Court Opinion

ID: 2994993
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:17:48.376112+00
Date Added: 2024-06-11T11:45:23.341408
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 01-8003
John D. Szabo, doing business as Zatron,

Plaintiff-Appellee,

v.

Bridgeport Machines, Inc.,

Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of Indiana, Fort Wayne Division.
No. 1:00cv200--William C. Lee, Chief Judge.

Submitted April 4, 2001--Decided May 4, 2001

  Before Posner, Easterbrook, and Williams, Circuit
Judges.

  Easterbrook, Circuit Judge. The district court
has certified a nationwide class of all persons
who since the beginning of 1996 have bought
machine tools that include a "DX-32 Control Unit"
manufactured by Bridgeport Machines. 2001 U.S.
Dist. Lexis 308 (N.D. Ind. Jan. 12, 2001). The DX-
32 unit combines computer hardware and software
to direct machine tools in performing complex
tasks, such as milling metal in three dimensions.
Plaintiff John Szabo believes that all DX-32
units sold during the past five years are
defective and that Bridgeport (or its agents)
also committed fraud in describing to customers
the abilities (and limitations) of milling
machines equipped with DX-32 units. According to
Szabo the class contains "hundreds" of customers,
and the complaint seeks more than $100,000 from
Bridgeport in damages for each. Bridgeport has
filed a petition under Fed. R. Civ. P. 23(f) and
Fed. R. App. P. 5 asking us to review the
district court’s order certifying the class.

  A nationwide class in what is fundamentally a
breach-of-warranty action, coupled with a claim
of fraud, poses serious problems about choice of
law, the manageability of the suit, and thus the
propriety of class certification. See In re
Rhone-Poulenc Rorer Inc., 51 F.3d 1293 (7th Cir.
1995). The warranty action is itself governed by
Connecticut law, as each contract provides.
(Connecticut is Bridgeport Machines’ home state.)
But claims for fraud and negligent
misrepresentation may depend on who made the
representations, where, and on whose behalf. Most
of the machine tools apparently were sold, and
the representations in question made, by
Bridgeport’s distributors rather than by
Bridgeport’s own employees. Were these
representations made with Bridgeport’s approval
(or knowledge)? If so, then Connecticut law might
apply across the board (as the district court
concluded), but if not then the applicable law
likely would be supplied by the state in which
the statements were made. Connecticut law
recognizes negligent misrepresentation as a
distinct tort. D’Ulisse-Cupo v. Notre Dame High
School, 520 A.2d 217, 223-25 (Conn. 1987).
Indiana, where Szabo purchased and uses his
milling machine, does not. Darst v. Illinois
Farmers Insurance Co., 716 N.E.2d 579, 584 (Ind.
App. 1999). States also differ substantially in
their willingness to permit buyers of commercial
products to recover in tort for defects that are
covered by warranties. Compare GTE Mobilnet of
South Texas LP v. Texas Cellular, Inc., 955
S.W.2d 286 (Tex. App. 1997), with Creative Demos,
Inc. v. Wal-Mart Stores, Inc., 142 F.3d 367 (7th
Cir. 1998) (Indiana law). Differences of this
kind cut strongly against nationwide classes, as
we held in Rhone-Poulenc Rorer. Moreover, oral
representations may vary substantially from one
dealer (or occasion) to another, destroying the
commonality of the claims. See, e.g., Nagel v.
ADM Investor Services, Inc., 65 F. Supp. 2d 740,
746 (N.D. Ill. 1999), affirmed, 217 F.3d 436 (7th
Cir. 2000). To top this off, the DX-32 control
units may work differently in different machine
tools, and they may do well for some kinds of
work (with a given tool) even if they are
unsuited to others. These and other potential
sources of variation account for the fact that
few warranty cases ever have been certified as
class actions--let alone as nationwide classes,
with the additional choice-of-law problems that
complicate such a venture.

  The district judge recognized that the request
for class certification presented difficult
problems, and that on key points Szabo’s position
had been contested. Szabo asserts, for example,
that all oral representations by all Bridgeport
distributors everywhere have been either
authorized or ratified by Bridgeport itself;
Bridgeport contends that this is untrue.
Resolution of this dispute is vital to any
sensible decision about class certification.
Szabo contends that the DX-32 unit is unsuited to
any machine tool with which it may be mated;
Bridgeport contends that its operation depends at
least in part on the tool it is controlling.
Again the propriety of a class comprising all
buyers of all machine tools that include DX-32
control units depends on the outcome of this
disagreement. There are other important disputes
that we need not discuss, for the district court
handled all of them in the same way: the judge
assumed that whatever Szabo alleges must be true.
Proceeding as if class certification under Rule
23 were governed by the same principles as
evaluating the sufficiency of the complaint under
Rule 12(b)(6), the district judge stated:

since the class determination is made at
the pleading stage of the action, the
substantive allegations in the complaint
are accepted as true for purposes of the
class motion. In re Synthroid Marketing
Litig., 188 F.R.D. 287, 290 (N.D. Ill.
1999); Jefferson v. Security Pacific
Financial Svcs., Inc., 161 F.R.D. 63, 66
(N.D. Ill. 1995).

2001 U.S. Dist. Lexis 308 at *7. The opinion
contains several variations on the same theme,
such as:

Bridgeport relies on Szabo’s deposition,
wherein he indicated that numerous oral
representations were made to him by
Bridgeport’s alleged agent (Advanced
Machinery), as well as a demonstration of
the product. Bridgeport then concludes
that Szabo’s claim is one based on oral
misrepresentations, which oral
misrepresentations would be different for
each potential Class member, and,
therefore, class certification is not
permissible. Clearly, Bridgeport is
forgetting that this court must accept the
substantive allegations of Szabo’s
complaint as true. In re Synthroid Mktg.
Litig., 188 F.R.D. 287, 290 (N.D. Ill.
1999).
Id. at *15. And this passage:

[The court follows] the principle that, in
ruling on a class certification, the
question is ’whether plaintiff is
asserting a claim which, assuming its
merit, will satisfy the requirements of
Rule 23. . . .’ Eggleston v. Chicago
Journeymen Plumbers’ Local No. 130, 657
F.2d 890, 895 (7th Cir. 1981) (emphasis
added). . . . Bridgeport is not permitted,
at this stage, to contest the validity of
[Szabo’s] theory that the local dealer
with whom [Szabo] dealt was Bridgeport’s
agent.

Id. at *40. In sum, the district judge certified
the class without resolving factual and legal
disputes that strongly influence the wisdom of
class treatment. The judge stated that he had no
other option.

  For two reasons, we have granted Bridgeport’s
request for discretionary appellate review under
Rule 23(f). First, the class certification turns
a $200,000 dispute (the amount that Szabo claims
as damages) into a $200 million dispute. Such a
claim puts a bet-your-company decision to
Bridgeport’s managers and may induce a
substantial settlement even if the customers’
position is weak. This is a prime occasion for
the use of Rule 23(f), not only because of the
pressure that class certification places on the
defendant but also because the ensuing settlement
prevents resolution of the underlying issues. See
Blair v. Equifax Check Services, Inc., 181 F.3d
832, 834-35 (7th Cir. 1999). Accepting an appeal
in a big-stakes case is especially appropriate
when the district court’s decision is
problematic, as it is here. Second, the district
court’s decision to certify the class implies
that important legal principles have evaded
attention by appellate courts. Id. at 835. At
critical junctures the district judge cited only
decisions by other district judges, most in cases
later settled and thus not subject to appellate
consideration. By granting review now, we can
consider whether these cases correctly understood
the applicable principles.

  Which, we hold, they did not. The proposition
that a district judge must accept all of the
complaint’s allegations when deciding whether to
certify a class cannot be found in Rule 23 and
has nothing to recommend it. The reason why
judges accept a complaint’s factual allegations
when ruling on motions to dismiss under Rule
12(b)(6) is that a motion to dismiss tests the
legal sufficiency of a pleading. Its factual
sufficiency will be tested later--by a motion for
summary judgment under Rule 56, and if necessary
by trial. By contrast, an order certifying a
class usually is the district judge’s last word
on the subject; there is no later test of the
decision’s factual premises (and, if the case is
settled, there could not be such an examination
even if the district judge viewed the
certification as provisional). Before deciding
whether to allow a case to proceed as a class
action, therefore, a judge should make whatever
factual and legal inquiries are necessary under
Rule 23. This would be plain enough if, for
example, the plaintiff alleged that the class had
10,000 members, making it too numerous to allow
joinder, see Rule 23(a)(1), while the defendant
insisted that the class contained only 10
members. A judge would not and could not accept
the plaintiff’s assertion as conclusive; instead
the judge would receive evidence (if only by
affidavit) and resolve the disputes before
deciding whether to certify the class. What is
true of disputes under Rule 23(a)(1) is equally
true of disputes under Rule 23(b)(3). A court may
certify a class under Rule 23(b)(3) only if it
finds that all of the prerequisites (such as
numerosity) have been demonstrated, and in
addition

the court finds that the questions of law
or fact common to the members of the class
predominate over any questions affecting
only individual members, and that a class
action is superior to other available
methods for the fair and efficient
adjudication of the controversy. The
matters pertinent to the findings include:
(A) the interest of members of the class
in individually controlling the prosecution
or defense of separate actions; (B) the
extent and nature of any litigation
concerning the controversy already
commenced by or against members of the
class; (C) the desirability or
undesirability of concentrating the
litigation of the claims in the particular
forum; (D) the difficulties likely to be
encountered in the management of a class
action.
Questions such as these require the exercise of
judgment and the application of sound discretion;
they differ in kind from legal rulings under Rule
12(b)(6). And if some of the considerations under
Rule 23(b)(3), such as "the difficulties likely
to be encountered in the management of a class
action", overlap the merits--as they do in this
case, where it is not possible to evaluate
impending difficulties without making a choice of
law, and not possible to make a sound choice of
law without deciding whether Bridgeport
authorized or ratified the dealers’
representations--then the judge must make a
preliminary inquiry into the merits.

  Courts make similar inquiries routinely under
Rule 12(b)(1) and 12(b)(2) before deciding
whether they possess jurisdiction over the
subject matter of the case and the persons of the
defendants, the location of the proper venue,
application of forum non conveniens, and other
preliminary issues. Often personal jurisdiction
is closely linked to the nature, and merit, of
the claim being asserted, see, e.g., Sheet Metal
Workers’ National Pension Fund v. Elite Erectors,
Inc., 212 F.3d 1031 (7th Cir. 2000), but this
does not mean that the judge will just take the
plaintiff’s word about what happened. Nor will
the court accept the plaintiff’s say-so when
deciding how much could be recovered (and thus
whether the amount in controversy for diversity
jurisdiction is present), even though the maximum
recovery depends strongly on the merits. See,
e.g., Pratt Central Park Limited Partnership v.
Dames & Moore, Inc., 60 F.3d 350 (7th Cir. 1995).
When jurisdiction or venue depends on contested
facts--even facts closely linked to the merits of
the claim--the district judge is free to hold a
hearing and resolve the dispute before allowing
the case to proceed. A motion under Rule 12(b)(6)
is unique in requiring the district judge to
accept the plaintiff’s allegations; we see no
reason to extend that approach to Rule 23, when
it does not govern even the other motions
authorized by Rule 12(b).

  The district judge thought that Eisen v.
Carlisle & Jacquelin, 417 U.S. 156, 177-78
(1974), adopts the approach of Rule 12(b)(6) for
decisions under Rule 23. We do not read Eisen so.
The Court observed that the 1966 amendment to
Rule 23 departed from the earlier handling of
class claims by placing certification ahead of a
decision on the merits. A class thus can lose as
well as win, while in a permissive-intervention
system the case is decided on the merits before
the identities of the parties to be bound are
known. The success of the 1966 amendments (which
are still in force) depends on making a
definitive class certification decision before
deciding the case on the merits, and on judicial
willingness to certify classes that have weak
claims as well as strong ones. A court may not
say something like "let’s resolve the merits
first and worry about the class later" (Rule
23(c)(1) requires the certification decision to
be made "[a]s soon as practicable after the
commencement of an action brought as a class
action") or "I’m not going to certify a class
unless I think that the plaintiffs will prevail."
But nothing in the 1966 amendments to Rule 23, or
the opinion in Eisen, prevents the district court
from looking beneath the surface of a complaint
to conduct the inquiries identified in that rule
and exercise the discretion it confers.
Plaintiffs cannot tie the judge’s hands by making
allegations relevant to both the merits and class
certification. We said as much in Eggleston:
"Eisen has not been interpreted so broadly . . .
as to foreclose inquiry into whether plaintiff is
asserting a claim which, assuming its merit, will
satisfy the requirements of Rule 23 as
distinguished from an inquiry into the merits of
plaintiff’s particular individual claim." 657
F.2d at 895.

  The district court’s approach, by contrast, is
reminiscent of the "across-the-board" rule
jettisoned by General Telephone Co. v. Falcon,
457 U.S. 147 (1982). In circuits following the
across-the-board rule, district judges were
required to assume that all members of a proposed
class were situated similarly to plaintiff and to
certify classes "across the board." Falcon held,
however, that similarity of claims and situations
must be demonstrated rather than assumed. The
Court pointedly observed that "sometimes it may
be necessary for the court to probe beyond the
pleadings before coming to rest on the
certification question. . . . [A]ctual, not
presumed, conformance with Rule 23(a) remains .
. . indispensable." 457 U.S. at 160. That is
equally true of Rule 23(b). Certifying classes on
the basis of incontestable allegations in the
complaint moves the court’s discretion to the
plaintiff’s attorneys-- who may use it in ways
injurious to other class members, as well as ways
injurious to defendants. Both the absent class
members and defendants are entitled to the
protection of independent judicial review of the
plaintiff’s allegations.

  Szabo’s proposed class is highly problematic,
for reasons given in Rhone-Poulenc Rorer and
sketched above. Nagging issues of choice of law,
commonality, and manageability beset this case.
It is unlikely that dealers in different parts of
the country said the same things to hundreds of
different buyers. (Szabo stresses that Bridgeport
accepted each order at its home office, but this
does not demonstrate that Bridgeport knew of or
ratified any particular representation by any
given dealer.) It is unlikely that other models
of milling machines exhibit the same problems
that Szabo says that the DX-32 unit has caused in
his model. And it is unnecessary to certify a
nationwide class. Each buyer has a substantial
claim, of the sort that could be, and often is,
pursued independently. If any class treatment is
appropriate, a class limited to a single state
(or customers of a single dealer) would be more
practical--though buyers in a single state (or of
a single kind of machine) may be too few to
justify class treatment. Now that the district
court is free to pierce the allegations of the
complaint, it may find these and other daunting
obstacles good reasons to deny Szabo’s request
for class certification or certify a more limited
class. The order certifying the class accordingly
is vacated, and the case is remanded for further
proceedings consistent with this opinion.