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November 20, 2012 Articles

Dealing with Competing Class Actions

Knowing the tools available for competing class actions will give defense counsel and the defendant the best opportunity to tailor a successful strategy.

By Michael R. Pennington and John E. Goodman

The problem of competing class actions presents a variety of challenges and options for the defendant. There is no one-size-fits-all response, but knowing the tools available will give defense counsel and the defendant the best opportunity to tailor a successful strategy to deal with a multiplicity of class litigation involving overlapping or repetitive claims.

A Race to Judgment
One option, of course, is to simply defend each action separately. In this scenario, the first action to reach judgment on the merits, whether by settlement or litigation, will generally be conclusive as to all class members despite any competing litigation that remains pending, by virtue of res judicata and claim preclusion principles and the Full Faith and Credit Clause of the United States Constitution. See, e.g., Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367 (1996); Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373 (1985).

The preclusive effect of settlement creates an undeniable incentive among competing class counsel to be the first to reach settlement. Critics of this phenomenon argue that it undercuts the interests of class members by setting up opportunities for a defendant to pursue a so-called reverse auction, forcing class counsel to bid against each other to see who is willing to offer the cheapest overall class settlement. See, e.g., Samuel Issacharoff, “Governance and Legitimacy in the Law of Class Actions,” 1999 Sup. Ct. Rev. 337, 388. From the defense perspective, simultaneous negotiation with class counsel in multiple cases is inadvisable and can lead to unnecessary difficulties in obtaining approval of the resulting settlement in the face of inadequate representation claims and other objections by counsel with whom settlement is not reached. See, e.g., Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, 282 (7th Cir. 2002) (Posner, J.) (reversing settlement approval under circumstances suggestive of reverse auction); Figueroa v. Sharper Image, 517 F. Supp. 2d 1292, 1323 (S.D. Fla. 2007) (same). However, the fact remains that a defendant facing numerous class actions has strong express or implied bargaining leverage with whichever set of counsel the defendant chooses to negotiate: Be the first to cut a deal, class counsel, or risk being left out entirely.

This leverage is certainly not unchecked. All requirements of Federal Rule of Civil 23, other than manageability, must still be satisfied by whatever settlement is reached. See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997). And the settlement must still be found to be fair and reasonable to the class upon independent review by the trial court after the class is provided with the best practicable notice and the opportunity to object. Id. at 625–26. The settlement must also survive any appeal, and would-be class counsel whose cases are being settled out from under them are highly likely to appeal. To avoid this, defendants sometimes try to bring all would-be class counsel into the settlement by agreement once a deal has tentatively been struck with one set of class counsel. Further, it is not unheard of for courts in first-filed class actions to enjoin settlements, or even settlement negotiations, in subsequently filed class actions, although the scope of their authority to do so is hardly settled. See, e.g., In re Checking Account Overdraft Litig., No. 09-MD-02036-JLK, 2012 WL 1564007, at *8–11 (S.D. Fla. Apr. 30, 2012); In re Managed Care Litig., 236 F. Supp. 2d 1336, 1343 (S.D. Fla. 2002). But cf. Negrete v. Allianz Life Ins. Co. of N. Am., 523 F.3d 1091, 1098 (9th Cir. 2008) (vacating order enjoining settlement activity in a subsequently filed class action); Grider v. Keystone Health Plan Cent., Inc., 500 F.3d 322, 326–27 (3d Cir. 2007) (same).

This “race to judgment” scenario has shortcomings. If class settlement is not the client’s goal, the defendant’s ability to control which case goes to judgment first can be quite limited. Often, the cases in the venues that are the worst from the defendant’s perspective are the cases that are put on the fastest tracks by plaintiff-friendly judges. Moreover, the cost of defending multiple class actions at once can be prohibitive for all but the largest defendants. Worse yet, defeating class certification in one jurisdiction will generally not have preclusive effect in another jurisdiction, particularly as between state and federal court class actions. See Smith v. Bayer, 131 S. Ct. 2368, 2381–82 (2011).

First-to-File Rule
Where the competing class actions are each within the same state or are each filed in or removable to federal court, traditional principles of comity between courts can often provide an opportunity to limit the litigation to the first-filed case, or at least consolidate all of the litigation before the judge with the first-filed case. How attractive this option is will depend, of course, on the defendant’s evaluation of the desirability of the venue and the trial judge in the first-filed case.

First, there is a long-standing rule of comity whereby a federal court in which a substantially identical action is filed has discretion to stay, dismiss, or transfer the second-filed action in deference to the first-filed action. This is known as the “first-to-file” or “first-filed” rule. See, e.g., Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180 (1952). The rule provides that when actions involving nearly identical parties and issues have been filed in two different district courts, the court in which the first suit was filed should generally proceed to judgment.” Zide Sport Shop of Ohio, Inc. v. Ed Tobergte Assocs., Inc., 16 F. App’x 433, 437 (6th Cir. 2001); accord Cadle Co. v. Whataburger of Alice, Inc., 174 F.3d 599, 603 (5th Cir. 1999); Save Power Ltd. v. Syntek Fin. Corp., 121 F.3d 947, 950 (5th Cir. 1997); Sutter Corp. v. P & P Indus., Inc., 125 F.3d 914, 920 (5th Cir. 1997). The potential use of the rule is less settled when one action is pending in state court (Compare, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 675 F.2d 1169, 1174 (11th Cir. 1982), with Kaiser Found. Health Plan, Inc. v. Shelton, No. 09-00309 JMS LEK, 2009 WL 3018704, at *6 (D. Haw. Sept. 17, 2009)). However, the Class Action Fairness Act (CAFA) and the Securities Litigation Uniform Standards Act (SLUSA) now make it easier to get most class actions removed to federal court than once was the case, mitigating this problem to a large degree.

The degree of identity of parties and claims is a significant factor in the application of the first-to-file rule. See, e.g.,Mann Mfg., Inc. v. Hortex, Inc., 439 F.2d 403, 407 (5th Cir. 1971). How much is a subject of some disagreement. Compare Fat Possum Records, Ltd. v. Capricorn Records, Inc., 909 F. Supp. 442, 445 (N.D. Miss. 1995) (holding that “a substantial overlap of the content of each suit is sufficient”), with Owens v. Blue Tee Corp., 177 F.R.D. 673, 679 (M.D. Ala. 1998) (finding the rule inapplicable where an earlier filed suit involved certain identical claims but where two of the three plaintiffs in the second suit were not parties to the first suit).

Most states have similar principles of comity among courts of equal jurisdiction, which, as a matter of jurisdiction, discretion, or statute, can give precedence to the court first seized of jurisdiction. See, e.g., Ex parte Liberty Nat’l Life Ins. Co., 631 So. 2d 865 (Ala. 1993) (court first seized of jurisdiction over a controversy has exclusive jurisdiction, through and including entry and enforcement of judgment in the first-filed action); Tunica Pharmacy, Inc. v. Cumberland Mut. Fire Ins. Co., No. L-5827-08, 2010 WL 4116964 (N.J. Super. Ct. App. Div. June 23, 2010) (holding New Jersey insurance coverage class action against insurer was substantially similar to a pending action in Pennsylvania; a comity dismissal was therefore warranted); Levert v. Univ. of Ill. at Urbana/Champaign ex rel. Bd. of Trs.,857 So. 2d 611 (La. Ct. App. 2003) (comity warranted declining jurisdiction due to prior similar class action in another state).

Transfers of Venue
Complementing the first-filed rule and similar state court principles are the transfer of venue tools available both in the federal system and in most state systems. 28 U.S.C. § 1404(a) provides that “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought ….” Transfer of venue pursuant to 28 U.S.C. § 1404(a) is at the discretion of the court, considering “‘[a]ll relevant factors to determine whether or not on balance the litigation would more conveniently proceed and the interests of justice be better served by transfer to a different forum.’” Peteet v. Dow Chem. Co., 868 F.2d 1428, 1436 (5th Cir. 1989) (quoting 15 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3847, at 370 (1986)). The factors normally considered under this discretionary venue transfer statute include a number of private and public interest factors, none of which is given dispositive weight. In re Volkswagen AG, 371 F.3d 201, 203 (5th Cir. 2004). Cf. Van Dusen v. Barrack, 376 U.S. 612 (1964);Jones v. GNC Franchising, Inc., 211 F.3d 495, 498–99 (9th Cir. 2000); Manuel v. Convergys Corp., 430 F.3d 1132, 1135 n.1 (11th Cir. 2005).

Although the plaintiff’s choice of forum is also normally accorded some weight, numerous courts have held that it is accorded less weight when the suit is brought as a class action, partly because the interests and convenience of the class as a whole are at stake. See, e.g., Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518 (1947); Lou v. Belzberg, 834 F.2d 730, 739 (9th Cir. 1987); In re Warrick, 70 F.3d 736, 741 & n.7 (2d Cir. 1995). Moreover, courts have frequently found that the pendency of a prior similar action in the proposed transferee forum strongly militates in favor of a section 1404(a) transfer. See, e.g., Cont’l Grain Co. v. The Barge FBL-585, 364 U.S. 19, 26 (1960); Cianbro Corp. v. Curran-Lavoie, Inc., 814 F.2d 7, 11 (1st Cir. 1987); Emerson Elec. Co. v. Black & Decker Mfg. Co., 606 F.2d 234, 242 (8th Cir. 1979);C.M.B. Foods, Inc. v. Corral of Middle Ga., 396 F. Supp. 2d 1283, 1286 (M.D. Ala.2006).A recent amendment to T itle 28 of the United States Code allows a court to transfer even to a venue where the action could not have been filed originally if all parties consent. Otherwise, transfer is available only under section 1404(a) if the proposed transferee forum is one in which venue would have been proper. See, e.g., Hoffman v. Blaski,363 U.S. 335 (1960).

Most states, by statute or rule of civil procedure, have transfer or dismissal options under principles similar to those ofsection 1404(a). See, e.g., Ala. Code §§ 6-3-21.1, 6-5-430 (1975); Ga. Code Ann. § 9-10-31.1(a) (West 2005); 735 Ill. Comp. Stat. 5/2-619(3) (1983); N.Y. C. P. L. R. § 327 (McKinney YEAR); N.C. Gen. Stat. § 1-75.12 (West 1967); Tex. Civ. Prac. & Rem. Code § 71.051 (2005); Va. Code § 8.01-265 (2007).

MDL Transfer
Another option available to a defendant facing competing class actions with overlapping issues is to seek a transfer and pretrial consolidation of all cases into multidistrict litigation (MDL) pursuant to 28 U.S.C. § 1407. Unlike the first-filed rule of comity, this option does not require substantial identity of parties. The mere presence of one or more common issues is enough. Also, unlike a motion under the first-filed rule, a motion for transfer to MDL is not ruled on by any of the judges assigned to the pending class actions. Unlike a section 1404(a) transfer motion, an MDL transfer motion need not address the issue of whether the forum chosen for pretrial MDL consolidation is a venue in which each of the actions could have been filed originally. And, unlike the “race-to-judgment” strategy, the object of MDL treatment is to bring all cases together for coordinated discovery and pretrial proceedings, including determination of class certification issues.

28 U.S.C. § 1407 provides that “[w]hen civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings.” The decision whether to order MDL treatment with respect to overlapping actions is made by the Judicial Panel on Multidistrict Litigation (JPML), based on considerations of public and private convenience and efficiency. Id. Cases transferred for MDL treatment are transferred and consolidated for pretrial purposes only, and each must be remanded to the original forum for any trial. Id.

MDL treatment has several advantages for the defendant. It has the potential to lessen the overall costs of defending a multiplicity of suits. It avoids inconsistent rulings on pretrial matters, discovery, dismissal and summary judgment motions, and class certification. It brings all relevant players to the same bargaining table for purposes of settlement and thereby enhances the prospects for an effective global resolution of the controversy. Counsel for all plaintiffs are forced to coordinate their discovery efforts, so that the defendant does not have to deal with an endless series of different but overlapping discovery requests in each case, nor tender the same witnesses for deposition multiple times. This substantially reduces the disruption of the defendant’s business.

At the same time, MDL treatment also carries disadvantages. Plaintiffs’ counsel forced to pool their resources often become a much more formidable, collective adversary than the individual counsel would be if left to fend for themselves. Collectively, the combined mass of a large number of plaintiffs tends to enhance the leverage exerted even by claims with relatively questionable merit. Among the consequences of this are that discovery often proceeds at a much faster pace, and discovery battles often become more difficult for the defendant to win, because any given discovery request is more likely to be relevant in some respect when several different cases are at issue than when there is only one. Consequently, the promise of overall cost savings that led the defendant to seek MDL treatment in the first place can often vanish in an ever-expanding quagmire of broadened discovery. MDLs also tend to generate substantial publicity and a large amount of “copycat” or “tagalong” litigation that might not otherwise have been filed. All of these factors combine to increase the likelihood that the result of the litigation in an MDL setting will be a class action settlement.

Whether the JPML will grant MDL treatment depends in large part on the number of overlapping actions facing the defendant. In general, the fewer the number of overlapping cases, the more complex the common issues will have to be to justify MDL treatment. MDL transfer is also more likely when cases are young than when they are nearing trial.

There is no way for a defendant to know which judge will be assigned the eventual MDL if the JPML grants the request for multidistrict transfer and consolidation. Which districts the cases are pending in and which cases are further along are certainly factors, as are the parties’ preferences, but factors such as relative court congestion, the experience of potential judges with MDLs generally and the subject matter at issue, and the geographic proximity of the potential forum to key evidence and witnesses are also considered as well. Although the forum chosen does not have to be a forum in which any of the actions was originally filed, over 90 percent of the time it is. Daniel A. Richards, “An Analysis of the Judicial Panel on Multidistrict Litigation’s Selection of Transferee District and Judge,”78 Fordham L. Rev. 311, 331 (2009).

Anti-Suit Injunctions
Under limited circumstances, it may be possible for a defendant to enjoin prosecution of a competing class action. To the extent a federal court is authorized to issue such an injunction, its authority derives from the All Writs Act (AWA), 28 U.S.C. § 1651, and exceptions to the Anti-Injunction Act (AIA), 28 U.S.C. § 2283.

The AWA provides that “[t]he Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” 28 U.S.C. § 2283. The AIA provides that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” In limited circumstances, these statutes together enable a federal court to take the extraordinary step of enjoining activity being undertaken in a state court, an injunction to which the state court must accede under the Supremacy Clause of the U.S. Constitution. Recognizing the extraordinary force of a federal injunction, the courts have likewise recognized that it should be used sparingly; the AIA’s “core message is one of respect for state courts.” Smith v. Bayer, 131 S. Ct. 2368, 2375 (2011).For that reason, to be sustainable on appeal, any injunction of a state proceeding must fit within one of the AIA’s three exceptions—specific authorization by Act of Congress, injunctions “in aid of” the federal court’s jurisdiction, or injunctions to “protect or effectuate” the federal court’s judgments. Nor can the federal court evade the AIA by enjoining a party rather than the state proceeding itself; the courts have recognized that “[o]rdering the parties not to proceed is tantamount to enjoining the proceedings.” Bennett v. Medtronic, Inc., 285 F.3d 801, 805 (9th Cir. 2002).

The “in aid of jurisdiction” exception to the AIA typically applies only when a res is at stake and thus only to actions in rem. Kline v. Burke Constr. Co., 260 U.S. 226, 229 (1922); United States v. $270,000 in U.S. Currency, Plus Interest, 1 F.3d 1146, 1148 (11th Cir. 1993). However, the courts have also recognized an additional scenario in which an injunction “in aid of jurisdiction” is permissible: when a federal court has “retained jurisdiction over complex, in personam lawsuits,” resolution of which is threatened by competing state court litigation. See, e.g., In re Bayshore Ford Truck Sales, Inc., 471 F.3d 1233, 1251–52 (11th Cir. 2006). The most common use of this “‘complex multi-state litigation exception’” is where a “complex and carefully crafted settlement” in federal court “would be undermined by a state court adjudication.” Id. at 1252; see also In re Diet Drugs Prods. Liab. Litig., 282 F.3d 220, 239 (3d Cir. 2002); In re Baldwin-United Corp., 770 F.2d 328, 337–38 (2d Cir. 1985).

The injunction “in aid of jurisdiction” has been used in other contexts in class action litigation as well, albeit rather sparingly. For example, in Winkler v. Eli Lilly & Co., 101 F.3d 1196, 1203 (7th Cir. 1996), the Seventh Circuit, while vacating an AIA injunction as overbroad, held that the AWA and AIA “permit a district court . . . to issue an injunction to safeguard a pre-trial ruling like [a] discovery order. . . .” See also Newby v. Enron Corp., 338 F.3d 467, 476 (5th Cir. 2003) (holding district court’s stay of discovery in related state court action appropriate under the AWA); In re Prudential Ins. Co. of Am. Sales Practices Litig., 261 F.3d 355, 364–69 (3d Cir. 2001) (affirming injunction preventing opt-outs from using evidence, or engaging in motion practice, pertaining to settled class action claims in individual lawsuits; “the All-Writs Act and the Anti-Injunction Act do extend to discovery”); In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 93 F. Supp. 2d 876, 880 (M.D. Tenn. 2000) (enjoining Texas state court, under the AWA, from ruling on plaintiffs’ motion to compel discovery in a substantially similar suit). On the other hand, “the mere existence of a parallel lawsuit that seeks to adjudicate the same in personam cause of action does not itself provide sufficient grounds for an injunction against a state action in favor of a pending federal action.” In re Baldwin-United, 770 F.2d at 336 (citing Vendo Co. v. Lektro-Vend Corp., 433 U.S. 623 (1977)). Protection of a trial date in the federal court, for example, has been found to be insufficient to support an injunction against a competing state case. Ret. Sys. of Ala. v. J.P. Morgan Chase & Co., 386 F.3d 419, 430 (2d Cir. 2004).

The AWA also permits injunctions against state proceedings where necessary to “protect and effectuate” the federal court’s judgments. The applicability of the “relitigation exception,” as it is known, turns on principles of claim and issue preclusion. Smith v. Bayer, 131 S. Ct. 2368, 2375 (2011). These principles are to be strictly and narrowly applied. Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 148 (1988). Because the state court’s erroneous refusal to give preclusive effect to a federal judgment can be reviewed by state appellate courts and ultimately the U.S. Supreme Court, a federal court should ordinarily not dictate to a state court the preclusive consequences of the federal court’s judgment. “[E]very benefit of the doubt goes toward the state court.” Smith, 131 S. Ct. at 2376.

The Supreme Court’s Smith decision, its latest pronouncement on the relitigation exception, casts doubt on whether that exception has any vitality outside the context of a final federal judgment on the merits. Smith involved competing federal and state product liability class actions against Bayer, the manufacturer of a prescription pharmaceutical. The federal case was filed approximately one month before the state action; both cases proceeded through discovery and toward class certification. The trial court denied class certification in the federal action, on predominance and commonality grounds. Bayer then sought an injunction from the federal court, seeking to have the state court prevented from entertaining plaintiffs’ motion to certify a statewide class. The district court granted the injunction, a ruling upheld by the Eighth Circuit. The Supreme Court unanimously reversed.

The Court in Smith held that because the analysis for class certification under Federal Rule of Civil Procedure 23 was a different question from the state court’s analysis of its own class action rule, there was no identity of issues in the two actions regarding class certification. The Court also held that an unnamed member of a putative and uncertified class could not be deemed a party for preclusion purposes;  thus, there was no identity of parties. The Court noted awareness of the problem of “serial relitigation of class certification” but observed that the passage of CAFA enables defendants to remove most significant class actions to federal court, where either MDL consolidation under 28 U.S.C. § 1407 or “principles of comity” among federal courts should minimize conflicting certification decisions.

How the lower courts will go about applying the Smith “principles of comity” language in the class certification context remains to be seen. Some courts have been disinclined to view previous certification denials as significant in any way. See, e.g., Smentek v. Dart, 683 F.3d 373, 376 (7th Cir. 2012) (rejecting notion of “mandatory comity” where district court did not follow other courts’ class certification denials in earlier cases involving same alleged class); Thorogood v. Sears, Roebuck & Co., 678 F.3d 546, 551–52 (7th Cir. 2012) (vacating anti-suit injunction based on class certification denial); Heibel v. U.S. Bank Nat’l Ass’n, No. 2:11-CV-00593, 2012 WL 4463771, at *4 (S.D. Ohio Sept. 27, 2012) (“[N]either comity nor stare decisis make the [earlier] court’s decision binding on this court, nor does the decision relieve this court of its obligation to conduct an independent analysis.”). Other courts have relied heavily on previous certification denials. See, e.g., Edwards v. Zenimax Media, Inc., No. 12-cv-00411,2012 WL 4378219, at *4 (D. Colo. Sept. 25, 2012) (denying certification; finding opinion denying certification in earlier competing class case “highly persuasive and relevant”); Baker v. Microsoft, 851 F. Supp. 2d 1274, 1278–79 (W.D. Wash. 2012) (following earlier certification denial in overlapping class action, and holding that previous denial was entitled to rebuttable presumption that certification should not be granted).

Certain of the Supreme Court’s language in dicta (“whether and how prior litigation has preclusive effect is usually the bailiwick of the second court,” Smith, 131 S. Ct. at 2375) suggests that the relitigation exception might now have truly minimal scope. Nevertheless, the Court’s invocation of comity principles, and its stated awareness of the potential abuse of seriatim class certification motions, can certainly be relied on by a defendant in defending a second such motion after having once defeated certification.

One weapon decidedly not in a defendant’s arsenal in dealing with competing class actions is an anti-suit injunction by a state court against a federal court. The law is settled that a state court has no authority to enjoin prosecution of federal court in personam proceedings, even if the state proceeding has been reduced to final judgment. See Gen. Atomic Co. v. Felter, 434 U.S. 12, 12 (1977) (per curiam); Donovan v. City of Dallas, 377 U.S. 408, 412–13 (1964).

Keywords: litigation, class action, derivative suits, Anti-Injunction Act, All Writs Act, anti-suit injunction, claim preclusion, comity, Federal Rule of Civil Procedure 23, multidistrict litigation, MDL, reverse auction, relitigation exception

Michael R. Pennington and John E. Goodman – November 20, 2012


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