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EISEN V. CARLISLE & JACQUELIN, 417 U. S. 156 (1974) - US SUPREME COURT DECISIONS ON-LINE
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(a) Section 1291 does not limit appellate review to "those chanroblesvirtualawlibrary
(a) There is nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether chanroblesvirtualawlibrary
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J.,and STEWART, WHITE, BLACKMUN, and REHNQUIST, JJ., joined. DOUGLAS, J., filed an opinion dissenting in part, in which BRENNAN and MARSHALL, JJ., joined, post, p. 417 U. S. 179. chanroblesvirtualawlibrary
On May 2, 1966, petitioner filed a class action on behalf of himself and all other odd-lot [Footnote 1] traders on the New York Stock Exchange (the Exchange). The complaint charged respondents with violations of the antitrust and securities laws and demanded damages for petitioner and his class. Eight years have elapsed, but there has been no trial on the merits of these claims. Both the parties and the courts are still wrestling with the complex questions surrounding petitioner's attempt to maintain his suit as a class action under Fed.Rule Civ.Proc. 23. We granted certiorari to resolve some of these difficulties. 414 U.S. 908 (1973). chanroblesvirtualawlibrary
Petitioner brought this class action in the United States District Court for the Southern District of New York. Originally, he sued on behalf of all buyers and sellers of odd lots on the Exchange, but subsequently the class was limited to those who traded in odd lots during the period from May 1, 1962, through June 30, 1966. 52 F.R.D. 253, 261 (1971). Throughout this period, odd-lot trading was not part of the Exchange's regular auction market, but was handled exclusively by special odd-lot dealers, who bought and sold for their own accounts as principals. Respondent brokerage firms Carlisle & Jacquelin and DeCoppet & Doremus together handled 99% of the Exchange's odd-lot business. S.E.C., Report of Special Study of Securities Markets, H.R.Doc. No. 95, pt. 2, 88th Cong., 1st Sess., 172 (1963). They were compensated by the odd-lot differential, a surcharge imposed on the odd-lot investor in addition to the standard brokerage commission applicable to round-lot transactions. For the period in question the differential was l/8 of a point (12 1/2¢) per share on stocks trading below $40 per share and 1/4 of a point (25¢) per share on stocks trading at or above $40 per share. [Footnote 2]
Petitioner charged that respondent brokerage firms had monopolized odd-lot trading and set the differential at an excessive level in violation of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, and he demanded treble damages for the amount of the overcharge. Petitioner also demanded unspecified money damages from the Exchange for its alleged failure to regulate the differential for the protection of investors in violation of §§ 6 and 19 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78f and 78s. Finally, he requested attorneys' chanroblesvirtualawlibrary
As we have seen, petitioner began this action in May, 1966. In September of that year, the District Court chanroblesvirtualawlibrary
The District Court had experienced little difficulty in finding that petitioner satisfied the first three prerequisites, but had concluded that petitioner might not "fairly and adequately protect the interests of the class" as required by Rule 23(a)(4). The Court of Appeals indicated its disagreement with the chanroblesvirtualawlibrary
In addition to meeting the four conjunctive requirements of 23(a), a class action must also qualify under one of the three subdivisions of 23(b). [Footnote 3] Petitioner argued that the suit was maintainable as a class action under all three subdivisions. The Court of Appeals held the first two subdivisions inapplicable to this suit [Footnote 4] and chanroblesvirtualawlibrary
therefore turned its attention to the third subdivision, (b)(3). That subdivision requires a court to determine whether "questions of law or fact common to the members of the class predominate over any questions affecting only individual members," and whether "a class action is superior to other available methods for the fair and efficient adjudication of the controversy." More specifically, it identifies four factors relevant to these inquiries. After a detailed review of these provisions, the Court of Appeals concluded that the only potential barrier to maintenance of this suit as a class action was the Rule 23(b)(3)(D) directive that a court evaluate "the difficulties likely to be encountered in the management of a class action." Commonly referred to as "manageability," this consideration encompasses the whole range of practical problems that may render the class action format inappropriate for a particular suit. With reference to this litigation, the Court of Appeals noted that the difficulties of distributing any ultimate recovery to the class members would be formidable, though not necessarily insuperable, and commented that it was "reluctant to permit actions to proceed where they are not likely to benefit anyone but the lawyers who bring them." 391 F.2d 567. The Court therefore directed the District Court to conduct "a further inquiry . . . in order to consider the mechanics involved in the administration of the present action." Ibid. chanroblesvirtualawlibrary
391 F.2d 569.
After it held the evidentiary hearing on remand, which together with affidavits and stipulations provided the basis for extensive findings of fact, the District Court issued an opinion and order holding the suit maintainable as a class action. 52 F.R.D. 253 (1971). The court first noted that petitioner satisfied the criteria identified by the Court of Appeals for determining adequacy of representation under Rule 23(a)(4). Then it turned to the more difficult question of manageability. Under this general rubric, the court dealt with problems of the computation chanroblesvirtualawlibrary
of damages, the mechanics of administering this suit as a class action, and the distribution of any eventual recovery. The last-named problem had most troubled the Court of Appeals, prompting its remark that, if "class members are not likely ever to share in an eventual judgment, we would probably not permit the class action to continue." 391 F.2d 567. The District Court attempted to resolve this difficulty by embracing the idea of a "fluid class" recovery, whereby damages would be distributed to future odd-lot traders, rather than to the specific class members who were actually injured. The court suggested that "a fund equivalent to the amount of unclaimed damages might be established and the odd-lot differential reduced in an amount determined reasonable by the court until such time as the fund is depleted." 52 F.R.D. at 265. The need to resort to this expedient of recovery by the "next best class" arose from the prohibitively high cost of computing and awarding multitudinous small damages claims on an individual basis.
Finally, the District Court took up the problem of notice. The court found that the prospective class included some six million individuals, institutions, and intermediaries of various sorts; that with reasonable effort some two million of these odd-lot investors could be identified by name and address; [Footnote 5] and that the names and addresses of an additional 250,000 persons who had participated in special investment programs involving chanroblesvirtualawlibrary
The only issue not resolved by the District Court in its first opinion on remand from Eisen II was who should bear the cost of notice. Because petitioner understandably declined to pay $21,720 in order to litigate an action chanroblesvirtualawlibrary
Relying on the purported retention of jurisdiction by the Court of Appeals after Eisen II, respondents, on May 1, 1972, obtained an order directing the clerk of the District Court to certify and transmit the record for appellate review. Subsequently, respondents also filed a notice of appeal under 28 U.S.C. § 1291. Petitioner's motion to dismiss on the ground that the appeal had not been taken from a final order was denied by the Court of Appeals on June 29, 1972. chanroblesvirtualawlibrary
On May 1, 1973, the Court of Appeals issued Eisen III. 479 F.2d 1005. The majority disapproved the District Court's partial reliance on publication notice, holding that Rule 23(c)(2) required individual notice to all identifiable class members. The majority further ruled that the District Court had no authority to conduct a preliminary hearing on the merits for the purpose of allocating costs, and that the entire expense of notice necessarily fell on petitioner, as representative plaintiff. Finally, the Court of Appeals rejected the expedient of a fluid-class recovery, and concluded that the proposed class action was unmanageable under Rule 23(b)(3)(D). For all of these reasons, the Court of Appeals ordered the suit dismissed as a class action. One judge concurred in the result solely on the ground that the District Court had erred in imposing 90% of the notice costs on respondents. Petitioner's requests for rehearing and rehearing en banc were denied. 479 F.2d 1020.
Thus, after six and one-half years and three published decisions, the Court of Appeals endorsed the conclusion reached by the District Court in its original order in 1966 -- that petitioner's suit could not proceed as a class action. In its procedural history, at least, this litigation has lived up to Judge Lumbard's characterization of it as a "Frankenstein monster posing as a class action." Eisen II, 391 F.2d 572.
At the outset we must decide whether the Court of Appeals in Eisen III had jurisdiction to review the District Court's orders permitting the suit to proceed as a class action and allocating the cost of notice. Petitioner contends that it did not. Respondents counter by asserting two independent bases for appellate jurisdiction: first, that the orders in question constituted a "final" chanroblesvirtualawlibrary
Restricting appellate review to "final decisions" prevent the debilitating effect on judicial administration caused by piecemeal appellate disposition of what is, in practical consequence, but a single controversy. While the application of § 1291 in most cases is plain enough, determining the finality of a particular judicial order may pose a close question. No verbal formula yet devised can explain prior finality decisions with unerring accuracy or provide an utterly reliable guide for the future. [Footnote 9] We know, of course, that § 1291 does not chanroblesvirtualawlibrary
Turning to the merits of the case, we find that the District Court's resolution of the notice problems was chanroblesvirtualawlibrary
Id. at 7768. The chanroblesvirtualawlibrary
Id. at 339 U. S. 315. The Court then held that publication notice could not satisfy due process where the names and addresses of the beneficiaries were known. [Footnote 12] In such cases, "the reasons chanroblesvirtualawlibrary
Petitioner contends, however, that we should dispense with the requirement of individual notice in this case, and he advances two reasons for our doing so. First, the prohibitively high cost of providing individual notice to 2,250,000 class members would end this suit as a class action and effectively frustrate petitioner's attempt to vindicate the policies underlying the antitrust and securities chanroblesvirtualawlibrary
Petitioner further contends that adequate representation, rather than notice, is the touchstone of due process in a class action, and therefore satisfies Rule 23. We think this view has little to commend it. To begin with, Rule 23 speaks to notice as well as to adequacy of representation, and requires that both be provided. Moreover, petitioner's argument proves too much, for it chanroblesvirtualawlibrary
We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. Indeed, such a procedure contravenes the Rule by allowing a representative plaintiff to secure the benefits of a class action without first satisfying the requirements for it. He is thereby allowed to obtain a determination on the merits of the claims advanced on chanroblesvirtualawlibrary
In the absence of any support under Rule 23, petitioner's effort to impose the cost of notice on respondents must fail. The usual rule is that a plaintiff must initially bear the cost of notice to the class. The exceptions cited by the District Court related to situations where a fiduciary duty preexisted between the plaintiff and defendant, as in a shareholder derivative suit. [Footnote 15] Where, as here, the relationship between the parties is truly adversary, chanroblesvirtualawlibrary
Petitioner has consistently maintained, however, that he will not bear the cost of notice under subdivision (c)(2) to members of the class as defined in his original complaint. See 479 F.2d 1008; 52 F.R.D. at 269. We therefore remand the cause with instructions to dismiss the class action as so defined. [Footnote 16]
Adjusting this figure to reflect the subsequent 4¢ increase in first class postage would yield a figure of $315,000.
McGourkey v. Toledo & Ohio R. Co., 146 U. S. 536, 146 U. S. 544-545. In the intervening years, the difficulty of resolving such questions has not abated. As Mr. Justice Black commented in @ 379 U. S. 152 (1964),
Or a subclass might include those on monthly investment plans, or payroll deduction plans run by brokerage houses. [Footnote 2/1] The possibilities, though not infinite, are numerous. chanroblesvirtualawlibrary
The statute of limitations, it is argued, has run or is about to run on many of these classes. We held in American Pipe & Construction Co. v. Utah, 414 U. S. 538, that the start of a class action prior to the running of the statute protects all members of the class. Whether that rule should obtain for the benefit of other members who could have been included in the subclass bringing suit, but for the manageability issue, is a question we have not decided. [Footnote 2/2] Moreover, if the subclass sues and wins or chanroblesvirtualawlibrary
The Court permits Eisen to redefine his class either by amending his complaint pursuant to Fed.Rule Civ.Proc. 15 or by proceeding under Rule 23(c)(4). While Eisen may, of course, proceed by amending his complaint to define a subclass, it is clear that he need not do so. [Footnote 2/6] Definition of the subclass would properly be accomplished by order of the District Court, as permitted by Rules 23(c)(4) and 23(c)(1), without amendment of the complaint as filed. While the complaint alleges that chanroblesvirtualawlibrary
The purpose of Rule 23 is to provide flexibility in the management of class actions, with the trial court taking an active role in the conduct of the litigation. See Dolgow v. Anderson, 43 F.R.D. 472, 481-482 (EDNY); Green v. Wolf Corp., 406 F.2d 291, 298 (CA2), cert. denied, 395 U.S. 977. Lower federal courts have recognized their discretion to define those subclasses proper to prosecute an action without being bound by the plaintiff's chanroblesvirtualawlibrary
complaint. See, e.g., Dolgow v. Anderson, supra at 491-493; Philadelphia Elec. Co. v. Anaconda American Brass Co., 43 F.R.D. 452, 462-463 (ED Pa.). See generally 7A C. Wright & A. Miller, Federal Practice and Procedure § 1790, p. 187; 3B J. Moore, Federal Practice ¦ 23.65. And, as Rule 23(c)(1) clearly indicates, the courts retain both the power and the duty to realign classes during the conduct of an action when appropriate. See, e.g., Carr v. Conoco Plastics, Inc., 423 F.2d 57, 58 (CA5), cert. denied, 400 U.S. 951; Johnson v. ITT-Thompson Industries, Inc., 323 F.Supp. 1258, 1262 (ND Miss.); Ostapowicz v. Johnson Bronze Co., 54 F.R.D. 465, 466 (WD Pa.); Baxter v. Savannah Sugar Refining Corp., 46 F.R.D. 56, 60 (SD Ga.). That discretion can be fully retained only if the full-class complaint is preserved when a subclass is defined to prosecute the action. The bounds of the subclass can then be narrowed or widened by order of the District Court as provided in Rule 23(c)(1), without need to amend the complaint and without the constraints which might exist if the complaint had earlier been amended pursuant to Rule 15 to include only the subclass.
I agree with Professor Chafee that a class action serves not only the convenience of the parties, but also prompt, efficient judicial administration. [Footnote 2/7] I think in our society that is growing in complexity there are bound to be innumerable people in common disasters, calamities, or ventures who would go begging for justice without the class action but who could with all regard to due process be protected by it. Some of these are consumers whose claims may seem de minimis but who, alone, have no practical recourse for either remuneration or injunctive relief. Some may be environmentalists who have no photographic development plant about to be ruined because of chanroblesvirtualawlibrary
If the subclass lost, it is argued that other investors not members of that subclass could not be precluded from prosecuting successful suits of their own, since they had never had their day in court or necessarily even been apprised of the subclass' action. See Hansberry v. Lee, 311 U. S. 32; F. James, Civil Procedure § 11.26 (1965); 1B J. Moore, Federal Practice ¦ 0.411[1] (1974). If the subclass won, strict application of the doctrine of mutuality of estoppel would limit the usefulness of that subclass victory in suits brought by investors not members of that subclass. See generally F. James, supra, § 11.31; 1B J. Moore, supra, ¦0.41[1] (and Supp 1973), and cases cited therein. And see Vestal, Preclusion/Res Judicata Variables: Parties, 50 Iowa L.Rev. 27, 55-59 (1964); Note, 35 Geo.Wash.L.Rev. 1010 (1967); Currie, Mutuality of Collateral Estoppel: Limits of the Bernhard Doctrine, 9 Stan.L.Rev. 281 (1957).