Putting the cart before the horse

Sergio J. Campos is an associate professor of law at the University of Miami School of Law, where teaches civil procedure and remedies.  His current research is on the class action, and his recent papers can be accessed here.

This Term the Supreme Court decided four cases involving the class action, the most famous (or infamous, depending on your perspective) being Wal–Mart Stores, Inc. v. Dukes.  With the Wal–Mart decision, the Supreme Court has made clear that it will subject the class action to significant scrutiny, since the class action takes away a plaintiff’s control over his or her claim and may in fact extinguish the claim entirely.  The class action is also suspect because it may restrict a defendant’s defenses.

But the Court’s insistence on protecting the parties’ rights over their claims and defenses ignores the parties’ other interests at stake.  In particular, both plaintiffs and defendants also care about avoiding the legal violation in the first place.  This interest in avoiding unlawful conduct requires the class action in settings like Wal–Mart where the plaintiffs are numerous but share common questions of liability.  In fact, the Court’s insistence on protecting the parties’ claims and defenses in these settings will undermine what makes these rights worth having in the first place.

In Wal–Mart, the Supreme Court reviewed the class certification of gender discrimination claims under Title VII.  The plaintiffs sought class certification under Rule 23(b)(2), which permits class actions when “final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.”  The Court concluded, however, that certification under Rule 23(b)(2) was inappropriate.  The plaintiffs sought injunctive relief, but also sought back pay, which would require individualized determinations for each plaintiff.  For the Court, providing such individualized relief is a big no-no because Rule 23(b)(2) does not require a court to provide notice and an opportunity to opt out to the class.  The Court noted that, “rightly or wrongly,” when the relief is injunctive, “depriving people of their right to sue in this manner complies with the Due Process Clause.”  But when the relief is “predominately for money damages[,] we have held that absence of notice and opt-out violates due process.”

The Court’s concern for the plaintiffs’ claims also extends to the defendant’s defenses.  The Wal–Mart Court further rejected the lower court’s proposed procedure for determining individual damages among the literally millions of claims.  The district court proposed (and the Ninth Circuit approved) a random sampling of the plaintiffs’ claims to determine the values of the rest, a procedure first used in a case involving the claims of human rights victims against Ferdinand Marcos.  The Court, however, “disapprove[d] that novel project,” and suggested that preventing Wal-Mart from “litigating its statutory defenses” may violate the Rules Enabling Act, which prevents a Rule from “abridg[ing], enlarg[ing], or modify[ing], a substantive right.”

One would think that protecting the parties’ claims and defenses is just common sense, but that would ignore why a class action is needed in cases like Wal–Mart.  The plaintiffs alleged that Wal-Mart’s delegation of pay and promotion decisions to store and regional managers introduced excessive subjectivity that caused female employees to be paid and promoted less than male employees.  The plaintiffs, however, did not assert a disparate impact claim, but argued that Wal-Mart’s awareness of the discriminatory effect of its delegation practices, coupled with its uniform corporate culture, permitted an inference of discriminatory intent.  To prove their claim, the plaintiffs had to invest in developing their legal theories and evidence to support their common allegation of Wal-Mart’s discriminatory intent.  Wal-Mart, however, is no shrinking violet, and likely invested a great deal to show that its practices could not be considered discriminatory.

A plaintiff going alone probably could not afford or finance the investments the plaintiffs ultimately made in the Wal–Mart litigation.  In fact, an individual plaintiff would probably not bring suit at all, since “only a lunatic or fanatic sues for $30.” However, as noted by the Court in Amchem Products, Inc. v. Windsor, “[a] class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone’s (usually an attorney’s) labor.”  It does so by equalizing the stakes between the plaintiffs and defendant.  The class action gives control of the plaintiffs’ claims to class counsel, plus a percentage interest, so that class counsel will invest in the case as if he or she had the entire amount at stake.  In this way the plaintiffs take advantage of the same economies of scale as Wal-Mart in investing in common questions of liability.  In fact, Wal-Mart made its fortune (and, ironically, created the massive class in the litigation) by using increased scale to lower its costs.

The Court’s increased scrutiny of class actions will make it more difficult for plaintiffs to level the playing field with defendants like Wal-Mart, where the defendant has the entire liability at stake but the recovery (the flipside of liability) is divided up among numerous plaintiffs.  Indeed, the notice and opt-out rights the Court now demands make it easier for the plaintiffs to divide themselves to their own detriment.

Consider the most controversial aspect of the decision — the holding (on a five-to-four vote) that the plaintiffs failed to satisfy the “commonality” requirement of Rule 23(a)(2), which applies to all class actions.  A majority concluded that the plaintiffs could not show any “questions of law or fact common to the class,” even though the “commonality” requirement previously had been a low standard — it required only common “questions,” not common answers.  In so holding, the Court concluded that a court was permitted to review the merits if the merits overlapped with the commonality requirement, even suggesting that the court may have to conduct Daubert hearings to determine the admissibility of expert evidence on merits issues.  Other courts have similarly required an inquiry into the merits to show a “predominance” of common issues under Rule 23(b)(3), in part to make sure that the claims can be resolved by common answers, but also because the class action “bestows upon plaintiffs extraordinary leverage, and its bite should dictate the process that precedes it.”

Certainly the class action gives the plaintiffs increased “leverage,” but that’s the point.  It is meant to give the plaintiffs the same leverage as the defendant.  Requiring the plaintiffs to effectively prove their claims before class certification would deny them the benefits of the class action in investing in the merits.  It would put the cart before the horse.

More is at stake than the plaintiffs’ ability to prove their claims.  The point of Title VII liability, like all civil liability schemes, is to deter companies like Wal-Mart from discriminating in the first place.  Arguably other enforcement mechanisms, such as public enforcement, contract, and market pressure, can pick up the slack.  But the Court made no mention of these alternatives.  Instead, in invoking the Due Process Clause and the Rules Enabling Act, the Court suggests that it may be impossible for a court to change claims and defenses to facilitate enforcement.

The interest in enforcement is more than academic.  Who wants protection of a Title VII claim that does nothing to deter gender discrimination in violation of Title VII?  Moreover, who would insist on the protection of a defendant’s defenses under Title VII when it would undermine the whole point of Title VII?  Even defendants have a stake in ensuring optimal enforcement of civil liability schemes like Title VII.  Everyone has an interest in a discrimination-free environment.

A different approach is suggested by another class action case decided this term, Erica P. John Fund, Inc. v. Halliburton.  There the plaintiffs asserted claims of securities fraud based on alleged fraudulent statements made by Halliburton.  The plaintiffs invoked the fraud-on-the-market presumption, a judicial doctrine blessed by the Supreme Court which facilitates class certification by allowing plaintiffs in securities fraud cases to avoid proving reliance on an individual basis.  The basic idea is that reliance can be presumed when the stock is sold on an efficient market where all relevant information is reflected in the price.  The Fifth Circuit, however, required the plaintiffs to prove loss causation — that the alleged fraud caused a price change — to establish the presumption, which would effectively require the plaintiffs to prove an element of their claim to obtain class certification.  The Court rejected such a requirement, concluding that loss causation “has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.”

In reaffirming the fraud-on-the-market presumption, the Court protects a doctrine that puts some limits on a defendant’s right to prove on an individual basis that a plaintiff did not rely on the fraud, which, according to Wal–Mart (and suggested by some scholars), may violate the Rules Enabling Act.  But this result is permitted because the point of the securities laws is enforcement, and making it harder to certify a class would make it harder for investors with small claims to bring suit at all.  In the absence of effective public enforcement, a decrease in securities fraud class actions would cause an increase in the very fraud the plaintiffs’ claims were meant to deter.  Put more broadly, some change to the claims and defenses may be necessary to realize the very purpose of those claims and defenses.  This lesson is not discussed in Halliburton, and blatantly ignored in Wal–Mart, but because the fraud-on-the-market presumption lives to see another day, it is hopefully not forgotten.