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Beyond Knowles: Fairness to Absent Class Members And the Manipulation of Class Action Claims

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By Michael G. Biggers and Sarah April, Bryan Cave LLP

The U.S. Supreme Court unanimously held March 19 in Standard Fire Insurance Co. v. Knowles, 133 S. Ct. 1345 (2013), that putative class counsel cannot avoid removal of a state case through a precertification stipulation purporting to limit damages to less than the federal jurisdictional threshold amount.

In Knowles, the plaintiff filed a class action in Arkansas state court against Standard Fire Insurance. The complaint stipulated that the class would seek less than $5 million in damages; this was an attempt to prevent the case from being removed to federal court under the Class Action Fairness Act (CAFA), which permits class actions to be removed when the aggregated amount of claims in the case exceeds $5 million.

Standard Fire nonetheless sought removal, but the federal court remanded the case to state court based on the stipulation to limit damages.

The Supreme Court, in a concise ruling by Justice Breyer, held that removal to federal court was appropriate because “stipulations must be binding.” This holding is based on the narrow reasoning that a class representative cannot legally bind unnamed class members until the class is certified. Id. at 1350.

Plaintiff as Master of Complaint
v. Fairness to Absent Class Members

Lurking in Knowles, however, is a tension between the long-standing precedent that a plaintiff is the master of his complaint and the judicial system's interest in various principles, including fairness to absent class members. Knowles's counsel argued that removal was inappropriate because the Supreme Court precedent has long recognized that a plaintiff is the master of his complaint and can limit his claims. See Brief for Respondent Knowles, Standard Fire Ins. Co. v. Knowles, No. 11-1450, at 17, 19-20 (U.S. July 2, 2012).

Addressing concerns related to protecting the silent class members, Knowles's counsel argued that other procedures are in place to protect the class—the named plaintiff can be removed if inadequate; absent class members can opt out; and a defendant can seek removal again if the complaint is amended to increase the amount in controversy. Transcript for Oral Argument in Standard Fire Ins. Co. v. Knowles, No. 11-1450, at 50:2-24 (U.S. Jan. 7, 2013).

Conversely, Standard Fire's counsel argued that the plaintiff in a putative class is in fact not the master of absent putative class members prior to certification and therefore cannot bind them through a damages stipulation. Id. 9:23-10:22. Standard Fire relied on a recent Supreme Court decision—Smith v. Bayer Corp., 131 S. Ct. 2368, 2382 (2011)—for the proposition that class members are not parties to the litigation prior to certification, and therefore the plaintiff has no ability to bind them through stipulation. Id. 10:23-11:18.

The Knowles decision failed to directly address this tension. However, during arguments, Justice Kagan foreshadowed that the Supreme Court may have to address the tension in the near future. In response to Standard Fire's arguments, she expressed concern that although the case purportedly addressed only stipulations limiting damages, there is a slippery slope and future cases may need to address stipulations regarding the named plaintiff's ability to define the claims and to name defendants. Id. at 15:4-21.

Justice Kagan's concerns are well-warranted. For years, courts have been attempting to strike a balance in a class context between acknowledging a plaintiff's right to control his or her own complaint, such as control in defining claims or naming defendants, and judicial protection of absent class members.

On the one hand, judicial protection of the absent class members is an important factor in the certification process because courts are directed to ensure that “parties will fairly and adequately protect the interests of the class.” In re Teflon Products Liability Litigation, 254 F.R.D. 354, 368 (S.D. Iowa 2008) (quoting Fed. R. Civ. P. 23(a)(4)). Rule 23(a) requires courts to determine whether the named plaintiffs are appropriate representatives of the class whose claims they wish to litigate and seeks to uncover conflicts of interest between named parties and the class they seek to represent. Wal-Mart v. Dukes, 131 S. Ct. 2541, 2550 (2011); Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997). “[A] class representative must be part of the class and ‘possess the same interest and suffer the same injury’ as the class members.” Amchem, 521 U.S. at 625-26 (quotingSchlesinger v. Reservists Comm. to Stop the War, 418 U. S. 208, 216 (1974)).

Similarly, courts are concerned with the adequacy of counsel and ensuring counsel do not place their own interests ahead of class members. This issue most often comes up in the early settlement context. The class action mechanism can often tempt class counsel to settle early to “avoid substantial risk and maximize their hourly return.” Louis W. Hensler, Class Counsel Self-Interest and Other People's Money, 35 U. Mem. L. Rev. 53, 69 (2004).

If class counsel takes a case all the way to trial and the class loses, the attorney receives no fee. Id. Thus, the Supreme Court has recognized that “with an already enormous fee within counsel's grasp, zeal for the client may relax sooner than it would in a case brought on behalf of one claimant.” Id. (citing Ortiz v. Fibreboard Corp., 527 U.S. 815, 852 n.30 (1999)); see also In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Products Liab. Litig., 55 F.3d 768, 801 (3d Cir. 1995) (stating that the conventional method in calculating class attorneys' fees gives class counsel “incentives to act earlier than [the class] would deem optimal,” and that “the settlement process may amount to a covert exchange of a cheap settlement for a high award of attorney's fees”).

On the other hand, it is historically understood in various contexts that the law allows a plaintiff and plaintiff's counsel to be the masters of their own complaint, as the plaintiff in Knowles made clear in his argument. A tension between these interests comes to a boil when a class representative and counsel make decisions that could sacrifice the rights or interests of absent class members.

Courts Struggle Over Claim Splitting

One persistent issue that courts struggle with in this context is claim splitting. Where a class representative and his or her counsel choose to pursue only certain claims to improve the prospects for certification, that choice could result in precluding some of the class members from pursuing any of the dropped claims under the theory of claim preclusion.

A number of courts have held that where a class representative chooses to pursue only some of the available legal theories in order to facilitate certification, that choice renders the representative inadequate. See, e.g., Feinstein v. Firestone Tire and Rubber Co., 535 F. Supp. 595, 606-07 (S.D.N.Y. 1982) (denying certification for representatives asserting limited set of claims); Brown v. Kerkhoff, 279 F.R.D. 479, 495-96 (S.D. Iowa 2012);Fosmire v. Progressive Max Ins. Co., 277 F. R.D. 625, 634 (W.D. Wash. 2011).

These holdings are based on court views that a class representative seeking only partial available relief for the class is possibly “waiving, on behalf of hundreds of class members, any possible recovery of potential substantial damages—present or future.” Krueger v. Wyeth, Inc., No. 03cv2496 JLS (AJB), 2008 BL 298174, at *3 (S.D. Cal. Feb. 19, 2008).

This possibility of waiver calls into question whether the class has “adequate representation,” because the decision could possibly prejudice some class members, and prevents the class representative's interests from being fully aligned with those of the entire class. In re Teflon Products Liability Litigation, 254 F.R.D. 354, 368 (S.D. Iowa 2008); see also Thompson v. American Tobacco Co., 189 F.R.D. 544, 550-51 (D. Minn. 1999) (“[T]he possible prejudice to class members is simply too great … to conclude that the named Plaintiffs' interest are aligned with those of the class.”).

Moreover, even assuming splitting claims would not subsequently bar class members from obtaining further relief through the dropped claims, some courts feel that the class representative who dropped the claims “holds different priorities and litigation incentives than a typical class member.” Drimmer v. WD-40 Co., No. 06-CV-900 W (AJB), 2007 BL 198124, at *3 (S.D. Cal. Aug, 24, 2007); see also Thompson, 189 F.R.D. at 550 (finding that when plaintiffs have jeopardized a class member's potential claims for personal injury damages, their interests are “antagonistic” to those of the class). Thus, some courts determine that simply the “the existence of claim splitting constitutes a compelling reason to deny class certification” under Rules 23 because it shows that the class has inadequate representation. Krueger, 2008 BL 298174, at * 3.

Notwithstanding these policy concerns, denial of certification in these circumstances can be considered harsh where the representative is simply attempting to craft a complaint that will have the highest likelihood of overcoming any certification challenges.

Seventh Circuit Ruling
May Offer a Compromise

With these competing interests in mind, the Seventh Circuit has attempted to devise a compromise by which courts can assess whether a class representative is truly inadequate when crafting a class complaint and certification motion by limiting certified claims to overcome barriers to certification. In Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006), the court held that a class representative was not inadequate where she sought purely statutory damages and not compensatory damages under a negligence theory.

The court stated that “[r]efusing to certify a class because the plaintiff decided not to make the sort of person-specific arguments that render class treatment infeasible would throw away the benefits of consolidated treatment.” Id. at 953. The court then instructed that “[u]nless a court finds that personal injuries are large in relation to statutory damage,” a class representative should be allowed to drop claims for compensatory damages so that he or she can attain class certification. Id.

This resolution, according to the court, would allow class members with large compensatory injuries to opt out when their numbers are few, preventing class certification when all or almost all of the claims are likely to be large enough to justify individual litigation. Id.

While this solution attempts to resolve the claim-splitting issue, it fails to address certain problematic aspects of the situation:

  • The standard is subjective. What is a substantial enough number of class members with other valuable claims to justify rejection of the class? Conversely, what is a small enough number of such class members to justify proceeding as a class, with those potential members free to opt out and pursue their own claims? Without a clear standard, courts and parties necessarily find it difficult to know when certification is appropriate.

  • What happens when the few members with larger claims fail to opt out because they do not understand their claims or the implications of preclusion and then later seek to pursue their own claims? Their subsequent claims would still be subject to dismissal as claim splitting, leaving these members that had a potentially large recovery unable to pursue those claims. See, e.g., Feinstein, 535 F. Supp. at 606-07.

While arguably flawed, and non-binding on other circuits, more than anything the Seventh Circuit decision exemplifies the courts' struggle to find a resolution to “an inherently insoluble certification problem.” Feinstein, 535 F. Supp. at 606-07. It is a problem that arises in contexts beyond defendants' efforts to defeat certification.See In re Uponor, Inc. F1807 Plumbing Fittings Products Liability Litig., Nos. 12-2761, 12-3179, 2013 BL 150623, at *5-7 (8th Cir. June 7, 2013) (rejecting objection to settlement by group of class members protesting failure to assert California statutory cause of action). Knowles acknowledged this issue, yet failed to give clear guidelines.

In light of lower courts grappling with these certification issues, Justice Kagan's concerns are likely prophetic. The Supreme Court will probably again be confronted with these issues, and in order to create greater consistency and predictability in the class certification process the Court will need to shed more light on how lower courts should resolve the tension between a plaintiff's right to control his or her own complaint and the judicial system's interest in fairness to absent class members.

Michael G. Biggers, a partner at Bryan Cave in St. Louis, practices primarily in the area of complex business litigation. He is available at mgbiggers@bryancave.com.

Sarah April, an associate in Bryan Cave's Denver office, focuses on commercial litigation. She can be contacted at sarah.april@bryancave.com.

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