SECURITIES CLASS ACTIONS: THE PLAINTIFFS’ PERSPECTIVE – Part II

This is Part 2 in a 4 part series on Securities Class Actions by Martin Chitwood.

Class Actions: Procedural Issues

Rule 23 of the Federal Rules of Civil Procedure (hereinafter “Rule 23”) governs federal class actions; however, the Local Rules of the Northern District of Georgia also contain important provisions specific to class actions.  Both should be thoroughly reviewed before filing a class action complaint.

Local Rule 23.1A requires that each class action complaint contain the designation “Complaint—Class Action” in the style of the case.  L.R. 23.1A, N.D. Ga.  The complaint must also contain a section titled “Class Action Allegations” that states the following:

(1) The section of Rule 23 of the Federal Rules of Civil Procedure which is claimed to authorize maintenance of suit by class action.

(2) The size (or approximate size) and definition of the alleged class.

(3) The basis of the named plaintiff’s or plaintiffs’ claim to be an adequate representative of the class, or, if defendants, the basis of the named defendant’s or defendants’ claim to be an adequate representative of the class.

(4) The alleged questions of law and fact which are common among members of the class.

(5) The allegations necessary to satisfy the criteria of section (b)(1) or (b)(2) of Rule 23 or to support the findings required by section (b)(3) of Rule 23.

(6) For actions requiring a jurisdictional amount, the basis for determination of that amount.

L.R. 23.1A, N.D. Ga.  The complaint must also define the class in a manner that is precise, clear, and presently ascertainable.  The definition of the class is of critical importance because it identifies both the persons entitled to relief and those to be bound by a final judgment.  The appropriate class definition may also be affected by other factors, such as the applicable law and choice-of-law considerations, which may sometimes necessitate the use of sub-classes.  See generally Manual for Complex Litigation, Third, § 30.14, at 217-218 (1995).

Before a case may proceed as a class action, the plaintiff must move for, and receive, “certification” of the class by the court.[1]  Although Rule 23(c) provides only that the court should determine “as soon as practicable” whether an action may be maintained as a class action, Local Rule 23.1B requires a plaintiff to move for class certification within ninety days after filing the complaint.  Whether and when a class is certified and how it is ultimately defined significantly affects the management and outcome of the litigation.  Early certification of a class is crucial, because it can affect who the parties are, the timing and scope of discovery and motion practice, and the approach to settlement negotiations.  See generally Manual for Complex Litigation, Third, § 30.14, at 217-218 (1995).

The defendants in a purported class action often seek a court order early in the litigation limiting precertification discovery to specific class-related issues and staying any discovery on the merits of the action until after the court rules on the plaintiff’s motion for class certification.  However, this type of bifurcated discovery procedure is problematic because discovery relating to class issues usually overlaps substantially with merits discovery.  For example, an important factor in determining whether a class should be certified is the similarity between the claims of the class representatives and those of the other class members — an inquiry that often requires discovery on the merits of the action.  Id. at 215-216 (citing Chateau de Ville Prod., Inc., v. Tams-Witmark Music Library, 586 F.2d 962 (2d Cir. 1978)).  As a result, bifurcating class and merits discovery leads to unnecessary duplication of discovery and disputes among counsel over the appropriate scope of discovery at the class certification stage.  See Manual for Complex Litigation, Third, § 30.12, at 215.

The plaintiff should prepare for the possibility that the court will hold an evidentiary hearing before ruling on a motion to certify a class.  The evidentiary hearing serves the limited purpose of allowing a court to assess how class claims will be presented and defended at trial.  Manual for Complex Litigation, Third § 30.13, at 217.  Consistent with the standard of review on a motion for class certification, the purpose of the hearing is not to evaluate the merits of the plaintiff’s claims; rather, the court will examine how the plaintiff intends to prove his case, not whether the plaintiffs can prove the case.  Id.  See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78 (1974) (holding that courts have “no authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.”).

[1]  Although Rule 23 does not use the term “certification,” it is commonly used to refer to the process by which a court finds that an action has satisfied the requirements to proceed as a class action under Rule 23.  See Manual for Complex Litigation, Third, § 30.14, at 217-218 (1995).

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