By Neal R. Marder and Andrew S. Jick, Winston & Strawn LLP
On March 12, 2012, groundbreaking legislation in Mexico went into effect allowing “collective actions” in which private individuals, non-profits and government agencies can now prosecute claims representatively on behalf of a group of people. These collective action procedures are codified in Book Five of Mexico's Federal Code of Civil Procedure (“Book Five”).
Book Five shares many similarities with Federal Rule of Civil Procedure 23. As expected, there are also significant differences. This article provides a broad overview and comparison of Book Five's key provisions with Rule 23, and concludes by highlighting the implications of the new Mexican collective action procedures for companies doing business in Mexico.
In order to certify a collective action under Mexican law, familiar prerequisites must be satisfied. Book Five contains provisions which roughly correspond to Rule 23's requirements that the class size be sufficiently numerous,1 common questions of fact or law exist among class members,2 and absent class members be adequately represented.3 Although in a strict sense there appears to be no requirement that the representative's claims and defenses be typical of the class, Book Five's provisions requiring “adequate representation,” “no conflict of interest,” and “common facts,” read together, largely overlap with the typicality requirement.4
Book Five contains an additional requirement not found in Rule 23: Whereas U.S. class actions may be brought regarding any substantive claim,5 Mexico's collective actions can only be used by individual class representatives to prosecute consumer claims (including antitrust and financial services claims) and environmental claims.6
Book Five provides for three types of collective actions. The first type are “diffuse” actions, in which the rights prosecuted are indivisible and pertain to an undetermined group of individuals. The second are “collective” actions “in the strict sense” (hereafter “pure collective” actions) in which the rights are indivisible but the group is determined or determinable. The third type are “homogenous individual” actions, in which the rights prosecuted are divisible and the group is comprised of similarly situated individuals.7
In a general sense, diffuse actions and pure collective actions may be compared to Rule 23(b)(1) and (b)(2) actions, to the extent these class actions are concerned with indivisible harm to a class of people, while “homogeneous individual” actions may be compared to Rule 23(b)(3) actions to the extent these actions are concerned with divisible harm to individuals. The following chart illustrates this comparison:
The rules regarding what damages may be sought under the different types of class actions are somewhat different. Under Rule 23(b)(3), individualized monetary damages may be pursued for all types of claims, but under Rule 23(b)(2), the primary form of relief sought must be injunctive or declaratory. Moreover, under Wal-Mart Stores, Inc. v. Dukes, individualized monetary damages under Rule 23(b)(2) may not be awarded.8 Under Book Five, on the other hand, injunctive and declaratory relief are available in all three types of collective actions, but monetary damages appear to be available only for pure collective and individual homogenous actions.9 Moreover, only causes of action arising from a contract relationship may be pursued in a homogenous individual action under Book Five, with damages limited to specific performance, rescission and other appropriate ex contractu relief.10 None of the three types of class actions under Rule 23 contains any such restriction.
In addition, the scope and requirements of actions for monetary damages are different. Similar to the superiority requirement for a class action under Rule 23(b)(3), Book Five requires that a collective action must have greater “convenience” than an individual action,11 and that collective action treatment must be “suitable.”12 But although Book Five requires common questions of law or fact exist among the members of the collectivity,13 there is no specific requirement that such common questions predominate over individual issues—the touchstone for actions under Rule 23(b)(3). This may be tempered to some extent by Book Five's convenience and suitability provisions, but nonetheless, it marks a substantial divergence.
As under Rule 23, Book Five requires judges to issue a class certification order14; however, the timing of this process is drastically different. In U.S. practice, under Rule 23 and other applicable rules of procedure, the defendant has several weeks to respond initially to the complaint; then, typically, after defendant has answered, plaintiffs will move for a class certification order after some initial discovery has occurred. This process can take many months. Under Book Five, by contrast, the defendant has only five days to respond to the collective action complaint. Additionally, the court has only 10 days after the complaint is filed to issue its class certification decision.15 This strongly suggests that the class certification procedure under Book Five is a purely procedural mechanism, such that the court does not conduct a rigorous analysis and, unlike U.S. procedure, examine the merits.
Book Five does not explicitly require, as does Rule 23, that the certification order define the collectivity and the claims, issues or defenses; however, the plaintiff must have alleged a valid collective cause of action, and the judge can refuse certification until the plaintiff has amended the complaint to comply with this requirement.16 Book Five also does not require the judge to appoint class counsel. (Appointment of class counsel is discussed below.)
Like Rule 23, Book Five provides that the court can modify the certification order at any stage of the proceedings.17
Under Rule 23, class members in Rule 23(b)(3) actions may opt out, but class members in Rule 23(b)(1) and (b)(2) actions do not have this option. In diffuse actions under Book Five, members of the collectivity may opt out, but in pure collective and homogenous individual actions, members of the collectivity may instead opt in and obtain damages within 18 months after final judgment.18 This is a very significant departure from U.S. practice.
Book Five requires the judge, after issuing orders certifying the collective action and admitting the complaint, to provide notice to the collectivity by “proper means” given the size and location of class members. Such notice must be “economic, efficient and wide” under the circumstances.19 These requirements are similar to Rule 23(c)’s class notice requirements for Rule 23(b)(3) actions. It is unclear, however, if Book Five requires notice to the individual members of the collectivity as does Rule 23, which can be very expensive to provide.20
In addition, Book Five grants powers to the court in conducting a collective action that are broadly similar to those granted under Rule 23(d). Specifically, courts may require the collectivity representative to give periodic status updates to the collectivity,21 may impose conditions on the representative,22 and may require the representative to alter or amend the collective action allegations in the complaint.23
Like Rule 23, Book Five allows parties to settle a collective action only with the court's approval.24 Under both systems, the court must ensure that the settlement is fair and that the interests of absent class members are protected.25 In addition, as noted, both systems require giving notice of the proposed settlement to the collectivity and require the court to conduct a hearing at which the parties and any objecting members of the collectivity may be heard. 26 However, under Book Five the court is authorized to propose settlement terms and encourage the parties to reach a settlement.27 By contrast, the role of the court in U.S. proceedings is far less active.
Similar to notice requirements under the Class Action Fairness Act of 2005 (CAFA),28 under Book Five, before final approval, the court must give notice to the attorney general and certain designated government agencies, who are also empowered to comment.29
Unlike Rule 23(g), Book Five does not require the court to appoint counsel for the collectivity. Rather, the court's supervisory powers extend to overseeing the representative of the collectivity to ensure that the common representative provides “adequate representation” throughout the proceedings, and to appointing a substitute representative if the original representation is or becomes inadequate.30 The common representative has “broad powers” with regard to representing the collectivity,31 which presumably extend to retaining and supervising legal counsel for the collectivity. In effect, then, the court serves a similar function in ensuring that class counsel adequately represents the class.
In contrast to Rule 23(h)’s open-ended provision that the “the court may award reasonable attorney's fees and … costs,” Book Five sets by schedule a maximum fee for compensation of the collectivity's legal representative and the common representative.32 This fee schedule is geared to the daily minimum wage for workers in Mexico City and provides a sliding scale based on the amount of the settlement or judgment. If the parties settle, the amount of the fee is determined during negotiations, subject to the statutory maximum. If plaintiffs obtain a judgment, the court determines the amount of attorneys' fees, subject to the statutory maximum, giving consideration to the quality of work performed, the complexity of the case, the size of the collectivity, the benefit received by the collectivity, and other circumstances.33 Depending on the size of the settlement or judgment, the maximum fee ranges from 11% to 20% of the amount of the settlement or judgment.34
Although Rule 23 does not provide a maximum fee, and thus attorney fee awards can and often do exceed 11% or even 20% of the size of a settlement or judgment, some courts have adopted 25% as a “benchmark for a reasonable fee award,” which may be adjusted upward or downward in consideration of all relevant circumstances.35 In determining what is a “reasonable” amount under Rule 23(h), courts generally consider similar factors as those listed under Book Five.36
Collective actions in Mexico are subject to many of the same or similar procedural requirements as class actions in the United States. But companies must be aware of at least three significant differences that may have a major impact on their potential liability in a collective action under Mexican law.
First, the short timeframe given to defendants to respond to a collective action complaint—and thus, to oppose certification—means that defendants will not have the opportunity, after being sued, to conduct exhaustive factual discovery. Defendants sued in the United States have months during which to develop legal strategies, interview and depose witnesses, and conduct written discovery. Legal strategies and evidence gathered during this time period often can be used to defeat class certification, reduce the size of a potential class, or position the company for a favorable settlement. In particular, evidence that the representative plaintiff's situation is unique from the rest of the class, for example, or that a conflict of interest exists between the representative and the class members, or that class counsel is ill-equipped to handle the litigation can change the tide of the litigation and put the defendant in the driver's seat.
Defendants sued in Mexico, however, will not have the luxury of time in which to gather evidence. Instead, companies will be forced to rely heavily on publicly available information or evidence that can be hastily gathered. As a result, pre-suit investigation will take on critical importance. Companies must watch for early warning signs of potential lawsuits, including by paying attention to consumer complaints or demand letters and by monitoring internet forums and social media. In addition, companies should periodically conduct internal audits of their business practices to ensure compliance with relevant laws and regulations.
Second, the opt-in period extending 18 months after judgment means that a defendant's ultimate liability may be difficult to predict. This will be particularly true where the size of the collectivity is difficult to measure. Under these circumstances, defendants may face an inordinate amount of pressure to settle claims before judgment, and may be forced to accept unfavorable settlement terms in order to avoid unpredictable liability.
Finally, unless homogeneous individual and pure collective actions are interpreted by developing case law to require predominance of common issues over individual issues, certification of classes for monetary damages may occur more easily and with greater frequency in Mexico than in the United States. Class actions commonly challenged in the U.S. on predominance grounds include claims for fraud, product liability and breach of contract. Additionally, the existence of affirmative defenses, such as statutes of limitations, assumption of risk and comparative fault, or the assertion of counterclaims can convince a United States court to deny class certification.
Although a Mexican court could find that the existence of such individual issues renders the action unsuitable for collective action treatment (which, as noted above, is similar to the United States superiority requirement), courts in the United States more often deny certification on predominance grounds than superiority grounds. Companies doing business in Mexico therefore face a comparatively greater risk that collective actions for monetary damages will be certified.
In light of the short timeframe defendants are allotted to investigate claims, the unpredictable liability they face if a judgment is obtained, and the increased potential for certification of monetary damages collective actions, companies doing business in Mexico must familiarize themselves with Book Five's procedures and consider the risks of being forced to defend against a collective action lawsuit.
Neal R. Marder is a partner in the Los Angeles office of Winston & Strawn LLP. He concentrates his practice on complex business and commercial litigation, white collar, securities, internal investigations, and antitrust, with an emphasis on the defense of class actions. Marder can be reached at firstname.lastname@example.org.
Andrew S. Jick is an associate at Winston & Strawn in the same office. Jick concentrates his practice on complex business and commercial litigation, including the defense of class actions, and can be contacted at email@example.com.
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