Class action litigation is often about leverage. The grant or denial of class certification can be a make-or-break moment that gives one side or the other leverage to obtain a favorable resolution. That ruling can either produce a large settlement from the defendant or sound the death knell for the plaintiff’s litigation.
The timing of a class certification motion is set forth in Federal Rule of Civil Procedure 23(c). The rule, as amended in 2003, states the court should decide whether to certify the action as a class action “at an early practicable time.” Before 2003, in equally Delphic prose, Rule 23(c) directed a class be certified “as soon as practicable after commencement of an action.” Lawyers can debate what is “practicable,” but the modification of the rule and the increasing recognition that district courts must resolve factual issues in deciding whether to certify a class have in practice delayed consideration of class certification. With this changed timing comes leverage. A 2018 U.S. Supreme Court decision on the tolling rule to be applied to statutes of limitation when a class action is filed has only added to the opportunity for leverage, and perhaps mischief, in class action litigation.
Beginning with cases such as the Seventh Circuit’s decision in Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 676–77 (7th Cir. 2001), and continuing through the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) (which cited Szabo with approval), appellate courts have held that district courts must decide factual issues necessary to the class certification analysis before certifying the class. For example, an uncontroversial application of this principle is the requirement that the court must actually decide if the class is numerous enough to satisfy Rule 23. If the parties dispute factually whether the class is sufficiently numerous, the court must decide that factual issue prior to ruling on the certification motion. It cannot leave the question of numerosity for the jury. If deciding whether there are common questions, or whether those common questions predominate, requires the resolution of contested facts, the district court must decide those facts as well. The factual issue can even involve expert proof. If the plaintiff’s claim that damages can be assessed for the entire class using class-wide proof rests on an expert opinion, and the defendant has submitted a contrary expert report opining that damages cannot be determined on a class-wide basis, the court needs to decide that disputed factual issue as a predicate to its determination of whether the requirements of Rule 23 have been met. As the Supreme Court has emphasized, the district court must decide such factual issues when determining whether to certify a class, even if the factual issues overlap with the merits.
This interpretation of Rule 23 prolongs the consideration of class certification motions in many cases. No longer can the court decide class certification without discovery or after the deposition of the class representative alone. Instead, in a complicated case, the court may need to permit the parties to engage in extensive merits discovery, even including expert disclosure and discovery, before deciding whether to certify the class. Often, it takes months or years before the court can resolve complicated issues that arise from class certification motions.
In China Agritech v. Resh, 138 S. Ct. 1800 (2018), the Supreme Court resolved a split in the circuits about the American Pipe tolling doctrine. Under that doctrine, the filing of a class action tolls the running of the statute of limitations for all putative class members until the motion for class certification is decided or the case is dismissed. If class certification is denied, the statute of limitations will begin to run again for each plaintiff. In China Agritech, the question presented was whether the American Pipe tolling doctrine tolls the statute of limitations for any putative class member to bring a new class action or whether it only tolls the time for class members to bring individual claims. For example, if the district court denied class certification because the named plaintiff representative was an inadequate representative, could a new plaintiff file a new class suit and seek to be its class representative notwithstanding the expiration of the statute of limitations in the interim? Before China Agritech, some courts approved that outcome, allowing the new class representative to share the benefit of tolling with all of the members of the putative class even though the statute of limitations expired in the meantime. Other courts reached a different outcome and allowed tolling only of the time to bring individual claims. In China Agritech, the Supreme Court resolved this dispute. It held that the American Pipe doctrine tolls the time to bring an individual action, not a class action.
The interplay of these two class action doctrines creates leverage and, with it, an opportunity for mischief. While the parties are engaging in discovery and expert work and getting ready to brief class certification, the statute of limitations to bring an individual claim is tolled, but the time to bring a class claim continues to run. When the time remaining under the statute of limitations is about to expire at the time the class action is filed or when the time to litigate the class certification motion is long, the limitations period to bring a class action may expire while the class certification motion remains pending. China Agritech resolved that only the individual claims of putative class members are tolled during the pendency of the class action case. That is where opportunity for mischief comes in.
Once the statute of limitations to bring a new class action expires, only the incumbent class plaintiff has the power to litigate the case on behalf of the class. Only that individual has the leverage to obtain a large settlement on a class basis. If that class representative were to settle the case individually and drop the class claim, which the class representative can do without judicial approval, members of the class have no recourse other than to file individual actions. If the class case is one that aggregates many small claims and is economically viable only with class treatment, individual actions would be poor substitutes for class litigation.
For this leverage to arise, the parties must be certain the pending case is the only case that can be brought as a class. Sometimes statutes of limitations are unclear, or similar factual claims could be filed on different theories with different limitations periods. Defendants are not willing to overpay for an individual settlement if that settlement does not buy peace.
When there is certainty that a pending class action is the only class case that can be brought, however, tremendous leverage accrues through the mere passage of time to the class representative (or, often more accurately, the class representative’s counsel). By this accident of timing, the class representative knows that the premium attached to a certified class can be recovered, if at all, only through that case. If the statute of limitations has expired, there will be no other class litigation.
The way it should work is that the putative class representative and class counsel continue to act on behalf of the class, pursue class certification, and try to maximize the class’s recovery. Rule 23 requires court supervision of class litigation and approval of class settlements to enforce that expected behavior. That is how Rule 23 guards the class against collusion and self-dealing. But that rule does not prevent an unscrupulous class representative from demanding from defendants a substantial premium, perhaps approaching the value of the class case, to settle without court approval on an individual basis once the statute of limitations has run. With no other class representative able to sue on behalf of the class, the incumbent class representative has no need to share the class premium with the class.
An example demonstrates the risk. Imagine a large potential class action in which each class member’s individual damages are slight. In that circumstance, there is no real risk that plaintiffs will file individual claims. Class certification has not been decided. Assume that if the class is certified and prevails on the merits, the class will recover damages of $50 million. A scrupulous class representative would demand $50 million to settle the case on behalf of the putative class. A negotiated settlement, perhaps for some fraction of that demand, would be shared with the entire class. An unscrupulous class representative could take a different approach once the time to file a new class action has passed. The unscrupulous class representative could demand less—let’s say $10 million—to settle the claim on an individual basis. Plaintiff and counsel can split that bounty in any way they choose. There will be no judicial supervision. Because it is an individual settlement, the district court would never learn the terms of the deal, and the settlement would not need judicial approval. Yet, it would have the same preclusive effect. While there could be a handful of individual actions, it would not be possible for another class plaintiff to sue on behalf of the now-abandoned class. A defendant may be willing to do the deal—resolving the entire case, quietly, at a discount. Through the individual settlement, the defendant would effectively obtain a class-wide release without the publicity and cost of class certification and at a financial discount from a class settlement.
The convergence of class action timing caused by Rule 23’s amendment and the Supreme Court’s rulings in Wal-Mart and China Agritech has created this leverage and opportunity for mischief. By pushing class certification out beyond the expiration of the statute of limitations and by tolling only the time to file individual claims, the combination effect can empower the incumbent class representative to act out of self-interest alone and capture the value of the class action without compensating the class, while evading judicial supervision.
Judicial opinions often describe class action issues in economic terms. Courts may seek to award counsel with a fee equivalent to what the market would set. Class objectors sometimes bring market discipline to the evaluation of a settlement. The aggregation of a class case has been compared to a central planning model, as opposed to a free-market one. A class plaintiff representing a class after the statute of limitations has expired is a different type of market participant altogether—a monopolist. That putative class plaintiff is able to exert “market power” over the outcome of the litigation. An unscrupulous one may use the accident of timing for personal benefit in a way unanticipated by the rules.
There are ways to eliminate or lessen the leverage of an incumbent class representative after the limitations period has expired. Often a class will be represented by multiple counsel, organized as a committee of plaintiffs’ counsel. A committee of class counsel would be less susceptible to this temptation as any individual member of the committee could blow the whistle. Likewise, if competing class actions have been filed by other plaintiffs before the statute of limitations expires, the existence of other viable class claims would prevent any one putative class representative from having exclusive leverage. But multiple lawsuits do not often go forward; having multiple, simultaneous suits defeats the purpose of class actions and American Pipe tolling.
Courts may also need to step in. In applying new provisions in Rule 23 that require disclosure of agreements to withdraw or forgo an objection, courts are beginning to demand that objectors surrender any premium they obtain by trading on the value of the class claim. Courts, such as the Seventh Circuit in Pearson v. Target, Inc., 968 F.3d 827 (7th Cir. 2020), have characterized such conduct as “objector blackmail.” Such decisions suggest that the power of the class should not lead to private benefit. As of yet, the rules do not require disclosure and scrutiny of individual settlements, where the mischief of private benefit can be wrought.
In the absence of a rule, exploiting the leverage is nonetheless a risky venture for the putative class plaintiff’s counsel. The risk of disclosure of such self-dealing, even if unlikely, should deter putative class counsel from selling out their class, possibly sacrificing their reputation among the community of the class action bar, plaintiff and defense, and putting their professional future at risk.
Still, the combination of these class action timing rules can create an enticement that would tempt even the most honorable lawyers. Lawyers on both sides of the v. who practice in this area must pay attention to how the delayed timing of class certification can make a monopolist out of a putative class representative willing to sell out the class and capture the premium associated with class-wide resolution for individual gain.
