Chevron Suit Proceeds: Ecuador Plaintiffs' Judicial Estoppel Motion Rejected

A New York federal court ruled last week that Chevron could continue to pursue its effort to overturn a questionable $18 billion judgment against the company in Ecuadorean court. Chevron Corp. v. Salazar et al., No. 1:11-cv-0371 (S.D.N.Y. 8/31/11).

This is an action by Chevron for, among other things, a declaration that the large judgment entered against it by a provincial court in Lago Agrio, Ecuador, is not entitled to recognition or enforcement, and for an injunction against its enforcement outside of Ecuador.

The district court's memorandum opinion dealt with their contentions that Chevron was judicially estopped to now deny that (1) the Ecuadorian legal system provides impartial tribunals and procedures compatible with due process of law, and (2) the Ecuadorian court had jurisdiction over Chevron.

The judicial estoppel argument rested principally on statements made in a separate lawsuit brought in 1993 by many of the same plaintiffs against Texaco, Inc. — then an independent, publicly owned company.  That suit was dismissed on the ground of forum non conveniens many years ago and, indeed, before this Lago Agrio litigation even began.  Plaintiffs cited statements made in briefs, and in affidavits and declarations by witnesses submitted in the prior litigation in
support of Texaco's efforts to obtain the forum non conveniens dismissal.  All were allegedly to the effect that the Ecuadorian courts were neither corrupt nor unfair.

Each and every one of these statements was made by Texaco. Indeed, each was made before Chevron acquired its stock in Texaco in October, 2001.  Chevron never was a party to the prior litigation. Thus, the statements about and the alleged consent to jurisdiction in Ecuador were made by Texaco and Texaco alone.

The court thought it important to emphasize that the pleadings in this case were entirely devoid of any allegations that Texaco merged with or into Chevron, or indeed, any subsidiary of Chevron. Nor were there any allegations that would support piercing the corporate veil of Texaco, treating Chevron as Texaco's alter ego, or otherwise disregarding the separate corporate existence of Texaco. Texaco did not merge with or into Chevron. Rather, a wholly owned subsidiary of Chevron
merged with and into Texaco. Texaco was the surviving entity. Chevron became the sole stockholder.

Judicial estoppel occurs when a party assumes a legal position which it later changes, and  assumes a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position previously taken by him. It applies if 1) a party's later position is clearly inconsistent with its earlier position; 2) the party's former position has been adopted in some way by the court in the earlier proceeding; and 3) the party asserting the two positions would derive an unfair
advantage against the party seeking estoppel. Some courts limit it to situations where the risk of inconsistent results has a clear impact on judicial integrity.

Here, the court had a factual and a legal rejection of the application of judicial estoppel.  While Texaco certainly appeared to have argued throughout much of the 1990s that it could get a fair trial in Ecuador, the issue here was different. The issue now was whether the Ecuadorian legal system, in the next decade, provided impartial tribunals and procedures compatible with due process of law. It was Chevron's contention that it did not, as a result of events that occurred in and after 2004, whatever may have been the case previously.  That is not an inconsistent position from what Texaco had allegedly argued.

Second, the operative legal documents in the public record established that Texaco at all relevant times was a legal entity separate and distinct from Chevron. The fact that a Chevron subsidiary merged into Texaco did not make Chevron responsible for Texaco's obligations. To be sure the law recognizes various bases for disregarding a corporate entity and imposing its obligations upon the stockholder or stockholders. But a litigant seeking to impose corporate obligations on a shareholder or shareholders must allege facts that, if proven, would justify disregard of the corporate entity. The plaintiffs alleged no such facts in this case. They certainly had not demonstrated, as they must in order to prevail on a motion for judgment on the pleadings on this theory, that the pleadings unequivocally establish facts that warrant disregarding Texaco's separate corporate existence and imputing its prior statements and positions to Chevron. 

Court of Appeals Enjoins Copycat Class Actions

The Seventh Circuit has held that a "copycat" class action suit cannot go forward in federal court in California after a similar class action had already been denied certification in federal court in Illinois.  Thorogood v. Sears, Roebuck & Co., No. 10-2407 (7th Cir., 11/02/10).

The first class action in the package of related cases was filed in state court in Illinois but removed to federal court under the Class Action Fairness Act.  Thorogood, a Tennessean, bought a Kenmore-brand clothes dryer from Sears (Kenmore is a Sears brand name). The words “stainless steel” were imprinted on the dryer, and point-of-sale advertising explained that this meant that the drum in which the clothes are dried was made of stainless steel. Thorogood claimed to have thought that this meant that the drum was made entirely of stainless steel, whereas part of the front of the drum—a part the user would see only if he craned his head inside the drum—is made of a ceramic-coated steel. 

The district court certified a multi-state class of Kenmore-brand clothes dryer purchasers. On appeal, the Seventh Circuit called the case “a notably weak candidate for class treatment.” Not only did common issues of law or fact not predominate over the issues particular to each purchaser of a stainless steel Kenmore dryer, as Rule 23(b)(3) requires, there were, the court said, “no common issues of law or fact.” 547 F.3d at 746-47.  It was well-nigh inconceivable, said the court,  that the other members of the class had the same understanding of Sears’s advertising as Thorogood claimed to have. Sears hadn’t advertised the dryers as preventing rust stains on clothes; and it’s not as if such stains are a common concern of owners of dryers—there was no suggestion of that either.

Stainless steel appliances are popular even among consumers, undoubtedly the vast majority, who do not expect a dryer to cause rust stains. Stainless steel does not rust, and that is certainly a plus, clothing stains to one side. But ceramic doesn’t rust either.  Advertisements for clothes dryers mention a host of features that might matter to consumers, such as price, size, electrical usage, appearance, speed, and controls, but not the prevention of clothing stains attributable to rust. The litigation of the class members’ claims would thus have devolved into a series of individual hearings in which each class member who wanted to pursue relief against Sears would testify to what he understood to be the meaning of a label or an  advertisement that identified a clothes dryer as containing a stainless steel drum. Few if any of them would have shared Thorogood’s alleged concerns, which, were a confabulation, said the court.

After the court of appeals thus ordered the first class decertified, thus shrinking the suit to Thorogood’s individual claim, Sears made Thorogood an offer of judgment under Rule 68 of $20,000 inclusive of attorneys’ fees. The district judge, believing that Thorogood should receive no attorneys’ fees, dismissed the suit. The Seventh Circuit affirmed the district court’s denial of attorneys’ fees and dismissal of the suit. 595 F.3d 759 (7th Cir. 2010).

The same plaintiffs' lawyer then brought Murray v. Sears, Roebuck & Co., No. 4:09-cv-
5744-CW (N.D. Cal.). Murray was a member of Thorogood’s class, and he brought essentially the identical claim in California.  Sears Roebuck sought an injunction halting the new class action in front of Judge Leinenweber, who had presided over and eventually dismissed Thorogood’s original class suit, but he ruled that Sears could obtain adequate relief against being harassed by repetitive litigation by pleading collateral estoppel in Murray’s suit in California. Sears appealed, asking the court to to reverse the district court's denial of  Sears’s motion to enjoin the virtually identical class action suit.

The Seventh Circuit (Judge Posner writing) noted that the class in Murray’s case was smaller than
Thorogood’s because it was limited to California purchasers, but it was still very large. The claims in Murray’s original complaint, when Sears pleaded the defense of collateral estoppel, were identical to Thorogood’s; they challenged the same advertising for the same models of clothes dryer. Murray acknowledged that he was alleging “a similar general set of operative facts as alleged in the Thorogood case.”  That caused the California court to find for Sears on collateral estoppel grounds.  So re judicata saves the day, just like the Illinois district court predicted in denying the requested injunction.

But (wouldn't be a blog-worthy case without the but) Murray then amended his complaint to allege additional facts in an effort to show that he had a different case, perhaps one more amenable to class action treatment. On the basis of the amendment, the district judge in California reversed his earlier ruling, and having thus rejected the defense of collateral estoppel allowed discovery to begin.

Ordinarily the ability to plead res judicata or collateral estoppel gives a litigant adequate protection against being harassed by repetitive litigation by the loser in a previous suit against him. But this case was unusual, said Judge Posner, both because it involved class action litigation and because of the specific tactics employed by class counsel. Class members are interested in relief for the class but the lawyers are primarily interested in their fees, and the class members’ stakes in the litigation are ordinarily too small to motivate them to supervise the lawyers in an effort to align the lawyers’ incentives with their own.  The defendant wants to minimize outflow of expenditures
and the class counsel wants to increase inflow of attorneys’ fees. "Both can achieve their goals if they collude to sacrifice the interests of the class.” Leslie, “The Significance of Silence: Collective Action Problems and Class Action Settlements,” 59 Fla. L. Rev. 71, 79-81 (2007). And when the
central issue in a case is given class treatment and so will be resolved once and for all, a trial becomes a roll of the dice. Depending on the size of the class, a single throw may determine the outcome of an immense number of separate claims (hundreds of thousands, in the dryer
litigation)—there is no averaging of decisions over a number of triers of fact having different abilities, priors, and biases. The risk of error becomes asymmetric when the number of claims aggregated in the class action is so great that an adverse verdict would push the defendant into bankruptcy; in such a case the defendant will be under great pressure to settle even if the merits
of the case are slight.

Moreover, in most class action suits, there is far more evidence that plaintiffs may be able to discover in defendants’ records (including emails, the vast and ever-expanding volume of
which has made the cost of discovery soar) than vice versa. Usually the defendants’ conduct is the focus of the litigation and it is in their records, generally much more extensive than the plaintiffs’ (especially when as in a consumer class action the plaintiffs are individuals
rather than corporations or other institutions), that the plaintiffs will want to go in search of a smoking gun.

There is no way in which Sears could recoup the expense of responding to Murray’s discovery requests and of filing preclusion defenses against even more soon-to-be-filed duplicative class actions in other states. The harm it faces from the denial of the injunction was irreparable and its remedy at law against settlement extortion nonexistent, found the Seventh Circuit.  Sears’s action under the All Writs Act was its only means, other than submitting to plaintiffs' lawyer’s  demands, of avoiding being drowned in the discovery bog.

Here, despite the artful pleading in the amneded complaint in California, there was nothing materially new in Murray’s complaint that should have allowed allow an escape from the bar of collateral estoppel. The critical issue was and is what consumers would understand by representations that the Kenmore dryer has a stainless steel drum. The finding in the first court was that common issues did not predominate in Thorogood’s suit; neither did they in Murray’s; the differences between the suits did not bear on that particulat finding.  Yet, the California court did not agree.

Sears’s motion had been filed under the “All Writs Act,” which authorizes a federal court to issue “all writs necessary or appropriate in aid of [its] jurisdiction and agreeable to the usages and
principles of law,” 28 U.S.C. § 1651(a), and which has been interpreted to empower a federal court “to issue such commands . . . as may be necessary or appropriate to effectuate and prevent the frustration of orders it has previously issued in its exercise of jurisdiction otherwise obtained.” United States v. N.Y. Tel. Co., 434 U.S. 159, 172 (1977). Abuse of litigation is a conventional ground for the issuance of an injunction under the All Writs Act, because without an injunction a defendant might have to plead the defense of res judicata or collateral estoppel in a myriad of jurisdictions in order to ward off a judgment, not without risks, and would be helpless against settlement extortion pressures.

The court of appeals left the details of the injunction to be worked out by the district judge, but noted that it had ordered the class decertified inthe first case because of the absence of issues common to all the class members. That ruling—as the injunction must make clear—does not preclude any of the class members from filing individual suits, should they choose. For it was not a ruling on the merits of any class member’s claim (including Thorogood’s). All that would be precluded is the filing (by members of Thorogood’s class, which includes the members of Murray’s class, or by the lawyers for those classes) of class action suits that are indistinguishable, so far as lack of commonality among class members’ claims is concerned, from Thorogood’s.  The plaintiff lawyers should be included in the injunction, as has been done in other cases. See In re Bridgestone/Firestone, Inc., Tires Products Liability Litigation, 333 F.3d at 769; Newby v. Enron Corp., 302 F.3d 295, 300-03 (5th Cir. 2002).


 

Issue Preclusion in Mass Torts

Professor Byron Stier, of Southwestern Law School, has written an interesting article entitled, Another Jackpot (In)Justice: Verdict Variability and Issue Preclusion in Mass Torts.

In it, he notes that if there are no prior inconsistent verdicts, non-mutual offensive issue preclusion generally allows a finding by a single jury to bar re-litigation, in future cases, of the issue by the defendant who lost in the prior case. This approach, however, ignores the possibility that the first verdict delivered may have been an outlier, a fact that would be shown only if further verdicts were permitted to be delivered. In mass tort litigation, such a flawed approach may result in critical issues such as defect or negligence being resolved by only six jurors, when the potentially outlier verdict is then potentially applied to resolve the cases of thousands, perhaps bankrupting a company or an industry -- even when most juries would not so hold.

Focusing on mass tort litigation, this article by Professor Stier presents some growing empirical evidence of verdict variability and then critiques the use of issue preclusion, whose downside is applied only against defendants, not plaintiffs, because only defendants were parties to the prior action. As a result, the article argues, courts should exercise their discretion to deny issue preclusion in mass tort litigation. Instead, he asserts, courts should join the emerging consensus of mass tort management that ultimately better serves the goals of efficiency and public respect supposedly underlying issue preclusion: allow multiple verdicts to unfold a more balanced view of liability that will frequently be used for well-informed and far-reaching settlements. 

Given the administrative burden that mass torts can place on the courts, even with the use of management techniques such as an MDL, the temptation to use short-cuts to the traditional day in court promised all litigants and demanded by fundamental fairness can be immense. The professor offers some powerful arguments against one such short-cut.