Competing Class Actions

For Whom the Pipe Tolls: SCOTUS to Decide Whether <i>American Pipe</i> Tolling Applies to “Piggyback” Class ActionsFederal courts generally agree that when certification of a class action is denied or the case is dismissed, the statute of limitations on the claim asserted on behalf of the would-be class is deemed to have been tolled during the pendency of the class claims for all individual members of the putative class action, at least for purposes of a subsequent individual action. The reason the federal courts agree on this much is that the United States Supreme Court so ruled in American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983).

But from that single point of origin, the American Pipe tolling rule branched out into a fair amount of controversy. One of the many circuit splits was resolved a few months ago when the Supreme Court ruled that American Pipe tolling does not apply to statutes of repose (California Public Employees’ Retirement System v. ANZ Securities, Inc., et al., 137 S. Ct. 2042 (2017)). Other disagreements have festered over questions such as whether a person who opts out can assert the tolling effect in a subsequent individual action prior to denial of certification or dismissal in the first action, and how the rule applies cross-jurisdictionally to successive actions in the state and federal systems.

But yet another circuit split concerning American Pipe will not be a circuit split much longer—whether American Pipe tolling applies to save an otherwise untimely successive class action. The Supreme Court last week granted certiorari to resolve that question in China Agritech, Inc. v. Resh, Dkt. No. 17-432.

The Courts of Appeal are sharply split on the issue. The First, Second, Third, Fifth, Eighth, and Eleventh Circuits have held, more or less, that allowing so called “piggyback” class actions would undermine the very judicial efficiency goals upon which the judicially created American Pipe tolling rule is based: avoiding duplicative litigation. They also point out that allowing tolling to save successive class actions would all but eliminate the utility and purpose of statutes of limitations in the class context. But since 2011, the Sixth, Seventh and Ninth circuits—the staunchest advocates of the class action device and its expansion in recent years—have brushed those concerns aside and embraced tolling for successive class actions. They argue that if claims are already tolled individually, then Rule 23 applies as much to tolled individual claims as to claims that are timely on their own. Because the Supreme Court has already ruled that denial of certification has no preclusive effect in a subsequent class action on the same claims, Smith v. Bayer, 564 U.S. 299 (2011), piggyback class action tolling seemingly would allow unsuccessful would-be class counsel to “try, try again” with new class representatives in another court as many times as necessary until they find a court willing to certify their class.

The many circuit splits American Pipe has generated illustrate the pesky problem with judicially created rules: They almost always lead to years of uncertainty and unforeseen consequences. Rule 23 contains no tolling rule, and neither did the statute of limitations at issue in American Pipe, yet the judiciary, ultimately the Supreme Court, chose to create one. Numerous circuit splits have resulted, likely to the surprise of nobody. One day, presumably, all those circuit splits will be resolved, with the rule’s application to “piggyback class actions” being the next in line. But in the years it takes for the splits to be resolved, the rights of numerous plaintiffs or defendants will have already been permanently lost because of the mistaken views of the courts on whatever proves to be the wrong side of the split. Real dollars will have been spent in error, and real rights will have been lost.

This tolling rule would have been better left to Congress or the rulemaking process. Though often incomplete, inefficient and otherwise wanting in themselves, those processes almost always result in a more comprehensive effort to address all foreseeable ramifications of the rule being created than legislating from the bench ever can. After all, Article III ripeness, standing and justiciability considerations actually prevent federal judges from addressing issues not yet presented in the case before the court. That constitutional limitation almost guarantees that judicially created rules will produce more collateral damage to the rights of individual litigants while the uncertainties are worked out in subsequent cases in different circuits at different times.  So while we wait for the Supreme Court to fix this particular glitch, the larger lesson will remain immutable: Courts should exercise restraint in creating ad hoc exceptions to timeliness or other legislatively promulgated rules, whether they be substantive or procedural.

Reverse Auction Ploy by Competing Class Counsel Creates Right of Intervention by Class Members Whose Settlement Demands Were UnderbidIn a case that reveals the darker aspects of what can sometimes be an ugly competition for the class counsel role, the Eleventh Circuit rendered an opinion last week finding that a group of plaintiffs were entitled to intervene in a class action settlement by a rival group of plaintiffs.

In Technology Training Assocs., Inc. v. Cin-Q Autos., Inc., a group of plaintiffs and their class counsel filed a class action similar to one already pending, then immediately announced a $20 million settlement. The class claims involved unsolicited “junk” faxes sent to over 180,000 recipients in alleged violation of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227. The plaintiffs who had filed the earlier (and still pending) similar class action moved to intervene pursuant to Rule 24, Fed. R. Civ. P., alleging that the defendant and the second group of plaintiffs were collusively settling on more favorable terms with the second plaintiff group, in what is known as a “reverse auction,” to knowingly undercut the higher demands of the first group. The motion to intervene argued that the second group of plaintiffs were inadequately representing the intervenors’ interests because some of those second plaintiffs’ claims were (or could be) barred by the statute of limitations, unlike the claims of the intervenors, which gave the second group of plaintiffs greater incentive to reduce their demands. The district court, however, denied the movants’ motion to intervene, finding that the movants could object at the “fairness hearing” rather than intervene.

In reversing the district court, Chief Judge Carnes, writing for the court, noted that Rule 24’s right to intervene was independent of Rule 23’s procedural protections such that “Rule 23’s procedural protections” did not “mean the movants fail to satisfy Rule 24(a)(2)’s third prong[,]” as the district court found.  In light of this finding, the court went further and analyzed whether the movants for intervention had satisfied their burden of showing that the settling plaintiffs’ representation of the movants’ interest “may be” inadequate. The court found that the movants had met this “minimal” burden, agreeing that the settling plaintiffs had a greater incentive to settle because their claims may be barred by the statute of limitations, an issue the movants did not have.

Even more telling, though, was the court’s finding that the record evidence showed that “plaintiffs’ counsel … deliberately underbid the movants in an effort to collect attorney’s fees while doing a fraction of the work that movants’ counsel did.” Slip Op. at 10. This evidence included some damning emails exchanged between counsel for the defendants and counsel for the low bidding plaintiffs. The court stated that this evidence not only showed that the settling plaintiffs’ (and their counsel’s) interests were aligned with the defendant, such that “plaintiffs cannot be expected to adequately represent the movants’ interests[,]” but also that such a “desire to grab attorney’s fees instead of a desire to secure the best settlement possible for the class” constituted a violation of counsel’s “ethical duty to the class.” (citing Am. Bar Ass’n, Ethical Guidelines for Settlement Negotiations § 4.2.2 (2002)).

The Eleventh Circuit’s decision in Technology Training Assocs., Inc. should serve as another warning to settling litigants that reverse auction settlements are likely to draw increased judicial skepticism, and that communications in the course of such reverse auctions may well become evidence against the settlement.

Dealing with Competing Class Actions, Part Three – Anti-Suit InjunctionsIn the final post of this series addressing competing class litigation, we’ll analyze the sparingly used but sometimes viable strategy of seeking an injunction against a competing class action. Under limited circumstances, it may be possible for a defendant to enjoin prosecution of a competing class case. To the extent a federal court is authorized to issue such an injunction, its authority derives from the All Writs Act (AWA), 28 U.S.C. § 1651, and exceptions to the Anti Injunction Act (AIA), 28 U.S.C. § 2283.

The AWA provides that “[t]he Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” The AIA provides that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” In limited circumstances, these statutes together enable a federal court to take the extraordinary step of enjoining activity being undertaken in a state court, an injunction to which the state court must accede under the Supremacy Clause of the U.S. Constitution.  Recognizing the extraordinary force of a federal injunction, the courts have likewise recognized that such should be used sparingly; the AIA’s core message is one of respect for state courts. As such, in order to be sustainable on appeal, any injunction of a state proceeding must fit within one of the AIA’s three exceptions:

  • specific authorization by Act of Congress (not addressed in this post);
  • injunctions “in aid of” the federal court’s jurisdiction; or
  • injunctions to “protect or effectuate” the federal court’s judgments.

In Aid of Jurisdiction Exception

The “in aid of jurisdiction” exception to the AIA typically only applies when a res is at stake and thus only to actions in rem. However, the courts have also recognized an additional scenario in which an “in aid of jurisdiction” injunction is permissible:  when a federal court has “retained jurisdiction over complex, in personam lawsuits,” resolution of which is threatened by competing state court litigation (see, e.g., In re Bayshore Ford Truck Sales, Inc., 471 F.3d 1233, 1251–52 (11th Cir. 2006)). The most common use of this “‘complex multi-state litigation exception’” is where a “complex and carefully crafted settlement” in federal court “would be undermined by a state court adjudication.” In re Bayshore, 471 F.3d at 1252; see also In re Diet Drugs Prods. Liab. Litig., 282 F.3d 220, 239 (3rd Cir. 2002); In re Baldwin-United Corp., 770 F.2d 328, 337-38 (2d Cir. 1985).

The “in aid of jurisdiction” has been used in other contexts in class action litigation, as well – if rather sparingly.  In Winkler v. Eli Lilly & Co., 101 F. 3d 1196, 1203 (7th Cir. 1996), for example, the Seventh Circuit, while vacating an AIA injunction as overbroad, held that the AWA and AIA “permit a district court . . . to issue an injunction to safeguard a pre-trial ruling like [a] discovery order. . . .” (see also Newby v. Enron Corp., 338 F.3d 467, 476 (5th Cir. 2003) (district court’s stay of discovery in related state court action appropriate under All Writs Act); In re Prudential Ins. Co. of Am. Sales Practices Litig., 261 F. 3d 355, 364-69 (3rd Cir. 2001) (affirming injunction preventing opt-outs from using evidence, or engaging in motion practice, pertaining to settled class action claims in individual lawsuits; “the All-Writs Act and the Anti-Injunction Act do extend to discovery”)). On the other hand, many courts have held that the mere existence of a parallel lawsuit that seeks to adjudicate the same in personam cause of action does not itself provide sufficient grounds for an injunction against a state action in favor of a pending federal action.  Protection of a trial date in the federal court, for example, has been found to be insufficient to support an injunction against a competing state case  (Ret. Sys. of Ala. v. J.P. Morgan Chase & Co., 386 F.3d 419, 430 (2d Cir. 2004)).

Relitigation Exception

The AWA also permits injunctions against state proceedings where necessary to “protect and effectuate” the federal court’s judgments.  Known as the “relitigation exception,” its applicability turns on principles of claim and issue preclusion, which are to be strictly and narrowly applied (Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 148 (1988)). Because the state court’s erroneous refusal to give preclusive effect to a federal judgment can be reviewed by state appellate courts and ultimately the U.S. Supreme Court, a federal court should ordinarily not dictate to a state court the preclusive consequences of the federal court’s judgment (“[E]very benefit of the doubt goes toward the state court”  Smith, 131 S.Ct. at 2376).

The Supreme Court’s decision in Smith v. Bayer Corp., 564 U. S. 299 (2011), its most recent pronouncement on the relitigation exception, casts doubt on whether that exception has any vitality outside the context of a final federal judgment on the merits.  Smith involved competing federal and state product liability class actions against Bayer, the manufacturer of a prescription pharmaceutical. The federal case was filed approximately one month before the state action; both cases proceeded through discovery and toward class certification.  The trial court denied class certification in the federal action, on predominance and commonality grounds, and Bayer then sought an injunction from the federal court, seeking to have the state court prevented from entertaining plaintiffs’ motion to certify a statewide class.  The district court granted the injunction, a ruling upheld by the Eighth Circuit.  The Supreme Court unanimously reversed.

The Supreme Court held that because the analysis for class certification under Fed. R. Civ. P. 23 was a different question from the state court’s analysis of its own class action rule, there was no identity of issues in the two actions regarding class certification.  The Supreme Court also held that an unnamed member of a putative and uncertified class could not be deemed a party for preclusion purposes, and thus that there was no identity of parties. The Supreme Court noted awareness of the problem of “serial relitigation of class certification,” but observed that the passage of CAFA enables defendants to remove most significant class actions to federal court, where either MDL consolidation under 28 U.S.C. § 1407 or “principles of comity” among federal courts should minimize conflicting certification decisions.

How the lower courts should go about applying the Smith “principles of comity” language in the class certification context is not yet settled.  Some courts have been disinclined to view as significant in any way previous certification denials  (see, e.g., Smentek v. Dart, 683 F.3d 373, 376 (7th Cir. 2012) (rejecting notion of “mandatory comity” where district court did not follow other courts’ class certification denials in earlier cases involving same alleged class); Thorogood v. Sears, Roebuck & Co., 678 F.3d 546, 551-52 (7th Cir. 2012) (vacating antisuit injunction based on class certification denial); Heibel v. U.S. Bank Nat. Ass’n, 2012 WL 4463771, at *4 (S.D. Ohio Sept. 27, 2012) (“neither comity nor stare decisis make the [earlier] court’s decision binding on this court, nor does the decision relieve this court of its obligation to conduct an independent analysis”)). Other courts have relied heavily on previous certification denials  (see, e.g., Edwards v. Zenimax Media, Inc., No. 12-cv-00411-WYD-KLM, 2012 WL 4378219, at *4 (D. Colo. Sept. 25, 2012) (denying certification; finding opinion denying certification in earlier competing class case highly persuasive and relevant”); Ott v. Mortgage Investors Corp. of Ohio, 65 F. Supp. 3d 1046, 1063 (D. Ore. 2014) (prior certification denial creates a “rebuttable presumption” against certification in later cases).

Certain dicta from Smith (“whether and how prior litigation has preclusive effect is usually the bailiwick of the second court,” 564 U.S. at 307) suggests that the relitigation exception will only apply when the second case presents identical issues actually decided in the first case and both cases involve identical parties.  Nevertheless, the Supreme Court’s invocation of comity principles and its stated awareness of the potential abuse of seriatim class certification motions can certainly be relied on by a defendant in defending a second such motion after having once defeated certification.

One weapon decidedly not in a defendant’s arsenal in dealing with competing class actions is an anti-suit injunction by a state court against a federal court.  The law is settled that a state court has no authority to enjoin prosecution of federal court in personam proceedings, even if the state proceeding has been reduced to final judgment (see Gen. Atomic Co. v. Felter, 434 U.S. 12, 12 (1977) (per curiam); Donovan v. City of Dallas, 377 U.S. 408, 412-13 (1964)).