Opinion ID: 894521
Heading Depth: 1
Heading Rank: 3

Heading: (b)(2) versus (b)(3) Class Actions

Text: The parties devote much energy and attention to whether this class properly falls under subsection (b)(2) or (b)(3) of rule 42, Tex.R. Civ. P. Compaq argues that the breach of warranty declaratory judgment claim is merely a predicate to a claim for damages and an attempt to shoehorn a damages claim into a (b)(2) claim for declaratory relief. Plaintiffs respond that (b)(2) certification is proper because they have disclaimed consequential damages and primarily seek a declaration that the FDC is defective and falls within Compaq's limited warranty. Rule 42(b)(2) provides that: An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition: the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole. . . . TEX.R. CIV. P. 42(b)(2). The Texas rule derives from its federal parallel, Rule 23(b)(2), and reads identically. TEX.R. CIV. P. 42 historical note (Vernon 1979) (Subdivision (b)(2) is copied from revised federal rule 23(b)(2).). Subdivision (b)(2) was added to [the federal rules] in 1966 primarily to facilitate the bringing of class actions in the civil rights area. Kincade v. Gen. Tire & Rubber Co., 635 F.2d 501, 506 n. 6 (5th Cir.1981) (quoting 7A CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, Federal Practice & Procedure § 1775 at 470-71 (2d ed.1986)) [6] . Before its adoption, the rules made no explicit reference to class actions involving injunctive or declaratory relief, and `there was some uncertainty whether a class action seeking one of those remedies was an appropriate device for vindicating civil rights.' In re Monumental Life Ins. Co., 365 F.3d 408, 417 n. 16 (5th Cir.2004) (quoting WRIGHT, MILLER & KANE, supra, § 1775, at 470 (2d ed.1986)). Commentators have observed: Much of the popularization of the Rule 23(b)(2)-type class action was accomplished in the late 1960s and early 1970s by legal services and other government and foundation-subsidized public interest attorneys, who sought to utilize this type of action as an inexpensive and powerful tool to provide representation for large numbers of indigent and minority persons who previously could secure little effective redress under the legal system. More recently, private counsel have been filing Rule 23(b)(2) class actions with increasing frequency in employment, civil rights, antitrust, environmental, securities, and other types of class litigation. ALBA CONTE AND HERBERT B. NEWBERG, 2 NEWBERG ON CLASS ACTIONS 62-66 (2003) (citations omitted). There are procedural distinctions between (b)(2) and (b)(3) class actions. While individual notice is required for classes certified under (b)(3), (b)(2) does not mandate individual notice. Additionally, rule 42(c)(2) provides that class members in a (b)(3) class are entitled to an opportunity to exclude themselves from the class and the preclusive effect of any judgment by opting out of the lawsuit. TEX.R. CIV. P. 42(c)(2); see also Eubanks v. Billington, 110 F.3d 87, 92 (D.C.Cir. 1997). The rule has no comparable provision for (b)(1) and (b)(2) classes. These distinctions have resulted in much legal wrangling over whether a class is appropriately certified under (b)(2) or (b)(3). As the Fifth Circuit noted, plaintiffs may attempt to shoehorn damages actions into the Rule 23(b)(2) framework, depriving class members of notice and opt-out protections. The incentives to do so are large. Plaintiffs' counsel effectively gathers clientsoften thousands of clientsby a certification under (b)(2). Defendants attempting to purchase res judicata may prefer certification under (b)(2) over (b)(3). [7] Bolin v. Sears, Roebuck & Co., 231 F.3d 970, 976 (5th Cir.2000)(footnote omitted). The rule is silent on whether damages are available in a (b)(2) class. The Federal Rules Advisory Committee apparently contemplated the possibility and stated that (b)(2) does not extend to cases in which the appropriate final relief relates exclusively or predominantly to money damages. FED.R.CIV.P. 23(b)(2) advisory committee's note (1966 amendment). The predominantly requirement (not to be confused with (b)(3)'s predominance requirement) has engendered some debate. The Fifth, Seventh, and Eleventh Circuits have held that claims for monetary relief predominate over equitable claims unless the monetary relief sought is incidental to the requested injunctive relief. See Murray v. Auslander, 244 F.3d 807, 812 (11th Cir.2001); Jefferson v. Ingersoll Int'l, Inc., 195 F.3d 894, 898 (7th Cir.1999); Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415 (5th Cir.1998). On the other hand, the Second and Ninth Circuits have rejected this approach in favor of an ad hoc balancing to determine whether (b)(2) certification is appropriate under the circumstances. Molski v. Gleich, 318 F.3d 937, 949-50 (9th Cir.2003); Robinson v. Metro-North Commuter R.R. Co., 267 F.3d 147, 164 (2d Cir.2001). The United States Supreme Court has not yet decided whether a (b)(2) mandatory class can include claims for monetary relief. Since 1966, when the Advisory Committee penned its note, the Supreme Court regularly has emphasized the importance of allowing affected persons to opt out of representative suits. See Ortiz v. Fibreboard Corp., 527 U.S. 815, 847-48, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999); S. Cent. Bell Tel. Co. v. Alabama, 526 U.S. 160, 167-68, 119 S.Ct. 1180, 143 L.Ed.2d 258 (1999); Richards v. Jefferson County, 517 U.S. 793, 799-802, 116 S.Ct. 1761, 135 L.Ed.2d 76 (1996); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985); see also Jefferson, 195 F.3d at 897. In recent years, it has demonstrated growing concern regarding the certification of mandatory classes when monetary damages are involved. See Ortiz, 527 U.S. at 844-48, 119 S.Ct. 2295; Ticor Title Ins. Co. v. Brown, 511 U.S. 117, 121, 114 S.Ct. 1359, 128 L.Ed.2d 33 (1994). In fact, the Supreme Court has stated that there is at least a substantial possibility that actions seeking monetary damages are certifiable only under (b)(3), which provides class members notice and the right to opt-out. Ticor Title, 511 U.S. at 121, 114 S.Ct. 1359. The Fifth Circuit recognize[d] that the Supreme Court's decision in [ Ticor Title ] casts doubt on the proposition that class actions seeking money damages can be certified under Rule 23(b)(2) and stated that [w]ere we writing on a clean slate, we might give further consideration to the extent to which monetary relief is available at all in 23(b)(2) class actions. However, in the absence of a clearer statement by the Supreme Court or en banc reconsideration of the issue, this panel is bound by circuit precedent. Allison, 151 F.3d at 411 n. 3; see also Coleman v. GMAC, 296 F.3d 443, 447 (6th Cir.2002) (expressing doubt that damages can be awarded in a (b)(2) class but declining to decide the issue). The Seventh Circuit noted that, in Ortiz, [t]he Supreme Court stressed that proper interpretation of Rule 23, principles of sound judicial management, and constitutional considerations (due process and jury trial), all lead to the conclusion that in actions for money damages class members are entitled to personal notice and an opportunity to opt out. [8] Jefferson, 195 F.3d at 898. The D.C. Circuit recently examined the development of (b)(2) class actions and whether notice and opt-out are appropriate in such cases: [A]s one commentator has noted, as has become increasingly apparent since 1966, these amendments [authorizing injunctive and declaratory relief] created an awkward mismatch between the subdivisions under which class actions are certified and the procedural protections to which a class is entitled. George Rutherglen, Better Late Than Never: Notice and Opt Out at the Settlement Stage of Class Actions, 71 N.Y.U. L.REV. 250, 260 (1996). This commentator has observed that the Advisory Committee foresaw neither the surge in filings of Title VII class actions nor decisions that award individual compensatory relief based on findings of classwide discrimination. George Rutherglen, Notice, Scope and Preclusion in Title VII Class Actions, 69 VA. L.REV. 11, 25 (1983). Consequently, this commentator concludes, the Advisory Committee did not address the need for notice in Title VII class actions seeking compensatory as well as injunctive relief. Id.; see also WRIGHT, supra, § 1776, at 495. The Advisory Committee's lack of foresight in this regard may also explain Rule 23's failure to address the possible need for opt-out rights in non-(b)(3) actions. Several commentators have suggested that, despite the absence of any such requirement in Rule 23, where class members seek individual compensatory relief in addition to broad classwide injunctive relief, it is appropriate for a court to afford them the procedural protections of notice and an opportunity to opt out. NEWBERG & CONTE, supra, § 4.15, at 4-51 to 4-52; Rutherglen, Notice and Opt-Out, supra, 71 N.Y.U. L.REV. at 274. Eubanks v. Billington, 110 F.3d 87, 93 (D.C.Cir.1997). Perhaps as a result of these concerns, recent decisions seem almost to conflate the (b)(2) and (b)(3) subsections. For example, the Seventh Circuit, noting that [i]t is an open question in this circuit and in the Supreme Courtwhether rule 23(b)(2) ever may be used to certify a nonotice, no opt-out class when compensatory or punitive damages are in issue, has announced three alternatives to a straight (b)(2) certification for cases that combine equitable or declaratory relief with money damages. Jefferson, 195 F.3d at 898. First, the trial court may certify the class under (b)(3) for all proceedings. Id. at 898. Second, the trial court could make a divided certification, certifying a (b)(2) class for the equitable portion of the case and a (b)(3) class for the damages portion. Under that scenario, the court noted that the Seventh Amendment right to a jury trial would require adjudication of the (b)(3) claims before the (b)(2) claims, even if adjudication of these claims decides the equitable claims as well. Lemon v. Int'l Union of Operating Eng'rs, 216 F.3d 577 (7th Cir.2000) (citing Jefferson, 195 F.3d at 898). The third option discussed in Jefferson is that the trial court might certify the class under (b)(2) for both monetary and equitable remedies but exercise its plenary authority to require individual notice and opt-out, as though the class was certified under Rule 23(b)(3). Id. In a similar vein, the D.C. Circuit has noted, in the context of a Title VII claim, cases seeking individual monetary damages as well as classwide injunctive relief may be equally amenable to certification as (b)(3) actions, and `the arguments supporting certification exclusively under subdivision (b)(2) are surprisingly weak.' Eubanks, 110 F.3d at 93 n. 9 (quoting George Rutherglen, Notice, Scope and Preclusion in Title VII Class Actions, 69 VA. L.REV. 11, 24 (1983)). Under each of these scenarios, the net effect is that notice and opt-out would be provided to class members, thereby satisfying due process requirements. Once notice and opt-out are provided, however, (b)(2) classes become virtually indistinguishable from (b)(3) classes. [9] The Fifth Circuit recently recognized as much, noting that arguing over whether certification is proper under (b)(2) versus (b)(3) is a waste of resources. In re Monumental Life Ins. Co., 365 F.3d 408 (5th Cir.2004). In that case, African-American policyholders sued three life insurance companies, alleging that the companies discriminated against them in the sale and administration of low-value life insurance policies. The plaintiffs moved for class certification under Rule 23(b)(2). Finding that plaintiffs' claims for monetary relief predominated over their claims for injunctive relief, the district court held that (b)(2) certification was inappropriate and refused to certify the class. The Fifth Circuit reversed, noting the futility of the district court's and the dissent's inquiry as to whether the `prime goal' of the class is injunctive or monetary relief: The rule 23(b)(2) predominance requirement, by focusing on uniform relief flowing from defendants' liability, serves essentially the same functions as the procedural safeguards and efficiency and manageability standards mandated in (b)(3) class actions. Allison, 151 F.3d at 414-15. Therefore, to deny certification on the basis that the damage claims would be better brought as a rule 23(b)(3) class serves no function other than to elevate form over substance. Indeed, interests of judicial economy are best served by resolving plaintiffs' claims for injunctive and monetary relief together. Id. at 417-18. The court then concluded that (b)(2) and (b)(3) may work in tandem, noting that [r]ule 23(b)(2) was adopted to facilitate the use of injunctive relief, not to compartmentalize claims for damages under rule 23(b)(3). Id. at 417 n. 16 (citing WRIGHT & MILLER, supra, § 1775, at 470-71). Thus, the court reversed the trial court's order denying class certification and remanded the matter for further proceedings, noting that [u]nder our precedent, should the class be certified on remand, class members must be provided adequate notice, and the district court should consider the possibility of opt-out rights. [10] Id. at 417. Accordingly, rather than focus on whether monetary relief predominates, or whether injunctive or declaratory relief will be necessary at some point, we hold that trial courts considering certification under (b)(2) must consider, and due process may require, individual notice and opt-out rights to class members who seek monetary damages under any theory. This conforms to United States Supreme Court guidance and discourages parties from artful pleading to circumvent what are perceived as stricter certification requirements under (b)(3). We recognize that (b)(2) playedand still playsa valuable role in class action litigation. As used initially, primarily to stop classwide illegal treatment in the civil rights arena, (b)(2) filled a void that (b)(3) did not. With the evolution of the caselaw, the acceptance of the idea that injunctive or declaratory relief is available even under (b)(3), and the United States Supreme Court's growing concern about mandatory classes that include damages, however, a mandatory (b)(2) consumer class may deprive its members of due process rights. In this case, the trial court certified a (b)(2) declaratory relief class which, if granted, would lead to enforcement of the remedies permitted by the written warranty (of repair, replacement or refund). The court then separately certified under (b)(2) the counts for declaratory relief and breach of warranty that Compaq argues could become a predicate for money damages outside the four corners of the written warranty (money damages for, alternatively, breach by sale and breach by failure to repair). As to the second (b)(2) class, the trial court noted that it understood that there was the prospect for recovery of money damages within a TRCP 42(b)(2) class but that the declaratory relief sought ... is not mere incidental baggage to the claim for money damages.... The trial court also certified both the declaratory relief and the damage claims under (b)(3). Thus, all claims and all remedies were certified under both (b)(2) and (b)(3). While the (b)(3) class would be automatically entitled to notice and optout, the trial court failed to even examine the possibility of notice and opt-out for the (b)(2) class. [11] In light of the concerns outlined above, we are reluctant to affirm a (b)(2) class that includes claims for damages without the concomitant protections afforded by notice and opt-out, and we cannot do so without knowing whether class members will be provided these protections. This is particularly true when, as here, the class has disclaimed consequential damages. If, in fact, some purchasers suffered such damages, their inclusion in a mandatory class may be improper; that is, due process may require that they be given notice of the class action and an opportunity to opt out and preserve their claims. In this case, the trial court wholly failed to address notice and opt-out rights for (b)(2) class members. [12] Because notice and optout must be determined before the parties can ascertain what their respective rights will be, an appellate court cannot effectively review a certification order that does not state how, if at all, these rights will be provided. While we cannot say that no (b)(2) class can be certified absent notice and opt-out rights to class members, we can state that, if damage claims are implicated, constitutional considerations will likely mandate such protections. The difficulty of reviewing a (b)(2) class that does not address notice and opt-out is evident when examining the first of the (b)(2) classes certified by the trial court. With regard to that class, we must consider whether declaratory relief, to the exclusion of damages, is appropriate in this case. The Fifth Circuit recently reversed certification of a (b)(2) class in a case involving breach of warranty, fraud, and negligent misrepresentation claims alleged against a motor home manufacturer by a putative class of motor home purchasers. See McManus v. Fleetwood Enters., 320 F.3d 545 (5th Cir.2003). The purchasers alleged that the manufacturer misrepresented that the motor home could safely tow 3,500 pounds when, in fact, supplemental brakes were required to safely tow that weight. The purchasers alleged breach of express and implied warranty claims, as well as violations of California's consumer protection statute. They sought injunctive relief under (b)(2) to compel Fleetwood to provide supplemental brakes and accurate information about the towing limitations. In the alternative, the purchasers sought damages under (b)(3). The district court certified a Texas-only subclass, and Fleetwood appealed. The Fifth Circuit first examined the history of (b)(2) and then noted that: Here, unlike Bolin and Allison, the district court certified the class under both (b)(2) and (b)(3), and the plaintiffs seek injunctive relief and damages as alternative remedies. Thus, Allison and Bolin are slightly off the mark. We need not ask whether damages predominate; we ask only whether injunctive relief, to the exclusion of damages is appropriate under Rule 23(b)(2). We conclude that it is not. ... The McManuses lawsuit is markedly different from the paradigm Rule 23(b)(2) class action. First, the ordinary relief for their lawsuit would be money damages, not injunctive relief. ... Second, Fleetwood sold its motor homes over a limited period of time to a limited number of purchasers and does not have an ongoing relationship with its purchasers. Third, Fleetwood would have to provide individual relief, based on the various models of motor homes, to each individual plaintiff having purchased a motor home between 1994 and 1999, as opposed to a uniform group remedy. ... These sharp differences make the classwide injunctive relief contemplated under Rule 23(b)(2) inappropriate to this case. We could find no case where injunctive relief was awarded under comparable circumstances. This result is unsurprising because damages would be the superior remedy especially considering that some class members may already own, or have no need for, supplemental brakes. We emphasize that otherwise inappropriate injunctive relief does not become appropriate for class treatment merely because the more permissive Rule 23(b)(2), as opposed to (b)(3), contemplates injunctive relief. The district court abused its discretion in allowing the Rule 23(b) classifications to inform the appropriate remedy, instead of vice versa. 320 F.3d at 553-54 (emphasis in original) (citations omitted). Finally, the court concluded: Moreover, permitting this lawsuit to continue as a Rule 23(b)(2) class would undo the careful interplay between Rules 23(b)(2) and (b)(3). That is, the class members would potentially receive a poor substitute for individualized money damages without the corresponding notice and opt-out benefits of Rule 23(b)(3); and defendants would potentially be forced to pay what is effectively money damages, without the benefit of requiring plaintiffs to meet the rigorous Rule 23(b)(3) requirements. We conclude that the district court abused its discretion in certifying the class under Rule 23(b)(2). Id. at 554 (citation omitted). We share the same concerns about plaintiffs' claims for declaratory reliefto the exclusion of damagesin this case. The ordinary remedy for a breach of warranty claim is damages, not declaratory relief like that sought here. See, e.g., TEX. BUS. & COM. CODE § 2.714(b) (The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.). Plaintiffs' expert witnesses testified variously that: the instant case. . . is a commercial case asserting at bottom damages for breach of an express warranty; this is a garden variety, plain vanilla consumer class action for modest damages per unit; and [t]his is a classic `consumer' class action in which the claimed injuries are economic in scope. Similarly, Compaq sold the thirty-seven affected Presario models to the purchasers but, in all likelihood, does not have an ongoing relationship with them. Thus, relief would have to be individualized, at least to some extent. Purchasers who bought the affected computers may no longer own them. Like the Fifth Circuit in Fleetwood, we could find no case where injunctive relief was awarded under comparable circumstances. Fleetwood, 320 F.3d at 554. Rather, as to the (b)(2) claims for declaratory relief to the exclusion of damages, it appears the plaintiffs have tried to shoehorn their damages action into the (b)(2) framework, depriving class members of notice and opt-out protections. Bolin, 231 F.3d at 976. We note, however, that these concerns will become largely irrelevant if, on remand, the trial court orders notice and opt-out for the (b)(2) class members.