Amicus Curiae Brief — United Health Group, Inc., Fka United Healthcare Corp. v. Klay

Supreme Cou Us.

(4) FILED

No. 04-522 DEC 3

a oT te

Jn the Supreme Court of the United States

UNITEDHEALTH GROUP, INC.., et al.,

Petitioners,

LEONARD J. KLAY, M.D., et ai.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals For the Eleventh Circuit

BRIEF OF THE CHAMBER OF COMMERCE

OF ‘THE UNITED STATES AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

ROBIN ‘S. CONRAD Roy T. ENGLERT, JR.*

STEPHANIE A. MARTZ DONALD RUSSELL

National Chamber BRIAN M. WILLEN

Litigatiion Center, Inc. Robbins, Russell, Englert,

1615 H! Street Orseck & Untereiner LLP

Washimgton, D.C. 20062 1801 K Street, N.W.

(202) 4:63-5337 Suite 411

Washington, D.C. 20006

(202) 775-4500

* Counsel of Record

TABLE OF CONTENTS

Page

SPIES FFE bo oo oer eke Oise ckacewads li

INTEREST OF THE AMICUS CURIAE ............... 1

INTRODUCTION AND SUMMARY

II eta ail Nao iGidw ale uals cada 2

Sh ho oe gcc ES OP ne ae ae an 4

I. CERTIFYING A CLASS BASED ONLY ON THE

PLAINTIFFS’ ALLEGATIONS “HAS NOTHING TO

RECOMMEND IT” AND LEADS TO ERRONEOUS

ie Fe ee ek ee re 5

Il. ERRONEOUS CLASS CERTIFICATION CAUSES

EXTENSIVE HARM TO DEFENDANTS AND TO

ABSENT CLASS MEMBERS .................. 11

Il. INTERLOCUTORY REVIEW OF A CLASS CER-

TIFICATION DECISION MAY BE REQUIRED TO

ADDRESS THE CIRCUIT SPLIT ............... 17

CONCLUSION ............. Co eT eee 20

(1)

TABLE OF AUTHORITIES

Page(s)

Cases:

Amchem Prods., Inc. v. Windsor,

$21 U.S. SR) Cee hk eer eee eee 14

Blair v. Equifax Check Services, Inc.,

181 F.30 O32 CP CO Te iv ad ccs a ca neses.s 19

Breuer v. Jim’s Concrete of Brevard, Inc.,

$38 U.S. GO CRD ski 3. css chs hkeeweakasesas 18

Castano v. Am. Tobacco Co.,

$4 F.3d 734.(5ia CO. TOD Sip cd iesedindases 5,12

Catalano, Inc. v. Target Sales, Inc.,

446 US. GAD CIGD: ak bk canes es rien ka bee 18

Chan v. Korean Air Lines, Ltd.,

490 US. Ua2 (UGE iiic een i Vad can senneacees 18

Coopers & Lybrand v. Livesay,

437 U.S. 463 C290RD & kcikanducenonewascuness 2,19

Deposit Guaranty Nat'l Bank v. Roper,

445 U.S. S26 CIRO okies x Rina Gaeenaceeeeseees 15

Eisen v. Carlisle & Jacqueline,

417 US. 196 CEG PED vn ckccnas bees taneencee 8,9

Gariety v. Grant Thornton, LLP,

368 F.3d 356 (4th Cir. 2004) ................. 7,10

(ii)

TABLE OF AUTHORITIES — Continued

General Telephone Company of the Southwest

v. Falcon, 457 U.S. 147 (1982) ..........

Hevesi v. Citigroup Inc.,

366 \F.36 70 (26 Cir. 2004) ... 0... cc ceee

In re General Motors Corp. Pick-Up Truck Fuel

Tank Prods. Liability Litig.,

Jo F 36 Fon G56 Cir. 1995) 2.0... c cc ccees

In re Initial Public Offering Secs. Litig.,

2004 WL 2297401 (S.D.N.Y. Oct. 13, 2004)

In re Lorazepam & Clorazepate Antitrust Litig.,

280 F.3d 98 (D.C. Cir. 2002) ............

In re Rhone-Poulenc Rorer Inc.,

ee broly Lo A . .)

In re Visa Check/MasterMoney Antitrust Litig.,

200 F346 124 (26 Car. 2001) .. 2... cee

J.B. ex rel. Hart v. Valdez,

186 F.3d 1280 (10th Cir. 1997) ..........

Miller v. Mackey Int'l,

452 F.2d 424 (Sth Cir. 1971) ............

Murphy Bros., Inc. v. Michetti Pipe Stringing, Inc.,

ae

iV

TABLE OF AUTHORITIES — Continued

Pages

Newton v. Merrill Lynch,

en a A ED oi a vii oso da veKds bcke 2

Norfolk Southern Ry. v. James N. Kirby, Pty Ltd.,

Serene SN 4 o sdatei das dete. wii ee. 18

Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ....... 16

Shelter Realty Corp. v. Allied Maintenance Corp.,

DIS FO GS6 CR Coe. 1978) o.oo ccc cc caccs. 9

Szabo v. Bridgeport Machines, Inc.,

249 F.3d 672 (7th Cir. 2001) ............... 6, 8, 10

Statutes and Regulations:

a OR ney ee mM ay 18

PS GEA ioe cnale eerie oa es 7

Pe a NO ie is) Bbw Khoo bdndankcwScuas 8

Sum. COV. FP, Te oo hed ce ak ES 6

| pO ee hs 13,19

V

TABLE OF AUTHORITIES — Continued

Pages

Miscellaneous:

Robert Bone & David Evans, Class Certification and the

Substantive Merits, 51 DUKE L.J. 1251 (2002) .. passim

Kenneth S. Bordens & Irwin A. Horowitz, Mass

Tort Civil Litigation: The Impact of Procedural Changes on

Jury Decisions, 73 JUDICATURE 22 CIPO cr cie eee 12

John Bronsteen & Owen Fiss, The Class Action Rule,

78 NOTRE DAME L. REV. 1419 (2003) 2. ccuass 14,15

David Evans, Class Certification, The Merits, And

Expert Evidence, 11 GEO. MASON L. REV. 1 (2002) 8,9

HENRY J. FRIENDLY, FEDERAL JURISDICTION:

A GENMRAL VOW (99S) 5 12

Bruce Hay & David Rosenberg, “Sweetheart” and “Blackmail”

Settlements in Class Actions: Reality and Remedy,

75 NOTRE DAME L. REV. 1377 (2000) ............. 2

High Flyers, Editorial, WALL ST. J., June 26, 2000 ..... 16

PETER HUBER, LIABILITY: THE LEGAL REVOLUTION AND ITS

CONSEQUENCES (Ist ed. 1990) .................. 17

ROBERT H. KLONOFF & EDWARD M. BILICH,

CLASS ACTIONS AND OTHER MULTI-PARTY

LITIGATION: CASES AND MATERIALS (2000) ....... 12

vi

TABLE OF AUTHORITIES — Continued

Pages

Aimee G. Mackay, Appealability Of Class

Certification Orders Under Federal Rule Of Civil

Procedure 23(f): Toward A Principles Approach,

96 Nw. U.L. REV. 755 (2002) ................ 11, 16

MANUAL FOR COMPLEX LITIGATION § 30.17........... 14

Robert Mednick & Jeffrey Peck, Proportianlity:

A Much-Needed Solution to the Accountants’ Legal

Liability Crisis, 28 VAL. U. L. REV. 867 (1994) ..... 16

George L. Priest, Procedural Versus Substantive

Controls of Mass Tort Class Actions,

26 5. LBGAL STUD. $21 (1997) 2.0... ec ccccccccss 15

Michael A. Schneider, Foreign Listing and the

Preeminence of the U.S. Securities Exchanges:

Should the SEC Recognize Accounting Standards?,

3 MINN. J. GLOBAL TRADE 301 (1994) .......... 16-17

Linda Silberman, The Vicissitudes of the American

Class Action — With a Comparitive Eye,

7 Tul. J. INT’L & Comp. L. 201 (1999) ............ 11

Michael E. Solimine & Christine Oliver Hines,

Deciding to Decide: Class Action Certification and

Interlocutory Review by The United States Courts of

Appeals Under Rule 23(f),

41 WM. & Mary L. REV. 1531 (2000) ......... 11, 16

-Vli-

TABLE OF AUTHORITIES — Continued

Pages

ROBERT L. STERN, ET AL.,

SUPREME COURT PRACTICE (8th ed. 2002) ....... 17-18

Laurens Walker, A Model Plan to Resolve Federal

Class Action Cases by Jury Trial,

Oe VA. Ba Wee OE ok vc ccccdoncbanndacan 11

THOMAS E. WILLGING, ET AL., EMPIRICAL STUDY OF CLASS

ACTIONS IN FOUR FEDERAL DISTRICT COURTS: FINAL

REPORT TO THE ADVISORY COMMITTEE ON CIVIL

I 6 ov cece ee citck edie 13

BRIEF FOR THE CHAMBER OF COMMERCE

OF THE UNITED STATES AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

INTEREST OF THE AMICUS CURIAE'

Representing an underlying membership of more than three

million companies and professional organizations of all sizes

and in all industries, the Chamber of Commerce of the United

States (“the Chamber’) is the world’s largest business federa-

tion. The Chamber advocates the interests of its members in

matters before the courts, Congress, and the Executive Branch.

To that end, the Chamber regularly files amicus curiae briefs in

cases that raise issues of vital concern to the nation’s business

community.

The Chamber’s members are frequently the target of class

action litigation. Although class actions can be useful devices,

they are readily prone to abuses that pose significant risks to the

business community and to the nation’s economy. Class

certification greatly increases the burdens of litigation, includ-

ing the risk of an adverse verdict, and thus often forces defen-

dants to settle cases even if they lack merit. Such settlements —

aptly described by Judge Friendly’s term “blackmail settle-

ments” — distort the legal system and cause substantial eco-

nomic harm. Settlements coerced by questionable or erroneous

certification decisions impose substantial costs on businesses

that are often passed on to consumers; they deter innovation;

and they cause inefficiency in the capital markets. Application

of the proper standards for class certification under Rule 23 of

the Federal Rules of Civil Procedure is an issue of surpassing

importance to the Chamber and its members. Amicus has

extensive experience litigating these issues and is well situated

' The parties’ letters of consent to this filing of this brief have been

lodged with the Clerk. Pursuant to Rule 37.6 of the Rules of this

Court, the Chamber states that no counsel for a party has written this

brief in whole or in part and that no person or entity, other than

amicus curiae, its members, or its counsel, has made a monetary

contribution to the preparation or submission of this brief.

2

to brief this Court on their importance, which extends well

beyond the immediate concerns of the parties.

INTRODUCTION AND SUMMARY OF ARGUMENT

“{C]lass actions are without doubt the most controversial

subject in the civil process today.” Bruce Hay & David

Rosenberg, “Sweetheart” and “Blackmail” Settlements in Class

Actions: Reality and Remedy, 75 NOTRE DAME L. REV. 1377,

1377 (2000). Much of the controversy centers on class certifi-

cation, which can transform a modest set of individual claims

into a gargantuan lawsuit that threatens an entire company (or,

as in this case, an entire industry) with ruinous financial liabili-

ty. From a defendant’s perspective, certification dramatically

increases both the costs of litigation and the costs of an adverse

verdict. It also increases the likelihood of an adverse verdict,

because class actions create additional procedural burdens for

defendants that make such cases more difficult to defend.

For these reasons, judges and academic commentators have

_ recognized that class certification “places inordinate or hydrau-

lic pressure on defendants to settle.” Newton v. Merrill Lynch,

259 F.3d 154, 164 (3d Cir. 2001); see also Robert Bone &

David Evans, Class Certification and the Substantive Merits, 51

DUKE L.J. 1251, 1292 (2002) (“{A]lmost all class actions settle,

and the class obtains substantial settlement leverage from a

favorable certification decision.”). The settlement pressures

created by certification decisions apply even for claims that lack

merit. Coopers & Lybrand v. Livesay, 437 U.S. 463, 476 (1978)

(“[C]ertification of a large class may so increase the defendant’s

potential damages liability and litigation costs that he may find

it economically prudent to settle and abandon a meritorious

defense.’’).

Against this backdrop, few legal questions are of greater

concern to the business community than the one presented in

this case: whether a federal court is required, before certifying

a class action, to conduct a rigorous analysis that goes beyond

the bare allegations of the complaint, in order to determine

3

whether the class certification is in fact appropriate under the

standards of Rule 23. That issue recurs in case after case;

indeed, the persistent and deepening circuit split regarding the

standard imposed by Rule 23 of the Federal Rules of Civil

Procedure is a continuing source of frustration and dismay for

class action defendants. The division in the lower courts springs

from a misreading of this Court’s prior decisions that has

generated confusion for decades. The consequences have been

forum shopping and abuse of the class action mechanism to

coerce lucrative settlements in cases of dubious validity. The

present case provides an excellent opportunity to end those

abuses and bring much-needed clarity and uniformity to the

application of Rule 23.

I. The approach followed by the court of appeals in this

case makes class certification all but automatic. It allows

plaintiffs to secure certification merely by artfully drafting a

complaint, rather than demonstrating to the district court that the

prerequisites of Rule 23 actually exist. Such abdication of

judicial responsibilities is inconsistent with this Court’s

instruction that “rigorous analysis” of certification issues is

required by Rule 23, but many courts have mistakenly con-

cluded that the analysis must be based on plaintiffs’ allegations,

rather than judicial findings, because of this Court’s admonition

that class certification decisions should not be based on a

preliminary examination of the merits. Many of the worst

abuses in contemporary class action litigation arise because

Rule 23 is treated merely as a pleading requirement.

II. Class certification fundamentally changes the nature of

a case and gives plaintiffs enormous leverage over defendants.

Certifying a class without looking beyond the allegations of the

complaint leads to erroneous certification decisions that greatly

benefit class counsel at the expense of defendants and absent

class members. Such a cavalier approach confers the benefits

of class certification without meaningful judicial scrutiny of

even the most outlandish and implausible allegations. It

encourages vexatious class action litigation that burdens the

4

judicial system and imposes substantial economic costs on

defendants — all to the ultimate detriment of U.S. companies and

consumers.

Ill. The petition should be granted, even though it seeks

interlocutory relief. In authorizing interlocutory appellate

review of certification decisions, FED. R. Civ. P. 23(f) recog-

nizes that class certification by a district court fundamentally

alters the nature of a case and greatly reduces the likelihood of

a final, appealable judgment. Without interlocutory review,

certification decisions of the sort made in this case are likely to

escape this Court’s review altogether.

The Court should take this opportunity to make clear that

certification decisions require an analytic rigor commensurate

with their effects on the parties to a particular case and on the

legal system more generally. The issue is too important — and

the costs of getting it wrong too great — to allow this widening

circuit split to linger any longer.

ARGUMENT

The proper application of Rule 23’s requirements for class

certification is an issue of unarguable significance that arises in

nearly every case filed as a class action. This Court has yet to

address the issue squarely, but has instead allowed an increas-

ingly deep and obvious circuit split to develop. Because that

split is effectively described in the petition, amicus will concen-

trate on the very real — and very serious — consequences of the

split; why the approach taken by the Eleventh Circuit (and those

other courts in whose wake it traveled) is so profoundly

misguided; and why it is immediately imperative for this Court

to address these problems and ensure national uniformity in the

application of Rule 23.

2

I. CERTIFYING A CLASS BASED ONLY ON THE

PLAINTIFFS’ ALLEGATIONS “HAS NOTHING TO

RECOMMEND IT” AND LEADS TO ERRONEOUS

CLASS CERTIFICATIONS

The court of appeals in this case affirmed class certification

— including the critical “finding” that common issues would

predominate over individual issues — based on nothing more

than plaintiffs’ allegations. The Eleventh Circuit ignored the

extensive evidence in the record that the defendants’ representa-

tions to the members of the purported class were not uniform

and that the nature and that the extent of reliance (if any) on

those representations varied considerably among class mem-

bers.” Rule 23 does not require this evidence to be believed, but

* As the petition for a writ of certiorari accurately observes, two

distinct circuit splits have developed — one concerning whether the

court conducting a Rule 23 inquiry should accept the plaintiffs’

allegations as true, the other concerning the ability to find that the pre-

dominance requirement is met when each plaintiff's case depends on

a showing of reliance — that are both implicated by the decision be-

low. On the second question, the court of appeals expressly rejected

the Fifth Circuit’s holding in Castano v. Am. Tobacco Co., 84 F.3d

734, 745 (Sth Cir. 1996) that “a fraud class action cannot be certified

when individual reliance will be an issue.” Castano recognizes, cor-

rectly in the Chamber’s view, that class certification is almost invari-

ably inappropriate when plaintiffs must prove reliance individually.

The Eleventh Circuit disagreed, however, holding that individual reli-

ance was no barrier to certification. Pet. App. 62a-64a. Because this

important conflict is worthy of the Court’s attention, the Chamber

fully supports a grant of certiorari on both questions presented. The

Chamber devotes this brief entirely (other than this footnote) to the

first question presented, however, because “[tJhe court of appeals’s re-

fusal to recognize that individual issues always predominate in a fraud

case in which reliance is disputed is a product of its failure to look be-

yond the plaintiffs’ allegations and apply the rigorous analysis that

Rule 23 requires.” Pet. 25 (emphasis added). That is, the Eleventh

Circuit gave the wrong answer to the second question presented — re-

laxing the requirement for proving reliance and suggesting that plain-

6

it does require the evidence to be considered. The court of

appeals, however, affirmed the class certification based only on

an inquiry into whether the allegations in the complaint sup-

ported the requisite “predominance” finding. This cramped

analysis permitted a class certification based on generalized

characterizations of the defendants’ representations and plain-

tiffs’ reliance — for example, that defendants promised to

“honestly pay physicians the amounts to which they were

entitled,” Pet. App. 62a — rather than a careful analysis of

whether, in fact, common issues would predominate in the case.

In so doing, the court of appeals aligned itself with a minori-

ty of circuits that have held that, “when deciding a motion for

class certification, the district court should accept the allegations

contained in the complaint as true.” J.B. ex rel. Hart v. Valdez,

186 F.3d 1280, 1290 n.7 (10th Cir.1997). As the Seventh

Circuit has observed, however, that approach “cannot be found

in Rule 23 and has nothing to recommend it.” Szabo v. Bridge-

port Machines, Inc., 249 F.3d 672, 676 (7th Cir. 2001). Indeed,

relying solely on the plaintiffs’ allegations bespeaks a funda-

mental misunderstanding both of Rule 23 and of class certifica-

tion, one that poses severe consequences for defendants, for

absent class members, and for the legal system generally.

The problems with this approach begin with the text of Rule

23, which mandates that a class may be certified only if the

district court “finds that questions of law or fact common to the

-members of the class predominate over any questions affecting

only individual members.” FED. R. CIv. P. 23(b)(3) (emphasis

added). Deference to bare allegations, particularly when those

allegations gloss over critical facts that undermine commonality

or when the allegations are contradicted by evidence in the

record, cannot substitute for the “findings” required by the rule.

tiffs could satisfy that element by means of “common evidence” (Pet.

App. 64a) — precisely because it had already given the wrong answer

to the first question.

7

See Gariety v. Grant Thornton, LLP, 368 F.3d 356, 365 (4th

Cir. 2004).

This is confirmed by the 2003 Amendment to Rule

23(c)(1)(A), which directed that class certification be resolved

“at an early practicable time” rather than “‘as soon as practic-

able,” as the earlier version of the rule required. The rule was

amended in recognition of the fact that it is often “appropriate

to conduct controlled discovery into the ‘merits,’ limited to

those aspects relevant to making the certification decision on an

informed basis.” FED. R. CIV. P.23 advisory committee’s notes.

This provision makes clear that class certification should rest on

facts, not mere allegations; it requires careful analysis of the

actual circumstances of the case, rather than a cursory reading

of the complaint. To.make the necessary findings, in other

words, requires active engagement with the evidence and the

legal issues in the case to determine whether the claims can

indeed be fairly and effectively tried on a classwide basis.

When that determination cannot be reached solely on the basis

of the complaint, as is almost invariably the case, the court must

engage in fact-finding based on evidence presented by the

parties.

This much should have been clear from General Telephone

Company of the Southwest v. Falcon, 457 U.S. 147 (1982). In

Falcon, an employment discrimination case, the Court affirmed

the reversal of a certification decision, faulting the district court

for failing to “evaluate carefully the legitimacy of the named

plaintiff's plea” that he was a proper class representative under

Rule 23(a). Jd. at 160. Emphasizing that “actual, not presumed,

conformance with Rule 23(a) remains indispensable,” the Court

specifically observed that it will often be “necessary for the

[district] court to probe behind the pleadings before coming to

rest on the certification question.” Jbid. Thus, whereas the

Eleventh Circuit’s decision here suggests that class certification

decisions may merely test the sufficiency of plaintiffs’ allega-

tions — akin to a motion under Rule 12(b)(6) — Falcon says the

contrary. It illustrates that Rule 23 does more than impose a

8

pleading requirement. The certification procedure described by

the rule is instead meant to ensure that defendants and absent

class members are not subjected to the potential prejudice that

inheres in an improper class certification, by demanding a

“rigorous analysis” sufficient to show that the certification is

appropriate. /d. at 161. As one commentator has aptly ob-

served, “[i]t is hard to imagine how one could conduct a ‘rigor-

ous analysis’ if evidence related to the merits cannot be consid-

ered specifically for the purpose of assessing whether plaintiffs

have met the Rule 23 requirements.” David S. Evans, Class

Certification, The Merits, And Expert Evidence, 11 GEO.

MASON L. REV. 1, 10 (2002).

The fallacy of the Eleventh Circuit’s approach is highlighted

by considering what would happen if it were applied in the

context of the Rule 23(a) factors. For example, could plaintiffs

satisfy the numerosity requirement of Rule 23(a)(1) simply by

alleging that the putative class was sufficiently large to render

joinder impracticable? As the Seventh Circuit has observed,

there would be no justification for a district court to defer to

such an allegation in the face of evidence that the class had only

two members. Szabo, 249 F.3d at 676. Similarly, if a defendant

put forward evidence that the named plaintiffs had interests

adverse to those of the class, see FED. R. CIv. P. 23(a)(4), the

district court surely could not certify the class based merely on

contrary allegations in the complaint. In order to protect absent

class members and the court itself, that issue would have to be

squarely confronted and decided — based on the facts as they

are, not as plaintiffs wish them to be. And there is simply no

reason why the certification procedure should be any different

where (as here) the dispute centers on the predominance

requirement of Rule 23(b)(3).

The courts that have suggested otherwise have done so

largely because of a misreading of Eisen v. Carlisle &

Jacquelin, 417 U.S. 156 (1974). Eisen involved claims brought

by approximately 6 million odd-lot traders on the New York

Stock Exchange alleging violations of the antitrust and securi-

9

ties laws. The district court, concerned about the costs of

notifying all prospective class members, conducted a prelimi-

nary inquiry into the merits of the suit. After concluding that

plaintiffs had a strong case, the judge allocated 90 percent of the

notice costs to the defendants. The Second Circuit reversed, and

this Court affirmed the Second Circuit. In so doing, the Court

observed that a district court should not “conduct a preliminary

inquiry into the merits of a suit in order to determine whether it

may be maintained as a class action.” Jd. at 177. In context,

this statement is perfectly sensible; class certification decisions

must turn on whether the elements of Rule 23 are satisfied, not

whether the plaintiffs have a strong case on the merits.

Since it was decided, however, Eisen has been cited fre-

quently as supporting a rule that allows district courts at the

certification stage to ignore any evidence that might bear on the

merits — even when considering such evidence is necessary to

determine whether the prerequisites of Rule 23 actually exist in

a particular case. See Bone & Evans, supra, 51 DUKE L.J. at

1266 (“Eisen * * * has produced a large body of case law in

which lower court judges stop short of making the sort of merits

inquiry required for a sound certification analysis.”). This

approach has led courts to certify classes based on an unques-

tioning acceptance of the allegations in the plaintiffs’ complaint.

E.g., Shelter Realty Corp. v. Allied Maintenance Corp., 574

F.2d 656, 661 n.15 (2d Cir. 1978). Despite Falcon, this

misreading of Eisen has persisted and has seriously distorted the

law of class actions for decades. See Evans, supra, 11 GEO.

MASON L. REV. at 8-9 (“Many district court have misread Eisen

as saying that anything that smacks of merits is off limits in

* Indeed, in support of its conclusion, the Court approvingly cited

Judge Wisdom: “In determining the propriety of a class action, the

question is not whether the plaintiff or plaintiffs have stated a cause

of action or will prevail on the merits, but rather whether the require-

ments of Rule 23 are met.” Eisen, 417 U.S. at 178 (quoting Miller v.

Mackey Int'l, 452 F.2d 424, 427 (5th Cir. 1971)).

10

considering the class issues.”). The time has come for the Court

to correct that long-standing error.

This distortion of Eisen demands correction not merely

because it is wrong, but because it is dangerous. It makes class

certification far too easy. As the Fourth Circuit has observed,

if “it were appropriate for a court simply to accept the allega-

tions of a complaint at face value in making class action

findings, every complaint asserting the requirements of Rule

23(a) and (b) would automatically lead to a certification order.”

Gariety, 368 F.3d at 365. It is difficult to imagine a case in

which a well-represented class would not be certified because

certification could be secured simply by artful drafting of the

complaint.

District courts are supposed to act as guardians of the rights

of defendants and absent class members, and as protectors of the

interests of the judicial system itself, by making the “findings”

required by Rule 23 after performing the “rigorous analysis” re-

quired by Falcon. But courts that rely solely on plaintiffs’ alle-

gations are instead turned into little more than rubber stamps,

whose task is merely to ensure that the complaint includes the

requisite magic words. This “moves the court’s discretion to the

plaintiff s attorneys,” allowing them to manipulate the certifica-

tion process to their own ends. Szabo, 249 F.3d at 677. Asa

result, many cases in which class treatment is grossly inappro-

priate — cases, like this one, in which it is manifest that individ-

ual issues predominate over common issues — are nonetheless

certified and proceed toward trial as class actions. Defendants,

absent class members, and the courts have no meaningful

protection against the certification of cases that are unfair and

unworkable.

Such an approach is comprehensible only if one views class

certification as an insignificant procedural decision that has

little substantive effect. It requires a belief that the costs of

erroneous certification decisions are negligible and that mis-

takes are readily corrected. As we next discuss, however, those

views are profoundly mistaken.

11

Il. ERRONEOUS CLASS CERTIFICATION CAUSES

EXTENSIVE HARM TO DEFENDANTS AND TO

ABSENT CLASS MEMBERS

“The class certification order (granting or denying class

Status) is the most important decision in a class action case: for

the plaintiffs, it means the life or death of their pursuit of their

claims; for the defendants, it means a very close line between

almost zero liability and so much liability that settlement is the

only option.” Aimee G. Mackay, Appealability Of Class

_Certification Orders Under Federal Rule Of Civil Procedure

23(f): Toward A Principles Approach, 96 Nw. U. L. REv. 755,

798 (2002). The reasons for this phenomenon are obvious: “the

specter of huge damage awards against defendants in a class

action suit and the expense of litigating these large suits in a

system without cost-shifting frequently led defendants to settle

even marginal cases, with the settlement often including sub-

stantial attorneys’ fees for the class lawyers.” Linda Silberman,

The Vicissitudes of the American Class Action — With a Com-

parative Eye, 7 TUL. J. INT’L & Comp. L. 201, 205 (1999).

“(T]hat defendants would rather settle large class actions

than face the risk, even if it be small, of crushing liability from

an adverse judgment on the merits is widely recognized.”

Michael E. Solimine & Christine Oliver Hines, Deciding to

Decide: Class Action Certification and Interlocutory Review by

the United States Courts of Appeals Under Rule 23(f), 41 WM.

& MarRY L. REV. 1531, 1546 n.74 (2000); see also id. at 1546

(observing that class certification “has a huge impact on the

subsequent course of the litigation”). Two leading commenta-

tors summarized “what most class action lawyers know to be

true: almost all class actions settle, and the class obtains sub-

stantial settlement leverage from a favorable certification

decision.” Bone & Evans, supra, 51 DUKE L.J. at 1291-1292;

see also Laurens Walker, A Model Plan to Resolve Federal

Class Action Cases by Jury Trial, 88 Va. L. REv. 405, 410

(2002) (noting that most certified class actions settle and that

the number of class action jury trials is “only a handful”) (citing

12

ROBERT H. KLONOFF & EDWARD K.M. BILICH, CLASS ACTIONS

AND OTHER MULTI-PARTY LITIGATION: CASES AND MATERIALS

362 (2000)).

The immense settlement pressures induced by certification

of a large class have been noted by federal judges, including

Judge Fnendly, who described them as “blackmail settlements.”

See In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298 (7th

Cir. 1995) (Posner, J.) (citing HENRY J. FRIENDLY, FEDERAL

JURISDICTION: A GENERAL VIEW 120 (1973)); Jn re Lorazepam

& Clorazepate Antitrust Litig., 289 F.3d 98, 102 (D.C. Cir.

2002) (“[T]he grant of class status can put substantial pressure

on the defendant to settle independent of the merits of the

plaintiffs’ claims.”); Castano v. Am. Tobacco Co., 84 F.3d 734,

746 (Sth Cir. 1996) (“{C]lass certification creates insurmount-

able pressure on defendants to settle, whereas individual trials

would not. The risk of facing an all-or-nothing verdict presents

too high a risk, even when the probability of an adverse

judgment is low.”).

It is not merely the size of a potential jury verdict that

makes class certification such a powerful engine of settlement.

Because of their sheer mass, class actions are likely to be tried

in a manner that is ultimately prejudicial to the defendant and

that increases the likelihood of an adverse result. See Castano,

84 F.3d at 746 (“Aggregation of claims also makes it more

likely that a defendant will be found liable and results in

significantly higher damage awards.”); see also Kenneth S.

Bordens & Irwin A. Horowitz, Mass Tort Civil Litigation: The

Impact of Procedural Changes on Jury Decisions, 73 JUDICA-

TURE 22, 24-25 (1989) (empirical studies showing that, as the

number of plaintiffs in a case increases, juries become more

likely to find fault and to impose greater damages).

Moreover, as one district judge recently observed, “[o]ne of

the interesting side effects of the class action form is that, in

some cases, it effectively transfers the burden of proving

individual facts from plaintiffs to defendants.” Jn re Initial

Public Offering Secs. Litig., 2004 WL 2297401, at *28 n.300

a ee a ee

13

(S.D.N.Y. Oct. 13, 2004). The present case shows this process

at work. Here, where reliance is an element of plaintiffs’

claims, the certification of a class effectively relieves plaintiffs

from the obligation to demonstrate reliance individually.

Instead, as the court of appeals suggested, plaintiffs will be able

to prove reliance on a classwide basis “through common

evidence.” App. 64a. If defendants believe that a particular

class member did not in fact rely on the alleged misrepresenta-

tions, it will now be defendants’ burden to make that showing

as to that particular plaintiff. In a class of this size, the process

of trying to rebut, plaintiff-by-plaintiff, the classwide showing

of reliance, may simply be overwhelming. This reversal of the

ordinary burden makes litigation both more expensive and more

risky. It makes settlement far more attractive even if the

balance of the evidence favors defendants.

The fact that a certification decision “may be altered or

amended before final judgment,” FED. R. Crv. P. 23(c)(1)(C),

does little to mitigate these risks. In practice, class certifications

are rarely modified or undone. See Bone & Evans, supra, 51

DUKE L.J. at 1301 (“{I]nitial certification is, as a practical

matter, tantamount to final certification for most cases.”). A

1995 study found that certification decisions were altered in

fewer than two percent of federal cases. See THOMAS E.

WILLGING, ET AL., EMPIRICAL STUDY OF CLASS ACTIONS IN

FOUR FEDERAL DISTRICT COURTS: FINAL REPORT TO THE

ADVISORY COMMITTEE ON CIVIL RULES 180, tbl 132 (1996).

For that reason, the settlement leverage conferred by a certifica-

tion order exists from the moment the order is entered. “Once

a certification ‘order is issued, the parties can be expected to

rely on it and * * * engage in settlement discussions on the

assumption that in the normal course of events it will not be

altered except for good cause.’” Jn re Visa Check/MasterMoney

Antitrust Litig., 280 F.3d 124, 152 (2d Cir. 2001) (Jacobs, J.,

dissenting) (quoting MANUAL FOR COMPLEX LITIGATION

§ 30.17, at 223). It is thus cold comfort to suggest that defen-

dants will be able to challenge the factual basis of plaintiffs’

Rule 23 allegations at trial, for the certification decision itself

7

renders the chance of a trial remote. Moreover, even if the class

is ultimately decertified once the facts become known, the

correct result is reached only after a substantial waste of judicial

and party resources.

Defendants are not the only group threatened by ill-consid-

ered certification decisions. Rule 23 is designed to protect

absent members of the purported class, as well as defendants;

the rule seeks to ensure that the named plaintiff adequately

represents and vindicates the interests of those who are not

there. See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625

(1997). Those absent plaintiffs will be bound, for better or for

worse, by the outcome of the class action:

If the named plaintiff loses in court, then all of the members

of the class have lost and cannot relitigate their claims.

Some people who might never even have known about the

lawsuit and who certainly never participated in it will

suddenly find themselves denied access to the court system,

on the theory that they were already represented by the

named plaintiffs who litigated the action on their behalf.

John Bronsteen & Owen Fiss, The Class Action Rule, 78 NOTRE

DAME L. REV. 1419, 1420 (2003). The protections that Rule 23

was meant to provide for absent class members are undermined

when certification rests only on allegations, rather than true

findings. The fate of absent members is hitched to the class

representatives without any serious inquiry into whether their

interests are actually aligned. This represents an abdication of

the district court’s responsibility “in a sort of fiduciary capac-

ity,” to protect the absentees’ fundamental due process rights.

In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods.

Liability Litig., 55 F.3d 768, 784 (3d Cir. 1995).

What is ultimately at stake in this case is whether the pro-

cedures associated with class certification should be made to

correspond with the actual importance of certification decisions.

Giving plaintiffs a free pass at the certification stage while

reserving the hard questions for trial ignores the fact that, in

15

modern class action litigation, certification itself is often the

crucial event, the decision on which the ultimate outcome of the

case will turn. In light of the profound substantive effects that

erroneous certification brings, there is simply no justification for

conferring the benefits of certification on the named plaintiffs

and their attorneys without first requiring them actually to

demonstrate that theirs is a case that the governing rules really

allow to proceed as a class action. To conclude otherwise, as

the Eleventh Circuit did here, undermines the rule of law. See

George L. Priest, Procedural Versus Substantive Controls of

Mass Tort Class Actions, 26 J. LEGAL STUD. 521, 547 (1997);

cf. Bronsteen & Fiss, supra, 78 NOTRE DAME L. REV. at 1426

(Rule 23 “requires the judge to make a judgment before she

allows the case to proceed on a class basis”) (emphasis added).

And, although other courts have construed Rule 23 to

require a more searching analysis (see Pet. 13-15), the liberal

venue provisions of the statutes that typically give rise to large-

scale federal class actions (RICO and the federal securities laws,

in particular) make it easy for plaintiffs to bring cases in those

districts that permit certification without looking behind the

allegations of the complaint. Cf. Deposit Guaranty Nat’! Bank

v. Roper, 445 U.S. 326, 339-340 (1980). The opportunities for

such forum shopping make it especially urgent for this Court to

set a uniform national standard that requires district courts to act

as genuine gatekeepers at the class certification stage.

The alterative — leaving the split unresolved and allowing

plaintiffs to bring class claims in whatever jurisdictions make

certification most likely — is an invitation to frivolous class

action litigation, with all of the social and economic harms that

such litigation brings. Because settlements induced by class

certification are so frequently “divorced from the parties’

underlying legal positions,” Hevesi v. Citigroup Inc., 366 F.3d

70, 80 (2d Cir. 2004), an overly deferential certification

standard all but encourages plaintiffs to file marginal class

action suits. For, even if a claim has little chance of success if

tried, it is still likely to extract a lucrative settlement once a

class is certified. Plaintiffs can therefore be confident that any

16

flaws in their allegations will not be exposed until a trial that

will probably never come. Cf. Visa Check, 280 F.3d at 151

(Jacobs, J., dissenting) (“[I]f the district court later finds that a

trial is unmanageable, the named plaintiffs and their counsel

lose nothing, but in the meantime they have in hand the means

to extract a favorable settlement of what may be weak claims.”).

The prospect of a greater volume of questionable class

actions litigation threatens severe consequences that extend far

beyond any particular case.* Meritless class actions are eco-

nomically inefficient; they “waste[] capital and unfairly

transfer[] money from those who have earned it to those who

have not.” Ronconi v. Larkin, 253 F.3d 423, 428 (9th Cir.

2001). This increases the costs of doing business in this country,

putting U.S. companies at a competitive disadvantage and

deterring foreign companies from investing here. See Robert

Mednick & Jeffrey Peck, Proportionality: A Much-Needed

Solution to The Accountants’ Legal Liability Crisis, 28 VAL. U.

L. REV. 867, 910 (1994) (“Frivolous Rule 10b-5 class action

litigation puts American companies on an uphill slope against

companies in Japan and Europe that do not face this perpetual

burden of litigation.”); Michael A. Schneider, Foreign Listing

and the Preeminence of the U.S. Securities Exchanges: Should

the SEC Recognize Foreign Accounting Standards?, 3 MINN. J.

GLOBAL TRADE 301, 315-316 (1994) (observing how foreign

issuers are often deterred “from raising capital or listing

* Class action litigation is already on the rise. Although statistics are

not easy to come by, all empirical data suggest that class actions are

playing an increasingly prevalent role in the federal judicial system.

See Solimine & Hines, supra, 41 WM. & MARY L REV. at 1543 &

n.62 (“[I]t appears that parties — mainly plaintiffs — are increasingly

seeking to certify such classes.”); Mackay, supra, 96 Nw. U. L. REV.

at 755 &n.2. One survey of Fortune 500 companies estimated that,

between 1988 and 1998, the number of class actions rose by 338

percent in federal court. High Flyers, Editorial, WALL ST. J., June 26,

2000, at A46.

17

securities in the United States” because they do not want to

“subject themselves to * * * U.S. class action suits”).

What is more, the fear of liability often causes firms to

change the way they do business — often in ways that benefit

neither the company nor society. “Companies are deterred

from engaging in socially beneficial activities for fear of being

targeted. Moreover, high stakes class litigation can threaten to

bankrupt a socially valuable firm. And the time spent dealing

with frivolous cases harms companies by diverting valuable

management resources from more productive uses.” Bone &

Evans, supra, 51 DUKE L.J. at 1302. Indeed, companies fre-

quently “adjust to the threat of liability by doing less. Not inno-

vating is a remarkably easy thing to do.” PETER HUBER, LIA-

BILITY: THE LEGAL REVOLUTION AND ITS CONSEQUENCES 155

(1st ed. 1990). And products not pulled from the shelves often

become more expensive as businesses pass the costs of litigation

on to their customers. In these ways, class actions, typically

brought in the name of the American consumer, ironically end

up hurting the very constituencies they purport to help.

Il. INTERLOCUTORY REVIEW OF A CLASS CERTIF-

ICATION DECISION MAY BE REQUIRED TO

ADDRESS THE CIRCUIT SPLIT

The fact that petitioners seek interlocutory relief should be

no obstacle to granting the petition. The Court will have few,

if any, opportunities to resolve the circuit conflict through the

review of a final judgment for the very reason that erroneous

class certifications create enormous pressure to settle and rarely

culminate in a litigated judgment on the merits. If the circuit

split is not resolved through this Court’s review of a decision on

an interlocutory appeal under Rule 23(f), it will almost certainly

linger, causing confusion for litigants and courts alike.*

‘The petition should be granted, as well, to decide an issue of

exceptional importance that will resolve an extraordinarily complex

case of overriding importance to a critical industry. “In some

instances, the interlocutory status of the case may be no impediment

18

The court of appeals allowed petitioners to pursue an inter-

locutory appeal under Rule 23(f) of the Federal Rules of Civil

Procedure. That rule, enacted in 1998, gives appellate courts

discretion to “permit an appeal from an order of a district court

granting or denying class certification.” FED. R. Civ. P. 23(f).

Such appeals are analogous to the appeals authorized by 28

U.S.C. § 1292(b). See FED. R. Civ. P. 23(f) advisory committee

notes. And this Court has certainly not hesitated to review inter-

locutory judgments made by appellate courts under that provi-

sion. See, e.g., Norfolk Southern Ry. v. James N. Kirby, Pty

Ltd., 125 S. Ct. 385 (2004); Breuer v. Jim’s Concrete of

Brevard, Inc., 538 U.S. 691 (2003) (denial of motion to remand

case to state court); Murphy Bros., Inc. v. Michetti Pipe

Stringing, Inc., 526 U.S. 344 (1999) (same); Chan v. Korean Air

Lines, Ltd., 490 U.S. 122 (1989) (denial of motion for partial

summary judgment); Catalano, Inc. v. Target Sales, Inc., 446

U.S. 643 (1980) (denial of motion to declare an agreement to fix

credit terms illegal per se under the Sherman Act). There is no

reason not to follow a similar practice under Rule 23(f) with re-

spect to class certification decisions — especially given that the

framers of the rule deliberately created a more favorable pro-

cedure for interlocutory review than that authorized by Section

1292(b). FED. R. Civ. P. 23(f) advisory committee’s notes.

The passage of Rule 23(f), which greatly mitigated the

effect of this Court’s decision in Coopers & Lybrand v. Livesay,

437 U.S. 463 (1978), represents a considered policy judgment

that interlocutory appeals may be needed to prevent the harmful

effects of improper class certification. In enacting the tule, the

advisory committee recognized that an order granting class

certification “may force a defendant to settle rather than incur

the costs of defending a class action and run the risk of poten-

to certiorari where the opinion of the court below has decided an

important issue, otherwise worthy of review, and Supreme Court

intervention may serve to hasten or finally resolve the litigation.”

ROBERT L. STERN, ET AL. SUPREME COURT PRACTICE § 4.18, at 260

(8th ed. 2002).

19

tially ruinous liability.” Jbid. When that happens, of course,

there is no appealable final judgment and any errors made in the

certification decision will go uncorrected.

Rule 23(f) thus highlights the importance of getting

certification decisions right “at an early practicable time,” FED.

R. Civ. P. 23(c)(1)(A), rather than waiting until the end of

litigation when it will likely be too late to correct erroneous

certification decisions. It recognizes that, if appellate courts

wait for a final judgment before deciding important legal

questions arising under Rule 23, many of those questions will

escape review altogether. See Hevesi, 366 F.3d at 80-81. That

result not only would work an injustice on parties (defendants

or plaintiffs, as the case may be) harmed by erroneous certifica-

tion decisions, but also would frustrate the consistent develop-

ment of the law.

Rule 23(f) provides an avenue for appellate review of

decisions that would otherwise escape such review, as a matter

of practical reality; the rule thereby allows future litigants to

benefit from the development and clarification of the law

through the appellate process. See Blair v. Equifax Check

Services, Inc., 181 F.3d 832, 835 (7th Cir. 1999). Such clarifi-

cation sorely needed here; indeed, the fact that Rule 23(f) was

not enacted until 1998 may well be one reason that the funda-

mental issue presented by this case has not previousiy been

resolved by this Court. And the reasons why interlocutory

appeals are fully justified in the intermediate federal appellate

courts are likewise reasons why this Court should not hesitate

to review an otherwise certworthy decision just because it is

interlocutory.

20

CONCLUSION

For the foregoing reasons, and those stated in the petition

for a wnit of certiorari, the petition should be granted.

Respectfully submitted.

ROBIN S. CONRAD ROY T. ENGLERT, JR.*

STEPHANIE A. MARTZ DONALD RUSSELL

National Chamber BRIAN M. WILLEN

Litigation Center, Inc. Robbins, Russell, Englert,

1615 H Street Orseck & Untereiner LLP

Washington, D.C. 20062 1801 K Street, N.W.

(202) 463-5337 Suite 41]

Washington, D.C. 20006

(202) 775-4500

* Counsel of Record

DECEMBER 2004