69 F. 3d 293 - Schwarzschild v. Tse

We consider here a narrow question of procedure involving notices in class action cases. We must decide whether a defendant who has succeeded in obtaining summary judgment may subsequently compel the named plaintiff to give the class the Rule 23(c)(2) notice that is ordinarily given shortly after class certification, or whether by obtaining judgment before the notice is given the defendant has waived any right to have notice sent to the purported class members.

Richard T. Schwarzschild [plaintiff] sued Bernard K. Tse, et al. [defendants], for violations of Sections 13(e) and 14(e) of the Securities and Exchange Act, as well as for violations of the California Corporations Code. Plaintiff filed his claim in January of 1990. In July of that year, he moved for class certification. The district court granted the motion to certify on October 24th, 1991 and denied the defendants' subsequent motion for reconsideration in July of 1992.

On October 9th, 1992, defendants filed a motion for summary judgment and a motion to decertify the class. On the same day, plaintiff filed a motion for an order approving class notice. On December 9th, 1992, the district court entered an order granting the defendants' motion for summary judgment and stating that the defendants' motion to decertify and the plaintiff's motion to distribute notice were moot. Almost six months after the grant of summary judgment, in May of 1993, defendants moved for an order directing the distribution of notice to the class concerning the pendency of an action.

On July 13, 1993, the district court granted the defendants' motion and ordered that notice concerning the pendency of an action be sent to all members of the plaintiff class. Schwarzschild now appeals that order.1 He contends that, once summary judgment has been granted upon the defendants' own motion, a district court may not require notification of the members of the class.

This appeal involves the notice requirement of Federal Rule of Civil Procedure 23(c)(2), which states that:

In any class action maintained under subdivision (b)(3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice shall advise each member that (A) the court will exclude the member of the class if the member so requests by a specified date; (B) the judgment, whether favorable or not, will include all members who do not request exclusion; and (C) any member who does not request exclusion may, if the member desires, enter an appearance through counsel.

Fed.R.Civ.P. 23(c)(2). We review the district court's interpretation of the rule de novo.

Defendants maintain, and the district court agreed, that Rule 23(c)(2) compels a court to send notice concerning the pendency of the action to all members of the class even when summary judgment has already been granted upon the merits of the case. Plaintiff contends, in contrast, that notice is not required when a district court has already granted summary judgment in favor of the defendants upon their own motion. We agree with the plaintiff and hold that, by obtaining summary judgment before the class has been certified and notice has been sent, the defendants waived any right to compel the plaintiff to notify the class of the pending action.

The unusual nature of the issue before us is due in large part to the fact that district courts generally do not grant summary judgment on the merits of a class action until the class has been properly certified and notified. The purpose of Rule 23(c)(2) is to ensure that the plaintiff class receives notice of the action well before the merits of the case are adjudicated. See, e.g., Postow v. OBA Fed. Sav. and Loan Ass'n, 627 F.2d 1370, 1381-82 (D.C.Cir.1980); Katz v. Carte Blanche Corp., 496 F.2d 747, 759-60 (3d Cir.1974) (en banc), cert. denied, 419 U.S. 885, 95 S.Ct. 152, 42 L.Ed.2d 125 (1974); 7B Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure, Sec. 1788, at 222-23 (2d ed. 1986); cf. Besinga v. United States, 923 F.2d 133, 136-37 (9th Cir.1991).

As the Third Circuit has noted, the history of the development of Rule 23(c)(2) makes clear that the rule was adopted to prevent "one-way intervention"--that is, the intervention of a plaintiff in a class action after an adjudication favoring the class had taken place. Such intervention is termed "one way" because the plaintiff would not otherwise be bound by an adjudication in favor of the defendant. Katz, 496 F.2d at 759. In the words of the Third Circuit:

Many commentators objected that one-way intervention had the effect of giving collateral estoppel effect to the judgment of liability in a case where the estoppel was not mutual. This was thought to be unfair to the defendant. To meet the point that one-way intervention was unfair to the defendant, the Advisory Committee on Federal Rules concluded that class members should be brought in prior to the determination of defendant's liability, thus making the estoppel mutual. To make joinder at an early stage practically achievable, the "opting out" mechanism was devised.

Id. (emphasis added and internal citations omitted).

The language of Rule 23(c)(2) supports the view that notice must be sent before a judgment has been granted. First, it applies only to a class action "maintained" before the district court. Fed.R.Civ.P. 23(c)(2). Second, the rule states that the notice must advise the member that "the judgment, whether favorable or not, will include all members who do not request exclusion," id. (emphasis added). The rule thus clearly contemplates that the notice requirement will be met before the parties are aware of the district court's judgment on the merits.

Although the history, purpose, and language of Rule 23(c)(2) indicate that it only contemplates notification of the class before a final judgment has been rendered on the merits, defendants maintain that this court's per curiam decision in Manasen v. California Dental Services, 638 F.2d 1152 (9th Cir.1979), compelled the district court to grant the defendants' motion to send notice to the class even after it rendered its judgment.2 In effect, defendants urge us to extend the mandatory notice requirement of Rule 23(c)(2) to cases in which summary judgment has already been granted on the defendant's own motion. We decline to do so.

The defendants misread our holding in Manasen. In Manasen, we reversed and remanded a case in which a district court had made a summary judgment ruling that was contrary to a new Supreme Court decision. In ruling upon the plaintiffs' appeal, we also granted the defendant's cross-appeal from the district court's failure to order the plaintiffs to send notice to the class they purported to represent. Manasen, 638 F.2d at 1153-54. We observed when granting the defendant's cross-appeal that notice under Rule 23(c)(2) is "mandatory and not discretionary." Id. at 1154. The defendants here contend that the Manasen defendant was cross-appealing a refusal by the district court to send notice to the class after it had granted summary judgment in its favor. Accordingly, they urge us to interpret Manasen as holding that notice is mandatory even after summary judgment has been granted.

Manasen does not support the defendants' contention. To the contrary, once we decided to reverse the grant of summary judgment in that case and remand it to the district court, it was clear that notice would be required under Rule 23(c)(2) because the case would once again be pending before the district court. Thus, the Manasen defendants were entitled to have the class notices sent. Accordingly, we find that Manasen in no way supports the defendants' strained reading of Rule 23(c)(2).

Having concluded that Manasen does not compel notice to be sent in this case, we now turn to the plaintiff's contention that the defendants waived their right to send notice to the class by obtaining summary judgment before notice of the pending action was sent.3

Although we have not explicitly ruled upon this question, several circuits have concluded that a defendant waives his right to have notice sent to the class under Rule 23(c)(2) whenever he moves for summary judgment before the class has been properly certified and notified. For example, the District of Columbia Circuit has stated:

the strongest argument for [forbidding] post-judgment class certification is that pre-judgment certification and notice to the class are necessary to protect the defendant from future suits by potential members of the class. But that rationale disappears when the defendant himself moves for summary judgment before a decision on class certification. In such a situation, "the defendants ... assume the risk that a judgment in their favor will not protect them from subsequent suits by other potential class members, for only the slender reed of stare decisis stands between them and the prospective onrush of litigants."

Postow, 627 F.2d at 1382 (quoting Haas v. Pittsburgh Nat'l Bank, 381 F.Supp. 801, 805 (W.D.Pa.1974), rev'd on other grounds, 526 F.2d 1083 (3d Cir.1975)).4 Similarly, the Third Circuit has concluded in an en banc decision that when a defendant prefers to "take its chances on stare decisis rather than res judicata," the district court may grant the defendant's motion for summary judgment even though the class has not yet been notified. Katz, 496 F.2d at 759.5

We join the District of Columbia and Third Circuits in holding that when defendants obtain summary judgment before the class has been properly certified or before notice has been sent, they effectively waive their right to have notice circulated to the class under Rule 23(c)(2); in such cases, the district court's decision binds only the named plaintiffs. The defendants' novel interpretation of Rule 23(c) ignores its purpose, development, and text. Given that notice would serve no purpose in this case save to require the plaintiffs to engage in a costly and unnecessary exercise, we decline to apply Rule 23(c)(2) in a manner that is clearly contrary to the intent of its framers.

By obtaining summary judgment before notice had been sent to the class, the defendants waived their right to have such notice given and to obtain a judgment that was binding upon the class. Accordingly, the decision of the district court is reversed and remanded for further proceedings not inconsistent with this opinion.

REVERSED AND REMANDED.

The court suggests that the sole purpose of Rule 23(c)(2) is to prevent one-way intervention by plaintiffs when judgment against a defendant has been granted. The rule, however, is intended to protect the due process rights of potential class members. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 173-74, 94 S.Ct. 2140, 2150-51, 40 L.Ed.2d 732 (1974) (citing Advisory Committee's Note to Rule 23). The opinion's "waiver" rationale is puzzling in this context. The reasoning is based on the notion that a defendant has a right to send class notice. Rule 23(c)(2), however, gives potential class members a right to receive individual notice upon the court's direction. Correlative to this right is a duty imposed on the class representative to send the class the appropriate notice. The opinion transforms this duty to the class into a right of the defendant to have such notice sent. This view is unsupported by Rule 23(c)(2), which imposes a requirement of notice to the class members but does not mention any right of the opposing party to have notice sent.

The court, however, goes on to suggest that the language of Rule 23(c)(2) supports its view because the rule only applies to a class action "maintained" before the district court. In the instant case, no final judgment has been entered by the district court. The case is therefore still being maintained. Moreover, contrary to the majority's suggestion, the district court's order of class notice can still properly satisfy the requirements of Rule 23(c)(2)(B) to inform potential class members that "the judgment, whether favorable or not, will include all members who do not request exclusion." Fed.R.Civ.P. 23(c)(2).

In weaving together its novel waiver theory, the court is inconsistent with the two cases as to which it says that it is in harmony. Postow v. OBA Fed. Sav. and Loan Ass'n, 627 F.2d 1370 (D.C.Cir.1980); Katz v. Carte Blanche Corp., 496 F.2d 747 (3d Cir.1974) (en banc), cert. denied, 419 U.S. 885, 95 S.Ct. 152, 42 L.Ed.2d 125 (1974). In Postow the district court certified the class after summary judgment, with the implication that members of the class be notified; the order was affirmed by the circuit. Postow, 627 F.2d at 1383. In Katz the defendant was permitted to wait until after disposition of the case on the merits before class notice was sent. Katz, 496 F.2d at 762. Dicta in both cases do refer to the possibility of waiver of notice by the defendant prior to class certification. But neither case holds that by moving for summary judgment after certification a defendant waives the requirement of notice.

In Eisen, 417 U.S. at 175, 94 S.Ct. at 2151, the Supreme Court committed itself to the view that Federal Rule of Civil Procedure 23(c)(2) leaves "no doubt that individual notice must be provided to those class members who are identifiable through reasonable effort" even though in the case before the court there were 2,250,000 identifiable members. Against all practical objections raised the Supreme Court held: "The short answer to these arguments is that individual notice to identifiable class members is not a discretionary consideration to be waived in a particular case. It is, rather, an unambiguous requirement of Rule 23." Id. at 176, 94 S.Ct. at 2152. Despite the attractive policy arguments presented in the majority opinion, we are bound by this opinion.

I respectfully dissent.