Bally Total Fitness Corp. v. Jackson

Justice OWEN,

joined by Justice HECHT and Justice ABBOTT, dissenting.

After the class in this case had been certified, but before notice was given to class members, the trial court granted partial summary judgment for the plaintiffs on the liability issues. The trial court thus converted the class from one that did not permit so-called “one-way interventions” into a class that did. This altered the fundamental nature of the class because under our class action rule, when liability is resolved before notice is given to class members, the class certification can no longer be sustained, and the class must be decertified. An interlocutory appeal from a denial of a motion to decertify can be taken under these circumstances. Accordingly, I dissent.

Bally says, and I agree, that there is no principled basis for drawing a distinction between the facts of this case and the facts in De Los Santos v. Occidental Chemical Corp., 933 S.W.2d 493 (Tex.1996). In De Los Santos , the trial court modified the class to change it from an opt-out class to a mandatory class. We held that this fundamentally altered the nature of the class. “Changing a class from opt-out to mandatory does not simply enlarge its membership; it alters the fundamental nature of the class.” De Los Santos, 933 S.W.2d at 495 . We accordingly held that the court of appeals had jurisdiction over an interlocutory appeal from the trial court’s modification of the class even though a modification of a class is not, strictly speaking, “an interlocutory order ... that ... certifies or refuses to certify a class” within the meaning of section 51.014(a)(3). Tex. Civ. Prac. & Rem.Code § 51.014(a)(3). In this case, the fundamental nature of the class was altered when the trial court issued a decision on liability before notice to class members had been given. After that ruling, a class could no longer be certified. Decertification was required.

The law is clear in this regard. That is because our class action rule, like the federal rule, was designed to put an end to so-called “one-way intervention” when an opt-out class is certified. See Tex.R. Civ. P. 42(c)(2); Fed.R.Civ.P. 23(c)(2). As the United States Supreme Court has explained, until 1966, the federal class action rule allowed members of a class to wait and see the outcome before deciding whether to join:

“[WJhen a suit was brought by or against such a class, it was merely an invitation to joinder — an invitation to become a fellow traveler in the litigation, which might or might not be accepted.” A recurrent source of abuse under the former Rule lay in the potential that members of the claimed class could in some situations await developments in the trial or even final judgment on the merits in order to determine whether participation would be favorable to their interests.

American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 546-47 , 94 S.Ct. 756 , 38 L.Ed.2d *360 713 (1974) (citations omitted). This potential for “one-way intervention” was ended by the current federal class action rule:

This situation — the potential for so-called “one-way intervention” — aroused considerable criticism upon the ground that it was unfair to allow members of a class to benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one. The 1966 amendments were designed, in part, specifically to mend this perceived defect in the former Rule and to assure that members of the class would be identified before trial on the merits and would be bound by all subsequent orders and judgments.

Id. at 547 , 94 S.Ct. 756 (footnotes omitted).

Now, certification and notice must occur before any decision on the merits is reached so that all class members will be bound, whether the judgment is favorable or unfavorable:

Once it is determined that the action may be maintained as a class action under subdivision (b)(3), the court is mandated to direct to members of the class “the best notice practicable under the circumstances” advising them that they may be excluded from the class if they so request, that they will be bound by the judgment, whether favorable or not if they do not request exclusion, and that a member who does not request exclusion may enter an appearance in the case.

Id. at 547-48 , 94 S.Ct. 756 (footnotes omitted).

The federal courts have adhered to the requirement that a decision on the merits must occur after notice to the class or else a class cannot be certified or maintained. “The purpose of Rule 23(c)(2) is to ensure that the plaintiff class receives notice of the action well before the merits of the case are adjudicated.” Schwarzschild v. Tse, 69 F.3d 293, 295 (9th Cir.1995) (emphasis in original). This is true even if a determination of the merits is interlocutory and is favorable to the plaintiff rather than the defendant, as is the case here. When the plaintiff has received summary judgment in its favor, class certification or notice to the class after a merits determination is prohibited. The Seventh Circuit has so held in an interlocutory appeal. Peritz v. Liberty Loan Corp., 523 F.2d 349 (7th Cir.1975). It recognized that “[t]he obvious import ... is that the amended Rule 23 requires class certification prior to a determination on the merits.” Id. at 353 . That court reiterated what the Supreme Court had said in American Pipe:

Section 23(c)(1) makes it plain in the second sentence thereof that the order determining class status is to be made and finalized “before the decision on the merits.” Section 23(c)(2) similarly indicates that the class members in a 23(b)(3) class action are to be notified early enough to allow voluntary exclusion prior to “judgment” and also early enough to allow for effective appearance by counsel. Section 23(c)(3), by providing that the judgment shall bind all class members, was specifically intended to confront the one-way intervention problem, as the Advisory Committee Notes point out.

Peritz, 523 F.2d at 354 . Decertification was required:

Inasmuch as the plaintiffs here did not seek certification, and in fact affirmatively sought resolution on the merits prior to certification in the face of objections by the defendants, they have themselves effectively precluded any class certification in this case. Accordingly, this cause is remanded with instruction to vacate the order of certification of the *361 class and to proceed with the individual claims of the named plaintiffs.

Id.

Peritz is indistinguishable from this case. In Peritz , the trial court convened a jury for a special verdict on the sole issue of whether a loan form used by the defendant clearly and conspicuously made certain disclosures. Id. at 351 . After the jury found against the defendant, the trial court certified a class and ordered the defendant to pay the costs of notice. The defendant then filed an interlocutory appeal. The Seventh Circuit held that assessing costs of notice against the defendant was a final order within the meaning of 28 U.S.C. § 1291 , and that the trial court’s decision on the merits before class certification and notice was an order “[u]n-derlying and basic to” the assessment of costs. The Seventh Circuit then squarely and extensively addressed why the trial court had erred in ruling on the merits of the liability issue common to all potential plaintiffs before certifying the class and sending notice. The circuit court held that decertification was required under those circumstances. Id. at 354-55 . The Court argues that Peritz “expressly declined to decide “whether in all cases Rule 23(c) would bar certification subsequent to a decision on the merits.’ ” 53 S.W.3d at 357 n. 3. But the examples Peritz cites as situations in which certification may occur after an adjudication of the merits are cases in which a defendant has waived one-way intervention protection. Peritz, 523 F.2d at 354 n. 4.

Peritz is not an anomaly. It is in line with what virtually every court that has considered the issue has said. See, e.g., Smith v. Shawnee Library Sys., 60 F.3d 317 , 322 (7th Cir.1995) (holding that “class certification was void because no notice was ever given” before adjudication of the merits); see also Gert v. Elgin Nat’l Indus., Inc., 773 F.2d 154, 159-60 (7th Cir.1985); Katz v. Carte Blanche Corp., 496 F.2d 747, 762 (3d Cir.1974) (noting that the federal class action rule provides protection against one-way intervention after an interlocutory merits determination). In Philip Morris Inc. v. National Asbestos Workers Medical Fund, 214 F.3d 132, 135 (2d Cir.2000), which was a mandamus proceeding, the Second Circuit held that a trial court was required to decide whether to certify a class before it proceeded to try the case on the merits. This was necessary, the Second Circuit explained, to forestall the “specter of a risk-free intervention decision by thousands of putative plaintiffs.” Id. Although the Second Circuit stated that “[wjhile [it did] not foreclose the possibility of a post-trial class certification in another case,” it emphasized that such a situation would be rare, stating that “it is ‘difficult to imagine cases in which it is appropriate to defer class certification until after decision on the merits.’ ” Id. (quoting Bieneman v. Chicago, 838 F.2d 962, 964 (7th Cir.1988)).

In this case, the plaintiffs will know the outcome before deciding whether to opt out, which the federal class action rule, like our rule, prohibits:

The prompt decision on certification would both fix the identities of the parties to the suit and prevent the absent class members from waiting to see how things turned out before deciding what to do.... So a person’s decision whether to be bound by the judgment — like the court’s decision whether to certify the class — would come well in advance of the decision on the merits. Under the scheme of the revised Rule 23, a member of the class must cast his lot at the beginning of the suit and all parties are bound, for good or ill, by the results.

*362 Premier Elec. Constr. Co. v. Nat’l Elec. Contractors Ass’n, 814 F.2d 358, 362 (7th Cir.1987).

The Court refuses to rule on the substantive requirements of our class action rule in this regard, which is taken from the federal rule. Compare Tex.R. Civ. P. 42(c) with Fed.R.Civ.P. 23(c). The Court will not say whether a decision on the merits before notice to the class destroys the ability of a trial court to maintain a class and thus fundamentally alters the nature of the class. Instead, the Court asks and answers irrelevant questions, such as whether the trial court’s ruling on the merits creates incentives for class members to opt out or will increase the size of the class. 53 S.W.3d at 355.

The overarching question is whether there can be a class at all after the trial court’s ruling on the merits. If there can no longer be a class, the fundamental nature of the class has unquestionably been changed. If the trial court’s ruling on the merits destroyed its ability to maintain a class, then surely, that ruling affected “class members’ relationships with each other or with class counsel,” which the Court says were the concerns that permitted an interlocutory appeal in De Los Santos. Id.

The Court attempts to distinguish the federal decisions that have declared that the current class action rule was intended to end and has ended one-way intervention. The Court says that it is an open question whether “certification and notice may proceed in cases in which the plaintiffs have prevailed on summary judgment.” Id. at 357. The Court’s discussion of the federal authorities is misleading.

First, the Court cites a footnote in Schwarzschild v. Tse that in turn cites Postow v. OBA Federal Savings and Loan Ass’n, 627 F.2d 1370, 1383 (D.C.Cir.1980). These decisions stand only for the proposition that a defendant can waive the protection against one-way interventions that the class action rule affords. The body of the opinion in Schwarzschild notes that “several circuits have concluded that a defendant waives his right to have notice sent to the class under Rule 23(c)(2) whenever he moves for summary judgment before the class has been properly certified and notified.” 69 F.3d at 297 (emphasis in original). And that is precisely what happened in Postow . The decision in Postow expressly recognizes that the class action rule affords protection from having a determination of the merits before certification and notice but that this protection can be waived: “[A] defendant may waive the protections Rule 23(c) offers and elect to have the merits decided ... before notice is sent to the class when, as here, the defendant moves for summary judgment before resolution of the certification issue.” 627 F.2d at 1382 . The Postow decision explained that one reason for requiring certification before a ruling on the merits is to protect a defendant from future suits by potential members of the class, but that this reason is no longer viable when the defendant insists on a determination of the merits before certification or notice:

Other courts have expressly held that a defendant may waive the protections Rule 23(c) offers and elect to have the merits decided before the class certification question and before notice is sent to the class when, as here, the defendant moves for summary judgment before resolution of the certification issue. E.g., Katz v. Carte Blanche Corp., 496 F.2d 747, 757-62 (3d Cir.1974) (en banc), cert. denied, 419 U.S. 885 , 95 S.Ct. 152 , 42 L.Ed.2d 125 (1974); Torosian v. National Capital Bank of Washington, 411 F.Supp. 167, 169-71 (D.D.C.1976); Haas v. Pittsburgh Nat’l Bank, 381 F.Supp. *363 801 (W.D.Pa.1974), rev’d on other grounds, 526 F.2d 1083 (3d Cir.1975).

We find the reasoning of those opinions instructive. The Haas court noted, for example, that the strongest argument for construing Eisen to preclude post-judgment class certification is that pre-judgment certification and notice to the class are necessary to protect the defendant from future suits by potential members of the class. But that rationale disappears when the defendant himself moves for summary judgment before a decision on class certification. In such a situation, “the defendants ... assume the risk that a judgment in their favor will not protect them from subsequent suits by other potential class members, for only the slender reed of stare decisis stands between them and the prospective onrush of litigants.” Haas, supra, 381 F.Supp. at 805 .

Postow, 627 F.2d at 1382 (footnote omitted).

This unremarkable holding is consistent with Peritz and Katz. See Peritz, 523 F.2d at 354 n. 4; Katz, 496 F.2d at 762 . Bally has not waived its rights in this case. The Court mischaracterizes the record when it says that “Bally had earlier moved for summary judgment seeking dismissal of the class’s claims.” 53 S.W.3d at 358. Bally did not move for summary judgment on the merits of the class’s claims. Bally requested summary judgment on Jackson’s individual claims based on the affirmative defense of one-satisfaction, arguing that in a prior suit against Bally, Jackson had already received full satisfaction of all amounts he sought to recover in this suit. Because of this affirmative defense peculiar to Jackson and because Jackson was the only name-plaintiff at the time of Bally’s motion, Bally also argued that the suit could not be maintained as a class action. But unlike the defendant in Postow , Bally did not request summary judgment on the merits of the class’s underlying claims.

Next, the Court quotes Katz entirely out of context, suggesting that it stands for the proposition that postponing certification until after a determination of the merits would be efficient and acceptable. Id. at 357 n. 3. In Katz , the defendant, not the plaintiff who was seeking certification, asked the trial court to rule on the merits before certification. The defendant hoped to prevail on the merits and thus avoid having a class consisting of its customers certified and notified. The Katz court was careful to point out that the defendant would otherwise have had the right to insist on notice to the class before liability was determined:

Finally, turning to the defendant’s interest, it must be understood that we are dealing only with the defendant who declines the protection against one-way intervention after a violation has been proved which rule 23(b)(3) was designed to afford. If a class action defendant insists upon early class determination and notice, he is, under the rule, entitled to it. But where he makes a nonfrivo-lous claim that his business will be harmed or disrupted by the notice, and is willing to run the risk that the determination of liability, if he loses, will be given effect in favor of the class, with notice in the event of such determination, the district court must seriously consider that alternative.

496 F.2d at 762 .

The Court’s implication that Katz would permit a trial court to establish a defendant’s liability at the request of a plaintiff seeking certification and then decide whether to certify a class is directly contrary to the United States Supreme Court’s holding in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 , 94 S.Ct. 2140 , 40 *364 L.Ed.2d 732 (1974). The Supreme Court admonished that a trial court is prohibited from conducting any inquiry into the merits in deciding whether to certify a class:

We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. Indeed, such a procedure contravenes the Rule by allowing a representative plaintiff to secure the benefits of a class action without first satisfying the requirements for it. He is thereby allowed to obtain a determination on the merits of the claims advanced on behalf of the class without any assurance that a class action may be maintained. This procedure is directly contrary to the command of subdivision (c)(1) that the court determine whether a suit denominated a class action may be maintained as such “as soon as practicable after the commencement of [the] action.... ”

Eisen, 417 U.S. at 178-79 , 94 S.Ct. 2140 .

This Court has expressly followed Eisen , determining that evaluation of the merits prior to certification is inappropriate:

Deciding the merits of the suit in order to determine the scope of the class or its maintainability as a class action is not appropriate. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 , 94 S.Ct. 2140 , 40 L.Ed.2d 732 (1974); Sirota v. Solitron Devices, Inc., 673 F.2d 566, 572 (2d Cir.1982); Irving Trust Co. v. Nationwide Leisure Corp., 95 F.R.D. 51, 62 (S.D.N.Y.1982). By evaluating the merits at the certification stage, the trial court would allow a representative plaintiff to secure the benefits of proceeding with a class-action suit without first satisfying the requirements for maintaining one. See Eisen, 417 U.S. at 177 , 94 S.Ct. 2140 .

Intratex Gas Co. v. Beeson, 22 S.W.3d 398, 404 (Tex.2000).

The Court attempts to refute the rule that a merits determination should not occur before class certification and notice by noting that in some of the cases cited above, the trial court proceeded with certification and notification after the defendant had been granted summary judgment. The Court argues, therefore, that those cases are inapposite in deciding whether certification can proceed after a trial court grants summary judgment in favor of the plaintiff. I agree that cases in which a defendant is granted summary judgment before certification present different concerns than when a plaintiff has been granted summary judgment. For example, a trial court must consider the due process rights of potential class members in deciding whether to proceed with class certification and notification after a defendant receives a favorable summary judgment ruling. Gert, 773 F.2d at 159-60 . But these different concerns do not detract from these courts’ clear recognition that, absent waiver by the defendant, a trial court is prohibited from adjudicating the merits at the plaintiffs request until after certification and notification.

The federal class action rule, which the Texas rule follows in the aspects material here, has been authoritatively construed to mean that a class cannot be maintained if a trial court rules on the merits before giving notice to the class. This Court may not agree with what the federal courts have said, but it cannot plausibly deny that they have said it.

The Court’s remarks about federal precedent concerning interlocutory appeals reveal that it continues to insist on asking the wrong questions. The case before us does not turn on whether the federal rules *365 or statutes would permit an interlocutory appeal. The question is whether Texas law permits an interlocutory appeal. That in turn depends on whether the trial court’s ruling fundamentally changed the nature of the class. The trial court in this case changed the nature of the class when its ruling on the merits ended the viability of the class. The purpose of section 51.014(a)(3) of the Texas Civil Practice and Remedies Code, which allows interlocutory appeals of certain class-certification rulings, is to ensure that the costly process of a class action, with its attendant potential for irremediable harm to a defendant, does not proceed when there is no basis for certifying a class. Section 51.014(a)(3) provides that “[a] person may appeal from an interlocutory order ... that: ... certifies or refuses to certify a class in a suit brought under Rule 42 of the Texas Rules of Civil Procedure.” Tex. Civ. Prac. & Rem.Code § 51.014(a)(3). The Legislature has directed that in construing this provision, we may consider the object it sought to attain and the consequences of a particular construction. Tex. Gov’t Code § 311.023; see also Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 350 (Tex.2000). The Court has refused to acknowledge and give effect to the object that the Legislature sought to attain, which is to allow interlocutory appeals of rulings on whether a class is certified. In this case, the trial court’s refusal to decer-tify after the certification could no longer be sustained is the functional equivalent of and indistinguishable from a decision granting certification.

In closing, it should be noted that the Court says Bally is appealing the order that granted partial summary judgment. 53 S.W.3d at 359. That is not the case. Bally is appealing only the trial court’s refusal to decertify the class after it had ruled on the merits. Bally’s briefing and request for relief are unmistakable in this regard.

Because the Court refuses to give effect to legislative intent and to adhere to our own precedent, I dissent.