Eisen v. Carlisle & Jacquelin

• Citation: 391 F.2d 555
• Decision Date: 08 March 1968
• Docket Number: No. 78,Docket 30934.,78
• Parties: Morton EISEN, on behalf of himself and all other purchasers and sellers of "odd-lots" on the New York Stock Exchange similarly situated, Plaintiff-Appellant, v. CARLISLE & JACQUELIN and DeCoppet & Doremus, each limited partnerships under New York Partnership Law, Article 8 and New York Stock Exchange, an unincorporated association, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

391 F.2d 555 (1968)

Morton EISEN, on behalf of himself and all other purchasers and sellers of "odd-lots" on the New York Stock Exchange similarly situated, Plaintiff-Appellant, v. CARLISLE & JACQUELIN and DeCoppet & Doremus, each limited partnerships under New York Partnership Law, Article 8 and New York Stock Exchange, an unincorporated association, Defendants-Appellees.

No. 78, Docket 30934.

United States Court of Appeals Second Circuit.

Argued November 6, 1967.

Decided March 8, 1968.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

William E. Haudek, New York City (Robert Zicklin, Richard M. Meyer, Laventhall & Zicklin and Pomerantz, Levy, Haudek & Block, New York City, on the brief), for plaintiff-appellant.

Devereux Milburn, New York City (Louis L. Stanton, Jr. and Carter, Ledyard & Milburn, New York City, on the brief), for defendant-appellee Carlisle & Jacquelin.

Francis S. Bensel, New York City (Bud G. Holman, J. Portis Hicks, Kelley, Drye, Newhall Maginnes & Warren, New York City, on the brief), for defendant-appellee DeCoppet & Doremus.

William E. Jackson, New York City (A. Sidney Holderness, Jr., Russell E. Brooks, and Milbank, Tweed, Hadley & McCloy, New York City, on the brief), for defendant-appellee New York Stock Exchange.

Before LUMBARD, Chief Judge, and MEDINA and HAYS, Circuit Judges.

MEDINA, Circuit Judge:

On this appeal we are presented with significant questions involving the interpretation of recently amended Rule 23 of the Federal Rules of Civil Procedure. Morton Eisen instituted this action seeking damages and injunctive relief on behalf of himself and all other purchasers and sellers of "odd-lots" on the New York Stock Exchange against Carlisle & Jacquelin and DeCoppet & Doremus, alleging that the two brokerage firms had combined and conspired to monopolize odd-lot trading, and had fixed the odd-lot differential at an excessive amount in violation of the Sherman Act. 15 U.S.C. Sections 1, 2. A third count alleged that the defendant New York Stock Exchange had failed to discharge its duties under the Securities Exchange Act of 1934 by neglecting to adopt rules protecting investors in odd-lots. 15 U. S.C. Sections 78f(b), 78f(d), 78s(a).

Following a motion by defendants for a determination pursuant to Rule 23(c) (1) of the Federal Rules of Civil Procedure, Judge Tyler held that the suit could not be brought as a class action. Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147 (S.D.N.Y.1966). A motion to dismiss the present appeal because the decision below constituted a non-final order has previously been denied by this Court. Eisen v. Carlisle & Jacquelin, 370 F.2d 119 (2d Cir. 1966), cert. denied 386 U.S. 1035, 87 S.Ct. 1487, 18 L.Ed.2d 598 (1967). In dismissing the class action the District Court found that plaintiff failed to demonstrate that he would be able fairly and adequately to protect the interests of the class, Fed.R. Civ.P. 23(a) (4); that the notice required by due process and the rule, Fed.R. Civ.P. 23(c) (2), could not be given and that questions common to the class did not predominate over questions affecting individual members. Fed.R. Civ.P. 23(b) (3).

At the outset, it is necessary briefly to describe the mechanics of odd-lot trading on the New York Stock Exchange. The regular unit of trading on the Exchange is the "round lot" of 100 shares. An "odd-lot" is the term used to designate transactions involving less than 100 shares. Odd-lot orders do not form part of the "regular auction market" but are exclusively handled by special odd-lot dealers who buy and sell for their own account as principals. In order to purchase or sell an odd-lot an individual first contacts a brokerage firm which then places an order with the odd-lot dealer. The cost to the customer includes both a standard commission payable to the brokerage firm and the odd-lot differential which is received by the odd-lot dealer. The differential is a figure amounting to a fraction of a point for each share traded, which is added to the customer's purchase price and deducted from the sale price. During the period of time in which plaintiff had alleged he was involved in the odd-lot market, covering the years 1960-1966, the differential was 1/8th of a point (12½ cents) per share on stock selling below $40 per share and ¼ of a point (25 cents) per share on stock selling at $40 or above per share.¹ Over the years odd-lot trading has accounted for a fairly steady percentage of the total volume on the Stock Exchange, ranging from a high of 12.9% in 1937 to a low of 7.9% in 1950 and 1958. For example, recent figures indicate that in 1961 the volume of odd-lot transactions totalled 214,018,834 shares. SEC, Report of Special Study of Securities Markets, H.R.Doc. No. 95, Pt. 2, 88th Cong. 1st Sess. 171-202, 393 (1963), hereinafter cited as SEC Special Study. Defendants Carlisle & Jacquelin and DeCoppet & Doremus are engaged exclusively in odd-lots and collectively they handled 99% of the volume in odd-lot transactions. SEC Special Study at 172. Various alleged abuses in odd-lot trading disclosed by the SEC in 1963, form, in large part, the basis of the present action. See SEC Special Study at 171-202.

I.

Class actions serve an important function in our judicial system. By establishing a technique whereby the claims of many individuals can be resolved at the same time, the class suit both eliminates the possibility of repetitious litigation and provides small claimants with a method of obtaining redress for claims which would otherwise be too small to warrant individual litigation. Nevertheless, Rule 23 of the Federal Rules of Civil Procedure, as it was originally enacted, did not effectively achieve either of the above two objectives. Class actions were divided into various categories reflecting the "jural relationships of the members of the class." See 3 Moore, Federal Practice par. 23.08 at 3434 (2d ed. 1953). Only after a determination of the nature of the rights: "joint, common or secondary" in the true class action, "several related to specific property" in the hybrid class action, and "several affected by a common question and related to common relief" in the spurious class action, was a court able to proceed. Advisory Committee's Note, Proposed Rules of Civil Procedure, 39 F.R.D. 98 (1965), hereinafter cited as Advisory Committee's Note. There were significant differences in the res judicata effects accorded to the various class actions. Thus while a judgment in a true class action was binding on the entire class, the spurious class action only concluded the rights of parties. 3 Moore, Federal Practice par. 23.11 at 3472 (2d ed. 1953). Since the great majority of cases fell into this latter category, the objective of determining all questions in one suit was effectively frustrated. In essence, the spurious class action was interpreted as merely a permissive joinder device.² See Carroll v. American Federation of Musicians, 372 F.2d 155 (2d Cir. 1967); Fox v. Glickman Corp., 355 F.2d 161 (2d Cir. 1965), cert. denied 384 U.S. 960, 86 S.Ct. 1585, 16 L.Ed.2d 672 (1966); Nagler v. Admiral Corp., 248 F.2d 319 (2d Cir. 1957); Oppenheimer v. F. J. Young & Co., 144 F.2d 387 (2d Cir. 1944). But see Weeks v. Bareco Oil Co., 125 F.2d 84 (7th Cir. 1941) (dictum).

To avoid the problems associated with the original rule the Advisory Committee on the Rules of Civil Procedure has completely redrafted Rule 23 in order to provide a thoroughly flexible remedy. Throughout the course of a proceeding courts are given complete control to give assurance that the procedures adopted are fair, reasonable and effective. All actions will result in judgments binding on the entire group of individuals found by the court to be members of the class. Fed.Rule C.P. 23(c) (3). While the new concepts incorporated in the rule have not as yet been passed upon by any federal Court of Appeals,³ they have received somewhat less than an enthusiastic reception in the District Courts. Compare School District of Philadelphia v. Harper & Row Publishers, Inc., 267 F. Supp. 1001 (E.D.Pa.1967), expressing grave doubts about the propriety of a rule which binds absent but described class members, with Siegel v. Chicken Delight, Inc., 271 F.Supp. 722 (N.D.Cal. 1967) which upholds a class action brought by 5 franchise dealers on behalf of a class of over 700 dealers, alleging anti-trust violations. Nevertheless, the majority of courts have upheld the validity of representative actions brought under the new rule. See, e. g., Van Gemert v. Boeing Co., 259 F.Supp. 125 (S.D. N.Y.1966); Fischer v. Kletz, 41 F.R.D. 377 (S.D.N.Y.1966); Kronenberg v. Hotel Governor Clinton, Inc., 41 F.R.D. 42 (S.D.N.Y.1966); Brennan v. Midwestern United Life Insurance Co., 259 F.Supp. 673 (N.D.Indiana 1966); Booth v. General Dynamics Corp., 264 F.Supp. 465 (N.D.Ill.1967). But see Richland v. Cheatham, 272 F.Supp. 148 (S.D.N.Y. 1967); Hohmann v. Packard Instrument Co., 43 F.R.D. 192 (N.D.Ill.1967); Jacobs v. Paul Hardeman, Inc., 42 F.R.D. 595 (S.D.N.Y.1967); Berger v. Purolator Products, Inc., 41 F.R.D. 542 (S.D. N.Y.1966). Although representing a totally different approach to class actions, the new rule does retain two standards which were embodied in the old rule, namely, the class must be so numerous as to make it impracticable to bring every member before the court, and the representative party must be able fairly and adequately to protect the interests of the entire class. Necessarily the old case law will furnish some guidance in defining these concepts.

II.

To be maintainable as a class action a suit must meet all the requirements set forth in Section 23(a)⁴ and also fall within one of the subsections of 23(b).⁵

Plaintiff has alleged that he was engaged in odd-lot trading during the years 1960-1966. Though estimates of the number of class members similarly engaged in this activity during those years have varied, all the litigants concede "the class is so...