June 17, 2011

Class Action Update: Supreme Court Declines to Rein In Re-Litigation of Class Actions

The Supreme Court yesterday issued a decision in Smith v. Bayer, which will continue to permit plaintiffs’ counsel to re-file similar or even identical class action lawsuits in multiple jurisdictions after being denied class certification in another jurisdiction, in the hopes of finding at least one court willing to certify a class.  The Court ruled that a federal court cannot enjoin a state court from considering certification of a class action when the federal court has already denied certification of the same purported class.  The decision below by the Eighth Circuit Court of Appeals – upholding a Minnesota federal court’s action enjoining a West Virginia state trial court from allowing plaintiffs to re-litigate the same proposed class – had given defendants hope that plaintiffs would no longer be able to forum-shop by filing the same case in different courts across the country when faced with an unfavorable class certification decision.  But in the opinion authored by Justice Kagan, the Supreme Court refused to rein in this tactic, holding that the federal court in question did not have the power to issue an injunction for a variety of technical legal reasons described further below. 

The consequences of this decision could well be felt by any company that faces class action suits, but particularly by companies in the pharmaceutical or consumer product industries, which find themselves defending against ever-increasing numbers of purported state- or nation-wide class actions.  As it became common for courts to refuse certification of personal injury classes (because common issues almost never predominate over individual issues when it comes to personal injury), the plaintiffs’ bar turned its attention to class actions seeking recovery for supposed economic harms based on consumer protection or false advertising statutes.  The plaintiffs’ bar has further refined its tactics by often bringing similar suits in multiple jurisdictions, as a hedge against rulings either denying class certification in its entirety or refusing to grant a nation-wide class and instead certifying only a state-wide class.  These tactics pose a significant problem for manufacturers because they are often forced to re-litigate the same case in multiple state and federal courts.  Until the Smith v. Bayer decision, it was not clear to what extent federal courts could prevent such repetitive class action litigation.

Smith v. Bayer:  The Road to the Supreme Court

Defendant Bayer Corp. sold Baycol, a prescription cholesterol-lowering medication, from 1997 until it was taken off the market in August of 2001 due to health concerns.  At that time, George McCollins, a Baycol user, brought a class action suit in West Virginia state court seeking refunds for economic loss caused by Bayer’s supposed breach of warranties and violation of the West Virginia Consumer Credit and Protection Act.  Bayer removed the case to federal court and it was transferred to an MDL in Minnesota, which ultimately denied class certification.

After the Minnesota federal court denied class certification, another former Baycol user (Smith) sought to certify a class in West Virginia state court.  Bayer then brought a motion in the McCollins case for the Minnesota district court to enjoin Smith from re-litigating class certification in West Virginia state court.  The Minnesota court granted Bayer’s motion and enjoined the state court action, finding that Smith was precluded from re-litigating the case. 

On appeal, the Eighth Circuit affirmed the district court’s injunction, holding that:  (1) Smith was collaterally estopped from seeking class certification in state court based on the district court’s prior denial; and (2) the injunction was warranted.  The Eighth Circuit noted that the issues and the parties were the same in the West Virginia state court action as they were in the federal action that had been denied certification.

The plaintiffs from the state court action appealed the Eighth Circuit’s decision and petitioned for writ of certiorari from the Supreme Court of the United States.  The Court granted review and oral arguments were held on January 18, 2010. 

The Supreme Court’s Decision

The Court relied on the legal principles of claim preclusion and issue preclusion in reaching its decision.  Justice Kagan, writing for the Court, explained that in order for the federal court’s class action determination to preclude further state court adjudication, at least two requirements must be met:  first, the issue decided by the federal court must be the same as the one before the state court; and second, the plaintiff in state court must have been a party in the federal court action.  The Court found both requirements lacking.

With regard to the requirement that the issues be the same, the Court hinged its decision primarily on the fact that West Virginia interprets its version of Rule 23 differently than the federal rule, particularly on the requirement that common issues predominate over individual ones.  The Court thus seemed to leave open the possibility that the “same issue” requirement could be satisfied where the case is pending before a state court that interprets its class certification rules in accordance with the Federal Rule. 

With regard to the requirement that the party must have been a party to the prior action, the Court’s strict adherence to principles of preclusion law leaves little if any room for distinguishing the decision in later cases.  Despite the fact that Smith would have been a member of the class proposed in the federal action, the Court still found that he was not a “party” before the federal court, and thus could not be precluded from bringing the later action.  Thus, even though there may be room to argue for preclusion in the future on the grounds that the issues in successive cases are the same, plaintiffs can avoid preclusion simply by appointing a new class representative who was not technically a party to the prior action. 

Justice Kagan did acknowledge that Bayer perhaps had legitimate policy concerns that allowing serial relitigation of class certification forces defendants to try to buy peace by settlements.  But in the Court’s view, those concerns did not warrant a departure from the usual rules of preclusion.  Justice Kagan tried to soften that blow by pointing out that the Class Action Fairness Act of 2005 (“CAFA”) now permits defendants to remove large class actions to federal court.  Once in federal court, the courts can consolidate actions via the Judicial Panel on Multi-District Litigation (“MDL”).  Federal courts can then enforce other federal courts’ class certification decisions when addressing a common dispute.  Justice Kagan, however, has perhaps an overly optimistic view on defendants’ ability to remove all class actions of this nature to federal court on CAFA grounds, and in the event that a defendant cannot do so, then it will face potentially conflicting certification rulings in federal and state court.

The Future: Ramifications for Defendants

The Supreme Court’s holding will no doubt make it easier for plaintiffs to maintain similar purported class actions in multiple jurisdictions.  The decision allows the plaintiffs’ bar to structure cases so as to allow it multiple attempts at class certification.  Drug and consumer product manufacturers may well continue to face what Bayer has here: having to re-litigate virtually identical suits in different forums.  While CAFA is often very helpful to defendants in permitting removal of cases to federal court, it will not necessarily prevent defendants from having to fight off repetitive lawsuits.  Unfortunately for businesses facing potential class action suits, this may well translate to an increase in litigation costs required to oppose class certification.