Class actions, which aggregate hundreds and thousands of claims are fraught with problems for defendants. Whether specious or not, class actions are costly to defend and problematic to settle. If a class action involves products that were sold in more than one state, there can be multiple class actions pending at the same time. One of those class actions may take precedence and may settle on a state-wide or nationwide basis. A nationwide class action that is rendered to a final judgment in an individual state is supposed to be enforceable in every other state pursuant to the 'full faith and credit' clause of the US Constitution.(1) Whether a nationwide class action will actually be afforded full faith and credit, however, depends on a number of factors, as a series of cases involving one such nationwide class action demonstrates.
In 2001 a company called Dryvit Systems, Inc was facing numerous lawsuits over defectively manufactured synthetic stucco that was applied to buildings throughout the United States. Dryvit was sued in Tennessee on behalf of a class of Tennessee residents.(2) In April 2002 Drvyit and the Tennessee plaintiffs agreed to settle the action and convert the Tennessee class to a nationwide class. The Tennessee plaintiffs were to amend their complaint to reflect a nationwide class. The trial court granted the Tennessee plaintiffs leave to file such an amended complaint, but the plaintiffs did not actually file that amended complaint until 2005. In the interim, an order granting preliminary approval was entered and notice was sent out to the approximately 95,000 members of the nationwide class of homeowners. Before the fairness hearing, certain contractors objected and sought to intervene. The trial court refused to allow the intervention and the nationwide class was subsequently certified and rendered final. The case was then reviewed twice by the Tennessee appellate court. The first time, the court reviewed the denial of the right to intervene and openly questioned the adequacy of notice. The second time, the court questioned the fairness of the settlement.(3) The trial court approved the final settlement in April 2005 and rendered a final judgment that was not appealed further.
Numerous Actions in Other States
During the three-year delay in obtaining final approval of the settlement in Tennessee, numerous individual and class actions were filed in other states. Dryvit attempted to use the Tennessee settlement to preclude these (and any other) actions. As a result, the Tennessee settlement was subsequently examined by several appellate and trial courts. The settlement was given full faith and credit in New Jersey, but not in Ohio and South Carolina. The Ohio Court of Appeals refused to give the Tennessee settlement full faith and credit, primarily based on the failure to file the amended complaint until the case was rendered final.(4) The New Jersey Supreme Court gave the Tennessee settlement full faith and credit, finding that the plaintiff had the opportunity to opt out.(5) The New Jersey Supreme Court's view of what occurred in the trial court in Tennessee was markedly different from how the Ohio Court of Appeals viewed that proceeding. For example, the New Jersey Supreme Court did not even note the lack of a complaint on file that alleged a nationwide class or the three-year lapse in filing that complaint. By contrast, the Ohio Court of Appeals was deeply troubled by the chain of events in Tennessee, noting that the failure properly to file the amended complaint deprived the Tennessee court of jurisdiction, and indicated that due process was not afforded to the absent class members.
The Ohio Court of Appeals raised two issues that should concern any defendant seeking such a nationwide class: jurisdiction (privity/party to the class) and due process. Some federal courts have refused to allow nationwide class actions on the basis that no class is proper unless they are governed by the same legal rules and there are variants on many claims from state to state.(6) In Posey the Tennessee plaintiffs alleged violations of the Tennessee Consumer Protection Act, strict liability, negligence, intentional misrepresentation, breach of warranties, negligent misrepresentation and unjust enrichment. As the US Court of Appeals for the Seventh Circuit previously noted, many - if not most - of these claims vary from state to state, and there is no indication that the Posey court performed a choice of law analysis as to which law governed the claims.(7) Considering these issues, the Ohio Court of Appeals' concern about the Tennessee court's jurisdiction over a nationwide class seems to have basis in the law. Unless a nationwide class is certified based on a claim that is common to all of the United States or the class is clearly certified based on all the states' laws, not just the forum state, the nationwide settlement is open to challenge for lack of jurisdiction over the claims.
Consideration of Other Jurisdictions
Although the Dryvit settlement may present a somewhat unique set of circumstances, the case demonstrates that a nationwide class action settlement can be fraught with problems and not lead to the result intended or expected by the defendants. When settling cases on nationwide basis, as opposed to a state-wide basis, special consideration must be given to how that settlement may be treated in other jurisdictions. Class action settlements are often challenged on the basis of fairness/value, collusion and notice; so how a nationwide class action settlement was reached will be incredibly important in subsequent proceedings in other states. The more adequate the notice, the more likely settlement will be subsequently viewed as fair and given full faith and credit. Likewise, the more negotiations that take place at arm's length and the more value that is given to the class members, the more likely the settlement will subsequently be viewed as fair and given full faith and credit.
For further information on this topic please contact Christopher W Carmichael at Holland & Knight LLP by telephone (+1 312 263 3600), fax (+1 312 578 6666) or email (firstname.lastname@example.org).
(6) In re Bridgestone/Firestone, Inc, 288 F 3d 1012, 1015 (7th Cir 2002); see also 333 F 3d 763, 766-67 (enjoining state courts from certifying nationwide classes based on prior ruling holding that a nationwide class was not possible).
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