The right to present a full defense is crucial in every case, but it takes on special significance in the class action context. The courts have explicitly acknowledged what corporate defendants have long recognized; the decision to certify a class can coerce settlement of non-meritorious claims. See In re Rhone Poulenc, 51 F.3d 1293, 1298 (7th Cir. 1995). Certifying a class can increase potential damage exposure to a level where a loss can bankrupt a company or an industry. Even with a high probability of success, the catastrophic consequences of a loss chill defendants' willingness to "roll the dice." Id. The coercive effect of a class certification decision could be multiplied if the underlying claim alleges violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO), which allows for the recovery of treble damages and attorneys' fees.
In its recent decision in Sandwich Chef of Texas, Inc. v. Reliance Nat'l Indem. Ins. Co., No. 01-20924, 2003 U.S. App. LEXIS 912 (5th Cir. Jan. 21, 2003), the United States Court of Appeals for the Fifth Circuit took an important step in protecting defendants' rights, reining in the creative and coercive use of class actions and RICO. In Sandwich Chef, the court reversed certification of a claim based on an alleged nationwide RICO conspiracy to defraud, finding the district court abused its discretion by failing to consider defendants' case and evidence when making the crucial class certification decision.
Plaintiff Sandwich Chef operates delicatessens in several states under the name Wall Street Deli. Wall Street purchased a retrospectively rated workers' compensation insurance policy from Reliance. Wall Street, through its broker, actively negotiated the pricing terms of the policy. The final pricing terms included a charge, called a residual market load, intended to recover assessments states would impose on Reliance as a result of issuing the policy. Wall Street alleged this charge was unlawful because it was not provided for in the rates Reliance had filed with state insurance regulators.
Wall Street alleged Reliance's inclusion of the residual market load constituted mail fraud and a pattern of racketeering activity in violation of RICO. Wall Street contended the residual market loads were unlawful because they were not included in the rate filings Reliance made with state insurance regulators. Wall Street alleged Reliance defrauded it by submitting invoices that failed to disclose the illegal charges and the illegal nature of the charges. To up the ante further, Wall Street alleged Reliance acted in a conspiracy with one hundred forty other insurers to impose similar charges on their policyholders. Wall Street sought to certify a nationwide class of all purchasers of retrospectively rated workers compensation insurance policies over a fourteen-year period.
At a five-day class certification hearing, defendants presented evidence and other submissions to establish that the purchasers of retrospectively rated workers' compensation insurance policies were typically large employers who paid hundreds of thousands, if not millions of dollars in premiums. There was evidence that many purchasers preferred not to purchase insurance programs constrained by regulatory filings. Rather, they wished to negotiate the best available package of coverages and rates. Far from being deceived, these purchasers, represented by brokers and risk managers, negotiated every aspect of their insurance programs, including the very charges Wall Street alleged to be unlawful. Wall Street, for example, was aware Reliance was charging a residual market load and knew the relationship of the charge to Reliance's filings. Wall Street negotiated the amount of the residual market charge and also negotiated for other terms that reduced its insurance costs. Defendants argued the case could not be tried as a class action because they were entitled to present, for each class member, similar evidence of disclosure, knowledge, and negotiation to rebut plaintiffs' allegations of fraud.
As a general rule, this evidence of individualized negotiations and disclosures would defeat class certification. The need to present detailed evidence of the thousands of communications and face-to-face negotiations to determine whether class members were actually defrauded, or relied upon fraudulent representations, would make a class trial impracticable and unmanageable. To avoid this general rule, Wall Street contended it could prove misrepresentation and reliance as to every class member by establishing that insurers uniformly submitted invoices that failed to disclosed the illegal nature of the charges being imposed. Wall Street would then offer expert evidence to establish that when deciding to pay invoices businesses rely upon the invoice as representation that its charges are lawful.
The district court certified a class of all purchasers of retrospectively rated workers' compensation policies effective on or after January 1, 1987. The district court accepted Wall Street's assertions that liability could be established with common evidence, finding that each class member was injured by paying a residual market charge in an inflated invoice. The court also accepted Wall Street's assertion that defendants' records provided the information needed to measure injury for the class, meaning proof of damages would not be unduly complicated and would not defeat class certification.
The defendants petitioned for interlocutory review, which the Fifth Circuit Court of Appeals granted. Upon review, the Fifth Circuit reversed, finding the district court abused its discretion by narrowly focusing on plaintiffs' theories and evidence. A class certification ruling requires analysis of how a case will be tried. This includes an analysis of how defendants will rebut a plaintiff's case. Even if Wall Street's evidence of fraud might convince a trier of fact to find in a policyholder's favor, defendants clearly were entitled to attack that evidence and establish, as to each customer, that the particular purchaser had full knowledge of the nature of the charges in its individually negotiated insurance program. The need to resolve these issues for each class member individually precluded certification.
Sandwich Chef's message to defendants is clear. Do not permit the plaintiff to dictate the rules of the game. Plaintiff's prima facie case is only half the trial a court must consider when deciding whether to certify. Be certain the court will look past the of the pleadings and past plaintiffs' theory of the case by submitting whatever is necessary to demonstrate what the full trial will involve. No matter how the plaintiff intends to prove its case, a defendant can still defeat class certification by showing the court that the defense it will present makes the case unsuitable for class treatment.
Wildman, Harrold, Allen & Dixon represents clients in class action matters in state and federal courts throughout the United States.