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The U.S. Supreme Court long ago instructed judges to engage in a “rigorous analysis” of Fed. R. Civ. P. 23′s class certification requirements. See, e.g., Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 160-61 (1982); see also Amchem Prods. Inc. v. Windsor, 521 U.S. 591 (1997). Yet an earlier decision from that court- Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974)-was routinely invoked by plaintiffs in an attempt to discourage that analysis. Plaintiffs regularly argued that Eisen prohibited at the class certification stage any inquiry into the merits of their claims and thereby sought to confine the scope of the court’s analysis to the complaint allegations. The 2d U.S. Circuit Court of Appeals recently joined other courts in rejecting this view and, in its opinion, discussed the unique context in which the Eisen decision arose. See In re Initial Pub. Offering Sec. Litig., No. 05-3349-cv, 2006 WL 3499937 (2d Cir. Dec. 5, 2006). In so doing, the 2d Circuit provided much needed, practical guidance to lower courts on how best to comply with the rigorous analysis obligation. The IPO decision also has far-reaching implications for any putative class case in which, for example, a defendant may wish to argue that the class should not be certified because individualized issues predominate over common ones. See Fed. R. Civ. P. 23(b)(3). With IPO, the 2d Circuit has now embraced the growing trend toward requiring courts to make a definitive assessment on all Rule 23 requirements before allowing certification, notwithstanding the fact that these requirements may overlap with merits issues. The message coming from these courts is that plaintiffs should be held to their burden of proof for each Rule 23 element, and the district court must consider all evidence relevant to such issues, including rebuttal evidence offered by the defendants. The 2d Circuit lays to rest the ‘Eisen’ myth In IPO, the district court had certified a class of investors for six focus cases, all of which alleged various violations of the federal securities laws in connection with a series of initial public offerings. The 2d Circuit reversed, finding that the lower court’s standards on Rule 23 were too lenient. Specifically, the circuit court held that a class may not be certified unless the district judge affirmatively rules that each Rule 23 requirement is met; all of the evidence relevant to each Rule 23 requirement must be assessed and any necessary factual disputes resolved; and the fact that a Rule 23 requirement may overlap with, or even be identical to, an issue on the merits does not lessen the court’s obligation to make a specific ruling as to whether the requirement is met. The IPO court rejected the notion that plaintiffs may satisfy their burden of proof based merely on “some showing” of compliance with the Rule 23 requirements. In support of this view, the lower court had relied on a passage from Eisen, warning that a court should not “conduct a preliminary inquiry into the merits of a suit” when deciding on class certification. The district court found Eisen to be in conflict with those courts that held plaintiffs to a preponderance of the evidence standard at class certification. For example, it refused to weigh competing expert reports on the issue of the plaintiffs’ ability to prove the mandatory element of loss causation. Instead, it found that the plaintiffs had met their burden by articulating a loss causation theory that was not “fatally flawed.” Putting Eisen in context, the 2d Circuit held that there was no basis in the decision for concluding that a specific Rule 23 requirement need not be fully established just because it concerns, or overlaps with, an aspect of the merits of the case. The 2d Circuit observed that the “inquiry into the merits” in Eisen did not involve a determination on any of the requirements for class certification. Rather, the judge engaged in a preliminary inquiry into the merits after the decision to certify the class had been made and did so only for the purpose of assessing which party should bear the costs of class notice. The high court in Eisen was, thus, never called upon to decide any particular Rule 23 requirement and necessarily did not face a requirement that overlapped with the merits. Nonetheless, as noted above, the merits comment in Eisen led subsequent courts to be overly cautious in examining whether plaintiffs met their burden on Rule 23 issues. Ironically, the rationale given in Eisen for avoiding the merits was a fear of prejudice to the defendants. Yet this concept was routinely cited by plaintiffs to suggest that a court should not consider the defendants’ evidence at the certification stage. As the 2d Circuit observed, such concerns over potential prejudice are misplaced. A rigorous analysis of Rule 23 requirements that touch on the merits would not be binding on the ultimate fact-finder, even if that trier of fact was the class certification judge. Many courts have found that an analogous situation exists with respect to the showing necessary to obtain a preliminary injunction. “Courts make factual findings in determining whether a preliminary injunction should issue, but those findings do not bind the jury adjudging the merits, and the jury’s findings on the merits govern the judgment to be entered in the case.” Gariety v. Grant Thornton LLP, 368 F.3d 356, 366 (4th Cir. 2004). Any other rule that gave deference to complaint allegations alone would mean that virtually every complaint would result in a class certification order-a result in conflict with the district court’s responsibility to take a “close look” at certification. Amchem, 521 U.S. at 615. The 2d Circuit did, however, foresee that some adjustment to a district court’s procedures might be necessary when a Rule 23 requirement and a merits issue overlap. It recognized the need to avoid turning a Rule 23 hearing into “a protracted mini-trial of substantial portions of the underlying litigation.” 2006 WL 3499937, at 15. To that end, the district judge should be given wide discretion to limit discovery and also to limit the extent of the Rule 23 hearing. The court, however, would still need to have before it sufficient evidence by affidavits, documents or testimony to be satisfied that each Rule 23 requirement has been met. The 2d Circuit further held that remand was not necessary. Sufficient evidence existed in the form of the plaintiffs’ own allegations and submissions demonstrating that the requirement of common questions predominating over individual ones could not be satisfied. Among the individual issues found to predominate were issues of reliance. Reliance on the defendants’ alleged misstatements is a mandatory element of a claim under � 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5. In Basic Inc. v. Levinson, 485 U.S. 224, 245-47 (1988), the Supreme Court recognized that a rebuttable presumption of reliance may exist under the “fraud-on-the-market” theory if investors could show that the stock at issue traded in an open, well-developed and efficient market. The IPO plaintiffs’ own evidence, however, showed that the market for stock in the wake of the IPO was not efficient and, therefore, a presumption of reliance would not be available to them. The prevailing consensus now is that a court must examine whether the plaintiffs have satisfied all Rule 23 requirements, even if that process requires the court to resolve issues that overlap with merits issues. See, e.g., Unger v. Amedisys Inc., 401 F.3d 316 (5th Cir. 2005); In re PolyMedica Corp. Sec. Litig., 432 F.3d 1 (1st Cir. 2005); Blades v. Monsanto Co., 400 F.3d 562 (8th Cir. 2005); Cooper v. Southern Co., 390 F.3d 695 (11th Cir. 2004); Gariety v. Grant Thornton LLP, 368 F.3d 356 (4th Cir. 2004); Szabo v. Bridgeport Machs. Inc., 249 F.3d 672 (7th Cir. 2001); Newton v. Merrill Lynch, Pierce, Fenner & Smith Inc., 259 F.3d 154 (3d Cir. 2001). The implications of ‘IPO’ and similar cases The IPO case brings the 2d Circuit in line with the majority view on Rule 23 standards. The court’s thorough analysis provides a clear road map for any federal court facing these certification issues for the first time. The decision’s most important aspect is the fatal blow it dealt to any continued misreading of Eisen. In the context of securities class actions, it is now clear that plaintiffs may no longer prevail based on the mere fact that they have pleaded an entitlement to the fraud-on-the-market theory. There is now an increased willingness by courts, even in cases involving stocks traded on national exchanges, to require plaintiffs to come forward with specific evidence sufficient to support a finding of market efficiency before the court will rule that Rule 23(b)(3) has been satisfied. See, e.g., Bell v. Ascendant Solutions Inc., 422 F.3d 307, 314 (5th Cir. 2005). Moreover, for purposes of any class case, the clear message to judges is that they must allow the parties to develop and present a full record on Rule 23 issues at the class certification stage. This directive is also an outgrowth of the increased likelihood of appeals from certification decisions under Rule 23(f). Indeed, in IPO, the 2d Circuit used the opportunity presented by a Rule 23(f) appeal to provide a much needed clarification of its standards on this important issue. The greater access to appellate courts occasioned by Rule 23(f) is largely responsible for this trend of moving Rule 23 standards in a direction more in keeping with prior Supreme Court precedent. Susan E. Hurd is a partner in the securities litigation group in the Atlanta office of Alston & Bird, and Michael Johnson is a partner in the litigation and trial practice group in the New York office. The firm represents defendants iXL Enterprises Inc., Bert Ellis and Wayne Boylston in the case discussed in this article. This recent opinion did not, however, address the causes of action against these defendants.

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