News & Developments
Securities Class Actions Settlements: 2008 Review and Analysis
Cornerstone Research issues report showing that the value and number of federal securities class settlements declined in 2008.
Stay Under Federal Arbitration Act Held Inapplicable Where Agreement Containing the Arbitration Clause and Prohibition on Class Acts Was Unconscionable
On March 24, 2009, Judge Thomas P. Griesa of the Southern District of New York denied the defendants’ motion to stay a class action and to compel the plaintiff to arbitrate his claims in Fensterstock v. Education Finance Partners, 08 Civ. 3622(TPG).
The plaintiff alleged that the defendant’s improper determination of the portion of a loan payment should be applied to principal versus interest results in a hidden penalty on the loan because it causes the principal to be repaid more slowly than it should be.
The subject promissory note requires arbitration if claims brought under any theory of law and includes a prohibition against class actions. Finding that the stay requirement of the Federal Arbitration Act (relating to cases brought in federal court) is inapplicable where an agreement is deemed unconscionable, the court applied California law (as provided in the promissory note) and determined that the promissory note was unconscionable under the three elements set forth in Discover Bank v. Superior Court, 36 Cal. 4th 128, 162-63 (2005), namely (1) if the waiver is found in a consumer contract of adhesion;(2) in a setting in which disputes between the parties predictably involve small damage amounts; and (3)it is alleged that the party with superior bargaining power has carried out a scheme to purposely cheat large numbers of consumers out of small amounts of money.
New York Court holds that Relationship Between Absent Class Members and Class Counsel Different than Typical Attorney Client Relationship
A recent New York Supreme Court case held that an absent class member is not entitled to the files of co-lead counsel accumulated during the course of two consolidated federal class actions, nor was the absent class member entitled to attorney work product. Wyly v. Milberg Weiss Bershad and Schulman, LLP, 2007 WL 4533380 (NY Supr., App. Div., Dec. 27, 2007). After a federal court approved a settlement and an award of attorneys' fees and dismissed the case, a class member filed a collateral attack on the settlement by filing a special proceeding in state court seeking a judgment directing class counsel to turn over its files. The hearing court granted the petition and directed class counsel to turn over the files finding that generally a client has full access to those files at the conclusion of the attorney/client relationship.
The appellate court reversed the lower court and rejected the argument that an absent class member was entitled to the same range of rights and privileges that a traditional client was entitled to-especially after the case was closed. The Wyly court stated that it has been observed by courts and commentators alike, that the relationship between appointed counsel and an absent class member in a class action differs substantially from that found in a traditional attorney/client relationship.
Although the court acknowledged that an absent class member is entitled to some of the benefits of an attorney/client relationship, such as the right to privileged communications with class counsel and the prohibition against attempts by defendants' counsel to communication with him, he has no right to direct the course of the litigation, testify at trial, participate in discovery or dismiss class counsel. The court noted that if a more traditional attorney/client relationship was sought, the absent class member was free to hire his own individual counsel or opt out of the class action altogether if he was unsatisfied with his limited role.
In order to avoid the unduly burdensome potential, even after the end of litigation, that would result from a multitude of requests from absent class members for counsel's entire file, the court adopted a requirement that absent class members establish their entitlement to class counsel's file on a case-by-case basis.
Two Recent Class Certification Appeals Were Decided with Opinions that Are Likely to Echo Beyond the Particular Cases
In In re New Motor Vehicles Canadian Export Antitrust Litig., __ F.3d __, 2008 WL 820822 (1st Cir. Mar. 28, 2008), a divided First Circuit panel vacated the order certifying a class of indirect purchasers and remanded the case back to the district court. As noted by Judge Torruella in his dissenting opinion, the majority’s opinion blurs the boundaries between class certification and summary judgment, __ F.3d __, 2008 WL 820822, at *23, and is likely to encourage district courts to defer decisions on class certification until discovery is complete.
The First Circuit characterized the plaintiffs’ theory of injury (and damages) as “novel and complex,” __ F.3d __, 2008 WL 820822, at *18, which therefore required a more “searching injury” to test whether the plaintiffs could use common proof to establish its viability. __ F.3d __, 2008 WL 820822, at *17. Although discovery had not been completed at the time of the initial class certification decision, discovery has now been completed, and the First Circuit therefore remanded the case back to the district court for further findings. The district court is to consider how the plaintiffs’ theory of injury and damages is likely to play out at trial – to give the court a better sense of whether common proof could establish injury and damages. __ F.3d __, 2008 WL 820822, at *20. This decision questions the value of bifurcating class- and merits-related discovery, a practice that is likely to be curtailed, at least in subsequent antitrust cases brought in the First Circuit.
In McLaughlin v. American Tobacco Co., ___ F.3d ___, 2008 WL 878627 (2d Cir. Apr. 3, 2008), the Second Circuit reversed a decision certifying a class of smokers who brought a RICO-based fraud case alleging that cigarette manufacturers had deceptively marketed “light” cigarettes as being healthier (or less dangerous) as “full flavored” cigarettes. The Second Circuit’s opinion sheds light on the applicability of securities fraud cases to consumer fraud actions, and on the use of fluid recovery to aggregate plaintiffs’ claims.
Contrasting plaintiffs in securities fraud cases to those bringing consumer fraud cases, the Second Circuit noted that plaintiffs in a consumer case cannot necessarily rely on the presumption that the market operates efficiently. Here, the court noted, the class members may have chosen to purchase light cigarettes for any number of reasons, not necessarily due to the defendants’ marketing campaign. ___ F.3d ___, 2008 WL 878627, at *5. The court also noted that the plaintiffs’ individual levels of awareness and knowledge would also preclude a presumption of reliance that would enable the plaintiffs to prove causation through common evidence. ___ F.3d ___, 2008 WL 878627, at *5-*6.
The court also rejected the plaintiffs’ proposal to prove collective damages on a classwide basis, which would generate an aggregate pool from which individual plaintiffs would claim their share. The court noted that such a system of “fluid recovery” has been prohibited in the Second Circuit since Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1008 (2d Cir. 1973). ___ F.3d ___, 2008 WL 878627, at *11. The court reaffirmed that the type of aggregate determination proposed would violate both the Rules Enabling Act and the Due Process Clause, as bearing “little or no relationship to the amount of economic harm actually caused by defendants.” Id.
Subprime Mortgage Litigation Study
February 14, 2008 – Navigant Consulting, Inc. (NYSE:NCI), a global provider of business, regulatory and financial advisory services, released a study today that shows the number of subprime-related cases filed in federal courts dramatically outpacing the savings-and-loan (S&L) litigation of the early 1990s.
According to the Navigant study, the number of subprime-related cases filed in 2007 already equals half of the total 559 S&L cases handled by the Resolution Trust Corporation (RTC) over a multiple-year period. The subprime numbers represent only federal court filings.
