Since the onset of our nation’s mortgage crisis, there has undoubtedly been a rise in securities related litigation involving claims of discriminatory practices in mortgage lending and underwriting based upon misuse of discretionary pricing authority, specifically in the wholesale mortgage market. Many of these actions have been brought forth in the form of class actions. This article explores recent decisions occurring at the class certification stage, and the profound implications such rulings have, and will continue to have, on the manner in which similarly situated class actions are litigated.
“Before certifying a putative class, the Court must perform a “rigorous analysis” to ensure the class first meets the requirements of Rule 23(a) and then one of the Rule 23(b) subsections.” In re Countrywide Fin. Mortg. Lending Practices Litig., No. 08-MD-1974, 2011 WL 4862174 (W.D.Ky. Oct. 13, 2011). (citing Reeb v. Ohio Dep’t of Rehab.& Corr., 435 F.3d 639, 644 (6th Cir. 2006)).
Federal Rule of Civil Procedure 23(a) – Class Actions, provides:
(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.
Class certification determinations in securities actions historically have shared the same heavy reliance on both statistical evidence and expert testimony, in supporting the requirements of subsections (2) and (3) of FRCP 23(a), which, respectively, involve proving commonality and typicality. In the past, statistical analysis presented in the form of expert report(s) combined with expert testimony resulted in perhaps more relaxed determinations permitting class certification. This is in part due to courts’ careful avoidance of deciding class certification matters on the merits of the case, but also due to a somewhat lack of guiding principles as provided by interpretations of prior decisions. In other words, so long as some commonality and typicality was shown to be present amongst the members to the class action, and the evidence, presented by the expert’s report or testimony, was not effectively challenged on the basis of unreliability or unaccepted methodology, the action stood a fair chance of survival, at least at the initial certification stage.
The recent Supreme Court decision in Wal-mart, Inc. v. Dukes, 564 U. S. ____ (2011) seems to suggest that a revived, or perhaps elevated “rigorous analysis” standard is now in place. In the very least, the Wal-Mart decision provides the parties to these matters with more concrete standards for evaluating evidentiary issues arising at class certification stages. In the Wal-Mart class action, the court stated, “[t]he crux of this case is commonality—the rule [23(a)(2)] requiring a plaintiff to show that “there are questions of law or fact common to the class.” That language is easy to misread, since “[a]ny competently crafted class complaint literally raises common `questions.'” Id. at 2551 (quoting Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U.L.Rev. 97, 131-132 (2009).
Despite the subject matter originating in allegations of employment discrimination, the principles outlined in Wal-mart, and the case upon which it relies, General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982), have been cited in several recent securities class actions, which allege discrimination. Conceivably, as a result of the analysis’ of each being guided by same underlying principles. The application of Wal-mart and Falcon in securities class actions is better understood by removing the “promotion [or higher pay]” in the following:
“Conceptually, there is a wide gap between (a) an individual’s claim that he has been denied a promotion [or higher pay] on discriminatory grounds, and his otherwise unsupported allegation that the company has a policy of discrimination, and (b) the existence of a class of persons who have suffered the same injury as that individual, such that the individual’s claim and the class claim will share common questions of law or fact and that the individual’s claim will be typical of the class claims.” Falcon at 157-158, 102 S.Ct. 2364. [emphasis added]
In further evaluating the standard under FRCP 23(a)(2), Wal-Mart, citing to Falcon, the aforementioned “conceptual gap” can be “abridged” in one of two ways. The first is a showing that the defendant(s) engaged in biased procedures in making determinations which form the basis of the class action. The second is a showing of “significant proof” of general discrimination, which, as previously suggested, is a heightened standard through which practitioners can expect a resultant profound impact on class certification determinations. See generally, Wal-Mart; Falcon; and Countrywide. What can be gained from recent developments is that parties to fair lending discrimination class actions have been provided with a more substantial platform from which to survive or defend certification stages. In sum, ‘Litigators—align your experts!’
By: Alicia McKnight, J.D.