Rule 23(f) Requires Plaintiffs Seek Interlocutory Review from First Denial of Motion for Class Action Certification because 10-Day Window for Appeal does not Commence with Every Denial of such a Motion First Seventh Circuit Holds
Plaintiffs filed six securities fraud class action lawsuits against Baxter International. Asher v. Baxter Int’l Inc., 505 F.3d 736 [Slip Opn., at 1] (7th Cir. 2007). The district court granted a defense motion to dismiss the consolidated class action lawsuits based on the “safe harbor” provision for forecasts and other forward-looking statements created by the Private Securities Litigation Reform Act of 1995 (PSLRA), id., but the Seventh Circuit reversed, holding that the district court erred in dismissing the class action complaint based on the allegations in the complaint. See Asher v. Baxter Int’l Inc., 377 F.3d 727 (7th Cir. 2004). It was the Seventh Circuit’s expectation “that discovery sufficient to make a prompt decision about the safe harbor would follow [the] opinion, for the safe harbor is supposed to be applied at an early stage.” Asher, at 2. Instead, the litigation devolved into “extended wrangling about who should be the ‘lead plaintiff’ under the 1995 Act, and thus which law firm would control the plaintiffs’ side of the litigation.” Id. In the face of the infighting, “the district court eventually held that none of the persons proposed as lead plaintiffs is satisfactory and that the suit therefore cannot proceed as a class action.” Id. The motions panel for the Seventh Circuit permitted plaintiffs to file an interlocutory appeal under FRCP Rule 23(f) from the denial of class action treatment, id., but the Circuit Court dismissed the appeal as untimely, id., at 10.
The Seventh Circuit explained at page 2 that the purpose of designating “lead plaintiffs” in class actions is “to counteract the dominance of lawyers over class-action suits.” Asher, at 2 (italics added). Specifically, “[T]he district judge should select a representative with a financial stake large enough to make monitoring of counsel worthwhile, and with the time and skills needed to make monitoring productive. The idea is that securities suits then will proceed in the interest of investors rather than the lawyers who appoint themselves to prosecute these actions.” Id. (italics added). (The Circuit Court’s observation and criticism may have been influenced by the criminal indictment of several securities fraud class action plaintiff lawyers – including Melvyn Weiss, David Bershad, Steven Schulman and William Lerach – most of whom have pleaded guilty to paying illegal kickbacks to individuals to serve as “lead plaintiffs” in securities fraud class action lawsuits.) According to the Seventh Circuit, “The principal substantive questions on appeal are (a) whether the City of Fayetteville Firemen’s Pension and Relief Fund (‘the Fund’) is unsuitable as a lead plaintiff because it learned about Baxter International’s supposed wrongs from a securities lawyer rather than from a business executive, and (b) whether ‘no one’ can be the answer to the question ‘who is the best representative of investors’? Perhaps, when all potential lead plaintiffs have shortcomings, the district judge must choose the least bad of a mediocre lot; after all, the 1995 statute refers to ‘the most adequate plaintiff’ among many, without setting a floor.” Asher, at 2 (italics added). While a district court may ensure “minimum standards of adequacy” under “adequacy” test of Rule 23(a)(4), in this case the lower court never made such an inquiry. Id., at 2-3.
But the Circuit Court never reached these substantive issues because of a preliminary procedural hurdle – whether the appeal was timely. Asher, at 3. The district court first denied a motion to certify class action treatment of the consolidated securities fraud class action complaint in November 2005; at that time, it held that proposed lead plaintiffs James and Heidi Hill had lied about their ownership of Baxter stock because they represented that they owned 2,663 shares of stock when in fact they owned but 2.663 shares. Id. (The Seventh Circuit noted at page 3 that “Their lawyer, who has since been indicted for fraud in conducting other class-action suits, called the misrepresentation an ‘administrative error.’”) Interlocutory review under Rule 23(f) was not sought at that time; instead, plaintiffs’ counsel proposed two other lead plaintiffs that the district court subsequently determined to be “totally inadequate” to serve as representatives in a class action, id., at 3, and in September 2006 it denied a renewed motion to certify the litigation as a class action, id., at 4.
Rather than seek appellate review under Rule 23(f), plaintiffs’ counsel once again proposed a new lead plaintiff (the Fund) which the district court in January 2007 once again rejected. Asher, at 4. To “set up” an interlocutory appeal, the Fund asked the district court to deny its motion for class action treatment, id. As the Seventh Circuit surmised at page 4, “Evidently the judge, having already twice denied a motion to certify a class of investors, had not seen a reason to enter a third such order; the judge had thought it sufficient to rebuff another attempt to designate lead plaintiffs. But Rule 23(f) does not allow interlocutory appeals from orders designating (or not designating) lead plaintiffs-and although 28 U.S.C. §1292(b) could in principle allow an interlocutory appeal from such an order with the approval of both the district court and this court, the Fund did not ask for permission to appeal under §1292(b).” Accordingly, in March 2007 the district court granted the Fund’s request to deny its motion for class certification, after which the Fund sought and received permission to pursue an interlocutory appeal under Rule 23(f), id., at 4-5.
Rule 23(f) provides, “A court of appeals may in its discretion permit an appeal from an order of a district court granting or denying class action certification under this rule if application is made to it within ten days after entry of the order.” Defense attorneys argued that this 10-day window expired in November 2005; plaintiffs’ lawyer countered that every order granting or denying class action treatment gives rise to a new 10-day period to appeal. Asher, at 5. The Seventh Circuit agreed with the defense, explaining at page 5: “The time limit would not be worth anything if it restarted with each new motion. Then the rule might as well say ‘at any time’ instead of ‘within ten days’. A short limit would be turned into an indefinite one.” This rule, the Circuit Court explained, helps prevent abuse by class action plaintiff lawyers: “Both the judicial system and the investors gain from dispatch. Class actions are unwieldy and often dominated by lawyers. (That’s a major reason why the lead-plaintiff statute was enacted.) Investors are poorly situated to protect their own interests, while lawyers are tempted to drag out the case to increase their fees (or, by fighting to have their clients named as lead plaintiffs, to engross larger portions of available fees). Judges should insist that these cases proceed to decision rather than linger on the docket. Preventing the window for Rule 23(f) review from remaining open for years (as the Fund proposes) promotes the public interest.” Id., at 9. Accordingly, the Seventh Circuit dismissed the appeal as untimely, id., at 10.
NOTE: The Seventh Circuit explained “a district court could keep open the prospect of interlocutory review under Rule 23(f) by denying one class member’s motion for appointment as lead counsel and inviting a new motion from some other member, all the while leaving the motion for class certification undecided,” and then acting on the motion for class action certification “[o]nly after running through all potential lead plaintiffs,” but noted that the lower court did not proceed in such a manner in this case. Asher, at 7-8.