259 F.3d 154 (3rd Cir. 2001), Newton v. Merrill Lynch

Citation:259 F.3d 154
Party Name:KENNETH E. NEWTON; MLPF&S CUST. FPO, BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; PAINEWEBBER, INC. JEFFREY PHILLIP KRAVITZ, V. DEAN WITTER REYNOLDS, INC. MLPF&S CUST. FPO, BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM, JEFFREY PHILLIP KRAVITZ, GLORIA BINDER, APPELLANTS
Case Date:August 06, 2001
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
FREE EXCERPT

Page 154

259 F.3d 154 (3rd Cir. 2001)

KENNETH E. NEWTON; MLPF&S CUST. FPO, BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; PAINEWEBBER, INC.

JEFFREY PHILLIP KRAVITZ,

V.

DEAN WITTER REYNOLDS, INC.

MLPF&S CUST. FPO, BRUCE ZAKHEIM IRA FBO BRUCE ZAKHEIM, JEFFREY PHILLIP KRAVITZ, GLORIA BINDER, APPELLANTS

United States Court of Appeals, Third Circuit

August 6, 2001

Argued December 14, 2000

On Appeal from the United States District Court for the District of New Jersey (D.C. Civil Action Nos. 94-CV-05343 & 95-CV-00213) Honorable Dickinson R. Debevoise

Page 155

[Copyrighted Material Omitted]

Page 156

[Copyrighted Material Omitted]

Page 157

[Copyrighted Material Omitted]

Page 158

[Copyrighted Material Omitted]

Page 159

[Copyrighted Material Omitted]

Page 160

[Copyrighted Material Omitted]

Page 161

Karen L. Morris, Esquire (argued) Morris & Morris 1105 North Market Street, Suite 1600 Wilmington, Delaware 19801 Attorney for Appellants

Stephen M. Shapiro, Esquire (argued) Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603 Attorney for Appellees, Merrill Lynch, Pierce, Fenner & Smith, Inc., PaineWebber, Inc., and Dean Witter Reynolds, Inc.

David A. Brownlee, Esquire Kirkpatrick & Lockhart Henry W. Oliver Building 535 Smithfield Street Pittsburgh, Pennsylvania 15222 Attorney for Appellee, Merrill Lynch, Pierce, Fenner & Smith, Inc.

Paul J. Fishman, Esquire Friedman, Kaplan & Seiler One Gateway Center, 25th Floor Newark, New Jersey 07102 Robert B. McCAW, Esquire Wilmer, Cutler & Pickering 520 Madison Avenue New York, New York 10022 Attorneys for Appellee, PaineWebber, Inc.

William H. Pratt, Esquire Kirkland & Ellis Citigroup Center 153 East 53rd Street New York, New York 10022 Attorney for Appellee, Dean Witter Reynolds, Inc.

Karl A. Groskaufmanis, Esquire Fried, Frank, Harris, Shriver & Jacobson 1001 Pennsylvania Avenue, N.W., Suite 800 Washington, D.C. 20004 Attorney for Amicus Curiae-Appellees, Securities Industry Association

Before: Scirica, Fuentes and Garth, Circuit Judges

Page 162

OPINION OF THE COURT

Scirica, Circuit Judge.

In this putative class action under S 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thousands of investors sued their broker-dealers, who traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ), for breaching their duty of best execution. Despite the broker-dealers' duty to execute trades under the most "favorable terms reasonably available," the investors charge the defendants executed orders at the price offered on the central National Best Bid and Offer system (NBBO), failing to investigate other feasible alternatives that potentially offered better prices. With hundreds of thousands of investors in the putative class, this alleged practice affected hundreds of millions of transactions.

The crux of this interlocutory appeal under Fed. R. Civ. P. 23(f) is whether plaintiffs' securities fraud claims satisfy the requirements for class certification under Fed. R. Civ. P. 23. The District Court denied plaintiffs' petition for class certification. We will affirm.

I.

The District Court had jurisdiction over the federal claims arising under the Securities Exchange Act of 1934, 15 U.S.C. S 78j(b), and 28 U.S.C. S 1331, as well as supplemental jurisdiction over the state law claims under 28 U.S.C. S 1367. Plaintiffs filed a petition for permission to appeal the denial of class certification under Fed. R. Civ. P. 23(f) which we granted. As an interlocutory appeal, we have jurisdiction under 28 U.S.C. S 1292(e).

II.

In 1998, the Supreme Court responded to the risk of improvident and largely unreviewable class certification decisions by amending Fed. R. Civ. P. 23 to provide for interlocutory appeal by permission of the court of appeals.1 Recognizing that denying or granting class certification is often the defining moment in class actions (for it may sound the "death knell" of the litigation on the part of plaintiffs, or create unwarranted pressure to settle non-meritorious claims on the part of defendants), the Rule acknowledges the extraordinary nature of class actions and permits the appellate courts to develop a coherent body of jurisprudence in this area.2

Page 163

The new Rule provides that "[a] court of appeals may in its discretion permit an appeal from an order of a district court granting or denying class action certification under this rule if application is made to it within ten days after entry of the order." Fed. R. Civ. P. 23(f). Before its adoption, courts were hesitant to invoke an alternative grant of appellate jurisdictional authority under 28 U.S.C.S 2072(c), which enabled the Supreme Court by rule to "define when a ruling of a district court is final for the purposes of appeal under section 1291." 28 U.S.C. S 2072(c); see also Blair v. Equifax Checking Servs., Inc., 181 F.3d 832, 833 (7th Cir. 1999) (noting this authority "had gone unused, in part because it invites the question whether a particular rule truly `defines' or instead expands appellate jurisdiction"); 7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure S 1802, pp. 105-06 (West Supp. 2000) (hereinafter Wright, Miller & Kane) ("[Rule 23(f)] is modelled on Section 1292(b), but differs in significant respects from that device in that it requires only appellate court approval of the appeal and it does not require that the district court's decision involve `a controlling question of law' about which the courts are divided."). On occasion, courts granted writs of mandamus to review certification decisions but with an uneasiness that their actions stretched the writ's traditionally restrictive parameters. See 5 James Wm. Moore et al., Moore's Federal Practice S 23.61[9][c] (discussing standard and cases); see also, e.g., In re Rhone-Poulenc Rorer Inc. , 51 F.3d 1293 (7th Cir. 1995) (granting order of mandamus to rescind class certification). Although we have issued rulings on Rule 23(f) motions, we have yet to articulate standards for granting or denying permission to appeal.3

The Committee Note is always a good starting point. It emphasizes that "[t]he court of appeals is given unfettered discretion whether to permit the [interlocutory] appeal, akin to the discretion exercised by the Supreme Court in acting on a petition for certiorari." Comm. Note, Fed. R. Civ. P. 23(f). The Note also sketches a rough outline of the types of cases courts of appeals should review: "Permission is most likely to be granted when the certification decision turns on a novel or unsettled question of law, or when, as a practical matter, the decision of certification is likely dispositive of the litigation."4 Id.; see also 5 Moore's Federal Practice S 23.61[9][b]. To provide further guidance on how to separate the wheat from the chaff, the Note instructs that

several concerns justify expansion of present opportunities to appeal. An order denying certification may confront the plaintiff with a situation in which the only sure path to appellate review is by proceeding to final judgment on the merits of an individual claim that, standing alone, is far smaller than the costs of litigation. An order granting certification,

Page 164

on the other hand, may force a defendant to settle rather than incur the costs of defending a class action and run the risk of potentially ruinous liability.

Comm. Note, Fed. R. Civ. P. 23(f). We can glean from the Note, therefore, at least three principles to guide the appellate courts in their exercise of discretionary jurisdiction: (1) when denial of certification effectively terminates the litigation because the value of each plaintiff's claim is outweighed by the costs of stand-alone litigation; (2) when class certification places inordinate or hydraulic pressure on defendants to settle, avoiding the risk, however small, of potentially ruinous liability; and (3) when an appeal implicates novel or unsettled questions of law; in this situation, early resolution through interlocutory appeal may facilitate the orderly development of the law.5

But interlocutory review is not cabined by these circumstances. The Note signals that the new Rule gives appellate courts broad discretion. For example, an error in the class certification decision that does not implicate novel or unsettled legal questions may still merit interlocutory review given the consequences likely to ensue. To put it another way, if the appellant demonstrates that the ruling on class certification is likely erroneous, " `taking into account the discretion the district judge possesses in implementing Rule 23, and the correspondingly deferential standard of appellate review,' " Mowbray, 208 F.3d at 293 (quoting Blair, 181 F.3d at 835), interlocutory review may be proper.

Furthermore, as explained in the Note, interlocutory review is not constrained by the potentially limiting requirement of 28 U.S.C. S 1292(b) that the district court order "involve[ ] a controlling question of law as to which there is a substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation." Yet if allowing

Page 165

the litigation to follow its natural course would provide the moving party with an adequate remedy, interlocutory review will generally prove unnecessary. In the end, however, the courts of appeals are afforded wide latitude as "[p]ermission to appeal may be granted or denied on the basis of any consideration that the courts of appeals finds persuasive." Comm. Note, Fed. R. Civ. P. 23(f).

We believe these principles provide a useful template for courts to work from when...

To continue reading

FREE SIGN UP