I've had more time to read the majority and concurring opinions in Regents of the University of California v. Credit Suisse First Boston (USA), Inc., ___ F.3d ___ (5th Cir. Mar. 19, 2007). The majority unabashedly decides core merits questions in the context of a Rule 23(f) interlocutory appeal from an order granting class certification. In the words of the concurring opinion:
According to the majority, because the banks did not make public misstatements and had no duty to disclose vis-à-vis Enron’s shareholders, their participation with Enron in fraudulent transactions that lacked any independent business purpose is beyond the reach of Section 10(b); because the banks’ conduct is not actionable under Section 10(b), the plaintiffs cannot invoke a classwide presumption of reliance; and because reliance cannot be presumed on a classwide basis, individual issues of reliance predominate over common issues. In sum, the upshot of the majority’s reasoning is that plaintiffs are not entitled to maintain a class action because the conduct for which they seek to recover — to take the majority’s example, Merrill Lynch’s alleged conduct in connection with the so-called “Nigerian Barges Transaction” — is not actionable under Section 10(b).
Slip op. at 24-25 (emphasis added). One of the main authorities the majority cites to justify its approach to this appeal is In re IPO Securities Litigation, 471 F.3d 24 (2d Cir. 2006), an opinion from late last year that has created a lot of buzz among class action practitioners due to its departures from precedents that everyone thought were well-established. Regents v. Credit Suisse takes IPO Securities one step further down the same road. The majority's discussion of merits issues consumes about 95% of the opinion. Its analysis of whether common questions predominate — the basis for reversing the class certification order — occupies a single sentence on the last page (slip op. at 19).
The majority acknowledges that its approach "makes substantial merits review on a rule 23(f) appeal inevitable." Id. It went on to say:
If, as is probably the case here, [the] legally appropriate examination makes interlocutory appeals in securities cases practically dispositive of the merits, we take comfort in two observations. First, the availability of broad presumptions in this area means that the legal merit of securities cases is somewhat less likely than that of other cases to be contingent on facts that have been only incompletely developed at the time of class certification. Second, as we observed in Castano, 84 F.3d at 746, class certification is often practically dispositive of litigation like the case at bar. If the certification decision is so entangled with the merits as to make interlocutory appeal dispositive of the substantive litigation, it is incidentally but perhaps happily more likely that the legal merit and practical outcome of securities cases will coincide.
Id. (emphasis added). I cannot agree with either of these justifications for deciding the case at the class certification stage. I differ from the majority for two primary reasons — the very reasons why most courts conclude that merits determinations are improper at the class certification stage to begin with: (1) class certification is usually decided relatively early in a case, before all the discovery that the plaintiff might need to defeat a summary judgment motion has been completed; and (2) the class certification motion procedure does not afford the protections of the summary judgment motion procedure, or even the dismissal motion procedure, which usually affords at least one opportunity to amend the complaint.
The majority purported to resolve several substantive securities law questions based on the complaint's allegations, as if the court were reviewing an order granting a Rule 12(b)(6) motion to dismiss (or, in California parlance, sustaining a demurrer). However, the majority opinion makes no mention of when the operative complaint was filed, how many times it has been amended, what discovery may have been conducted since, or whether the complaint might be further amended to satisfy the new rules of law the majority adopts. Nothing indicates whether facts about the status of the complaint, discovery, and any prior amendments are even part of the appellate record. This is just one reason why it is dangerous for appellate courts to try to decide merits issues when reviewing orders on class certification motions that have been briefed as such at the trial court level.
In sum, I agree with the concurring judge's conclusion that "Rule 23(f) does not permit review of every issue that, if resolved against the plaintiffs, would destroy the class action." Slip op. at 27. This decision should not be followed outside the jurisdictions where it is binding. It is, in fact, possible that we will see U.S. Supreme Court involvement. The opinion not only takes class action procedure into new and uncharted territory, it also exacerbates a pre-existing split among the Circuits as to at least one important substantive securities law question. See this post from ScotusBlog for more on that.