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.
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.
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,
To be maintainable as a class action a suit must meet all the requirements set forth in Section 23(a)
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 numerous that joinder of all members is impracticable." Fed.R.Civ. P. 23(a) (1). Defendants' "rough" approximation, not disputed by plaintiff,
Inability on the part of the plaintiff to "fairly and adequately protect the interests of the class," Fed.R. Civ.P. 23(a) (4), was considered by the District Court to be one of the primary reasons for dismissing the class action. We believe the court employed incorrect standards in reaching this result.
Since Eisen had not alleged with specificity the nature of his various odd-lot transactions, the court below felt it lacked sufficient information properly to assess his qualifications as a representative, and, even if such information were alleged, "the diverse rights and interests of other members of the claimed class plainly could not be reasonably protected by plaintiff in this litigation." Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147, 150 (S.D.N.Y.1966). The District Judge also felt it was impossible to assume that plaintiff "alone with a comparatively minuscule and limited interest in odd-lot transactions" could represent a class numbering at least in the hundreds of thousands, which encompassed individuals with much larger and different interests. Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147, 151 (S.D.N.Y.1966).
Traditionally, courts have expressed particular concern for the adequacy of representation in a class suit because the judgment conclusively determines the rights of absent class members. See Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed. 22 (1940). Of course, understandably, the standards for representation under the old spurious class action were not as rigorously enforced, due to the minimal res judicata effects given to the judgments in these suits. See Oppenheimer v. F. J. Young & Co., 144 F.2d 387 (2d Cir. 1944). However, as a result of the sweeping changes in Rule 23, a court must now carefully scrutinize the adequacy of representation in all class actions.
What are the ingredients that enable one to be termed "an adequate representative of the class?" To be sure, an essential concomitant of adequate representation is that the party's attorney be qualified, experienced and generally able to conduct the proposed litigation. Additionally, it is necessary to eliminate so far as possible the likelihood that the litigants are involved in a collusive suit or that plaintiff has interests antagonistic to those of the remainder of the class. See Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed. 22 (1940). Courts. on occasion, have also required that the
We are not persuaded that it is essential that any other members of the class seek to intervene. Absent class members will be able to share in the recovery resulting in the event of a favorable judgment, and, if they wish to avoid the binding effect of an adverse judgment they may in various ways and at various times that we need not now attempt to particularize, attack the adequacy of representation in the initial action or disassociate themselves from the case. Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed. 22 (1940); see Weinstein, Revision of Procedure: Some Problems in Class Actions, 9 Buffalo L.Rev. 433, 436 (1960). If we have to rely on one litigant to assert the rights of a large class then rely we must. The dismissal of the suit out of hand for lack of proper representation in a case such as this is too summary a procedure and cannot be reconciled with the letter and spirit of the new rule.
Necessarily, a different situation is presented where absent class members inform the court of their displeasure with plaintiff's representation, see Hess v. Anderson, Clayton & Co., 20 F.R.D. 466 (S.D.Cal.1957), but the representative party cannot be said to have an affirmative duty to demonstrate that the whole or a majority of the class considers his representation adequate. Nor can silence be taken as a sign of disapproval.
In addition to complying with the requirements of Section (a) of Rule 23, a potential class action must also satisfy the requirements of one of the three subsections of 23(b).
We must also note that plaintiff's effort to qualify the action under 23(b) (1) and 23(b) (2) was induced by his erroneous theory that notice is not "mandatory" under these sections. This theory is based on the assumption that 23(c) (2)
Ultimately plaintiff must fall back on subsection (b) (3), which in effect corresponds to the old spurious class action. Presumably influenced by the same thinking which relegated the old spurious class action to the position where it was used primarily as a device for permissive joinder, the Advisory Committee has commented that "class action treatment is not as clearly called for [in (b) (3) situations] but it may nevertheless be convenient and desirable depending upon the particular facts." Advisory Committee's Note at 102. A court, under this subsection, is thus required to find that the questions of law or fact common to the class predominate over questions affecting individual members and that the class action is "superior to other available methods for the fair and efficient adjudication of the controversy." Fed.R.Civ.P. 23(b) (3). Moreover, resolution of the issue concerning the propriety of a suit under 23(b) (3) involves an assessment of various factors, including among others, "(A) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum"; and "(D) the difficulties likely to be encountered in the management of a class action." Fed.R.Civ.P. 23(b) (3).
The District Court felt "the tremendous size of the asserted class, the fact that there is no evidence that any other member has the slightest interest in this litigation" and the "varied nature and quantum of the interests of other odd-lot purchasers and sellers" necessarily compelled a finding that questions affecting individual members predominated over questions common to the entire class. Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147, 152 (S.D.N.Y.1966).
However, under both the old and the amended rule 23, anti-trust violations practised upon large groups of individuals have been held to involve sufficient common questions of law or fact to merit treatment as class actions. Kainz v. Anheuser-Busch, Inc., 194 F.2d 737 (7th Cir.), cert. denied 344 U.S. 820, 73 S.Ct. 17, 97 L.Ed. 638 (1952) (old rule); City of Philadelphia v. Morton Salt Co., 248 F.Supp. 506 (E.D.Pa.1965) (old rule); Siegel v. Chicken Delight, Inc., 271 F.Supp. 722 (N.D.Cal.1967) (new rule); but see School District of Philadelphia v. Harper & Row Publishers, Inc., 267 F.Supp. 1001 (E.D.Pa.1967) (new rule). The Advisory Committee has specifically noted that "concerted anti-trust violations may involve" predominantly common questions. Advisory Committee's Note at 103. Suits alleging violations of Section 10(b) of the Securities Exchange Act, though often involving separate consideration of the elements of misrepresentation and reliance as they affect individual members, have also been accorded treatment as class actions under the new rule. 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 Ins. Co., 259 F.Supp. 673 (N.D.Indiana 1966); but see Berger v. Purolator Products, Inc., 41 F.R.D. 542 (S.D.N.Y.1966).
We realize that members of the proposed class might have had different motives when they entered into the odd-lot market.
Before allowing a suit to proceed under 23(b) (3) the trial court must also find that a "class action is superior to other available methods for the fair and efficient adjudication of the controversy." Although defendants argue that intervention and permissive joinder
Bearing in mind the desirability of providing small claimants with a forum in which to seek redress for alleged large scale anti-trust violations,
Before allowing the suit to proceed, a further inquiry by the District Court is necessary in order to consider the mechanics involved in the administration of the present action. Defendants may be able to present data indicating that in analogous situations large sums have been absorbed by paper work, fees of Special Masters, printing, postage and so on. Procedures should be outlined with regard to possible intervention by other class members and provisions made for the filing of claims. The court should explore the problems which individual class members would be likely to encounter in filing and proving their claims. If as a practical matter class members are not likely ever to share in an eventual judgment, we would probably not permit the class action to continue. There may conceivably be questions of jurisdiction or venue, as well as of demands for a jury trial.
In view of the arguments previously discussed relating to the necessity for separate computation of damages because of the variety of services performed by the defendant-dealers, it is not inconceivable that the District Court on remand may conclude that these separate questions present insuperable problems of judicial administration sufficient to justify the dismissal of the action.
The notice requirement of 23(c) (2), as recognized by Judge Tyler, presents what may turn out to be the most serious obstacle to the maintenance of the present action. Subsection 23(c) (2) provides:
The District Judge held that "both the Rule and concepts of due process require individual notice for the class members who can be identified." Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147, 151 (S.D.N.Y.1966). As a result of "practical financial limitations" present in the instant case, he was of the opinion that the notice requirement could not be met. Publication plus the mailing of individual notice to stock exchange member firms was rejected as a possible alternative method.
While the Supreme Court has recognized that class actions represent an exception to the general rule under which only parties are bound by a judgment, the procedure adopted must conform to the requirements of due process and fairly insure the protection of absent parties who are to be bound. Hansberry v. Lee, 311 U.S. 32, 42, 61 S.Ct. 115, 85 L.Ed. 22 (1940). Notice, as an integral part of due process must be "reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950). The Advisory Committee in its note has suggested that the mandatory notice pursuant to 23(c) (2) and the discretionary notice under 23(d) (2)
The task of furnishing notice to the class members in such a case as this must rest upon the representative party when he is the plaintiff.
The District Courts have been inconsistent in their interpretations of the notice requirement under the new rule. One opinion reads 23(c) (2) as requiring that actual notice be given to all absent class members, Richland v. Cheatham, 272 F.Supp. 148 (S.D.N.Y.1967), while another has permitted a representative to use notice by publication to inform an entire class in a taxpayer's suit. Booth v. General Dynamics Corp., 264 F.Supp. 465 (N.D.Ill.1967). See also Harris v. Jones, 41 F.R.D. 70 (D.C.Utah 1966), requiring individual notice to be given to 1500 class members in an action for violation of Rule 10b-5 of the Securities Exchange Act because all the names and addresses were on file and available.
On the record before us we cannot arrive at any rational and satisfactory conclusion on the propriety of resorting to some form of publication as a means of giving the necessary notice to all members of the class on behalf of whom the action is stated to be commenced and maintained. But we assume that some sort of ritualistic notice in small print on the back pages of a newspaper would in no event suffice. Not only did the court below fail to analyze and give proper consideration to the standards set forth in 23(c) (2); there was also a lack of evidentiary basis for the findings necessary to support rulings of what would or would not amount to compliance with the requirements of due process and with the provisions of 23(c) (2) to which reference has already been made.
Can any members of the class be identified through reasonable effort so that such persons may be given individual notice? Without an evidentiary hearing we do not see how this question can be answered. And, until it is answered, how is one to give any rational consideration to the question of what notice by publication would be deemed appropriate, what should be stated in the notice, and who is to take on the burden of answering the large number of written and oral inquiries by members of the class?
The affidavits before us are conclusory in character and they merely scratch the surface. For example, a general partner in Carlisle & Jacquelin in his affidavit states that there is no way in which his firm could identify the odd-lot customers.
On remand the court may find that the names of certain class members, because of their widespread dealings in odd-lots, may be readily ascertainable. Arguably these class members may possess enough of a stake in the proceedings to justify personal intervention. At this point the court will then have to consider once again the question of publication. Under certain circumstances published notice may amount to
It may be that in some situations it is better at the outset to decide that the proceeding may be prosecuted as a class action and leave for later resolution some of the debatable matters, such as the sufficiency of the representation or the notice to be given, or the feasibility of meeting problems of judicial administration. In this particular case, with its millions of possible claimants, we think it would be most amiss to let the case go ahead until it becomes hopelessly entangled in a mass of procedural detail and expense from which it may not be easy or even possible to extricate it with justice to the parties by the simple means of deciding at a later day that the order permitting the case to proceed as a class action was improvidently granted.
Finally, it is worthy of note that in dismissing the action as one including "a myriad of complex, frustrating, needless problems in attempted management" the District Court in School Dist. of Philadelphia v. Harper & Row Publishers, Inc., 267 F.Supp. 1001, 1006, commented that, prior to the dismissal there had been "numerous hearings and conferences."
Accordingly, the order appealed from is reversed; we retain jurisdiction, and the case is remanded for a prompt and expeditious evidentiary hearing, with or without discovery proceedings, on the questions of notice, adequate representation, effective administration of the action and any other matters which the District Court may consider pertinent and proper.
LUMBARD, Chief Judge (dissenting):
It seems to me that we should affirm Judge Tyler's ruling that this is not a proper class action because it is so clearly right on two counts: the impossibility of the plaintiff giving suitable notice and the unmanageability of this suit as a class action. I would not remand to the district court to do the obvious and the unnecessary.
What could be less of a class action than a suit where there are more than 3,750,000 potential plaintiffs living in every state of the union and in almost every foreign country? If this is a "class," it is so large and indiscriminate that a substantial proportion of its membership will have no idea whatever that they belong to it. Just how a notice can be worded which could alert so large a "class" to the possibility that proceedings in the Sonthern District, if carried forward, would someday enrich each one by a few dollars, if there be anything left after expenses and attorneys' fees, is a mystery to me.
Indeed, the question of how to give any notice which would be sufficient to meet constitutional requirements is so impossible of solution that my colleagues choose to ignore it.
In any event, plaintiff suggests no way in which he can give notice to his 3,750,000 potential brothers-in-litigation which could conceivably attract the attention of any appreciable number of them. Who is to advise foreign class members who do not read or understand English, and how is this to be done? Who is to pay for class notice, and for the subsequent notice of any step in the action which the Rule says must be given?
To me, these illustrations of the practical and insurmountable difficulties that would be encountered in administering this action as a class suit underscore that Judge Tyler could only have exercised his discretion as he did. As a class action the claim is totally unmanageable. See School District of Philadelphia v. Harper & Row Publishers, Inc., 267 F.Supp. 1001 (E.D.Pa., 1967).
Even if all of the difficulties inherent in the administration of the suit were overcome, the amount expended in filing and processing claims would probably exceed any recovery. Illinois Bell Telephone Co. v. Slattery, 102 F.2d 58 (7th Cir.), cert. denied, 307 U.S. 648, 59 S.Ct. 1045, 83 L.Ed. 1527 (1939) is inapposite. In that case the telephone company had sought an interlocutory injunction against an Illinois Commerce Commission order requiring reduction of certain of its rates. The interlocutory injunction was granted, conditioned upon an undertaking by the telephone company to refund to its subscribers any sums paid by them in excess of the proposed reduced rates should the company lose its suit. The company had already collected the money and had laid it aside. The Supreme Court eventually ordered the injunction dissolved and that refunds be made in accordance with the terms of the injunction. Lindheimer v. Illinois Bell Telephone Company, 292 U.S. 151, 54 S.Ct. 658, 78 L.Ed. 1182 (1934). The telephone company agreed to undertake the task of making refunds and to assume the costs of the distribution. The payments were not made by the Court, but by the company under the supervision of a representative of the court. 102 F.2d at 61.
In this case, unlike Slattery, the potential claimants have no direct business dealings with the parties which plaintiff seeks to hold liable, and therefore defendants are in no position to identify from their own records the potential claimants, let alone calculate the amounts of any refund that they may be found entitled to receive.
Here no one can ascertain whether any recovery will be due any particular plaintiff until the case has been litigated, and, if any recovery is decreed, there must follow an enormous number of calculations regarding the dealings of each plaintiff who is entitled to any recovery. And even after that the court would have to pass upon the expenses and fees to be deducted from any recovery.
Class actions were not meant to cover situations where almost everybody is a potential member of the class. Nor were they ever intended to compel any court to entertain an alleged controversy with so many potential parties, or to compel any court to entrust the interests of numerous plaintiffs to representation by one plaintiff whose interest is all of $70. Rule 23(b) (3) requires that a class action
Even if plaintiff is unable to maintain an action, when a controversy touches the interest of so many members of the public it is sufficient that Congress has provided a public agency whose duty it is to supervise and regulate such matters. Comment, Recovery of Damages in Class Actions, 32 U.Chi.L.Rev. 768, 785 (1965). The matter of proper commissions to be paid by those who engage in odd-lots transactions is within the jurisdiction of the SEC. It has been the subject of study and in due time the Commission will take appropriate action.
The appropriate action for this Court is to affirm the district court and put an end to this Frankenstein monster posing as a class action.
(a) Prerequisites to a Class Action. One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class."
(1) the prosecution of separate actions by or against individual members of the class would create a risk of
(A) inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or
(B) adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests; or
(2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or
(3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matters pertinent to the findings include: (A) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; (D) the difficulties likely to be encountered in the management of a class action."
"In any class action maintained under subdivision (b) (3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice shall advise each member that (A) the court will exclude him from the class if he so requests by a specified date; (B) the judgment, whether favorable or not, will include all members who do not request exclusion; and (C) any member who does not request exclusion may, if he desires, enter an appearance through his counsel."
"(d) Orders in Conduct of Actions. In the conduct of actions to which this rule applies, the court may make appropriate orders: * * * (2) requiring, for the protection of the members of the class or otherwise for the fair conduct of the action, that notice be given in such manner as the court may direct to some or all of the members of any step in the action, or of the proposed extent of the judgment, or of the opportunity of members to signify whether they consider the representation fair and adequate, to intervene and present claims or defenses, or otherwise to come into the action; * * *."