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Litigation News

Litigation News | 2024

A Class Conundrum: Filing Suit Does Not Make You a Plaintiff

Tiega Noel Varlack


  • Court throws out investor’s appeal of dismissal, finding he was not a plaintiff.
  • The appellate court reasoned that although the investor had filed the lawsuit and listed himself on the caption page, he was not a party and did not significantly participate in the litigation.
  • The Private Securities Litigation Reform Act of 1995 applied due to allegations of securities fraud.
A Class Conundrum: Filing Suit Does Not Make You a Plaintiff
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A federal appellate court has held that an individual investor lacked standing to appeal an order dismissing a class action that he originally filed. In Habelt v. Pub. Emps' Ret. Sys. of Miss., the appellate court reasoned that although the investor had filed the lawsuit and listed himself on the caption page, he was not a party and did not significantly participate in the litigation. The case included allegations of securities fraud, and therefore the Private Securities Litigation Reform Act of 1995 (PLRSA) applied.

An individual investor filed a complaint claiming that the defendants (a company and its executives) had misled investors about how its product, a heart monitor patch, would be reimbursed by the Centers for Medicare and Medicaid Services (CMS). The complaint alleged that the company told its investors that CMS would likely adopt a reimbursement rate of around $380 per patch but that the company hid from its investors the fact that it had not provided CMS with the type of data it needed to price the patch at that rate. When the rate was announced, it was much lower than expected, and the share price dropped.

Although the individual investor filed the putative class action suit in response, the court appointed another plaintiff. The appellate court explained that, in PLRSA cases, there is a rebuttable presumption that the trial court should appoint as lead plaintiff the entity with the “largest financial interest” in the relief sought by the class after the complaint is filed. In Habelt, the U.S. District Court for the Northern District of California appointed the Mississippi State Retirement System to serve as lead plaintiff. The individual investor who had originally filed suit did not apply for appointment, nor did he otherwise participate in the case.

Thereafter, the defense filed a motion to dismiss in lieu of an answer, which the district court granted. The retirement system, as lead plaintiff, then filed an amended complaint which was also dismissed. The individual investor appealed the latter dismissal.

Individual Investor’s Appeal Dismissed for Lack of Standing

The U.S. Court of Appeals for the Ninth Circuit dismissed the investor’s appeal, finding that he lacked standing for two reasons. First, the court found that the investor was not a party to the action because after he filed the complaint, he did not participate significantly in the district court. Second, the amended complaint, which did not specifically name him in any of its allegations, superseded the original. The majority also found that the equities did not favor allowing him to appeal as a non-party.

Although the investor was listed in the caption, the body of the complaint made clear that the retirement system was the plaintiff, and the class had not been certified. Thus, despite the investor being a part of the putative class, for purposes of appealing an adverse judgment, the term “party” did not include unnamed class members.

The dissent would have held that investor was a “party” and, therefore, had a right to appeal. It reasoned that “[p]arty status does not depend on being present in the district court litigation from the moment it began or at the moment it ended.” Moreover, according to the dissent, even if the investor was not a party, exceptional circumstances existed to allow him to appeal. Specifically, the investor initiated the lawsuit and remained in the caption of the amended complaint. His claims were covered by the substantive allegations in the amended complaint, and the investor did not act to remove himself from the litigation, the dissent concluded. Further, the district court never told the investor that he was no longer a party.

Section Leaders Offer Mixed Reviews

The court’s rejection of appellate standing for the original plaintiff drew varied reactions from ABA Litigation Section leaders. “The standing issue is interesting to me,” states Jason K. Kellogg, Miami, FL, cochair of the Litigation Section’s Class Actions & Derivative Suits Committee. “There are so many traps for the unwary in this job. This decision presents a new creative way of falling into a trap that creates litigation,” remarks Kellogg.

“This is a tough one, as evidenced by the split panel,” adds Ian H. Fisher, Chicago, IL, immediate past cochair of the Section’s Class Actions & Derivative Suits Committee. “Once Habelt filed the case, he was a plaintiff and, absent notice that his status would change and an opportunity to contest the change, he should remain a party for the purposes of an appeal,” concludes Fisher.

“The decision seems sound to me. It is a procedural case, one that could be useful to examine in a first year civil procedure class” says Mark E. Rooney, Washington, DC, cochair of the Section’s Consumer Litigation Committee. “Not everyone can appeal every decision, and in this case, Mr. Habelt is not bound by the decision below anyway. While he cannot appeal in this case, he may live to fight another day,” Rooney concludes.

Active involvement in the litigation is the key to avoiding a similar outcome. “If one represents a plaintiff who is not selected to be the lead plaintiff, stay involved and vocal in the proceedings to make clear you are not abdicating the role of plaintiff,” suggests Fisher.