Friday, June 17, 2011

U.S. Supreme Court Severely Limits Preclusive Effect Afforded To Denials of Class Certification: Smith v. Bayer Corp.

On June 16, 2011, the U.S. Supreme Court issued an important class action decision in Smith v. Bayer Corp., 564 U. S. ____ (2011) (2011 U.S. LEXIS 4559) relating to the preclusive effect which may be given to a Federal court order denying class certification.  This opinion involves an issue I have litigated at length before.  See Johnson v. GlaxoSmithKline, Inc., 166 Cal. App. 4th 1497 (2d Dist. 2008).  In Smith, the Court considered whether a district court exceeded the bounds of its authority under the “relitigation exception” to the Anti-injunction Act (28 U.S.C. § 2283) by enjoining a State court class action from proceeding based on a prior certification denial in Federal court.  The Court resolved this question in the affirmative, finding that two elements of issue preclusion – i.e. the “identity of issues” and “identity of parties” requirements – could not be met.

With regard to the “identity of issues” requirement, the Court focused on whether variations in class action procedure at the State and Federal level could ever produce a finding that the "same issues" had actually been litigated and decided. The Court concluded that while such a finding was possible, this finding could not be predicated upon the mere fact that the State adopted Rule 23 procedural standards, as doing so would infringe upon each State’s right to develop its own class action jurisprudence.  According to the Court, this was the starting point in the analysis, and to the extent any uncertainty exists, this requires the issue be left for resolution at the state court level:
The Court of Appeals and Smith offer us two competing ways of deciding whether the West Virginia and Federal Rules differ, but we think the right path lies somewhere in the middle. The Eighth Circuit relied almost exclusively on the near-identity of the two Rules' texts. See 593 F.3d at 723. That was the right place to start, but not to end. Federal and state courts, after all, can and do apply identically worded procedural provisions in widely varying ways. If a State's procedural provision tracks the language of a Federal Rule, but a state court interprets that provision in a manner federal courts have not, then the state court is using a different standard and thus deciding a different issue. See 18 Wright & Miller § 4417, at 454 (stating that preclusion is "inappropriate" when "different legal standards . . . masquerad[e] behind similar legal labels"). At the other extreme, Smith contends that the source of law is all that matters: a different sovereign must in each and every case "have the opportunity, if it chooses, to construe its procedural rule differently." Brief for Petitioners 22 (quoting ALI, Principles of the Law, Aggregate Litigation § 2.11, Reporters' Notes, cmt. b, p. 181 (2010)). But if state courts have made crystal clear that they follow the same approach as the federal court applied, we see no need to ignore that determination; in that event, the issues in the two cases would indeed be the same. So a federal court considering whether the relitigation exception applies should examine whether state law parallels its federal counterpart. But as suggested earlier, see supra, at 6, the federal court must resolve any uncertainty on that score by leaving the question of preclusion to the state courts.
See Smith, 2011 U.S. LEXIS 4559, at 20-21.

With regard to the “identity of parties” requirement, the Court extended its "virtual representation" analysis in in Taylor v. Sturgell, 553 U.S. 880 (2008) to conclude that a prior order denying certification of a class cannot be imposed on a completely different representative plaintiff, even if the subsequent action is otherwise identical in all other respects.  As reasoned by the Court, the proposition that a denial of certification can itself be imposed on a class-wide basis rests squarely upon fallacious logic:
Indeed, the very ruling that Bayer argues ought to be given preclusive effect is the District Court's decision that a class could not properly be certified. So Bayer wants to bind Smith as a member of a class action (because it is only as such that a nonparty in Smith's situation can be bound) to a determination that there could not be a class action. And if the logic of that position is not immediately transparent, here is Bayer's attempt to clarify: "[U]ntil the moment when class certi-fication was denied, the McCollins case was a properly conducted class action." Brief for Respondent 37. That is true, according to Bayer, because McCollins' interests were aligned with the members of the class he proposed and he "act[ed] in a representative capacity when he sought class certification." Id., at 36.
But wishing does not make it so. McCollins sought class certification, but he failed to obtain that result. Because the District Court found that individual issues predominated, it held that the action did not satisfy Federal Rule 23's requirements for class proceedings. In these circumstances, we cannot say that a properly conducted class action existed at any time in the litigation. Federal Rule 23 determines what is and is not a class action in federal court, where McCollins brought his suit. So in the absence of a certification under that Rule, the precondition for binding Smith was not met. Neither a proposed class action nor a rejected class action may bind nonparties. What does have this effect is a class action approved under Rule 23. But McCollins' lawsuit was never that.
See Smith, 2011 U.S. LEXIS 4559, at 29-30.

This latter conclusion is the kicker, as it all but eliminates any argument that issue preclusion can be applied to subsequent lawsuits.  The Court acknowledged as much, asserting that the policy objective of preventing a successive line of separate actions “flies in the face of the rule against nonparty preclusion.”

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