In Re: LifeUSA Holding, Inc.

Opinions of the United

2001 Decisions States Court of Appeals

for the Third Circuit

3-5-2001

In Re: LifeUSA Holding, Inc.

Precedential or Non-Precedential:

Docket 00-1775

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Filed March 5, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 00-1775

IN RE: LIFEUSA HOLDING INC.,

LifeUSA Holding, Inc.,

Appellant

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civ. No. 97-cv-07827)

District Judge: Honorable J. Curtis Joyner

Argued: Thursday, December 14, 2000

Before: SCIRICA, FUENTES and GARTH,

Circuit Judges

(Filed: March 5, 2001)

James F. Jorden (Argued)

Waldemar J. Pflepsen, Jr.

Paul A. Fischer

Richard Karpinski

Stephen H. Goldberg

Jorden Burt Boros Cicchetti

Berenson & Johnson LLP

1025 Thomas Jefferson Street, N.W .

Suite 400 East

Washington, D.C. 20007

William T. Hangley

Michael Lieberman

Hangley Aronchick

Segal & Pudlin

One Logan Square - 27th Floor

Philadelphia, PA 19103

Attorneys for Appellant

John M. Elliott

Thomas J. Elliott

Henry F. Siedzikowski (Argued)

Mark A. Kearney

Timothy T. Myers

Brian J. McCormick

Elliott Reihner Siedzikowski

& Egan, P.C.

925 Harvest Drive

P.O. Box 3010

Blue Bell, PA 19422

Attorney for Appellees

Evan M. Tager

Mayer, Brown & Platt

1909 K Street, N.W.

Washington, D.C. 20006

Victoria E. Fimea

American Council of Life Insurers

1001 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2599

Attorneys for Amicus-Appellant

American Council of Life Insurers

2

OPINION OF THE COURT

GARTH, Circuit Judge:

LifeUSA appeals the January 13, 2000 order (filed

January 19, 2000) of the District Court which certified a

class of plaintiffs who had purchased LifeUSA

"Accumulator" annuity policies between August 1, 1989 to

the present. In its order certifying a class, the District

Court focused entirely on the alleged pr e-sale

misrepresentations of LifeUSA agents in the marketing,

advertising, and sales of the Accumulator, stating ". . . that

the gravamen of plaintiffs' claims is that Defendant's sales

techniques and advertising constituted an allegedly

fraudulent scheme." (A-16). The District Court's focus was

not on the alleged post-sale misr epresentations contained in

quarterly statements issued to purchasers of the

Accumulator.

This emphasis on the pre-sale marketing of the

Accumulator is not surprising, considering the allegations

of the plaintiffs' Complaint. However, on appeal for the first

time, we learned that the plaintiffs' claims were not and are

not based upon the sales presentations made by each of

LifeUSA's agents. Rather, the plaintif fs have since shifted

their emphasis from pre-sale fraud and misconduct in

connection with the sale and marketing of the annuities, to

post-sale fraud and misconduct: "The gravamen of this case

is the nondisclosure of the real inter est rate in every

uniform annuity and identical quarterly statement."

Appellees' Br., at 20.

Because the plaintiffs have alleged no br each of contract

claim in their Complaint and because their claims ar e no

longer based on the sales presentations -- the predicate of

the District Court's class certification -- but are rather

centered on the interest rates reported in post-sale

quarterly statements and because the requir ements of

Federal Rule of Civil Procedure 23(a) and (b) have not been

met, we will vacate the District Court's class certification,

which resulted from facts, allegations, and a theory

3

differing materially from the facts, allegations, and theory

presented to us on appeal.

We will, however, remand to the District Court to give

that Court an opportunity to consider, together with the

other issues identified in its summary judgment opinion,1 if

the present interest rate and real interest theory of the

plaintiffs as explicated in their briefs on appeal and at oral

argument warrant relief and if so, class certification. On

remand, if a class meets class certification standards and

is then certified, the District Court must also ascertain

whether it may exercise jurisdiction over all class plaintiffs

consistent with this Court's ruling in Meritcar e, Inc. v. St.

Paul Mercury Ins. Co., 166 F.3d 214 (3d Cir. 1999), and

whether jurisdiction pursuant to the Employee Retir ement

Income Security Act of 1974 ("ERISA"), 29 U.S.C. SS 1001-

1461, is available.

I

Plaintiffs/appellees represent a class of persons

who purchased "Accumulator" annuities fr om

defendant/appellant LifeUSA Holding, Inc. ("LifeUSA"). The

Accumulator is a two-tiered deferred annuity contract,2

whereby upon the deposit of the purchaser's premiums, a

one-time bonus is paid on the amount deposited and

interest is then credited to that incr eased amount.

_________________________________________________________________

1. See Benevento v. LifeUSA Holding, Inc., 61 F.Supp.2d 407 (E.D. Pa.

1999). The District Court's denial of summary judgment does not bear

on Rule 23 class certification. It does not implicate Rule 23(a)

requirements of numerosity, commonality, typicality, and adequacy of

representation, nor the predominance and superiority requirements of

Rule 23(b)(3). See Fed. R. Civ. P. 23(a), (b)(3), and see note 11, infra.

2. An annuity is a savings instrument which accumulates sufficient

funds to pay a fixed income to the annuitant for a definite period of time

or for the annuitant's lifetime. It receives interest on a tax-deferred

basis.

A two-tiered annuity has two fund balances and two different credited

interest rates. A higher interest rate is credited on accumulated sums

used to purchase an annuity payout option, with a lower rate credited

on funds payable upon lump sum surrender of the contract.

4

The Contract Provisions

The Accumulator is a two-tiered annuity because it

contains both an "Annuitization Value" and a "Cash Value."

The Annuitization Value is the amount paid to the owner if

the funds deposited are held under the contract for at least

one year and annuitized over at least five years. The

contract provides that the owner "will r eceive the

Annuitization Value if the policy has been in force for at

least one year and the proceeds are paid in a settlement

extending over at least five years." (A-510). The

Annuitization Value consists of premiums, bonuses credited

to such premiums, and accumulated inter est. The contract

guarantees that the "minimum interest rate credited to the

Annuitization Value is 4%," (id.), but provided that LifeUSA

"may declare a higher interest rate than the guaranteed

rate." (Id.).

The Cash Value of the contract is the amount the

contract owner receives in the event that he or she elects a

full or partial lump sum surrender. The Cash Value reflects

a front-end load, no bonus, and, if the contract has been in

deferral for less than ten years, a credited interest rate

lower than that used to calculate the Annuitization Value.

The contract explains:

Cash Value -- Cash Value premium payment are equal

to 80% of the first year premium payment and 90% of

the premium payment in years two throughfive. Cash

Value premium payments after year five are equal to

100% of the payment made.

Premium paid during the first five policy years in

excess of the planned annual premium will be cr edited

to the Cash Value in an amount equal to 95% of the

excess amount paid. After the first five policy years,

any excess premium will be credited to the Cash Value

in an amount equal to 105% of the excess amount

paid.

The guaranteed minimum interest rate cr edited to the

Cash Value is 4%. We may declar e a higher interest

rate than the guaranteed rate. The rate in ef fect for the

Cash Value on the policy date is guaranteed for the

first policy year. After the first policy anniversary, we

5

may change the declared rate at our option. The rate

declared will never be lower than the guaranteed

minimum interest rate.

The interest rate credited to the Cash V alue will be

equal to the rate credited to the Annuitization Value

after the tenth policy anniversary.

(Id.).

The contract further provides that "Policy values before

the Annuity Date are based on 4% interest compounded

annually." (Id.). All Accumulator contracts contained a 20-

day "free look" period providing the prospective purchaser

the opportunity to review the contract and r eturn it within

20 days if not satisfied.3 Significantly, the Complaint filed

by the plaintiffs does not contain any claims that LifeUSA

has breached any of the contract provisions. Moreover, in

depositions, the named plaintiffs testified that they either

failed to read or merely glanced at the contracts after they

had received them.

LifeUSA's Marketing of the Accumulator

LifeUSA sold the Accumulator through 30,271

independent agents. Indeed, the record discloses that a

number of Accumulator purchasers were themselves

independent agents who sold annuities. Agents wer e not all

trained by LifeUSA. Agents learned about the Accumulator

from (1) written materials describing the pr oduct, (2) the

contract itself, and (3) from voluntary seminars sponsored

by LifeUSA and independent Field Marketing Or ganizations

("FMOs"). Marketing materials sent by LifeUSA to agents

were not uniform. Decl. Of Charles Kavitsky P 17, (A-2588)

("While some of the product information LifeUSA created

was mailed to all LifeUSA or Allianz agents and FMOs,

other items were distributed only to agents and FMOs

licensed in a particular state.").

Agents also employed marketing materials generated by

FMOs, not LifeUSA. Agents were permitted to use their own

_________________________________________________________________

3. Florida law was amended to provide Florida residents, such as Plaintiff

Rita Baskin, with a 30-day free look period. McKay Decl. P 42, (A-1198).

6

sales material, provided that the material was approved by

LifeUSA, for the purpose of complying with state r egulation.

Agents did not uniformly rely on the marketing materials in

learning about LifeUSA's Accumulator. In fact, some

discarded the materials entirely. Appr oximately 10-15% of

LifeUSA's agents have attended the seminars, and the oral

content of the seminars varies.

The Accumulator was sold typically in face-to-face

meetings between agents and clients. The District Court

found that the Accumulator was not sold accor ding to

uniform, scripted sales presentations . (A-22) ("the

information provided to each of the plaintiffs by the

individual sales agents who sold them their policies was not

identical."). Agents used varying sales pr esentations that

they developed themselves, based on the prospective

purchaser's financial objectives and sophistication, and the

agent's knowledge and experience. Agents did not employ

LifeUSA's marketing materials uniformly. For example,

some agents always used illustrations provided by LifeUSA,

while other agents never used them. Four of the plaintiffs

testified that they might have received literature from their

agents before purchasing the Accumulator , but none of

them relied on such literature and none could recall the

substance of it.

Plaintiffs' Class Allegations

Plaintiffs' Complaint asserts claims of fraudulent

nondisclosures and misrepresentations (Count II), negligent

misrepresentation (Count III), breach of duty of good faith

and fair dealing (Count IV), negligence (Count V), and

unjust enrichment (Count VI). In Count I, plaintif fs seek

injunctive relief.

Although the plaintiffs' Complaint alleges that LifeUSA

misrepresented the Accumulator annuities provisions and

the post-sale quarterly statements fraudulently

misrepresented the interest rates cr edited to the annuities,

the District Court's class certification opinion was directed

entirely to the pre-sale marketing and sales of the

Accumulator. With respect to plaintiffs' allegations

concerning pre-sale marketing and sales tactics, the

7

Complaint alleges that LifeUSA "induc[ed]" and "train[ed]"

agents to misrepresent the terms of the Accumulator

"through standardized and unifor m misrepresentations and

nondisclosures" at point of sale. (Compl.PP 1(a), (b)).

Plaintiffs charged that LifeUSA "conceal[ed] and fail[ed] to

disclose the true terms of the LifeUSA Accumulator annuity

from the purchasers, who are given no written materials

from LifeUSA and provided with only an application and the

uniform representations of LifeUSA agents based upon

LifeUSA's standardized misrepresentations and material

omissions taught to the agents." (Id.P 1(c)). They alleged

that "LifeUSA marketed its Accumulator annuities through

standardized and a uniform patter n and practice of

deceptive misrepresentations and nondisclosures to

agents." (Id. P 43. See also id. PP 44-47).

Despite the alleged misrepresentations which plaintiffs

claim induced them to purchase Accumulator annuities (a

claim now apparently abandoned) the plaintif fs also

charged that quarterly accounting statements r eceived after

purchase of an Accumulator uniformly misr epresented the

true interest rate credited to a pur chaser's account. In

essence, the plaintiffs charged that". . . the interest rate is

less than the interest rate misr epresented by LifeUSA in

quarterly statements to LifeUSA annuity purchasers."

(Compl. P 83(a)).

The District Court granted plaintiffs' Rule 23 class

certification motion, relying on LifeUSA's pre-sale activities,

holding, as we have earlier noted, that "the gravamen of

plaintiffs' claims is that Defendant's sales techniques and

advertising constituted an allegedly fraudulent scheme."4

(A-16). While conceding that it was presented with a "close

case," (A-12), and that LifeUSA's argument"has some

merit," (A-22), the District Court nonetheless ruled that the

requirements of Rule 23(a) and (b) wer e satisfied. With

_________________________________________________________________

4. Although the plaintiffs claim that a paragraph of the District Court's

class certification opinion refers to inter est rates, withdrawal of

funds,

penalties, and loads, thereby indicating that the District Court's

attention was drawn to the post-sale activities and quarterly statements

now stressed by the plaintiffs, a fair r eading of the District Court's

January 13, 2000 opinion is that these allegations all pertain to the pre-

sale sales presentations of the LifeUSA agents.

8

respect to the predominance requir ement of Rule 23(b)(3),5

the District Court stated:

While [LifeUSA's] argument has some merit in that the

information provided to each of the plaintiffs by the

individual sales agents . . . was not identical, it

nevertheless appears that the source of the plaintiffs'

misinformation and/or confusion was the advertising,

sales and marketing literature which Life USA prepared

and disseminated to its clients and its agents either

directly or indirectly through its Field Marketing

Organizations ("FMOs").

(A-22) (emphasis added). The District Court emphasized

that "the basis for plaintiffs' claims against Defendant is

that they [the plaintiffs] and the agents who sold them [the

plaintiffs] their policies were intentionally misled by

Defendant's sales literature and advertising." (Id.).

The District Court also ruled that the superiority

requirement of Rule 23(b)(3) was satisfied, with the

following analysis:

In addition, in light of the fact that the potential class

in this matter could number over 280,000, we believe

that the class action device is superior to other

methods of adjudicating this dispute. Obviously,

joinder of all class members would be impracticable

and duplicative individual trials would impose an

inordinate burden on the litigants and the court.

Accordingly, we conclude that the prer equisites of Rule

23(b) are present in this case.

(A-23) (citations and footnote omitted). Oddly enough, the

District Court made no mention of the approximately

30,000 independent agents who sold the policies to the

plaintiffs. The District Court then certified the following

class:

_________________________________________________________________

5. Rule 23(b)(3) of the Federal Rules of Civil Pr ocedure requires that

after

the conditions of Rule 23(a) have been satisfied, the District Court must

determine that common questions predominate over any questions

affecting only individual members, and that class representation is

superior to other available methods for the fair and efficient

adjudication

of the controversy. Fed. R. Civ. P. 23(b)(3). The full text of Rule 23(a)

and

(b) is reprinted in the Appendix, attached to this opinion.

9

All persons who purchased an Accumulator annuity

from Life USA between August 1, 1989 and the pr esent

and are not officers or directors of Life USA or

members of the immediate family of any officer or

director of Life USA or any entity in which Life USA has

a controlling interest or the heir , successor or assign of

any such excluded party.

(A-26). LifeUSA has timely appealed.

II

Plaintiffs filed this class action complaint against LifeUSA

in the United States District Court for the Easter n District

of Pennsylvania. The District Court's jurisdiction was

premised on 28 U.S.C. S 1332, as this case is an action

between citizens of different states wher ein the amount in

controversy ostensibly exceeds $75,000, exclusive of

interests and costs. (Compl. P 22). After extensive discovery,

on September 29, 1999, the District Court denied LifeUSA's

motion for summary judgment, and on January 13, 2000,

granted plaintiffs' motion for class certification. (A-3-24).

LifeUSA moved before us to appeal pursuant to Rule 23(f)

of the Federal Rules of Civil Procedure. On June 5, 2000,

this Court granted LifeUSA's motion.

A threshold issue which came to our attention is whether

the District Court had diversity jurisdiction under 28

U.S.C. S 1332 over the class, as the plaintif fs alleged.6

Federal courts have diversity jurisdiction wher e there is

complete diversity among the parties, and the amount in

controversy meets the jurisdictional minimum. Each

member of a class action must independently meet the

jurisdictional amount requirement in or der to establish

_________________________________________________________________

6. Because we were concerned about the District Court's jurisdiction, we

required supplemental memoranda fr om the parties. We called attention

to our Court's decision in Meritcare, Inc. v. St. Paul Mercury Ins. Co.,

166

F.3d 214, 218 (3d Cir. 1999). The memoranda that we received referred

not only to diversity but also to possible jurisdiction deriving from

employee benefit plans governed by ERISA, 29 U.S.C. S 1001 et seq. Our

disposition remanding to the District Court will permit the parties to

explore the existence of ERISA jurisdiction with the District Court on

remand.

10

diversity jurisdiction under 28 U.S.C. S 1332. Each member

who fails to meet the jurisdictional amount must be

dismissed from the case. Zahn v. Inter national Paper Co.,

414 U.S. 291, 301 (1973) (holding that "[e]ach plaintiff in a

Rule 23(b)(3) class action must satisfy the jurisdictional

amount, and any plaintiff who does not must be dismissed

from the case."); Meritcare, 166 F.3d at 218. "Zahn does not

require that an entire class action be dismissed for lack of

subject matter jurisdiction over some of the class members.

Rather, the court is required only to dismiss those class

members whose claims appear to a `legal certainty' to be

less than the jurisdictional amount." In r e School Asbestos

Litig., 921 F.2d 1310, 1315 (3d Cir . 1990).7

As a general rule, the jurisdictional amount is determined

from the good faith allegations appearing on the face of the

complaint. St. Paul Mercury Indem. Co. v. Red Cab Co., 303

U.S. 283, 288 (1938). A complaint will be deemed to satisfy

the required amount in controversy unless the defendant

can show to a legal certainty that the plaintif f cannot

recover that amount. Id. at 289. The Complaint here alleges

generally that the amount in controversy in this action

_________________________________________________________________

7. In Meritcare, this Court ruled that the supplemental jurisdiction

statute, 28 U.S.C. S 1367, does not overrule Zahn and thus does not

disturb its holding that every class plaintif f must meet the

jurisdictional

amount requirement of 28 U.S.C. S 1332. Meritcare, 166 F.3d at 222

(holding that "Section 1367 . . . preserves the prohibition against

aggregation outlined in Zahn v. Inter national Paper Co., and Clark v.

Paul

Gray, Inc., and thus maintains the traditional rules governing diversity

of citizenship and the amount in controversy under 28 U.S.C. S 1332.").

See also Trimble v. Asarco, Inc., 232 F.3d 946 (8th Cir. 2000). In so

holding, we explicitly rejected the decisions r elied upon here by

plaintiffs:

In re Abbott Labs., 51 F.3d 524, 527-29 (5th Cir. 1995), aff'd by equally

divided court sub nom., Free v. Abbott Labs., Inc., 529 U.S. 333 (2000),

and Stromberg Metal Works, Inc. v. Press Mech., Inc., 77 F.3d 928 (7th

Cir. 1996). The Supreme Court has not r esolved this circuit split,

affirming the Fifth Circuit by "an equally divided Court," with no

opinion.

Free v. Abbott Labs., Inc., 529 U.S. 333 (2000). However, an affirmance

by an equally divided Supreme Court has no pr ecedential value. See

Rutledge v. United States, 517 U.S. 292, 304 (1996). Therefore, Meritcare

remains the law of this Circuit: each member of a class action must

independently meet the jurisdictional amount r equirement, and those

that do not must be dismissed from the action.

11

exceeds $75,000. (Compl. PP 22, 23). The Complaint also

alleges that the named plaintiffs pur chased Accumulator

annuities in the amount of $10,000, (id.P 7) (plaintiff

Krapf), $75,000, (id. PP 5, 9) (plaintiffs Benevento and

Rosenblum), $1,000,000, (id. P 13) (plaintiff Maze),

$110,364.44, (id. P 15) (plaintif f Baskin), and $123,332. (Id.

P 11) (plaintiff Compaine).

However, whereas the Complaint alleges that "Plaintiffs

and all members of the Class sustained damages," (id.

P 33), it does not allege that each class member suffered

damages in the amount of $75,000. Our remand to the

District Court will require that court, among other things,

to ascertain whether all members of the putative class

suffered injury in the amount of $75,000, or to limit any

class that may be certified to individuals with r equisite

diversity, as Meritcare requir es.8

III

We review a District Court's decision to certify a class

action for an abuse of discretion. Holmes v. Pension Plan of

Bethlehem Steel Corp., 213 F.3d 124, 136 (3d Cir. 2000); In

re The Prudential Ins. Co. of Am. Sales Practices Litig., 148

F.3d 283, 299 (3d Cir. 1998). W e 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." Prudential,

148 F.3d at 299 (citations and internal quotations omitted).

A finding is "clearly erroneous when the r eviewing court on

the entire evidence is left with the definite and firm

conviction that a mistake has been committed." United

States v. Igbonwa, 120 F.3d 437, 440 (3d Cir. 1997)

(citations and internal quotations omitted).

_________________________________________________________________

8. In this connection, we call the District Court's attention to Georgine

v.

Amchem Prods., Inc., 83 F.3d 610, 626 (3d Cir. 1996), aff'd Amchem

Prods., Inc. v. Windsor, 521 U.S. 591 (1997). In Georgine, we declined to

reach the issue of jurisdiction because it"would not exist but for the

[class action] certification." Georgine, 83 F.3d at 623. The Supreme Court

held that "[t]he class certification issues are dispositive; because their

resolution [there] is logically antecedent to the existence of any Article

III

issues, it is appropriate to reach themfirst." Amchem, 521 U.S. at 612

(citing Georgine, 83 F.3d at 623).

12

A

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

requirements of Rule 23(a) of the Federal Rules of Civil

Procedure: (1) numerosity, (2) commonality, (3) typicality,

and (4) adequacy of representation. Fed. R. Civ. P. 23(a);

Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613 (1997).

If these Rule 23(a) requirements ar e satisfied, the court

must also find that the class is maintainable under Rule

23(b)(1), (2), or (3). Fed. R. Civ. P. 23(b). See note 5, supra,

and Appendix. Rule 23(b)(3) provides that common

questions must predominate over any questions affecting

only individual members, and class repr esentation must be

superior to other available methods for the fair and efficient

adjudication of the controversy. The Rule 23(b)(3)

predominance inquiry tests whether the class is sufficiently

cohesive to warrant adjudication by repr esentation, and

mandates that it is far more demanding than the Rule

23(a)(2) commonality requirement. Amchem, 521 U.S. at

623-24.

In this case, the District Court found that the Rule 23(a)

requirements had been satisfied, and that the conditions of

Rule 23(b)(3) were met. LifeUSA appeals only the District

Court's conclusions with respect to Rule 23(b)(3). See

Appellant's Br., at 4-5, 23-24. Thus we ar e not concerned

on this appeal with the Rule 23(b)(1) and (b)(2) subsections.

To qualify for certification under Rule 23(b)(3), a class

must meet two requirements beyond the Rule 23(a)

prerequisites:

Common questions must predominate over any

questions affecting only individual members; and class

resolution must be superior to other available methods

for the fair and efficient adjudication of the

controversy. . . . Rule 23(b)(3) includes a nonexhaustive

list of factors pertinent to a court's `close look' at the

predominance and superiority criteria.

Amchem, 521 U.S. at 615 (emphasis added and internal

quotation marks omitted).

In adding "predominance" and "superiority" to the

qualification-for-certification list, the Advisory

13

Committee sought to cover cases "in which a class

action would achieve economies of time, effort, and

expense, and promote . . . uniformity of decision as to

persons similarly situated, without sacrificing

procedural fairness or bringing about other

undesirable results."

Id. (citation omitted). The Rule 23(b)(3) r equirements protect

the same interests in fairness and efficiency as the Rule

23(a) requirements. Georgine v. Amchem Prods., Inc., 83

F.3d 610, 626 (3d Cir. 1996), af f'd Amchem Prods., Inc. v.

Windsor, 521 U.S. 591 (1997).

Having reprinted in full Federal Rule of Civil Procedure

23(a) and (b) in the attached appendix, we do not list all the

factors here. Rather, in this case, wefind particular

significance in the last recited factor of Rule 23(b)(3)(D)

which stresses "the difficulties likely to be encountered in

the management of a class action." Fed. R. Civ. P .

23(b)(3)(D). We also recognize that because the Rule 23(b)(3)

predominance requirement incorporates the commonality

requirement of Rule 23(a) we must tr eat them together,

Georgine, 83 F.3d at 626, and as we have noted above, even

if Rule 23(a)'s commonality requirement is satisfied,

predominance may not be, as it is mor e demanding.

Amchem, 521 U.S. at 623-24.

Thus our focus is on testing whether the class certified

by the District Court here meets all the r equirements of

predominance (i.e., that common questions predominate

over questions affecting only individual members) and that

class treatment is a superior method of adjudication.

Factored into those questions is the difficulty to be

encountered in the management of a class action.

B

Predominance

As noted, the District Court found that the plaintif fs

satisfied all four of the Rule 23(a) requir ements including

commonality (Rule 23(a)(2)). However, in light of the record,

we find unconvincing the District Court's explanation that:

14

While [LifeUSA's] argument has some merit in that the

information provided to each of the plaintiffs by the

individual sales agents who sold them their policies

was not identical, it nevertheless appears that the

source of the plaintiffs' misinfor mation and/or

confusion was the advertising, sales and marketing

literature which LifeUSA prepared and disseminated to

its clients and its agents either directly or indirectly

through its Field Marketing Organizations ("FMO's").

(A-22). Equally unpersuasive is the District Court's

statement that "[w]hile there ar e unquestionably individual

issues of fact in each case, we find that the pr edominant

issues in each such case of necessity are whether or not

the defendant intentionally misled and deceived the

plaintiffs, through its product and sales information and

the training provided to its agents." (A-22-23).

The District Court also noted that the "pr edominance test

has also been found to have been easily satisfied in cases

involving a common scheme to defraud millions of life

insurance policy holders," (A-21), relying on In re The

Prudential Ins. Co. of Am. Sales Practices Litig. , 148 F.3d

283 (3d Cir. 1998). LifeUSA had argued that predominance

was not established because the purported class members'

claims arose from individual and non-standardized

transactions involving non-uniform oral

misrepresentations. (A-21-22). Because common questions

(commonality) must be established before pr edominance

can be found, we turn to that element.

Commonality

We have held that class certification is inappropriate in

mass tort claims (i.e., asbestos, Georgine , 83 F.3d 610, and

tobacco, Barnes v. American Tobacco Co., 161 F.3d 127 (3d

Cir. 1998)) which present questions of individualized issues

of liability.

In Georgine, we vacated a district court's certification of

a nationwide settlement class of people exposed to

asbestos. There we recognized that mass torts involving a

single accident may be amenable to class action tr eatment,

but observed that "the individualized issues can become

15

overwhelming in actions involving long-term mass torts

(i.e., those which do not arise out of a single accident)."

Georgine, 83 F.3d at 628. W e continued: "Furthermore, the

alleged tortfeasor's affirmative defenses (such as failure to

follow directions, assumption of the risk, contributory

negligence, and the statute of limitations) may depend on

facts peculiar to each plaintiff's case." Id. (citation omitted).

In addition, we held that the predominance r equirement

was not satisfied in Georgine, id. at 618, because

Initially, each individual plaintiff's claim raises

radically different factual and legal issues from those of

other plaintiffs. These differences, when exponentially

magnified by choice of law considerations, eclipse any

common issues in this case. In such circumstances,

the predominance requirement of Rule 23(b) cannot be

met.

Id.9 LifeUSA claims, and we are compelled to agree that on

the record before us, in this case the plaintiffs' claims raise

"different factual and legal issues fr om those of other

plaintiffs."

In Barnes, we affirmed the decertification of a

conditionally-certified statewide class of cigar ette smokers

who asserted state law claims against a cigar ette

manufacturer. Barnes, 161 F.3d at 143. We stated:

"Because of the individual issues involved in this case --

nicotine addiction, causation, the need for medical

monitoring, contributory/comparative negligence and the

statute of limitations -- we believe class tr eatment is

inappropriate." Id. at 149 (footnote omitted). While we

recognize that Amchem and Bar nes are multiple tort cases,

the principles and reasoning in those cases ar e applicable

here.

Here the plaintiffs assert claims arising not out of one

single event or misrepresentation, but claims allegedly

_________________________________________________________________

9. The Advisory Committee Notes to Rule 23(b)(3) provide that "although

having some common core, a fraud case may be unsuited for treatment

as a class action if there was material variation in the representations

made or in the kinds or degrees of reliance by the persons to whom they

were addressed." Fed. R. Civ. P . 23(b)(3), Advisory Committee Note.

16

made to over 280,000 purchasers by over 30,000

independent agents where the District Court found that the

sales presentations (hence the alleged misr epresentations)

were neither uniform nor scripted. Indeed, the District

Court, while acknowledging that the claims or defenses of

the class must arise from the same event, pattern, or

practice, or be on the same legal theory, never identified

any uniform misrepresentation made to the plaintiffs nor

did it detail any material fact which was not disclosed to

class members, and which accordingly, could have misled

them. Significantly, in its class certification opinion, the

District Court, in discussing commonality in connection

with Rule 23(a)(2), found this case to be a "close" one. (A-

12).

The District Court's principal reliance on In re The

Prudential Ins. Co. of Am. Sales Practices Litig. , 148 F.3d

283 (3d Cir. 1998), in certifying the LifeUSA class was

misplaced and unfortunate. In Prudential, we affirmed the

certification of a settlement10 class action involving

Prudential's allegedly deceptive sales practices af fecting

over 8 million claimants nationwide. However , Prudential,

unlike this case, involved uniform, scripted, and

standardized sales presentations. The district court opinion

in Prudential found that "the oral component of the

fraudulent sales presentations did not vary appreciably

among class members. Plaintiffs' allegations and the

evidence presented to the Court demonstrate that

throughout the country, Prudential agents uniformly misled

class members with virtually identical oral

misrepresentations." In re The Prudential Ins. Co. of Am.

Sales Practices Litig., 962 F. Supp. 450, 514 (D. N.J. 1997)

(citation omitted) (emphasis supplied).

In Prudential, the agents were car eer agents who worked

exclusively for Prudential. Id. They wer e not independent

agents like the 30,271 agents who sold Accumulator

annuities to the plaintiffs. Prudential's agents were

uniformly trained and Prudential requir ed its agents to use

the uniform sales materials which Prudential furnished. Id.

_________________________________________________________________

10. A settlement class, as distinct from a class action to be tried, does

not implicate trial management problems. Amchem, 521 U.S. at 620.

17

at 515. Moreover, audits and state r egulatory investigations

of Prudential revealed that Prudential agents had indeed

committed uniform, deceptive sales practices nationwide.

Id. at 514.

The facts here in the extensive evidentiary r ecord of this

case (depositions, affidavits, declarations, and the like)

contrast starkly with the facts found in Prudential. In this

case, as we have earlier pointed out, the Accumulator was

not sold according to standard, unifor m, scripted sales

presentations. In fact, the District Court found that "the

information provided to each of the plaintiffs by the

individual sales agents . . . was not identical." (A-22).

LifeUSA agents are independent agents, not"captive"

agents, as were Prudential's agents. LifeUSA's agents learn

about the Accumulator from written materials describing

the product, from the contract itself and from voluntary

seminars sponsored by LifeUSA, but only 10-15% of agents

attend LifeUSA's seminars. Marketing materials sent to

LifeUSA agents are not uniform and many utilized

marketing materials generated by Field Marketing

Organizations who are not affiliated with LifeUSA.

Moreover, the selling agents did not employ LifeUSA's

marketing materials uniformly. Some agents discarded the

marketing materials entirely. Agents' sales pr esentations

were individually tailored to each customer's financial

objectives. Significantly, when the plaintif fs testified on

deposition, they admitted that if they r eceived information

from sales agents prior to purchase, they did not rely on it,

nor could they recall its substance. Indeed, a number of the

plaintiffs failed to read or merely glanced at the contracts,

leading to the District Court's observation that"it was

incumbent upon the plaintiffs to read these materials,

particularly in light of the defendant's twenty-day

examination and return policy." (A-17).

Hence, the facts of this case differ markedly from those

which were found in Prudential. Accor dingly, even if the

District Court had not centered its attention on pre-sale

LifeUSA marketing activities, as the plaintif fs now claim it

should not have, the record is uncompr omising in revealing

non-standardized and individualized sales "pitches"

presented by independent and differ ent sales agents, all

18

subject to varying defenses and differing state laws, thus

making certification of individualized issues inappropriate.

Thus, the District Court's finding from the r ecord that

LifeUSA "has engaged in standardized conduct," (A-13),

affecting the class members cannot be sustained.

Moreover, the District Court in denying summary

judgment to LifeUSA identified at least four major factual

and legal issues that had to be resolved.11 The District

Court failed to consider how individualized choice of law

analysis of the forty-eight different jurisdictions12 would

impact on Rule 23's predominance requir ement, see

Georgine, 83 F.3d at 627, as well as individual

determinations of causation, adjudications of contract law,

reliance, the fiduciary status of defendant, and LifeUSA's

defenses of contributory/comparative negligence and

limitations.

If commonality in the pre-sale marketing context does not

exist, then common questions cannot predominate over

individual issues because as Georgine found, each

individual plaintiff's claim raises radically differing factual

and legal issues from those of other plaintif fs. This, too, is

the case here. Accordingly, we cannot uphold the District

Court's exercise of discretion in concluding from its

findings that commonality and predominance have been

demonstrated.

_________________________________________________________________

11. See Benevento, 61 F.Supp.2d 407. The four issues were (1) the

independence of LifeUSA's agents; (2) plaintif fs' justifiable reliance on

defendant's alleged misrepresentations and non-disclosures; (3) whether

plaintiff could recover under the economic loss doctrine under Florida

and New Jersey law; and (4) whether plaintif fs were entitled to relief

for

breach of contractual duty of good faith and fair dealing under the laws

of Pennsylvania, New Jersey, and Florida. Those issues which included

differing and independent defenses available to LifeUSA and which

require individualized choice of law analysis to each of the plaintiffs'

claims, see Georgine, 83 F.3d at 627 (noting that where variations in

state law exist, "the proliferation of disparate factual and legal issues

is

compounded exponentially."), all operate to discourage class treatment

and therefore class certification. Her e, among other litigable matters,

LifeUSA will be confronting differing aspects of causation, differing

state

laws, and different defenses. See Benevento, 61 F.Supp.2d 407.

12. LifeUSA represents that the "Accumulator" has been approved for

sale in 47 states and the District of Columbia.

19

C

Superiority

Having determined that the class certified by the District

Court does not meet the "predominance" r equirement of

Rule 23(b)(3), we need not dwell at length on the superiority

requirement of the rule, inasmuch as failure to meet any of

the requirements of Rules 23(a) and (b) pr ecludes

certification of a class. See, e.g., W ilcox v. Commerce Bank

of Kansas City, 474 F.2d 336, 345 (10th Cir. 1973);

Harriston v. Chicago Tribune Co., 992 F .2d 697, 703 (7th

Cir. 1993).

It will be recalled that the District Court her e dealt with

the "superiority" test in one cursory paragraph:

In addition, in light of the fact that the potential class

in this matter could number over 280,000, we believe

that the class action device is superior to other

methods of adjudicating this dispute. Obviously,

joinder of all class members would be impracticable

and duplicative individual trials would impose an

inordinate burden on the litigants and the court.

Accordingly, we conclude that the prer equisites of Rule

23(b) are present in this case.

(A-23) (citations and footnote omitted). This discussion, of

course, gives little indication as to how a trial of this

controversy, if tried as a class action, could be efficiently

and fairly managed, which is the polestar of Rule 23(b)(3).

In Georgine which decertified a class action we concluded in

discussing the superiority prong of Rule 23(b)(3) that

The proposed class action suffers serious problems in

both efficiency and fairness. In ter ms of efficiency, a

class of this magnitude and complexity could not be

tried. There are simply too many uncommon issues,

and the number of class members is surely too large.

Considered as a litigation class, then, the difficulties

likely to be encountered in the management of this

action are insurmountable.

Georgine, 83 F.3d at 632-33.

20

In Georgine, admittedly, the size of the purported class

was much larger than the class here. It ranged from

250,000 to two million individuals. However, in the present

case, LifeUSA has issued well over 280,000 annuities to the

class members, and the individual agents who sold the

policies numbered over 30,000. Moreover , as we discussed

under the section of this opinion dealing with

predominance, there are individualized issues that would

require individual determinations of defenses,

representations, state laws, and the like. 13 Without going

into detail as to the management of how a trial which

would require proofs of individual claims of the plaintiffs

and proofs of varying defenses of the defendant could be

conducted, it is sufficient for our purposes to r ecognize that

attempting to adjudicate plaintiffs' various claims through

a class trial would not only be inordinately time consuming

and difficult, but it would impermissibly transgress upon

the required standards of fair ness and efficiency.

Thus having concluded that the requirement of

predominance has not been met, and that the superiority

and the management of the trial could not be fairly and

efficiently conducted as a class action, we ar e obliged to

hold that the District Court improperly exer cised its

discretion in certifying a pre-sale class. Accordingly, we will

vacate the January 13, 2000 order of the District Court

which certified the plaintiff class in a pr e-sale context, and

remand this case to the District Court with instructions to

decertify the class.14

_________________________________________________________________

13. Although plaintiffs' claims are r elatively modest and separate suits

may be impracticable, cf. Georgine, 83 F.3d at 633, that factor by itself

is insufficient to overcome the hurdles of predominance and superiority

and efficient and fair management of a trial, which Rule 23(b) requires.

The individual adjudications of causation, r eliance, LifeUSA's multiple

defenses, and application of differing state laws would make trying the

plaintiffs' claims in a class action a thor oughly unwieldy endeavor and

in the terms of Georgine make it impossible to conclude that this class

action is superior to alternative means of adjudication.

14. LifeUSA and Amicus argue that segr egation of individual issues of

fact from common issues would violate LifeUSA's Seventh Amendment

right to have its claims adjudicated by a single jury. See Appellant's

Br.,

at 46 n.35. Although this issue is of serious concer n, we have not

addressed it because we have concluded that the putative class must be

decertified because it fails the predominance, superiority, and

management requirements of Rule 23(b)(3).

21

IV

Even though we have concluded that the class

certification decreed by the District Court cannot be upheld

because it rested on the pre-sale marketing, advertising,

and "sales pitches" of the Accumulator , we nevertheless are

seriously troubled by the constant assertions made by the

plaintiffs in their appellate briefs and their appellate

arguments that LifeUSA misrepresented interest rates and

amounts all of which apparently stem not fr om the pre-sale

representations but from quarterly statements which could

only come about subsequent to the purchase of the

annuities by the plaintiffs. As a consequence, we asked at

oral argument for post-argument memoranda which would

expound upon the real interest rate and the amounts

actually paid.

Plaintiffs furnished us with exhibits detailing calculations

which allegedly illustrate the actual interest rate credited

assuming daily compounding of interest. Those

computations purported to show that, assuming daily

compounding, the amount of interest credited represented

a lower interest rate than the rate stated on the quarterly

statements. In response, LifeUSA argued that plaintiffs'

calculations incorrectly assumed that LifeUSA r epresented,

in quarterly statements, that it would engage in daily

compounding of the declared current rate of interest.

Instead, it argued, the contract, the quarterly statements,

and the marketing literature circulated to agents

demonstrate that contract values are calculated based on

an annual compounding of the declared current rate.15

We had anticipated that these submissions would clarify

the issue of post-sale misrepresentations which was

emphasized by the plaintiffs in their appellate briefs and

oral argument. We did so because, among other

_________________________________________________________________

15. Additionally, LifeUSA asserts that, even if quarterly statements

uniformly failed to disclose the actual inter est rate, individualized

issues

remain with respect to this theory of liability, precluding class

certification. It states that multiple variants of the quarterly

statements

existed, and that individual determinations of reliance, on the agents'

representations as well as on quarterly statements themselves, would be

required in order to determine liability.

22

considerations, plaintiffs had not claimed and do not claim,

any breach of contract in their Complaint. This is not

surprising to us because the contract entered into by each

of the named plaintiffs provides no mor e than a guaranteed

4% interest rate and also provides for dif ferent features of

payments as well as representing that interest would be

compounded annually. Thus we found it difficult to

understand the shift in the plaintiffs' emphasis and even

more difficult to understand allegations of standard

uniformity in LifeUSA's representations.

However, we found that we could not r econcile the post-

argument briefs nor could we determine whether in light of

the arguments therein made, a class meeting the standards

of Rules 23(a) and (b) could be certified. In any event, it is

not our function to make these determinations, but we

would be loath to disregard these allegations just because

they had not been ruled upon by the District Court. It is

true that we had anticipated that the post-ar gument

submissions would be conclusive in establishing either

plaintiffs' claims or LifeUSA's defenses. Unfortunately this

was not to be, and because we are not factfinders, see

Pullman-Standard v. Swint, 456 U.S. 273, 291 (1982)

("[F]actfinding is the basic responsibility of district courts,

rather than appellate courts"); Chalfant v. The Wilmington

Inst., 574 F.2d 739, 749-750 & n.3 (3d Cir. 1978) (Garth,

J., dissenting), we now determine that the questions of

alleged post-sale representations and standard uniformity

as well as all requirements of Rule 23(a) and (b) should be

found in the first instance by the District Court just as the

District Court should resolve those issues it identified in its

summary judgment decision. We suggest that if the

plaintiffs desire to seek class certification again based on

these post-sale activities of LifeUSA rather than on the

marketing of the policies, it is the District Court that

should consider and act upon such submissions.

It may be, however, that when the District Court takes

evidence of the post-sale representations and activities of

LifeUSA it may determine that there ar e no grounds for

relief or that if the grounds for r elief exist, that they do not

comply with the stringent requirements of Rules 23(a) and

23(b) due to individualized claims and individualized

23

defenses, and the requirements of pr edominance,

superiority, and the management of a fair and efficient trial.

Accordingly, our direction to decertify the class which was

based on pre-sale activities will not preclude consideration

by the District Court of claims with respect to post-sale

activities that are viable and perhaps certifiable.

V

We have determined that the class certified by the

District Court looking to pre-sale actions of LifeUSA was an

abuse of the District Court's discretion because the record

does not support the findings made which ar e required by

Rules 23(a) and (b). Nor does the recor d support the

District Court's conclusions leading to a certification of a

pre-sale class. However, because of the consistent

arguments of the plaintiffs which emphasize post-sale

activities of LifeUSA and post-sale misr epresentations with

respect to interest, we will remand to the District Court for

consideration of those claims and if applied for by the

plaintiffs for consideration as to whether those post-sale

claims comply with Rules 23(a) and (b), all in accor dance

with the foregoing opinion.

24

APPENDIX

Rule 23. Class Actions

(a) Prerequisites to a Class Action. 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 numer ous that joinder

of all members is impracticable, (2) there ar e 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 repr esentative parties will

fairly and adequately protect the inter ests of the class.

(b) Class Actions Maintainable. An action may be

maintained as a class action if the prer equisites of

subdivision (a) are satisfied, and in addition:

(1) the prosecution of separate actions by or against

individual members of the class would create a risk of

(A) inconsistent or varying adjudications with r espect

to individual members of the class which would

establish incompatible standards of conduct for the

party opposing the class, or

(B) adjudications with respect to individual members

of the class which would as a practical matter be

dispositive of the interests of the other members not

parties to the adjudications or substantially impair

or impede their ability to protect their inter ests; or

(2) the party opposing the class has acted or r efused to

act on grounds generally applicable to the class,

thereby making appropriate final injunctive relief or

corresponding declaratory relief with r espect to the

class as a whole; or

(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) the interest of members of the class in

individually controlling the prosecution or defense of

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

25

litigation concerning the controversy alr eady

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(a), (b).

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

26