Fourth Circuit Class Action Litigation | Fall 2019
Fourth Circuit reviews certification of a defendant class action.
In this case, the Fourth Circuit encountered “one of the rarest types of complex litigation, the defendant class action.” 922 F.3d at 504.
Bell involved an alleged Ponzi scheme in which many participants lost money and some participants earned money – the “Net Winners.” After the SEC shut down the scheme, the court appointed a receiver who sought to recover money earned by the Net Winners. Because their identities were not readily available, the receiver filed a defendant class action that sought to certify a class of the Net Winners. The district court certified the defendant class, but the court and the receiver found it difficult to find class counsel because the named defendants were not willing to fund the defense of the entire class. Class counsel was not appointed until seven months after the class was certified – after the class notice was sent and after experts were retained. Two years after the class was certified, the district court entered judgment against the class, after which multiple class members moved to decertify. The district court denied the motions.
The appeal focused primarily on the adequacy of class counsel under Rule 23. The Fourth Circuit recognized that the adequacy requirement is “especially important for a defendant class action where due process risks are magnified” because “an unnamed class member can be brought into a case, required to engage in discovery and even be subjected to a judgment compelling the payment of money or other relief without ever being individually served with a lawsuit.” Id. at 511. The Fourth Circuit agreed with the class members that the district court violated Rule 23(c)(1)(B) by failing to appoint class counsel at the time of certification and violated Rule 23(g) by not explicitly considering the adequacy factors set forth in the Rule. Although these errors would normally “render certification fatally defective,” the panel affirmed the district court due to the “unique circumstances of this case,” namely the failure of the class members to timely raise their objections. Id. at 512. The other “unique circumstance” was that, due to the significant post-certification progress made in the district court – including over 2,500 settlements with class members – “the toothpaste cannot be put back into the tube” if the class certification order were rescinded. Id. at 513.
Bell demonstrates that a defendant class action can be used where there is a large group of defendants whose identities are not readily available at the outset of a case. Unlike a plaintiff class action, however, where class counsel accepts the representation on a contingency basis, it may be difficult to find counsel to represent a defendant class when the named defendants are not willing to fund the defense of the entire class. Finally, Bell demonstrates the importance of raising objections to a proposed class because the failure to timely do so typically will not be overlooked by the reviewing court.
Part of the Fall 2019 Class Action Litigation Newsletter available here.