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The Fourth Circuit’s unanimous published opinion today in Gentry v. Siegel looks to be important reading for bankruptcy lawyers and class action lawyers with putative class actions against a company that enters into bankruptcy before a class is certified. The decision arises out of notices of claim filed by lawyers who had filed putative wage-and-hour class actions against Circuit City. Judge Niemeyer wrote the opinion, in which Judge Shedd and Judge Davis joined.

I will leave it to subject-matter experts to digest the analysis, which begins with the following statement:

The Named Claimants’ efforts to pursue class actions in this bankruptcy case reveal gaps in the Bankruptcy Rules and raise some difficult procedural issues about the manner in which the Bankruptcy Rules provide for class actions in bankruptcy cases, as authorized by Rules 7023 and 9014.

The intrepid reader who continues onward will encounter some of these important-looking statements:

It is not completely clear that Civil Rule 23 could ever be applied to a contested matter. . . . For purposes of our holding, we assume, without deciding, that the Civil Rule 23 process could be applied to the resolution of a contested matter. [p. 8, n.1, emphasis in original]

* * *

[T]he Trustee’s construction of the Bankruptcy Rules is unduly cramped and unsuited for application by a court in equity seeking, by application of the Bankruptcy Rules, to accomplish the purposes of the Bankruptcy Act. The Bankruptcy Rules are tools, which include Rule 7023 and derivatively Civil Rule 23, by which the bankruptcy court as a court of equity is to accomplish the Act’s purposes. In the absence of some prohibiting rule or principle, the Bankruptcy Rules should be construed to facilitate creditors’ pursuit of legitimate claims and to allow Civil Rule 23 to be applied if doing so would result in a more practical and efficient process for the adjudication of claims. [10]

* * *

Because the Bankruptcy Rules accept the notion that class action rules may, in appropriate circumstances, be employed in a bankruptcy case, we conclude that they therefore necessarily embrace the notion that the proposal to represent a class is tentative pending approval. And with that notion comes the equally necessary propositions that if the proposal is approved, the approval relates back to when it was made, and if it is rejected, the putative class members must be given time after the court’s rejection to file individual proofs of claim. [11]

* * *

For the most part, Civil Rule 23 factors do not become an issue until the bankruptcy court determines that Rule 7023 applies by granting a Rule 9014 motion. The issue on such a motion centers more directly on whether the benefits of applying Rule 7023 (and Civil Rule 23) are superior to the benefits of the standard bankruptcy claims procedures. While some Civil Rule 23 factors could be relevant to resolving a Rule 9014 motion, extensive discovery related to class certification is not necessary.

* * *

In deciding the Rule 9014 motion, the bankruptcy court assumed that a class action could be certified, thus rendering discovery into certification irrelevant, and concluded nonetheless that the process of a certified class action would be more cumbersome and expensive than the bankruptcy process. Accordingly, the court found that in this particular case, class certification discovery was not necessary. It reached its decision on the Rule 9014 motion on the threshold question of whether the specific claims resolution process established in this bankruptcy case was superior to the resolution process in a class action, assuming that the proposed classes were to be certified. We conclude that this approach was not an abuse of discretion.

Distinct from the bankruptcy court’s denial of class action discovery, we cannot conclude that the court’s ruling on the merits of the Rule 9014 motion was an abuse of discretion. The court noted that approximately 15,000 claims had been filed against Circuit City as part of the claims process and that the structural mechanisms that the court had put in place to process claims were “well underway” and had been operating smoothly to date.

* * *

Because the bankruptcy court denied the Rule 9014 motion to apply Rule 7023, there was no requirement that unnamed class members be notified in accordance with the procedures under Civil Rule 23. The bankruptcy court would have to grant the Rule 9014 motion before the requirements of Civil Rule 23 could apply. Thus, the only notice required was that given by Circuit City for giving notice of bankruptcy procedures and the bar date.

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A couple of weeks ago, I criticized the Third Circuit’s decision in Sullivan v. DB Investments, Inc., which affirmed certification of a nationwide class of indirect purchasers and approved a class settlement that treated identically indirect purchasers who were entitled to pursue damages under state law and those who were not entitled to do so.

Dan Bushell at Florida Appellate Review offers a thoughtful commentary on the decision. Bushell contends that the “main take-away” of the decision is that “there is a real and significant difference between the standard that must be met to certify a settlement class from the standard for certifying a litigation class.”

I agree with Bushell that the best reading of the opinion is that its analysis of certification should be limited to settlement-only classes. Unfortunately, the Third Circuit could not say so explicitly because to do so would be inconsistent with Amchem, in which the Supreme Court stated that, apart from considerations of manageability, the requirements of Rule 23 “demand undiluted, even heightened, attention in the settlement context.”

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Federal law does not allow indirect purchasers to pursue damages under the antitrust laws. Many states follow this rule, and many do not. The Third Circuit’s en banc decision in Sullivan v. DB Investments affirms the certification of an indirect purchaser settlement class that treats indirect purchasers who can pursue damages claims under state antitrust law identically with indirect purchasers who cannot pursue damages claims under state antitrust law. Objectors to certification and settlement challenged certification based on commonality and predominance grounds, and challenged the pro rata distribution aspect of the settlement as unfair under Rule 23(e). I agree with the dissent that there are Rule 23 problems with the certification and the settlement. The best way to think about those problems, in my view, is as a failure of typicality.

Apart from the majority opinion by Judge Rendell and the dissent by Judge Jordan, there is also a concurring opinion by Judge Scirica, a leader among federal judges in analyzing class actions. Yet there is virtually no analysis of the typicality requirement in any of the opinions. This is an important omission from the analysis, because it is the typicality requirement that specifically calls for a claim to claim comparison. See Rule 23(a)(3) (requiring an assessment whether “the claims or defenses of the representative parties are typical of the claims or defenses of the class”).

Consider the following key paragraphs from the en banc majority’s opinion:

At bottom, we can find no persuasive authority for  deeming the certification of a class for settlement purposes improper based on differences in state law. The objectors and our dissenting colleagues nevertheless insist that, despite the prevalence of the shared issues of fact and law stemming from the defendant‘s conduct common as to all class members and each class member‘s resulting injury, states‘ inconsistent treatment of indirect purchaser damages claims overwhelms the commonalities. They advocate this because approximately twenty-five states have not extended antitrust standing to indirect purchasers through Illinois Brick repealer statutes or judicial edict; likewise, some uncertain number of states do not permit an end-run around antitrust standing through claims based on consumer protection and/or unjust enrichment statutes. (See Quinn Supp. Br. on Reh‘g En Banc 21-22.) It follows then, they argue, that a large proportion of the Indirect Purchaser Class lacks any valid claims under applicable state substantive law, and, therefore, cannot “predominantly” share common issues of law or fact with those Indirect Purchasers actually possessing valid claims.

In turn, they insist that a district court must undertake a thorough review of applicable substantive law to assure itself that each class member has “at least some colorable legal claim” (Dissenting Op. at 10) or “has a valid claim” (Quinn  Supp. Br. at 16) before certifying a settlement. But this focus is misdirected. The question is not what valid claims can plaintiffs assert; rather, it is simply whether common issues of fact or law predominate. See Fed. R. Civ. P. 23(b)(3). Contrary to what the dissent and objectors principally contend, there is no “claims” or “merits” litmus test incorporated into the predominance inquiry beyond what is necessary to determine preliminarily whether certain elements will necessitate individual or common proof. Such a view misreads Rule 23 and our jurisprudence as to the inquiry a district court must conduct at the class certification stage. An analysis into the legal viability of asserted claims is properly considered through a motion to dismiss under Rule 12(b) or summary judgment pursuant to Rule 56, not as part of a Rule 23 certification process.

The problem with the majority’s analysis would have been evident if the clear divergence among the claims possessed by class members who have antitrust standing to seek damages and the claims possessed by class members who do not have antitrust standing to seek damages had been viewed through the lens of the typicality requirement.

By comparison, consider the following discussion of typicality in a Fourth Circuit opinion about a putative antitrust class action, Dieter v. Microsoft, 436 F.3d 461 (4th Cir. 2006):

The class action device, which is “designed as an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only,” Gen. Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 155, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982) (internal quotation marks omitted), allows named parties to represent absent class members when, inter alia, the representative parties’ claims are typical of the claims of every class member. To be given the trust responsibility imposed by Rule 23, “a class representative must be part of the class and possess the same interest and suffer the same injury as the class members.” Id. at 156, 102 S.Ct. 2364 (internal quotation marks omitted). That is, “the named plaintiff’s claim and the class claims [must be] so interrelated that the interests of the class members will be fairly and adequately protected in their absence.” Id. at 157 n. 13, 102 S.Ct. 2364. The essence of the typicality requirement is captured by the notion that “as goes the claim of the named plaintiff, so go the claims of the class.” Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 340 (4th Cir.1998) (quoting Sprague v. Gen. Motors Corp., 133 F.3d 388, 399 (6th Cir.1998) (internal quotation marks omitted)).

The typicality requirement goes to the heart of a representative parties’ ability to represent a class, particularly as it tends to merge with the commonality and adequacy-of-representation requirements. See Amchem, 521 U.S. at 626 n. 20, 117 S.Ct. 2231Gen. Tel., 457 U.S. at 157 n. 13, 102 S.Ct. 2364. The representative party’s interest in prosecuting his own case must simultaneously tend to advance the interests of the absent class members. For that essential reason, plaintiff’s claim cannot be so different from the claims of 467*467 absent class members that their claims will not be advanced by plaintiff’s proof of his own individual claim. That is not to say that typicality requires that the plaintiff’s claim and the claims of class members be perfectly identical or perfectly aligned. But when the variation in claims strikes at the heart of the respective causes of actions, we have readily denied class certification. See, e.g.,Broussard, 155 F.3d at 340-44 (holding that plaintiffs could not sustain a class action based on a theory of collective breach of contract because variations in the claims undermined typicality); Boley v. Brown, 10 F.3d 218, 223 (4th Cir.1993) (affirming the district court’s denial of class certification when the resulting harm was dependent on considerations of each class member’s unique circumstances). In the language of the Rule, therefore, the representative party may proceed to represent the class only if the plaintiff establishes that his claims or defenses are “typical of the claims or defenses of the class.” Fed.R.Civ.P. 23(a)(3) (emphasis added).

Thus, it follows that the appropriate analysis of typicality must involve a comparison of the plaintiffs’ claims or defenses with those of the absent class members. To conduct that analysis, we begin with a review of the elements of plaintiffs’ prima facie case and the facts on which the plaintiff would necessarily rely to prove it. We then determine the extent to which those facts would also prove the claims of the absent class members.

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In Sullivan v. DB Investments, Inc., the en banc Third Circuit has affirmed the approval of a nationwide class settlement that includes people with no viable claim.

De Beers allegedly broke federal and state antitrust laws in its marketing of diamonds. After a long period of ignoring litigation in the United States, De Beers orchestrated a nationwide class settlement of the claims against it. After receiving district court approval, that settlement was thrown out by the Third Circuit. But now the Third Circuit, sitting en banc, has decided that the class and the class settlement comport with Rule 23.

I need to sit down with the opinions and examine them more closely, but my initial reaction is that the Third Circuit has erred significantly–and not simply by rejecting arguments advanced by Howard Bashman (which is a mark, but not a criterion, of infirmity).

The federal judiciary has no business overseeing conduct that does not involve a claim upon which relief can be granted. And it is hard to see how a federal court could have evaluated the fairness of a settlement that involved parties with no colorable claim to settle. But these are just initial reactions.

My overriding impression in going over the en banc opinion was that it was a throwback to an earlier era (not too long ago) when federal courts were much less careful than they should have been about Rule 23.

(The sense of a throwback was heightened when I saw the appellate court approvingly cite the district court opinion in McCoy v. Health Net, Inc., 569 F. Supp. 2d 448 (D.N.J. 2008), which approved the settlement of a class action previously vacated by the Third Circuit in Wachtel v. Guardian Life Ins. Co. of Am., 453 F.3d 179 (3rd Cir. 2006). While the two cases are different in many respects, it is worth noting that Judge Smith opposed class treatment in both the De Beers case and the Health Net case. Although the Third Circuit’s decision in Wachtel sounded in Rule 23(c), that may have reflected a compromise among the panelists, as there were serious predominance questions in the underlying class as well.)

[UPDATE: Welcome, readers of "How Appealing." See here for another post on the DeBeers case, contending that a class that contains indirect purchasers with damages claims and indirect purchasers without damages claims fails under the typicality requirement of Rule 23(a)(3).)]

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The Fourth Circuit issued a split decision today in Gray v. Hearst Communications, Inc. affirming the certification of a class of business advertisers. The class members are businesses that purchased advertising in The Talking Telephone Book directories published in various South Carolina markets. The class alleged that they bought this advertising on the basis of the publishers’ representation of its distribution coverage, but that the publisher “knowingly misrepresented its actual distribution, never made a full distribution as promised, and intentionally sought to conceal this deception.” The district court certified a class to pursue three theories: breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair and deceptive trade practices. Judge Shedd authored the Fourth Circuit’s majority opinion affirming certification, an unpublished opinion that was joined in by Judge Moon (senior judge from WDVA sitting by designation). Judge Wilkinson dissented.

The case was argued in December 2010. Eight months between argument and decision is a long time even for a split decision, particularly when the resulting opinions are not lengthy. The wait may have been due to a desire to wait until the Supreme Court decided Wal-Mart v. Dukes, a case discussed by both majority and dissent.

The decision may be of interest to students of appellate practice, inasmuch as the majority opinion attributes dispositive significance to a concession made by counsel for appellant at the oral argument.

For students of class action law, however, the majority opinion should be of less interest. The unpublished opinion contains only a cursory discussion of the predominance requirement of 23(b)(3). Moreover, the analysis examines only certification of the breach of contract claim, disposing of class certification questions surrounding the other two claims in a brief footnote. Also disposed of in another brief footnote at the end of the opinion are appellant’s arguments “that the district court abused its discretion by (a) certifying Gray’s class on a conditional basis, (b) failing to conduct a rigorous analysis of the record, and (c) finding the class satisfied the superiority, typicality, and adequacy requirements of Rule 23(b)(3).”

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John O’Brien reported in Legal Newsline earlier this week that the Fourth Circuit granted the motion of several pharmacy chains to stay its decision in West Virginia v. CVS Pharmacy pending a petition for certiorari. In the underlying case, the Fourth Circuit held, by a 2-1 vote, that a parens patriae action brought by West Virginia’s Attorney General (represented by two private law firms) was not removable under the Class Action Fairness Act (“CAFA”). Judge Niemeyer wrote the opinion, joined by Judge Davis. Judge Gilman (CA6, sitting by designation) dissented. The decision affirms Judge Copenhaver (SDWV).

The issue of when a federal court can look through the form of a parens patriae case to determine that the case actually is a removable “class action” or “mass action” under CAFA may be ripe for review by the Supreme Court, in this or some other case. For a decision that, on a broad level, conflicts with the Fourth Circuit’s decision, see the Fifth Circuit’s split decision in Louisiana v. Allstate Ins. Co., 536 F.3d 418 (2008). (I use the qualifier “on a broad level” because the Fifth Circuit decision held that the removed action qualified as a “mass action” under CAFA whereas the issue in the Fourth Circuit case is whether the removed action qualified as a “class action.” Notwithstanding this difference, the cases have many similarities.)

Additional cases and analysis may be found in an excellent student note by Dwight R. Carswell in Volume 78 of the University of Chicago Law Review.

Prediction: If and when the Supreme Court addresses this issue, the Court’s decision will be in line with the conclusion reached by the Fourth Circuit and Mr. Carswell.

(N.B. The title of the post comes from the concluding paragraph of Judge Gilman’s dissent: “In sum, there is a saying that if something looks like a duck, walks like a duck, and quacks like a duck, it is probably a duck. To my mind this case “quacks” much more like a CAFA class action than a parens patriae case. I would therefore reverse the judgment of the district court and allow this case to proceed in federal court.”)

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