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Class Action

CLASS ACTION

A lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

The class action suit began in the equity courts of seventeenth-century England as a bill of peace. English courts would allow a bill of peace to be heard if the number of litigants was so large that joining their claims in a lawsuit was not possible or practical; the members of the group possessed a joint interest in the question to be adjudicated; and the parties named in the suit could adequately represent the interests of persons who were absent from the action but whose rights would be affected by the outcome. If a court allowed a bill of peace to proceed, the judgment that resulted would bind all members of the group.

Justice joseph story, who served on the U.S. Supreme Court from 1811 to 1845, advocated the development of the bill of peace in the United States. He wrote that in equity courts, "all persons materially interested, either as plaintiffs or defendants in the subject matter of a bill ought to be made parties to the suit, however numerous they may be," so that the court could "make a complete decree between the parties [and] prevent future litigation by taking away the necessity of a multiplicity of suits" (West v. Randall, 29 F. Cas. 718, 2 [C.C.R.I. Mason] 181 [1820] [No. 17, 424]). The bill of peace, and later the class action, provided a convenient and efficient vehicle for resolving legal disputes affecting a number of parties with similar claims. Common issues that could have similar outcomes did not have to be tried piecemeal in separate actions, thus saving the courts and the litigants time and money.

Initially, a class action could be brought only in equity cases, disputes in which the parties did not necessarily seek monetary damages but instead might desire some other type of relief. The adoption of Rule 23 of the Federal Rules of Civil Procedure in 1938 broadened the scope of the class action suit, providing that cases in law seeking money damages as well as cases in equity could be brought as class actions. In 1966, the scope of the class action was again clarified and expanded when Rule 23 was amended to provide that unnamed parties to a class action were bound by the final judgment in the action so long as their interests were adequately represented.

Rule 23 of the Federal Rules of Civil Procedure defines three kinds of class actions. The first type may be brought where separate lawsuits might adversely affect other members of the class or the defendant in either of two ways—if the piecemeal litigation resulting from separate suits might impose inconsistent standards of conduct on the defendant, or if multiple suits might "impair or impede" the class members from protecting their various interests. In the second type of class action, a class seeks an injunction or some type of relief compelling the defendant either to cease a certain activity or to perform some other type of action. In the third category of class action lawsuit, there are questions of law or fact common to the entire class that predominate over questions peculiar to each individual plaintiff, and a class action suit is a more efficient means to resolve the controversy. Under the third type of class action, individual members of the class may "opt out" of the litigation if they do not want to be bound by the results of the suit. Courts have held that due process requires that absent class members be given adequate notice, adequate representation, and adequate opportunity to opt out, before they can be bound by a final judgment in the suit (Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S. Ct. 2965, 86 L. Ed. 2d 628 [1985]).

Class action suits have led to social reform in the United States. They have helped to remedy discrimination based on race and gender; been used to address inequities in education, housing, and voting rights laws; and helped to ensure due process. For example, brown v. board of education, 347 U.S. 483, 74 S. Ct. 686, 98 L. Ed. 873 (1954), the Supreme Court decision striking down segregated schools, was brought as a class action lawsuit. The landmark decision Goldberg v. Kelly, 397 U.S. 254, 90 S. Ct. 1011, 25 L. Ed. 2d 287 (1970), in which the supreme court of the united states held that recipients of public assistance must be given notice and the opportunity for a hearing prior to termination of benefits, was also litigated as a class action suit.

Should Class Actions Be Restricted?

Class action lawsuits have become a controversial topic in the 1990s. Once seen as a way of empowering individuals with small claims to have their day in court, class actions are viewed by many lawyers, legislators, and government officials as a vehicle for plaintiffs' lawyers to make millions of dollars on issues of dubious merit. Other critics charge that class actions have been used by defendants in mass tort cases, such as asbestos litigation, to frustrate the large and legitimate claims of individual victims.

Defenders of class actions argue that this type of lawsuit has a legitimate social purpose. A lawyer who prosecutes a class action can be viewed as a "private attorney general" who aggressively enforces various regulatory laws or who alerts the public to fraud, health, and safety problems. In a time when government is seeking to reduce government regulation, class action lawsuits provide an opportunity for the private sector to take up the oversight function.

Defenders note that the class action format has most often been used to aggregate small claims that were not worth litigating separately. A class action is an effective means for holding defendants accountable for widespread harm that would otherwise go unchecked. There is public value in allowing this type of class action to go forward, even if the amount payable to each member of the class is small. The deterrent effect of a class action can be substantial, forcing the defendant to change its product or procedures.

Supporters of class actions contend that trivial cases are rare and that neither high settlement rates nor small individual recoveries demonstrate frivolous litigation. Moreover, criticism of multimillion-dollar attorney fees ignores the risk that class action attorneys take in starting such lawsuits. Not every class action will be successful and the costs of litigation can be substantial. Without a financial incentive, attorneys will not take on and plaintiffs will not find redress for certain types of injury. Defenders also point out that personal injury attorneys receive large portions of the awarded damages through contingent fee agreements. Class action attorneys should not be treated differently.

Defenders of large claim class actions believe that mass tort cases benefit from using a class action structure. When victims of mass torts seek substantial compensation for injuries caused by a defective product, such as asbestos, breast implants, and birth control devices, it makes sense to aggregate the claims. It is more economical for attorneys and the courts to manage hundreds or even thousands of similar claims as a group rather than on a case-by-case basis. The courts would be tied up for years if each case had to be handled individually, and the duplication of evidence and expert witnesses would generate needless expense. A class action, on the other hand, can resolve the central issues and develop rational compensation schedules for the victims. Settlement also becomes a more attractive option for defendants when the victims are members of a class.

Critics of class actions remain unconvinced about the social and legal value of group lawsuits. In small claims class actions, critics question the value of supporting litigation in which individual class members have very small stakes. For example, does it make sense to permit a lawyer to initiate a class action where a utility company overcharged two million customers two cents per month? Such filings demonstrate to the critics the lawyer-driven nature of most small claims class actions. The individual claimants, because they have so little at stake, do not exercise any control over the litigation or elect to opt out of the class and pursue individual claims. With the plaintiffs' lawyer in total control, the dynamics of the lawsuit change. The lawyer has the largest economic stake in the outcome, leading to settlements that guarantee high attorney fees and minimal payouts to the class members.

Critics also dispute the value of the private attorney general role. Most class action attorneys, they contend, are seeking lucrative financial awards rather than social justice. Moreover, class actions may interfere with the regulatory and oversight functions of the appropriate government agency. The agency may conclude that the injuries attributed to the defendant are insignificant and do not warrant prosecution. A class action substitutes the judgment of the private attorney for that of the public's elected officials.

As to the deterrence value of class actions, the critics maintain that state and federal law enforcement organizations have the ability to investigate and punish cases involving widespread small-scale fraud and offer an alternative means of addressing wrongful conduct. Private enforcement through a class action reduces the accountability of the law enforcement effort and delegates to the plaintiffs' attorney control over enforcement priorities.

As to large claim class actions, critics believe that the victims may not be fairly served. They contend that large claim cases raise concerns about the capacity of the class action format to provide individualized justice, the ability of class attorneys to effectively represent the various needs of class members, and the impact on future class members who do not, at the time of litigation, have a ripe claim (their injury is not yet apparent).

Critics argue that in these large claim cases, defendants have sought class action status as a way of limiting liability. In some cases, the parties propose a settlement before a complaint has ever been filed, suggesting the possibility of collusion between the attorneys for the two sides. Finally, defendants in mass tort class actions have an incentive to search for and negotiate with the plaintiffs' attorney for the lowest settlement amount.

Critics of class actions propose that legislation and court rules be changed to give more power to the courts to examine class action applications. Courts should carefully review the applications and deny class status to small claims cases with little social value in the adjudicating the claims. Another alternative is to sharply reduce attorney fees, which would reduce the incentive for frivolous actions.

further readings

Conte, Alba, and Herbert B. Newberg. 2002. Newberg on Class Actions. 4th ed. St. Paul, Minn.: Thomson/West.

Coyle, Marcia. 2003. "Bill Targets Class Action Lawyer Fees: Sparked by Ire Over Tobacco Money. The National Law Journal 25 (May 19): 1.

Feldman, Joel S., and Keith M. Fleischman. 2002. Non-Federal Question Class Actions 2002: Prosecution & Defense Strategies. New York: Practicing Law Institute.

Schwartz, Robert Alexander. 2003. "Can Arbitration Do More for Consumers? The TILA Class Action Reconsidered." New York University Law Review 78 (May): 809–44.

In addition, the class action suit has been used in several widely publicized mass tort cases. In these actions, many plaintiffs, often hundreds or even thousands, have alleged injuries suffered as the result of the actions of a single defendant, usually the manufacturer of some product believed to have caused damage. In the mid-1970s, thousands of women brought suit against the manufacturer of the Dalkon Shield, an intrauterine contraceptive device linked to numerous health problems, including sterility. A class action suit was also employed in lawsuits against the manufacturer of the herbicide Agent Orange, a highly toxic defoliant that was used during the vietnam war and has been linked to cancer and birth defects in Vietnam era veterans and their families. In mid-1995, two major class action suits on behalf of millions of smokers were instituted against several tobacco companies. The plaintiffs hoped to prove that they had become addicted to nicotine and suffered illnesses as a result, and that the defendant tobacco companies concealed their knowledge of the addictive nature of nicotine and the harmful effects of smoking.

Some large companies, anticipating liability for potentially huge damages as a result of class action suits, file for bankruptcy in order to protect their assets. The pharmaceutical company A. H. Robins, the manufacturer of the Dalkon Shield, filed for bankruptcy in 1985 when it was faced with the prospect of paying millions of dollars as a result of class action suits filed against it. In 1995, Dow Corning Corporation, the subject of hundreds of claims resulting from allegedly defective silicone gel breast implants, filed for Chapter 11 bankruptcy protection. Other companies, fearing the financial consequences of possible class action suits arising from certain types of products, have ceased research and development in certain areas altogether. The Upjohn Company, for instance, ceased contraceptive research in 1986.

The Supreme Court addressed concerns about the use of Rule 23 in mass tort actions in Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). This case involved persons who had been exposed to asbestos and who either had diseases attributed to this exposure or who had the potential of developing these diseases. The federal courts became worried that they would be inundated by thousands of individual cases. Therefore, in 1991 all asbestos cases that had been filed but not tried were consolidated and transferred to a single judge in Pennsylvania.

During settlement discussions the defendants refused to negotiate unless the final agreement bound victims who would file claims in the future. The plaintiffs eventually agreed and the parties came to a settlement. They then went into court and obtained a certification of class action. However, objections were raised by many class members and the Supreme Court was required to make a final determination.

The Supreme Court ruled the class action was improper. The Court was troubled by attorneys of current victims, who stood to receive payment from the defendants, binding future victims to a settlement that greatly restricted their ability to receive compensation. Rule 23 requires class representatives to protect the interests of all class members, yet it seemed unlikely that future victims were fully protected. Another concern was that the proposed class did not have sufficient unity so that the future claimants could "fairly be bound by class representatives' decisions. "The current plaintiffs, who had asbestos injuries and wanted immediate compensation, had agreed to terms that future claimants might find unacceptable. These included the lack of inflation adjustment, the limitation on the number of payable claims each year, and the prohibitions against asking for damages based on emotional distress and loss of consortium.

The Court found that the proposed class was not "sufficiently cohesive." Although all members of the class shared experience of asbestos exposure, this did not meet the predominance requirement under Rule 23 (b)(3). In fact, there were many individual issues and many categories of persons who were exposed and injured or exposed but not yet injured. The supposed class was too "sprawling" to meet the Rule 23 requirement.

In 2002, the Supreme Court reviewed the rights of persons who seek to intervene in a class action settlement for the purpose of objecting to the settlement. In Devlin v. Scardelletti, 536 U.S. 1, 122 S.Ct. 2005, 153 L.Ed.2d 27 (2002), the Court held that persons affected by a settlement may appeal even if they are not a class representative or a court-approved intervener. The decision is likely to increase such appeals.

further readings

Hensler, Deborah, Nicholas M. Pace, Bonita Dombey-Moore, Beth Giddens, et al. 2000. Class Action Dilemmas: Pursuing Public Goals for Private Gain. Santa Monica, Calif.: Rand.

Olson, Walter K. 2003. The Rule of Lawyers: How the New Litigation Elite Threatens America's Rule of Law. New York: St. Martin's Press.

Viscusi, Kip W., ed. 2002. Regulation Through Litigation. Washington, D.C.: Brookings Institution.

cross-references

Civil Procedure; Product Liability.

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class action

class action, in law, a device that permits one or more persons to sue or be sued as representative of a large group of people interested in the matter at issue. The court in whose jurisdiction a suit is brought typically has wide discretion in determining that a class will be so represented. Certain requirements must be met, e.g., the class must be so large or dispersed that actual joinder of all individuals would be impractical; there must be questions of law and fact common to all members, and these must outweigh any individual questions; and the named parties must adequately represent the interests of their class. Certain forms of notice to members of the class, e.g., by newspaper or broadcast publication or by mail, are also required. In most types of suit, all members of the class are bound by the decision, unless a member of the class opted out of the action at the beginning of the lawsuit. An absentee member may be able to contest the outcome on the basis that due process of law was not adhered to.

In the United States, federal and most state courts allow class action suits. Such suits have figured prominently in civil-rights litigation and in other cases brought to further social and economic reform. In recent decades they have been employed notably by groups of consumers and others seeking to affix liability for harm caused by various products, especially through manufacturers' negligence. Major litigation against the producers of the Dalkon shield (an intrauterine device; see birth control), of Agent Orange (a herbicide used as a defoliant in the Vietnam War), and of asbestos insulation has involved class action suits.

Since the 1980s such suits have been under attack, along with negligence litigation in general, with opponents, mainly conservatives and business interests, arguing that many lawsuits are frivolous and that awards are out of proportion to the offense in some juridictions. A study published in 2004 that reviewed several hundred state and federal class action lawsuits from 1993 to 2002 found that, adjusted for inflation, the average annual award in such suits varied but did not progressively increase, while the median award was relatively constant. At the same time, however, federal court data showed that the number of class action lawsuits doubled from 1997 to 2002. A 2011 Supreme Court decision on a proposed class action lawsuit concerning gender discrimination in employment tightened the requirements for determining what constitutes the common issue defining the class.

See study by S. Yeazell (1987).

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Class Action

Class Action ★★★ 1991 (R)

1960s versus 1990s ethics clash when a father and daughter, both lawyers, wind up on opposing sides of a litigation against an auto manufacturer. Hackman and Mastrantonio give intense, exciting performances, almost surmounting the melodramatic script. 110m/C VHS, DVD . Mary Elizabeth Mastrantonio, Gene Hackman, Joanna Merlin, Colin Friels, Laurence Fishburne, Donald Moffat, Jan Rubes, Matt Clark, Fred Dalton Thompson, Jonathan Silverman, Dan Hicks; D: Michael Apted; W: Samantha Shad, Christopher Ames; M: James Horner.

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Class Action

Class Action

A lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

Kircher v. Putnam Funds Trust

In Kircher v. Putnam Funds Trust, No. 547 U.S. ___, 126 S.Ct. 2145, ___ L.Ed.2d ___ (2006), the U.S. Supreme Court unanimously held that a district court's remand of a case to state court, pursuant to the Securities Litigation Uniform Standards Act of 1998 (SLUSA), was not subject to appellate review. This decision resolved a split between the Second and Seventh Circuit Courts of Appeal on the issue.

The SLUSA provides that private state-law "covered" class actions that allege untruth or manipulation "in connection with the purchase or sale" of a "covered" security could not "be maintained in any State or Federal Court." 15 U.S.C. § 77p(b). In other words, SLUSA generally precludes bringing a securities class action based on state law into a state court. The Act authorizes removal to federal district court of "[a]ny covered class action brought in any State court involving a covered security, as set forth in subsection (b)." 15 U.S.C. § 77p(c). A "covered class action" is a lawsuit seeking damages on behalf of more than 50 people. A "covered security" is one traded nationally and listed on a regulated national exchange.

In 2003, plaintiffs Kircher and Brockway filed suit in an Illinois state court against several mutual funds, including defendant Putnam Funds Trust (Putnam). The complaint alleged misconduct that resulted in devalued shares owned by plaintiffs, who comprised eight groups of investors holding mutual funds shares. Each group had filed a separate action in Illinois state courts, and all of them alleged only state-law claims, such as negligence and breach of fiduciary duty.

Although the defendants filed notices of removal to federal district court in each case, stating that SLUSA precluded state actions and authorized such removals, the separate plaintiffs resisted. They argued that SLUSA only covered injuries relating to "the purchase or sale" of covered securities (see above) and that their claims were premised upon injuries as "holders" of mutual fund shares, not involving purchase or sale. Therefore, SLUSA did not preclude their actions in state court. The federal District Court for the Southern District of Illinois agreed, and in separate orders remanded each case back to state court, citing lack of subject matter jurisdiction.

The defendant funds then appealed to the Seventh Circuit Court of Appeals, but plaintiffs next argued that any appeal was barred by 28 U.S.C. § 1447(d), which provides that a district court's order to remand a case to state court is not appealable.

The Seventh Circuit disagreed with plaintiffs, holding that remand was not affected by 28 U.S.C. § 1447(d), which only affected lawsuits in which removal was not proper. In this case, the court held, removal was proper because the securities were regulated by federal securities laws, giving federal court jurisdiction. This decision was consistent with similar decisions in the Third and 11th Circuit Courts of Appeal.

Title 28 USC §1447(d) bars review of district court orders remanding removed cases for lack of subject matter jurisdiction. But the Seventh Circuit reasoned that §1447(d) was not applicable because the district court had rendered a substantive decision of no preclusion (under SLUSA), rather than a procedural decision of no subject matter jurisdiction, thus making the decision appealable. Defendants were permitted to remove the case to federal district court for a determination on whether the case was preempted by statute. If it were, the district court would have to dismiss the case. If not, the district court would have to remand back to state court.

In an opinion delivered by Justice David Souter, the U.S. Supreme Court reversed. The Court noted that under SLUSA's text, removal and jurisdiction to deal with removed cases was limited to those precluded by the statute. Any motion to remand which claims the action is not precluded contemplates a jurisdictional issue. Therefore, a federal district court's exercise of its adjudicative power is jurisdictional, so a remand decision under these circumstances is not appealable.

The Supreme Court also noted that the Seventh Circuit's rationale was in part motivated by an erroneous assumption that SLUSA gave federal courts exclusive jurisdiction to decide preclusion issues. Nothing in SLUSA created this exclusive jurisdiction, and on remand, the state court would be "perfectly free to reject the remanding court's reasoning" and render its own determination as to preclusion. The Court vacated the judgment of the Seventh Circuit and remanded the case with instructions to dismiss the appeal for lack of jurisdiction.

The Court's decision was nearly unanimous. Justice Antonin Scalia filed a separate opinion concurring in part and concurring in the judgment. Said Justice Scalia, "I disagree with the Court's reasoning in Part II, however, because it holds only that the Court of Appeals' recharacterization was incorrect, and not (as I believe) that recharacterization—being a form of review—is categorically forbidden."

Merrill Lynch, Pierce, Fenner & Smith v. Dabit

Since the disastrous collapse of the stock market in 1929 and the Great Depression that continued through the 1930s, the federal government has asserted primary authority over the regulation of stocks and other publicly traded securities. The Securities Act of 1993, 48 Stat. 74, and the Ssecurities and Exchange Commission Act of 1934, 48 Stat. 881, remain the central laws governing securities regulation in the United States. However, in the 1990s class action lawsuits involving securities fraud and misrepresentation began to be filed that were based on state regulatory laws. Congress responded by passing the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 112 Stat. 3227, which prohibited the filing of class actions based on state laws and alleging "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" in any state or federal court by any private party. The Supreme Court, in Merrill Lynch, Pierce, Fenner & Smith v. Dabit, ___U.S.___, 126 S.Ct. 1503, ___L.Ed.2d ___ (2006), was called upon to decide whether a class action under state law could proceed if the plaintiffs alleged they were holders of securities rather than purchasers or sellers. The Court concluded that Congress intended to cut off all class action suits based on state law when it enacted SLUSA.

Shadi Dabit was a broker for Merrill Lynch, Pierce, Fenner & Smith, a prominent investment banking firm that offers research and brokerage services to investors. In 2002 Eliot Spitzer, New York Attorney General, began an investigation into Merrill Lynch's business practices, raising questions about the objectivity and truthfulness of the reports produced by the firm's investment analysts concerning the value of certain stocks. Though Merrill Lynch settled the dispute with Spitzer, a number of class action lawsuits were filed alleging financial losses because of the firm's practices. Dabit, who lived in Oklahoma, filed a class action suit against his former employer in Oklahoma federal district court based on violations of Oklahoma state laws rather than on federal securities laws. Dabit argued that Merrill Lynch had breached its fiduciary duty and covenant of fair dealing and good faith that it owed its stock brokers. He alleged that the firm's analysts had fed the brokers misleading and overoptimistic research as a way to manipulate stock prices. Because of this false information brokers and their customers held onto stock long past the time they would have sold the stock, if they had known the truth. When the truth was revealed, the stock prices dropped precipitously. Dabit alleged the brokers had been injured by this behavior and by the loss of commission fees when their disgruntled customers took their business elsewhere.

Merrill Lynch moved the district court to dismiss the case, arguing that SLUSA barred this type of class action. The court agreed that Dabit's allegations involving the purchase of securities were prohibited under SLUSA but that "holding" claims might not be pre-empted by the federal law. The court dismissed Dabit's complaint but gave him the opportunity to re-file the case with only the holding claims. Dabit complied, listing as members of his class Merrill Lynch brokers who "owned and continued to own" the subject securities. During this same period dozens of similar lawsuits were filed around the United States, leading to a consolidation of all the cases in New York federal district court. Merrill Lynch renewed its motion to dismiss with this court and the court agreed that SLUSA barred holding claims as well. Dabit appealed to the Second Circuit Court of Appeals, which reversed the district court. The appeals court concluded that Congress intended to limit SLUSA to the purchase and sale of stocks; allegations that brokers were fraudulently induced to retain or delay the sale of their securities was outside the language of SLUSA. Merrill Lynch then took its case to the Supreme Court.

The Court, in an 8-0 ruling (newly confirmed Justice Samuel Alito did not participate in the consideration of the case), overturned the Second Circuit decision. Justice John Paul Stevens, writing for the Court, noted that the Court had established in a 1975 case a limitation on private class action suits filed under federal securities law. The Court permitted such suits only in cases where the class members were purchasers or sellers of securities. This limitation was justified on policy grounds, specifically the need to prevent lawsuits that could, even in weak cases, lead to substantial settlements that would hurt brokerage firms. Congress had adopted this same stance when it passed the Private Securities Litigation Reform Act of 1995, 109 Stat. 737, pointing to nuisance filings, complicated discovery requests and the manipulation by class action lawyers of their clients. The 1995 Reform Act placed limits on the amount of recoverable damages and attorney's fees.

The 1995 act produced the unintended consequence of encouraging lawyers to file class actions using state rather than federal laws and to try these cases in state courts. This shift was a dramatic change, for state-court class actions involving national securities firms had been rare. Justice Stevens pointed out that this was the context for Congress's passage of SLUSA and for the current dispute over the breadth of the phrase "in connection with the purchase or sale" of securities. Stevens concluded that the policy considerations that led to the Court's 1975 decision involving federal law class action suits were applicable to state law actions. That fact that Dabit's lawsuit was brought by holders rather than purchasers or sellers was, for SLUSA purposes, "irrelevant; the identity of the plaintiffs does not determine whether the complaint alleges fraud 'in connection with the purchase or sale' of securities." The misconduct at issue was the "fraudulent manipulation of stock prices," which qualified "in connection with the purchase or sale' of securities." Therefore, Dabit could not pursue his class action suit under state law.

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Class Action

CLASS ACTION

A lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

Stoneridge v. Scientific Atlanta

Section 10(b) of the Securities Exchange Act of 1934, 15 USC 78j(b) and correlative Rule 10b-5 of the Securities and Exchange Commission (SEC) both prohibit and provide remedies for securities fraud , i.e., fraudulent or deceptive conduct involving the promotion, sale, or exchange of publicly-traded stocks. The U.S. Supreme Court has previously held that Section 10(b) of the Act provides for, by implication, a “private right of action” for violations, in addition to actions brought by state prosecutors or the SEC. Sup't of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6. The Supreme Court has also held, in another previous case, that any private cause of action did not extend to conduct which could essentially be characterized as (merely) “aiding and abetting” a 10(b) or Rule 10(b)-5 violation. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164.

In Stoneridge v. Scientific-Atlanta, Inc. No. 06-43; 552 U.S.—,—S. Ct.—,—L. Ed. 2d—(2008), the Supreme Court affirmed a lower court decision, holding that the conduct of Defendant Scientific-Atlanta, Inc. did not rise to the level of a 10(b)-5 or Rule 10(b)-5 violation, but rather constituted the “aiding and abetting” of such a violation by a co-defendant, Charter Communications, Inc. Therefore, Plaintiff/Petitioner Stoneridge Investment Partners, LLC, (Stoneridge), representing shareholders of Charter Communications, had no private cause of action against Scientific-Atlanta. The significance of this case was to clarify that so-called “secondary actors,” such as banks, accountants, lawyers, and others that may have peripherally participated in or contributed to a fraud may not be reachable as defendants (in private causes of action) in alleged 10(b)-5 and Rule 10(b)-5 violations.

Stoneridge had brought a securities fraud action in federal district court against Charter Communications, Inc. (Charter), a cable television provider, for allegedly deceptive misstatements in its financial statements, designed to fraudulently inflate the price of its stock. According to the complaint, the alleged scheme involved a “sham transaction” in which Charter fraudulently overpaid its equipment vendor, Scientific-Atlanta, for television cable boxes, and Scientific-Atlanta then returned the excess payment amounts to Charter as “advertising fees.” Charter then fraudulently accounted the returned excess payments as incoming revenue, allegedly designed to inflate its revenue by some $17 million. Stoneridge also charged Motorola Inc. with entering into the same sham transactions with Charter.

The federal district court dismissed the complaint for failure to state a claim, finding that the defendants had aided and abetted the fraud but had not violated anti-fraud securities laws themselves. The Eighth Circuit Court of Appeals affirmed.

In a prior similar case, the Fifth Circuit Court of Appeals ruled against a class action suit by former Enron Company shareholders against several investment banks (including Merrill Lynch Inc.) for their alleged role in Enron's misconduct. But the Ninth Circuit Court of Appeals held that under certain circumstances a “secondary actor” could be held liable. An example of such an instance under the Ninth Circuit's ruling is where the alleged conduct had “the principal purpose and effect of creating a false appearance of fact” in support of a scheme to defraud. This conflict between the nation's circuit courts of appeals prompted review by the U.S. Supreme Court.

The Supreme Court, in again affirming the decisions of both district and appellate courts, held that there was no private right of action under securities laws 10(b)-5 or Rule 10(b)-5, against secondary defendants (such as Scientific-Atlanta and Motorola) because Charter's investors (Stoneridge) did not rely on any Scientific-Atlanta or Motorola statements or representations. “Detrimental reliance” (where plaintiffs allege that they relied upon fraudulent statements or misrepresentations, to their detriment) is an essential element in any action for fraud. Without such reliance, Scientific-Atlanta and Motorola could not have committed a fraud upon investors, but instead, at most, may have “aided and abetted” such fraud.

The Court also noted that it had already decided in its earlier decision in Central Bank, that no cause of action under the cited securities laws/rules existed for aiding and abetting . Justice Kennedy, writing for the 5–3 majority, further noted that although the Central Bank decision prompted calls for the creation of an express cause of action for aiding and abetting, Congress had failed to do so in the ensuing years.

Instead, in 104 of the Private Securities Litigation Reform Act of 1995 (PSLRA), Congress directed the SEC to prosecute such secondary actor aiders and abettors.

Stoneridge had argued that, although Scientific-Atlanta and Motorola may not have made public statements upon which the plaintiffs relied, plaintiffs nonetheless did rely upon their deceptive conduct. But the Court rejected the so-called “scheme liability,” noting that if the scope of liability were to include not just statements but also the transactions reflected by those statements, an implied cause of action would essentially reach the whole marketplace and all players with which the issuing company did business. There was simply no authority under 10(b) or Rule 10(b)-5 for such an expanded application.

Justice Stevens, joined by Justices Souter and Ginsberg, dissented, noting that Charter could not have carried out its fraudulent scheme to hide a $15-20 million cash flow shortfall without the knowingly fraudulent actions of Scientific-Atlanta and Motorola. The dissenting justices opined that the “deceptive devices” clause of the subject 10(b) of the Act would have brought their conduct under the purview of the Act's requirements, and yet still distinguish this case from the decision in Central Bank.

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Class Action

CLASS ACTION

The class action is a procedural device aggregating the claims or defenses of similarly situated individuals so that they may be tried in a single lawsuit. In recent decades the class action has frequently served as the vehicle by which various groups have asserted constitutional claims. For example, all the minority-race school children in various districts have sued (through their parents) to rectify alleged racial discrimination on the part of school authorities; or, to illustrate a nonconstitutional claim, the buyers of home freezers have sued as a group claiming that the dealer had made fraudlent misrepresentations. In both examples the members of the class could have sued separately. The class action pulled these potential individual actions into a single lawsuit making litigation feasible for the members of the class (by permitting a single lawyer to try all their claims together). For the party opposing the class the suit has the advantage of providing a single adjudication of all similar claims and the disadvantage, especially marked in suits for money damages, that the entire potential liability to a large group turns on a single suit.

The class action depends on representation, and that concept draws the Constitution into the picture. In the class action most class members are represented by an active litigant whose success or failure binds the class members. Opinions interpreting the due process clauses of the Constitution (in the Fifth and fourteenth admendments) suggest that normally one may not be bound by the results of litigation to which one is not a party. Yet the class action purports to do just that—to bind the absentee class members to the results of a suit in which they played no active role.

The Supreme Court and the drafters of state and federal class action rules have supplied two solutions to this apparent tension. The Supreme Court's answer came in Hansberry v. Lee (1940), in which the justices indicated that class actions could bind absentee class members if the active litigants adequately represented the class. If not, the Court reasoned, binding the absentees would deprive them of due process of law.

Adequate representation has two aspects, competence and congruence of interests. All would agree that adequate representation implies some absolute level of competence and diligence on the part of the class representative and attorney. Though few cases have specifically discussed the question, it seems virtually a matter of definition that an adequate representative must pursue the cause with some minimum level of professional skill.

The second aspect of adequate representation presents a more difficult problem, forcing us to decide whether such representation requires the class members to have agreed that the action is in their interests, or whether it is possible to define such interests abstractly, without specific consent. Such an abstract definition relies on common intuitions about what would benefit persons in the class's circumstances. In Hansberry the Court did not need to decide between these definitions of interest because the attempted class representation failed on either count. Subsequent cases and procedural rules have not clearly resolved the question.

Contemporary procedural rules require that a judge presiding over a class action suit consider initially whether the action is in the class's interest, abstractly considered; that much seems constitutionally required. Beyond that, some rules also require that the absentee members receive individual notice permitting them to exclude themselves from the litigation.

Founded on the constitutional proposition that some form of representation will suffice to bind members of a class, the class suit has come to play an important role in twentieth-century American litigation.

Stephen C. Yeazell
(1986)

(see also: Groups and the Constitution.)

Bibliography

Kalven, Harry, Jr. and Rosenfield, Maurice 1941 The Contemporary Function of the Class Suit. University of Chicago Law Review 8:684–721.

Wright, Charles A. and Miller, Arthur 1972 Federal Practice and Procedure, Vols. 7 & 7a. St. Paul, Minn.: West Publishing Co.

Yeazell, Stephen C. 1980 From Group Litigation to Class Action; Part II: Interest, Class and Representation. UCLA Law Review 28:1067–1121.

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Class Action

CLASS ACTION

A lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.

Congress Passes Class Action Fairness Act

President George W. Bush on February 18, 2005 signed into law the Class Action Fairness Act, Pub. L. No. 109-2, which will move most large class actions into federal court. Supporters of the bill claim that the legislation will prevent large, national class actions from appearing in state courts that are known for giving large awards. Opponents and some other commentators, however, note that the statute could bring unintended consequences.

The first iteration of the bill that passed in 2005 appeared as the Class Action Fairness Act of 1998, S. 2083, introduced by Senator Chuck Grassley (R.-Iowa). Grassley introduced similar bills in each subsequent session between 1999 and 2004. A number of companion bills were also introduced in the House of Representatives during that time.

Grassley again introduced class action reform legislation in 2005, which appeared as S. 5 in the 109th Congress, First Session. Thirty-three senators served as co-sponsors, including a number of Democrats. The bill passed in the Senate by a vote of 72 to 26 on February 10, 2005. One week later, the House passed the bill by a vote of 279 to 149. Bush signed the bill one day after the House approved it.

One of the concerns that the Act addresses is the practice of some plaintiffs' lawyers to shop for the most favorable state forum in which to bring national class action lawsuits. Tort-reform advocates have often referred to courts in such locations as Madison County in Illinois and Jefferson County in Texas as "judicial hellholes" because of their reputations for giving large jury awards. Under the Class Action Fairness Act, plaintiffs' lawyers must file many of these class actions in federal court.

The new statute, which applies only in actions with more than 100 plaintiffs, alters what constitutes diversity of citizenship for purposes of determining whether a federal court has jurisdiction. Under prior law, a defendant could not remove a case to federal court when any defendant named in the suit was a citizen of the state where the class action was going to be removed. Moreover, prior law also required every defendant in a class action to agree to removal to a federal court. The new act contains no such requirement. Under the new statute, a federal court maintains original jurisdiction over a class action suit where any single member of a class is a citizen of a different state from that of any single defendant.

The Class Action Fairness Act also modifies the method for calculating the amount in controversy that is necessary for diversity jurisdiction. In order to maintain diversity jurisdiction, the amount in controversy must be $75,000 or more. Prior law prevented federal courts from considering the aggregate of claims by a class of plaintiffs. Thus, even if the total amount sought in a class action were several million, if no single claim were $75,000 or more, a federal court could not assert jurisdiction. The Class Action Fairness Act removes this requirement and permits federal courts to consider the aggregate of the claims.

The new law allows federal courts to decline to exercise jurisdiction where more than one-third, but fewer than two-thirds, of the plaintiffs reside in the same state as the primary defendant. A federal court may not assert jurisdiction where more than two-thirds of the plaintiffs reside in the same state as the primary defendant. Thus, state courts will continue to hear large class action suits where most of the plaintiffs reside in the same state as the primary defendant in the case.

The statute also applies to so-called "mass actions," which the statute defines as actions involving more than 100 plaintiffs with an aggregate amount in controversy of more than $5 million. These actions are now treated as class actions and may be removed to federal court, provided that other criteria are satisfied.

The law additionally limits recovery of attorney's fees for "coupon settlements," which are settlements that provide discounts on products to members of the class rather than monetary relief. Previously, plaintiffs' attorneys would receive fees based on the total face value of all of the coupons issued, irrespective of whether those coupons were redeemed. Under the new statute, attorneys may receive fees based only on the amount actually redeemed by members of the class.

Upon signing the new legislation, Bush stressed that class actions "serve a valuable purpose in our legal system." According to Bush, "They allow numerous victims of the same wrong-doing to merge their claims into a single lawsuit. When used properly, class-actions make the legal system more efficient and help guarantee that injured people receive proper compensation." On the other hand, Bush stressed that class actions have often been abused, quoting a newspaper editorial that called the class action system "an extortion racket that only Congress can fix."

The actions of some plaintiffs' lawyers prior to passage of the act seemed to have vindicated the passage of the statute. In the days the preceded the act's passage, plaintiffs' law firms filed 24 new class actions in Madison County. Supporters of the statute expressed hope that the procedural requirements under the new federal law would discourage the mass filing of class actions or that it would lead to fewer class certifications by federal courts.

On the other hand, critics and some commentators noted that the statute could run into some practical problems or that it could have unintended consequences. Some note that attorneys might be less likely to seek coupon settlements when they know that it will be more difficult to recover fees from these settlements. Commentators have also noted that plaintiffs' attorneys could decide to file a series of smaller actions in several state courts(i.e., actions with fewer than 100 members), thus avoiding the act's application. As one former defense lawyer, an executive with General Motors Corp., told Business Week, "[The Class Action Fairness Act] will not eliminate many class actions. It was a modest procedural step."

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