The docket for the Supreme Court’s October 2016 term is still taking shape. The Court has already committed to hearing some cases; of particular note is Microsoft Corp. v. Baker, a case involving class certification denial, voluntary case dismissal, and the right to an immediate appeal. Certiorari for other noteworthy cases is still under consideration.
Baker: Appeal of Class Certification Denial
The Court has agreed to hear Microsoft Corp. v. Baker, No. 15-457, which will decide whether class plaintiffs can force an immediate appeal after a denial of class certification by voluntarily dismissing the class action case. The question that the Court will address in Baker has significant implications for class action practitioners.
Currently, when class certification is denied and a court of appeals refuses to hear an appeal of the class certification decision under Federal Rule of Civil Procedure 23(f), class plaintiffs face a dilemma. The lawyers either need to try an individual class plaintiff’s case to verdict before taking an appeal (however, the individual plaintiff’s potential damages are often so small that trying the case is not economically rational) or walk away from the case even though the class lawyers believe that the district court erred in its class certification decision.
The lawyers in Baker challenged this notion and undertook a different approach. Rather than trying the case or walking away, the lawyers voluntarily dismissed the case and then filed an appeal with the Ninth Circuit Court of Appeals. Even though it had denied an interlocutory appeal pursuant to Rule 23(f), the Ninth Circuit heard the case after the voluntarily dismissal and ultimately reversed the district court’s decision on class certification.
The case dates back to 2011 when a class action was brought on behalf of a handful of Xbox 360 owners who claimed that the Xbox 360 had a design defect that caused game discs to be scratched if the Xbox was moved too quickly during its operation. The case mirrored a case that had been filed in 2007 by the same lawyers on behalf of other Xbox 360 owners based on the same claims. The 2007 case was resolved with a settlement, but only after the district court denied class certification and the Ninth Circuit denied the plaintiffs’ request for an interlocutory appeal under Rule 23(f).
The 2011 case was brought after a Ninth Circuit case, Wolin v. Jaguar Land Rover North America, LLC, 617 F.3d 1168 (9th Cir. 2010), held that proof of the manifestation of a defect is not a prerequisite to class certification. Wolin eliminated one of the main justifications on which the court relied in denying class certification in the 2007 Xbox case. Defendant Microsoft moved to strike the plaintiffs’ class allegations, arguing that Wolin did not apply and relying on the court’s ruling denying class certification in the 2007 Xbox case. The district court agreed with Microsoft and struck the plaintiffs’ class allegations. The plaintiffs then sought an interlocutory appeal pursuant to Rule 23(f). The Ninth Circuit denied their petition. Thereafter, the plaintiffs decided to voluntarily dismiss their claims with prejudice rather than prosecute the individual class representatives’ claims. In that request, the plaintiffs explicitly stated that they intended to appeal the district court’s final judgment. Microsoft, while stipulating to the dismissal with prejudice, made clear that it believed that the plaintiffs had no right to appeal the district court’s order striking the class allegations after the plaintiffs voluntarily dismissed their case. Once the final judgment was entered, the plaintiffs appealed to the Ninth Circuit, and the Ninth Circuit accepted jurisdiction.
The Ninth Circuit held that adversity still existed even though the plaintiffs had voluntarily dismissed their claims. In doing so, the Ninth Circuit drew a line between cases that were dismissed as a result of a settlement (where no adversity remains) and cases that were voluntarily dismissed without settlements (where adversity continues). Ultimately, the Ninth Circuit found that the Wolin decision was controlling and that the district court abused its discretion in striking the class allegations. Microsoft then filed a petition for certiorari, which the Supreme Court granted.
Before turning to the Supreme Court’s review of Baker, it is helpful to consider the evolution of the current procedure for review of class certification decisions. Nearly 40 years ago in Coopers & Lybrand v. Livesay, 437 U.S. 463 (1978), the Supreme Court held that orders denying class certification are not immediately appealable. Federal Rule of Civil Procedure 23(f) was adopted twenty years later. The rule permits a litigant to file a petition in the court of appeals to request that the court grant a discretionary interlocutory appeal of an order granting or denying a class certification.
Now, almost 20 years after the addition of Rule 23(f), the plaintiffs in Baker seek what they view as the next step in the evolution of appellate procedure related to class certification decisions—the right to force an immediate appeal of a class certification decision by voluntarily dismissing a class action case after a denial of class certification. Baker therefore presents the Court with an important jurisdictional question: Does a federal court of appeals have jurisdiction under both Article III of the U.S. Constitution and 28 U.S.C. § 1291 to review an order denying class certification after the named plaintiffs voluntarily dismiss their claims with prejudice?
Defendant Microsoft maintains in its briefing that the answer is clearly no. Microsoft argues that Rule 23(f) provides an adequate mechanism for plaintiffs to immediately appeal a lower court’s decision on class certification. From Microsoft’s perspective, if the appellate court reviews the case and deems it unworthy of an appeal at that stage, then a plaintiff has the option to pursue its individual claims and revisit the adverse class determination after trial. Microsoft also argues that the Supreme Court’s decision in Livesay rejected the idea that class certification decisions prompt immediate appellate rights and that allowing plaintiffs to manufacture finality and force an appeal after they receive an unfavorable result would allow an end run around Rule 23(f) and Livesay. Microsoft adds that because the plaintiffs dismissed their claims with prejudice, their individual claims no longer exist, and they have forfeited their “case or controversy” under Article III. According to Microsoft, a reversal of a class certification order would not reinstate the forfeited claims, so the case is moot for the individual plaintiffs.
The plaintiffs’ briefing urges the opposite conclusion. The plaintiffs maintain that their voluntary dismissal and the resulting final judgment prompt appellate review under § 1291. The plaintiffs argue that adversity is not lost under Article III simply because they voluntarily dismissed their claims.
There are a number of policy issues at play in Baker. For example, Microsoft argues that a ruling in favor of the plaintiffs could lead to a situation in which class plaintiffs receive two bites at the proverbial apple by first seeking a Rule 23(f) appeal and then, if unsuccessful, a “forced appeal.” The plaintiffs claim that this a phantom risk because plaintiffs who voluntarily dismiss their claims run the risk of losing their rights to pursue their claims, which means that only the most dedicated plaintiffs would seek the voluntary-dismissal route. Microsoft also argues that the rule is unfairly one-sided in that only plaintiffs could take advantage of the rule urged by the plaintiffs and that there is no mechanism for a defendant to “force” an appeal of an order granting class certification. Plaintiffs, on the other hand, point out that not allowing an appeal after a voluntary dismissal would harm good faith litigants and frustrate judicial objectives. A plaintiff with a meritorious argument about an improper denial of class certification—as was the case in Baker—would be faced with two equally bad choices after the denial of a Rule 23(f) appeal. The plaintiff would need to go through the process of a full-blown, complex litigation over a tiny claim or abandon the case altogether, either by dismissing the case or accepting a nominal settlement. The plaintiffs claim that because dismissing the claim with prejudice would mean that the entire case hinges on the class certification decision, only those plaintiffs with strong or highly meritorious claims for a potential appeal would actually invoke the voluntary-dismissal procedure.
There are practical considerations as well. Because most circuits grant Rule 23(f) petitions sparingly, there is currently limited opportunity for appellate review of class certification decisions. An affirmance of the Ninth Circuit’s decision will almost certainly lead to an increased number of class certification decisions considered by courts of appeal. Additionally, a favorable decision for plaintiffs may encourage class plaintiffs in cases with very small individual claims to bring motions for class certification earlier in a litigation—knowing that they would be able to immediately appeal an adverse decision, plaintiffs would not need to expend resources on merits issues, which, because of delays in class certification, often overlap with the class certification process. This could result in the preservation of resources for plaintiffs and defendants alike, not to mention the courts.
In simplest terms, Baker presents the Supreme Court with the question of whether to maintain the status quo for the appellate process with respect to class certification decisions or provide plaintiffs with a new tool to challenge denials of class certification. The case should be closely watched by class action practitioners because the Court’s decision and its underlying reasoning could have a considerable impact on how class action cases are litigated in the future.
Other Cases to Watch
Manrique v. United States, No. 15-606, involves the intersection between the rule on notices of appeal in criminal cases (Fed. R. App. P. 4(b)(2)) and the jurisdictional prerequisites to appeal deferred restitution awards. The Supreme Court has granted certiorari in this case, and the issue before the Court is whether a notice of appeal from a sentencing judgment deferring restitution can be used to secure an appeal to challenge the validity of a later-issued restitution award.
Schulman v. LexisNexis Risk & Information Analytics is another case worth following. Although the Supreme Court has yet to decide whether it will hear Schulman, much like Baker, it presents multifaceted questions about class action procedure and due process rights. The case involves a settlement that released some class members’ statutory damages claims in exchange for injunctive relief without giving them the opportunity to opt out. The certification petition for Schulman presents the question of whether Federal Rule of Civil Procedure 23 provides damages claimants the right to opt out of a class in such scenarios and, if not, whether the Due Process Clause guarantees that right.
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