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Freed by a new Federal Rule of Civil Procedure to accept interlocutory appeals from class certification decisions, several federal appellate courts have released a flurry of decisions interpreting the requirements of Rule 23. In the wake of the 2nd U.S. Circuit Court of Appeals’ decision last week in the high-stakes Visa Check/Mastermoney Antitrust Litigation, [FOOTNOTE 1] a sharp split seems to have developed on the critical question of whether and how courts are permitted to resolve fact-based disputes that affect a case’s suitability for class treatment. Rule 23 provides that federal cases may be maintained as class actions only if certain criteria (numerosity, typicality, etc.) are met. In class actions where primarily money damages are sought, plaintiffs also must demonstrate that a trial of their claims will be manageable, and that issues common to all class members will “predominate over any questions affecting only individual members.” Disputes over the propriety of class certification often focus on these requirements of “predominance” and “manageability.” The U.S. Supreme Court has held that courts must “conduct a rigorous analysis” of the Rule 23 prerequisites, and has said that this analysis often will be “intimately involved with the merits of the claims.” [FOOTNOTE 2] It has provided little guidance, though, on how to proceed if plaintiffs and defendants disagree over facts that are central to determining whether any of the requirements of Rule 23 are met — such as whether common or individual questions would predominate at trial, whether the plaintiffs assert “typical” claims, or how many class members there would be. In the absence of clear rules, the federal appellate courts have issued conflicting opinions. The 2nd Circuit, which in general has given “a liberal rather than restrictive construction” to Rule 23, [FOOTNOTE 3] long has required courts to accept plaintiffs’ allegations as true, and not to wade into disputed factual issues when considering class certification motions. [FOOTNOTE 4] According to this view, if a court finds that the facts as a plaintiff alleges them support class treatment, it should certify the class, subject to decertification later if the defendant proves a different factual landscape. Visa Check reiterated this principle. The 3rd and 7th U.S. Circuit Courts of Appeal, though, lately have adopted a quite different approach, holding that when parties dispute facts that are central to a class certification decision, judges “must make a preliminary inquiry into the merits” to determine whether the underlying facts of a case actually satisfy Rule 23. [FOOTNOTE 5] These courts have recognized that, if judges simply were to accept plaintiffs’ claims as true, then plaintiffs can “tie the judge’s hands by making allegations relevant to both the merits and class certification.” [FOOTNOTE 6] THE MEANING OF ‘EISEN’ Aside from being a philosophical debate, the present discord among the Circuits reflects competing views over the meaning of the Supreme Court’s 1974 decision in a securities case, Eisen v. Carlisle & Jacquelin. [FOOTNOTE 7] In Eisen, a district court certified a six million-member class, and had to decide who would pay to notify class members that the suit was pending. The plaintiffs had insufficient resources and argued that the defendants should bear the costs. The district judge resolved the dispute by conducting an inquiry, similar to that required for a preliminary injunction, to determine which side was more likely to prevail at trial. Finding that the plaintiffs’ claims had substantial merit and would probably succeed, the district court imposed 90 percent of the costs of notice on the defendants. [FOOTNOTE 8] The Supreme Court reversed. The primary focus of the Court’s holding was that, except in extraordinary circumstances, notice costs always must be borne by plaintiffs. But the Court also addressed the district court’s early attempt to weigh the parties’ chances of success, writing that “nothing in either the language or history of Rule 23 … gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.” [FOOTNOTE 9] The Eisen Court did not prohibit district judges from weighing evidence to ensure that the requirements of Rule 23 actually are met. Certainly, Eisen did not hold or even intimate that courts must accept a complaint’s allegations as true. A few years later, however, the 2nd Circuit cited Eisen for exactly this premise, [FOOTNOTE 10] and it reiterated in 1982 — even after another Supreme Court decision had mandated “rigorous analysis” of the Rule 23 factors — that courts still must assume at the certification stage that facts alleged by plaintiffs are true. [FOOTNOTE 11] The 2nd Circuit’s rulings helped foster a persistent mythology about Eisen. Today, the claim that Eisen prohibits inquiries into the facts of a case is a staple of every plaintiff’s class certification briefing. Hundreds of district courts around the country have cited Eisen as requiring them to accept plaintiffs’ allegations as true when ruling on class certification. In a great many of these cases, classes were certified over the defendants’ attempts to show that allegations pivotal to certification were completely wrong. THE SPLIT DEVELOPS For more than 30 years after the 1966 adoption of the present Rule 23, a district court’s decision to certify a class, even if it exponentially multiplied a defendant’s exposure, generally was non-appealable on an interlocutory basis. Most certified class actions thus tended to settle before trial, so the Courts of Appeals had few chances to address the appropriate standards for deciding whether classes should be certified. Even though the Circuits handed down only a few major class action rulings during these years, it was apparent even twenty years ago that they were adopting different approaches to class certification. In 1978, the 2nd Circuit began allowing antitrust plaintiffs to achieve class certification based only on their allegations that defendants had engaged in “price-fixing conspiracies.” [FOOTNOTE 12] The 5th U.S. Circuit Court of Appeals, by contrast, at the same time explicitly required antitrust plaintiffs to demonstrate clearly how they might prove with common evidence that an alleged “conspiracy” actually impacted all class members. [FOOTNOTE 13] During the mid-1990s, however, the chasm between the Courts of Appeals grew wider, as the 4th, 5th, 6th and 7th Circuits strained — sometimes controversially through mandamus orders — to reverse high-profile class certifications. [FOOTNOTE 14] These courts’ late-1990s rulings all required district courts to scrutinize class motions more thoroughly. Some addressed Eisen head on. The 5th Circuit interpreted Eisen as having said only “that the strength of a plaintiff’s claim should not affect the certification decision.” [FOOTNOTE 15] Nothing in Eisen, it said, prohibits courts from probing behind the pleadings to “understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.” [FOOTNOTE 16] In 1999, Rule 23 was amended to include Rule 23(f), giving the Courts of Appeals express discretion to accept interlocutory appeals from class certification decisions. Following this amendment, the re-examination of Rule 23′s standards generally, and of Eisen in particular, has accelerated. Last year, the 1st Circuit held that district courts “must formulate some prediction as to how specific issues will play out in order to determine whether common or individual issues predominate in a given case.” Addressing Eisen, the court wrote that Eisen “does not foreclose [this] consideration.” [FOOTNOTE 17] The real bombshell, though, earlier this year, when the 7th Circuit, in Szabo v. Bridgeport Machines, went further than any previous Court of Appeals in obliterating the myth of Eisen. In Szabo, a district judge “certified the class without resolving factual and legal disputes that strongly influence the wisdom of class treatment.” Citing Eisen, the district court “stated that he had no other option.” In reversing, the 7th Circuit stated that it “d[id]not read Eisen so.” [FOOTNOTE 18] The court stated that while Eisen prohibits district judges from “say[ing] something like ‘let’s resolve the merits first and worry about the class later,’” it does not “prevent the district court from looking beneath the surface of a complaint to conduct the inquiries identified in that rule and exercise the discretion it confers.” [FOOTNOTE 19] According to the 7th Circuit, judges “should resolve all factual and legal disputes on which the Rule 23 inquiries turn. If these inquiries “overlap the merits,” which the court assumed would happen frequently, “then the judge must make a preliminary inquiry into the merits.” [FOOTNOTE 20] The 3rd Circuit has strongly endorsed the 7th Circuit’s approach. In Newton v. Merrill Lynch, the court said that Eisen “must be examined in context,” [FOOTNOTE 21] and ruled that “in reviewing a motion for class certification, a preliminary inquiry into the merits is sometimes necessary to determine whether the alleged claims can be properly resolved as a class action.” [FOOTNOTE 22] The Newton court reversed a certification order after finding that the district judge had failed to consider the defendants’ challenges to the plaintiffs’ factual allegations and expert testimony. Similarly, in Johnston v. HBO Film Management, the 3rd Circuit supported a district court’s decision to weigh a defendant’s evidence showing that its communications with investors were highly individualized against plaintiffs’ allegations of uniform oral misrepresentations. The district judge denied certification based on the defendant’s evidence, and the 3rd Circuit upheld this denial, repeating its Newton holding that courts must base certification decisions on the “factual record,” not mere allegations. [FOOTNOTE 23] LAST WEEK’S RULING Last week, however, the 2nd Circuit — the birthplace of the view that Eisen prohibits examination of the merits at the certification stage — stayed its long-held course without addressing this recent precedent from other Circuits. In Visa Check, the 2nd Circuit had to decide whether a district judge should have weighed two expert’s competing views on whether a means could be devised to try the plaintiffs’ complex antitrust claims without the need for individualized mini-trials. After repeating its view that “a motion for class certification is not an occasion for examination of the merits of the case,” the court held that the district judge was correct to have credited the plaintiff’s expert testimony, without engaging in a “battle of the experts.” Plaintiffs’ expert testimony offered to bolster a class certification motion must always be credited, the court held, unless the defendant can show that it is “fatally flawed” and thus “inadmissible as a matter of law.” [FOOTNOTE 24] In dissent, Judge Dennis G. Jacobs chastised his panel-mates, Judges Sonia Sotomayor and Denise Cote, for failing to require the district court, in a case involving a multimillion-member class seeking damages that could reach $100 billion, actually to determine if and how the case could be manageably tried before certifying the class. If the defendants were correct that mini-trials would be required, Judge Jacobs wrote, “the damages phase of trial would last as long as the whole course of Western civilization from Ur.” [FOOTNOTE 25] THE NEXT STEP Visa Check, along with the 2nd Circuit’s recent opinion in Sumitomo Copper where it held that plaintiffs need not “demonstrate at the moment of certification” that their claims could be proved on a class-wide basis, [FOOTNOTE 26] are irreconcilable with the 3rd and 7th Circuits’ view that courts must affirmatively resolve factual conflicts bearing on the suitability of cases for class treatment. If appealed to the Supreme Court, Visa Check may provide the Court with an opportunity to settle this apparently pronounced Circuit split, perhaps by stating more strongly its post- Eisen holdings requiring district courts to consider, with reference to more than just the pleadings, whether a case truly is suitable for class treatment. Absent quick intervention from the Supreme Court, it is difficult to predict whether the 2nd Circuit will remain a minority of one, or whether other Circuits will split with the merits-examination approach adopted expressly by the 3rd and 7th Circuits and in more circumspect fashion by the 1st and 5th. It is also possible that some middle ground, perhaps giving plaintiffs’ allegations or expert submissions the benefit of the doubt unless a defendants’ countering evidence is clear and convincing, may emerge. Lorna G. Schofield is a partner and Jeffrey S. Jacobson is an associate with Debevoise & Plimpton in New York. ::::FOOTNOTES:::: FN1 No. 00-7699, 2001 WL 1242717 (2d Cir. Oct. 17, 2001). FN2 Coopers & Lybrand v. Livesay, 437 U.S. 463, 469 n.12 (1978). FN3 Marisol A. v. Giuliani, 126 F.3d 372, 377 (2d Cir. 1997). See, e.g., Korn v. Franchard Corp., 456 F.2d 1206, 1208-09 (2d Cir. 1972). FN4 See Shelter Realty Corp. v. Allied Maintenance Corp., 574 F.2d 656, 661 n.15 (2d Cir. 1978). See also Ansoumana v. Gristede’s Operating Corp., 201 F.R.D. 81, 85 (S.D.N.Y. 2001); Duprey v. Connecticut Dep’t of Motor Vehicles, 191 F.R.D. 329, 331 (D. Conn. 2000). FN5 Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 676 (7th Cir. 2001). See Johnston v. HBO Film Mgmt., Inc., No. 00-8070, 2001 WL 1077913 (3d Cir. Sept. 14, 2001); Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154 (3d Cir. 2001). FN6 Szabo, 249 F.3d at 677. FN7417 U.S. 156 (1974). FN8 Id. at 168. FN9 Id. at 177. FN10 See Shelter Realty, 574 F.2d at 661 n.15. FN11 See Sirota v. Solitron Devices, Inc., 673 F.2d 566, 570-71 (2d Cir. 1982). FN12 See Shelter Realty, 574 F.2d at 659 n.11; In re Master Key Antitrust Litig., 528 F.2d 5, 12 n.11 (2d Cir. 1975). FN13 See Alabama v. Blue Bird Body Co., 573 F.2d 309 (5th Cir. 1978). FN14 See Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998); Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996); In re American Medical Systems, Inc., 75 F.3d 1069 (6th Cir. 1996); In the Matter of Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir. 1995). FN15 Castano, 84 F.3d at 744. FN16 Id. FN17 Waste Mgmt. Holdings, Inc. v. Mowbray, 208 F.3d 288, 298 (1st Cir. 2000). FN18 Szabo, 249 F.3d at 675-77. FN19 Id. FN20 Id. at 675-76. FN21 Newton, 259 F.3d at 166. FN22 Id., at 168-69. FN23 Johnston, 2001 WL 1077913, at *9. FN24 Id. FN25 Id., 2001 WL 1242717, at *20 (Jacobs, J., dissenting). FN26 See In re Sumitomo Copper Litig., No. 00-8028, 2001 WL 930184, at *6 (2d Cir. Aug. 15, 2001).

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