Rule 23(b)(3) Superiority Problems: Proceeding With Both A Class Action And Individual Suits

The superiority requirement of Fed. R. Civ. P. 23 mandates that a (b)(3) class action be "superior to other available methods for the fair and efficient adjudication" of the particular controversy at issue. One factor a court should consider in its superiority analysis is the manageability of proceeding with a class action.

While defending a securities fraud class action, Jones Day recently faced an interesting superiority issue: whether problems that prohibit class certification of certain claims in an action may prevent a court from properly certifying any remaining claims because of manageability concerns. Relying on principles discussed in Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996) -- a mass tort case -- we successfully argued that, because plaintiff's reliance-based Section 10(b) claims were unfit for class determination and could therefore only proceed in individual suits, proceeding with the remaining claims on behalf of a class would be duplicative of these individual actions and would thus violate Rule 23(b)(3)'s superiority requirement. The court's decision denying class certification in that case, Madison Partnership Liquidity Investors 31, LLC v. USAA Properties III, Inc., No. SA-98-CA-324-EP, Order (W.D. Tex. July 16, 1999), is significant because it may have important implications for class action litigation -- particularly in the securities fraud area.

Background

Securities fraud plaintiffs commonly plead the "kitchen sink" of claims under the Securities Act of 1933 and the Securities Exchange Act of 1934. Certain of these claims often require showings of individualized proof (e.g., proof of reliance in a Section 10(b) claim where no presumption of reliance exists) that would defeat Rule 23(b)(3)'s predominance requirement -- and therefore class certification -- as to those claims. Plaintiffs generally seek class certification, however, as to all of their claims, hoping that the court will certify a class on any claim -- an act that may significantly affect the parties' settlement posture.

This approach creates the potentially troublesome situation that arose in the Madison Partnership action, where a court faces certain claims that are not appropriate for class certification along with other claims for which certification may otherwise be proper. Ignoring the possible claim-splitting arguments, a court in this position must decide whether to permit the parties to litigate some claims through a class action but leave absent class members to seek relief on other claims only through individual actions. The duplication and inefficiency that arise from proceeding with both a class action and potentially innumerable individual suits -- involving many of the same facts and proof -- may prevent a finding that the class action is the superior method of adjudicating the controversy as required by Rule 23(b)(3).

Surprisingly, there appears to be a dearth of published opinions addressing this important issue. Because of the ramifications of class certification, defendants should carefully analyze whether, in a given action, issues that prohibit certification of some claims destroy the superiority of certifying any class. While a few courts have addressed this...