The U.S. Court of Appeals for the Second Circuit recently affirmed a trial court's grant of judgment on the pleadings and dismissal of two individual plaintiffs' claims in a putative class action lawsuit.
In so ruling, the Second Circuit held that Federal Rule of Appellate Procedure 3 requires named plaintiffs in a class action – who, unlike absent class members, have chosen to litigate their claims personally – to indicate individually their intent to appeal.
A copy of the opinion is available at: Link to Opinion
In 2013, two consumers were named individual plaintiffs in a consolidated complaint in federal court alleging that the defendants made material misrepresentations and omissions related to the release of the corporate defendant's new product, thereby artificially inflating the company's stock price. The two consumers were not selected as lead plaintiffs.
Subsequently, the trial court dismissed the putative class's complaint and denied leave to amend, concluding that the plaintiffs failed to plausibly allege that the defendants made misrepresentations or omissions of material fact, and failed to show that the defendants acted with scienter.
The designated lead plaintiffs appealed on behalf of the class, filing a notice of appeal that did not state that the two consumers were also appealing. In this prior appeal, the Second Circuit allowed the lead plaintiffs to amend the complaint, and the two consumers were again named in the amended complaint as individual plaintiffs.
On remand from the prior appeal, the defendants moved for judgment on the pleadings as to the two consumers, arguing that the earlier dismissal had become final as to them because they did not properly appeal.
The trial court granted the motion, concluding that under Federal Rule of Appellate Procedure 3, the two consumers had failed to appeal the earlier judgment against them because they did not indicate their intent to appeal in the notice of appeal filed by the lead plaintiffs. The two consumers moved for reconsideration, but the trial court denied the motion.
The two consumers then appealed, arguing that: (1) the trial court erred in dismissing their claims because Rule 3 does not require individual named plaintiffs in a class action to indicate their intention to appeal, so long as the appeal is filed by persons qualified to represent the class; (2) in the alternative, even if the judgment dismissing their earlier claims had become final, res judicata does not bar their new claims against an additional defendant not previously named; and (3) the trial court should have granted their motion for reconsideration.
The Second Circuit disagreed with the two consumers on all three of their points.
Federal Rule of Appellate Procedure 3(c)(1)(A) describes the party information that must be included in a notice of appeal:
The notice of appeal must . . . specify the party or parties taking the appeal by naming each one in the caption or body of the notice, but an attorney representing more than one party may describe those parties with such terms as "all plaintiffs," "the defendants," "the plaintiffs A, B, et al.," or "all defendants except X".
The Court noted that the requirement that the parties appealing clearly identify themselves serves an important purpose, as it "provide[s] notice to the court and to the opposing parties of the identity of the appellant or appellants, permitting the court and the opposition to know, for example, which parties are bound by the district court's judgment or which parties may be held liable for costs or sanctions on the appeal." Baylis v. Marriott Corp., 906 F.2d 874, 877 (2d Cir. 1990).
Based on a plain reading of Rule 3(c)(1)(A), the Second Circuit concluded that the fact that the two consumers are not mentioned anywhere in the notice of appeal is enough to defeat their argument that they successfully appealed.
However, the two consumers also attempted to use Rule 3(c)(3), which applies specifically to class actions, to save their claims. Rule 3(c)(3) provides:
In a class action, whether or not the class has been certified, the notice of appeal is sufficient if it names one person qualified to bring the appeal as representative of the class.
The two consumers argued that so long as a qualified class representative appeals, that appeal covers the entire class, including other named plaintiffs. However, the Second Circuit held that the provision covers unnamed class members that the party bringing the appeal is qualified to represent; it does not include individual named plaintiffs, who have appeared in the case as distinct parties separate from the class members represented by lead plaintiffs, and who, as in any other case, must appeal individually.
Had the Second Circuit accepted the two consumers' interpretation of Rule 3(c)(3), then the purpose of the notice requirement in Rule 3(c)(1)(A) would have been subverted in the Court's eyes. The two consumers could have chosen not to appeal, or filed an individual appeal and made different arguments than the lead plaintiffs. Or, if the lead plaintiffs chose not to appeal and thus to abandon the case, the two consumers could have pursued an appeal on their own behalf. As a result, allowing them to proceed as "an unnamed party" in the notice of appeal, as they argued the Court should, would "leave[] the notice's intended recipients – the appellee[s] and court – unable to determine with certitude whether [the two consumers] should be bound by an adverse judgment or held liable for costs or sanctions." Gonzalez v. Thaler, 565 U.S. 134, 147-148 (2012). The two consumers "could sit on the fence, await the outcome, and opt to participate only if it was favorable." Id.
The Second Circuit held similarly in Cohen v. UBS Financial Services Inc., 799 F.3d 174 (2d Cir. 2015). In that case, the plaintiff filed a putative class action against the corporate defendant, asserting claims under the Fair Labor Standards Act and California law. Id. at 175. The trial court granted the defendant's motion to compel arbitration based on an arbitration clause, and the plaintiff appealed. Id. On appeal, the plaintiff argued, inter alia, that California law prohibited arbitration of his California law claims. Id. at 180. The Second Circuit concluded that the plaintiff's own California law claims were time-barred, and although another named plaintiff had claims that were not time-barred, that named plaintiff had not indicated his intent to join the notice of appeal. Accordingly, the Court "reject[ed] [the plaintiff's] assertion that the other named plaintiffs... joined his appeal." Id. at 177 n.3.
The two consumers also argued that the Second Circuit's conclusion runs contrary to the Third Circuit's holding in Massie v. U.S. Dep't of Housing & Urban Development, 620 F.3d 340 (3d Cir. 2010). In Massie, the Third Circuit ruled that all named plaintiffs had adequately appealed, even though the original notice of appeal only listed one plaintiff by time. The Second Circuit here noted that Third Circuit law does not bind it.
However, more importantly, the Court distinguished the facts of Massie from the facts in this case because the original notice of appeal in Massie included "et al." after the lead plaintiff's name, and the plaintiffs later filed a second, untimely notice of appeal that listed all five named plaintiffs. Under those circumstances, the Third Circuit held that the named plaintiffs not listed in the original notice of appeal had still sufficiently appealed. These facts were not present in the presently discussed case.
Next, the two consumers contended that the Second Circuit's reading of Rule 3(c)(1)(A) imposes too great a burden on individual plaintiffs in a putative class action, especially in light of the US Supreme Court's decision in California Public Employees' Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042, 2054 (2017). In ANZ, the Supreme Court noted that plaintiffs can easily preserve their claims during the pendency of a class action, and that "[a] simple motion to intervene or request to be included as a named plaintiff in the class-action complaint may well suffice." Id. at 2054. The two consumers used this holding to argue that the Second Circuit was adding to the "simple" burden referenced by the Supreme Court.
However, the Second Circuit concluded that the burden the two consumers complained of was negligible; named plaintiffs are merely required to indicate their intent to appeal in a notice of appeal. Additionally, counsel for the two consumers (who also represented the lead plaintiffs) actually signed the notice of appeal as "Additional Counsel for Lead Plaintiffs and the Class" and did not mention any of the other named plaintiffs, including the two consumers. Counsel needed only to state that they signed on behalf of their individual clients, or to indicate in any way that those clients wished to appeal, which was a "simple" burden in the eyes of the Second Circuit.
Thus, the Second Circuit held that the trial court did not err in dismissing the two consumers' claims against the original defendants.
The two consumers also argued that even if their claims against the original defendants were barred by their failure to appeal, their claims against a defendant added after the lead plaintiffs' successful appeal should have been allowed to proceed. The Second Circuit disagreed and held that the two consumers' claims against the new defendant were barred by res judicata.
The doctrine of res judicata bars later litigation if "an earlier decision was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same cause of action." EDP Med. Computer Sys., Inc., 480 F.3d at 624 (internal quotation marks omitted).
As mentioned above, the Second Circuit concluded that the two consumers' failure to appeal the trial court's original dismissal of their claims rendered that dismissal a final judgment on the merits by a court of competent jurisdiction. Therefore, whether the two consumers' claims against the new defendant were barred turned on whether they involved the same cause of action as the claims in the original complaint, and whether the new defendant was in privity with the three original defendants.
"Even claims based upon different legal theories are barred [by res judicata] provided they arise from the same transaction or occurrence." L-Tec Elecs. Corp. v. Cougar Elec. Org., Inc., 198 F.3d 85, 88 (2d Cir. 1999).
The two consumers asserted claims against the new defendant based on the same allegedly misleading statement that was relied upon in the original complaint. Therefore, the Second Circuit held that the claims against the new defendant clearly arose from the same transaction or occurrence as the claims in the original complaint.
The two consumers argued that because the claims against the new defendant relied on newly discovered evidence showing that the statement was a misrepresentation, they were not barred by res judicata. However, the Second Circuit concluded that even claims based on newly discovered evidence do not escape the bar of res judicata "unless the evidence was either fraudulently concealed or it could not have been discovered with due diligence." L-Tec Elecs. Corp., 198 F.3d at 88 (internal quotation marks omitted).
The two consumers also argued that the new defendant was not in privity with the earlier defendants because he is being sued in his individual capacity under a "primary violator" theory of liability, which is different than the "control person" liability asserted against the original defendants. But the Second Circuit noted that the privity inquiry is a "functional" one, and "[r]es judicata may bar non-parties to earlier litigation . . . when the interests involved in the prior litigation are virtually identical to those in later litigation." Chase Manhattan Bank, N.A., 56 F.3d at 345-46 (emphasis omitted).
The new defendant was the chief legal officer of one of the original defendants when he made the statements giving rise to the claims against him and was speaking on behalf of the company. Therefore, the new defendant had a "sufficiently close relationship to the original defendant[s] to justify preclusion," Cent. Hudson Gas & Elec. Corp., 56 F.3d at 368, as their "agent," Sacerdote, 939 F.3d at 506. See also John St. Leasehold, LLC v. Cap. Mgmt. Res., L.P., 283 F.3d 73, 75 (2d Cir. 2002) (FDIC employees acting within the scope of their agency were in privity with employer FDIC for purposes of res judicata).
Accordingly, the Second Circuit held that the trial court properly dismissed the two consumers' claims against the new defendant.
Lastly, the two consumers argued that the trial court abused its discretion in denying their motion for reconsideration. "[A] party may move for reconsideration and obtain relief only when the [party] identifies an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice." Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Tr., 729 F.3d 99, 108 (2d Cir. 2013) (internal quotation marks omitted). "The standard for granting such a motion is strict, and reconsideration will generally be denied unless the moving party can point to controlling decisions or data that the court overlooked – matters, in other words, that might reasonably be expected to alter the conclusion reached by the court." Van Buskirk v. United Grp. of Cos., Inc., 935 F.3d 49, 54 (2d Cir. 2019) (internal quotation marks omitted).
The two consumers alleged that they presented "new evidence" in their motion for reconsideration, most notably an audio recording of the oral argument in Cohen. The Second Circuit was not persuaded that this recording is "evidence" at all, and if it is "evidence," the Court did not believe it is "new evidence" because the recording was readily available at the time of briefing before the trial court. The Court also stated that the recording provides no grounds for reconsideration because it did not alter the trial court's or the Second Circuit's understanding of Cohen. Third, the two consumers' interpretation of Cohen could not alter the outcome in this case because neither the trial court nor the Second Circuit relied solely on Cohen in interpreting Rule 3.
Thus, the Second Circuit decided that the trial court was warranted in denying the two consumers' motion for reconsideration.
Accordingly, the Second Circuit held that: (1) the two consumers' failure to appeal the trial court's first dismissal of their claims personally rendered that decision final as to them, and the trial court properly dismissed their attempt to renew their claims after the lead plaintiffs successfully appealed; (2) the two consumers' claims against the newly added defendant were barred by res judicata; and (3) the trial court did not abuse its discretion in denying reconsideration. Therefore, the Court affirmed the ruling of the trial court.
Ralph T. Wutscher
Maurice Wutscher LLP
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