We talk like product liability lawyers, but we can spell “10b-5.” Trust us.
We even read securities cases every once in a while. Here’s one we recommend to readers of this blog who are fighting some types of pharmaceutical or medical device class actions in Texas state courts: Citizens Insurance Company of America v. Daccach, No. 03-0505 (Tex Sup. Ct. Mar. 2, 2007). The facts don’t have much to do with drug or device law, but the holding may be worth an awful lot in the right situation.
In Citizens Insurance, a Texas insurance company sold securities to foreign citizens. A putative class of foreign citizens filed suit in Texas state court pleading violation of the Texas Deceptive Trade Practices Act, breach of contract, fraud, and a litany of other claims. The named plaintiff ultimately pleaded a single new count — for violation of the Texas Securities Act — and abandoned the ten claims he had originally pleaded. The trial court certified the class.
The court of appeals affirmed class certification; the Texas Supreme Court reversed.
The Texas Supreme Court first grappled with a choice of law question: whether the Texas Securities Act applied to the defendant Texas residents’ sales of securities to foreigners. For today’s purposes, we don’t much care about the result on that issue. (For those who are curious, the court held that, on the facts presented, the Act could apply to sales by Texas residents to foreigners.)
The piece of this case that caught our eye had to do with the adequacy of a named plaintiff who chooses to abandon a bunch of claims available to a putative class and instead to pursue only one, more easily certifiable, cause of action.
We see this all the time in drug and device cases. Named plaintiffs abandon the (uncertifiable) personal injury claims and instead pursue on behalf of the class only claims for, say, consumer fraud or medical monitoring. We routinely insist that this unfairly cheats the class. Since all claims arising out of a single transaction must be litigated in a single lawsuit or be barred, absent class members may some day be startled to learn that they’ve prevailed on their $35 consumer fraud claims, but lost their multimillion dollar personal injury claims because of the doctrine of res judicata. We maintain that the named plaintiff’s decision to split claims renders the named plaintiff an inadequate class representative.
And the Texas Supreme Court, in Citizens Insurance, resoundingly agrees with us. “Under the transactional approach [to res judicata] followed in Texas,” the court writes, “a subsequent suit is barred if it arises out of the same subject matter as the prior suit, and that subject matter could have been litigated in the prior suit.” And “[c]lass certification under [the Texas equivalent of Rule 23] was never meant to be an exception to res judicata.” Thus, “claims not pursued, or abandoned, in a class suit seeking damages that proceeds to final judgment on other claims arising from the same subject matter are subject to preclusion from relitigation by the principles of res judicata.”
What’s the effect on the class certification decision? “We hold, therefore, that Texas Rule of Civil Procedure 42 [analogous to federal Rule 23] requires the trial court, as part of its rigorous analysis, to consider the risk that a judgment in the class action may preclude subsequent litigation of claims not alleged, abandoned, or split from the class action. The trial court abuses its discretion if it fails to consider the preclusive effect of a judgment on abandoned claims, as res judicata could undermine the adequacy of representation requirement.”
We’ll take that. If named plaintiffs pursue only half of a drug or device case — by disclaiming personal injury claims — they’re sacrificing the absent class members’ most valuable rights in pursuit of a more easily certifiable class (and a payday for plaintiffs’ counsel). The class should not be certified.
That result makes our day. We just might start reading those securities cases all the time.