Attorneys for Defendants

Simply put, the defendants are entitled to whatever preclusive effect this Court's ruling on the sufficiency of plaintiff's Complaint may have. This Court need not determine that preclusive effect; that question will be answered by the court, if any, in which the preclusive effect is sought to be applied. The proper role of this Court, however, is to fully and finally resolve the issues before it. The preclusive effect of those rulings are matters for other courts to determine.

Likewise, this Court need not supervise or otherwise participate in the class notice proceedings of the state court action. By plaintiff's own choice, that action is a separate action.

The issue here is not the preclusive effect of a judgment or the form of notice in the state court action. It is instead simply whether class certification (and any discovery defendants need to oppose plaintiff's motion for class certification) should be resolved prior to resolution of defendants' second motion to dismiss. On that issue, courts have found that certification is proper before ruling on a dispositive motion. This can be achieved in either of two ways: (1) allowing defendants to depose Mr. Genna to be followed by a contested motion, without lifting the general discovery in place under the Reform Act; or (2) conditionally certifying the class subject to a motion for decertification following the Court's ruling on the motion to dismiss and the subsequent deposition of Mr. Genna.

Plaintiff has failed to make any principled argument why either of these alternatives should not be pursued. Instead, his opposition ("Opp.") rests on the assumption that defendants should bear the risk of one-way intervention and its attendant costs so that plaintiff can avoid the cost of notifying the class members of the action he filed on their behalf. Plaintiff's assumption is unfounded and incorrect.

I. PLAINTIFF OFFERS NO LEGITIMATE REASON WHY CLASS CERTIFICATION SHOULD NOT PROCEED NOW

A. Defendants Have Not Waived Their Right to Insist That Class Certification Procedures Be Completed Now

The decision cited by plaintiff in support of this argument, Wright v. Schock, 742 F.2d 541 (9th Cir. 1984), not only fails to support plaintiff, but actually completely undermines his entire position on this motion. In Wright, the trial court simultaneously faced a myriad of factual issues pertaining to summary judgment and procedural issues relating to class certification. Id. at 544. The defendants expressly consented to resolve the issues related to summary judgment prior to any determination of those pertaining to class certification. Thus, the ruling of the Ninth Circuit was limited to the proposition that "[w]here the defendant assumes the risk that summary judgment in his favor will have only stare decisis effect on the members of the putative class, it is within the discretion of the district court to rule on the summary judgment motion first." Id. Defendants have not provided their consent to have class certification delayed until after this Court rules on a potentially dispositive motion, and therefore class certification must be resolved first.

B. Congress Did Not Intend for Defendants in Securities Actions to Endlessly Litigate Motions to Dismiss

To the contrary, there is nothing in the Reform Act or in the Local Rules that would sanction the delay that plaintiff now seeks to impose with respect to class certification. Nowhere did Congress express its intent that the granting of a motion to dismiss be rendered nugatory by virtue of the failure to certify a class. Congress did not intend for defendants to endlessly litigate motions to dismiss without ever achieving a binding result on the class in the absence of class certification. Indeed, plaintiff's argument that class certification is an "other proceeding" stayed by the Reform Act was specifically rejected by the only court that has addressed the issue, Diamond Multimedia Systems. See In re Diamond Multimedia Sys. Inc. Sec. Litig., [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,561, at 97,797 (N.D. Cal. Oct. 14, 1997).

Moreover, the changes in the Local Rules were not instituted to allow a plaintiff class to be free to relitigate issues following a dispositive ruling on a motion to dismiss. Local Rule 16-1(g) does exempt the parties from the normal Case Management Schedule in Local Rule 16-2, but the principal effect of this change is to postpone the need to make initial disclosures as would normally be required under Local Rules 16-2 and 16-5, which in turn implement Federal Rule of Civil Procedure 26. These changes in the Local Rules follow naturally from the Reform Act because the initial disclosures constitute discovery that is stayed by the Reform Act. See Medhekar v. United States Dist. Court, 99 F.3d 325, 328 (9th Cir. 1996). In addition, the elimination of Local Rule 23-2, which previously required that a motion for class certification be filed within six months of plaintiff's initial pleading, likewise has no impact on the issue facing the Court here. Significantly, prior Local Rule 23-2 was not limited to class actions for securities claims, and thus there is no reason to believe that the rule was eliminated in order to implement the Reform Act. Thus, there is nothing in the statutory text or legislative history of either the Reform Act or the Local Rules suggesting that class certification not proceed prior to the resolution of defendants' second motion to dismiss.

C. Defendants Would Be Unduly Prejudiced If Class Certification Does Not Proceed Now Prior to the Ruling on Their Motion to Dismiss

The recent decision in Diamond Multimedia is squarely on point in addressing these issues in the context of a motion to dismiss. See Diamond, [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,561, at 97,797. The court in Diamond held that plaintiff must proceed with class certification prior to the resolution of a defendants' motion to dismiss. Id. Realizing this, plaintiff is forced to attempt to distinguish Diamond (albeit in a brief footnote) by arguing that the cases upon which the court in Diamond relied only involved motions for summary judgment. Opp. at 5 n.3. Whether a motion is one to dismiss or one for summary judgment, the risk of one-way intervention is created when a court grants a dispositive motion prior to class certification. This is the identical situation facing the defendants here if this Court grants defendants' motion to dismiss without first certifying a class. Thus, this Court should follow Diamond and require that class certification procedures be completed prior to ruling on defendants' pending motion to dismiss.¹

Plaintiff also maintains that the Court's ruling on the motion to dismiss will not have preclusive effect in the state court action. Specifically, plaintiff argues that certifying the class now "will afford negligible protection to the defendants" because unlike a ruling on a motion for summary judgment, a ruling on a Rule 12(b)(6) motion would not create a barrier to suits based on the same cause of action. Opp. at 5. Plaintiff's argument ignores well-established precedent that a dismissal for failure to state a claim under Rule 12(b)(6) is a judgment on the merits for purposes of res judicata or collateral estoppel. See, e.g., Federated Dep't. Stores Inc. v. Moitie, 452 U.S. 394 (1981); Cook v. Peter Kiewit Sons Co., 775 F.2d 1030, 1035 (9th Cir. 1985). In any event, plaintiff's point is academic at best. If this case is dismissed, defendants desire whatever preclusive effect is available, and would be prejudiced by the possibility that class members could avoid the Court's adverse ruling by proceeding with individual actions or in state court. This Court should act now simply to ensure that its ruling fully resolves the current dispute before it. See Diamond, [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 97,796-97. Ultimately, it is the state court (or other subsequent courts) that will decide what preclusive effect, whether by res judicata or collateral estoppel, that any of this Court's rulings may have on the issues and claims in the state case.

D. Plaintiff Has Failed to Show That it is Impracticable to Proceed with Class Certification Prior to Resolving Defendants' Motion to Dismiss

Plaintiff's argument that prompt class notice would provide insufficient information to class members (Opp. at 7) directly contradicts the requirements of Rule 23. The certification procedure, including the notice and opt-out provision, provides potential class members with ample opportunity to make informed decisions about whether to exclude themselves from this action. Plaintiff's contention that delaying certification will provide more information to potential class members reveals that plaintiff's real intent is to preserve the improper option of one-way intervention: the only "additional information" class members will receive is the outcome of the motion to dismiss, and it is the very risk of class members avoiding the binding effect of dismissal that defendants seek to avoid by having notice issued promptly. Plaintiff's tactics undermine Rule 23 and this Court's ability to manage its resources and issue conclusive, binding rulings in the cases before it.

Moreover, plaintiff can hardly argue credibly for impracticability since plaintiff himself has already moved for class certification and has represented to the Court that he "expects to move for class certification" in the state court action "shortly." Opp. at 7. Given plaintiff's prior willingness to move for class certification in the federal action, and his current willingness to proceed with class certification in the state court action, plaintiff patently believes class notice is practicable. The only plausible explanation for the sudden impracaticability of class certification is that plaintiff seeks to avoid any preclusive effect a ruling by this Court may have on the issues in the parallel state action, or on the filing of similar claims by absent class members in this Court.

Likewise, plaintiff's plea regarding the "burdensome" costs of issuing two notices (one for the federal action and one for the state action) should be disregarded entirely; those additional costs are a direct result of plaintiff's strategic decision to pursue simultaneous actions in two different forums -- even though the parties and the factual allegations are the same and even though plaintiff could have asserted all of his claims in this action. It is ironic, at best, that after the defendants have had to expend considerable resources defending duplicative litigations (after having sought unsuccessfully to stay the state court action over plaintiff's objection), it is now plaintiff who complains of the cost associated with pursuing his own strategy. The same is true with respect to the alleged "confusion" that might arise from separate notices in the state and federal actions; the requirement of separate notices is a direct consequence of plaintiff's strategic decision -- wasteful though that decision was -- to pursue separate state and federal actions. The costs and the potential "confusion" arising from state court notice procedures are irrelevant to this Court, which should not presume to take any actions with respect to state court class action notice procedures.

Similarly, plaintiff also cannot reasonably complain about the possibility of sending an additional notice of termination if defendants' motion to dismiss is granted. See Opp. at 2. Such an additional notice of termination would also be required where a plaintiff survives the pleading stage, a class is then certified, and a defendants' motion for summary judgment is granted. Thus, none of the "reasons" advanced by plaintiff are legitimate grounds upon which to seek to delay class certification, and this Court should require plaintiff to proceed with the determination of his motion prior to the ruling on defendants' motion to dismiss.

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

Plaintiff argues that because this securities action is no different than any other securities action, there are no circumstances in this case warranting an exception to the discovery stay. Opp. at 2-3. Plaintiff's argument is misplaced. That Congress did not expressly create an exception for class certification discovery does not indicate that proceeding with such discovery during the pendency of a motion to dismiss is contrary to the Reform Act. The legislative history is clear that the discovery stay was intended to prevent plaintiffs from engaging in fishing expeditions to provide a factual basis for their allegations in the Complaint. The discovery stay was not intended to prevent defendants from protecting themselves against the potential risk of one-way intervention. As discussed above, proceeding with class certification is entirely consistent with preventing the abuses Congress sought to minimize for defendants in securities actions. See supra at 2-4.

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

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

In fact, it is plaintiff who is trying to obtain a procedural advantage by preventing any binding effect a contrary ruling by this Court would have on the state court action. In short, plaintiff has utterly failed to advance any reason why defendant should be forced to bear the costs of the notice. See Eisen, 417 U.S. at 178 (noting that exceptions to rule of plaintiff paying notice relate to situations involving pre-existing fiduciary obligation between plaintiff and defendant). Moreover, plaintiff has indicated that he wishes to send out coordinated notices for both the federal and state actions, and that he "expects" to move for class certification in the state action "shortly." Opp. at 7. Assuming that plaintiff is prepared to pay for the costs of sending the notice to potential state court class members, and given that plaintiff desires to issue a coordinated notice for both parallel actions, there is no valid reason why defendants should have to bear the burden of this expense.

Moreover, as discussed above, plaintiff cannot reasonably complain about the possibility of sending an additional notice regarding termination if defendants' motion to dismiss is granted. It is plaintiff who seeks to benefit from bringing these lawsuits as class actions, and the costs of sending these notices are inherently related to plaintiff's pursuit of a class action. Accordingly, plaintiff should pay the associated costs from pursuing them as such, including the costs of sending the notices.

¹ Plaintiff argues that defendants would not seek to compel class certification now but for the parallel state case. See Opp. at 6. Plaintiff misstates defendants' position. The risk of one-way intervention exists even without the state action. Until the class is certified and notice is sent, this Court's orders would in all likelihood not bind absent class members. See American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 552 (1974). They might file another federal action and force the courts and the defendants to relitigate the same issues. The pendency of the state action turns this risk into a certainty.
 

Source: File to epost from Wilson Sonsini Goodrich & Rosati