Rare Class Decision Describing Adequacy Prong

The adequacy prong of Rule 23 as applied to named representatives probably does not garner as much attention in litigation as the other prerequisites.  A federal court decision reminds readers that there are proposed class actions where the adequacy prong can be vital.  See In re Kosmos Energy Ltd. Sec. Litig., No. 3:12-CV-3733-B (N.D. Tex. , 3/19/14).

The issue before the court was whether to grant Lead Plaintiff’s motion to certify a class of investors who purchased or otherwise acquired common stock from Defendant Kosmos Energy Ltd. (“Kosmos”), through its May, 2011 initial public offering (“IPO”), and were allegedly damaged thereby. The court concluded that Lead Plaintiff fell short of the dictates of Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541 (2011), and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), as well as the Fifth Circuit’s standard for class certification in securities cases set out in Berger v. Compaq Computer Corp., 257 F.3d 475, 483 (5th Cir. 2001). Instead, and to its apparent detriment, plaintiff relied on pre-Comcast case authority. The prevailing current view  is that a plaintiff seeking class certification must affirmatively demonstrate his compliance with Rule 23(a) by showing that there are in fact sufficiently numerous parties, common questions of law or fact, typicality of claims or defenses, and adequacy of representation.

At the heart of defendants’ opposition to the pension plan’s request to be appointed as class
representative was their assertion that there was a fatal absence of evidentiary support for the Plan’s request. Defendants argued that a purported class representative must demonstrate that it possesses a sufficient level of knowledge and understanding to be able to control the litigation, that a potential representative must also establish that it—not the lawyers—is directing the litigation, and that it is not only sufficiently informed about the case to properly manage the effort, but that it must also be willing and able to take an active role and protect the interests of absentee class members. 

Defendants asserted that Lead Plaintiff fell far short of satisfying this stringent standard for  adequacy. They pointed out that the Plan offered little, if any, evidence to prove its adequacy to as
class representative. For their part, defendants submitted the deposition transcript of the Plan’s Board Chair Ms. Saville, which was taken in conjunction with the certification proceedings. Saville’s
deposition, Defendants claimed, established that the Plan had virtually no knowledge about the case, and in fact, did not understand their own allegations or the core themes permeating the complaint. Defendants pointed to portions of Saville’s deposition which they asserted showed that she had never seen, much less read, the Registration Statement, nor could she identify a single misstatement in it, was unable to recognize the names of certain defendants, and was either confused or did not know whether the Kosmos stock price dropped, or if it did, what might have caused the drop, after the Plan purchased the stock.

Adequacy is a constitutional prerequisite to class certification. In fact, it has been said that, due process issues are the single most important feature of class litigation, and adequacy looms
over the entire class debate.  There was no dominant, discernable standard of proof for the requirement. Some courts presumptively favored finding class representatives adequate, requiring little or no evidence to support the determination. Others employed a more robust review of the issue, incorporating the due process considerations inherent in the concept, making certain that the representative possessed the character traits necessary to guarantee his commitment to his fiduciary duties to the class.  The court concluded that the Supreme Court’s recent decisions in Wal-Mart and Comcast, leave no doubt that plaintiffs can no longer rely upon the lax adequacy standards employed at times in the past. Instead, plaintiffs seeking certification must produce actual, credible evidence that the proposed class representatives are informed, able individuals, themselves—not the lawyers––actually directing the litigation.

Applying this rigorous adequacy review—in practice—can involve consideration of a number
of factors, said the court. For example, courts often consider the proposed representative’s personal attributes, including evidence of the representative’s character, honesty, and conscientiousness.  The representative’s familiarity with the case is also important. Certification may be denied where the representative lacks knowledge or a basic understanding of what the suit is about. Likewise, evidence of the representative’s willingness or ability to participate in the litigation is relevant. When it appears that the potential representatives are simply lending their names to a suit controlled entirely by the class attorney, or where the representative is too closely affiliated with class counsel, courts may find them to be inadequate. Failing to appear at the class certification hearing has also been considered a negative factor in the adequacy assessment.  

In terms of evidence, deposition testimony of the proposed representative—where the party opposing certification was able to  question the individual in person—may trump a written, sworn statement by that representative. Here, the only evidence submitted by the Pension Plan in support of its claims of adequacy was the Declaration of its Board Chair, Suzanne Saville. The Declaration, however, contained little more than formulaic, boiler-plate assertions over two pages of substantive text. The court determined that the deposition taken carried more weight. Lead Plaintiff’s defense of the Saville deposition, in turn, fell short.  And without facts to support its position, the Plan failed the rigorous test posed by Berger, Wal-Mart and Comcast.

Moreover, when focusing on the factors listed above that courts have examined in assessing adequacy, (e.g. close affiliation with and dependence upon class counsel, knowledge of the basic facts of the case and defendants involved, desire to vigorously prosecute the case, among others), the court noted that here the plaintiff and counsel maintained the type of close affiliation that calls into question whether the Plan or its counsel was the one actually pursuing the case.  The court referred to the type of free securities monitoring service that counsel provided the Plan, which has been criticized by other courts as fostering tendencies toward lawyer-driven litigation.

Moreover, Saville did not attend the class certification hearing and sought permission to be excused from attending court-ordered mediation in person. These facts indicated that the Plan lacked the incentive needed to fulfill its fiduciary duties and vigorously prosecute the claims filed on behalf of “likely thousands” of potential class members who would not have the opportunity to represent themselves in court.

All in all, one of the more comprehensive recent discussions of the adequacy prong.

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