Class Actions Protect Investors and Consumers from Abuse: An Overview of the Requirements for Prosecuting and Certifying a Class Action
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Class Actions Protect Investors and Consumers from Abuse: An Overview of the Requirements for Prosecuting and Certifying a Class Action

A class action is a powerful procedural tool to hold corporate wrongdoers accountable where there is widespread abuse of a large number of individuals who have suffered damages that individually are insufficient to support the cost of prosecuting individual claims. Class actions have been most effective in redressing investment fraud, sales of defective products and in the management of toxic chemical pollution and damage claims.

Rule 23 of the Federal Rules of Civil Procedure is the starting point and the foundation for class action practice in the United States. This article provides a summary of the federal law on class actions that are filed in the U.S. District Court. The same rules have been adopted by most states to control class actions filed in state courts.

Fed. R. Civ. P. 23(a)(1) requires that the class be "so numerous that joinder of all members is impracticable." Numerosity depends on the specific facts of each case.

Fed. R. Civ. P. 23(a)(2) requires that there be "questions of law or fact common to the class." In re Asbestos School Litig., 104 F.R.D. 422(E.D. Pa 1984). Absent commonality, a class action judgment is not binding on the class with respect to the questions of law or fact that were not common to the class. Cooper v. Federal Reserve Bank of Richmond, 467 U.S. 867, 104 S. Ct. 2794 (1984).

Fed. R. Civ. P. 23(a)(3) requires that a class action may be maintained only if "the claims or defenses of the representative parties are typical of the claims or defenses of the class." Typicality is to ensure that the interests of the class representative are aligned with the interest of the class. General Tel. Co. v. Falcon, 457 U.S. 147, 157 n.13 (1982). Factual distinctions between plaintiffs are acceptable if the claim arises from the same event, or course of conduct, and if it is based on the same legal theory. Heastie v. Community Bank, 125 F.R.D. 669 (N.D. Ill. 1989). No certification when the legal theories of the named plaintiffs conflict with those of the absent class members. See, e.g., Georgine v. AmChem Products, Inc., 83 F.3d 610 (3d Cir. 1996) (class contained those presently suffering from asbestos exposure and those not yet injured).

Fed. R. Civ. P. 23(a)(4) requires that the class representatives "fairly and adequately protect the interests of the class." See also Hansberry v. Lee, 311 U.S. 32, 61 S. Ct. 115 (1940) (due process requires that class members share the same interests as the class representative). Adequacy of representation requirement, a class representative must be part of the class and possess the same interest and suffer the same injury as class members. East Tex. Motor Freight Sys., Inc. v. Rodriguez, 431 U.S. 395, 97 S. Ct. 1891 (1977). Adequacy also requires that the class counsel provide adequate representation. See e.g., In re: General Motors Corp. Pickup Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768 (3d Cir.), cert. denied, 116 S. Ct. 88 (1995) (adequate experience, vigorously prosecute and act at arms length).

Fed. R. Civ. P. 23 requires that class members be permitted to opt out when the class action involves claims for substantial, individualized money damages. See, Fed. R. Civ. P. 23(c)(2); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985). See also Brown v. Ticor Title Ins. Co., 982 F.2d 386 (9th Cir. 1992) (where no opportunity to opt out, damage claims will not be barred by res judicata).

In addition to meeting the general requirements for all class actions, a Rule 23(b)(3) "opt­out" class action must meet the additional requirements of "predominance" and "superiority." Predominance requires that questions of law or fact common to the members of the class predominate over questions affecting only individual members. Fed. R. Civ. P. 23(b)(3). Predominance is difficult to meet in mass tort cases, where individual concerns may supersede common questions. See, e.g., Castano v. The American Tobacco Co., 84 F.3d 734 (5th Cir. 1996) (variations in state law required decertification of a nation­wide class).

Superiority requires that the class action device be superior to other available means of fairly and efficiently adjudicating the controversy. Fed. R. Civ. P. 23(b)(3). Where a class action seeks to include plaintiffs with factually or legally different claims, the superiority requirement ordinarily cannot be met. See, e.g., Georgine v. AmChem Products, Inc., 83 F.3d 610 (3d Cir. 1996).

Mandatory class actions are limited to cases that do not involve claims that are wholly or predominantly for money damages. Fed. R. Civ. P. 23(b)(1)(A) authorizes mandatory class actions when individual litigation might "establish incompatible standards of conduct for the party opposing the class" but only when the risk of inconsistent adjudications would have the effect of placing the defendant in an "actual or virtual dilemma" with respect to what standards of conduct to follow. Advisory Committee Notes to 1966 Amendments of Rule 23, 39 F.R.D. 69, 100 (1966). A "dilemma" does not occur because plaintiffs might be more successful than others. In re Bendectin Prod. Liab. Litig., 749 F.2d 300 (6th Cir. 1984).

Fed. R. Civ. P. 23(b)(1)(B) permits certification of a mandatory class where there is evidence that class members would be unfairly harmed if some class members attempted to pursue separate litigation because of a "limited fund" that is insufficient to satisfy all claims. A "limited fund" case must have a "substantial probability" that recovery by one class member might impair recovery by another class member. Jenkins v. Raymark Industries, Inc., 109 F.R.D. 269, 277 (E.D. Tex. 1985) Most courts require an evidentiary hearing regarding the financial assets of the defendant. See In re Temple, 851 F.2d 1269, 1272 (11th Cir. 1988) (finding the net worth of the required.) Fed. R. Civ. P. 23 (b)(2) permits mandatory classes for those cases where injunctive relief claims predominate. Rule 23(b)(2) is most commonly used in civil rights cases and is inapplicable in cases where money damages is the primary relief sought. See Newberg on Class Actions, §4.12 at 4­42 (3d ed. 1992).

Notice and the opportunity to be heard are essential elements of due process in class actions. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 318­19 (1950). Fed. R. Civ. P. 23(c)(2) requires notice to class members when they would be included in an opt­out class. The notice must fairly apprise class members of their right to exclude themselves. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 318­19 (1950). Fed. R. Civ. P. 23(e) requires notice to class members of a proposed settlement, which must fairly apprise class members of the settlement's terms and of their options. Mullane v. Central Hanover Bank & Trust Co. Courts have also held that the class must also be provided with notice of the proposed attorneys' fees. See, e.g., Piambino v. Bailey, 610 F.2d 1306, 1328 (5th Cir.). Notice must be directed to all class members identified through reasonable effort, regardless of the size of the class, cost, or inconvenience. Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974). For unidentified class members, publication may provide sufficient notice. In re Agent Orange Prod. Liab. Litig., 818 F.2d 145, 168­70 (2d Cir. 1987). The class notice should be neutral in tone and "avoid even the appearance of judicial endorsement of the merits of the action." Hoffman­LaRoche, Inc. v. Sperling, 493 U.S. 165, 174 (1989).

In cases of proposed settlements, the question is whether the settlement is fair, reasonable, and adequate. Piambino v. Bailey, 610 F.2d 1306 (5th Cir.), cert. denied, 449 U.S. 1011 (1980). The court must be assured that the settlement adequately protects the interests of all class members, particularly when monetary interests are involved. In re General Motors Corp. Pick­up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir. 1995); Diaz v. Trust Territory of Pac. Islands, 876 F.2d 1401 (9th Cir. 1989); Shelton v. Pargo, Inc., 852 F.2d 1298 (4th Cir. 1978).

Newberg sets out eight general criteria for settlement approval:

1) likelihood of recovery, or likelihood of success;

2) amount and nature of discovery or evidence;

3) settlement terms and conditions;

4) recommendation and experience of counsel;

5) future expense and likely duration of litigation;

6) recommendation of neutral parties, if any;

7) number of objectors and nature of objections; and

8) presence of good faith and absence of collusion.

See Newberg On Class Actions §11.43 (3d ed. 1992). Courts also consider whether there has been adequate discovery with which to evaluate the proposed settlement. See also Flinn v. F.M.C. Corp., 528 F.2d 1169 (4th Cir. 1975) ("The fact that all discovery has been completed and the cause is ready for trial is important since it ordinarily assures sufficient development of the facts to permit a reasonable judgment on the possible merits of the case").

Only class members have standing to object to a proposed settlement. Newberg On Class Actions §11.55 at 11­134 (3d ed. 1992). Those who exclude themselves from the class action do not have standing to object. Many courts have held that an objecting class member must formally intervene, pursuant to Rule 24, in order to have standing to appeal the approval of a class action settlement. See Walker v. City of Mesquite, 858 F.2d 1071, 1074 (5th Cir. 1988). The Third and Ninth Circuits have consistently allowed objecting class members to appeal without moving to intervene. See Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1310 (3d Cir. 1993); In re Cement Antitrust Litig., 688 F.2d 1297, 1309 (9th Cir. 1982), aff'd sub nom., Arizona v. Ash Grove Cement Co., 459 U.S. 1190 (1983).

When a lawyer recovers a common fund for the benefit of others, the court is empowered to award an attorneys' fee from the fund. See, e.g., Boeing Co. v. Van Gemert, 444 U.S. 472 (1980); see also Lindy Bros. Builders v. American Radiator & Std. Sanitary Corp. (Lindy I), 487 F.2d 161, 165 (3d Cir. 1973). Courts differ on whether to use the percentage method or a lodestar approach in determining a reasonable attorneys' fee. The percentage method allocates attorneys' fees through a percentage of the common fund established for the benefit of the class. Camden I Condo. Assoc., Inc. v. Dunkle, 946 F.2d 768 (11th Cir. 1991). The Eleventh Circuit is the only circuit that mandates the use of the percentage method. Other circuits permit the use of the percentage method, but do not require its use. See, e.g., In re General Motors Corp. Pick­up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768,820­822 (3d Cir. 1995); Brown v. Phillips Petroleum Co., 838 F.2d 451, 454 (10th Cir.); Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1311 (9th Cir. 1990); Bebchick v. Washington Metro. Area Transit Comm'n., 805 F.2d 396, 407 (D.C. Cir. 1986); In re Continental Illinois Sec. Litig., 962 F.2d 566, 572 (7th Cir. 1992). Awards generally range between 25 and 30 percent of the fund. See, e.g., Paul, Johnson, Alston & Hunt v. Graulty, 866 F.2d 268 (9th Cir. 1989)(suggesting that 25% should be the benchmark for percentage fee awards).

The lodestar method involves multiplying the number of hours reasonably expended by the prevailing hourly rate in the community for similar work. The lodestar may then be adjusted upward or downward based on additional factors. See, e.g., Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717­19 (5th Cir. 1974); Longden v. Sunderman, 979 F.2d 1095, 1099 (5th Cir. 1992). The party seeking an award of fees must present "evidence that is adequate for the court to determine what hours should be included in the reimbursement." Bode v. United States, 919 F.2d 1044, 1047­49 (5th Cir. 1996).

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