Rand v. Monsanto Co.

• Decision Date: 20 February 1991
• Docket Number: No. 90-1442,90-1442
• Citation: 926 F.2d 596
• Parties: Fed. Sec. L. Rep. P 95,795, 18 Fed.R.Serv.3d 952 Claire RAND, custodian for Brett Rand, Plaintiff-Appellant, v. MONSANTO COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 596

926 F.2d 596

Fed. Sec. L. Rep. P 95,795, 18 Fed.R.Serv.3d 952

Claire RAND, custodian for Brett Rand, Plaintiff-Appellant, v. MONSANTO COMPANY, Defendant-Appellee.

No. 90-1442.

United States Court of Appeals Seventh Circuit.

Argued Nov. 2, 1990.

Decided Feb. 20, 1991.

Ira J. Bornstein, Harvey J. Barnett, Barnett, Bornstein & Blazer, Chicago, Ill., Jules Brody, Mark Levine, Stull, Stull & Brody, Joseph H. Weiss, New York City, Michael Malakoff, Berger, Kapetan, Malakoff & Myers, Pittsburgh, Pa., for plaintiff-appellant.

Joan M. Hall, Lawrence C. Begun, Jerold S. Solovy, William D. Heinz, Marquerite M. Tompkins, R. Edward Wilhoite, Jr., Jenner & Block, Chicago, Ill., for defendant-appellee.

Before EASTERBROOK, MANION, and KANNE, Circuit Judges.

EASTERBROOK, Circuit Judge.

Brett Rand bought 200 shares of stock in Monsanto Company on July 23, 1985, five days after Monsanto announced plans to acquire G.D. Searle & Company. He argues in this securities suit that Monsanto committed fraud by not disclosing Searle's potential liabilities for its Cu-7 intrauterine device, the subject of an article that Business Week published on October 4, 1985. The day after the article appeared, Monsanto stock fell from 46 3/4 to 41 1/8. The price later rose, however, and Rand sold his stock in March 1986 for 56 3/4 per share, a small advance over the 55 1/8 he paid in July 1985--which does not disqualify him from recovering any loss attributable to the concealment of material information that Monsanto had a duty to disclose. Goldberg v. Household Bank, f.s.b., 890 F.2d 965, 966-67 (7th Cir.1989).

After the district court refused to allow Rand ¹ to represent the other purchasers (1,600 plus an unknown number dealing in street name), Monsanto offered $1,135, the full amount by which answers to interrogatories assert that Rand was injured, plus the costs of the suit. See Fed.R.Civ.P. 68. When Rand refused the offer, the district court properly entered judgment against him. 130 F.R.D. 87 (N.D.Ill.1990). Once the defendant offers to satisfy the plaintiff's entire demand, there is no dispute over which to litigate, Alliance to End Repression v. Chicago, 820 F.2d 873 (7th Cir.1987), and a plaintiff who refuses to acknowledge this loses outright, under Fed.R.Civ.P. 12(b)(1), because he has no remaining stake. Accord, Zimmerman v. Bell, 800 F.2d 386, 390 (4th Cir.1986); Abrams v. Interco Inc., 719 F.2d 23, 32-34 (2d Cir.1983); Spencer-Lugo v. INS, 548 F.2d 870 (9th Cir.1977). Under Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 100 S.Ct. 1166, 63 L.Ed.2d 427 (1980), however, the dispute about certification of the class survives.

Monsanto took Rand's deposition and used the results as the basis for opposing class certification. Rand revealed that he had consulted with his lawyers "maybe once or twice" during the three years between the filing of the suit and the deposition. He was startled when counsel for Monsanto told him that according to his lawyers' answers to interrogatories, his maximum claim was $1,135; Rand said that he believed that he could receive $100,000. This led to an exchange about who would bear the costs of the suit if Monsanto should prevail. Rand said that counsel were advancing the costs of suit and had agreed not to seek reimbursement for any costs exceeding $25,000, a cap that looks unattractive if Rand's maximum award is $1,135:

Q: Would you accept the risk of bearing $25,000 in cost based on a recovery of $1,100 and change, as you've put it?

A: No. That doesn't sound feasible.

. . . . .

Q: ... [A]re you willing, still, to bear responsibility for up to $25,000 in costs, even though you now understand that your total maximum recovery under your lawyer's theory is $1,100? ...

A: No.

Although this exchange reveals that Rand is a rational investor, Monsanto argues that it also establishes that he is a poor representative of the class. The deposition as a whole, according to Monsanto, shows that Rand is a figurehead with neither intellectual nor financial commitment to this suit. In a deposition taken in unrelated litigation, Rand stated that he was not the representative but only a member of the class in the suit against Monsanto, reinforcing this submission.

The district court held that "[a]lthough Mr. Rand meets all of the other requirements for representing the class which he has defined, he is inadequate to protect class interests because he is unwilling to risk responsibility for the payment of costs." 1989 WL 27458, 1989 U.S.Dist. LEXIS 2936 at * 19. The court derived this largely from its conclusion that Local Rule 3.54(b), adopting the ABA's Model Code of Professional Responsibility, forbids counsel to bear the costs of suit themselves. Disciplinary Rule 5-103(B) of the Model Code requires the client to remain responsible for costs, even if counsel advance the money. As Rand refused to underwrite the costs, no one was willing (or, in the case of counsel, able) to do so. In denying a motion for reconsideration, 1989 WL 51415, 1989 U.S.Dist. LEXIS 5228 at *2-3, the judge stated: "we are bound by the decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974) ... that it is the named plaintiff's responsibility to pay class notice costs". The court added that Rand's "unwillingness to pay costs is a sign that he will not vigorously pursue his claim (even if his attorneys will) and that he is, therefore, inadequate." Id., 1989 WL 51415, 1989 U.S.Dist. LEXIS 5228 at 3.

If we understood the district court's opinion entirely as an assessment of Rand's commitment to this litigation, we would affirm. Appellate review of class certification decisions is deferential, Bieneman v. Chicago, 864 F.2d 463, 465 (7th Cir.1988). Although a representative plaintiff need not immerse himself in the case--small stakes imply large benefits from the division of labor, with lawyers handling details, Kamen v. Kemper Financial Services, Inc., 908 F.2d 1338, 1349 (7th Cir.1990), cert. denied on this question and granted on an unrelated issue, --- U.S. ----, 111 S.Ct. 554, 112 L.Ed.2d 561 (1990)--the named plaintiff must have some commitment to the case, so that the "representative" in a class action is not a fictive concept. Ensuring that the suit stems from real grievances of real persons is especially important in securities class actions. The costs of litigation are so great, the potential damages so high, and the sources of payment so likely to disappear in the event of victory after trial, that many cases settle for substantial sums, which one careful study has found to be unrelated to the strength of the claim. Janet M. Cooper, Do the Merits Matter? A Study of Settlements in Securities Class Actions, Stanford Law School Working Paper No. 73 (Nov. 1990). Courts ought not set this engine in motion at the request of a person so uninterested that he does not even know he is a plaintiff, or so deluded that he thinks he can recover $100,000 because his 200 shares of stock fell 4 5/8 (a total of $915) when bad news appeared.

Yet the district court did not stop with the observation that Rand is the wrong plaintiff because the litigation is founded on a fantastic belief about damages or because Rand is substantially more detached from the case than the norm in securities litigation. Instead the court concentrated on Rand's unwillingness to be responsible for costs. To use Rand's unwillingness to pay anything as a clue to his lack of interest in the litigation is one thing; to use his unwillingness to pay everything as an absolute bar, as a per se rule of inadequacy, is another. Much language in the opinions suggests that the court was of the latter view, and a decision built on that foundation cannot stand.

Rule 23 contemplates, and the district court should insist on, a conscientious representative plaintiff. All class suits create some conflict between the representative and the class; the representative and counsel may be tempted to sell out the class for benefits to themselves. Judges are on the lookout for persons who may pay inadequate attention to the interests of the others they purport to represent. A conscientious plaintiff is likely to be willing to make some financial commitment to the case. But no person need be willing to stake his entire fortune for the benefit of strangers. Class lawsuits can be frightfully expensive: the costs (apart from legal fees) include not only the notice to the class but also the reporter's fees for depositions, duplication expenses, payments to express delivery services, and the like. No (sane) person would pay the entire costs of a securities class action in exchange for a maximum benefit of $1,135. None would put up $25,000 or even $2,500 against a hope of recovering $1,135.

Class actions assemble small claims--usually too small to be worth litigating separately, but repaying the effort in the aggregate. A representative plaintiff gains nothing from the collective proceeding. Under the district court's rationale, however, he could well lose, because filing the class suit would expose him to the entire costs of the case. The class as a whole might be willing to pay the costs. Lawyers, who unlike the representative plaintiff receive compensation reflecting any benefits conferred on the class as a whole, also may be willing to underwrite the costs. Lawyers can spread risk not only across the partners of the firms but also across cases. One loss does not mean disaster if the firms have portfolios of actions, as they will. But the representative cannot diversify in this way and cannot collect a reward for bearing exceptional risk in a single case. The very feature that makes class treatment appropriate--small individual stakes and large aggregate ones--ensures that the representative will be unwilling to vouch for the entire costs. Only a lunatic would do so. A madman is not a good representative of the class!

Eisen v. Carlisle &...