Articles from September 2012

In a decision likely to be influential beyond both its jurisdictional and factual settings, the Second Circuit Court of Appeals has held that securities fraud plaintiffs need not prove that fraud-on-the-market applies in order to satisfy the predominance requirement for certification of a settlement class, the Second Circuit Court of Appeals held. In re Am. Int’l Grp., Inc. Secs. Litig., No. 10–4401 (2d Cir. Aug. 13, 2012) (available here). The influential Second Circuit also underscored the pragmatic doctrine whereby settling class action parties, despite being required to establish most elements of certification to the same degree of proof as in a contested certification motion, are not required to establish the manageability of the settled action. See Slip op. at 21 (“with a settlement class, the manageability concerns posed by numerous individual questions of reliance disappear”).

The unanimous opinion, written by Circuit Judge Gerard R. Lynch, explained that “a Section 10(b) settlement class’s failure to satisfy the fraud-on-the-market presumption does not necessarily preclude a finding of predominance,” and “the fact that the plaintiff class is unable to invoke the presumption, without more, is no obstacle to certification.” Id. at 23-24. Judge Lynch was joined by Circuit Judges Ralph K. Winter and Robert A. Katzman. The three-judge panel members were appointed, respectively, by presidents Obama, Reagan, and Clinton.

Though decided in the context of securities litigation, the American Int’l decision will likely function as a potent counterpoint in any circumstance where a class action settlement objector attempts to invoke the irrelevant “manageability” criterion to urge courts to deny motions for settlement approval.

Almost lost amidst the holiday weekend news vortex, last Friday the United States Supreme Court agreed to hear a case that is likely to add to the Court’s aggressive remaking of class action jurisprudence. See Knowles v. The Standard Fire Ins. Co., No. 11-04044, Petit. for Writ of Certiorari (available here). In addressing the damages threshold under the Class Action Fairness Act of 2005 (CAFA) for invoking federal jurisdiction, Knowles could result in a substantial change in the division of class actions between state and federal courts. See 28 U.S.C. § 1332(d) (“district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000”). 

The Knowles case addresses whether a named plaintiff can effectively promise to seek less than $5 million in aggregate damages, not just on his own behalf but on behalf of all class members, and thereby prevent the case’s removal under CAFA. In the underlying case, the named plaintiff alleged only state-law claims and filed a stipulation — purportedly binding on all prospective class members — that less than $5 million in aggregate damages would be sought in the action. The Eighth Circuit upheld the plaintiff’s stipulation, even though the defendant was able to show that the amount in controversy, absent the stipulation, would exceed $5 million. The plaintiff accomplished the “legal certainty” requirement by seeking to recover damages for a period shorter than the applicable statute of limitations. Strangely, the defendant’s calculation of the aggregate amount in controversy only exceeded the threshold by a mere $24,150.

Knowles is expected to test the maxim that a plaintiff is the “master” of his or her complaint — all the more with the claims of prospective, not-yet-represented class members also at stake. See, e.g., Brill v. Countrywide Home Loans, Inc., 427 F.3d 446, 449 (7th Cir. 2005) (“[A] removing defendant can’t make the plaintiff ’s claim for him; as master of the case, the plaintiff may limit his claims (either substantive or financial) to keep the amount in controversy below the threshold.”). Existing caselaw appears to affirm the plaintiff’s position that the “master of his/her complaint” principle should be strictly interpreted. Potentially decisive will be how the Court applies the body of authority holding that class counsel functions in something other than a pure stranger relationship vis-à-vis prospective class members, notwithstanding that a formal attorney-client relationship does not attach pre-certification.

The case will be argued sometime this winter, with a decision expected in mid-2013.