M E M O
TO: Joint Procedure Committee
FROM: Tom Tudor
RE: Rule 23, N.D.R.Civ.P.; Class Actions Rule
There are two questions for consideration by the Committee concerning Rule 23. The first is whether, with respect to any one action, there should be any limitation on the number of appeals which may be taken from orders certifying a class action. The second question is whether Rule 23 should be amended to allow a member of a mandatory plaintiff class to be excluded from the action. This second question will be the subject of a later memo.
These questions have been raised at this time as a consequence of two recent cases before the North Dakota Supreme Court arising from the same district court lawsuit, both involving appeals from the district court's orders certifying a class action. The Court remanded the first case to the district court for a determination of class action certification based upon a correct consideration of Rule 23(c)(1) factors. Ritter, Laber & Assoc. v. Koch Oil, 2000 ND 15, 605 N.W.2d 153 (Koch I). The Court affirmed the district court's amended order of class action certification in the second case. Ritter, Laber & Assoc. v. Koch Oil, 2001 ND 56, 623 N.W. 2d 424 (Koch II).
Rule 23(d)(3) provides that an order certifying or refusing to certify an action as a class action is appealable. Rule 23(e)(4) provides that an order amending a certification order is appealable, but that an order denying the motion of a member of a defendant class, not a representative party, to amend the certification is appealable if the district court certifies it for immediate appeal.
The apparent concern is that a district court's certification order and subsequent amended certification orders with respect to the same action may be the subject of several appeals to the Supreme Court.
It may be helpful to first review briefly the judicial history and philosophy of Rule 23 as developed and expressed by the North Dakota Supreme Court .
N.D.C.C. § 28-27-02 lists district court orders which may be appealed, and only orders which are within this statute are appealable. Regardless of the right of appeal granted in Rules 23(d)(3) and (e)(4), this statutory requirement must be met. N.D. Const. art. VI, § 6; Holloway v. Blue Cross of North Dakota, 294 N.W.2d 902, 905 (N.D. 1980). The Court held in Holloway that the right to an appeal under Rule 23(d)(3) is within the scope of § 28-27-02(1), which provides as follows:
"The following orders when made by the court may be carried to the supreme court:
"1. An order affecting a substantial right made in any action, when such order in effect determines the action and prevents a judgment from which an appeal might be taken;"
The Court stated that "[s]ection 28-27-02(1) allows appellate review when a trial court order, in effect, determines the action and prevents a judgment from which an appeal may be taken. We interpret this to mean a judgment from which a meaningful appeal might be taken." Id. at 906. In effect, the Court held that an order denying class action status is an appealable order.
The Court has also held that Rule 54(b) does not apply to an appeal under Rule 23 because "Rule 54 applies to decisions which finally dispose of causes of action, as opposed to matters collateral to the merits of a case, such as the determination that an action may not be maintained as a class action." Rogelstad v. Farmers Union Grain Terminal Ass'n, 224 N.W.2d 544, 548 (N.D. 1974) (Rogelstad I).
The Court has explained its judicial philosophy concerning class actions as follows:
In reviewing an order granting certification, we are guided by the broad and liberal policy in favor of class actions in this state:
Decisions as to whether class action status should be allowed seem to rest, more than many other judicial determinations, on judicial philosophy, rather than on precedent or statutory language. . . .
We will interpret Rule 23 so as to provide an open and receptive attitude toward class actions.
We believe that Rule 23 is a remedial rule which "continues to have as its objectives the efficient resolution of the claims or liabilities of many individuals in a single action, the elimination of repetitious litigation and possibly inconsistent adjudications involving common questions, related events, or requests for similar relief, and the establishment of an effective procedure for those whose economic position is such that it is unrealistic to expect them to seek to vindicate their rights in separate lawsuits." Wright & Miller, Federal Practice and Procedure: Civil § 1754.
Peterson v. Dougherty Dawkins, Inc., 1998 ND 159, ¶ 10, 583 N.W.2d 626.
In Rogelstad v. Farmers Union Grain Terminal Ass'n, 226 N.W.2d 370 (N.D. 1975) (Rogelstad II), the Court briefly reviewed the statutory and judicial history of class actions and stated that "[i]n view of this long tradition of hospitality toward class actions, by whatever name, we are not disposed now to take a constrictive view of class action eligibility." Id. at 377.
This judicial philosophy of hospitality toward class actions has been consistently adhered to by the Court. See Koch, 2001 ND 56, 623 N.W.2d 424; Koch, 2000 ND 15, 605 N.W.2d 153; Werlinger v. Champion Healthcare Corp., 1999 ND 173, 598 N.W.2d 820; Peterson v. Dougherty Dawkins, Inc., 1998 ND 159, 583 N.W. 2d 626; Holloway, 294 N.W.2d 902 (N.D. 1980).
It should be pointed out that although each of the earlier cases involved an appeal from the order of certification and not from an order amending an order of certification, the Court did not distinguish these two categories of appeals in Koch II, which involved an appeal from an amended order of certification. Because there is no substantive difference between the two, references to an order of certification will include an amended order of certification.
The Court has stated that its standard of review on an appeal from a district court order refusing to certify a proceeding as a class action is to determine whether the district court abused its discretion in entering the order. An "abuse of discretion" has been defined by the Court as "an unreasonable, arbitrary, or unconscionable attitude" of the district court. A district court also abuses its discretion when its decision is not the product of a rational mental process leading to a reasoned decision, or when it misinterprets or misapplies the law. Koch II, at ¶ 5.
This background may help frame the context for the question of whether limitations should be established on the right of appeal from an order of class action certification under Rule 23. Keeping in mind the supreme court's "philosophy of hospitality" toward the granting of class action status, a possible approach to limiting appeals of a class action certification order would be to adopt a provision for appeals similar to Rule 23(f), Fed.R.App.P., included in the December 1998 amendments to the federal rules. Subdivision (f) provides as follows:
A court of appeals may in its discretion permit an appeal from an order of a district court granting or denying class action class certification under this rule if application is made to it within 10 days after entry of the order. An appeal does not stay proceedings in the district court unless the district judge or the court of appeals so orders.
The federal rule does not establish any explicit limitations on the right of appeal, but rather leaves it to the courts to establish standards for determining when an appeal should be granted. This approach would allow the North Dakota Supreme Court to adopt standards consistent with its class action judicial philosophy.
The federal Committee Note to subdivision (f) points out that "[t]he court of appeals is given unfettered discretion whether to permit the appeal, akin to the discretion exercised by the Supreme Court in acting on a petition for certiorari. . . . Permission to appeal may be granted or denied on the basis of any consideration that the court of appeals finds persuasive." The Committee Note also indicates that it is the expectation that "[t]he courts of appeals will develop standards for granting review that reflect the changing areas of uncertainty in class litigation."
A quick review of four federal circuit court decisions discussing the implementation of Rule 23(f) may aid in determining whether this approach makes sense, if in fact the Committee is of a mind to pursue this question.
In possibly the first federal case addressing the application of Rule 23(f), the court of appeals for the Seventh Circuit indicated that it would not come up with a list of standards to determine the exercise of its power under Rule 23(f): "Neither a bright-line approach nor a catalog of factors would serve well--especially at the outset, when courts must necessarily experiment with the new class of appeals." Blair v. Equifax Check Services, Inc., 181 F.3d 832, 834 (7th Cir. 1999). Rather, the court stated that it would keep in mind the three reasons for the adoption of Rule 23(f), and then set out and discussed those reasons.
The first reason discussed by the court in Blair is that in some cases the denial of class action status may have the practical effect of sounding the death knell for the action because the plaintiff's claim is too small to justify the expense of litigation. Id. At 834. The North Dakota Supreme Court discussed the death knell doctrine in Rogelstad I, at 546, and stated that if it is applicable, it would look to this doctrine for the reasoning it contains.
The second reason discussed by the court in Blair is when a class action certification puts pressure on the defendant to settle, even if the plaintiff's probability of success on the merits is slight. The court stated that this situation justifies an earlier appellate look because it may be too late to do so at the end of the case, if in fact the case has an ending that is subject to appellate review. Id. at 834.
The third reason discussed by the court is that an appeal may provide an opportunity for the development of the law. The court stated that the "more fundamental the question and the greater the likelihood that it will escape effective disposition at the end of the case, the more appropriate is an appeal under Rule 23(f)." Id. at 835.
The court stressed that an appellant which relies upon either of the first two reasons in support of the appeal "must demonstrate that the district court's ruling on class certification is questionable -- and must do this taking into account the discretion the district judge possesses in implementing Rule 23, and the correspondingly deferential standard of appellate review. However dramatic the effect of the grant or denial of class action status in undercutting the plaintiff's claim or inducing the defendant to capitulate, if the ruling is impervious to revision there's no point to an interlocutory review" Id. at 835.
The justification for Rule 23(f) was described by the First Circuit as follows:
First, the rule provides a mechanism through which appellate courts, in the interests of fairness, can restore equilibrium when a doubtful class certification ruling would virtually compel a party to abandon a potential meritorious claim or defense before trial. Second, the rule furnishes an avenue if the need is sufficiently acute, whereby the court of appeals can take earlier- than-usual cognizance of important, unsettled legal questions, thus contributing to both the orderly progress of complex litigation and the orderly development of the law.
Waste Management Holdings, Inc. v. Mowbray, 208 F.3d 288, 293 (1st Cir. 2000).
The court narrowed the third reason given in Blair by stating that category should be restricted to instances where an appeal will allow the court to resolve an unsettled legal issue that is important to the instant litigation as well as important in itself and not likely to be effectively reviewed if left until the end of the case. The court prefaced this statement by emphasizing that "interlocutory appeals should be the exception, not the rule; after all, many (if not most) class certifications turn on 'familiar and almost routine issues'." Id. at 294.
The court concluded its discussion of Rule 23(f) by stating that "[w]e should err, if at all, on the side of allowing the district court an opportunity to fine-tune its class certification order . . . rather than opening the door too widely to interlocutory appellate review." Id. at 294.
The Eleventh Circuit had its first opportunity to clarify the circumstances in which a court of appeals should exercise its discretion to accept an appeal under Rule 23(f) in Prado-Steiman v. Bush, 221 F.3d 1266 (11th Cir. 2000). The court reviewed favorably both the Blair and Mowbray opinions and, after discussing additional considerations, established certain guideposts to use in determining whether to grant an appeal under Rule 23(f).
The first guidepost is to determine whether the district court's ruling has created a death knell for either the plaintiff or the defendant. The court added to the discussion of this factor in Blair by stating that "the decision to grant interlocutory review based primarily on this factor generally should be limited to those cases where the district court's ruling, as a practical matter, effectively prevents the petitioner from pursuing the litigation." Id. at 1274.
The court's second guidepost is to consider whether the appellant has demonstrated that the decision likely constitutes an abuse of discretion--"whether the petitioner has shown a substantial weakness in the class certification decision." However, the court stated that simply to demonstrate that the district court's ruling is questionable generally should not be sufficient to support an appeal in the absence of other factors supporting an appeal. Id. at 1274-75.
The third guidepost, with respect to whether the appeal would permit the resolution of an unsettled legal issue, is that an appeal will be "more appropriate if the unsettled issue relates specifically to the requirements of Rule 23 or the mechanics of certifying a class." The court emphasized, however, that a certification order which rests on case-specific matters of fact and district court discretion generally will not be appropriate for review on appeal. Id. at 1275.
The fourth guidepost is that the nature and status of the action before the district court should be taken into consideration:
Some cases will be in a better position for review than may others. Therefore, as noted above, the propriety of granting or denying a class, as well as the proper scope of any class that has been granted, may change significantly as new facts are uncovered through discovery. Similarly, a limited or insufficient record may adversely affect the appellate court's ability to evaluate fully and fairly the class certification decision. Moreover, a district court's ruling on dispositive motions or a motion to add new class representatives, parties, or claims may significantly redefine the issues in the case and thereby affect the scope of or need for a class. Accordingly, the decision on a Rule 23(f) petition may take into account such considerations as the status of discovery, the pendency of relevant motions, and the length of time the matter has already been pending.
Id. at 1276.
The final guidepost established by the court is the consideration of the likelihood that future events may make the appeal more or less appropriate. For example, an appeal may not be appropriate if settlement negotiations are being undertaken or if a change in the financial status of a party, such as a bankruptcy filing, is about to occur. These events might weigh against granting the appeal. Also significant is whether the district court has indicated that its certification order is subject to revision at a later stage of the action. Id. at 1276.
The court concluded its discussion of Rule 23(f) with these general comments:
We do not create any bright-line rules or rigid categories for accepting or denying Rule 23(f) petitions today. Our authority to accept Rule 23(f) petitions is highly discretionary, and the foregoing list of factors is not intended to be exhaustive. . . . Moreover, none of the foregoing factors is necessarily conclusive; ordinarily, each relevant factor must be balanced against the others, taking into account any unique facts and circumstances. . . . Piecemeal appellate review has a deleterious effect on judicial administration. . . . Most of [our] concerns are, if anything, even more compelling in the class action context, especially given the district court's broad authority under Rule 23(c)(1) to monitor and if necessary reconsider its class certification decision as discovery unfolds and the action progresses to trial.
We will therefore use restraint in accepting Rule 23(f) petitions, and these interlocutory petitions will not be accepted as a matter of course.
Id. at 1276-77.
The Fourth Circuit, after reviewing the three cases discussed above, stated that
Standards certainly must reflect the limited capacity of appellate courts to consider interlocutory appeals, as well as the institutional advantage possessed by district courts in managing the course of litigation and the judicial diseconomy of permitting routine interlocutory appeals. Routine interlocutory review of class certifications is simply not feasible as a practical matter. . . . In addition to addressing "death knell" situations and promoting the resolution of legal questions of general importance, a careful and sparing use of Rule 23(f) may promote judicial economy by enabling the correction of certain manifestly flawed class certifications prior to trial and final judgment.
Where a district court's certification decision is manifestly erroneous and virtually certain to be reversed on appeal, the issues involved need not be of general importance, nor must the certification decision constitute a "death knell" for the litigation. Such a rule would waste, rather than conserve, judicial resources, because self-evidently defective classes would proceed through trial to final judgment, only to face certain decertification on appeal and a requirement that the process begin agin from square one. . . . In extreme cases, where decertification is a functionary certainty, the weakness of the certification order may alone suffice to permit the Court of Appeals to grant review. Conversely, when the weakness of the district court's certification is loess substantial (or insubstantial), a commensurately stronger showing on the other factors [discussed in Prado-Steiman] is necessary to support review
Lienhart v. Dryvit Systems, Incorporated, 255 F3d 138,145 (4th Cir. 2001).
The adoption by the North Dakota Supreme Court of an amendment to Rule 23 similar to Rule 23(f) of the federal rules would provide the court with an opportunity to limit appeals from orders and amended orders of certification by permitting appeals only at the discretion of the Court pursuant to flexible standards and guidelines similar to those discussed above by the federal courts. A proposed amendment to Rule 23, N.D.R.App.P., adding a new subdivision for appeals, is attached.