Friday, January 12, 2007

Class Actions – Merits Review Is “In” in the Second Circuit

It’s a securities case – but a big one – and it bears mentioning here. In In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006) ("Miles"), the Second Circuit started what might be a sea change in how class actions are certified. We’re not going to get into details, because anyone can read the opinion and lots of people will no doubt comment, but it does bear mentioning here. Miles reads almost like a Daubert analysis of the methodology of class certification, and holds that class certification requires definitive proof for each element of Rule 23 and that the plaintiff must meet a preponderance of the evidence standard to establish that every claim can be proven on a predominately classwide basis. “Some showing” is not enough. Id. at 32.

The certifying court must make formal determinations at to each of the Rule’s requirements. Id. at 40.

The judge must examine the relevant factual disputes, figure out what facts are relevant to each Rule 23 requirement, and state how the classwide proof standard is met. Id.

Inquiry into the merits is specifically permitted (good-bye Eisen, see 471 F.2d at 33-34), indeed encouraged, and the obligation to determine predominance cannot be shirked by calling something a “merits issue.” Id. at 40-41.

The district court can tailor discovery both to ensure predominance is addressed and to prevent certification from becoming a pre-trial trial. Id. at 41.

It does not escape our notice that the district courts of the Second Circuit have been the source of some of the most extreme attempts at class certification in the product liability area. We also doubt that this fact escaped the Second Circuit’s notice. Now that the Second Circuit has adopted the most stringent approach to class certification review that we have yet seen, we trust that district courts in the Second Circuit – and elsewhere – will be less tempted than in the past to aggregate product liability claims through questionable class certification decisions.

If the district courts can’t be deterred, we hope that the Second Circuit enforces its new standard as “rigorously” as the Miles opinion promises.

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