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| Finding the Earliest and Least Expensive Exit from Financial Services Class Actions
Finding the Earliest and Least Expensive Exit from
Financial Services Class Actions
By Michael R. Pennington, John E. Goodman, and Robert J. Campbell
Effectively responding to class
litigation doesn’t necessarily mean simply
preparing an answer or perfunctory motion
to dismiss, diving headlong into class
discovery, investing in full-fledged combat
on the merits of the claims, and planning for
a fully contested class certification hearing.
That is usually the most expensive option,
but not always the best one. Even when it
is the best option, important strategy choices
on the front end can directly affect the
outcome on the back end. For example,
serious motions to dismiss can whittle down
the claims at issue or the scope of the
proposed class to more manageable levels,
or maneuver the plaintiff into making
allegations that avoid dismissal but create
obstacles to certification. Resisting removal
temptations under the Class Action Fairness
Act, Pub L. No. 109-2, 119 Stat. 4
(“CAFA”), may set up an interlocutory
appeal as of right on class certification under
the applicable state court class action regime
(as opposed to the discretionary review
afforded under Federal Rule of Civil
Procedure 23(f)), keep a class settlement
based upon coupon relief in play under a
more lenient state court approval standard,
and avoid the CAFA’s expanded notice
requirements (which in some cases invite
regulator comment or scrutiny).
Your strategy in defending any class
action, or any set of class actions, should be
custom-made for that particular litigation,
informed by a careful study of all available
early strategy choices and potential end
games. Locating the earliest and most cost
effective exit in a given class action or set of
class actions requires serious early
examination of all the available options in
each case, not reliance on a “one size fits
all” approach.
Bradley Arant Boult Cummings |
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I. GATHER THE FACTS AND
ASSESS THE RISK UP FRONT.
Certainly, receipt of a summons
carries with it time constraints on the duty to
answer or otherwise respond to the case.
But a company and its outside counsel
should not let the opportunity for a serious
motion to dismiss go by without serious
investigation of the claims and transactions
underlying them, and the substantive and
procedural attacks that might be levied
before an answer is filed. The company and
its outside counsel should quickly assess the
merits of the plaintiff’s claim and analyze
the facts of his or her individual transaction
history before a first response is prepared
and filed. If the claims made lack merit due
to information the plaintiff’s counsel seems
not to know, it may well be that a voluntary
dismissal can be obtained with a simple
phone call to plaintiff’s counsel, and if not,
with a Rule 11 letter. If not, a convincing
basis to propose a “nuisance value”
individual settlement before the
commencement of discovery may be
revealed. On the other hand, such an
analysis may reveal potential defenses that
merit early dispositive briefing, or the
identification of issues for targeted
discovery from the plaintiff or third-parties
to develop the defense. The more factual
information the company can put in outside
counsel’s hands about the named plaintiff
and his or her relevant transactions before
the initial motion to dismiss or answer is
filed, and the more the company empowers
them to explore available options at the
outset, the less likely you are to miss an
opportunity for the earliest possible exit
from the case.
II. IF THE CLASS ACTION IS
FILED IN STATE COURT,
THINK STRATEGICALLY
ABOUT WHETHER TO
REMOVE.
CAFA made removing class actions
to federal court much easier, chiefly by
eliminating the “complete diversity”
requirement for removal of most class
actions with an aggregate amount in
controversy exceeding $5,000,000, and
replacing it with a “minimal diversity”
standard. But just because you can remove
a class action doesn’t mean you should.
Federal court is not automatically the best
venue for every class action, and businesses
should not employ a knee-jerk preference
for federal court. Whether to remove
requires a case-by-case inquiry.
Removing cases under CAFA
presents some significant drawbacks for the
class action defendant. For example, the
defendant must attempt to prove the amount
in controversy exceeds $5,000,000 with
detailed evidence that may have to primarily
come from the company’s own records.
See, e.g., Preston v. Tenet Healthsystem
(5th Cir. 2007). This requirement can
provide significant free discovery to the
plaintiff, along with the identities of possible
deponents, information as to various records
to request in subsequent discovery, a road
map to proving damages, and possible
admissions that can be used against the
company during class certification,
summary judgment, or trial stages of the
litigation, whether or not remand is granted.
The more the company tries to hedge its
statements as to the amount in controversy
in an effort to avoid such admissions and
consequences, the less likely it is that the
company’s burden of proving that the
amount in controversy exceeds $5,000,000
will be found satisfied.
Even if the removing defendant
carries that burden, the company will then
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| Finding the Earliest and Least Expensive Exit from Financial Services Class Actions
be in a venue where any appeal from class
certification is solely within the discretion of
the appellate court. See FED. R. CIV. P. 23(f).
The federal courts have made clear that such
interlocutory appeals will be granted only
sparingly, and only in the most compelling
circumstances. See, e.g., Asher v. Baxter
Int’l Inc., 505 F.3d 736, 741 (7th Cir. 2007)
(“The final-decision rule of § 1291 is the
norm, and Rule 23(f) is an exception that,
like § 1292(b), must be used sparingly lest
interlocutory review increase the time and
expense required for litigation.”); Prado-
Steiman ex rel. Prado v. Bush, 221 F.3d
1266, 1273–1274 (11th Cir. 2000) (same).
In fact, on behalf of the U.S. Chamber of
Commerce Institute for Legal Reform, the
Skadden law firm recently conducted a
study on 23(f) appeals, which was presented
at DRI’s 2014 Class Actions Seminar in
Washington, D. C. The study analyzed 23(f)
filings between October 31, 2006 and
December 31, 2013, along with the ultimate
dispositions of those petitions. The study
showed that over the last seven years, less
than 25% of 23(f) petitions have been
granted, and of those that are, plaintiffs are
enjoying increasing success in both
reversing orders denying class certification
and affirming orders granting class
certification, despite the number of Supreme
Court decisions over the last few years that
should make class certification more
difficult to obtain and sustain.
By contrast, some states allow
appeals as of right from any grant or denial
of class certification. See, e.g., ALA CODE §
6-5-642; 12 OKLA. STAT. ANN. § 993(A)(6);
TEX. CIV. PRAC. & REM. CODE ANN. §
51.014(a)(3); FLA. R. APP. P.
9.130(a)(3)(c)(vi) and (a)(6). In other states,
petitions for mandamus or discretionary
interlocutory appeals from class certification
may be granted much more often than in the
relevant federal court. An appeal as of right
(or its functional equivalent) can be
monumentally important because class
certification and denial of a discretionary
interlocutory appeal often force the
defendant to settle rather than take a chance
on the outcome of a classwide trial,
particularly given the deleterious effects that
an adverse classwide verdict and its
attendant publicity can have on publicly
traded stock. See In re Rhone-Poulenc
Rorer Inc., 51 F.3d 1293, 1298–1302 (7th
Cir. 1995). Worse yet, after class
certification has already been granted and
interlocutory review has been denied, a
company wishing to settle is forced to
negotiate with class counsel at a time when
class counsel’s leverage is at its most
effective.
Moreover, even if a company is
successful in removing a class action under
CAFA, it will now find it somewhat more
difficult and more expensive to settle the
action on a class basis than would be the
case in most state courts. CAFA makes
even legitimate “coupon settlements” much
less feasible. CAFA also requires that all
relevant state and federal regulators of the
company be provided with detailed notice of
any proposed settlement and disclose the
identities of the class members affected by
the settlement before it is approved. This
requirement can not only make the terms of
a settlement more expensive for the
defendant in and of itself, but the necessity
of abiding by this rule can easily generate
both adverse publicity and additional
collateral individual litigation, both at the
hands of competing would-be class counsel
and class members who object to or opt out
of the action, and at the hands of regulators
who choose to pursue their own separate
investigations or lawsuits. The potential for
intervention or objection by such
