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October Term, 2010

June 16, 2011

Today the Supreme Court issued one decision, described below, of interest to the business community.

Class Actions—Preclusive Effect of Federal Class Certification Rulings

Smith v. Bayer Corp., No. 09-1205 (previously discussed in the September 28, 2010 Docket Report).

The federal Anti-Injunction Act generally bars federal courts from enjoining proceedings in state court. 28 U.S.C. § 2283. One exception to that prohibition, commonly known as the “relitigation exception,” permits a federal court to enjoin state court litigation “to protect or effectuate [the federal court’s] judgments.” In Smith v. Bayer Corp., a federal court presiding over multidistrict litigation against Bayer applied that exception, enjoining class certification proceedings that were pending in West Virginia state court because the federal court had already denied certification of a similar class in a lawsuit filed by a different plaintiff. The Eighth Circuit affirmed the injunction.

Today, in an opinion by Justice Kagan that was in all respects but one unanimous, the Supreme Court reversed, holding that the injunction did not qualify for the relitigation exception because the federal court’s denial of class certification did not have preclusive effect on the parallel state proceeding. The Court held that two conditions for preclusion were not met: first, “the issues before the two courts were not the same,” and second, the state court plaintiff “was neither a party [to the federal action] nor the exceptional kind of nonparty who can be bound” by a previous ruling. Slip. op. 7.

In concluding that the class certification issues before the federal and state court were not identical, the Court acknowledged that the proposed classes and substantive claims in both actions mirrored one another. But the Court held that the legal standards for class certification under Federal Rule of Civil Procedure 23 were different from the standards governing class certification under “West Virginia Rule 23.” Slip. op. 9 (emphasis in original). Even though the rules had nearly identical language, the Court stated that “[f]ederal and state courts * * * can and do apply identically worded procedural provisions in widely varying ways,” and that “absent clear evidence that the state courts” have interpreted the state provision in the same manner, the “uncertainty would preclude an injunction.” Id. at 9–10. In particular, the Court noted that the West Virginia Supreme Court of Appeals had taken a different approach to the analysis of whether common issues predominate over individual issues—the “predominance requirement” of Rule 23—than the approach followed by federal courts within the Eighth Circuit. 

On the second point (as to which Justice Thomas did not join), the Court noted that its precedent had “taken a ‘constrained approach to nonparty preclusion’” in light of “‘the general rule’ that only parties can be bound by prior judgments.” Slip. op. 12 (quoting Taylor v. Sturgell, 553 U.S. 880, 898 (2008)). The Court held that the petitioner, Smith, “an unnamed member of a proposed but uncertified class” could not qualify as a “party” to the federal case—particularly when, as here, the named plaintiff in the federal case was denied leave to represent a class. Id. at 12–13. Although the Court noted the “recognized exception to the rule against nonparty preclusion” for class members (id. at 13), it explained that the exception applied only to a “properly conducted class action”—i.e., one certified under Rule 23—and that “[n]either a proposed class action nor a rejected class action may bind nonparties.” Id. at 14–15. 

Although both aspects of the Court’s preclusion analysis are significant, the circumstances before the Court are less likely to recur in the future. The parallel lawsuits at issue in Smith v. Bayer were filed in 2001—four years before the enactment of the Class Action Fairness Act of 2005 (“CAFA”), under which “Congress enabled defendants to remove to federal court any sizable class action involving minimal diversity of citizenship.” Slip op. 17. Thus, going forward, it is less likely that there will be parallel class actions that proceed in state and federal court because most class actions involving $5 million or more can be removed to federal court and consolidated for pre-trial proceedings.

Mayer Brown LLP filed an amicus brief in support of the respondent on behalf of the Product Liability Advisory Council.

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