STEVEN M. SCHATZ, State Bar # 118356
TIMOTHY T. SCOTT, State Bar # 126971
DANIEL W. TURBOW, State Bar # 175015
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (415) 493-9300

Attorneys for Defendants

Pursuant to the Court's March 9, 1998 Order Following Status Conference , defendants Digital Link Corporation, Vinita Gupta, Daniel L. Palmer, Timothy K. Montgomery, Stanley E. Kazmierczak, Toni Bellin, Benjamin W. Berry, Morey R. Schapira, Gregory M. Avis and Charles R. Moore (collectively, the "defendants") submit the following memorandum in support of their request to take the deposition of named plaintiff George Genna or, in the alternative, establish a procedure for conditionally certifying a plaintiff class. Defendants request that all class certification issues should be completed prior to the resolution of defendants' pending motion to dismiss.

Under Local Rule 23-2, plaintiffs were required to and did file a motion to certify this case as a class action within six months after their first pleading. By stipulation and order, this Court has allowed the parties to defer briefing schedule and arguing the propriety of class certification until after the Court has provided direction on how to proceed with class certification issues.

In order to ascertain whether to oppose plaintiff's motion for class certification, defendants need to take the deposition of the named plaintiff, George Genna. Thus, defendants requested plaintiff's counsel to produce Genna for deposition, subject to the condition that the Reform Act discovery stay, Section 78u-4(b)(3)(B) of Title 15, would remain in effect for any other discovery. Plaintiff has refused to produce Genna under that condition and has taken the position that Genna would only be produced for deposition if the discovery stay of the Reform Act no longer has effect for all parties in the action.

This Court has requested briefing on the following issues. First, whether defendants may take the deposition of Genna prior the resolution of all motions to dismiss while still preserving the general discovery stay mandated by the Reform Act. Second, if deposing Mr. Genna at this time would not be possible without opening up the discovery stay, whether a class should be conditionally certified before the Court rules on Defendants' motions to dismiss. Defendants believe that interests of judicial economy and fairness to all parties weigh heavily in favor certifying a class before ruling on the potentially dispositive motion to dismiss. Finally, defendants address whether plaintiffs or defendants should pay for the required class notice. Defendants believe that plaintiffs should pay for notifying class members because it is an ordinary cost of filing a class action.

I. THE PARTIES SHOULD PROCEED WITH CLASS CERTIFICATION ISSUES AT THIS TIME

A. This Court Has The Authority To Make Appropriate Orders Concerning Class Certification Procedures

This Court's broad discretion to manage class actions under Rule 23 means that the Court should determine class certification issues as soon as practicable, even if one or both of the parties resists. Fed. R. Civ. P. 23 Advisory Committee's Notes, 1966 Amendment.² The Court may impose conditions on class certification or, in its discretion, dismiss class allegations. See Fed. R. Civ. P. 23(d)(3), (4). The broad discretion granted courts under Rule 23 clearly encompasses the ability to require that plaintiffs allow class certification discovery or amend their Complaint to drop their class claims.

Thus, the Court not only has the power, but also the duty to make an early class certification decision. Judge Armstrong concluded as much in her recent decision in In re Diamond MultiMedia Systems, Inc. Sec.Litig., [Current Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,561, at 97,796-97 (N.D. Cal. Oct. 14, 1997). In this case, because plaintiff has already filed a motion for class certification, defendants should be allowed the opportunity to conduct appropriate discovery to oppose this motion.

B. This Court Should Resolve The Class Certification Procedures Prior to Resolving Defendants' Motion to Dismiss

The possibility of one-way intervention unfairly prejudices defendants. Under Schwarzschild v. Tse, 69 F.3d 293 (9th Cir. 1995), if the Court were to grant defendants' motion to dismiss plaintiff's First Amended Complaint without leave to amend before the plaintiff class is certified and before notice has gone out to plaintiff class members, there might be a substantial risk that only the named plaintiffs here would be bound by the Court's order. The rest of the class, allegedly hundreds of purchasers of Digital Link common stock, would be free to relitigate the issues already decided by this Court. Class members could either file federal actions in this Court or in another U.S. District Court, or they could pursue the same factual claims under different legal theories in state court.

If the Court denies the motion to dismiss and later certifies a class, the class would receive the benefit of the Court's ruling, as those issues would have been decided against defendants. Unlike the plaintiff class, however, defendants will be bound by the Court's ruling, whether favorable or unfavorable. Therefore, until a class is certified and notice goes out, defendants confront the prospect of "one-way intervention": the plaintiff class may intervene if the motion to dismiss were denied but avoid the binding effect if the motion were granted. Diamond, at 97,796-97; see American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 547 (1974) (recognizing the problem of one-way intervention absent certification).

Rule 23's procedures -- class certification, notice and an opt-out procedure were specifically designed to prevent "one-way intervention" by resolving class membership "as soon as practicable after the commencement" of the action. American Pipe, 414 U.S. at 547-49; see Fed. R. Civ. P. 23. The notice and opt-out procedures give potential class members an opportunity to decide either to be parties to the litigation who are bound by this Court's decision, or to remain non-parties or pursue their own separate action. American Pipe, 414 U.S. at 549. Certification thus prevents wasteful relitigation and provides the parties with certainty as to the effect of this Court's rulings. Diamond, Fed. Sec. L. Rep. at 97,796-97. Thus, certification of a class is practicable at this stage, will promote judicial economy, and will provide the most efficient resolution of this matter for the parties and the potential class members.

II. DEFENDANTS SHOULD BE ALLOWED TO DEPOSE GENNA FOR THE PURPOSE OF OPPOSING PLAINTIFF'S MOTION FOR CLASS CERTIFICATION

Defendants recognize that the Reform Act generally requires a stay of all discovery pending resolution of all motions to dismiss. See 15 U.S.C. 78u-4(b)(3)(B). However, defendants believe that they should be allowed to proceed with plaintiff's deposition because it is completely consistent with the purpose of the Reform Act.

"[P]rompted by significant evidence of abuse in private securities lawsuits," Congress passed the Reform Act in December, 1995. H.R. Conf. Rep. No. 104-369, 104th Cong. 1st Sess. (1995) ("Conf. Rep.") at 31.³ One of the concerns expressed by Congress was the "routine filing of lawsuits . . . without regard to any underlying culpability of the issuer, and with only the faint hope that the discovery process might lead eventually to some plausible cause of action." Id. (emphasis added); see also id. at 32 (Reform Act "reforms discovery rules to minimize costs incurred during the pendency of a motion to dismiss or a motion for summary judgment."). In particular, Congress sought to minimize the substantial cost of discovery that "often forces innocent parties to settle frivolous securities class actions." Id. at 37. Thus, seeking to prevent the kind of discovery that often resembles a "fishing expedition," Congress enacted the following provision:

In any private action arising under this title, all discovery and other proceedings shall be stayed during the pendency of any motion to dimisss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.

The obvious Congressional intent is to protect defendants from the unnecessary expense and burden before the sufficiency of the pleadings has been determined, and to prevent the abusive practice of using early discovery to search for support for an unsubstantiated complaint. Nowhere in the legislative history is there any indication that Congress intended to create a situation where a motion to dismiss would be rendered nugatory because it would not be binding on the class. In fact, as discussed above, unless defendants are allowed to take the deposition of the named plaintiff in this action, they would be unduly prejudiced. Therefore, proceeding with the deposition is not contrary to the discovery stay since that stay expressly allows "particularized discovery" where necessary to avoid "undue prejudice" to defendants.⁴

III. IN THE ALTERNATIVE DEFENDANTS HAVE OFFERED TO CONDITIONALLY STIPULATE TO CERTIFY A CLASS

A. The Class Should Be Conditionally Certified Prior to Resolving Defendants' Motion to Dismiss

To achieve these clear benefits, defendants offered to stipulate to certification of the plaintiff class (see Turbow Decl. ¶ 3, Ex. B); certification would be conditional as provided in Rule 23(c)(1), which permits the issue to be revisited later. It would also provide that upon a motion to decertify, plaintiffs would maintain the burden of persuasion that class certification was proper. Plaintiffs have not stipulated to class certification to date. If plaintiff wants to proceed with his class action, he should agree to conditional certification of the class before this Court's ruling on Defendants' motion to dismiss. If he does not want to certify a class, he should drop his class allegations. Certification at this stage is not only practicable but warranted to ensure the fair and efficient resolution of this case for the class members, defendants, and this Court.

B. Plaintiff Must Bear the Cost of Notice to Class Members

Plaintiff has expressed concern about paying the cost of the notice prior to the time this Court rules on defendants' motion to dismiss. This concern is misplaced. Plaintiff is attempting to shift the burden of financing class notice to defendants as if it were a price to be paid for purchasing preclusive effect. In Eisen, the Supreme Court rejected such arguments, holding that the cost of class notice must be paid by plaintiffs as a price for bringing a class action. Id. at 178-79 ("Where, as here, the relationship between the parties is truly adversary, the plaintiff must pay for the cost of notice as part of the ordinary burden of financing his own suit."). See Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 361 n.30 (1978) (explaining that Eisen rejected the argument that "defendants should pay part of the cost of notice because of the supposed res judicata benefits to them from class-action treatment").

Defendants have agreed to stipulate to conditional class certification to eliminate the risk of one-way intervention and effect an efficient and fair resolution of this action if this Court grants their motion to dismiss. Having filed this class action, plaintiff should bear the cost of notifying the absent class members they purport to represent.

¹ See Kilgo v. Bowman Transp., Inc., 789 F.2d 859, 877-78 (11th Cir. 1986) (Rule 23(c)(1) "grants the trial court broad discretion in the initial certification and subsequent amendment of a class"); 5 James W. Moore et al., Moore's Federal Practice § 23.64 (3d ed. 1997) (courts "liberally apply [subdivision (d)(5)] to authorize any orders not otherwise listed in the rule that facilitate the fair and efficient conduct of the action").

² See Senter v. General Motors Corp., 532 F.2d 511, 520-21 (6th Cir. 1976) (Rule 23(c)(1) is "mandatory" and obligates the court to decide the class action issue); McDonald v. General Mills, Inc., 387 F. Supp. 24, 38-39 (E.D. Cal. 1974) ("Although either plaintiff or defendants may move for a determination of appropriateness of a class action . . . the court has an independent obligation to decide the issue and need not wait for the parties to so move"); Ponce v. Housing Auth. of Tulare County, 389 F. Supp. 635, 654 (E.D. Cal. 1975) (same).

³ Relevant excerpts of the Conference Report are attached as exhibit A to the Declaration of Daniel W. Turbow filed concurrently herewith ("Turbow Decl.").

⁴ If this Court allows defendants to take plaintiff's deposition now, defendants would request additional time in which to appropriately respond to plaintiff's class certification motion.

⁵ Defendants do not object to performing routine tasks associated with giving notice, such as assisting in the identification of class members, provided that such costs are not substantial. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358-59 (1978).
 

Source: File to epost from Wilson Sonsini Goodrich & Rosati