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November 13, 2012 Articles

Drawing the Line Between Class Action and Quasi-Class Action

By Tammy B. Webb and Ina D. Chang

The Judicial Panel on Multidistrict Litigation (JPML) was created in 1968 and has since become a primary avenue for federal lawsuits that involve common questions of facts to be organized and coordinated in a single venue during pretrial proceedings. Over time, the centralization of such a large number of mass tort lawsuits has resulted in some courts treating multidistrict litigation (MDL) as “quasi-class actions” and moving beyond the management of discovery and preventing inconsistent pretrial rulings to extensive involvement in settlement and attorney fees. Recently, the desire to obtain global settlements has expanded beyond quasi-class actions to other MDLs or complex class actions. Others courts have found that attempts to further coordinate such settlements are not appropriate.

Development and Purpose of the JPML
Since its inception, the JPML has considered centralization in nearly 400,000 cases. JPML, Overview of Panel. To understand the expansion of MDLs, a review of the legislative purposes behind the creation of the JPML is imperative. In the 1960s, nearly 2,000 civil antitrust cases were pending in 36 different federal district courts relating to price fixing by the electrical equipment industry. The flood of cases prompted various interest groups to lobby the U.S. Congress to develop a comprehensive way to handle such litigation. See Manual for Complex Litigation § 2:1-2.

Congress passed 28 U.S.C.A. § 1407, creating the JPML as a way of permanently coordinating such massive litigation and eliminating the potential for conflicting pretrial rulings.

The objective of the legislation is to provide centralized management under court supervision of pretrial proceedings of multidistrict litigation to assure the “just and efficient” conduct of such actions. The committee believes that the possibility for conflict and duplication in discovery and other pretrial procedures in related cases can be avoided or minimized by such centralized management. To accomplish this objective the bill provides for the transfer of venue for the limited purpose of conducting coordinated pretrial proceedings.

H.R. Rep. No. 1130, at 2–3 (1968).

Congress granted the transferee court broad power to decide all matters until remand occurs, and it rejected a statute allowing transfer of only certain claims or for limited purposes. See Manual for Complex Litigation § 2:3.

The JPML recognized almost immediately the parallels and overlapping interests of class actions and MDLs. The need for such centralization was particularly necessary in class actions, as the potential for conflicting, disorderly, and chaotic judicial action is the greatest. In re Plumbing Fixture Cases, 298 F. Supp. 484, 494 (J.P.M.L. 1968). Thus, from the beginning, the JPML ruled that a transferee court had the authority to rule on class certification because such determinations occurred before trial and fell within the “pretrial proceeding” parameters set forth in section 1407. The coordination was necessary to prevent district courts from making conflicting class action determinations, and such rulings would not otherwise be “expressly limited by space, time, description of party [sic] of nature claims or defense.” Id.

Mass Tort MDLs as “Quasi-Class Actions”
Analogies between the management of mass tort MDLs and the management of class actions were further explored (and are exemplified) in three modern MDLs: In re Zyprexa Products Liability Litigation, No. 4-md-1596 (E.D.N.Y.), In re Vioxx Products Liability Litigation, MDL No. 1657 (E.D. La.), and In re Guidant Corp. Implantable Defibrillators Products Liability Litigation, MDL No. 05-1708 (D. Minn.) . Analysts acknowledge that the handling of these MDLs not only provides a detailed snapshot of contemporary MDL management techniques but also illustrates a shift in judicial involvement in pretrial administration. Charles Silver & Geoffrey P. Miller, “The Quasi-Class Action Method of Managing Multi-District Litigations: Problems and a Proposal,” 63 Vand. L. Rev. 107 (2010); Lynn A. Baker & Charles Silver, “Fiduciaries and Fees: Preliminary Thoughts,” 79 Fordham L. Rev. 1833 (2011).

All three MDLs refer to the management of these aggregate litigations as “quasi-class actions,” and each goes to striking and extensive lengths in coordinating these cases. In all three, the judges appointed leadership committees of attorneys to coordinate pretrial discovery, review and approve settlement conditions, control the leadership attorneys’ compensation, and cap fees for other counsel.

The first of these three MDL cases, Zyprexa, was consolidated before Judge Jack Weinstein in April 2004, with some 30,000 cases brought by individual plaintiffs suffering from psychiatric problems after treatment with the antipsychotic drug. In re Zyprexa, 2009 WL 1514427, No. 04-MD-1596 (E.D.N.Y. May 29, 2009) (the suit also involved state attorneys general, third-party payers, and other entities alleging physical or financial injury). Although these were individual plaintiff cases, the litigation was administered as a “quasi-class action.” Id. at *1. The court recognized its obligation to exercise careful oversight when there is an aggregation of masses of individual cases. The court also recognized that there is a strong interest in allowing the transferee court to manage the consolidated action in the way that it believes will best serve the interests of justice and efficiency. In re Zyprexa Prods. Liab. Litig., 433 F. Supp. 2d 268, 271 (E.D.N.Y. 2006).

This rationale was particularly necessary in justifying the court’s intervention in settlement agreements and capping attorney fees. In labeling these cases as “quasi-class actions,” the court analogized to Federal Rule of Civil Procedure 23, which explicitly gives a court power to do this in a class action. Even though the nature of the settlement in Zyprexa would be between plaintiffs and defendants, it had many of the characteristics of a class action. See, e.g., In re Zyprexa Prods. Liab. Litig., 233 F.R.D. 122, 122–23 (E.D.N.Y. 2006).

The large number of plaintiffs subject to the same settlement matrix approved by the court, the utilization of special masters appointed by the court to control discovery and to assist in reaching and administering a settlement, the court’s order approving and controlling a huge escrow fund, other interventions by the court in controlling discovery for all claimants, the employment of a multidistrict reference, and cooperation among many federal and state courts, reflect a degree of court control that supports the imposition of fiduciary standards to ensure fair treatment to all parties and counsel regarding issues such as settlement procedures.

In re Zyprexa Prods. Liab. Litig., 433 F. Supp. 2d 268, 271 (E.D.N.Y. 2006).

The court asserted that the lack of precedent or legislative rule making should not foreclose its involvement. Such “innovation and creativity” were not only permitted under the court’s inherent equitable power but also necessary for the efficient and fair control of mass torts of this kind and to preserve the viability of an effective pharmaceutical industry and public health considerations. Id. In addition, the court asserted its ability to augment and cap attorneys’ contingency fees based on the judiciary’s authority to exercise ethical supervision of the bar in individual and mass actions. In re Zyprexa Prods. Liab. Litig., 424 F. Supp. 2d 488, 492 (E.D.N.Y. 2006).

The Guidant MDL, commenced in November 2005, was brought by individual plaintiffs for injuries alleged to have been caused by certain defective implantable defibrillator devices and pacemakers. In re Guidant Corp. Implantable Defibrillators Prods. Liab. Litig., 2008 WL 682174, at *1 (D. Minn. Mar. 7, 2008). Judge Donovan Frank oversaw a settlement of $240 million, setting aside a portion of this for common costs, such as settlement administration costs, and a common benefit attorney fee fund to pay attorney fees for those who worked for the benefit of all plaintiffs. Id. at *4–7. The court also capped contingency fees at 20 percent, while allowing counsel to petition to have the fee increased to 33.33 percent if justified. Id. at *19.

Like Judge Weinstein’s rationale in the Zyprexa litigation, Judge Frank’s rationale for his involvement in the settlement was that the Guidant MDL was a quasi-class action and the court had the authority from its traditional power to do equity and ensure that the amount and mode of payment of attorney fees are fair and proper. Id. at *4–5. In addition, such limitations were within the court’s inherit power of supervision over the bar to examine attorney fees for conformity with the code of ethics and inquire into fee arrangements to protect clients from excessive fees and suspected conflicts of interest. Id. at *18.

The Vioxx MDL was centralized in the Eastern District of Louisiana and involved personal injury cases from use of the prescription drug. In re Vioxx Prods. Liab. Litig., 574 F. Supp. 2d 606 (E.D. La. 2008). Judge Eldon Fallon approved a $4.5 billion settlement amount for some 50,000 eligible claimants and capped contingent fee arrangements for attorneys at 32 percent plus reasonable costs. Id. at 612; 617–18. The court also allowed for 6.5 percent of the total settlement (or $315,250,000) as a reasonable common benefit fee award. In re Vioxx Prods. Liab. Litig., 760 F. Supp. 2d 640, 658 (E.D. La. 2010).

Citing the rulings in Zyprexa and Guidant, the court found that Vioxx was a quasi-class action, that the court’s equitable powers gave it the power to review the settlement, and that its concomitant duty to exercise ethical supervision over attorneys allowed it to cap contingency fees. In re Vioxx Prods. Liab. Litig., 574 F. Supp. 2d at 611–12.

The court also further articulated the argument made in Zyprexa and Guidant that such judicial authority was necessary because the parties were seeking a global settlement.

With large corporations now seeking to achieve global peace by resolving mass tort litigations simultaneously in state and federal courts, settlement agreements such as the one currently before the Court will likely become more common. As these global settlements occur more frequently, however, and as the public consciousness focuses more closely on the outcome of mass tort litigations, there will also be a growing need to protect the public’s trust in the judicial process. The potential harm to the public’s perception of the judicial process is especially acute in the instant case because of the large number of claimants participating in the settlement. The approximately 50,000 plaintiffs and the $4.85 billion settlement fund have captured the public’s attention, resulting in a heightened degree of public scrutiny on the settlement proceedings and the judicial process in general.

Id. at 613 (internal citations omitted).

Zyprexa, Guidant, and Vioxx labeled mass tort litigation coordinated into an MDL as a “quasi-class action.” This classification not only expanded how cases are managed and coordinated but presented subsequent MDLs with innovative theories of authority to consider in crafting pretrial proceedings and settlements.

Expansions and Limitations
Commentators note the attraction of the “quasi-class action” label as it provides a rationale for judges exercising considerable power. Silver & Miller,  supra, at 115. The label also provided the clout for achieving a “global peace” in the Zyprexa, Guidant, and Vioxx cases. Subsequent courts handling MDLs or class actions have taken the rationale of obtaining a “global settlement” farther, while others have found that the rationale for such treatment was not suitable.

The principle of achieving a “global peace” took center stage in the Third Circuit’s opinion upholding two nationwide settlement classes comprising purchasers of diamonds from De Beers. Plaintiffs alleged that De Beers exploited its market dominance to artificially inflate the prices of rough diamonds. Sullivan v. DB Investments, Inc., 667 F.3d 273, 285–86 (3d Cir. 2011). Two initial lawsuits were filed in the District of New Jersey and the Southern District of New York. Five subsequent suits were filed in federal and state courts with two remaining in Arizona and California state courts. The five suits in federal courts were all transferred to the District of New Jersey. Id. at 286–87. The plaintiffs in these cases were two types of purchasers: The first were direct purchasers from De Beers or one of its competitors, and the second were indirect purchasers who included consumers and jewelry retailers and other middlemen. Id. at 288. De Beers agreed to a settlement fund of $295 million with $272.5 million to be distributed to indirect purchasers and $22.5 million allotted to direct purchasers, and with the agreement that De Beers would not contest certification of these settlement classes.

Relying on the decisions in Vioxx and Guidant, the majority of the Third Circuit affirmed the approval of the settlement class and found that the class would not be limited to only those alleging “colorable” claims. Although Sullivan was a class action and did not require the label of “quasi-class action” to oversee settlement, the majority used the rationale of achieving a “global peace” to assert that the settlement would cover plaintiffs in every federal and state case, as well as potential plaintiffs who had not yet filed cases or those who did not even have a colorable claim. Id. at 310–11. Like the parties in Vioxx and Guidant, the parties in Sullivan also contemplated a global settlement covering plaintiffs from both the MDL and state cases, including plaintiffs whose cases had been filed or transferred to the MDL, plaintiffs whose cases were filed outside the MDL in state court proceedings, and potential plaintiffs who had not yet filed their cases. Id. at 311. The court asserted that achieving a global peace is a valid and valuable incentive to avoid future litigation with all potential plaintiffs (meritorious or not) and that there is a strong presumption in favor of voluntary settlement agreements.

In a concurring opinion, Circuit Judge Anthony Joseph Scirica specifically recognized the impact of Zyprexa, Guidant, and Vioxx on mass tort settlements like Sullivan. He noted that although the settlement of mass tort cases remains problematic, there has been a shift in mass personal injury claims from class actions to aggregate non-class settlements. These settlements “suggest that the MDL process has supplemented and perhaps displaced the class action device as a procedural mechanism for large settlements.” Id. at 334 (Scirica, J., concurring) (internal citations omitted).

The paradigm of aggregate non-class settlements has become so prevalent that courts have even cited this line of cases when such references are unnecessary. For example, the district court overseeing a settlement for the Deepwater Horizon oil spill cited Judge Fallon’s ruling in Vioxx as rationale for limiting contingency fee arrangements in “quasi-class actions.” In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, MDL No. 2179, 2012 WL 2236737, at *1 (E.D. La. June 15, 2012). The court noted that unlike Vioxx, the case at hand had been preliminarily certified as a class action for settlement, and that because Federal Rule of Civil Procedure 23 directly applies to class actions, there was no need to analogize MDLs to class actions. However, the court continued to cite Judge Fallon’s rationale throughout its opinion, asserting that in this instance, “there is an even stronger argument for the Court’s authority to cap attorney’s fees than existed in In re Vioxx.” Id.

Not all courts have agreed that the rationale of encouraging global settlements in quasi-class actions expands the power to oversee settlements in class actions or that such treatment is appropriate. In Sullivan, Third Circuit Judge Kent Jordan issued a vigorous dissent and argued that the desire of obtaining a “global settlement” in mass tort cases cannot result in the fabrication of substantive rights or allow people with no colorable claim to recover. Sullivan, 667 F.3d at 340–41 (Jordan, J., dissenting). The dissent noted that because standing to bring an antitrust claim varies by case, some indirect purchaser class members actually lacked the ability to bring what was effectively an antitrust claim. Id. at 348. The dissent argued that defining a class to include members who lacked any colorable claim “is short-sighted and counterproductive” regardless of the defendant’s willingness to waive the argument to obtain a global peace. Id. at 354–56.

In the interest of short-term peace, it sacrifices long-term legitimacy and, with that, a more stable, lasting peace. By failing to enforce the limits of Rule 23, today’s decision will encourage frivolous class action claims and have the predictable consequence of weakening the incentives—the sheltering shadow—under which non-frivolous disputes would otherwise be properly resolved.

Id. at 356.

Similarly, other courts have rejected the notion that the Zyprexa, Guidant, and Vioxx settlements enable an MDL court to assert jurisdiction over the settlements for state court cases not consolidated before it. In an MDL stemming from the spread of unapproved genetically modified long-grain rice, plaintiffs who lead the MDL requested that the defendants be required to hold back and contribute amounts from settlements and judgments to related cases pending in state courts. In re Genetically Modified Rice Litig., No. 4:06 MD 1811, 2010 WL 716190, at *1 (E.D. Mo. Feb. 24, 2010). Plaintiffs’ lead counsel argued that the plaintiffs from state court cases derived substantial benefit from the work of the leadership counsel and that those lawyers who would not agree to join in the trust would be unjustly enriched if they were not required to contribute to the fees of the leadership lawyers. The court reluctantly rejected plaintiffs’ request, holding that although Vioxx states that an MDL proceeding may be treated as a “quasi-class action,” it did not support the argument that the MDL court could act without jurisdiction and order hold-backs for those state cases not before the court. Id. at *5 n.4.

Congress created the JPML in an effort to coordinate and organize lawsuits that involved common issues or facts. As modern mass tort cases have increased and grown more intricate, judges have sought to expand management techniques, sometimes labeling such MDLs as “quasi-class actions” and thereby deriving greater control in such things as the regulation of settlement agreements. One of the rationales for the analogy between MDLs and class actions is the desire to obtain global settlements in cases that are extremely complex and involve thousands of plaintiffs. As courts seek an effective and comprehensive means of adjudicating these complicated cases, courts continue to determine where the line between class actions and quasi-class actions must be drawn.

Keywords: litigation, mass tort, Federal Rule of Civil Procedure 23, equitable powers, attorney fees, judicial authority

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