Petrobras: The Second Circuit Quietly Renounces Its 24-Year-Old “Preference” for Class Certification

Earlier this month, the Second Circuit decided In re Petrobras Securities, and class-action commentators (including this one) have been talking about it ever since — chiefly for its relevance to the red-hot “ascertainability” debate. Because Petrobras purported to reject a so-called “heightened” ascertainability requirement, many have deemed it a setback for class-action defendants. By contrast, I have written that the ultimate impact of Petrobras’ comments on ascertainability remains unclear.
But all the hubbub over ascertainability has obscured another remarkable part of the Petrobras decision — one that constitutes a major victory for the defense side. Specifically, the Second Circuit at last rejected the decades-old canard that the grant of a class-certification motion is generally preferred over the denial of such a motion. This largely overlooked aspect of Petrobras may eventually have a far greater impact on class-action practice in the Second Circuit than the headline discussion about ascertainability.
Twenty-four years ago, the Second Circuit first made the curious statement that “we are noticeably less deferential to the district court when that court has denied class status than when it has certified a class.” Lundquist v. Sec. Pac. Auto. Fin. Servs. Corp., 993 F.2d 11(1993) (emphasis added). The statement first appeared in an obscure, two-judge per curiam decision, and it was pure dictum to boot. But for the next two-plus decades, Second Circuit panels repeated Lundquist’s dictum in a number of class-action decisions, including some where it was unclear whether the statement was dictum or holding.
As I have written elsewhere, the statement is a bizarre one on its face. Standards of review are ordinarily a function of the type of decision on appeal — a ruling on a motion to dismiss is reviewed de novo; an evidentiary ruling is reviewed for abuse of discretion; etc. — and not a function of the result the district court reached. What is more, the Supreme Court made clear long before Lundquist that class certification is “[the] exception to the usual rule,” Califano v. Yamasaki, 442 U.S. 682 (1979), and that the requirements for certification are “rigorous,” Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147 (1982). If anything, then,one would think that an appellate court would be more skeptical of class-certification grants than denials — not the other way ‘round.
I have also noted elsewhere that the cases the Lundquist panel cited for its pro-certification principle do not actually support it. Those decisions simply stated that the Second Circuit reviews district courts’ class-certification decisions — whether grants or denials — less deferentially than it reviews other types of discretionary decisions, such as “the curtailment of cross-examination or the grant or denial of a continuance.” Abrams v. Interco, 719 F.2d 23 (1983). Those decisions said nothing about preferring class certification grants over denials. The Lundquist panel just misread them — and, as later decisions uncritically quoted Lundquist, that error became self-propagating.
This mistake did not just place a pro-plaintiff thumb on the scales at the appellate level — it also biased the class-certification decisions of the district courts. After all, if a district judge knows that the Second Circuit will review her class-certification decisions “less deferentially” if those decisions deny class status, then consciously or not, she may favor class certification even if it is not truly warranted.
In fact, district judges in the Second Circuit have expressly cited the Lundquist dictum for the proposition that, “when a court is in doubt as to whether or not to certify a class action, the court should err in favor of allowing the class to go forward.” Other district judges have cited Lundquist for the proposition that it is “beyond peradventure that the Second Circuit’s general preference is for granting rather than denying class certification.” Statements like these have surely led to a number of dubious class-certification grants by district courts — grants that the Second Circuit, pursuant to Lundquist, would then have reviewed with undue deference, compounding the unfairness to the defendants.
There things stood when the Second Circuit decided Petrobras earlier this month. In a lengthy footnote to its recitation of the “abuse of discretion” standard of review, the Petrobras court remarked:
[A]lthough we have sometimes stated in the past that we “apply[] a ‘noticeably less deferential’ standard when the district court has denied class certification,” this language apparently arose from a misreading of earlier Second Circuit cases. Moreover, it is out of step with recent Supreme Court authority.
Slip op. at 18 n.11.
The court went on to trace the origins of this pro-certification bias to Lundquist, and explained that the cases Lundquist cited for this standard “do not support [it]”:
Thus, neither [of the cases cited by Lundquist] applied a different standard to denials versus grants of class certification. Rather, both cases stated that this Court is more likely to find abuse of discretion in appeals involving the issue of class certification — whether certification was granted or denied — when compared with other types of legal issues. It appears that Lundquist misinterpreted that comparison.
Slip op. at 19 n.11.
The panel then observed that this longstanding bias toward certification runs counter to recent Supreme Court decisions, such as Wal-Mart Stores, Inc. v. Dukes (2011) and Comcast Corp. v. Behrend (2013), which emphasize the “rigorous” test that a plaintiff must meet to obtain class certification. Slip op. at 19 n.11. (That is certainly true — although, as noted above, the Supreme Court has been clear about the “rigorous” nature of this test for 35 years.)
In the end, Petrobras did not formally overrule Lundquist. (It would take an en banc decision or the assent of the full Second Circuit to do that.) But it stopped just short of that, explaining that the oft-repeated maxim that class-certification grants are reviewed with greater deference than denials “need not and ought not” continue to exist. “Should the resolution of this issue prove determinative of the outcome in a future matter,” the panel stated, “the question can likely be resolved by this Court’s protocol for the circulation of opinions [to the full court] at that time.”
Even though Lundquist’s slanted standard of review technically remains on the books for now, the Petrobras court’s unassailable critique of that standard may have a resounding impact on class-action law in the Second Circuit. Again, district courts have decided class-certification motions for decades under the impression that the Second Circuit has a “preference … for granting … class certification” that is so clear that it is “beyond peradventure.” That supposed “preference,” however, always rested on a foundation of sand — and now, the Second Circuit has demolished that shaky foundation. District judges throughout the Second Circuit should no longer feel pressured to grant class certification in cases where the question is close — let alone in cases where their own preference would be to deny it.
To the contrary, Petrobras makes clear, district courts should apply Rule 23’s requirements “rigorously” and certify classes only if those requirements are clearly met. See also Petrobras, slip op. at 44 (noting that district courts have a “duty to take a ‘close look’” and to “give careful scrutiny” before certifying); id. at 54 (describing “the robust predominance inquiry that Rule 23 demands”). This long-overdue recognition— rather than the much-heralded discussion of ascertainability — may well prove to be Petrobras’ most significant legacy.
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