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On May 7, the Texas Supreme Court derailed a nationwide class action against a computer manufacturer for an alleged defective part, reversing a 9th Court of Appeals decision that had affirmed certification of the class. David Beck, lead counsel for the computer company and a partner in Houston’s Beck, Redden & Secrest, says the Supreme Court’s 8-0 decision in Compaq Computer Corp. v. Lapray, et al. will make it more difficult to certify a class in most cases. Alistair Dawson, one of Beck’s partners and another attorney representing Compaq in the interlocutory appeal, says litigants have been using Texas Rule of Civil Procedure 42(b)(2) to file class actions to get around the requirements under TRCP 42(b)(3). For example, (b)(3) requires that individual notice be provided to class members, but (b)(2) does not. A member of a (b)(3) class also is entitled to opt out of a suit to pursue an individual action against a defendant. “It really plugs the (b)(2) loophole,” Beck says of the high court’s decision. Although the state Supreme Court’s decision blocks a nationwide class action in Compaq, attorneys for the class aren’t throwing in the towel and say a statewide class action still is possible. The Supreme Court remanded the case to the 60th District Court in Beaumont, Texas, where the plaintiffs filed the suit against Compaq in 2000. Class counsel Gary Reger, a partner in Beaumont, Texas’ Orgain, Bell & Tucker, says he appreciates that the Supreme Court recognizes that class actions are important. “The defense bar had hoped this case would kill all class actions,” Reger says. “The Supreme Court did the opposite and made it possible for consumers to protect themselves.” Former Texas Tech University School of Law Dean Frank Newton, of counsel for the class, says the Supreme Court in Compaq “gave a clear and detailed map for harmed customers to follow.” Newton, now president of the Beaumont Foundation of America, says some companies have contended that they should get a free pass in a “negative-value” case such as Compaq — a case in which each plaintiff’s claim against a defendant is so small that it would not be feasible to be brought as an individual suit. “This case says [companies] can be held accountable — here’s the way,” Newton says. The foundation that Newton heads was funded with $360 million left over from the $2.1 billion settlement of another nationwide class action, Ethan Shaw, et al. v. Toshiba Corp., over an alleged defect in a computer part. The foundation distributes computers to low-income students across the country. U.S. District Judge Thad Heartfield of Beaumont approved the Toshiba settlement in February 2000. Newton says the allegations in Compaq are similar to those made in Toshiba. In both cases, consumers alleged the computer companies sold them machines with faulty floppy disk controllers (FDCs), he says. According to the Supreme Court’s opinion, written by Justice Wallace Jefferson, the plaintiffs in Compaq claim that computer system delays can cause the FDC to fail to identify that data has been written incorrectly to the floppy disk, resulting in the loss of some data. The plaintiffs allege that Compaq elected to sell the computers even though the company identified the FDC problem as “a failure” of a “main feature,” Jefferson wrote. In an appendix to their brief to the Supreme Court, the plaintiffs allege that Compaq consistently identified the FDC as a defective part and determined on five different occasions before the suit was filed that it either was a Priority 1 defect — “stop shipment” issue — or a Severity 2 defect, which is a major feature not working. However, Dawson contends that a buffer in Compaq’s computers prevents problems with the FDC. Judge Gary Sanderson, of the 60th District Court, certified a national class of 1.8 million computer buyers as a mandatory declaratory judgment class under 42(b)(2) and, alternatively, as a (b)(3) opt-out class for breach-of-warranty damages. Sanderson also concluded that he would “likely” apply Texas law to all class members’ claims but deferred a final determination on the choice of law. Beaumont’s 9th Court analyzed Sanderson’s certification of the class under 42(b)(2) and affirmed. But the appeals court concluded that because Sanderson only alternatively certified the class under 42(b)(3), and did not abuse its discretion in certifying a (b)(3) class, it was unnecessary to address Compaq’s challenges based on predominance and superiority, according to the Supreme Court’s opinion. Justice Don Burgess wrote the 9th Court’s opinion, which was issued in June 2002. Former Chief Justice Ronald Walker and senior Judge John Hill, sitting by assignment, joined Burgess in the opinion. With Chief Justice Tom Phillips not participating, the Supreme Court determined it had jurisdiction over the interlocutory appeal because Sanderson had granted and the 9th Court had, in effect, affirmed the 42(b)(3) certification without a rigorous analysis of whether individual issues of class members predominate over their common issues or whether litigating the case as a class action is superior to litigating it in another manner. The class would be entitled to seek damages under 42(b)(3) without any court having conducted the required analysis, and that directly conflicts with the Supreme Court’s 2000 decision in Southwestern Refining Co. v. Bernal, Jefferson wrote. The Supreme Court’s decision will force trial judges to look at classes seeking certification under either 42(b)(2) or (b)(3) in much the same way. The court held that trial judges considering certification under 42(b)(2) must consider individual notice and opt-out rights to class members seeking monetary damages. NOT WELL DEVELOPED Also addressed by the Supreme Court is whether parties can evade the requirements of Bernal by seeking 42(b)(2) certification. “Put simply, they may not,” Jefferson wrote. Although 42(b)(2) does not explicitly require analysis of predominance and superiority, it does require a rigorous analysis of “cohesiveness” to determine if class members’ common issues predominate over other issues, according to the opinion. Jefferson also wrote, “[T]rial courts must abandon the practice of postponing choice-of-law questions until after certification, as courts can hardly evaluate the claims, defenses or applicable law without knowing what that law is.” The Supreme Court found that the 60th District Court and the 9th Court erred by failing to conduct a state-by-state analysis of the questions of law presented in Compaq. For example, according to the opinion, there may be differences in states’ notice requirements or in how they interpret such requirements. In the October 2003 arguments before the Supreme Court, Beck argued that there is no proof of a defect in the FDC. The defect alleged by the plaintiffs in Compaq is unmanifested, Beck told the court. While the Supreme Court said in Compaq that it is “of primary import” whether plaintiffs can recover on express warranty claims based on unmanifested defects, it doesn’t try to resolve that issue. “The law on this particular subject does not appear to be well developed in any jurisdiction,” Jefferson wrote. But a footnote in Compaq indicates the high court is likely to address the issue in a future case. According to the footnote, the courts of appeals have reached different conclusions as to whether damages can be recovered for unmanifested defects.

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