M E M O
TO:Joint Procedure Committee
FROM:Tom Tudor/Mike Hagburg
RE:Rule 23(h), N.D.R.Civ.P.; Class Actions (Exclusion)
The Committee addressed N.D.R.Civ.P. 23 at its meeting September 27-28, 2001, and approved several amendments. These amendments have been incorporated into the draft of Rule 23 included in the agenda materials. The draft also includes several suggested form and style changes. In addition to the amendments reflected in the draft, the Committee may wish to consider whether to change the $100 notice threshold contained in Rule 23(g)(4). This amount has not been increased since the uniform rule was adopted in 1977.
One issue that was noted but not discussed at the September 2001 Committee meeting was whether Rule 23 should be amended to allow so-called "mandatory" plaintiffs to opt out of class actions governed by the rule. Because Rule 23 in its present form appears to give the courts discretion to allow even "mandatory" plaintiffs to opt out of a class action, no changes related to opting out have been added to the Rule 23 draft included in these materials. See N.D.R.Civ.P. 23(e)(1)(B) (authorizing courts to "eliminate from the class any class member who was included in the class as certified"); N.D.R.Civ.P. 23(e)(1)(E) (authorizing courts to "make any other appropriate change in the order").
This memo will address legal issues relevant to opting out under Rule 23. It should be noted that the question of opting out, or "exclusion" as it is called in Rule 23(h), does not arise until an action is certified as a class action. See N.D.R.Civ.P. 23(h)(2). As was discussed at the September 2001 meeting, gaining certification is the biggest hurdle in a class action and once this is achieved settlement discussions, rather than further litigation, often result. Opting out, however, is an option a plaintiff may wish to use to avoid being included in an unfavorable settlement.
Rule 23(h)(1) provides that: "A member of a plaintiff class may elect to be excluded from the action unless (A) he is a representative party, (B) the certification order contains an affirmative finding under subparagraph (A), (B), or (C) of subdivision (c)(1), or (C) a counterclaim under subdivision (k) is pending against the member or his class or subclass."
A plaintiff class member who comes within one of the Rule 23(h)(1) criteria is considered to be a "mandatory" plaintiff that cannot opt out of the action. The drafter's comment to the exclusion rule, however, indicates that "[i]n most situations members of a plaintiff class will be permitted to elect to be excluded." Handbook of the National Conference of Commissioners on Uniform State Laws at 139 (1976). Only when a plaintiff class member can be defined as an "indispensable party" would that plaintiff be barred from opting out. Id. The criteria listed in Rule 23(h)(1), therefore, appear to be guidelines to determining when a plaintiff in a class action can be defined as an "indispensable party."
Rule 23(h)(1)(A) bars "a representative party" from opting out. A representative party is a named class member who brings the action on behalf of other class members and who represents other class members in the action with the assistance of legal counsel. Rule 23(b)(2)(C), requires representative parties to "fairly and adequately . . . protect the interests of the class." This requirement is necessary because class actions give representative parties authority over the interests of passive class members.
A representative party that desires to opt out of a class action is clearly not a party that can "fairly and adequately . . . protect the interests of the class." Traditionally, courts in class actions have had authority to order the appointment of new representative parties if previously approved representative parties prove inadequate. See Swanson v. Wabash, Inc., 577 F.Supp. 1325-26 (N.D. Ill. 1983). Rule 23(e)(1) appears to give courts in North Dakota class actions the authority to perform such substitutions. Because a party can shed its status as a representative party, Rule 23(h)(1)(A) is not a bar to the exclusion of an unwilling representative party.
Rule 23(h)(1)(B) bars any plaintiff from opting out when the court has made "an affirmative finding" on one of the following issues:
(A) whether a joint or common interest exists among members of the class;
(B) whether the prosecution of separate actions by or against individual members of the class would create a risk of inconsistent or varying adjudications with respect to individual members of the class that would establish incompatible standards of conduct for a party opposing the class;
(C) whether adjudications with respect to individual members of the class as a practical matter would be dispositive of the interests of other members not parties to the adjudication or substantially impair or impede their ability to protect their interests[.]
See N.D.R.Civ.P. 23(c)(1); 23(h)(1)(B).
When a finding is made under Rule 23(c)(1)(A) that "a joint or common interest exists among members of the class" a so-called "true" class action exists. In a true class action, all plaintiffs have a common and undivided interest in the subject matter of the action, and issues determined in the action are res judicata for any member of the class, whether or not a party to the action. Werlinger v. Champion Health Care Corp., 1999 ND 173, ¶ 50, 598 N.W.2d 820. In Ritter Laber & Assocs., Inc. v. Koch Oil, Inc., 2000 ND 15, ¶ 12, 605 N.W.2d 153, the Court stated that, generally a common interest exists for purposes of N.D.R.Civ.P. 23(c)(1)(A) if the failure of one plaintiff to collect monetary damages would increase the recovery of the remaining plaintiffs or if the total liability of a defendant does not depend on how the recovery on a claim is distributed among the class members.
In an article by a member of the Federal Advisory Committee on Civil Rules, the author suggested that "true" class actions are rare because the terms "joint" and "common" have "little or no clear or ascertainable meaning in or out of the context of class actions." Benjamin Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure (I), 81 Harv. L. Rev. 356, 380 (1967-68). Kaplan wrote that it is difficult to distinguish a "joint or common" interest from a "several" interest in the context of certifying a class action. Id. at 378-386. Further, while a trial court may choose to certify a class action based on an initial finding that a common interest exists among class members, the trial court has the discretion to later modify such a certification order based on developments in the case. See Ritter Laber & Assocs., Inc. v. Koch Oil, Inc., 2001 ND 56, 623 N.W.2d 424. Considering these factors, it seems unlikely that it would be common for Rule 23(h)(1)(B) to prevent a class member from opting out in a given action.
Under North Dakota's class action rules, plaintiffs are barred from opting out when "the prosecution of separate actions by or against individual members of the class would create a risk of inconsistent or varying adjudications with respect to individual members of the class that would establish incompatible standards of conduct for a party opposing the class." See N.D.R.Civ.P. 23(c)(1)(B); 23(h)(1)(B). In Werlinger, the Court explained that "incompatible standards" exist when a defendant in a class action would not be able to comply with one judgment without violating the terms of another judgment. Werlinger at ¶ 54. However, incompatible standards do not exist when there is a possibility of different results in actions for monetary damages or when a defendant may be found liable to some plaintiffs and not to other plaintiffs. Werlinger at ¶ 55. Instead, incompatible standards are more likely to exist when actions could be brought against the same defendant seeking different and incompatible affirmative relief. See Koch, at ¶ 16.
If a certification order contains a finding that incompatible standards could exist in a given case, this would seem to justify precluding plaintiffs from electing to be excluded from the action. On the other hand, actions in which incompatible standards could be found to exist are likely to be as rare as actions in which joint and common interests exist. Therefore, the rule barring exclusion in such cases does not seem to be unduly burdensome.
Plaintiffs are barred from opting out under North Dakota's class action rules when "adjudications with respect to individual members of the class as a practical matter would be dispositive of the interests of other members not parties to the adjudication or substantially impair or impede their ability to protect their interests." N.D.R.Civ.P. 23(c)(1)(C); 23(h)(1)(B). In Koch, the Court looked to the similar federal rule for guidance in determining the meaning of this standard. Koch at ¶ 18. The Koch Court decided the key factor to consider was whether separate actions "as a practical matter" would affect absent parties without giving them the protection of representation. The Koch Court indicated an analysis of this factor would need to be done on a case-by-case basis, and that an affirmative finding generally would be made on this factor only when there was a limited or insufficient fund available to compensate plaintiffs.
If an affirmative finding is made on this factor, this would seem to justify precluding a plaintiff from electing to opt out of an action. Situations which would justify such a finding, however, may be rare.
As noted above, Rule 23(e)(1)(B) and Rule 23(e)(1)(E) appear to give courts the discretion to allow the exclusion of plaintiffs from a class action, even when an opt out bar exists under Rule 23(h). Under the federal rules, some courts have decided that similar discretionary authority to allow exclusion even for mandatory plaintiffs exists under F.R.Civ.P. 23(d). See Robert L. Serrenka, Annotation, Propriety of Allowing Class Member to Opt Out in Class Action Certified Under Subsections (b)(1) or (b)(2) of Rule 23 of Federal Rules of Civil Procedure, 146 A.L.R. Fed 563 (1998). The United States Supreme Court has also suggested that due process considerations require the availability of the right to opt out in class actions. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985).
For all the reasons discussed above, there may not be a great deal of interest in amending, or a compelling need to amend, the Rule 23(h) exclusion provisions. Class action jurisprudence in North Dakota, as evidenced by recent cases cited above, is still in a developmental phase and each case is unique. At some point, the Court may be called upon to address the right of a mandatory plaintiff to be excluded from a class action. The federal courts appear to be addressing exclusion on a case-by-case basis, and this would appear to be a prudent course to be followed in North Dakota courts as well. Education of the judiciary and the bar regarding North Dakota's class action rule, as opposed to further amendment related to the exclusion issue, would be a reasonable approach.