Szabo v. Bridgeport Machines

• Decision Date: 04 May 2001
• Docket Number: No. 01-8003,01-8003
• Citation: 249 F.3d 672
• Parties: (7th Cir. 2001) John D. Szabo, doing business as Zatron, Plaintiff-Appellee, v. Bridgeport Machines, Inc., Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 672

249 F.3d 672 (7th Cir. 2001)

John D. Szabo, doing business as Zatron, Plaintiff-Appellee, v. Bridgeport Machines, Inc., Defendant-Appellant.

No. 01-8003

In the United States Court of Appeals For the Seventh Circuit

Submitted April 4, 2001

Decided May 4, 2001

Appeal from the United States District Court for the Northern District of Indiana, Fort Wayne Division. No. 1:00cv200--William C. Lee, Chief Judge.

Before Posner, Easterbrook, and Williams, Circuit Judges.

Easterbrook, Circuit Judge.

The district court has certified a nationwide class of all persons who since the beginning of 1996 have bought machine tools that include a "DX-32 Control Unit" manufactured by Bridgeport Machines. 2001 U.S. Dist. Lexis 308 (N.D. Ind. Jan. 12, 2001). The DX- 32 unit combines computer hardware and software to direct machine tools in performing complex tasks, such as milling metal in three dimensions. Plaintiff John Szabo believes that all DX-32 units sold during the past five years are defective and that Bridgeport (or its agents) also committed fraud in describing to customers the abilities (and limitations) of milling machines equipped with DX-32 units. According to Szabo the class contains "hundreds" of customers, and the complaint seeks more than $100,000 from Bridgeport in damages for each. Bridgeport has filed a petition under Fed. R. Civ. P. 23(f) and Fed. R. App. P. 5 asking us to review the district court's order certifying the class.

A nationwide class in what is fundamentally a breach-of-warranty action, coupled with a claim of fraud, poses serious problems about choice of law, the manageability of the suit, and thus the propriety of class certification. See In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293 (7th Cir. 1995). The warranty action is itself governed by Connecticut law, as each contract provides. (Connecticut is Bridgeport Machines' home state.) But claims for fraud and negligent misrepresentation may depend on who made the representations, where, and on whose behalf. Most of the machine tools apparently were sold, and the representations in question made, by Bridgeport's distributors rather than by Bridgeport's own employees. Were these representations made with Bridgeport's approval (or knowledge)? If so, then Connecticut law might apply across the board (as the district court concluded), but if not then the applicable law likely would be supplied by the state in which the statements were made. Connecticut law recognizes negligent misrepresentation as a distinct tort. D'Ulisse-Cupo v. Notre Dame High School, 520 A.2d 217, 223-25 (Conn. 1987). Indiana, where Szabo purchased and uses his milling machine, does not. Darst v. Illinois Farmers Insurance Co., 716 N.E.2d 579, 584 (Ind. App. 1999). States also differ substantially in their willingness to permit buyers of commercial products to recover in tort for defects that are covered by warranties. Compare GTE Mobilnet of South Texas LP v. Texas Cellular, Inc., 955 S.W.2d 286 (Tex. App. 1997), with Creative Demos, Inc. v. Wal-Mart Stores, Inc., 142 F.3d 367 (7th Cir. 1998) (Indiana law). Differences of this kind cut strongly against nationwide classes, as we held in Rhone-Poulenc Rorer. Moreover, oral representations may vary substantially from one dealer (or occasion) to another, destroying the commonality of the claims. See, e.g., Nagel v. ADM Investor Services, Inc., 65 F. Supp. 2d 740, 746 (N.D. Ill. 1999), affirmed, 217 F.3d 436 (7th Cir. 2000). To top this off, the DX-32 control units may work differently in different machine tools, and they may do well for some kinds of work (with a given tool) even if they are unsuited to others. These and other potential sources of variation account for the fact that few warranty cases ever have been certified as class actions--let alone as nationwide classes, with the additional choice-of-law problems that complicate such a venture.

The district judge recognized that the request for class certification presented difficult problems, and that on key points Szabo's position had been contested. Szabo asserts, for example, that all oral representations by all Bridgeport distributors everywhere have been either authorized or ratified by Bridgeport itself; Bridgeport contends that this is untrue. Resolution of this dispute is vital to any sensible decision about class certification. Szabo contends that the DX-32 unit is unsuited to any machine tool with which it may be mated; Bridgeport contends that its operation depends at least in part on the tool it is controlling. Again the propriety of a class comprising all buyers of all machine tools that include DX-32 control units depends on the outcome of this disagreement. There are other important disputes that we need not discuss, for the district court handled all of them in the same way: the judge assumed that whatever Szabo alleges must be true. Proceeding as if class certification under Rule 23 were governed by the same principles as evaluating the sufficiency of the complaint under Rule 12(b)(6), the district judge stated:

since the class determination is made at the pleading stage of the action, the substantive allegations in the complaint are accepted as true for purposes of the class motion. In re Synthroid Marketing Litig., 188 F.R.D. 287, 290 (N.D. Ill. 1999); Jefferson v. Security Pacific Financial Svcs., Inc., 161 F.R.D. 63, 66 (N.D. Ill. 1995).

199 F.R.D. at 284. The opinion contains several variations on the same theme, such as:

Bridgeport relies on Szabo's deposition, wherein he indicated that numerous oral representations were made to him by Bridgeport's alleged agent (Advanced Machinery), as well as a demonstration of the product. Bridgeport then concludes that Szabo's claim is one based on oral misrepresentations, which oral misrepresentations would be different for each potential Class member, and, therefore, class certification is not permissible. Clearly, Bridgeport is forgetting that this court must accept the substantive allegations of Szabo's complaint as true. In re Synthroid Mktg. Litig., 188 F.R.D. 287, 290 (N.D. Ill. 1999).

Id. at 285. And this passage:

[The court follows] the principle that, in ruling on a class certification, the question is 'whether plaintiff is asserting a claim which, assuming its merit, will satisfy the requirements of Rule 23. . . .' Eggleston v. Chicago Journeymen Plumbers' Local No. 130, 657 F.2d 890, 895 (7th Cir. 1981) (emphasis added). . . . Bridgeport is not permitted, at this stage, to contest the validity of [Szabo's] theory that the local dealer with whom [Szabo] dealt was Bridgeport's agent.

Id. at 293. In sum, the district judge certified the class without resolving factual and legal disputes that strongly influence the wisdom of class treatment. The judge stated that he had no other option.

For two reasons, we have granted Bridgeport's request for discretionary appellate review under Rule 23(f). First, the class certification turns a $200,000 dispute (the amount that Szabo claims as damages) into a $200 million dispute. Such a claim puts a bet-your-company decision to Bridgeport's managers and may induce a substantial settlement even if the customers' position is weak. This is a prime occasion for the use of Rule 23(f), not only because of the pressure that class certification places on the defendant but also because the ensuing settlement prevents resolution of the underlying issues. See Blair v. Equifax Check Services, Inc., 181 F.3d 832, 834-35 (7th Cir. 1999). Accepting an appeal in a big-stakes case is especially appropriate when the district court's decision is problematic, as it is here. Second, the district court's decision to certify the class implies that important legal principles have evaded attention by appellate courts. Id. at 835. At critical junctures the district judge cited only decisions by other district judges, most in cases later settled and thus not subject to appellate consideration. By granting review now, we can consider whether these cases correctly understood the applicable principles.

Which, we hold, they did not. The proposition that a district judge must accept all of the complaint's allegations when deciding whether to certify a class cannot be found in Rule 23 and has nothing to recommend it. The reason why judges accept a complaint's factual allegations when ruling on motions to dismiss under Rule 12(b)(6) is that a motion to dismiss tests the legal sufficiency of a pleading. Its factual sufficiency will be tested later--by a motion for summary judgment under Rule 56, and if necessary by trial. By contrast, an order certifying a class usually is the district judge's last word on the subject; there is no later test of the decision's factual premises (and, if the case is settled, there could not be such an examination even if the district judge viewed the certification as provisional). Before deciding whether to allow a case to proceed as a class action, therefore, a judge should make whatever factual and legal inquiries are necessary under Rule 23. This would be plain enough if, for example, the plaintiff alleged that the class had 10,000 members, making it too numerous to allow joinder, see Rule 23(a)(1), while the defendant insisted that the class contained only 10 members. A judge would not and could not accept the plaintiff's assertion as conclusive; instead the judge would receive evidence (if only by affidavit) and resolve the disputes before deciding whether to certify the class. What is true of...