How Much Is Enough?

Second Circuit's Decision

In In re: Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006), the Second Circuit resolved the 'surprisingly unsettled' issue of what standards should be applied by the district court on a Rule 23 motion for class certification. Although the case involved claims of securities fraud, and therefore required analysis of factual issues and legal principles not found in employment cases, its holding is nonetheless instructive for any Rule 23 class action. The court held that a proposed class should be certified under Rule 23 only if consideration of all the evidence presented by both parties ' not just an evaluation of plaintiffs' allegations and evidence ' revealed that plaintiffs had met each Rule 23 requirement. The court made clear that, even when this assessment requires some exploration of the merits of the case, courts must nonetheless conduct that assessment before certifying a Rule 23 class.

The Second Circuit thus rejected the approach it had suggested in earlier Rule 23 cases. In In re Visa Check/MasterMoney Antitrust Litigation, 280 F.3d 124 (2d Cir. 2001), the court had acknowledged that courts must conduct a 'rigorous analysis' of whether plaintiffs satisfied Rule 23, but had also admonished courts to avoid an examination of the merits of the case. Id. at 135 (citing Caridad v. Metro-North Commuter R.R., 191 F.3d 283, 291 (2d Cir. 1999)). The Visa Check court, like the Caridad court before it, had found the appropriate balance of these principles to lie in, for example, examining plaintiffs' experts' reports to determine whether the methodology was so flawed as to render the reports inadmissible, but not going so far as to weigh conflicting expert evidence. Relying on Supreme Court case law, principally including Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), these earlier Second Circuit decisions had emphasized the need to refrain from any assessment of the evidence, at the class certification stage, that approached an evaluation of the merits of the case.

After thoroughly reviewing the Supreme Court case law on which the Caridad court, and others, had relied, the IPO Securities Litigation court made two significant clarifications of the law in this area. First, it concluded that the Supreme Court had never signaled that courts should refrain from analyzing a Rule 23 requirement that overlapped with the merits of the case. Rather, district courts must make a 'definitive assessment of Rule 23 requirements, notwithstanding their overlap with merits issues.' IPO Securities Litigation, 471 F.3d at 41. The court nonetheless cautioned against allowing the Rule 23 class certification hearing to be transformed into a mini-trial on the merits, holding that district courts have wide latitude in imposing limitations on discovery and on the hearing itself. Id. Second, the court rejected the view that plaintiffs must only adduce 'some' evidence that the Rule 23 requirements are met, holding instead that plaintiffs must persuade the district court, on the relevant facts and applicable legal standards, that they have proven numerosity, typicality, and the other Rule 23 requirements. The court explained that, to determine that Rule 23 has been satisfied, district courts will likely be required to make findings on underlying facts and cannot hold that a particular requirement has been met simply because there is a disputed underlying fact. Id. at 40.

Other Courts of Appeals

The Second Circuit's decision in IPO Securities Litigation brings it in line with the majority of other courts of appeals to have addressed the issue of whether it is permissible for a district court to consider issues on a class certification motion that overlap with the merits of the case and to weigh the parties' evidence and make necessary factual findings. For example, the Seventh Circuit has been very clear that it is appropriate and may be necessary for the court to assess, on a class certification motion, issues that bear on the substantive merits of the case. Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 676 (7th Cir. 2001). Other courts of appeals have issued similar rulings. See, e.g., Bell v. Ascendant Solutions, Inc., 422 F.3d 307 (5th Cir. 2005); Blades v. Monsanto Co., 400 F.3d 562 (8th Cir. 2005); Cooper v. Southern Co., 390 F.3d 695 (11th Cir. 2004); Gariety v. Grant Thornton, LLP, 368 F.3d 356 (4th Cir. 2004); Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154 (3d Cir. 2001). The Second Circuit in IPO Securities Litigation took the analysis further than some of its sister circuits had done, however, insofar as some of the other courts had examined the issues in a more limited context; indeed, in some of the earlier cases (see, e.g., Gariety, 368 F.3d at 365) plaintiffs had argued that the standards for a Rule 23 class certification motion were akin to those for a Rule 12(b)(6) motion, whereby all of a plaintiff's factual allegations are presumed true. By analyzing in a broader context that quantum of evidence that district courts must require of plaintiffs seeking class certification under Rule 23, the Second Circuit created more comprehensive guidelines for district courts on these issues.

The First Circuit is the only court of appeals to have addressed the question of the standard of proof plaintiffs must meet on a Rule 23 motion for class certification, but to have drawn a somewhat different conclusion from that of other courts of appeals. In In re Polymedica Corp. Securities Litigation, 432 F.3d 1 (1st Cir. 2005), the court acknowledged the split that existed between the Second Circuit's approach to Rule 23 class certification motions and that of other courts of appeals, and then articulated its 'preference' for the latter line of cases. The Polymedica court then appeared to characterize that line of cases as permitting district courts to go beyond the mere allegations and pleadings to decide a class certification motion, but not as requiring district courts to engage in a full evaluation of evidence, including expert reports, before ruling on a class certification motion. Rather, after reviewing extensive case law and other authority on the securities law issues central to the case, the Polymedica court articulated a shifting standard, under which the quantum of evidence required to establish that Rule 23's requirements are satisfied is 'one of degree.' Id. at 17. Indeed, the First Circuit had earlier, in 2004, addressed this issue by indicating that, where there is a significant factual dispute between the parties, '[n]othing here obliged the district courts to do more than view the issue as such and, so viewed, it weighs in favor of class action status.' Tardiff v. Knox County, 365 F.3d 1 n.5 (1st Cir. 2004). Accordingly, in the First Circuit, there appears still to be a question as to whether the standards enunciated by the Second Circuit in IPO Securities Litigation would prevail.

Significance of Second Circuit Ruling

The IPO Securities Litigation decision emphasizes that the inquiry under Rule 23 at the class certification stage is rigorous and must consider both plaintiffs' evidence and defendants' evidence, even making factual findings where necessary as a predicate to determining whether the legal standards in Rule 23 have been met. Where this guidance is followed, it will undoubtedly change district courts' analysis of class certification motions, imposing a heavier burden on plaintiffs to adduce evidence that is not only colorable but is also persuasive as to the Rule 23 requirements.

To illustrate the likely impact of the IPO Securities Litigation decision, consider the gender class action at issue in Hnot v. Willis Group Holdings, Ltd., 228 F.R.D. 476 (S.D.N.Y. 2005), where the plaintiffs' certification motion was granted. There, the plaintiffs alleged that their employer, Willis Group, had discriminated against women in the Northeast region, negatively impacting promotion opportunities and compensation, and they sought to certify a class of over 100 female employees who were officers or were eligible to become officers.

As to the Rule 23 requirement of commonality, the Hnot plaintiffs and defendant presented widely disparate evidence as to the existence of common issues of law or fact affecting all class members. In evaluating this evidence, the district court relied heavily on the plaintiffs' evidence that Willis Group had afforded local company officers with unfettered discretion to make personnel decisions, but did not weigh that evidence against defendant's contrary evidence. Indeed, the court cited Willis Group's evidence that local personnel decisions were reviewed by Human Resources and a top level officer, but then dismissed its affect on commonality, by holding that the evidence supported a finding of a common practice without acknowledging that such evidence could not support the common practice ' unfettered discretion ' identified by plaintiffs.

As to the parties' statistical evidence, the Hnot court invoked Caridad for the proposition that the defendant's challenge to plaintiffs' statistical expert had 'minimal force' at the class certification stage. Id. at 483. The court refrained from evaluating the weight of the plaintiffs' statistical analysis as compared with the defendant's statistical analysis, but rather assessed the plausibility of the plaintiffs' expert report in isolation, holding 'plaintiff's report has properly considered the relevant factors to meet commonality.' Id. at 484. Moreover, in addressing Willis Group's argument that the plaintiffs' expert report was not admissible under Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), the court held that the report was not 'junk science' and that 'at the class certification stage, only a plausible position needs to be set forth.' Id. Such standards are just what the IPO Securities Litigation Court rejected as inconsistent with Rule 23 and prevailing Supreme Court precedent, insofar as their application may lead to certification of class actions without any findings that the Rule 23 requirements have been met.

Conclusion

District courts deciding Rule 23 motions for class certification will no doubt consider the Second Circuit's guidance in IPO Securities Litigation, and will likely apply its analysis in determining whether plaintiffs' evidence meets the Rule 23 requirements, paying more attention to making findings on key predicate facts and resolving factual disputes where necessary to draw conclusions on those requirements. Determining the plausibility of the plaintiffs' evidence without addressing the strength of that evidence when considering all the evidence together will not be sufficient. As to the usual battle of experts at the class certification stage in particular, litigants can expect district courts following IPO Securities Litigation to wade much more deeply into an assessment of the relative persuasiveness of the experts' reports, as well as into the fundamental question of admissibility of an expert's opinion. Whether this more comprehensive analysis leads district courts to grant fewer class certification motions, however, remains to be seen.

Victoria Woodin Chavey, a member of this newsletter's Board of Editors, is a partner at Day Pitney LLP, where she chairs the Employment Litigation practice group. She represents employers in litigation in federal and state courts, and can be reached at [email protected].

In employment class actions in federal court, such as class actions under Title VII for which Federal Rule of Civil Procedure 23 provides the governing procedure, the most critical juncture in the case is often the plaintiffs' motion for class certification. That motion requires the court to evaluate whether the plaintiffs have met the Rule 23 requirements and may proceed as a class; denial of the motion generally deals a devastating blow to plaintiffs' claims. In a new ruling that employers can use to support their bids to defeat plaintiffs' motions for class certification under Rule 23, the Second Circuit recently clarified ' and strengthened ' the standard under which district courts should determine plaintiffs' satisfaction of Rule 23's requirements.

Requirements of Rule 23

Under Rule 23, a class may be certified when the plaintiffs meet the requirements of numerosity, commonality, typicality, and adequacy under Rule 23(a). Moreover, plaintiffs must meet one of the standards in subsection (b) of Rule 23; Title VII class actions are most often pursued under either subsection (b)(2), under which plaintiffs may seek injunctive relief, and subsection (b)(3), which requires 'predominance,' that is, that 'the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods' of adjudication.

Second Circuit's Decision

In In re: Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006), the Second Circuit resolved the 'surprisingly unsettled' issue of what standards should be applied by the district court on a Rule 23 motion for class certification. Although the case involved claims of securities fraud, and therefore required analysis of factual issues and legal principles not found in employment cases, its holding is nonetheless instructive for any Rule 23 class action. The court held that a proposed class should be certified under Rule 23 only if consideration of all the evidence presented by both parties ' not just an evaluation of plaintiffs' allegations and evidence ' revealed that plaintiffs had met each Rule 23 requirement. The court made clear that, even when this assessment requires some exploration of the merits of the case, courts must nonetheless conduct that assessment before certifying a Rule 23 class.

The Second Circuit thus rejected the approach it had suggested in earlier Rule 23 cases. In In re Visa Check/MasterMoney Antitrust Litigation, 280 F.3d 124 (2d Cir. 2001), the court had acknowledged that courts must conduct a 'rigorous analysis' of whether plaintiffs satisfied Rule 23, but had also admonished courts to avoid an examination of the merits of the case. Id. at 135 (citing Caridad v. Metro-North Commuter R.R. , 191 F.3d 283, 291 (2d Cir. 1999)). The Visa Check court, like the Caridad court before it, had found the appropriate balance of these principles to lie in, for example, examining plaintiffs' experts' reports to determine whether the methodology was so flawed as to render the reports inadmissible, but not going so far as to weigh conflicting expert evidence. Relying on Supreme Court case law, principally including Eisen v. Carlisle & Jacquelin , 417 U.S. 156 (1974), these earlier Second Circuit decisions had emphasized the need to refrain from any assessment of the evidence, at the class certification stage, that approached an evaluation of the merits of the case.

After thoroughly reviewing the Supreme Court case law on which the Caridad court, and others, had relied, the IPO Securities Litigation court made two significant clarifications of the law in this area. First, it concluded that the Supreme Court had never signaled that courts should refrain from analyzing a Rule 23 requirement that overlapped with the merits of the case. Rather, district courts must make a 'definitive assessment of Rule 23 requirements, notwithstanding their overlap with merits issues.' IPO Securities Litigation, 471 F.3d at 41. The court nonetheless cautioned against allowing the Rule 23 class certification hearing to be transformed into a mini-trial on the merits, holding that district courts have wide latitude in imposing limitations on discovery and on the hearing itself. Id. Second, the court rejected the view that plaintiffs must only adduce 'some' evidence that the Rule 23 requirements are met, holding instead that plaintiffs must persuade the district court, on the relevant facts and applicable legal standards, that they have proven numerosity, typicality, and the other Rule 23 requirements. The court explained that, to determine that Rule 23 has been satisfied, district courts will likely be required to make findings on underlying facts and cannot hold that a particular requirement has been met simply because there is a disputed underlying fact. Id. at 40.

Other Courts of Appeals

The Second Circuit's decision in IPO Securities Litigation brings it in line with the majority of other courts of appeals to have addressed the issue of whether it is permissible for a district court to consider issues on a class certification motion that overlap with the merits of the case and to weigh the parties' evidence and make necessary factual findings. For example, the Seventh Circuit has been very clear that it is appropriate and may be necessary for the court to assess, on a class certification motion, issues that bear on the substantive merits of the case. Szabo v. Bridgeport Machines, Inc. , 249 F.3d 672, 676 (7th Cir. 2001). Other courts of appeals have issued similar rulings. See, e.g., Bell v. Ascendant Solutions, Inc. , 422 F.3d 307 (5th Cir. 2005); Blades v. Monsanto Co. , 400 F.3d 562 (8th Cir. 2005); Cooper v. Southern Co. , 390 F.3d 695 (11th Cir. 2004); Gariety v. Grant Thornton, LLP , 368 F.3d 356 (4th Cir. 2004); Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc. , 259 F.3d 154 (3d Cir. 2001). The Second Circuit in IPO Securities Litigation took the analysis further than some of its sister circuits had done, however, insofar as some of the other courts had examined the issues in a more limited context; indeed, in some of the earlier cases (see, e.g., Gariety, 368 F.3d at 365) plaintiffs had argued that the standards for a Rule 23 class certification motion were akin to those for a Rule 12(b)(6) motion, whereby all of a plaintiff's factual allegations are presumed true. By analyzing in a broader context that quantum of evidence that district courts must require of plaintiffs seeking class certification under Rule 23, the Second Circuit created more comprehensive guidelines for district courts on these issues.

The First Circuit is the only court of appeals to have addressed the question of the standard of proof plaintiffs must meet on a Rule 23 motion for class certification, but to have drawn a somewhat different conclusion from that of other courts of appeals. In In re Polymedica Corp. Securities Litigation, 432 F.3d 1 (1st Cir. 2005), the court acknowledged the split that existed between the Second Circuit's approach to Rule 23 class certification motions and that of other courts of appeals, and then articulated its 'preference' for the latter line of cases. The Polymedica court then appeared to characterize that line of cases as permitting district courts to go beyond the mere allegations and pleadings to decide a class certification motion, but not as requiring district courts to engage in a full evaluation of evidence, including expert reports, before ruling on a class certification motion. Rather, after reviewing extensive case law and other authority on the securities law issues central to the case, the Polymedica court articulated a shifting standard, under which the quantum of evidence required to establish that Rule 23's requirements are satisfied is 'one of degree.' Id. at 17. Indeed, the First Circuit had earlier, in 2004, addressed this issue by indicating that, where there is a significant factual dispute between the parties, '[n]othing here obliged the district courts to do more than view the issue as such and, so viewed, it weighs in favor of class action status.' Tardiff v. Knox County , 365 F.3d 1 n.5 (1st Cir. 2004). Accordingly, in the First Circuit, there appears still to be a question as to whether the standards enunciated by the Second Circuit in IPO Securities Litigation would prevail.

Significance of Second Circuit Ruling

The IPO Securities Litigation decision emphasizes that the inquiry under Rule 23 at the class certification stage is rigorous and must consider both plaintiffs' evidence and defendants' evidence, even making factual findings where necessary as a predicate to determining whether the legal standards in Rule 23 have been met. Where this guidance is followed, it will undoubtedly change district courts' analysis of class certification motions, imposing a heavier burden on plaintiffs to adduce evidence that is not only colorable but is also persuasive as to the Rule 23 requirements.

To illustrate the likely impact of the IPO Securities Litigation decision, consider the gender class action at issue in Hnot v. Willis Group Holdings, Ltd. , 228 F.R.D. 476 (S.D.N.Y. 2005), where the plaintiffs' certification motion was granted. There, the plaintiffs alleged that their employer, Willis Group, had discriminated against women in the Northeast region, negatively impacting promotion opportunities and compensation, and they sought to certify a class of over 100 female employees who were officers or were eligible to become officers.

As to the Rule 23 requirement of commonality, the Hnot plaintiffs and defendant presented widely disparate evidence as to the existence of common issues of law or fact affecting all class members. In evaluating this evidence, the district court relied heavily on the plaintiffs' evidence that Willis Group had afforded local company officers with unfettered discretion to make personnel decisions, but did not weigh that evidence against defendant's contrary evidence. Indeed, the court cited Willis Group's evidence that local personnel decisions were reviewed by Human Resources and a top level officer, but then dismissed its affect on commonality, by holding that the evidence supported a finding of a common practice without acknowledging that such evidence could not support the common practice ' unfettered discretion ' identified by plaintiffs.

As to the parties' statistical evidence, the Hnot court invoked Caridad for the proposition that the defendant's challenge to plaintiffs' statistical expert had 'minimal force' at the class certification stage. Id. at 483. The court refrained from evaluating the weight of the plaintiffs' statistical analysis as compared with the defendant's statistical analysis, but rather assessed the plausibility of the plaintiffs' expert report in isolation, holding 'plaintiff's report has properly considered the relevant factors to meet commonality.' Id. at 484. Moreover, in addressing Willis Group's argument that the plaintiffs' expert report was not admissible under Daubert v. Merrell Dow Pharm., Inc. , 509 U.S. 579 (1993), the court held that the report was not 'junk science' and that 'at the class certification stage, only a plausible position needs to be set forth.' Id. Such standards are just what the IPO Securities Litigation Court rejected as inconsistent with Rule 23 and prevailing Supreme Court precedent, insofar as their application may lead to certification of class actions without any findings that the Rule 23 requirements have been met.

Conclusion

District courts deciding Rule 23 motions for class certification will no doubt consider the Second Circuit's guidance in IPO Securities Litigation, and will likely apply its analysis in determining whether plaintiffs' evidence meets the Rule 23 requirements, paying more attention to making findings on key predicate facts and resolving factual disputes where necessary to draw conclusions on those requirements. Determining the plausibility of the plaintiffs' evidence without addressing the strength of that evidence when considering all the evidence together will not be sufficient. As to the usual battle of experts at the class certification stage in particular, litigants can expect district courts following IPO Securities Litigation to wade much more deeply into an assessment of the relative persuasiveness of the experts' reports, as well as into the fundamental question of admissibility of an expert's opinion. Whether this more comprehensive analysis leads district courts to grant fewer class certification motions, however, remains to be seen.

Victoria Woodin Chavey, a member of this newsletter's Board of Editors, is a partner at Day Pitney LLP, where she chairs the Employment Litigation practice group. She represents employers in litigation in federal and state courts, and can be reached at [email protected].