Absent Class Members Suing in State Court Are Not Bound by Prior Federal District Court Decision

Last year, in Shady Grove Orthopedic Associates, P. A. v. Allstate Ins. Co., 559 U.S. ___, 130 S. Ct. 1431; 176 L. Ed. 2d 311 (2010), the Supreme Court held that state law prohibitions against the use of the class action device did not apply to suits pending in federal court because class claims in federal court are governed by the requirements of Federal Rule of Civil Procedure 23.

Recently, in Smith v. Bayer Corp., 564 U.S. ___, 131 S.Ct. 2368, 180 L.E.2d 341 (2011), the Court addressed a variation on that theme: whether a federal court decision denying class certification had any preclusive effect on efforts by other plaintiffs to seek certification in state court under nearly identically worded state procedural rules. In Smith, the district court overseeing a federal MDL concluded that a West Virginia plaintiff could not seek class-wide relief under that state's consumer protection act. When an unrelated group of plaintiffs in a West Virginia state court proceeding then sought certification of essentially the same class in the state forum, the federal district court stepped in and enjoined further state court certification proceedings. The Eighth Circuit affirmed.

The Supreme Court reversed on two grounds: 1) The legal standard applied by the district court in denying certification under federal procedural rules was not necessarily the same standard the state court would apply in making its determination under state procedural rules; and 2) Absent plaintiffs in an uncertified federal class action were not “parties” to that action and could not otherwise be bound by the denial of certification. This article discusses the Smith decision and the implications of its view of preclusion rules in cases involving class certification.

Background

Bayer withdrew its prescription medicine Baycol from the market. Thousands of plaintiffs filed thousands of lawsuits against Bayer, including two suits by two different groups of plaintiffs in two different West Virginia state courts. Both sets of West Virginia plaintiffs sought class-wide relief on behalf of West Virginia residents who had purchased Baycol. Rather than claiming they suffered physical harm as a result of their ingestion of the drug, the named plaintiffs instead asserted that the defendant violated the state's consumer protection act in the marketing and sale of a potentially dangerous product. The plaintiffs contended they would not have purchased the product at all or at least would have paid less than they did but for the defendant's violation of the act. Both sets of plaintiffs sought refunds on behalf of the respective classes.

Bayer successfully removed one of the two cases to federal court on diversity grounds, where it was transferred into an MDL proceeding. The plaintiffs in the other matter had joined West Virginia residents as defendants and the manufacturer was unable to remove the second case under the then-applicable law. The district court overseeing the MDL refused to certify a nationwide refund class because it held plaintiffs could not meet their burden of showing that common issues predominated over individual issues as required by Federal Rule of Civil Procedure 23. In re Baycol Products Litigation, 218 F.R.D. 197, 213 ' 214 (D.Minn. 2003). The manufacturer then asked the district court to deny certification of the refund claims asserted on behalf of the proposed West Virginia class. Concluding that nothing in West Virginia's substantive law would change the analysis it applied to the nationwide refund class, the district court held that individual issues in the application of West Virginia's consumer protection act would predominate over common issues and denied certification. In re Baycol Products Litigation, McCollins v. Bayer Corp., 265 F.R.D. 453, 457 ' 458 (D.Minn. 2008). The federal plaintiff did not appeal the denial of certification.

About a week after the deadline passed for the federal plaintiff to appeal the denial of certification, the plaintiffs in the state court action asked that court to certify an economic loss class defined in the same manner as the rejected federal class. Believing it had already won that particular battle, Bayer asked the federal court to enjoin the state court plaintiffs from continuing to litigate the certification issue. Although the Anti-Injunction Act, 28 U.S.C. ' 2283, generally prohibits a federal court from enjoining state proceedings, it does contain a “relitigation” exception, which allows a federal court “to protect or effectuate its judgments.” The district court found that the exception authorized it to prevent the state plaintiffs from revisiting (albeit in another forum) its refusal to certify a West Virginia refund class and granted the injunction. In re Baycol Products Litigation: Black v. Bayer Corp., MDL No. 1431, No. 02-199, 2008 U.S.Dist. Lexis 112036 (Dec. 9, 2008). The West Virginia plaintiffs appealed, but the Eighth U.S. Circuit Court of Appeals affirmed. Smith v. Bayer Corp., 593 F.3d 716 (8th Cir. 2010).

The Supreme Court's Decision

The Supreme Court granted the state plaintiff's certiorari petition to resolve two circuit splits arising from the Anti-Injunction Act's relitigation exception. Both issues, the Court said, related to the federal principles of issue preclusion that inform the Anti-Injunction Act, and both issues were necessary in order to invoke the Act's relitigation exception. The first dealt with whether the state court certification motion presented the “same issue” already litigated in the federal action. The second addressed the extent to which the district court's denial of a certification motion could bind non-parties ' i.e., absent class members like the state court plaintiffs ' to anything. In an opinion authored by Justice Kagan, the Court unanimously held the lower court erred in concluding the state case presented the “same issue” for preclusion purposes, and eight of the nine Justices (Justice Thomas did not join this portion of the opinion) also held the district court erred in binding absent class members to the order denying certification.

On the first issue, Bayer argued the district court's certification decision involved a determination of substantive state law which the state court would have to revisit in order to reach a contrary result. The Supreme Court's opinion did not address that argument but instead focused on a somewhat different issue: Whether the district court's certification decision and the state court's consideration of the certification motion involved the “same legal standard.” 180 L.Ed.2d at 349. That determination, the Court said, does not turn on a simple comparison of the text of the relevant procedural rules, but rather on their application in order to “examine whether state law parallels its federal counterpart.” Id. Concluding West Virginia applied its Rule 23 in a meaningfully different fashion from the district court's application of Federal Rule 23, the Court held the cases did not present the “same issue” and, therefore, the Act's relitigation exception did not apply.

With respect to the issue of whether the denial of certification could bind absent members of the uncertified class, Bayer argued the state court plaintiffs were “parties” in a very technical sense to the federal litigation. The eight members of the Court who joined this portion of the opinion flatly rejected that argument, stating it “ill-comport[ed] with any proper understanding of what a 'party' is.” 180 L.Ed.2d at 353. Instead, the Court held that “the definition of the term 'party' can on no account be stretched so far as to cover a person … whom the plaintiff in a lawsuit was denied leave to represent.” 180 L.Ed.2d at 353. Because the state court plaintiffs were not named “parties” to the uncertified federal action, the Court turned whether principles of nonparty preclusion might apply.

The Court acknowledged Bayer's argument that members of a class in a “properly entertained class action” could be bound by a prior adjudication. Id. at 354 (citing Cooper v. Federal Reserve Bank of Richmond, 467 U.S. 867, 874 (1984)). The problem for the Court, as Justice Kagan explained, was that “if we know one thing about the [federal case], it was not a class action.” Id. (emphasis in original). It rejected Bayer's argument that the case was a “properly conducted class action” right up until the moment the district court denied certification of the class. Instead, the Court stated that because the district court determined the case did not meet the criteria for certification under Federal Rule 23, “we cannot say that a properly conducted class action existed at any time in the litigation.” 180 L.E.2d at 354. Thus, it said, “[n]either a proposed class action nor a rejected class action may bind nonparties.” Id. Thus, even if the Court had found the “same issue” was at stake, the state court plaintiff still would not have been bound by the federal decision denying certification.

State Versus Federal Class Claims

The Court's decision in Smith was not unexpected. In Shady Grove, the substantive state law under which the plaintiffs sought class-wide relief explicitly precluded class claims, and the Court nonetheless allowed the class claim to proceed because of its conclusion the issue of class certification was one governed by the procedural rules of the forum where certification was sought. In many ways, Smith simply presented the other side of that coin ' just because the federal procedural rules might preclude certification did not mean the state rules mandated the same result. If the rules are truly different and therefore the issues under consideration are not “the same,” the first part of the Court's decision is defensible as the product of a federal system.

Ultimately, however, the Court made clear that even if it had concluded precisely the same issues were involved in both the state and federal certification decisions, Bayer still would have lost. The Court's holding that absent class members are not bound by decisions made during the course of proceedings of an ultimately uncertified class is the more troubling aspect of the decision. After all, absent class members do get some benefits of the pendency of an ultimately uncertified class such as a tolling of the statute of limitations which arguably should be available only to “parties.” See United Airlines, Inc. v. McDonald, 432 U.S. 385, 97 S. Ct. 2464, 53 L. Ed. 2d 423 (1977); American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 94 S. Ct. 756, 38 L. Ed. 2d 713 (1974). The Court rejected Bayer's argument on this point, noting that “nonparties sometimes may benefit from, even though they cannot be bound by, former litigation.” 180 L.Ed.2d at 353 n. 10. Why this should necessarily be so in the context of class certification decisions is left unexplained by the Court's decision.

The Court recognized but declined to act on policy arguments raised by Bayer and by the Seventh Circuit in In re Bridgestone/Firestone Inc. Tires Prods. Liability Litigation, 333 F.3d 763 (7th Cir. 2003), concerning an “'asymmetric system in which class counsel can win but never lose' because of their ability to relitigate the issue of certification.” Id. at 355 (quoting In re Bridgestone/Firestone, 333 F.3d 763, 767 (7th Cir. 2003). Stating that the policy argument “flies in the face of the rule against nonparty preclusion,” the Court noted that the enactment of the Class Action Fairness Act of 2005 provided something of a remedy by allowing some class actions to be moved into federal court where the cases might then be consolidated or otherwise coordinated. The Court further noted that nothing in the opinion foreclosed federal legislation to “modify established principles of preclusion,” nor did it address the permissibility of a change to the federal civil procedure rules. 180 L.Ed.2d at 356 n. 12.

Smith again demonstrates the troubling issues presented by the use of the class action device. A court with jurisdiction to make the decision determined that class-wide relief was unavailable under the substantive law of a state. Nothing in Smith suggests a good reason that another court later considering the same issue should revisit the issue and reach a contrary result on behalf of the same putative class. While the Court left open the possibility of statutory changes or even amendments to the rules to address the concern, it leaves defendants for the time being facing the possibility of serial class actions or multiple actions pending simultaneously in multiple jurisdictions all seeking essentially the same relief. There is an inherent unfairness in this process which flows from the judicially created class action device. The district court overseeing the MDL ' the forum most familiar with the issues involved ' granted the injunction because it recognized this unfairness. It is unfortunate the Court refused to follow suit.

Jeffrey A. Holmstrand recently joined the Wheeling, WV, office of Flaherty Sensabaugh Bonasso, where he will continue to focus his state-wide practice on defending product liability, mass torts/class action and complex insurance disputes. He has both acted as lead trial counsel and worked with national counsel in cases involving a wide variety of products including tobacco, prescription medicines, chemicals, and motor vehicles and their tires. Mr. Holmstrand also has an active appellate practice.

Last year, in Shady Grove Orthopedic Associates, P. A. v. Allstate Ins. Co. , 559 U.S. ___, 130 S. Ct. 1431; 176 L. Ed. 2d 311 (2010), the Supreme Court held that state law prohibitions against the use of the class action device did not apply to suits pending in federal court because class claims in federal court are governed by the requirements of Federal Rule of Civil Procedure 23.

Recently, in Smith v. Bayer Corp. , 564 U.S. ___, 131 S.Ct. 2368, 180 L.E.2d 341 (2011), the Court addressed a variation on that theme: whether a federal court decision denying class certification had any preclusive effect on efforts by other plaintiffs to seek certification in state court under nearly identically worded state procedural rules. In Smith, the district court overseeing a federal MDL concluded that a West Virginia plaintiff could not seek class-wide relief under that state's consumer protection act. When an unrelated group of plaintiffs in a West Virginia state court proceeding then sought certification of essentially the same class in the state forum, the federal district court stepped in and enjoined further state court certification proceedings. The Eighth Circuit affirmed.

The Supreme Court reversed on two grounds: 1) The legal standard applied by the district court in denying certification under federal procedural rules was not necessarily the same standard the state court would apply in making its determination under state procedural rules; and 2) Absent plaintiffs in an uncertified federal class action were not “parties” to that action and could not otherwise be bound by the denial of certification. This article discusses the Smith decision and the implications of its view of preclusion rules in cases involving class certification.

Background

Bayer withdrew its prescription medicine Baycol from the market. Thousands of plaintiffs filed thousands of lawsuits against Bayer, including two suits by two different groups of plaintiffs in two different West Virginia state courts. Both sets of West Virginia plaintiffs sought class-wide relief on behalf of West Virginia residents who had purchased Baycol. Rather than claiming they suffered physical harm as a result of their ingestion of the drug, the named plaintiffs instead asserted that the defendant violated the state's consumer protection act in the marketing and sale of a potentially dangerous product. The plaintiffs contended they would not have purchased the product at all or at least would have paid less than they did but for the defendant's violation of the act. Both sets of plaintiffs sought refunds on behalf of the respective classes.

Bayer successfully removed one of the two cases to federal court on diversity grounds, where it was transferred into an MDL proceeding. The plaintiffs in the other matter had joined West Virginia residents as defendants and the manufacturer was unable to remove the second case under the then-applicable law. The district court overseeing the MDL refused to certify a nationwide refund class because it held plaintiffs could not meet their burden of showing that common issues predominated over individual issues as required by Federal Rule of Civil Procedure 23. In re Baycol Products Litigation, 218 F.R.D. 197, 213 ' 214 (D.Minn. 2003). The manufacturer then asked the district court to deny certification of the refund claims asserted on behalf of the proposed West Virginia class. Concluding that nothing in West Virginia's substantive law would change the analysis it applied to the nationwide refund class, the district court held that individual issues in the application of West Virginia's consumer protection act would predominate over common issues and denied certification. In re Baycol Products Litigation, McCollins v. Bayer Corp. , 265 F.R.D. 453, 457 ' 458 (D.Minn. 2008). The federal plaintiff did not appeal the denial of certification.

About a week after the deadline passed for the federal plaintiff to appeal the denial of certification, the plaintiffs in the state court action asked that court to certify an economic loss class defined in the same manner as the rejected federal class. Believing it had already won that particular battle, Bayer asked the federal court to enjoin the state court plaintiffs from continuing to litigate the certification issue. Although the Anti-Injunction Act, 28 U.S.C. ' 2283, generally prohibits a federal court from enjoining state proceedings, it does contain a “relitigation” exception, which allows a federal court “to protect or effectuate its judgments.” The district court found that the exception authorized it to prevent the state plaintiffs from revisiting (albeit in another forum) its refusal to certify a West Virginia refund class and granted the injunction. In re Baycol Products Litigation: Black v. Bayer Corp. , MDL No. 1431, No. 02-199, 2008 U.S.Dist. Lexis 112036 (Dec. 9, 2008). The West Virginia plaintiffs appealed, but the Eighth U.S. Circuit Court of Appeals affirmed. Smith v. Bayer Corp. , 593 F.3d 716 (8th Cir. 2010).

The Supreme Court's Decision

The Supreme Court granted the state plaintiff's certiorari petition to resolve two circuit splits arising from the Anti-Injunction Act's relitigation exception. Both issues, the Court said, related to the federal principles of issue preclusion that inform the Anti-Injunction Act, and both issues were necessary in order to invoke the Act's relitigation exception. The first dealt with whether the state court certification motion presented the “same issue” already litigated in the federal action. The second addressed the extent to which the district court's denial of a certification motion could bind non-parties ' i.e., absent class members like the state court plaintiffs ' to anything. In an opinion authored by Justice Kagan, the Court unanimously held the lower court erred in concluding the state case presented the “same issue” for preclusion purposes, and eight of the nine Justices (Justice Thomas did not join this portion of the opinion) also held the district court erred in binding absent class members to the order denying certification.

On the first issue, Bayer argued the district court's certification decision involved a determination of substantive state law which the state court would have to revisit in order to reach a contrary result. The Supreme Court's opinion did not address that argument but instead focused on a somewhat different issue: Whether the district court's certification decision and the state court's consideration of the certification motion involved the “same legal standard.” 180 L.Ed.2d at 349. That determination, the Court said, does not turn on a simple comparison of the text of the relevant procedural rules, but rather on their application in order to “examine whether state law parallels its federal counterpart.” Id. Concluding West Virginia applied its Rule 23 in a meaningfully different fashion from the district court's application of Federal Rule 23, the Court held the cases did not present the “same issue” and, therefore, the Act's relitigation exception did not apply.

With respect to the issue of whether the denial of certification could bind absent members of the uncertified class, Bayer argued the state court plaintiffs were “parties” in a very technical sense to the federal litigation. The eight members of the Court who joined this portion of the opinion flatly rejected that argument, stating it “ill-comport[ed] with any proper understanding of what a 'party' is.” 180 L.Ed.2d at 353. Instead, the Court held that “the definition of the term 'party' can on no account be stretched so far as to cover a person … whom the plaintiff in a lawsuit was denied leave to represent.” 180 L.Ed.2d at 353. Because the state court plaintiffs were not named “parties” to the uncertified federal action, the Court turned whether principles of nonparty preclusion might apply.

The Court acknowledged Bayer's argument that members of a class in a “properly entertained class action” could be bound by a prior adjudication. Id . at 354 (citing Cooper v. Federal Reserve Bank of Richmond , 467 U.S. 867, 874 (1984)). The problem for the Court, as Justice Kagan explained, was that “if we know one thing about the [federal case], it was not a class action.” Id. (emphasis in original). It rejected Bayer's argument that the case was a “properly conducted class action” right up until the moment the district court denied certification of the class. Instead, the Court stated that because the district court determined the case did not meet the criteria for certification under Federal Rule 23, “we cannot say that a properly conducted class action existed at any time in the litigation.” 180 L.E.2d at 354. Thus, it said, “[n]either a proposed class action nor a rejected class action may bind nonparties.” Id. Thus, even if the Court had found the “same issue” was at stake, the state court plaintiff still would not have been bound by the federal decision denying certification.

State Versus Federal Class Claims

The Court's decision in Smith was not unexpected. In Shady Grove, the substantive state law under which the plaintiffs sought class-wide relief explicitly precluded class claims, and the Court nonetheless allowed the class claim to proceed because of its conclusion the issue of class certification was one governed by the procedural rules of the forum where certification was sought. In many ways, Smith simply presented the other side of that coin ' just because the federal procedural rules might preclude certification did not mean the state rules mandated the same result. If the rules are truly different and therefore the issues under consideration are not “the same,” the first part of the Court's decision is defensible as the product of a federal system.

Ultimately, however, the Court made clear that even if it had concluded precisely the same issues were involved in both the state and federal certification decisions, Bayer still would have lost. The Court's holding that absent class members are not bound by decisions made during the course of proceedings of an ultimately uncertified class is the more troubling aspect of the decision. After all, absent class members do get some benefits of the pendency of an ultimately uncertified class such as a tolling of the statute of limitations which arguably should be available only to “parties.” See United Airlines, Inc. v. McDonald , 432 U.S. 385, 97 S. Ct. 2464, 53 L. Ed. 2d 423 (1977); American Pipe & Constr. Co. v. Utah , 414 U.S. 538, 94 S. Ct. 756, 38 L. Ed. 2d 713 (1974). The Court rejected Bayer's argument on this point, noting that “nonparties sometimes may benefit from, even though they cannot be bound by, former litigation.” 180 L.Ed.2d at 353 n. 10. Why this should necessarily be so in the context of class certification decisions is left unexplained by the Court's decision.

The Court recognized but declined to act on policy arguments raised by Bayer and by the Seventh Circuit in In re Bridgestone/Firestone Inc. Tires Prods. Liability Litigation, 333 F.3d 763 (7th Cir. 2003), concerning an “'asymmetric system in which class counsel can win but never lose' because of their ability to relitigate the issue of certification.” Id. at 355 (quoting In re Bridgestone/Firestone, 333 F.3d 763, 767 (7th Cir. 2003). Stating that the policy argument “flies in the face of the rule against nonparty preclusion,” the Court noted that the enactment of the Class Action Fairness Act of 2005 provided something of a remedy by allowing some class actions to be moved into federal court where the cases might then be consolidated or otherwise coordinated. The Court further noted that nothing in the opinion foreclosed federal legislation to “modify established principles of preclusion,” nor did it address the permissibility of a change to the federal civil procedure rules. 180 L.Ed.2d at 356 n. 12.

Smith again demonstrates the troubling issues presented by the use of the class action device. A court with jurisdiction to make the decision determined that class-wide relief was unavailable under the substantive law of a state. Nothing in Smith suggests a good reason that another court later considering the same issue should revisit the issue and reach a contrary result on behalf of the same putative class. While the Court left open the possibility of statutory changes or even amendments to the rules to address the concern, it leaves defendants for the time being facing the possibility of serial class actions or multiple actions pending simultaneously in multiple jurisdictions all seeking essentially the same relief. There is an inherent unfairness in this process which flows from the judicially created class action device. The district court overseeing the MDL ' the forum most familiar with the issues involved ' granted the injunction because it recognized this unfairness. It is unfortunate the Court refused to follow suit.

Jeffrey A. Holmstrand recently joined the Wheeling, WV, office of Flaherty Sensabaugh Bonasso, where he will continue to focus his state-wide practice on defending product liability, mass torts/class action and complex insurance disputes. He has both acted as lead trial counsel and worked with national counsel in cases involving a wide variety of products including tobacco, prescription medicines, chemicals, and motor vehicles and their tires. Mr. Holmstrand also has an active appellate practice.