Class-Action Lawyers Face Triple Threat At Supreme Court
forbes.com | Oct 1st 2012
Last year the U.S. Supreme Court dealt class-action lawyers a serious defeat in Wal-Mart v. Dukes, rejecting a suit on behalf of millions of the retail giant's female employees because it lacked the essential "glue" connecting their claims to one discriminatory practice.
As I said at the time, the decision by Justice Antonin Scalia changed class-action law in a subtle but powerful way, injecting the facts of the case at the earliest stages and giving defendants the chance to end a lawsuit before it gains so much momentum they are forced to settle.
The Supreme Court has agreed to hear three more challenges to class-action procedures this fall, at least one of which could cement the changes set in play by Dukes.
"The court's docket is now about half-full, and it's already got three class-action cases," said Dan Himmelfarb, an appellate practice expert with Mayer Brown in Washington. Given that business cases tend to be in the minority, he said, "a very heavy proportion of the court's business docket is class-action cases."
The most important one is probably Comcast v. Behrend, scheduled for argument Nov. 5, in which Comcast is challenging an appeals court decision allowing a class action to proceed on behalf of all of its Philadelphia customers even though Comcast argues there is no economic theory that could explain how to award damages to them. Comcast is asking the high court to declare such theories to be another type of essential "glue" holding plaintiffs together, which must be established at the front end of a class action.
"The broad issue is, how rigorous does a showing have to be at the class certification stage?" Himmelfarb said. "Obviously this is a very important question."
Plaintiff lawyers tend to argue that juries should decide questions of fact, such as whether an economist's theories hold water. That's the job of a lawyer, after all: To demolish the credibility of the other side's witnesses on the stand.
But the Supreme Court has undermined that idea over the years, most powerfully with its Daubert ruling in 1993, ordering judges to determine the credibility of scientific witnesses before they can even be allowed to provide evidence in civil lawsuits. Comcast attempts to inject some Daubert-style inquiry into class-action proceedings before the plaintiff side has assembled such a large case the defense can't take the financial risk of going to trial. And in Wal-Mart v. Dukes, Scalia left an important marker in Footnote 6, where he rejected the idea that judges can't consider evidence at the early stages of a case. In the footnote, Scalia said some have mistakenly interpreted another Supreme Court decision as requiring judges to leave so-called "merits" questions for the jury, but that was an overly broad reading of the decision. Judges routinely consider the merits of securities claims in order to establish class actions, he said.
Another case challenges a creative work-around lawyers dreamed up after Congress passed the Class Action Fairness Act in 2005. That law, among other things, required all cases seeking more than $5 million in damages to be heard in federal court. Corporate defendants like federal courts because they tend to have more consistent rules of procedure than state courts, especially in "hellhole jurisdictions" like Madison County, Ill., where judges are seen as giving too much control of proceedings to trial lawyers who helped elect them.
In The Standard Fire Insurance vs. Knowles, lawyers tried to keep their class action in state court in Arkansas by stipulating in their complaint they wouldn't seek more than $5 million.
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"Class counsel tend to be very creative and persistent," Himmelfarb said. "When loopholes are closed, they try to get around them."
This end-run may run afoul of CAFA as well as the Constitution. Class-action lawyers have clients, after all, even if they seem like an abstraction in many cases. And what kind of lawyer stipulates at the beginning of a lawsuit, before any evidence has been gathered, that he won't seek full compensation for their damages? Especially when the objective is to keep a particular kind of lawsuit in state court, where the lawyer stands to make much higher fees?
Himmelfarb said the defense will likely argue that Congress wrote CAFA – and passed it with strong majorities – to discourage lawyers from engaging in such self-serving behavior.
"When you're looking at what Congress intended, looking at these principles, Congress couldn't have intended this," he said lawyers will argue. The case also raises questions of constitutional due process, since the lawyer is seeking to bind all of his "clients" in a lawsuit that will end forever their right to sue over the same complaints, while stipulating at the beginning they won't seek full compensation for their damages.
The final case is Amgen vs. Conn. Retirement Plans, which asks the court to decide whether shareholder lawyers have to prove at the beginning of a case whether information they say a company withheld from investors was material or not. The case deals with the tricky, almost metaphysical concept known as the "fraud on the market" theory, which holds that individual shareholders don't need to prove they relied on company's disclosures when they bought a stock. The price they paid incorporated all that was known about the stock, the theory goes, so if it plunged after the company released new information, the investor can be presumed to have bought it at an inflated price.
The question in Amgen is whether the information has to be material. Amgen shares fell on news reports the Food and Drug Administration was critical of the company's drug trials, and lawyers quickly filed lawsuits accusing Amgen of withholding data about those tests from years before. Amgen says that data wouldn't have been material, and so investors weren't defrauded when they bought stock without knowing about it.
This case seems to follow in the steps of last year's Erica John Fund vs. Halliburton, in which the court rejected the idea that plaintiffs must prove a company's statements caused their losses at the beginning of a case. But Himmelfarb said defense lawyers in Amgen will argue their case merely seeks to establish the conditions required to establish fraud on the market. The court has already said that lawyers must show the market is efficient; defense lawyers just want to add another essential condition, that the information the company withheld was also material and would have moved the market.
The defense would seem to face a heavy burden here after Halliburton. While Amgen comes from the oft-overturned Ninth Circuit, Himmelfarb said, "it's not the 9th Circuit against the world, where the 9th Circuit usually loses and the world wins." Evidence: Judge Frank Easterbrook of the Seventh Circuit in Chicago, a favorite of free-market conservatives, ruled the same way in another case.
Will the Roberts court vote, 5:4, to lay waste to the class-action bar with this trio of cases? Prepare to be surprised. The court took on three class action cases last year, Himmelfarb noted, and decided two of them for the plaintiffs, one unanimously.
Original Page: http://www.forbes.com/sites/danielfisher/2012/10/01/class-action-lawyers-face-triple-threat-at-supreme-court/
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Victor Cuvo, Attorney at Law
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