith, and William Walton,

Appellants at Nos. 97-5155/5156/5312

IN RE: PRUDENTIAL INSURANCE COMPANY

AMERICA SALES PRACTICE LITIGATION AGENT ACTIONS

RICHARD JOHNSON,

Intervenor-Plaintiff in District Court

Richard E. Johnson,

Appellant at No. 97-5217

On Appeal from the United States District Court

for the District of New Jersey

(D.C. Civil Action No. 95-cv-04704)

Argued January 26, 1998

Before: SCIRICA, ROTH and RENDELL, Circuit Judges

(Filed July 23, 1998)

MICHAEL P. MALAKOFF, ESQUIRE

(ARGUED)

Malakoff, Doyle & Finberg

The Frick Building, Suite 200

Pittsburgh, Pennsylvania 15219

Attorney for Appellants,

Richard P. Krell, et al.

LYNDE SELDEN, II, ESQUIRE

Lynde Selden Chartered

501 West Broadway, Suite 845

San Diego, California 92101

Attorney for Appellant,

Richard E. Johnson

MELVYN I. WEISS, ESQUIRE

(ARGUED)

Milberg, Weiss, Bershad, Hynes &

Lerach

One Penn Plaza, 49th Floor

New York, New York 10119

ALLYN Z. LITE, ESQUIRE

Goldstein, Lite & DePalma

Two Gateway Center, 12th Floor

Newark, New Jersey 07102

Attorneys for Appellee,

George A. Zoller, Class Action

Plaintiff Representative

2

REID L. ASHINOFF, ESQUIRE

(ARGUED)

MICHAEL H. BARR, ESQUIRE

Sonnenschein, Nath & Rosenthal

1221 Avenue of the Americas,

24th Floor

New York, New York 10020

Attorneys for Appellees,

The Prudential Insurance

Company of America and

Ron D. Barbaro

BRIAN S. WOLFMAN, ESQUIRE

(ARGUED)

ALAN B. MORRISON, ESQUIRE

Public Citizen Litigation Group

1600 20th Street, N.W.

Washington, D.C. 20009

Attorneys for Amicus Curiae-

Appellant, Public Citizen, Inc.

JOHN J. GIBBONS, ESQUIRE

Gibbons, Del Deo, Dolan, Griffinger

& Vecchione

One Riverfront Plaza

Newark, New Jersey 07102-5497

Attorney for Appellee,

Robert C. Winters

FREDERICK B. LACEY, ESQUIRE

LeBoeuf, Lamb, Greene & MacRae

One Riverfront Plaza

Newark, New Jersey 07102

Attorney for Appellee,

Frances K. Beck, as Executrix of

the Estate of Robert A. Beck

3

TABLE OF CONTENTS

OPINION OF THE COURT 6

I. BACKGROUND AND PROCEDURAL HISTORY 8

A. The Multi-State Life Insurance Task Force 8

B. The Federal Class Action 11

1. The Proposed Settlement 16

a. The Alternative Dispute Resolution process 17

b. Basic Claim Relief 20

c. Enhancements To the Task Force Plan 20

2. The Fairness Hearing 23

II. ISSUES RAISED ON APPEAL AND STANDARD OF

REVIEW 25

III. JURISDICTION 26

A. Subject Matter Jurisdiction 26

1. Federal Question Jurisdiction as a Basis for

Supplemental Jurisdiction 28

2. Diversity Jurisdiction as a Basis for Supplemental

Jurisdiction 34

B. Personal Jurisdiction 39

C. Article III 40

IV. CLASS CERTIFICATION 42

A. Settlement-Only Class Certification 42

B. Class Certification under Rule 23 45

1. The Rule 23(a) Criteria 46

a. Numerosity 46

b. Commonality 47

c. Typicality 49

d. Adequacy of Representation 52

2. The Rule 23(b) Criteria 55

a. Predominance 55

b. Superiority 59

C. Conclusion 60

V. THE FAIRNESS OF THE PROPOSED

SETTLEMENT 60

A. The Girsh Factors 66

1. The complexity and duration of the litigation 66

2. The reaction of the class to the settlement 66

3. The stage of the proceedings and amount of

discovery completed 68

4

4. The risks of establishing liability and

damages 69

a. Replacement Claims 70

5. The risks of maintaining the class action

through trial 72

6. The ability of the defendants to withstand a

greater judgment 73

7. The range of reasonableness of the settlement

fund in light of the best possible recovery and

all the attendant risks of litigation 74

B. Other Objections 78

1. The Rules Enabling Act and the McCarran -

Ferguson Act 78

2. Failure to Allow Discovery 79

C. "Other Sales Claims" 80

1. The Alleged Expansion of the Class 81

2. Adequacy of Class Notice 83

D. Conclusion 87

VI. ATTORNEYS' FEES 88

A. The Fee Agreement 88

B. Fee Opinion 90

C. Analysis 96

1. "Clear-Sailing" Fee Agreement 99

2. Adverse Effect on Class Members 101

3. Fairness of the Award 102

a. The Value of the Settlement 102

b. The Appropriate Percentage Recovery 107

c. Lodestar Calculation 110

i. Multiplier 110

ii. Time Records 113

D. Conclusion 114

VII. KRELL'S MOTION TO RECUSE 114

A. Procedural History 114

B. Legal Standard 116

C. Krell's Arguments on Appeal 116

1. Ex Parte Meetings 116

2. The Conference With State Insurance

Regulators 117

3. Rutt v. Prudential 119

VIII. CONCLUSION 121

5

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is an appeal from the approval of the settlement of

a nationwide class action lawsuit against Prudential Life

Insurance Company alleging deceptive sales practices

affecting over 8 million claimants throughout thefifty states

and the District of Columbia.

The class is comprised of Prudential policyholders who

allegedly were the victims of fraudulent and misleading

sales practices employed by Prudential's sales force. The

challenged sales practices consisted primarily of churning,

vanishing premiums and fraudulent investment plans, and

each cause of action is based on fraud or deceptive

conduct. There are no allegations of personal injury; there

are no futures classes. The settlement creates an

alternative dispute resolution mechanism and establishes

protocols to determine the kind and amount of relief to be

granted. The relief awarded includes full compensatory

damages consisting of what plaintiffs thought they were

purchasing from the insurance agent. There is no cap on

the amount of compensatory damages for those who

qualify, and although punitive damages are not included in

the settlement, Prudential has agreed to pay an additional

remediation amount in addition to the payments made

through dispute resolution process.

The case involves five consolidated appeals from the

judgments of the District Court for the District of New

Jersey approving the settlement and awarding attorneys'

fees to class counsel. Appellants, members of the certified

class who object to the settlement, challenge the district

court's jurisdiction, the certification of the settlement class,

the fairness of the settlement itself, the award of attorneys'

fees, and the district court's refusal to disqualify itself.

We hold the district court properly exercised jurisdiction.

Federal subject matter jurisdiction is properly grounded on

the alleged violations of the federal securities laws.

Although most of the claims implicate state law,

6

supplemental jurisdiction is proper because all of the

claims arise out of a common nucleus of operative fact. The

district court had personal jurisdiction over the class

because actual notice was given to each of the 8 million

policyholders by direct mail, and disseminated through

television, radio and print advertising throughout the fifty

states and the District of Columbia. We also hold there was

no reason for the district court to recuse itself from these

proceedings.

The district court properly certified a national class under

Fed. R. Civ. P. 23(b)(3). The court assessed the numerosity

and commonality of the asserted claims, the typicality of

those claims, and the adequacy of representation provided

by the named plaintiffs and class counsel, and found they

satisfied the certification standards. The court also

concluded the proposed class action was the superior

means of addressing plaintiffs' claims of widespread sales

abuse, and the issues common to all members of the class

predominated over individual issues related to the members

of the class.

We hold the district court properly evaluated the

settlement, finding it fair, reasonable and adequate.

Prudential's deceptive practices occurred nationwide. It may

be argued that problems national in scope deserve the

attention of national courts when there is appropriate

federal jurisdiction. Because of the extraordinary number of

claims, fairness counsels that plaintiffs similarly injured by

the same course of deceptive conduct should receive similar

results with respect to liability and damages. The proposed

class settlement offers plaintiffs several advantages,

including full compensation for their injuries, no obligation

to pay attorneys' fees, and a relatively speedy resolution of

their claims. The alternative dispute resolution process is

sensible and provides adequate safeguards for individual

treatment of claims, including appeals. We will affirm the

district court's approval of the class certification and the

settlement.

The district court awarded $90 million in attorneys' fees

as a percentage of a common fund created under the

settlement. We will vacate and remand the fee award and

ask the district court to recalculate the fee to account for

7

work done by the multi-state task force whose efforts

served as a basis for the final settlement in this case.

Furthermore, we question the multiplier employed in the

lodestar analysis used by the court to cross check the size

of the fee award. Although granting discovery on fee

applications is within the sound discretion of the district

court, we will ask the district court to reconsider whether

it should grant limited discovery to the objectors on the fee

application.

I. BACKGROUND AND PROCEDURAL HISTORY

This case began in early 1994, when the first of many

individual and class action lawsuits alleging improper sales

and marketing practices was filed against Prudential, the

nation's largest life insurer. As lawsuits began to

accumulate, the New Jersey Insurance Commissioner

sought to organize a group to investigate the allegations

against Prudential.1 The resulting investigation into market

conduct sought to determine the scope of any improper

sales practices, and to develop a remedial plan designed to

compensate injured policyholders, to prevent future

violations, and to restore public confidence in the insurance

industry. Report of The Multi-State Life Insurance Task Force

and Multi-State Market Conduct Examination of The

Prudential Insurance Company of America at 2 ("Task Force

Report"). While the Task Force proceeded with its

investigation, federal and state court actions alleging sales

practice abuses by Prudential continued to accumulate.

Although our primary concern is the outcome of the federal

litigation, the history of both the Multi-State Life Insurance

Task Force's investigation and the various lawsuits filed

against Prudential overlap to a certain degree, and thus

warrant discussion.

A. The Multi-State Life Insurance Task Force

At the instigation of the New Jersey Insurance

Commissioner, the Multi-State Life Insurance Task Force

was formed on April 25, 1995, with the stated goal of

_________________________________________________________________

1. The New Jersey Department of Banking and Insurance also conducted

an independent market conduct investigation of Prudential's New Jersey

business. Its report was issued on July 9, 1996.

8

conducting a thorough and extensive examination of

Prudential's sales practices during the period from 1985

until 1995. In all, thirty states and jurisdictions elected to

participate.2 The Task Force interviewed 283 agents and 27

sales management executives, and reviewed voluminous

materials provided by Prudential. Among those materials

were internal computer data bases reflecting complaints,

policy transactions, and agent discipline. The Task Force

also reviewed market conduct reports prepared by other

states which had examined Prudential's business practices,

and examined the historical developments which affected

sales practices in the insurance industry.3

In July 1996, the Task Force issued its final report, citing

widespread evidence of fraudulent sales practices and

inadequate supervision by Prudential's management. It

explained that Prudential's records revealed the company

_________________________________________________________________

2. According to the Task Force Report, eleven states and the District of

Columbia "actively participated" in the investigation: Arizona, Arkansas,

California, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New

Jersey, Ohio, and Washington. These twelve jurisdictions represented

approximately 36.5 percent of the 10.7 million Prudential policies sold

during the investigation period. Report of the Multi-State Life Insurance

Task Force and Multi-State Market Conduct Examination of the Prudential

Insurance Company of America at 1-2 ("Task Force Report"). The Attorney

General of the State of Connecticut began a separate investigation of

Prudential in April 1995, in response to the filing of a class action

complaint in United States District Court for the District of Connecticut.

Although the Connecticut Insurance Commissioner subsequently joined

the Multi-State Task Force, the Attorney General completed its

independent investigation and issued a report on November 21, 1995.

3. According to the Task Force Report, a combination of regulatory and

economic changes in the 1970s and 1980s created an atmosphere within

the insurance industry that was more amenable to the replacement of

insurance policies. For example, the rise in interest rates allowed

insurance companies to offer new products "designed to compete with

banks, money market funds and newly founded life insurers," and thus

led companies to abandon their usually conservative approach. Task

Force Report at 7. At the same time, the original model replacement

regulations, which stated that replacement transactions were generally

not in the best interest of the customer, were modified to allow for these

transactions in certain cases. See discussion infra S V.A.4. & n.66. As a

result of these changes, replacement activity flourished.

9

"knew of cases of alleged misrepresentation and other

improper sales practices by its agents, and in many

instances failed to adequately investigate and impose

effective discipline." Task Force Report at 15. According to

the report, interviews with Prudential agents revealed "little

if any consistency in agent training and agent awareness of

company and regulatory guidelines." Id. at 16. While the

Task Force concluded that not all of the sales during the

time period investigated were fraudulent or improper, it

recognized the difficulty in ascertaining precisely which

policyholders had been harmed,4 and therefore

recommended the implementation of a remediation plan

which would "reach out to all potentially affected

policyholders." Id. at 17-18. Under the plan, which was

developed with Prudential's input and cooperation,

policyholders were given the option of pursuing claims in

an Alternative Dispute Resolution process ("ADR") or

through a "no-fault" remedy known as Basic Claim Relief.5

As part of the Task Force Plan, Prudential agreed to

conduct an extensive outreach program, including

individual notice to all persons who purchased a policy

between 1982 and December 31, 1995. Those electing the

ADR process could submit their claim for evaluation. The

remediation plan addressed four categories of claims:

financed or replacement sales; sales involving abbreviated

payment plans; life insurance sold as an investment; and

other claims "falling outside of the first three categories." Id.

at 19. Those electing Basic Claim Relief would be eligible for

preferred-rate loans or the opportunity to purchase

discounted policies.

Forty-three states and the District of Columbia signed a

Consent Order adopting the Task Force Plan, with the

understanding that if the pending class action achieved a

_________________________________________________________________

4. The Task Force found that, "[b]ecause of the nature of the

transactions and possible improprieties, an electronic analysis could not

identify every instance of sales abuse or violation of law or regulation."

Task Force Report at 6.

5. The structure of this remediation plan was based on a settlement

reached between a number of the class counsel here and New York Life

Insurance Company in a similar class action. Task Force Report at 198.

10

better result, the Task Force and the states could join in

the improved plan. The Task Force also recommended a

separate $35 million fine to be divided among the states

and the District of Columbia.

B. The Federal Class Action

While the Task Force was conducting its investigation,

parties continued to file individual claims and class actions

against Prudential in both state and federal court. On

February 6, 1995, named plaintiff Nicholson filed a class

action in Illinois state court which was removed one month

later to the United States District Court for the Southern

District of Illinois. The Kuchas plaintiffs filed their federal

class action on February 28, 1995 in the District of

Connecticut. Four other federal class actions were filed in

the District of New Jersey in early 1995. Appellant Krell

filed his class complaint in Ohio state court in June 1995.

On April 26, 1995, Prudential moved to consolidate the

various federal actions in the District of New Jersey. On

August 3, 1995, the Judicial Panel on Multidistrict

Litigation granted Prudential's motion and transferred

several actions to the District of New Jersey.6 Prudential

then removed the various state actions to federal court,

including the Krell action, and requested these additional

cases be consolidated in New Jersey. The MDL Panel

granted that request as well.7

In October 1995, the district court appointed Melvin

Weiss of Milberg, Weiss, Bershad, Hynes & Lerach and

Michael B. Hyman of Much, Shelist, Freed, Deneberg,

Ament, Bell & Rubenstein as Co-Lead Counsel for plaintiffs,

and ordered plaintiffs to file a consolidated complaint. On

October 24, 1995, plaintiffs filed the First Consolidated

Amended Class Action Complaint.

_________________________________________________________________

6. More than 100 actions have been centralized in the District of New

Jersey by the MDL Panel. In re The Prudential Ins. Co. of America Sales

Practice Litigation, 962 F. Supp. 450, 479 n.13 (D.N.J. 1997) ("Fairness

Opinion").

7. Appellant Krell moved the district court to remand his case to state

court. After the district court denied that motion on April 16, 1996,

Krell

filed a petition for mandamus relief with this Court. We denied that

motion without opinion on September 25, 1996.

11

The named plaintiffs filed suit on behalf of all persons

who purchased new or additional life insurance policies

between January 1, 1980 and the time of the complaint as

a result of Prudential's alleged fraudulent scheme. 8 They

alleged that Prudential management developed and

implemented a fraudulent scheme to sell life insurance

policies through a variety of deceptive sales practices,

including "churning," "vanishing premium," and

"investment plan" sales tactics. Plaintiffs also challenged

Prudential's dividend practices, among them the so-called

"investment generation approach," and "Prudential's

deceptive administration of class members' policies to

conceal fraudulent sales and effectuate the scheme,

including Prudential's use of unauthorized policy loans and

similar contrivances to deplete policyholders' cash values."

Lead Counsel Brief at 5. The Complaint alleged violations of

Sections 10(b) and 20(a) of the Securities Exchange Act of

1934, common law fraud, breach of contract, bad faith,

negligent misrepresentation, negligence, unjust enrichment,

and breach of state consumer fraud statutes.

On December 26, 1995, Prudential moved to dismiss the

complaint under Fed. R. Civ. P. 12(b)(6). At the same time,

Prudential approached Lead Counsel to discuss a possible

settlement. Those discussions ended, however, when Lead

Counsel indicated they would not settle the case without

significant discovery. The parties renewed their settlement

discussions in early 1996, after Prudential agreed to

provide discovery, but once again failed to reach an

agreement. When the talks ceased, Prudential stopped its

production of documents. Lead Counsel nevertheless

pursued its own investigation, interviewing approximately

thirty former Prudential agents and customers, and

reviewing the limited array of documents provided by

Prudential.

The district court granted Prudential's motion in part on

May 10, 1996, dismissing without prejudice all claims of

three of the five named plaintiffs, and several claims of the

_________________________________________________________________

8. Krell declined to join the class, claiming that Ohio policyholders with

replacement claims deserved the protection of Ohio insurance law. Krell

Brief at 5.

12

remaining two. It also noted that plaintiffs would not likely

prevail on many of their claims at trial. The district court

then ordered Prudential to provide plaintiffs with copies of

the substantial discovery materials already provided to the

Task Force.

Following the issuance of the Task Force Report in July

1996, Lead Counsel and Prudential once again entered

settlement negotiations, and again Prudential agreed to

Lead Counsel's demands for discovery.9 By August 8, 1996,

Prudential had provided plaintiffs with over 70 boxes of

documents in response to Lead Counsel's requests.

On September 19, 1996, plaintiffs filed their Second

Amended Consolidated Complaint. The Second Amended

Consolidated Complaint contained essentially the same

claims as the first, alleging Prudential implemented a

systematic fraudulent marketing scheme which made use

of false and misleading sales presentations, policy

illustrations, and marketing materials. Once again, the

Complaint specifically referred to Prudential's "churning,"

"vanishing premium," and "investment plan" sales tactics.10

Each of the named plaintiffs claimed to have been injured

by this common scheme, and alleged one or more of the

specified sales practices.11 Plaintiffs also sued several

_________________________________________________________________

9. According to Lead Counsel, the negotiations then proceeded through

three stages. The first, from July 6th through August 16th, involved

preliminary negotiation of the terms of settlement. During the second

phase, which ran from August 17th through September 22nd, the

parties negotiated the details of the actual Settlement Agreement.

Finally, from September 23rd until October 28th, the parties worked out

the final Stipulation of Settlement. Weiss Aff.P 103.

10. While the Complaint stated that "Prudential's scheme involved [these]

three notorious deceptive life insurance sales tactics," Second Am. Cons.

Compl. P 5, the allegations detailed therein also refer to other sales

abuses which fall outside these three categories. See, e.g., Second Am.

Cons. Compl. P 89-91 (alleging Prudential took affirmative steps to

conceal its misrepresentations); P 114-16 (alleging Prudential agents

informed the Nicholson plaintiffs to "ignore" notices concerning lapses in

their policies); P 128 (alleging a Prudential agent made unauthorized

withdrawals from the policy of named plaintiff Dorfner).

11. Carol Nicholson brought suit as executrix of the estate of her

deceased husband Keith. From 1966 to 1984, the Nicholsons purchased

13

persons in their individual capacities: Robert A. Beck,

Prudential President from 1972 until 1979 and Chairman

from 1978 until 1987; Ronald D. Barbaro, Prudential's

President from 1990 until 1992; and Robert C. Winters,

Chairman and CEO from 1987 until 1994, and President

from 1993 until 1994.

According to the Second Amended Consolidated

Complaint, Prudential was aware of these fraudulent sales

practices as early as 1982, when internal investigations

_________________________________________________________________

four Prudential policies worth approximately $30,000. In 1986, Keith

Nicholson purchased an addition $100,000 policy, allegedly as a result

of Prudential's fraudulent sales practices. Carol Nicholson alleged

churning, vanishing premium and investment plan claims.

Martin Dorfner and his wife operate a small grocery store in

Pennsylvania. By July 1989, they owned several Prudential policies.

Dorfner alleges that his Prudential agent informed the Dorfners that they

were entitled to a "free" policy, and proceeded to open another whole life

policy for them using funds drawn from their existing policies. In

addition, the same agent persuaded the Dorfners to purchase a $50,000

variable appreciable life insurance policy from Prudential in April 1991,

allegedly using misleading sales information. Dorfner brought suit in

January 1995, alleging churning and vanishing premium claims.

Vincent and Elizabeth Kuchas are Connecticut residents who

purchased individual variable life policies from Prudential. In 1987,

their

agent suggested that they purchase additional policies. The Kuchases

allege that they informed the agent that they were seeking an investment

similar to an IRA, and could not afford an investment plan if they had

to continue payment on their current Prudential policies. The agent

allegedly persuaded the Kuchases to purchase two VAL policies while

misinforming them as to their continuing payment obligations with

respect to their initial policies. In September 1994, the Kuchases learned

that the initial policies had lapsed and that their agent had taken out

loans against the initial policies to pay for the VALs. They filed suit in

February 1995.

Norman Gassman, an Ohio citizen, filed suit against Prudential in May

of 1995, alleging an investment plan claim. According to Gassman, a

Prudential agent persuaded Gassman to take $20,000 from a certificate

of deposit and "invest" it in a VAL policy. Gassman alleges that the agent

held himself out as a "financial planner" or"financial consultant" and

explained that a VAL policy was part of an "investment plan," paid a

higher rate of interest than a CD at a low risk, and was tax free. In

reliance on these representations, Gassman purchased the VAL policy.

14

discovered patterns of abuse involving financed insurance.

Plaintiffs alleged that Prudential failed to take serious steps

to combat the abuses, focusing instead on "damage control"

and warning internal auditors not to "rock the boat." For

example, when Prudential's auditing department tested a

new computer system to detect churning in its Minneapolis

office, sales dropped off sharply. Instead of addressing the

concerns raised by the audit department, Prudential merely

referred the matters to the "marketing" group, which took

no steps to stop the fraudulent activities. Second Am. Cons.

Compl. P 86.

Three days after the filing of the Second Amended

Consolidated Complaint, Prudential and class counsel

entered into a settlement agreement. There were three

preconditions to the agreement. First, those states which

had adopted the Task Force Remediation Plan through the

execution of the Consent Order had to agree to modify the

Consent Order to conform to the Settlement Agreement.

Second, the final Stipulation of Settlement had to be

executed by October 28, 1996. Lastly, the parties reserved

the right to modify the Stipulation of Settlement to reflect

any new information revealed by class counsel's ongoing

discovery.12 The Settlement Agreement did not address

attorneys' fees.13

On October 28, 1996, the parties filed a final Stipulation

of Settlement. At that time, the district court issued an

order conditionally certifying a national settlement class,

directing issuance of class notice, issuing an injunction,14

_________________________________________________________________

12. On October 25, 1996, Prudential formally responded to plaintiffs'

discovery requests, producing over one million pages of documents, 160

computer diskettes, and more than 500 audio and video tapes. See

Weiss Aff. P 85.

13. Although S K of the Settlement Agreement was entitled "Attorneys'

Fees, Costs and Expenses," subsection K.1 was left blank. Subsection

K.2 addressed certain additional expenses to be included in any payment

of fees, and guaranteed that any payment of fees would not reduce the

remedies provided under the agreement. Subsection K.3 also provided

that Prudential's liability for fees would be limited only to those fees

expressly provided for by the Settlement Agreement.

14. The injunction barred policyholders from pursuing overlapping

litigation unless the policyholder had opted out of the class, and

15

and scheduling a fairness hearing for January 21, 1997.

The notice was sent to each of the more than 8 million

class members by first class mail on or before November 4,

1996, and gave them until December 19, 1996 to file

objections or opt out of the class.15

1. The Proposed Settlement

The proposed settlement was largely based on the Task

Force Report and its proposed remediation plan. Like the

Task Force plan, the settlement proposed a remediation

scheme by which class members had the option of either

pursuing their claims through an Alternate Dispute

Resolution procedure or electing Basic Claim Relief. The

proposed settlement class included all persons who owned

one or more Prudential insurance policies between January

1, 1982 and December 31, 1995, with certain exceptions.16

_________________________________________________________________

prevented them from excluding other policyholders from the class. After

the class notice was mailed, several named plaintiffs in a competing

nationwide class action, filed and certified in Alabama state court three

days after the Settlement Agreement was signed (the"Steele action"),

opted out of the class. The so-called "Steele Opt-outs" also attempted, as

class representatives in the Steele action, to execute opt-outs on behalf

of the entire class. At Prudential's request, the district court issued an

Order to Show Cause on January 22, 1997. On May 28, 1997, the

district court ruled that the opt-out of the Steele class was null and

void

as a violation of the permanent injunction. The Steele Opt-outs filed an

appeal with this Court. We affirmed the district court in an unpublished

opinion.

15. In December 1996, Krell moved the district court to recuse itself. The

district court denied the motion, and Krell's subsequent petition for

mandamus relief was denied by this Court without opinion on April 4,

1997.

16. The following were explicitly excluded from the class: 1)

policyholders

who were represented by counsel and had already settled a claim and

signed a release with Prudential; 2) policyholders that are corporations,

banks, trusts or other non-natural entities that purchased policies as

corporate or trust-owned life insurance and under which a) there are

fifty or more separate insured individuals, or b) the aggregate premium

paid over an eight year period, ending with the close of 1996, exceeds $1

million; and 3) those policyholders who were issued policies in 1995 by

Prudential Select Life Insurance Company of America. Stipulation of

Settlement at 13.

16

The class included approximately eight million Prudential

policyholders who own or owned approximately 10.7 million

policies.

a. The Alternative Dispute Resolution process

Under the ADR process contained in the proposed

settlement, class members who believed they had been

misled could submit a claim to Prudential. The claim form

provided to all potential class members contained both

narrowly drawn questions designed to elicit information

relating to specific evidentiary scoring criteria established

under the settlement, as well as more open-ended

questions allowing claimants to explain the exact nature of

their claims. Claimants were also asked to submit any

supporting documents in their possession. Prudential

established a toll-free hotline to allow claimants to speak to

a Claimant Support team, whose members are specially

trained to answer policyholder inquiries, assist with filling

out claim forms, and advise them with respect to the

collection of supporting documents. Once the claim form

was submitted, Prudential was obligated to locate all of its

records pertaining to the claim and submit them for

consideration.

Once a claim has been filed and all the relevant materials

gathered, the claim is subject to a four tier review process.

At the first level, the claim would be examined by a member

of the Claim Evaluation Staff, who will apply a set of

specific criteria for each of four general categories of sales

complaints: (1) financed insurance (taking a loan against an

existing policy in order to pay the premiums on a new

policy); (2) abbreviated payment plans (using dividends

from a policy to pay the premiums on that policy); (3) life

insurance sold as an investment; and (4) other improper

sales practices.17 Based on the application of the

established criteria, the reviewers then assign a score from

zero to 3 to each claim.18 The Claim Evaluation Staff is

_________________________________________________________________

17. The financed insurance criteria include an assessment of Prudential's

conformity with state replacement laws.

18. The scoring system set forth in the Stipulation of Settlement is as

follows:

17

comprised of specially trained Prudential employees who

are not associated with Prudential's individual life

insurance sales force.

Any claim not receiving a score of "3" will automatically

be reviewed by a team of independent claim evaluators who

are selected by class counsel and representatives of the

state regulators. This team will apply the same criteria as

the Claim Evaluation Staff, and make a written

recommendation if it believes the claimant's score should

be adjusted.

That recommendation is then examined by a member of

the Claim Review Staff, which is comprised of Prudential

employees who have not worked as or had supervisory

authority over Prudential sales agents. The determination of

the Claim Review Staff may not be appealed by Prudential.

The claimant, however, may appeal the decision to the

_________________________________________________________________

- A score of "3" is assigned in the event that either (i) Company

Documentation expressly supports the Misstatement, or (ii) the

Agent Statement confirms the Claimant's allegation of the

Misstatement and this confirmation is not undermined by Available

Evidence.

- A score of "2" is assigned in the event that the alleged

Misstatement is not expressly in writing and the Agent Statement

denies the allegations, but (i) Available Evidence, on balance,

supports the Claimant's allegation of the Misstatement, or (ii) the

Agent has a Complaint History.

- A score of "1" is assigned in the event that the alleged

Misstatement is not expressly in writing and the Agent Statement

denies the allegation, and Available Evidence, on balance, neither

supports nor undermines the Claimant's allegation of the

Misstatement.

- A score of "0" is assigned in the event that Available Evidence

exists which undermines the Claimant's allegation of the

Misstatement and suggests that no Misstatement occurred.

- A score of "N/A" is assigned in the event that the Claim

Resolution

Factor is "not applicable" to the Claim submitted.

Prudential Alternative Dispute Resolution Guidelines, Stipulation of

Settlement, Ex. B, at 9.

18

fourth level of review, the Appeals Committee. The Appeals

Committee is selected by class counsel and representatives

of the state regulators from a list agreed upon by class

counsel, the state regulators, and Prudential. While the

Appeals Committee must apply the same criteria, its review

of the claim is de novo.19

The relief afforded a claimant varies depending on the

final score he or she is awarded. Those obtaining a score of

zero are afforded no relief. Those with a score of"1" may

obtain relief only through Basic Claim Relief. Those with

scores of "2" or "3" are entitled to compensatory relief.20

_________________________________________________________________

19. During this phase of the review, claimants may receive cost-free

representation from a representative selected by class counsel and

approved by the state regulators. The claimant is entitled to a full

rehearing if the representative determines that a "manifest injustice" has

occurred.

20. Under the Stipulation of Settlement, the following relief is available

based on the category of claim proven:

Financed Insurance - The policyholder may obtain a refund of the

loans, dividends, or values improperly used, with interest in some

cases. The policyholder also may be entitled to cancel the "new"

policy and get back some or all of the premiums paid, with interest

in some cases.

Abbreviated Payment - The policyholder may be permitted to cancel

the policy `and obtain a refund of some or all of the premiums

paid,

with interest in some cases. Alternatively, the policyholder may be

permitted to keep the policy without having to make any additional

out-of-pocket payments for some or all of the premiums due.

Investment Product - The policyholder may be allowed to cancel the

policy and obtain a refund of some or all of the premiums paid,

with

interest in some cases. Alternatively, the policyholder may be able

to

exchange the policy for an annuity.

Other Claims - If a policyholder was misled in some other way, the

policyholder may be allowed to cancel the policy and obtain a

refund

of some or all of the premiums paid, with interest in some cases,

or

may be able to use the refund to purchase another policy.

Fairness Opinion, 962 F. Supp. at 490 (citing February 1, 1997 Notice

at 7-8).

19

b. Basic Claim Relief

Basic Claim Relief allows the class member to obtain one

or more forms of relief without having to demonstrate

liability on Prudential's part. The available forms of Basic

Claim Relief include: (1) low interest loans to help policy

holders make premium payments on existing policies; (2)

enhanced value policies which allow members to purchase

new policies with additional coverage paid for by Prudential;

(3) deferred annuities enhanced by contributions from

Prudential; and (4) the opportunity to purchase shares in

designated mutual funds enhanced by a contribution from

Prudential.

c. Enhancements To the Task Force Plan

The district court found the settlement improved upon

the Task Force's remediation plan in several ways. Fairness

Opinion, 962 F. Supp. at 492-95. First, the court found

that the settlement improved the structure of the ADR

process by including class counsel and their

representatives in the monitoring process, and improving

the claim scoring criteria21 and evidentiary factors used to

analyze ADR claims.22 It also enhanced the remedies

_________________________________________________________________

21. The district court noted several improvements to the Settlement's

ADR process that would enhance the ability of a policyholder to establish

the presumption that he or she was misled. These enhancements to the

ADR process were:

(1) Provided that boilerplate statements in policy illustrations

and

contracts explaining that the dividends, interest or investment

returns are "not guaranteed" or "non-guaranteed," will not

independently undermine a claim;

(2) Reduced from six complaints to three the number of policyholder

complaints against an agent which would entitle a claimant to a

score of at least "2"; and

(3) Extended the period during which policyholder complaints would

be considered from July 9, 1996 to February 1, 1997.

Fairness Opinion, 962 F. Supp. at 492.

22. The district court also noted the proposed settlement "include[d]

significant improvements in the factors and evidentiary considerations

20

available through both the ADR process and Basic Claim

Relief,23 and provided for a blanket waiver of statute of

_________________________________________________________________

used to evaluate claims." Fairness Opinion, 962 F. Supp. at 492. The

court found that the settlement enhanced the Task Force ADR plan by:

(1) Allowing a claimant's score to be raised if documents

originally

kept by Prudential that could affect the scoring have improperly

been destroyed and no copies can be located;

(2) Allowing the claimant's score for "churning" to be raised if

12%

of the selling agent's total sales were "financed insurance" sales,

as

opposed to a threshold figure of 15% under the Task Force plan;

(3) Allowing a claimant's score to be raised if blank, unsigned

disbursement forms were used without the policyholder's consent;

(4) Allowing a claimant's score to be raised for "vanishing

premium"

claims if an agent used the phrases "vanishing premium" or

"vanishing point" in writing in connection with the sale of the

policy

at issue;

(5) Removing as a negative consideration the fact that a policy

lapsed prior to the date when the premiums were to "vanish", if it

appears that the policyholder became aware, prior to the

misrepresented "vanish" date, that the policy would not perform as

illustrated;

(6) Requiring Prudential to contact agents regarding policies they

sold to obtain additional information about the sale of the policy,

and to encourage honest responses by agreeing not to take

disciplinary action against an agent based on his or her truthful

statements;

(7) Removing Prudential from its co-equal role with the regulators

in

the selection of a representative to advocate on behalf of the

claimant at the arbitration level, and eliminating the $10 million

cap

on the funding the representative could receive; and

(8) Creating an entirely new position, the "Claimant

Representative,"

selected by Class Counsel and responsible for overseeing the entire

process on behalf of the claimant, including the initial claim

review.

Id. at 492-93.

23. The enhancements to the ADR remedies were:

(1) The settlement provided 100% interest to claimants scoring a

"2"

or a "3" in the ADR process (compared to the Task Force plan,

21

limitations and other defenses which Prudential might

otherwise have.

Second, it provided minimum financial guarantees which

were not contained in the Task Force plan. In addition to

the uncapped relief provided under both the Task Force

plan and the proposed settlement, Prudential guaranteed to

pay at least $260 million for each 110,000 claims remedied

(up to 330,000), with a minimum payment of $410 million

regardless of the number of claims remedied. Prudential

also agreed to pay an additional remediation amount based

on a sliding scale from $50 to $300 million, depending on

the number of claims remedied. This amount was to be

allocated by the district court.

_________________________________________________________________

which provided zero interest for scores of "2"), and allows

rescission

of the policy and a refund of the premiums, with interest;

(2) The settlement allowed a claim receiving a either a "2" or a

"3"

to receive relief where a policy lapsed before the claimant died,

as

opposed to the requirement under the Task Force plan that a

claimant receive a "3." three.

(3) Full compensatory relief for a vanishing premium claim where a

Prudential agent promised the claimant would have a"paid up"

policy;

(4) Removal of the exclusion in the Task Force plan which prevented

claims on behalf of the decedent where the policyholder/decedent

died while the policy was in force.

Fairness Opinion, 962 F. Supp. at 493-94.

The court found that the settlement enhanced the Basic Claim Relief

by:

(1) Eliminating fifty basis points on Optional Premium Loans;

(2) Increasing Prudential's contributions to the annual premiums

for

Enhanced Value Policies;

(3) Increasing Prudential's contributions toward the purchase price

of Enhanced Value Annuities;

(4) Creating a new form of Basic Claim relief known as Mutual Fund

Enhancements, for which Prudential would contribute 4% of the

initial purchase price to the fund, up to a maximum of $2,000.

Id. at 494.

22

Finally, the district court noted the "Proposed Settlement

establishe[d] an unparalleled outreach program to ensure

that class members are adequately informed." Fairness

Opinion, 962 F. Supp. at 492. This included mailing

individual notice to over 8 million current and former

policyholders, and publishing summary notices in the

national editions of The New York Times, The Wall Street

Journal, USA Today, and The Newark Star Ledger. The

summary notice was also published in the largest

newspaper in each of the fifty states and the District of

Columbia. In addition, the Stipulation of Settlement

provided that, following final approval of the settlement,

post-settlement notice would be (a) mailed to each class

member, (b) published in the national editions of The New

York Times, The Wall Street Journal, USA Today, The

Newark Star Ledger, and other regional newspapers, and (c)

disseminated through television and radio advertising "on

stations having representative regional coverage."

Stipulation of Settlement at 27-29. Finally, the outreach

program established a six-day-a-week toll-free "800"

number, staffed by specially trained personnel, to answer

class member questions.24 The Task Force plan did not

describe how its outreach program would be implemented.

Fairness Opinion, 962 F. Supp. at 494.

2. The Fairness Hearing

The district court held the fairness hearing on February

24, 1997.25 At that time the court heard oral argument from

all parties who requested the opportunity to speak,

including objectors. The district court also permitted

appearances by several states and allowed the California

Insurance Commissioner and the Florida Insurance

Commissioner to appear as amicus curiae. The court

allowed the Massachusetts Insurance Commissioner, the

Massachusetts Attorney General and the Texas Insurance

_________________________________________________________________

24. At oral argument, Lead Counsel noted that approximately 1.8 million

phone calls had already been processed. Tr. of Oral Argument, January

26, 1998, at 125 (Testimony of Melvyn Weiss).

25. The district court postponed the hearing date, originally set for

January 21, 1997, in order to allow policyholders more time to respond

to the class notice and to provide the parties more time to prepare.

23

Commissioner to intervene under Rule 24(b). The New

Jersey Department of Insurance appeared informally as

amicus curiae, on its own behalf and on behalf of the

Multi-State Life Insurance Task Force.

961<!>Before the fairness hearing, Prudential reached

agreements with the remaining state objectors - California,

Florida, Texas and Massachusetts - whereby several

enhancements were made to the Proposed Settlement.

Among those were an automatic score of "3" where a

claimant had a life insurance application containing an

unauthorized signature, and consideration as one of the

scoring criteria the fact that a claimant was over the age of

sixty at the time of sale.26 These enhancements were

subsequently incorporated into the settlement and made

available to all claimants. Fairness Opinion, 962 F. Supp.

at 473.27 The district court also took notice that these four

_________________________________________________________________

26. The district court noted five enhancements which resulted from the

negotiations between the state regulators and Prudential. These were:

(1) The extension of the complaint history cut-off until February

1,

1997;

(2) An increase in the interest paid on claims receiving a score of

"2"

from 50% to 100%;

(3) The addition of an evidentiary criterion allowing the claim

evaluator to consider that a claimant was 60 years or older at the

time of the sale;

(4) The addition of a claim resolution factor awarding an automatic

score of "3" if a claimant's life insurance application contained

an

unauthorized signature; and

(5) The requirement that Prudential provide claimants, at the

claimants request, with current account information, such as

outstanding loans, dividend payments and "currently illustrated

year of abbreviation."

Fairness Opinion, 962 F. Supp. at 498.

27. Krell disputes this finding, and argues that the additional

enhancements benefitted only the citizens of those four states. Krell

Brief

at 47 n.56. Krell's argument relies primarily on its assertion that

Florida

residents received better notice and were benefitted by more favorable

evidentiary presumptions, including a more favorable definition of

replacements. Id.; see also Krell Reply Brief at 49-51. Lead Counsel

24

states received, in addition to the negotiated enhancements,

additional fines and penalties from Prudential which were

paid to the states, and not to aggrieved policyholders.

On March 7, 1997 the able district court issued a

summary Memorandum Opinion and Order certifying the

class and approving the settlement as fair and reasonable,

and ten days later filed a lengthy (almost 250 pages) and

thorough opinion explaining its decision.

II. ISSUES RAISED ON APPEAL AND STANDARDS

OF REVIEW

Appellants principally challenge five distinct elements of

the settlement. First, they raise the threshold issue whether

the district court had jurisdiction over this class action.

_________________________________________________________________

responds that the court was correct to rely on Prudential's statements in

open court to the effect that the enhancements would be available to all

class members. Lead Counsel Brief at 58. Additionally, Lead Counsel

notes that the district court found the settlement was fair and

reasonable even without the state-negotiated enhancements. Id.

We disagree with Krell. At the Fairness Hearing on February 24, 1997,

Krell raised his concern regarding the state-negotiated enhancements.

Prudential explained that "the ADR plan changes that were agreed to

with the four states in terms of modifications of scoring and relief will

be

made available nationally through the class settlement." Tr. of Fairness

Hearing at 141. An examination of the settlements signed by the four

objecting states and the Amendment to Stipulation of Settlement filed by

the settling parties supports the district court'sfinding. Also, while

Prudential's explanation does not specifically respond to Krell's

assertion

that Florida residents received enhanced notice, we do not believe this is

significant. As discussed infra, we find the notice provided under the

settlement was adequate, and it is not rendered inadequate by any

additional notice provisions negotiated by an individual state. Finally,

Krell's argument with respect to replacement claims misses the mark. As

Prudential explained at the hearing, the "scoring enhancements [in the

ADR process] where there was a violation of state regulations on

replacement will be based on each states' individual replacement

regulations where the policy was sold . . . [t]he Florida provision is

confirmatory and expands what is already in the plan." Tr. of Fairness

Hearing at 174. Thus, any provision negotiated by Florida regarding the

definition of replacement is based on Florida law and is not applicable to

other states.

25

Second, they challenge the court's certification of the

settlement class. Third, they contest the district court's

order approving the proposed settlement as fair and

reasonable. Fourth, appellants take issue with the district

court's $90 million award of attorneys' fees. Finally, they

once more take aim at the district court's handling of this

case, appealing the denial of their motion to disqualify

under 28 U.S.C. SS 455(a), 455(b)(1) and 455(b)(5)(iv).

"The decision of whether to approve a proposed

settlement of a class action is left to the sound discretion

of the district court." Girsh v. Jepson, 521 F.2d 153, 156

(3d Cir. 1975). Consequently, we will reverse the district

court "for a clear abuse of discretion." Id. at 156 n.7. In

addition, the certification of a class and the award of

reasonable attorneys' fees are also subject to an abuse of

discretion standard. In re General Motors Corp. Pick-Up

Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 782 (3d

Cir. 1995) ("G.M. Trucks"). "An appellate court may find an

abuse of discretion where the `district court's decision rests

upon a clearly erroneous finding of fact, an errant

conclusion of law or an improper application of law to

fact.' " Id. at 783 (quoting International Union, UAW v. Mack

Trucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987)). Our review of

jurisdictional issues, however, is plenary. Anthuis v. Colt

Indus. Operating Corp., 971 F.2d 999, 1002 (3d Cir. 1992).

III. JURISDICTION

The Krell and Johnson appellants contend the district

court lacked subject matter jurisdiction over most of the

class, including objectors. Additionally, they contend that

there is no Article III "case or controversy" with respect to

the class claims, and that the court's exercise of

supplemental jurisdiction was improper.

A. Subject Matter Jurisdiction

As an initial matter, the district court found it had

subject matter jurisdiction over the named plaintiffs in this

class action. In particular, the court found it had both

federal question jurisdiction and diversity jurisdiction over

the class, as well as supplemental jurisdiction under 28

U.S.C. S 1367. Fairness Opinion, 962 F. Supp. at 500.

26

The district court found exclusive federal question

jurisdiction under 28 U.S.C. S 1331 based on the claims of

named plaintiff Dorfner. Dorfner alleged violations of the

federal securities laws, in particular Sections 10(b) and

20(a) of the Securities and Exchange Act, and Rule 10b-5

promulgated thereunder. In addition, approximately 30% of

the policies at issue were registered securities, and thus fell

within the court's federal question jurisdiction. The district

court also found it had diversity jurisdiction over each of

the named plaintiffs under 28 U.S.C. S 1332. All named

plaintiffs were residents of different states from the

defendants named in the complaint. Additionally, the

named plaintiffs have each alleged more than $50,000 in

losses as a result of Prudential's fraudulent scheme, and

thus meet the "amount-in-controversy" requirement in

effect at the time the complaint was filed.28

The primary jurisdictional objection raised on appeal

relates to the district court's assertion of supplemental

jurisdiction over the absentee class members on the basis

of 28 U.S.C. S 1367. The court found that all of the class

claims are "inextricably factually intertwined" because they

are all "premised upon a common course of conduct by

Prudential . . . relat[ing] to the same alleged company wide

development and implementation of the patently fraudulent

sales techniques." Fairness Opinion, 962 F. Supp. at 501.

Noting that S 1367 applies to both pendent parties and

pendent claims, the district court concluded it had the

discretion to exercise supplemental jurisdiction over the

entire dispute and the proposed settlement on the basis of

its initial federal question jurisdiction. The court also found

it could exercise supplemental jurisdiction over the state

claims on the basis of its diversity jurisdiction. Id. at 505.

Appellants dispute both of these asserted grounds for

supplemental jurisdiction. They contend the federal claims

of plaintiff Dorfner, the claims of persons with purely state

law claims, and the panoply of "other" sales claims do not

_________________________________________________________________

28. The 1996 Amendment to 28 U.S.C. S 1332, which raised the amount-

in-controversy requirement from $50,000 to $75,000, did not take affect

until after the filing of the Second Amended Consolidated Complaint. See

Pub. L. No. 104-317, S 205(b) (1996).

27

derive from a common nucleus of operative fact, and thus

the district court cannot exercise supplemental jurisdiction

based on its jurisdiction over plaintiffs' federal securities

claims.29 Johnson Brief at 4. Appellants also contest the

district court's assertion of supplemental jurisdiction based

on its initial diversity jurisdiction. They contend that, in

order for the district court to exercise supplemental

jurisdiction, each putative class member must meet the

amount-in-controversy requirement of S 1332. Johnson

Brief at 7-8 (citing Zahn v. International Paper Co., 414 U.S.

291 (1973)). Finally, appellants argue the district court's

application of 28 U.S.C. S 1367 to assert jurisdiction over

the proposed class violates Article III.

The settling parties respond with two arguments. First,

they claim the district court correctly exercised

supplemental jurisdiction based on its original federal

question jurisdiction because all class members' claims

arise from the same case or controversy. Thus there is no

need to address the question of the district court's diversity

jurisdiction. In the alternative, they argue that appellants'

reliance on Zahn is misplaced, and thatS 1367 overruled

Zahn's requirement that all class members meet the

amount-in-controversy requirement of S 1332.

Consequently, the court could properly exercise

supplemental jurisdiction based on its original diversity

jurisdiction.

1. Federal Question Jurisdiction as a Basis fo r

Supplemental Jurisdiction

None of the parties contest the district court's assertion

of federal question jurisdiction "over [plaintiff] Dorfner's

federal securities claims, and the federal securities claims

of other similarly situated plaintiffs." Fairness Opinion, 962

F. Supp. at 500. Instead they focus their arguments on the

court's exercise of supplemental jurisdiction.

Before enactment of S 1367, a district court could only

exercise jurisdiction over claims which did not satisfy the

requirements of SS 1331 and 1332 by applying the

_________________________________________________________________

29. They also argue that Dorfner could not be expected to bring both his

federal claims and his purely state law claims in the same suit.

28

principles of ancillary or pendent jurisdiction. The concept

of pendent jurisdiction, as explained by the Supreme Court

in United Mine Workers v. Gibbs, 383 U.S. 715 (1966),

allowed a court to hear non-federal claims over which it did

not have diversity jurisdiction provided those claims shared

a "common nucleus of operative fact" with the claims that

supported the court's original jurisdiction. But this

extension of jurisdiction was permitted only when it would

promote "judicial economy, convenience and fairness to

litigants." 383 U.S. at 726.

While pendent jurisdiction allowed district courts to hear

additional, non-federal claims which were part of the same

"case" as those claims within the court's original

jurisdiction, the doctrine of ancillary jurisdiction allowed

courts to hear claims brought against additional parties.

Ancillary jurisdiction, however, was more limited than its

counterpart. In Owen Equip. & Erection Co. v. Kroger, 437

U.S. 365 (1978), the Court held ancillary jurisdiction could

not be asserted when to do so was contrary to the rule of

complete diversity. Further, the Court found the doctrine of

ancillary jurisdiction did not allow the addition of parties

who were not within the court's original jurisdiction, even

in cases in which the district court had exclusive federal

jurisdiction. Finley v. United States, 490 U.S. 545 (1989).

But the Finley Court noted the cases addressing the scope

of ancillary and pendent jurisdiction were not entirely

consistent, and offered the possibility that "[w]hatever we

say regarding the scope of jurisdiction conferred by a

particular statute can of course be changed by Congress."

Id. at 556.

Congress responded by passing the Judicial

Improvements Act of 1990, which added S 1367 to the

jurisdictional arsenal of the federal courts and essentially

overruled Finley. Section 1367 combined the two concepts

of pendent and ancillary jurisdiction under the rubric of

"supplemental" jurisdiction, providing for jurisdiction "in

any civil action of which the district courts have original

jurisdiction" over "all other claims that are so related . . .

that they form part of the same case or controversy under

Article III." 28 U.S.C. 1367(a). The statute explicitly

included "claims that involve the joinder or intervention of

additional parties." Id.

29

The enactment of S 1367 has elicited a strong reaction

from legal scholars. Some have argued that Congress

intended S 1367 to be interpreted broadly, and hoped to

encourage the federal courts to hear claims which might

otherwise have fallen outside of their reach. See John B.

Oakley, Recent Statutory Changes in the Law of Federal

Jurisdiction and Venue: The Judicial Improvements Acts of

1988 and 1990, 24 U.C. Davis L. Rev. 735, 766 (Spring

1991) ("By the juxtaposition of sections 1367(a) and 1367(c)

Congress appears to have created a strong presumption in

favor of the exercise of supplemental jurisdiction."); 2

Herbert B. Newberg and Alba Conte, Newberg on Class

Actions, S 6.11, at 6-45 (3d ed. 1992) ("[T]here are multiple

reasons to expect that the rulings of Zahn v. International

Paper Co., requiring allegations that each class member

satisfied jurisdictional amount requirements in diversity

actions, have been legislatively bypassed."). Others have felt

that S 1367 is constrained by prior Supreme Court

decisions, and does not expand the courts' jurisdictional

grant. Thomas D. Rowe, Jr., Stephen B. Burbank &

Thomas M. Mengler, Compounding or Creating Confusion

About Supplemental Jurisdiction? A Reply to Professor Freer,

40 Emory L.J. 943, 960 n.90 (Fall 1991) (acknowledging

that while a facial construction of S 1367 would appear to

overrule Zahn, "the legislative history was an attempt to

correct the oversight"); Denis F. McLaughlin, The Federal

Supplemental Jurisdiction Statute - A Constitutional And

Statutory Analysis, 24 Ariz. St. L.J. 849, 973 (Fall

1992)("[Section] 1367 should be interpreted as effecting no

change in the prior practice and continuing undisturbed

the rule of Zahn."). Regardless of Congress's intent with

respect to Zahn, it is clear that S 1367 does not abrogate

the rule of law established in Gibbs, and thus any exercise

of supplemental jurisdiction must meet the requirements of

Article III's "case or controversy" standard. See H.R. Rep.

No. 101-734 at n.15 (1990), reprinted in 1990 U.S.C.C.A.N.

6860, 6875 n.15 (stating that S 1367(a) "codifies the scope

of supplemental jurisdiction first articulated by the

Supreme Court in United Mine Workers v. Gibbs"); New

Rock Asset Partners, L.P. v. Preferred Entity Advancements,

Inc., 101 F.3d 1492, 1505 (3d Cir. 1996) ("The Supreme

Court delineated the modern constitutional bounds of

30

pendent [now referred to as supplemental] jurisdiction in

United Mine Workers v. Gibbs."); Oakley, 24 U.C. Davis L.

Rev. at 764 (noting that under S 1367, the district court's

exercise of supplemental jurisdiction "extends to the limits

of Article III, thus ratifying and incorporating the

constitutional analysis of United Mine Workers v. Gibbs").

There is no dispute the district court had jurisdiction

over the federal securities claims alleged in the Second

Amended Consolidated Complaint. Caterpillar, Inc. v.

Williams, 482 U.S. 386, 392 (1987) (citing Gully v. First

National Bank, 299 U.S. 109, 112-113 (1936)) ("The

presence or absence of federal-question jurisdiction is

governed by the `well-pleaded complaint rule,' which

provides that federal jurisdiction exists only when a federal

question is presented on the face of the plaintiff 's properly

pleaded complaint."). It is equally clear that, under S 1367,

the district court could exercise supplemental jurisdiction

over any claims which were part of the same Article III

"case or controversy" as the federal securities claims.

Consequently, our analysis turns on whether the claims

asserted in the Second Amended Consolidated Complaint

meet the standard established in Gibbs.

Under Gibbs, three requirements must be met for a court

to exercise supplemental jurisdiction:

The federal claims must have substance sufficient to

confer subject matter jurisdiction on the court. The

state and federal claims must derive from a common

nucleus of operative fact. But if considered without

regard to their state or federal character, a plaintiff 's

claims are such that he would ordinarily be expected to

try them all in one judicial proceeding, then, assuming

substantiality of the federal issues, there is power in

the federal courts to hear the whole.

383 U.S. at 725 (emphasis omitted) (footnote and internal

citation omitted).

A district court may not assert supplemental jurisdiction

over state claims that are totally unrelated to the federal

claims that form the basis of the court's jurisdiction. Lyon

v. Whisman, 45 F.3d 758, 761 (3d Cir. 1995). In Lyon, the

district court had original jurisdiction to hear claims under

31

the Fair Labor Standards Act, and elected to exercise

supplemental jurisdiction over state contract and tort

claims. The federal claim involved the employer's failure to

pay overtime wages, while the state claims related to a

failure to pay certain bonuses. This Court ruled that the

exercise of supplemental jurisdiction was inappropriate,

because the only nexus between the state and federal

claims was the employer/employee relationship, rather

than the conduct underlying the claims.30 Id. at 764.

The Second Amended Consolidated Complaint alleges

that Prudential engaged in a widespread scheme to defraud

customers. As part of that scheme, Prudential allegedly

used "false and misleading sales presentations, policy

illustrations, marketing materials, and other information

approved, prepared and disseminated by Prudential to its

nationwide sales force. Second Amended Consolidated

Complaint at 3. According to plaintiffs, certain actions

taken by Prudential in furtherance of that scheme violated

S 10(b)31 and S 20(a)32 of the Securities and ExchangeAct.

_________________________________________________________________

30. The Lyon court found that "under any standard, the nexus between

the federal and state claims in this case is inadequate" to support

supplemental jurisdiction. 45 F.3d at 762. The court went on to note:

Lyon's FLSA claim involved very narrow, well-defined factual issues

about hours worked during particular weeks. The facts relevant to

her state law contract and tort claims, which involved Whisman's

alleged underpayment of a bonus and its refusal to pay the bonus

if Lyon started looking for another job, were quite distinct. In

these

circumstances it is clear that there is so little overlap between

the

evidence relevant to the FLSA and state claims, that there is no

"common nucleus of operative fact" justifying supplemental

jurisdiction over the state law claims. In fact, it would be

charitable

to characterize the relationship of the federal and state claims as

involving even a "loose" nexus.

Id. at 763.

31. Section 10(b) of the Securities Exchange Act of 1934 provides:

It shall be unlawful for any person, directly or indirectly, by the

use

of any means or instrumentality of interstate commerce or of the

mails, or of any facility of any national securities exchange--

* * *

32

As noted, the district court agreed with the settling parties,

finding that all of the class claims were "inextricably

intertwined" because there was a common scheme to

defraud.33

We agree. The Second Amended Consolidated Complaint

clearly alleges that Prudential engaged in a common

scheme to defraud. Each category of claims raised in the

Complaint relied on the implementation of that scheme, the

training of Prudential's agents in conformity with it, and the

use of pre-approved materials to support it. While only one

category of claims alleged in the Complaint involved

violations of the federal securities laws, all of the claims

derive from the same common scheme, and thus from the

same "nucleus of operative fact." That implementation of

Prudential's scheme resulted in a variety of unlawful

transactions does not negate the common basis they all

shared. We recognize the need to scrutinize assertions of

federal subject matter jurisdiction in these kinds of class

_________________________________________________________________

(b) To use or employ, in connection with the purchase or sale of

any

security registered on a national securities exchange or any

security

not so registered, any manipulative or deceptive device or

contrivance in contravention of such rules and regulations as the

Commission may prescribe as necessary or appropriate in the public

interest or for the protection of investors.

15 U.S.C. S 78j(b).

32. Section 20(a) of the Securities Exchange Act of 1934 provides:

Every person who, directly or indirectly, controls any person

liable

under any provision of this chapter or of any rule or regulation

thereunder shall also be liable jointly and severally with and to

the

same extent as such controlled person to any person to whom such

controlled person is liable, unless the controlling person acted in

good faith and did not directly or indirectly induce the act or

acts

constituting the violation or cause of action.

15 U.S.C. S 78t(a).

33. Furthermore, many plaintiffs had more than one claim stemming

from the conduct of Prudential's sales agents. For example, named

plaintiff Nicholson alleged churning, vanishing premium and investment

plan claims, while named plaintiff Dorfner alleged churning and

vanishing premium claims. See supra note 11.

33

actions where there are significant state law claims. But we

believe the nexus between the federal and state claims is so

close here that federal jurisdiction is appropriate.

Consequently, we hold the district court properly exercised

supplemental jurisdiction over the class members' state

claims based on its federal question jurisdiction.

Of course, S 1367 does not permit courts to take

jurisdiction over tangentially related claims. The issue is

whether there is a "common nucleus of operative fact" and

whether the claims are part of the "same case or

controversy under Article III." Here the facts underlying the

investment deception are so intertwined with the other

misrepresentations and frauds that, given the allegations of

the overall scheme, they have the same factual predicate,

making extension of federal jurisdiction appropriate.

2. Diversity Jurisdiction as a Basis for Supplemen tal

Jurisdiction

The district court also found that it had supplemental

jurisdiction under S 1367 based on its original diversity

jurisdiction over named plaintiffs' claims underS 1332. As

noted, the named plaintiffs satisfy the prerequisites for

diversity jurisdiction. None of the named plaintiffs is a

citizen of the same state as any defendant, satisfying the

complete diversity requirement, and each of the named

plaintiffs has alleged damages in excess of $50,000,

satisfying the amount in-controversy requirement. The

more perplexing question is whether the remaining class

members must also satisfy the requirements of diversity

jurisdiction in order for the court to exercise supplemental

jurisdiction over their claims.

Before enactment of S 1367, absentee class members

seeking to establish the court's subject matter jurisdiction

based on diversity of citizenship were not subject to the

same requirements as the class representatives. According

to the Supreme Court, the complete diversity requirement

did not apply to absentee class members, but was satisfied

so long as the named plaintiffs were completely diverse

from defendants. Supreme Tribe of Ben Hur v. Cauble, 255

U.S. 356, 365-67 (1921). But the absentee class members

34

were each subject to the same amount-in-controversy

requirement as the named plaintiffs, and could not

aggregate their claims in order to satisfy S 1332. Zahn, 414

U.S. at 301.

Although the complete diversity rule of Supreme Tribe of

Ben-Hur remains intact, the passage of S 1367 has raised

serious questions about the continuing viability of Zahn. On

the one hand, it is generally conceded that the plain

language of S 1367 states a different amount-in-controversy

rule from that set forth in Zahn.34 See, e.g., Russ v. State

_________________________________________________________________

34. Section 1367 provides:

(a) Except as provided in subsections (b) and (c) or as expressly

provided otherwise by Federal statute, in any civil action of which

the district courts have original jurisdiction, the district courts

shall

have supplemental jurisdiction over all other claims that are so

related to claims in the action within such original jurisdiction

that

they form part of the same case or controversy under Article III of

the United States Constitution. Such supplemental jurisdiction

shall

include claims that involve the joinder or intervention of

additional

parties.

(b) In any civil action of which the district courts have original

jurisdiction founded solely on section 1332 of this title, the

district

courts shall not have supplemental jurisdiction under subsection

(a)

over claims by plaintiffs against persons made parties under Rule

14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over

claims by persons proposed to be joined as plaintiffs under Rule 19

of such rules, or seeking to intervene as plaintiff under Rule 24

of

such rules, when exercising supplemental jurisdiction over such

claims would be inconsistent with the jurisdictional requirements

of

section 1332.

(c) The district courts may decline to exercise supplemental

jurisdiction over a claim under subsection (a) if--

(1) the claim raises a novel or complex issue of State law,

(2) the claim substantially predominates over the claim or claims

over which the district court has original jurisdiction,

(3) the district court has dismissed all claims over which it has

original jurisdiction, or

(4) in exceptional circumstances, there are other compelling

reasons for declining jurisdiction.

28 U.S.C. S 1367.

35

Farm Mut. Auto. Ins. Co., 961 F. Supp. 808, 817-20 (E.D.

Pa. 1997). Section 1367(a) gives courts discretion to

exercise supplemental jurisdiction in all cases where the

original claim supporting federal jurisdiction and the

additional claim are part of the same Article III case or

controversy, including those additional claims involving the

joinder of parties. At the same time, S 1367(b) establishes

certain exceptions to this permissive rule in cases where

the court's original jurisdiction is based solely on diversity.

In particular, S 1367(b) prohibits federal courts from

exercising supplemental jurisdiction over persons made

parties under Rules 14, 19, 20, and 24, unless those

additional claims independently satisfy S 1332. Under the

principle of expressio unius est exclusio alterius, Congress's

failure to include Rule 23 among the restrictions in

subsection (b) would seem to indicate Congress did not

intend to restrict the district court's exercise of

supplemental jurisdiction in class actions. In addition,

Zahn's critics contend that, from a policy standpoint, the

decision runs counter to Supreme Tribe of Ben-Hur. They

argue that while the complete diversity requirement

upholds the very essence of diversity jurisdiction, the

amount-in-controversy requirement is merely an

administrative concept designed to limit the caseload of the

federal judiciary. Consequently, they contend it would make

little sense to create an exception to complete diversity in

the context of class actions but to continue requiring all

class members to meet the amount-in-controversy

requirement. See Zahn, 414 U.S. at 309 (Brennan, J.

dissenting) ("Particularly in view of the constitutional

background on which the statutory diversity requirements

are written, it is difficult to understand why the practical

approach the Court took in Supreme Tribe of Ben-Hur must

be abandoned where the purely statutory `matter in

controversy' requirement is concerned.").35

_________________________________________________________________

35. It is interesting to note that one of the primary rationales for class

actions is allowing access to the courts for parties whose individual

claims are so small that it would be economically infeasible to pursue

them individually. See 1 Herbert Newberg & Alba Conte, Newberg on

Class Actions S 4.27 at 4-107 to 4-109 (3d ed. 1992). Consequently,

upholding Zahn's amount-in-controversy requirement would largely

undercut this purpose.

36

By contrast, others contend S 1367 was never intended to

eliminate the amount-in-controversy requirement for

661<!>absentee class members established in Zahn. This

argument relies heavily on the legislative history of the

statute, in particular the House Judicial Committee Report

that explicitly states S 1367 "is not intended to affect the

jurisdictional requirements of 28 U.S.C. S 1332 in diversity-

only class actions, as those requirements were interpreted

prior to Finley." H.R. Rep. No. 101-734 at 29 (1990),

reprinted in 1990 U.S.C.C.A.N. 6860, 6875 (footnote

omitted). The footnote to this section of the Report

specifically refers to Supreme Tribe of Ben-Hur and Zahn,

and supports the argument that the complete diversity and

amount-in-jurisdiction rules of those cases survive the

enactment of S 1367. Additionally, the Report of the Federal

Courts Study Committee urges Congress to "expressly

authorize federal courts to hear any claim arising out of the

same `transaction or occurrence' as a claim within federal

jurisdiction, including claims, within federal question

jurisdiction, that require the joinder of additional parties,

namely, defendants against whom that plaintiff has a

closely related state claim." Report of the Federal Courts

Study Committee 47 (1990) (quoted in Russ, 961 F. Supp.

at 815). The limited scope of the Committee's suggestion

can be read as support for upholding the restrictions of

Zahn.36

The cases addressing this issue reflect this difference of

opinion. The only two appellate courts to examine this

question have both found the language of the statute

_________________________________________________________________

36. The Federal Courts Study Committee Working Papers showed that

the matter had come to the attention of the Committee. 1 Federal Courts

Study Committee Working Papers and Subcommittee Reports 561 n.33

("From a policy standpoint, [Zahn] makes little sense, and we therefore

recommend that Congress overrule it."). Nonetheless, the Committee did

not adopt the proposal and, indeed, cautioned against reliance on the

Working Papers. See Preface to Working Papers ("These [Working Papers]

were valued background materials which the Committee determined

should be published for general consideration whether or not the

Committee agreed with their substantive proposals. . . . In no event

should the [Working Papers] be construed as having been adopted by the

Committee.").

37

controlling, and concluded that S 1367 overrules Zahn. See

In re Abbott Laboratories, 51 F.3d 524, 528 (5th Cir. 1995);

Stromberg Metal Works v. Press Mechanical, Inc., 77 F.3d

928, 930 (7th Cir. 1996). The Abbott Laboratories court

reasoned that it could not "search legislative history for

congressional intent unless [it found] the statute unclear or

ambiguous," and that in the absence of such ambiguity

"the statute is the sole repository of congressional intent."

51 F.3d at 528-9 (citing United States v. X-Citement Video,

Inc., 513 U.S. 64, 68-71 (1994); West Virginia Univ. Hosps.,

Inc. v. Casey, 499 U.S. 83, 99-100 (1991)). Because it

found the plain language of the statute unambiguous, the

court concluded that "under S 1367 a district court can

exercise supplemental jurisdiction over members of a class,

although they did not meet the amount-in-controversy

requirement, as did the class representatives." Id. at 529.

Unlike the class action facing the court in Abbott

Laboratories, the Court of Appeals for the Seventh Circuit

addressed this question in the context of two plaintiffs

seeking to join an additional claim that did not meet the

amount-in-controversy requirement. Stromberg, 77 F.3d at

930. The Stromberg court also reasoned that "[w]hen text

and legislative history disagree, the text controls," and

allowed the exercise of supplemental jurisdiction in that

instance. 77 F.3d at 931 (citing In re Sinclair, 870 F.2d

1340 (7th Cir. 1989)).

Most of the district courts that have addressed this issue

have concluded otherwise. These courts have relied

primarily on the legislative history to find that Zahn is still

good law. See, e.g., Russ, 961 F. Supp. at 817-20; Crosby

v. America Online, Inc., 967 F. Supp. 257, 263-64 (N.D.

Ohio 1997); Griffin v. Dana Point Condominium Ass'n, 768

F. Supp. 1299, 1301-02 (N.D. Ill. 1991). Judge Louis

Pollak's opinion in Russ, while conceding that the plain

language of the statute would appear to overrule Zahn,

presents a persuasive analysis of the legislative history and

the policy reasons supporting his conclusion that Zahn is

unaffected by the enactment of the supplemental

jurisdiction statute.

The district court here followed the reasoning of Abbott

Laboratories and concluded the plain language ofS 1367

38

overruled Zahn. Consequently, the district court found it

also had supplemental jurisdiction over the non-federal

claims of absentee class members based on its diversity

jurisdiction over the claims of the named plaintiffs.

The question is by no means an easy one. From a policy

standpoint, it can be argued that national (interstate) class

actions are the paradigm for federal diversity jurisdiction

because, in a constitutional sense, they implicate interstate

commerce, foreclose discrimination by a local state, and

tend to guard against any bias against interstate

enterprises. Yet there are strong countervailing arguments

that, at least under the current jurisdictional statutes, such

class actions may be beyond the reach of the federal courts.

Regardless of the relative strength of the competing

arguments over Zahn's continued viability, we need not

enter the fray. Because we have found that the district

court properly exercised supplemental jurisdiction over

class members' non-federal claims based on its original

federal question jurisdiction, we need not decide whether

the district court properly found it had supplemental

jurisdiction based on its exercise of diversity jurisdiction

over the claims of the named plaintiffs. The continued

viability of Zahn and its effect on class actions will

undoubtedly be addressed in the near future, either by the

Supreme Court or by Congress, and at present we need not

resolve the issue.

B. Personal Jurisdiction

The district court also found it had personal jurisdiction

over all members of the proposed class. We agree. In the

class action context, the district court obtains personal

jurisdiction over the absentee class members by providing

proper notice of the impending class action and providing

the absentees with the opportunity to be heard or the

opportunity to exclude themselves from the class. Phillips

Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 (1985). The

combination of reasonable notice, the opportunity to be

heard and the opportunity to withdraw from the class

satisfy the due process requirements of the Fifth

Amendment. Consequently, silence on the part of those

receiving notice is construed as tacit consent to the court's

39

jurisdiction. Id.; see also Carlough v. Amchem Prods., Inc.,

10 F.3d 189, 199 (3d Cir. 1993).

The district court here directed that notice of the class

action be sent to all persons who owned one or more

Prudential insurance policies between 1982 and the

present. Initially, we note the provision of individual notice

to each class member is by no means typical of the notice

provided in most class actions, and certainly qualifies as

unprecedented. The notice provided here met the

requirements for personal jurisdiction. It explained that

each individual receiving notice was a member of the

proposed class, and clearly set forth the procedure for

opting out of the class. The notice also contained the

proposed release, which explained that all claims would be

waived if the individual did not elect to opt out of the class.

Consequently, we find the members of the proposed class

were adequately informed of their potential claims against

Prudential, and the district court had personal jurisdiction

over those members of the putative class who did not timely

opt out.37

C. Article III

Appellants also dispute the district court's finding that

this case qualified as a "case or controversy" under Article

III. Fairness Opinion, 962 F. Supp. at 505-6. Appellants

contend that, "whether analyzed under the feigned case

doctrine or as a failure of Article III standing," the inclusion

of both injured and uninjured policyholders in the certified

class violates the case or controversy requirement of Article

III because the parties have not suffered an "injury in fact."

Public Citizen Brief at 16. Appellants also contend the

inclusion and release of claims arising out of not only the

three primary activities complained of, but also based on

"other improper sales practices," disqualifies the action as

a case or controversy under Article III. Id. at 16-17. Amicus

curiae Public Citizen further argues that the record is

devoid of information concerning these other improper sales

_________________________________________________________________

37. Appellants have questioned whether the notice adequately described

the category of "other improper sales practices" claims so as to inform

members that they might have a valid, compensable claim against

Prudential. We believe it did. See discussion infra S V.C.2.

40

practices, that no plaintiff has claimed an injury as a result

of them, and that there was never an intent to litigate

them. Consequently, "there never has been any live

controversy between Prudential and the `other improper

sales practices' class." Id. at 17. The district court

addressed appellants' contentions and found them to be

without merit. Fairness Opinion, 962 F. Supp. at 506.

We agree with the district court. Article III requires that

federal courts may only adjudicate an actual "case or

controversy." As the district court noted, whether an action

presents a "case or controversy" under Article III is

determined vis-a-vis the named parties. Id. at 506 (citing

Allee v. Medrano, 416 U.S. 802 (1974)). "Once threshold

individual standing by the class representative is met, a

proper party to raise a particular issue is before the court,

and there remains no further separate class standing

requirement in the constitutional sense."1 Newberg on

Class Actions S 2.05 at 2-29 (3d Ed. 1992). The record in

this case is replete with examples of the adversarial nature

of these proceedings, and it is clear that all of the named

representatives have a valid "case or controversy" with

respect to Prudential's alleged fraudulent sales scheme.

There is also ample evidence that each named party has

suffered an "injury in fact" as a result of Prudential's sales

practices and therefore has standing to bring suit. Thus,

the named plaintiffs satisfy Article III. The absentee class

members are not required to make a similar showing,

because once the named parties have demonstrated they

are properly before the court, "the issue [becomes] one of

compliance with the provisions of Rule 23, not one of

Article III standing." Goodman v. Lukens Steel Co., 777 F.2d

113, 122 (3d Cir. 1985), aff'd, 482 U.S. 656 (1987).

We also note that, with respect to appellants' "feigned

case" argument, the notice and the ADR process here were

designed to determine which members of the class could

demonstrate a compensable injury as a result of

Prudential's allegedly deceptive practices. To require the

named plaintiffs to determine beforehand which of the 8

million policyholders were deceived and provide notice to

only those persons would eliminate the viability of the class

action device.

41

We also disagree that the parties never intended to

litigate the "other sales practices" claims. As discussed,

those claims, along with the three categories of specific

violations, were all intertwined as part of the common

scheme allegedly employed by Prudential. If the parties

litigated the churning, vanishing premium and investment

plan claims, they would have litigated their "other sales

practice" claims as well.

Based on the foregoing, we will affirm the district court's

exercise of jurisdiction.

IV. CLASS CERTIFICATION

A. Settlement-Only Class Certification

Under the Federal Rules of Civil Procedure, a district

court generally makes a determination whether to certify a

class "as soon as practicable after the commencement of an

action brought as a class action." Fed. R. Civ. P. 23(c)(1).

This certification may be conditional, and may be modified

as needed. Id. Although the initial complaint in this case

was filed on October 24, 1995, the district court delayed

consideration of the certification issue pending the outcome

of the Task Force investigation.38

On October 28, 1996, the district court conditionally

certified the proposed class for settlement purposes only.

Reviewing the class action device historically, the Supreme

Court noted that "[a]mong current applications of Rule

23(b)(3), the `settlement only' class has become a stock

device. . . . all Federal Circuits recognize the utility of Rule

23(b)(3) settlement classes." Amchem Prods. Inc. v. Windsor,

___ U.S. ___, 117 S. Ct. 2231, 2247 (1997) (citations

omitted); see also G.M. Trucks, 55 F.3d at 786-800

(examining the arguments for and against the use of

settlement classes). But drawing on Judge Edward Becker's

comprehensive opinion in Georgine v. Amchem Products,

Inc., 83 F.3d 610 (3d Cir. 1996),39 the Amchem Court noted

_________________________________________________________________

38. As noted above, the district court partially granted Prudential's

motion to dismiss on May 10, 1996.

39. The proposed settlement in Georgine was the by-product of ongoing

negotiation and litigation involving a group of asbestos manufacturers

42

the special problems encountered with settlement classes.

Although as a general matter it approved the certification of

classes for settlement purposes only, the Supreme Court

cautioned that the certification inquiry is still governed by

Rule 23(a) and (b), and that "[f]ederal courts . . . lack

authority to substitute for Rule 23's certification criteria a

standard never adopted - that if a settlement is`fair,' then

certification is proper." Amchem, 117 S. Ct. at 2248-49.

Consequently, a district court must first find a class

satisfies the requirements of Rule 23, regardless whether it

certifies the class for trial or for settlement. Amchem, 117

S. Ct. at 2248 ("The safeguards provided by the Rule 23(a)

and (b) class-qualifying criteria, we emphasize, are not

impractical impediments - shorn of utility - in the

settlement class context."); G.M. Trucks, 55 F.3d at 799-800

("In sum, `a class is a class is a class,' and a settlement

class, if it is to qualify under Rule 23, must meet all of its

requirements.").

_________________________________________________________________

and a myriad of plaintiffs whose cases had been consolidated in the

Eastern District of Pennsylvania by the Multidistrict Litigation Panel.

Counsel for both sides negotiated separate settlements to resolve both

the then-pending claims against the CCR and the inventory of unfiled

claims held by plaintiffs' counsel. Once the extant cases were settled,

the

parties filed the Georgine class action on behalf of approximately 2

million individuals who had not previously filed lawsuits against the

asbestos defendants, but who had been exposed to asbestos products

produced by defendants. While some members of the class had suffered

physical injuries as a result of their exposure, other members of the

class were "exposure-only" plaintiffs who had not yet developed any

asbestos-related illness. The parties simultaneouslyfiled a complaint, an

answer, a proposed settlement and a joint motion for conditional class

certification. The district court granted the motion, and subsequently

approved the settlement. On appeal, the Georgine court vacated the

district court's opinion and remanded for decertification of the class,

finding that the class did not satisfy the typicality, adequacy of

representation, predominance and superiority requirements of Rule 23.

Georgine, 83 F.3d at 618. The Supreme Court affirmed. Amchem, 117 S.

Ct. at 2244.

Throughout this opinion, we will distinguish between the opinions of

this Court and the Supreme Court by referring to the Supreme Court's

decision as Amchem, and referring to this Court's opinion as Georgine.

43

The district court may take the proposed settlement into

consideration when examining the question of certification.

Amchem, 117 S. Ct. at 2248.40 In Amchem, the Supreme

Court held "a district court [determining whether to certify

a class for settlement purposes only] need not inquire

whether the case, if tried, would present intractable

management problems . . . for the proposal is that there be

no trial." Id. at 2248. But at the same time the Court noted

that "other specifications of the rule - those designed to

protect absentees by blocking unwarranted or overbroad

class definitions - demand undiluted, even heightened,

attention in the settlement context." Id. In particular, the

Court emphasized the importance of applying the class

certification requirements of Rules 23(a) and (b) separately

from its fairness determination under Rule 23(e). The Court

noted that "[i]f a common interest in a fair compromise

could satisfy the predominance requirement of Rule

23(b)(3), that vital prescription would be stripped of any

meaning in the settlement context." Id. at 2249-50.41 At the

same time, the Court stressed the requirements found

under Rule 23(a), in particular the stricture that"the

representative parties will fairly and adequately protect the

interests of the class." Indeed, the key to Amchem appears

to be the careful inquiry into adequacy of representation.

Id. at 2248 ("Subdivisions (a) and (b) [of Rule 23] focus

court attention on whether a proposed class has sufficient

unity so that absent members can fairly be bound by

decisions of class representatives. That dominant concern

persists when settlement, rather than trial, is proposed.")

With this standard in mind, we will review the district

court's analysis of the Rule 23 certification criteria.

_________________________________________________________________

40. The district court did not have the benefit of the Amchem decision

when it rendered its opinion, and did not take settlement into

consideration when conducting its certification analysis.

41. In his separate opinion concurring in part and dissenting in part,

Justice Breyer, joined by Justice Stevens, questioned the consistency of

the majority approach. "If the majority means that these pre-settlement

questions are what matters, then how does it reconcile its statement

with its basic conclusion that `settlement is relevant' to class

certification." Amchem, 117 S. Ct. at 2254.

44

B. Class Certification under Rule 23

"Rule 23 is designed to assure that courts will identify

the common interests of class members and evaluate the

named plaintiff 's and counsel's ability to fairly and

adequately protect class interests." G.M. Trucks, 55 F.3d at

799. In order to be certified, a class must satisfy the four

requirements of Rule 23(a): (1) numerosity; (2)

commonality; (3) typicality; and (4) adequacy of

representation.42 If the Rule 23(a) criteria are satisfied, the

court must also find that the class fits within one of the

three categories of class actions defined in Rule 23(b).43 In

this instance the parties sought to certify the class under

Rule 23(b)(3).44 In order to pass muster under Rule 23(b)(3),

_________________________________________________________________

42. Rule 23(a) provides:

One or more members of a class may sue or be sued as

representative parties on behalf of all only if (1) the class is so

numerous that joinder of all members is impracticable, (2) there

are

questions of law or fact common to the class, (3) the claims or

defenses of the representative parties are typical of the claims or

defenses of the class, and (4) the representative parties will

fairly

and adequately protect the interests of the class.

Fed. R. Civ. P. 23(a).

43. Rule 23(b)(1) authorizes certification in cases where separate actions

by or against individual class members would risk establishing

"incompatible standards of conduct for the party opposing the class,"

Rule 23(b)(1)(A), or would "as a practical matter be dispositive of the

interests" of nonparty class members "or substantially impair or impede

their ability to protect their interests," Rule 23(b)(1)(B). Rule 23(b)(2)

authorizes class actions seeking declaratory or injunctive relief, for

example civil rights cases alleging class based discrimination.

44. Rule 23(b)(3) provides:

(b) An action may be maintained as a class action if the

prerequisites of subdivision (a) are satisfied, and in addition:

* * *

(3) the court finds that the questions of law or fact common to the

members of the class predominate over any questions affecting

only individual members, and that a class action is superior to

other available methods for the fair and efficient adjudication of

the controversy. The matters pertinent to the findings include: (A)

45

the district court must determine that common questions of

law or fact predominate and that the class action

mechanism is the superior method for adjudicating the

case. The requirements of subsections (a) and (b) are

designed to insure that a proposed class has "sufficient

unity so that absent class members can fairly be bound by

decisions of class representatives." Amchem , 117 S. Ct. at

2248; see also Hassine v. Jeffes, 846 F.2d 169, 177 n.4 (3d

Cir. 1988) (" `[C]ommonality' like`numerosity' evaluates the

sufficiency of the class itself, and `typicality' like `adequacy

of representation' evaluates the sufficiency of the named

plaintiff . . . ."). As noted, these class certification

requirements are to be determined independently from the

court's determination of the "fairness" of the proposed

settlement under Rule 23(e).45 Amchem, 117 S. Ct. at 2248

(Rule 23(e) "was designed to function as an additional

requirement, not a superseding direction, for the`class

action' to which Rule 23(e) refers is one qualified for

certification under Rule 23(a) and (b).").

1. The Rule 23(a) Criteria

a. Numerosity

The court must find that the class is "so numerous that

joinder of all members is impracticable." Fed. R. Civ. P.

_________________________________________________________________

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.

Fed. R. Civ. P. 23(b)(3).

45. Rule 23(e) provides:

A class action shall not be dismissed or compromised without the

approval of the court, and notice of the proposed dismissal or

compromise shall be given to all members of the class in such a

manner as the court directs.

Fed. R. Civ. P. 23(e)

46

23(a)(1). No one has challenged the district court'sfinding

that the proposed class satisfies the numerosity

requirement. Indeed, the proposed class consists of more

than 8 million present and former policyholders.

b. Commonality

The commonality prong of Rule 23(a) asks whether"there

are questions of law or fact common to the class." Fed. R.

Civ. P. 23(a)(2).46 The district court found the proposed

class easily satisfied the commonality requirement, citing

several common factual and legal issues which the class

members would need to establish in order to prove

Prudential's liability.47 Fairness Opinion, 962 F. Supp. at

_________________________________________________________________

46. Courts frequently examine the Rule 23(a) requirement of

commonality in conjunction with Rule 23(b)(3)'s"predominance"

standard, reasoning that the "predominance requirement incorporates

the commonality requirement." Georgine, 83 F.3d at 626; 1 Newberg on

Class Actions S 3.13, at 3-71. Although the district court followed this

approach and examined the predominance and commonality

requirements together, appellants have not questioned the court's

finding that the proposed class satisfies this element of Rule 23(a).

47. The district court found that plaintiffs would need to establish the

following common factual issues at trial:

- Prudential's common course of conduct;

- Prudential's development of the sales presentations and

materials,

and artificial inflation and maintenance of dividend scales;

- the sale of replacement and vanishing premium policies by

material omission;

- the misrepresentation of po licies as investment or retirement

plans;

- the failure to train or sup ervise agents;

- Prudential's unwillingness to prevent deceptive sales practices;

and

- Prudential's scienter.

Fairness Opinion, 962 F. Supp. at 512.

The district court also found that plaintiffs would need to establish the

following common legal issues at trial:

47

512. The district court also noted that the MDL Transfer

Order recognized that the transferred actions "involve

common questions of fact . . . involv[ing] allegations that

deceptive life insurance sales practices occurred or were

encouraged as a [sic] result of some larger scheme or

schemes organized by Prudential." Id. (quoting August 3,

1995 Transfer Order at 1-2). Finally, the court found

Prudential had asserted affirmative defenses which were

common to all class members, and independently would

satisfy the predominance requirement. Id. at 512-13.48

We believe the court's finding that the proposed class

satisfied the commonality requirement was within its sound

discretion. A finding of commonality does not require that

all class members share identical claims, and indeed

"factual differences among the claims of the putative class

members do not defeat certification." Baby Neal v. Casey,

_________________________________________________________________

- whether policyholder relian ce could be presumed;

- whether Prudential's offer to finance a policyholder's purchase

of

a policy constitutes an enforceable financing contract distinct

from

the policy itself;

- whether Prudential breached the financing contract;

- whether Prudential breached an obligation of good faith and fair

dealing;

- whether constructive trust principles apply to premiums received

as a (result of deceptive sales practices;

- whether compensatory claims can be effectively quantified on a

class wide basis; and

- whether punitive damages sh ould be imposed.

Id.

48. The court also cited the following as examples of issues common to

all class members: Prudential's fraudulent concealment of its

misrepresentations; the use of substantially similar, and sometimes

identical, oral and written misrepresentations by Prudential agents in

furtherance of its fraudulent scheme; the required use of pre-approved

written marketing materials; and the fact that Prudential trained its

agents to use these fraudulent sales techniques. Fairness Opinion, 962

F. Supp. at 513-16.

48

43 F.3d 48, 56 (3d Cir. 1994) (citing Eisenberg v. Gagnon,

766 F.2d 770 (3d Cir. 1985)).49"The commonality

requirement will be satisfied if the named plaintiffs share at

least one question of fact or law with the grievances of the

prospective class." Id. As the district court found, the

allegations in the Second Amended Consolidated Complaint

raise numerous issues which all members of the class

would need to demonstrate in order to succeed at trial.

Consequently, the proposed class satisfies Rule 23(a)(2).

c. Typicality

The district court found the claims of the class

representatives were typical of the class as a whole. First,

the court noted all of the named plaintiffs have alleged

either churning, vanishing premium, or investment plan

claims, or some combination of the three. Second, it relied

on the "prominent guiding thread through all plaintiffs'

claims - Prudential's scheme to defraud" to support its

conclusion that the claims of the named plaintiffs are

typical of the class as a whole. Fairness Opinion, 962 F.

Supp. at 518. The court rejected the argument that"the

class fails for lack of typicality because no class

representative claims to have been injured by `other

improper sales practices.' " Id. The court reasoned that the

"class members injured by `other fraudulent sales practices'

have suffered the same injury - they are victims of

Prudential's deception - and have suffered the same generic

type of harm - they have economic damages - as the named

plaintiffs," thereby satisfying the typicality requirement. Id.

at 519 (citing General Tel. Co. of Southwest v. Falcon, 457

U.S. 147, 159 (1982)).

On appeal, Krell reasserts his argument that the

inclusion of the "other claims" defeats afinding of

typicality. In particular, Krell contends the named plaintiffs'

_________________________________________________________________

49. Krell objects to the district court's reference to Baby Neal,

complaining that the court was inappropriately applying the Rule

23(b)(2) standard for injunctive relief in a Rule 23(b)(3) class action.

The

objection is clearly without merit. The district court applied Baby Neal

in

the context of its Rule 23(a) "commonality" analysis, a factor applicable

whether the class action is brought under Rule 23(b)(2) or (b)(3).

49

claims cannot be representative of the class because the

"other claims" are not identified. Krell Brief at 29; see also

Public Citizen Brief at 13-16. Additionally, Krell contends

the court failed to consider the variations among the laws

of the 50 states, making its typicality analysis inadequate.50

Amicus Public Citizen, relying on Falcon, argues plaintiffs

must "show that the plaintiff class ha[s] been injured in the

same manner as ha[ve] the named representative[s]." Public

Citizen Brief at 15 (emphasis omitted).

"The concepts of commonality and typicality are broadly

defined and tend to merge." Baby Neal, 43 F.3d at 56

(citing 7A Charles A. Wright, et al., Federal Practice and

Procedure S 1764, at 247 (1986)). The typicality requirement

is designed to align the interests of the class and the class

representatives so that the latter will work to benefit the

entire class through the pursuit of their own goals. Id. at

57 ("The typicality inquiry is intended to assess whether the

action can be efficiently maintained as a class and whether

the named plaintiffs have incentives that align with those of

absent class members so as to assure that the absentees'

interests will be fairly represented."); 1 Newberg on Class

Actions, S 3.13. In this respect the commonality and

typicality requirements both seek to ensure that the

interests of the absentees will be adequately represented.

Falcon, 457 U.S. at 157 n.13. However, "neither of these

requirements mandates that all putative class members

share identical claims." Baby Neal, 43 F.3d at 56; Hassine

v. Jeffes, 846 F.2d at 176-77; Weiss v. York Hosp., 745

F.2d 786, 809 (3d Cir. 1984), cert. denied, 470 U.S. 1060

(1985). In addition, "factual differences among the claims of

the putative class members do not defeat certification."

Baby Neal, 43 F.3d at 56.

We believe the district court's typicality analysis is

correct. The named plaintiffs, as well as the members of the

proposed class, all have claims arising from the fraudulent

_________________________________________________________________

50. Krell also argues the court improperly evaluated the typicality

requirement because it merely presumed the factual and legal elements

of named plaintiffs' claims were aligned with the claims of absentee class

members. Krell's claim that the district court presumed typicality simply

ignores the findings contained in the district court's opinion.

50

scheme perpetrated by Prudential. That overarching

scheme is the linchpin of the Second Amended

Consolidated Complaint, regardless whether each class

member alleges a churning claim, a vanishing premium

claim, an investment plan claim, or some other injury

falling within the category of "other sales" claims.

"Commentators have noted that cases challenging the same

unlawful conduct which affects both the named plaintiffs

and the putative class usually satisfy the typicality

requirement irrespective of the varying fact patterns

underlying the individual claims." Baby Neal, 43 F.3d at

58. Consequently, the factual distinctions among and

between the named plaintiffs and the 8 million putative

class members do not defeat a finding of typicality. "[E]ven

relatively pronounced factual differences will generally not

preclude a finding of typicality where there is a strong

similarity of legal theories" or where the claim arises from

the same practice or course of conduct. Id.

This conclusion is further buttressed by the Supreme

Court's holding in Falcon. The Supreme Court reversed

certification of a class of Mexican-Americans who were

challenging their employers hiring and promotion decisions

on typicality grounds.51 Falcon, 457 U.S. at 157-59. Krell

relies on Falcon for the proposition that"across-the-board"

classes do not satisfy Rule 23. Krell Brief at 27-28. We

disagree. Falcon did not strike down "across-the-board"

classes per se, and, in fact, it agreed"with the proposition

underlying the across-the-board rule - that racial

discrimination is by definition class discrimination." Falcon,

457 U.S. at 157. The Court nonetheless reversed the class

certification because the district court had improperly

presumed that Falcon's claims were typical of the class

claims. In particular, the Court emphasized that Falcon's

claim was based on the theory of disparate treatment, while

_________________________________________________________________

51. Falcon involved a Mexican-American employee who was denied a

promotion, allegedly based on his national origin. After obtaining a

right-

to-sue letter from the EEOC, Falcon commenced a class action under

Title VII of the Civil Rights Act of 1964, alleging discrimination against

Mexican-Americans with respect to promotion. The class, however, was

comprised of all Mexican-American employees and Mexican-Americans

who had been denied employment.

51

the class claims relied on the theory of disparate impact.

Consequently, Falcon would need to "prove much more

than the validity of his own claim" in order to prove the

claims of the absentee class members, and thus his claims

were not typical of the class. Id. at 158.

The present case is readily distinguishable. Unlike the

plaintiff in Falcon, the named plaintiffs here have not relied

on allegations that they were singled out and defrauded by

Prudential. They have instead alleged that they suffered

harm as the result of the same company-wide conduct that

injured the absentee class members. The various forms

which their injuries may take do not negate a finding of

typicality, provided the cause of those injuries is some

common wrong. Baby Neal, 43 F.3d at 58 (citing Falcon,

457 U.S. at 157-59) ("Where an action challenges a policy

or practice, the named plaintiffs suffering one specific

injury from the practice can represent a class suffering

other injuries, so long as all the injuries are shown to result

from the practice."). In this instance, the alleged common

scheme provides an appropriate basis for a finding of

typicality. Since all members of the class would need to

demonstrate the existence of this scheme, their interests

are sufficiently aligned that the class representatives can be

expected to adequately pursue the interests of the absentee

class members. Amchem, 117 S. Ct. at 2248 (Rule 23 asks

"whether a proposed class has sufficient unity so that

absent class members can fairly be bound by decisions of

class representatives").

d. Adequacy of Representation

The final Rule 23(a) prerequisite encompasses two

distinct inquiries designed to protect the interests of

absentee class members. First, the adequacy of

representation inquiry "tests the qualifications of the

counsel to represent the class." G.M. Trucks, 55 F.3d at

800. Second, it "serves to uncover conflicts of interest

between named parties and the class they seek to

represent." Amchem, 117 S. Ct. at 2250. The district court

found that both class counsel and the named plaintiffs

satisfied these tests.

52

With respect to class counsel, the court found that

plaintiffs' counsel were highly competent and experienced

class action attorneys, and had pursued the interests of the

class vigorously. Fairness Opinion, 962 F. Supp. at 519-20.

With respect to the class representatives, the court found

named plaintiffs' interest in proving Prudential's"knowledge

and orchestration of the scheme to defraud" and their

"interest in obtaining relief commensurate with individual

injury," as well as punitive damages, demonstrates that

"there are no disparate interests to impair plaintiffs'

incentive to prosecute fully all aspects of their claims

against Prudential." Id. at 521.

Krell contests the district court's analysis on several

grounds. First, Krell disputes the district court'sfinding

that class counsel adequately served the interests of the

class. In particular, Krell argues that class counsel failed to

take adequate discovery, and that an improper "clear

sailing" fee agreement between class counsel and

Prudential created an impermissible conflict of interest.52

Krell Brief at 19-21, 51-53.

Second, Krell contends the inclusion of the category of

"other claims" defeats a finding of adequate representation.

Krell argues because policyholders have an equity interest

in any "surplus" of Prudential, the expansion of the class to

include policyholders with unidentified "other claims,"

whose interests were "adverse to those with asserted

claims," created a detriment on behalf of the"other"

policyholders for the benefit of those with asserted claims.

According to Krell, this conflict destroys the adequacy of

named plaintiffs' representation.

Third, Krell repeats his argument that the court's failure

to consider the variations among the laws of the 50 states

demonstrates that there was no adequate protection of the

claims of absentees. In particular, Krell claims there was a

conflict between class members with replacement claims

and those without, so that the district court should have

_________________________________________________________________

52. The court specifically noted that the fee agreement negotiated with

Prudential subsequent to the negotiation of the Proposed Settlement did

not undermine the adequacy of class counsel's representation. Fairness

Opinion, 962 F. Supp. at 519; see also infra S VI.C.1.

53

created a subclass of replacement claimants.53 Finally, both

Krell and Public Citizen argue the proposed class

improperly includes a subset of "futures" claimants,

thereby running afoul of Amchem.

We believe the district court exercised its sound

discretion when it found class counsel and the named

plaintiffs adequately represent the class. First, we believe

class counsel vigorously pursued this class action. Both the

uncapped nature of the proposed settlement and the

"unprecedented" outreach program indicate that class

counsel and the named plaintiffs have attempted to serve

the best interests of the class as a whole. Further, we agree

with the district court's finding that the attorneys' fee

arrangement between class counsel and Prudential did not

affect the adequacy of representation. See infra S VI.C.1.

Second, we also agree with the district court that the

named plaintiffs adequately represent the interests of the

absentee class members. As discussed, the crux of this

class action is the allegation that Prudential engaged in a

scheme to defraud policyholders by means of company-wide

deceptive sales practices. The named parties, like the

members of the class, would need to establish this scheme

in order to succeed on any of the claims in the Second

Amended Consolidated Complaint. Even those class

members with "other" claims share the common task of

demonstrating the existence and implementation of this

scheme. Consequently, we believe the proposed class

satisfies the adequacy of representation requirement of Rule

23(a).

We also reject the argument that the class as constituted

included persons who are currently unaware of their injury,

and that this "futures" class is barred under Amchem.

Amchem, of course, found the proposed class did not meet

the adequacy of representation standard because the

interests of those with present injuries differed from those

with "futures" claims. Amchem, 117 S. Ct. at 2251 (finding

that the economic interest of the currently injured

_________________________________________________________________

53. The district court explicitly rejected this argument. Fairness

Opinion,

962 F. Supp. at 522. For a more detailed discussion of Krell's

replacement claims, see infra S V.A.4.

54

claimants "tugs against the interest of the exposure-only

plaintiffs"). But Amchem is easily distinguished on its facts.

Unlike the "exposure-only" plaintiffs in Amchem, the class

members here need not wait to determine if they have been

harmed by Prudential's fraudulent sales practices. There is

no "future" manifestation of injury, because any injury

suffered by a member of the class has already occurred.

Having received notice of the pending class action and the

availability of relief, members of the class can determine

whether they have been victims of Prudential's fraud, either

through a review of their records or by calling the toll-free

number established by the settling parties. Consequently,

the district court exercised its sound discretion infinding

the proposed class meets the adequacy of representation

requirement of Rule 23(a)(4).

2. The Rule 23(b) Criteria

In order to certify an opt-out class under Rule 23(b)(3)

the district court must make two additional findings:

predominance and superiority. Issues common to the class

must predominate over individual issues, and the class

action device must be superior to other means of handling

the litigation. The district court found both requirements

were satisfied.

a. Predominance

The Supreme Court's recent decision in Amchem

addressed the application of the predominance prong to

"settlement only" classes. Although the Court made clear

that consideration of the proposed settlement was proper

when making a decision on class certification, it also placed

limits on the weight to be accorded to the settlement. In

particular, Amchem rejected the idea that the potential

benefits of settlement are relevant to the predominance

inquiry. According to the Court, the predominance "inquiry

trains on the legal or factual questions that qualify each

member's case as a genuine controversy, questions that

preexist any settlement." Amchem, 117 S. Ct. at 2249. The

court noted the "claims and defenses" relevant to both the

predominance test and the Rule 23(a)(4) adequacy of

representation inquiry "refer to the kinds of claims or

55

defenses that can be raised in courts of law as part of an

actual or impending law suit." 117 S. Ct. at 2249 n.18

(quoting Diamond v. Charles, 476 U.S. 54, 76-77 (1986)

(O'Connor, J. concurring in part and concurring in

judgment)).

In its predominance determination, the court focused

primarily on plaintiffs' allegation that Prudential engaged in

a common course of conduct by which it defrauded class

members, and concluded that "[w]here many purchasers

have been defrauded over time by similar

misrepresentations, or by a common scheme to which

alleged non-disclosures related, courts have found that the

purchasers have a common interest in determining whether

the defendant's course of conduct is actionable." Fairness

Opinion, 962 F. Supp. at 511 (citations omitted).

The district court also rejected the argument that

claimants' need to demonstrate reliance destroyed

predominance, reasoning that "reliance is an issue

secondary to establishing the fact of defendant's liability."

Id. at 516 (citing 1 Newberg S 4.26 at 4-104) ("Challenges

based on . . . reliance have usually been rejected and will

not bar predominance satisfaction because [reliance

pertains] to the right of a class member to recover in

contrast to underlying common issues of the defendant's

liability."). Additionally, the court noted that"most of the

plaintiffs' claims do not even involve a reliance element,"

including their claims for breach of contract, breach of

implied obligation of good faith and fair dealing, negligence,

negligent training and supervision, and unjust enrichment.

Id. Finally, the court found that, because "plaintiffs' fraud-

based claims stem largely from misleading omissions,"

reliance can be presumed. Id.

The district court also distinguished this case from

Georgine. First, the court reasoned that "Prudential's

alleged intentional use of the fraudulent sales tactics

provides the `single central issue' lacking" in Georgine. Id.

at 511 n.45. Whereas Georgine involved a variety of claims

encompassing scores of individual issues, a trial in this

instance would be focused on Prudential management's

conduct. Id. Second, the court noted the class here is

comprised of persons who purchased one type of product

56

(life insurance policies) from one company, in contrast to

the Georgine class members who were exposed to different

asbestos-containing products manufactured by different

companies. Finally, the district court noted the class here

lacked "futures" plaintiffs, because "class members are

readily identifiable and have already suffered injury by the

purchase of a product that was misrepresented." Id.

As the Supreme Court noted in Amchem, "[p]redominance

is a test readily met in certain cases alleging consumer or

securities fraud or violations of the antitrust laws. . . . [e]ven

mass tort cases arising from a common cause or disaster

may, depending upon the circumstances, satisfy the

predominance requirement." Amchem, 117 S. Ct. at 2250

(citing Adv. Comm. Notes, 28 U.S.C. App., p. 697). This

case, involving a common scheme to defraud millions of life

insurance policy holders, falls within that category. The

district court's opinion sets forth a litany of common issues

which the class must demonstrate in order to prevail. See

supra S IV.B.1 and n.47-48. While individual questions may

arise during the course of this litigation, we agree with the

district court that the presence of individual questions does

not per se rule out a finding of predominance. In particular,

the "presence of individual questions as to the reliance of

each investor does not mean that the common questions of

law and fact do not predominate." Eisenberg v. Gagnon, 766

F.2d 770, 786 (3d Cir. 1985).

Krell contends the district court did not conduct a proper

analysis under Rule 23(b)(3), and instead "presumed"

predominance by finding the central issue in this case was

nationwide deceptive conduct by Prudential's management.

We disagree. A review of the district court's fairness opinion

belies the contention that it merely presumed

predominance. See Fairness Opinion, 962 F. Supp. at 510-

17. The district court's finding that common issues

predominated in this case was within its sound discretion,

was supported by the record, and was amply demonstrated

in its opinion.

Krell also reasserts his argument that the class here

suffers the same defects as the class of asbestos plaintiffs

in Amchem. We find the district court's analysis of this

comparison convincing. The two cases are markedly

57

different, and easily distinguished. The Amchem class failed

the predominance inquiry because of the disparate

questions facing class members, based in part on their

differing levels of exposure, their differing medical histories,

and the presence of exacerbating conditions such as

smoking. Of course, the complexity of a case alleging

physical injury as a result of asbestos exposure differs

greatly from a case alleging economic injury as a result of

deceptive sales practices. The elements of proof are less

difficult when the vagaries of medical testimony and

scientific expertise are removed from consideration.

Furthermore, the Amchem class was further undermined by

the schism between the differing medical needs of currently

injured class members and exposure-only or "futures"

claimants. As noted, there is no "futures" class in this case.

We also reject Krell's contention that predominance is

defeated because the class claims are subject to the laws of

the fifty states. Courts have expressed a willingness to

certify nationwide classes on the ground that relatively

minor differences in state law could be overcome at trial by

grouping similar state laws together and applying them as

a unit. This Court has affirmed a class certification based

on a "creditable showing, which apparently satisfied the

district court, that class certification [did] not present

insuperable obstacles" relating to variances in state law.

See In re School Asbestos Litigation, 789 F.2d 996, 1010 (3d

Cir. 1986).54 In this instance Krell has failed to demonstrate

that the differences in applicable state law were sufficient to

foreclose a similar approach.55 In support of class

certification, plaintiffs compiled "a series of charts setting

forth comprehensive analyses of the various states' laws

potentially applicable to their common law claims."

Fairness Opinion, 962 F. Supp. at 525. The court

concluded that the "elements of these common law claims

are substantially similar and any differences fall into a

_________________________________________________________________

54. While we reached a different conclusion in Georgine, our decision

there turned on our belief that the case "could not be broken into

anywhere near that small a number of patterns." 83 F.3d at 627 n.13.

55. In addition, Krell's concern is addressed by the fact that "the ADR

scoring procedures specifically incorporate state replacement

regulations." Fairness Opinion, 962 F. Supp. at 550 n.79.

58

limited number of predictable patterns." Id. The district

court "considered the choice of law issues that confront[ed]

the Court and conclude[d] that these choice of law issues

[did] not render this class action unmanageable." Id. We

agree.

b. Superiority

Rule 23(b)(3) sets out several factors relevant to the

superiority inquiry.56 The district court addressed these

factors and found the class action mechanism was superior

to other possible means of adjudicating this case. First, the

court examined the relatively modest size of individual

claims and the sheer volume of those claims in the

aggregate, and concluded a class action presented the "only

rational avenue of redress for many class members." Id. at

523. Second, the court reasoned the relatively small

number of individual suits pending against Prudential

indicated that individual policyholders lacked a compelling

interest to control the prosecution of their own claims, and

at the same time represented a potentially great strain on

judicial resources. Third, the court found it was appropriate

to litigate the case in New Jersey, Prudential's principal

place of business. Finally, the district court determined that

the case, while challenging, would not present

insurmountable case management problems if it were tried.57

Id. at 525.

_________________________________________________________________

56. Rule 23(b)(3) lists the following factors for consideration by the

courts:

(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.

Fed. R. Civ. P. 23(b)(3).

57. While we believe the district court correctly analyzed whether

application of the laws of the fifty states would be manageable, we note

this analysis, depending on the facts in each case, may no longer be

necessary in the context of settlement-only class certification. See

Amchem, 117 S. Ct. at 2248 ("Confronted with a request for settlement-

only class certification, a district court need not inquire whether the

case, if tried, would present intractable management problems . . . for

the proposal is that there be no trial.").

59

Krell objects to the finding of superiority, claiming the

district court erred by only comparing the nationwide class

with the prospect of individual proceedings, without

considering the possibility of subclasses and without

allowing Krell to develop the subclass issue.

The superiority requirement asks the court "to balance,

in terms of fairness and efficiency, the merits of a class

action against those of `alternative available methods' of

adjudication." Georgine, 83 F.3d at 632 (citing Katz v. Carte

Blanche Corp., 496 F.2d 747, 757 (3d Cir.) (en banc), cert.

denied, 419 U.S. 885 (1974)). We believe the court's

superiority determination was within its sound discretion.

With respect to Krell's subclass argument, the district court

found no conflict between replacement and non-

replacement claimants. Fairness Opinion, 962 F. Supp. at

522. We agree. As discussed infra at S V.A.4., Krell has not

demonstrated that replacement claimants differ from other

class members so as to require the creation of a subclass.

Because the replacement claimants did not require

specialized or distinct treatment, the court's failure to

create a separate subclass for those claimants, as well as

its superiority determination, was not an abuse of

discretion.58

C. Conclusion

Based on our review of the prerequisites of Rule 23(a)

and 23(b)(3), we believe the "proposed class has sufficient

unity so that absent members can fairly be bound by

decisions of class representatives." Amchem, 117 S. Ct. at

2248. Consequently, we will affirm the district court's

certification of the class.

V. THE FAIRNESS OF THE PROPOSED SETTLEMENT

Even if it has satisfied the requirements for certification

under Rule 23, a class action cannot be settled without the

approval of the court and a determination that the

proposed settlement is "fair, reasonable and adequate."59

_________________________________________________________________

58. The district court expressly left open the possibility that it would

create subclasses if they became necessary. Fairness Opinion, 962 F.

Supp. at 525.

59. Both Rule 23(e) and Rule 23(c) require that notice of the proposed

settlement be given to all members of the class as directed by the court.

For a discussion of the notice provided, see discussion infra S V.C.2.

60

G.M. Trucks, 55 F.3d at 785. "Rule 23(e) imposes on the

trial judge the duty of protecting absentees, which is

executed by the court's assuring the settlement represents

adequate compensation for the release of the class claims."

Id. at 805 (citations omitted).

In deciding the fairness of a proposed settlement, we

have said that "[t]he evaluating court must, of course,

guard against demanding too large a settlement based on

its view of the merits of the litigation; after all, settlement

is a compromise, a yielding of the highest hopes in

exchange for certainty and resolution." Id. at 806 (citations

omitted). At the same time, we have noted that cases such

as this, where the parties simultaneously seek certification

and settlement approval, require "courts to be even more

scrupulous than usual" when they examine the fairness of

the proposed settlement. Id. at 805. This heightened

standard is designed to ensure that class counsel has

demonstrated "sustained advocacy" throughout the course

of the proceedings and has protected the interests of all

class members. Id. at 806.

"The decision of whether to approve a proposed

settlement of a class action is left to the sound discretion

of the district court." Girsh v. Jepson, 521 F.2d 153, 156

(3d Cir. 1975). Because of the district court's proximity to

the parties and to the nuances of the litigation, we accord

great weight to the court's factual findings. Bell Atlantic

Corp. v. Bolger, 2 F.3d 1304, 1305-6 (3d Cir. 1993) (citing

Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 34

(3d Cir. 1971)).

As the district court recognized, our decision in Girsh

sets out appropriate factors to be considered when

determining the fairness of a proposed settlement. Those

factors are:

(1) the complexity, expense and likely duration of the

litigation . . . ; (2) the reaction of the class to the

settlement . . . ; (3) the stage of the proceedings and

the amount of discovery completed . . . ; (4) the risks

of establishing liability . . . ; (5) the risks of

establishing damages . . . ; (6) the risks of maintaining

the class action through trial . . . ; (7) the ability of the

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defendants to withstand a greater judgment; (8) the

range of reasonableness of the settlement fund in light

of the best possible recovery . . . ; (9) the range of

reasonableness of the settlement fund to a possible

recovery in light of all the attendant risks of litigation

. . . .

Girsh, 521 F.2d at 157 (quoting City of Detroit v. Grinnell

Corp., 495 F.2d 448, 463 (2d Cir. 1974)) (the "Girsh

factors"). The court examined each of these factors and

found "the Proposed Settlement is indeed fair, reasonable,

and adequate and should be approved." Fairness Opinion,

962 F. Supp. at 534.

In addition to the Girsh analysis, the district court offered

other reasons for its conclusion that the settlement was fair

and reasonable. Describing the proposed settlement as

"exceptional," the court noted the settlement's structure

was based on the class action settlements approved in

Willson v. New York Life Ins. Co., No. 94-127804, 1995 N.Y.

Misc. LEXIS 652 (N.Y. Sup. Ct. Feb. 1, 1996), aff'd, 644

N.Y.S.2d 617 (A.D. 1st Dep't), and Michaels v. Pheonix

Home Life Ins. Co., No. 95-5318, 1997 N.Y. Misc. LEXIS

171 (N.Y. Sup. Ct. Jan. 3, 1997), both of which received the

praise of "[c]ourts, academic and industry experts, and

various independent organizations." Fairness Opinion, 962

F. Supp. at 535. The court also relied on the expertise of

the insurance regulators from the fifty states and the

District of Columbia, all of whom endorsed the settlement.

The court found the terms of the settlement "benefit[ ] the

class enormously," emphasizing the uncapped nature of the

relief, the fairness of the ADR process, and the availability

of Basic Claim Relief to those class members who either

elect not to participate in the ADR process or who cannot

demonstrate they have a compensable claim. The court

found this relief was enhanced by the inclusion of

"Additional Remediation Amounts," which it described as

the "punitive damage counterpart to the Proposed

Settlement," and by Prudential's agreement to pay all

attorneys' fees and costs associated with the settlement. Id.

at 535-36. Finally, the court emphasized the settlement

provided class members the opportunity to file claims

immediately after court approval of the settlement, rather

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than waiting through what no doubt would be protracted

litigation. Id. at 536.

Krell raises several challenges to the district court's

fairness determination.60 First, Krell claims the district

court applied several of the Girsh factors improperly, and in

some cases not at all, and that it erred by not creating a

separate subclass to address replacement claims. Krell

Brief at 43-50. Second, he contends the district court's

fairness determination violated the McCarran-Ferguson Act

and the Rules Enabling Act by altering the substantive

contractual and statutory insurance rights of the class. Id.

at 36-40. Finally, Krell alleges the certification and fairness

proceedings lacked due process. Id. at 40-42.

_________________________________________________________________

60. Prudential contends that nearly "[e]very argument Krell makes is

based on th[e] mistaken premise that his `replacement claims' were

stronger than the misrepresentation claims of the other Class Members."

Prudential Brief at 41 & n.10. As a result, Prudential argues, all but one

of the objections to the settlement's fairness are"felled by Krell's error

of

law." Id. We do not agree that Krell's arguments can be dismissed so

easily, and will address Krell's replacement claim objections in the

context of his other arguments.

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