4th Circ. Ruling Will Rewrite Class Action Litigation Strategies – Jim Francis Feature
For many years, when presented with a class action complaint, some defendants have resorted to filing a motion to strike class allegations right out of the gate, either with or without an accompanying motion to dismiss. The purpose behind such a motion is clear: preempt class discovery.
The problem is that such a vehicle, if granted, would essentially create an end run around Rule 23, which sets forth simple pleading standards for class action complaints and contemplates that class certification be decided after at least some discovery.
The patent incongruity between motions to strike under Rule 12(f) and Rule 23 has gone largely unaddressed by the circuits for years, most likely due to the interlocutory nature of a Rule 12(f) motion.
As a result, many district courts, left without clear guidance, have issued gut-reaction decisions based upon common sense and practicality, usually finding that a motion to strike was premature, or if the pleading was so clearly errant, striking class allegations without the benefit of any discovery.
As such, case law left practitioners with no bright-line controlling rule addressing the applicability, or inapplicability, of Rule 12(f) motions in the Rule 23 context. Until now.
In Oliver v. Navy Federal Credit Union, the U.S. Court of Appeals for the Fourth Circuit spoke to the issue unequivocally. On Feb. 9, it held that Rule 12(f) motions are an improper mechanism for contesting the sufficiency of a complaint’s class allegations, and rendered that long-standing playbook obsolete.
The court identified motions to deny class certification under Rule 23(c)(1)(A), coupled with a motion to strike under Rule 23(d)(1)(D), as the more appropriate procedure for challenging class actions at the pleading stage.
Oliver is the first federal circuit decision to hold that motions to strike are procedurally inappropriate vehicles for challenging class allegations at the pleading stage. In invalidating a tactic that had been used for decades, Oliver has rewritten the class action litigation playbook in the Fourth Circuit — and likely across the country as other circuits follow.
The Fourth Circuit Ruling
In Oliver, several applicants for residential mortgages sued Navy Federal Credit Union individually and on behalf of a putative class, alleging that it engaged in systematic discrimination against racial minorities.
The plaintiffs asserted claims under the Fair Housing Act and the Equal Credit Opportunity Act, alleging that Navy Federal Credit Union’s “semi-automated underwriting process” produced both intentional discrimination and disparate impact against minority applicants.
Navy Federal Credit Union sought to dismiss the complaint or to strike the class allegations under Rule 12(f) and Rule 23(d)(1)(D), arguing that the differences between loan programs precluded class certification.
Navy Federal Credit Union contended that the plaintiffs failed to allege how its underwriting process could produce discriminatory effects between class members who applied for different products. The U.S. District Court for the Eastern District of Virginia granted the motion to dismiss in part, and also struck the class allegations under both Rule 12(f) and Rule 23(d)(1)(D).
In the majority decision authored by U.S. Circuit Judge Toby Heytens, the Fourth Circuit affirmed the district court’s decision to strike the plaintiffs’ Rule 23(b)(3) class allegations, even though no discovery had occurred, but reversed the district court’s decision to strike the allegations for injunctive and declaratory relief under Rule 23(b)(2).
The majority opinion concluded that Rule 12(f) and Rule 23(d)(1)(D) were not the proper procedure for striking class allegations because there is nothing “impertinent” about class allegations before a Rule 23 ruling, and Rule 23(d)(1)(D) is “an optional housekeeping provision” that allows pleadings to be amended after the court has already concluded class certification is improper.
The court held that the “appropriate procedure for a defendant to challenge class certification — at the pleading stage or any other time — is to make ‘a motion to deny class certification under 23(c (1)(A), coupled with a motion to strike under 23(d)(1)(D) should the motion to deny class certification be granted.”
Relying on decades-old Fourth Circuit precedent, including its 1978 ruling in Goodman v. Schlesinger, and 1981 decision in International Woodworkers of America v. Chesapeake Bay Plywood Corp., the court further held that “a district court may deny class certification before discovery only if the complaint’s class action allegations fail to satisfy the relevant legal standards as a matter of law.”
In so holding, the Fourth Circuit articulated a clear two-step road map for defendants seeking to challenge class allegations at the pleading stage.
First, a defendant moves to deny class certification under Rule 23(c)(1)(A) — through which a court can determine the propriety of class certification at “an early practicable time,” the plaintiff briefs in opposition, the defendant files a reply, and the court rules.
Second, and only if the motion to deny is granted, the defendant follows with a motion to strike the class allegations under Rule 23(d)(1)(D). The motion-to-strike-first approach defendants have used for years, leading with Rule 12(f) or Rule 23(d)(1)(D), is now obsolete.
The majority opinion explained that district courts could strike class allegations that failed as a matter of law before discovery occurred. However, if a complaint asserted plausible allegations, a district court would err in striking them before discovery.
In the present case, the majority found that while the variation in Navy Federal Credit Union’s mortgage products could undermine a class action as the superior method of adjudicating the Rule 23(b)(3) claims, the Rule 23(b)(2) claims were more suited to class action litigation, and ruled that the district court erred in striking those allegations.
In a dissenting opinion, U.S. Circuit Judge Julius Richardson said he would have affirmed the district court’s ruling in full, arguing that the district court had discretion under Rule 23(d)(1)(D) to manage its docket by striking the class allegations.
The Post-Oliver Playbook for Plaintiffs
Oliver gives plaintiffs a persuasive argument for fighting motions to strike class allegations at the pleading stage — namely, that such motions are an inappropriate vehicle for challenging a class action at that time, and that defendants should have moved to deny class certification instead.
Plaintiffs counsel should consider opposing such motions head-on as procedurally infirm, rather than claiming that the motion should be decided after discovery.
But plaintiffs counsel should be aware of some nuance in Oliver. The Fourth Circuit declined to reverse the district court for treating Navy Federal Credit Union’s Rule 12(f) motion as a Rule 23(c)(1 (A) motion to deny class certification, considering it to be an accommodation tied to the prior unsettled state of the law. The court did not hold that improperly filed motions to strike are subject to sua sponte recharacterization as a matter of course.
Plaintiffs in the Fourth Circuit may wish to argue that, with the procedural rule now clear under Oliver, district courts should not extend the same courtesy to defendants who file the wrong motion.
Plaintiffs could argue that Rule 12(f) motions to strike class allegations should fail on procedural grounds, without judges repackaging them into the proper Rule 23(c)(1)(A) motion. In so arguing, plaintiffs force defendants to file and properly support a motion to deny class certification if they wish to challenge class allegations at the pleading stage.
The Post-Oliver Playbook for Defendants
With the Fourth Circuit holding that motions to strike are procedurally inappropriate, defendants may simply resort to filing motions to deny class certification at the pleading stage in their place. Oliver both requires and arguably validates such a motion’s value at that stage.
In Oliver, the Fourth Circuit, applying the new standard, dismissed the plaintiffs’ Rule 23(b)(3) class on the pleadings alone, showing that a properly framed motion to deny class certification can eliminate a damages class before any discovery occurs.
Defendants may find filing motions to dismiss at the pleading stage to be fruitful when a purported class action includes overly broad or ill-defined classes, or where the named plaintiff’s or plaintiffs’ allegations materially differ from the typical claims of the proposed class.
Additionally, defendants may benefit from the strategic advantage that filing such a motion during the pleading stage could confer: forcing plaintiffs to plausibly articulate their theories of class liability before they can conduct discovery to uncover evidence that supports their case.
One strategic consideration for defense counsel, and perhaps an area of caution, is the standard of review when challenging motions to strike. Appellate courts normally review decisions of class certification for abuse of discretion, but the Fourth Circuit explained that premature decisions regarding class certification at the pleading stage constitute legal error, for which an appellate court would afford no deference on review.
Thus, a well-supported denial at the pleading stage will receive less appellate deference than a post-discovery ruling, but so too will an erroneous denial. The Fourth Circuit will likely be more willing to reverse and reinstate class allegations that a district court struck prematurely. Defense counsel should therefore be selective about which cases warrant a motion to deny under Rule 23(c)(1)(A), reserving the vehicle for matters in which the Rule 23 deficiencies are apparent on the face of the complaint.
In addition, given that a motion to deny class certification will be evaluated solely on the sufficiency of the pleadings, rather than evidence, the rigor of a court’s analysis might be more favorable to plaintiffs than a motion for class certification, leaving defendants with an opinion that provides the plaintiff a road map for strengthening their class action allegations to satisfy Rule 23’s requirements.
Potential Impact in the Fourth Circ. and Beyond
Plaintiffs and defense counsel practicing in the Fourth Circuit should familiarize themselves with the Oliver decision and the ramifications of it on their strategies for litigating class actions.
Attorneys who do not practice in the Fourth Circuit may wish to consider doing the same, even though other circuit courts have not yet held that a motion to deny class certification is the appropriate mechanism for defendants to contest the sufficiency of plaintiffs’ class allegations.
Moving forward, plaintiffs counsel in class actions should be prepared for defense counsel to follow the Fourth Circuit’s guidance regardless of the court they’re in, and may want to shore up their class allegations in anticipation.
Defense counsel, on the other hand, should understand the strategic implications of choosing to move to deny class certification at the pleading stage, including the likely standard of review an appellate court would apply to a challenged lower court decision on such a motion.
Jim Francis is a founding shareholder at Francis Mailman Soumilas PC.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.