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Two billion dollars. That is what the top legal counsel at nearly 350 companies spent on the defense of class actions in 2014. In addition to the cost of outside counsel, on average, companies dedicate six in-house individuals to manage class actions, four of whom are attorneys. Moreover, class actions — regardless of whether they concern consumer fraud, cybersecurity or employment — have the ability to instantly damage an entity’s goodwill and reputation. And, critically, bet-the-company class action litigation is on the rise. Given these high stakes, it is too often that class action defendants bear the heavy burden of paying for costly discovery and substantial motion practice well before they can challenge even the flimsiest class action allegations.

Perhaps in response to these trends, a recent case emanating from the Western District of Pennsylvania, Bell v. Cheswick Generating Station, et al., Civ. A. No. 12-929 (W.D. Pa., Jan. 28, 2015), has provided a road map for defendants seeking to strike class allegations before slogging through burdensome discovery.

The Bell Framework: Rules 12(f), 23(c)(1)(A) and 23(d)(1)(D); Not Rule 12(b)

In Bell, plaintiffs alleged a class comprised of individuals that live or own property within one mile of the Cheswick Generating Station “who have suffered similar damages to their property by the invasion of particulates, chemicals and gases from defendant’s facility which thereby caused damages to their real property.” Defendant challenged the class definition by filing a motion to strike plaintiffs’ class allegations, relying primarily on Federal Rules of Civil Procedure 23(c)(1)(A) and 12(b). The court ruled that the authority to strike class allegations does not arise from Rule 12(b), but rather from Rules 12(f), 23(c)(1)(A) and 23(d)(1)(D).

Rule 23(d)(1)(D) provides that a “court may issue orders that … require that the pleadings be amended to eliminate allegations about representation of absent persons and that the action proceed accordingly.” Further, Rule 23(c)(1)(A) directs the court to make the class certification determination “[a]t an early practicable time.” Rule 12(f) permits a district court to “strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” The Bell court noted that these rules, when read in conjunction with one another, provide authority for the court to strike the class allegations even before a plaintiff moves for class certification. The Bell court also noted that opinions from district courts in the Third Circuit support striking class allegations where “no amount of discovery will demonstrate that the class can be maintained.”

Who Bears the Burden?

While the Third Circuit has not yet ruled on the appropriate standard of review to be utilized for prediscovery motions to strike class allegations, the Bell court adopted the reasoning set forth by the Seventh Circuit’s decision in Szabo v. Bridgeport Mach. Inc., 249 F.3d 672 (7th Cir. 2001), which holds that the Rule 23 burdens are on the plaintiff, even if the plaintiff is the nonmoving party. Specifically, the Bell court held that accelerating the class certification question does not alter the traditional Rule 23 burdens and plaintiffs must advance a “prima facie showing that the class action requirements of Federal Rule of Civil Procedure 23 are satisfied or that discovery is likely to produce substantiation of the class allegations.”

The Bell Proposed Class

After examining the class definition, the court determined that the class, as alleged, was a “fail-safe” class (i.e., one that “requires the court to address the central issue of liability in the case.” The court ruled that the proposed class was unascertainable because the class definition involved the ultimate issue of liability that would require the court to conduct minihearings to determine who belongs within the class and who does not, rendering the process administratively infeasible and therefore unascertainable. In addition, the court criticized the inclusion of “similar damages” in the class as independently problematic. Indeed, the court noted that the incorporation of a standard that turns on subjective criteria is administratively infeasible and renders the class uncertifiable.

While the court rejected the class claims, Bell may be saved by Federal Rule of Civil Procedure 15. The court held that an amended complaint that defines the class by “clear, objective criteria” may not be futile. Accordingly, the court granted the motion to strike the class claims without prejudice, subject to plaintiffs filing a motion to amend, but cautioned that no further amendments would be permitted.

The Class Action Climate Moving Forward

Not only is bet-the-company class action litigation on the rise, but regulatory agencies are also becoming more vocal about their support of class actions and disapproval of arbitration provisions and class action waivers. Recently, the Consumer Financial Protection Bureau issued a report criticizing arbitration agreements in the context of consumer actions. In addition, the CFPB’s study found that class actions deliver cash relief to vastly more consumers than individual arbitration. And, while the CFPB has yet to formally propose a rule restricting financial services companies from requiring consumers to arbitrate their claims, many speculate that such a rule is expected in the near future. Beyond the CFPB, the Dodd-Frank Act forbids arbitration agreements in certain contexts. The cumulative effect of regulatory agencies and certain laws forbidding arbitration provisions will be more class actions, especially in the consumer and financial services contexts.

However, despite the recent wave of support disfavoring arbitration agreements and touting class actions as a preferably method to get relief to the most people, there appears to be a growing tension between the regulators and the courts, with judges being more open to limiting the scope of class actions. Indeed, in addition to heightening the pleading requirements in all cases pursuant to Iqbal and Twombly, courts have permitted various avenues for defendant corporations to limit class actions, whether through contractual arbitration and class waiver provisions or otherwise. In this respect, the Bell decision is critical in that it signals a willingness to dispose of class claims before class discovery and prior to any motion for certification if the class as alleged is implausible on its face.

Conclusion

Companies must be prepared to vigorously defend themselves against class and collective claims. In this respect, Bell may provide a sharp weapon in a class action defendant’s arsenal to be brandished before undergoing pervasive and burdensome discovery.

“Not Saved By The Bell: Dismissing Classes Prediscovery,” by Laura E. Vendzules and Michael A. Iannucci appeared in the March 23, 2015 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.