Standards for Settlement Class Laxer Than for Litigation Class — Trial Management Problems Irrelevant — Securities Fraud Plaintiffs Needn’t Enjoy Fraud on the Market Presumption to Satisfy Predominance

In re AIG Int’l Grp., Inc., Secs. Litig., 2012 U.S. App. LEXIS 16911 (2d Cir. Aug. 13, 2012):

In this class action case, we face a rare joint appeal from a district court's order. After the parties arrived at a settlement agreement, the district court ... denied plaintiffs' motion to certify a settlement class. The court held that the class could not satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) because the fraud-on-the-market presumption does not apply to the class's securities fraud claims. We hold that, under Amchem Products, Inc. v. Windsor, 521 U.S. 591, 620 (1997), a securities fraud class's failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating "intractable management problems" at trial. Because settlement eliminates the need for trial, a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement. We therefore vacate the district court's class certification ruling, its grant of judgment on the pleadings, and its grant of partial final judgment under Federal Rule of Civil Procedure 54(b), and remand this case to the district court. ***

II. Class Certification Requirements

"Rule 23 does not set forth a mere pleading standard." Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011). The party seeking "class certification must affirmatively demonstrate . . . compliance with the Rule," and a district court may only certify a class if it "'is satisfied, after a rigorous analysis,'" that the requirements of Rule 23 are met. Id. (quoting Gen. Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 161 (1982)); see also In re IPO, 471 F.3d at 41 (holding that a district court must make a "definitive assessment of Rule 23 requirements" and "resolve[] factual disputes relevant to each Rule 23 requirement"); Myers, 624 F.3d at 547 ("The party seeking class certification bears the burden of establishing by a preponderance of the evidence that each of Rule 23's requirements has been met."). As the Supreme Court has recently noted, "[f]requently that 'rigorous analysis' will entail some overlap with the merits of the plaintiff's underlying claim. That cannot be helped." Wal-Mart Stores, 131 S. Ct. at 2551; see also In re IPO, 471 F.3d at 41 (holding that "the obligation to make [Rule 23] determinations is not lessened by overlap between a Rule 23 requirement and a merits issue, even a merits issue that is identical with a Rule 23 requirement").

Before approving a class settlement agreement, a district court must first determine whether the requirements for class certification in Rule 23(a) and (b) have been satisfied. See In re Pet Food Prods. Liab. Litig., 629 F.3d 333, 341 (3d Cir. 2010). Thus, the court must assess whether the proposed class satisfies Rule 23(a)'s four threshold requirements: (1) numerosity ("the class is so numerous that joinder of all members is impracticable"), (2) commonality ("there are questions of law or fact common to the class"), (3) typicality ("the claims or defenses of the representative parties are typical of the claims or defenses of the class"), and (4) adequacy of representation ("the representative parties will fairly and adequately protect the interests of the class"). Fed. R. Civ. P. 23(a). The district court must also determine whether the action can be maintained under Rule 23(b)(1), (2), or (3). In this case, the Lead Plaintiffs seek to certify a class under Rule 23(b)(3), which permits certification where "the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." If the class satisfies the requirements of Rules 23(a) and (b), then the district court must separately evaluate whether the settlement agreement is "fair, reasonable, and adequate" under Rule 23(e).

In its landmark decision in Amchem, the Supreme Court addressed whether a class of both current and future asbestos claimants could be certified for the purpose of entering into a global settlement of virtually all asbestos claims. 521 U.S. at 597, 602. The Court noted that the settlement class consisted of "[u]ntold numbers of individuals," including both plaintiffs who currently manifested asbestos-related injuries and those who had only been exposed to asbestos-containing products. Id. at 602-03. The Court held that this "sprawling" class failed both Rule 23(b)(3)'s predominance requirement and Rule 23(a)(4)'s adequacy of representation requirement, and accordingly refused to permit the certification of the class. Id. at 622-28.

In the course of its opinion, the Court recognized that "the 'settlement only' class has become a stock device" in modern class action litigation, and noted that it had "granted review to decide the role settlement may play, under existing Rule 23, in determining the propriety of class certification." Id. at 618, 619. The Court squarely held that "[s]ettlement is relevant to a class certification." Id. at 619. According to the Court, a district court "[c]onfronted with a request for settlement-only class certification . . . need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there be no trial." Id. at 620 (citing Fed R. Civ. P. 23(b)(3)(D)). At the same time, however, the Court stressed that in the settlement context "other specifications of [Rule 23] -- those designed to protect absentees by blocking unwarranted or overbroad class definitions -- demand undiluted, even heightened, attention." Id. As Judge Scirica has explained:

[S]ome inquiries essential to litigation class certification are no longer problematic in the settlement context. A key question in a litigation class action is manageability — how the case will or can be tried, and whether there are questions of fact or law that are capable of common proof. But the settlement class presents no management problems because the case will not be tried. Conversely, other inquiries assume heightened importance and heightened scrutiny because of the danger of conflicts of interest, collusion, and unfair allocation.

Sullivan v. DB Invs., Inc., 667 F.3d 273, 335 (3d Cir. 2011) (Scirica, J., concurring) (citing Amchem, 521 U.S. at 620); see also In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Products Liab. Litig., 55 F.3d 768, 795 (3d Cir. 1995) (identifying "collusion, inadequate prosecution, and attorney inexperience [as] the paramount concerns in precertification settlements"). Thus, in the context of settlement, Rules 23(a) and (b) continue to serve the purpose of "focus[ing] court attention on whether a proposed class has sufficient unity so that absent members can fairly be bound by decisions of class representatives." Amchem, 521 U.S. at 621.

Footnote 8. Accordingly, the Amchem Court cautioned that the fairness inquiry under Rule 23(e) does not supplant the Rule 23(a) and (b) requirements, but instead "function[s] as an additional requirement." Id.; see also Ortiz v. Fibreboard Corp., 527 U.S. 815, 858 (1999) ("Rule 23 requires protections under subdivisions (a) and (b) against inequity and potential inequity at the precertification stage, quite independently of the required determination at postcertification fairness review under subdivision (e) that any settlement is fair in an overriding sense.").


Rule 23(b)(3)'s predominance requirement tests "whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem, 521 U.S. at 623. The requirement's purpose is to "ensure[] that the class will be certified only when it would 'achieve economies of time, effort, and expense, and promote . . . uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results.'" Cordes & Co. Fin. Servs., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 104 (2d Cir. 2007) (quoting Amchem, 521 U.S. at 615). While predominance may be difficult to demonstrate in mass tort cases, such as Amchem, in which the "individual stakes are high and disparities among class members great," it is a "test readily met in certain cases alleging consumer or securities fraud or violations of the antitrust laws." Amchem, 521 U.S. at 625.

When evaluating litigation classes, we have held that the predominance "requirement is satisfied 'if resolution of some of the legal or factual questions that qualify each class member's case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof.'" Myers, 624 F.3d at 547 (quoting Moore v. PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002)); see also In re Salomon, 544 F.3d at 480 ("To meet the [predominance] requirement, a plaintiff must show that those issues in the proposed action that are subject to generalized proof outweigh those issues that are subject to individualized proof." (internal quotation marks omitted)); In re Nassau County Strip Search Cases, 461 F.3d 219, 227 (2d Cir. 2006) ("[A]n issue is common to the class when it is susceptible to generalized, class-wide proof.").

In the context of a settlement class, concerns about whether individual issues would create "intractable management problems" at trial drop out of the predominance analysis because "the proposal is that there be no trial." Amchem, 521 U.S. at 620. However, the certifying court must still determine whether the "the legal or factual questions that qualify each class member's case as a genuine controversy" are sufficiently similar as to yield a cohesive class. Id. at 623; see also Sullivan, 667 F.3d at 338 (Scirica, J., concurring) ("Issues of predominance and fairness do not undermine this settlement. All plaintiffs here claim injury that by reason of defendants' conduct . . . has caused a common and measurable form of economic damage. . . . All claims arise out of the same course of defendants' conduct; all share a common nucleus of operative fact, supplying the necessary cohesion."). The focus of this analysis is on "questions that preexist any settlement," and not on whether all class members have "a common interest in a fair compromise" of their claims. Amchem, 521 U.S. at 623.

While the predominance inquiry will sometimes be easier to satisfy in the settlement context, other requirements of Rule 23 "designed to protect absentees by blocking unwarranted or overbroad class definitions," such as the Rule 23(a)(4) requirement of adequate representation, will "demand undiluted, even heightened, attention." Id. at 620; see also In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions, 148 F.3d 283, 308 (3d Cir. 1998) (suggesting that "the key to Amchem appears to be the careful inquiry into adequacy of representation"); In re Literary Works in Elec. Databases Copyright Litig., 654 F.3d 242, 250-55 (2d Cir. 2011) (vacating certification of settlement class of copyright owners because of conflicts between different categories of class members).

III. Certification of the Gen Re Settlement Class

The district court held that it could not certify a settlement class because Stoneridge barred plaintiffs from invoking the fraud-on-the-market presumption against Gen Re.***

[T]he court erred in holding that a Section 10(b) settlement class must satisfy the fraud-on-the-market presumption in order to demonstrate predominance. In the context of a litigation class, the fraud-on-the-market presumption spares the plaintiff class from the extremely laborious -- and often impossible -- task of proving at trial that each individual plaintiff was aware of and specifically relied upon the defendant's false statement. See Basic, 485 U.S. at 245 (noting that presumptions such as the fraud-on-the-market presumption "serve to assist courts in managing circumstances in which direct proof . . . is rendered difficult"); Hevesi, 366 F.3d at 78 ("To the extent that members of a plaintiff class of securities purchasers can invoke the Basic presumption by alleging fraud on the market, they need not prove individual reliance on alleged misrepresentations by an issuer. By contrast, if plaintiffs are not entitled to the Basic presumption because they cannot plead fraud on the market, reliance must be proved separately as to each class member . . .").

Therefore, a litigation class's failure to qualify for Basic presumption typically renders trial unmanageable, precluding a finding that common issues predominate. See Basic, 485 U.S. at 242 ("Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones."). By contrast, with a settlement class, the manageability concerns posed by numerous individual questions of reliance disappear. See Amchem, 521 U.S. at 620.***

Footnote 10. We note that the Supreme Court has recently granted certiorari in Amgen Inc. v. Connnecticut Retirement Plans and Trust Funds, No. 11-1085, 2012 WL 692881 (June 11, 2012). The two questions presented by the petition for certiorari seek resolution of a split among the circuits regarding whether (1) in Section 10(b) misrepresentation cases district courts must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory, and (2) whether, in such cases, district courts must permit defendants to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based upon that theory. See Petition for a Writ of Certiorari, Amgen Inc. v. Connnecticut Retirement Plans and Trust Funds, No. 11-1085, 2012 WL 707042, *i (March 1, 2012); see also id. at *8-13 (discussing circuit split on these questions, and noting that our decision in In re Salomon requires that, at the class certification stage, plaintiffs present proof of a material misrepresentation and defendants have an opportunity to rebut the fraud-on-the-market presumption). The two questions in Amgen arise from Section 10(b) cases addressing the certification standards for litigation classes, not settlement classes, and are thus not at issue in this appeal.

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