Bayer withdrew Baycol, a prescription medicine, from the market. Thousands of plaintiffs filed thousands of lawsuits, including two suits by two different groups of plaintiffs in two different West Virginia state courts. Both sets of West Virginia plaintiffs sought class-wide relief on behalf of West Virginia residents who had purchased Baycol. The named plaintiffs did not claim they suffered physical harm as a result of their purchase of the drug, nor did they claim the medicine failed to perform its intended function. Instead, they asserted Baycol was potentially dangerous and that the defendant violated the state’s consumer protection act in the marketing and sale of the product. The plaintiffs contended they would not have purchased the product at all or at least would have paid less than they did but for the defendant’s violation of the statute. Both sets of plaintiffs sought refunds on behalf of the respective classes.
Relying on diversity jurisdiction, Bayer successfully removed one of the two cases to federal court. The judicial panel on multi-district litigation transferred the removed action to a consolidated proceeding involving thousands of other claims against the manufacturer over the same drug. The plaintiffs in the other matter had joined West Virginia residents as defendants, and the manufacturer was unable to remove the second case under the then-applicable law. At this point, the two sets of plaintiffs were pursuing two separate actions in different fora, each seeking essentially the same relief on behalf of the same proposed class under the same state substantive law.
The district court overseeing the MDL ultimately refused to certify a nationwide refund class, concluding that because plaintiffs “would have to demonstrate they were either injured by Baycol, or that Baycol did not provide them any health benefits,” they could not meet their burden of showing that common issues predominated over individual issues as required by Federal Rule of Civil Procedure 23. In re Baycol Prods. Litig., 218 F.R.D. 197, 213–14 (D. Minn. 2003). The manufacturer then asked the district court to deny certification of the refund claims asserted on behalf of the proposed West Virginia class. Concluding that nothing in West Virginia’s substantive law would change the analysis it applied to the nationwide refund class, the district court held that individual issues in the application of West Virginia’s consumer protection act would predominate over common issues and denied certification. In re Baycol Prods. Litig., McCollins v. Bayer Corp., 265 F.R.D. 453, 457–58 (D. Minn. 2008). The federal plaintiff did not appeal the denial of certification.
About a week after the deadline had passed for the federal plaintiff to appeal the denial of certification, the plaintiffs in the state court action—from which the non-diverse defendants had by then been dismissed—asked the state court to certify an economic loss class defined in the same manner as the rejected federal class. Believing it had put that issue astern, the manufacturer sought an injunction from the federal court prohibiting the state court plaintiffs from further proceeding down the road to certification. Although the Anti-Injunction Act, 28 U.S.C. § 2283, generally prohibits a federal court from enjoining state proceedings, it does have an exception to allow a federal court “to protect or effectuate its judgments.” Applying the act’s so-called re-litigation exception, the district court concluded it had the power to prevent the state plaintiffs from essentially revisiting (albeit in another forum) its refusal to certify a West Virginia refund class and granted the injunction. In re Baycol Prods. Litig., Black v. Bayer Corp., MDL No. 1431, No. 02-199, 2008 U.S. Dist. Lexis 112036 (D. Minn. Dec. 9, 2008).
Reaching that conclusion required the district court to find (1) that the parties to the state court proceedings were bound by the prior federal decision and (2) that the issue under consideration by the state court was the same as the one it had decided. Although there was no dispute the parties to the two proceedings were unrelated, the district court concluded that the state court plaintiffs were “absent members” of the class it had ultimately refused to certify and therefore could be bound by the refusal. Id. at *12–16. The district court further concluded that because the class for which the state court plaintiffs sought certification was the “same as was asserted in this case,” the fact that the state court plaintiffs were seeking certification under West Virginia’s civil procedure rules as opposed to Federal Rule 23 was of no relevance. Id. at *7–8. It also rejected the plaintiffs argument that the federal court had no jurisdiction over the absent class members because it found they had been adequately represented by the federal plaintiff who sought certification. Id. at *13–17.
The West Virginia plaintiffs appealed, but the United States Court of Appeals for the Eighth Circuit affirmed, agreeing that the district court correctly applied the re-litigation exception. Smith v. Bayer Corp., 593 F.3d 716 (8th Cir. 2010). Finding that the state court plaintiffs sought “certification on the same legal basis of the same class already denied in this case,” the court found no relevant substantive or procedural differences between the state and federal certification rules. Relying in part on a Seventh Circuit decision, In re Bridgestone/Firestone Inc. Tires Prods. Liability Litig., 333 F.3d 763 (7th Cir. 2003), the Eighth Circuit concluded that “in the context of MDL proceedings, certification in a state court of the same class under the same legal theories previously rejected by the federal district court presents an issue sufficiently identical to warrant issue preclusion under federal common law.”
The Supreme Court’s Decision
The Supreme Court granted certiorari to resolve circuit splits on two issues arising from the Anti-Injunction Act’s re-litigation exception. Both issues, the Court said, related to the federal principles of issue preclusion that inform the Anti-Injunction Act, and both issues were necessary to invoke the act’s re-litigation exception. The first dealt with whether the state court certification motion presented the “same issue” already litigated in the federal action. The second addressed the extent to which the district court’s denial of a certification motion could bind nonparties—absent class members—to anything. In an opinion written by Justice Kagan, the Court unanimously held that the lower court erred in concluding the “same issue” was involved for preclusion purposes, and eight of the nine Justices (Justice Thomas did not join this portion of the opinion) also held that the district court erred in binding absent class members to the order denying certification. The plaintiffs had also raised separate due process issues, which the court did not reach. Smith v. Bayer Corp., 180 L. Ed. 2d at 350 n.7.
On the first point, the Court noted that the Eighth Circuit in Bayer had held that two cases involved the “same issue” when “the state and federal class certification rules are not significantly different,” while the Fifth Circuit had previously held that because a state court could choose to interpret a similarly worded state certification rule differently than a federal court’s interpretation of its counterpart, the issues may not be the “same” for preclusion purposes. Id. at 348 n.3. Bayer took a slightly different tack, arguing that the question really was whether the district court’s denial of certification turned on its application and interpretation of state substantive law. See, e.g., Brief for Respondent at 10, Smith v. Bayer Corp., 131 S. Ct. 2368, 180 L. Ed. 2d 341 (2011) (No. 09-1205) (“petitioners seek a different ruling from the West Virginia court on a substantive issue of law”). In the opinion below, the Eighth Circuit had held that the district court’s certification decision “decided a substantive issue of West Virginia law as to what a former Baycol user suing Bayer must prove under [the state’s consumer protection act],” 593 F.3d at 722, and that its conclusion “has a preclusive effect and is inseparable from the certification decision.” Id. at 723.
The Supreme Court’s opinion on the “same issue” question essentially ignored this argument to focus on a different issue: whether the district court’s certification decision and the state court’s consideration of the certification motion involved the “same legal standard.” 180 L. Ed. 2d at 349. Because the district court applied Federal Rule 23 and the state court would apply West Virginia Rule 23, the Court felt it had to analyze whether there were differences in the application of the two. The Court rejected both a simple textual comparison (i.e., that the rules are essentially the same on paper) and a simple “whose law applies” approach (i.e., the state case would present the “same issue” only if the source of law was the same). Id. at 351. Instead, it plowed a middle ground, stating that “if state courts have made crystal clear that they follow the same approach the federal court applied, we see no need to ignore that determination.” Id. Applying that test meant the federal court would need to “examine whether state law parallels its federal counterpart.” Id. Concluding that West Virginia applied its Rule 23 in a meaningfully different fashion than the district court applied Federal Rule 23, the Court held that the cases did not present the “same issue”; therefore, the act’s re-litigation exception did not apply.
The other circuit split addressed in Bayer was the question of whether members of a proposed, but ultimately uncertified, class were subject to issue or claim preclusion based on their status as members of the proposed class. In this respect, Bayer made two arguments. First, it suggested that the state court plaintiffs were “parties” in a very technical sense to the federal litigation. See, e.g., Brief for Respondent at 11 (“This Court has long treated unnamed members of an uncertified class as parties for a variety of purposes.”). Second, it argued that even if the state court plaintiffs were not parties to the federal action, they could still be bound under rules applicable to members of class actions. Id. at 11–12 (“this case satisfies the criteria the Court has delineated for nonparty preclusion based on adequate representation”). The eight members of the Court who joined this portion of the opinion rejected both arguments.
On the first point, the Court stated that Bayer’s argument “ill-comports with any proper understanding of what a ‘party’ is.” 180 L. Ed. 2d at 353. Citing to the dissent in a prior case in which the Court held that an unnamed member of a certified class could be considered a party, it noted that no one in the prior case was “willing to advance the novel and surely erroneous argument that a non-named class member is a party to the class action litigation before the class is certified.” Id.(quoting Devlin v. Scardelletti, 536 U.S. 1, 16 n.1 (2002) (Scalia, J., dissenting)). It rejected in a footnote Bayer’s argument that because unnamed members of an uncertified class can benefit from the pendency of the action in the form of a tolling of the statute of limitations, such persons should also be considered “parties” up until the time of the certification decision. Id. at 353 n.10. Instead, the Court held that “the definition of the term ‘party’ can on no account be stretched so far as to cover a person . . . whom the plaintiff in a lawsuit was denied leave to represent.” Id. at 353. Because the state court plaintiffs were not named “parties” to the uncertified federal action, the Court turned to the second argument involving nonparty preclusion.
Here, the Court acknowledged Bayer’s argument that members of a class in a “properly entertained class action” could be bound by a prior adjudication. Id. at 354 (citing Cooper v. Federal Reserve Bank of Richmond, 467 U.S. 867, 874 (1984)). The problem for the Court, as Justice Kagan explained, was that “if we know one thing about the [federal case], it was not a class action.” Id. (emphasis in original). It rejected Bayer’s argument that the case was a “properly conducted class action” right up until the time the district court denied certification of the class. Instead, the Court stated that because the district court determined the case did not meet the criteria for certification under Federal Rule 23, “we cannot say that a properly conducted class action existed at any time in the litigation.” Id. Therefore, it said, “[n]either a proposed class action nor a rejected class action may bind nonparties.” Id. Thus, even if the Court had found that the “same issue” was at stake, the state court plaintiff still would not have been bound by the federal decision denying certification.
Finally, the Court recognized but declined to act on the policy arguments raised by Bayer and by the Seventh Circuit in Bridgestone/Firestone concerning an “‘asymmetric system in which class counsel can win but never lose’ because of their ability to re-litigate the issue of certification.” 180 L. Ed. 2d at 355 (quoting In re Bridgestone/Firestone, 333 F.3d 763, 767 (7th Cir. 2003)). Stating that the policy argument “flies in the face of the rule against nonparty preclusion,” the Court noted that the enactment of the Class Action Fairness Act of 2005 provided something of a remedy by allowing some class actions to be moved into federal court where the cases might then be consolidated or otherwise coordinated. The Court further noted that nothing in the opinion foreclosed federal legislation to “modify established principles of preclusion,” and the Court did not address the permissibility of a change to the federal civil procedure rules. Id. at 356 n.12. While not a definitive answer to the unaddressed due process challenge raised by the state court plaintiffs, this does suggest the Court did not see the issue preclusion rule discussed in the opinion to be sufficiently grounded in constitutional concerns that legislative changes were foreclosed.
Considerations for the Future
Although Smith v. Bayer involved two circuit splits, its holdings were unsurprising given the Court’s decision to frame the issues as it did. Leaving aside the possibility for legislative or rule changes in the future, what might Smith hold for today?
First, it demonstrates that plaintiffs’ counsel will need to continue considering ways to keep class actions in state court, at least in jurisdictions where the legal standard for certification arguably differs from the federal standard. It also suggests that they should try to tee up issues in state court in a manner that differs from potentially parallel federal claims—in other words, try to frame the issues in a manner that demonstrates the differences between the applicable issues and the legal standards for certification.
Second, just as plaintiffs desiring a state forum will attempt to prevent a successful removal, defendants seeking an alternative will continue to use Class Action Fairness Act to remove state class actions into the federal system. But where there are parallel proceedings, defendants may consider whether there are ways at the certification stage to minimize the differences between the legal standards for certification. In some sense, Bayer attempted to do this by arguing the issue that precluded federal certification was really a substantive question of state law that would be common to both certification decisions. Although the Court in Smith rejected (or, more accurately, ignored) that effort, defendants should continue to consider ways put the case in a place where the certification decision would involve the “same issue.”
Third, even where the issues are the “same” for preclusion purposes, Smith’s alternative holding—that uncertified class actions do not bind nonparties—suggests that defendants concerned with inconsistent certification rulings will need to be creative in their approach to the claims in order to get binding rulings. For example, a defendant might consider whether to attempt to use Rule 23(c)(4) or some other mechanism to certify an “issues class” on some aspect of the case it is concerned will be re-litigated, even as it fights the broader overall certification battle. In that case, the unnamed parties would be “class members” for purposes of that issue and therefore more likely bound by any favorable judgment. Of course, this sort of approach bears a number of potentially unacceptable risks. For example, it might require the defendant to concede—at least for the issue in question—that the Rule 23(a) factors have been met. In addition, it might lead to certification of issues class on topics the defendant would prefer to have the opportunity to re-litigate.
Finally, although it decided Smith under the Anti-Injunction Act, a statute applicable to state court proceedings, the Court made clear it was applying settled federal principles of issue and claim preclusion. Those principles will therefore apply even when the parallel class actions are pending in different federal courts. Thus, where there are multiple federal class actions, both sides will need to consider whether to request consolidation or referral to an MDL. If the cases are not consolidated, then the considerations set forth above may apply.