INTRODUCTION

ARGUMENT

I. THE COURT SHOULD ADDRESS THE CLASS CERTIFICATION ISSUE NOW

A. The Court Has The Authority To Compel Plaintiffs To Seek Class Certification Or Drop Their Class Action Allegations

B. The Court Should Certify The Plaintiff Class Before Issuing Its Ruling On Defendants' Motion To Dismiss

II. NOTICE TO CLASS MEMBERS SHOULD NOT PREJUDGE THE EFFECT THAT ANY RULINGS IN THIS CASE WILL HAVE ON THE STATE COURT ACTION

III. PLAINTIFFS MUST BEAR THE COST OF NOTICE TO CLASS MEMBERS

CONCLUSION

American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974)

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974)

In re Diamond MultiMedia Systems, Inc. Sec. Litig., [Current Tr. Binder]
     Fed. Sec. L. Rep. (CCH) ¶ 99,561 (N.D. Cal. Oct. 14, 1997)

In re Gypsum Antitrust Cases, 565 F.2d 1123 (9th Cir. 1977)

Kilgo v. Bowman Transp., Inc., 789 F.2d 859 (11th Cir. 1986)

McDonald v. General Mills, Inc., 387 F. Supp. 24 (E.D. Cal. 1974)

Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340 (1978)

Ponce v. Housing Auth. of Tulare County, 389 F. Supp. 635
     (E.D. Cal. 1975)

Schaefer v. Overland Express Fund Family of Funds, 169 F.R.D. 124
     (S.D. Cal. 1996)

Senter v. General Motors Corp., 532 F.2d 511 (6th Cir. 1976)

Wade v. Kirkland, 118 F. 3d 667 (9th Cir. 1997)

Wright v. Schock, 742 F. 2d 541 (9th Cir. 1984)

Fed. R. Civ. P. 23

5 James W. Moore et al., Moores Federal Practice § 23.64 (3d ed. 1997)

Manual For Complex Litigation § 30.211

2 H. Newberg & A. Conte, Newberg on Class Actions § 8.31 (3d ed. 1992)

On September 24, 1997, one day before the statute of limitations was to run, plaintiffs filed this class action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs previously filed a class action in Alameda County Superior Court (Copperstone v. TCSI Corp. et al., No. 775199-2) on behalf of the same class, against the same defendants, based on identical factual allegations, asserting violations of the California Corporations Code. The purported classes in these two actions include all purchasers of TCSI stock during the period from October 11, 1995 though September 25, 1996. Plaintiffs' counsel have not moved to certify a class in the state case, even though it has been pending since November 4, 1996.

This Court has requested briefing on three issues. First, whether a class should be 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. Second, whether class members should be notified of the pending state court action and of the possible effects of this Court's rulings on that action. Defendants believe that the notice to the class should state that a securities class action is pending in Alameda Superior Court, but that the notice cannot advise class members about the effects of rulings in the federal action on the state action because those effects must be determined by the state court. Third, 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.

If notice is not required, the state court action will provide plaintiffs with the opportunity to relitigate any issues decided by this Court, clearly raising the problem of "one-way intervention" and the risk that this Court will expend judicial resources deciding issues that may not bind the class. To avoid the adverse effects of one-way intervention and to obtain certainty about the effects of the Court's rulings in this action, Defendants have offered to stipulate to class certification before the Court rules on the pending motion to dismiss, subject to a reservation of their right to decertify. Although plaintiffs filed this case as a class action, they now refuse to certify a class. Contrary to Plaintiffs' contentions, 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.

I. THE COURT SHOULD ADDRESS THE CLASS CERTIFICATION ISSUE NOW

A. The Court Has The Authority To Compel Plaintiffs To Seek Class Certification Or Drop Their Class Action Allegations.

Federal Rules of Civil Procedure 23(c)(1) and 23(d) give this Court the authority to compel plaintiffs either to seek class certification or to amend their Complaint to eliminate their class allegations. Rule 23(c)(1) states in part that "[a]s soon as practicable after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained." Fed. R. Civ. P. 23(c)(1) (emphasis added). Like Rule 23(c), subpart (d) "is concerned with the fair and efficient conduct of the action." Fed. R. Civ. P. 23 Advisory Committee's Notes, 1966 Amendment. Rule 23(d) authorizes the court to "make appropriate orders" about the course of the proceedings; the content, manner and timing of notice to prospective class members; the imposition of conditions on representative parties or intervenors; amendments of the pleadings to eliminate therefrom allegations as to representation of absent persons; and other procedural matters. Fed. R. Civ. P. 23(d). Together, subdivisions (c) and (d) give the Court broad discretion to manage appropriately class actions.¹

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 either seek class certification by a particular date 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. This Court concluded as much in its recent decision in In re Diamond MultiMedia Systems, Inc. Securities Litigation, [Current Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,561, at 97,796-97 (N.D. Cal. Oct. 14, 1997). In this case, a motion for class certification is unnecessary because Defendants have already offered to stipulate to conditional class certification. The Court may order plaintiffs either to accept the stipulation or to drop the class action allegations.

B. The Court Should Certify The Plaintiff Class Before Issuing Its Ruling On Defendants' Motion To Dismiss.

The issue is not if but when a class should be certified. Judicial economy and fairness to all parties dictate that a class be certified before this Court rules on Defendants' motion to dismiss. As this Court previously concluded in Diamond, certification at this stage of the case will ensure that all parties are bound by the Court's rulings, will prevent duplicative litigation, and will avoid potential unfairness to Defendants. Id. at 97,796-97. In Diamond, the Court concluded that "it is practicable to certify the class at this juncture, prior to reaching the merits of the defendants' motion to dismiss." Id. at 97,797. The Court was persuaded that if a class were not certified, defendants would suffer great prejudice if they prevailed on their motion to dismiss and absent class members were not bound by the Court's rulings. Id.

The facts and procedural posture of Diamond are identical to those in this case. Here, as in Diamond, plaintiffs have filed parallel class actions in state and federal court, have identified the same class in both cases, have resisted certification in both actions, and have refused to accept Defendants' stipulation to certify a class prior to the resolution of their motion to dismiss. See id. at 97,796. The same reasoning applies full force here.

Despite plaintiffs' protest, the possibility of one-way intervention, no matter how small, unfairly prejudices Defendants. If the Court were to grant the motion to dismiss with prejudice without first certifying the plaintiff class, then only the two named plaintiffs would be bound by the Court's ruling. The rest of the class, allegedly thousands of purchasers of TCSI 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 -- from which Plaintiffs now hide, 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.

To achieve these clear benefits, Defendants offered to stipulate to certification of the plaintiff class; certification would be conditional as provided in Rule 23(c)(1), which permits the issue to be revisited later. Plaintiffs have balked at the prospect. Having filed this putative class action, and sought to be appointed as Lead Plaintiffs, Plaintiffs should not be permitted to avoid their fundamental procedural obligations.

Plaintiffs offer no legitimate reason why certification is not practicable at this stage of the litigation. First, plaintiffs claim that "[d]eferring certification . . . will enable potential class members to make informed decisions as to whether to opt out of the class." Joint Case Mgmt. Stmt. at 2 (filed, Feb. 17, 1998). This position 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. Plaintiffs' contention that delaying certification will provide more information to potential class members reveals that plaintiffs' real intent is to preserve the improper option of one-way intervention. Such tactics undermine Rule 23 and this Court's ability to manage its resources and issue conclusive, binding rulings in this action.

Second, ignoring this Court's order in Diamond, plaintiffs contend that "courts adjudicating securities class actions have historically waited until after ruling on a motion to dismiss before addressing the certification issue, and past practice demonstrates that potential class members do not file successive complaints after a complaint is dismissed." Joint Case Mgmt. Stmt. at 2. Before plaintiffs began filing parallel state and federal class actions -- before Congress passed the Private Securities Litigation Reform Act of 1995 -- the risk of "one-way intervention" usually did not arise. If a court granted a motion to dismiss before certifying a class, that ruling effectively ended the litigation. Absent class members rarely filed their own actions.

In the post-Reform Act world, however, plaintiffs routinely file parallel state and federal class actions in California. These parallel state class actions provide the class an opportunity to relitigate issues decided by the federal courts. Under these circumstances, as this Court has acknowledged in Diamond, if the Court granted Defendants' motion to dismiss the class would be able to opt-out of this case and any unfavorable rulings and relitigate those issues in state court. Diamond, Fed. Sec. L. Rep. at 97,796-97. The procedural mechanism of Rule 23 and the discretion afforded this Court thereunder to certify a class "as soon as practicable" are intended to compel class members to choose where and when they want their claims adjudicated. American Pipe, 414 U.S. at 548-49. Any other result, as this Court held in Diamond, would be unfair to Defendants. Diamond, Fed. Sec. L. Rep. at 97,797. Therefore, Rule 23 and federal case law interpreting it support the conclusion that a class should be certified prior to this Court's decision on a dispositive motion. Id. at 97,796 (citing Wright v. Schock, 742 F. 2d 541, 543-44 (9th Cir. 1984)); see Wade v. Kirkland, 118 F. 3d 667 (9th Cir. 1997) (reversing district court's dismissal of prisoners' class action prior to ruling on class certification and directing district court on remand to decide class certification issue before proceeding further).

Third, Plaintiffs contend that, with only one day left on the statute of limitations, the possibility that another plaintiff will file a second complaint is "virtually nil." Joint Case Mgmt. Stmt. at 2. Plaintiffs' supposition about the conduct of absent class members is an empty promise. Plaintiffs do not know and cannot postulate about what absent class members will do if the Court grants the motion to dismiss. The possibility of one-way intervention prejudices not only Defendants, who would remain financially and personally exposed, but this Court, which could be forced to relitigate the same issues if individual claims were filed. Diamond, Fed. Sec. L. Rep. at 97,797.

Finally, Plaintiffs contend that Defendants will not be prejudiced by waiting to certify a class because certification at this stage "will, as a matter of law, afford negligible protection to the defendants." Joint Case Mgmt. Stmt. at 3. In other words, plaintiffs contend that they should not be required to certify a class until just before summary judgment, because the preclusive effect of summary judgment for defendants may be greater than prevailing on a motion to dismiss. Plaintiffs' point is academic at best. Plaintiffs' complaint may not survive the pleading stage. If the 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. The Court should act now to eliminate this risk. Diamond, Fed. Sec. L. Rep. at 97,796-97.

Plaintiffs offer no rationale that distinguishes this case from Diamond and authorizes a delay in certifying a class until after this Court's ruling on the motion to dismiss. Plaintiffs should not be allowed to have it both ways. If they want to proceed with their class action, they should agree to conditional certification of the class before this Court's ruling on Defendants' motion to dismiss. If they do not want to certify a class, they should drop their 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.

II. NOTICE TO CLASS MEMBERS SHOULD NOT PREJUDGE THE EFFECT THAT ANY RULINGS IN THIS CASE WILL HAVE ON THE STATE COURT ACTION

Should this Court direct plaintiffs to give notice to potential class members before ruling on the motion to dismiss, the parties agree that notice should discuss the parallel state action, but disagree about whether notice should predict the effect of this Court's rulings on the state action. Joint Case Mgmt. Stmt. at 4-5. Both parties recognize that notice of the pendency of the class action must provide "sufficient information about the case . . . to enable class members to make an informed decision about their participation" and that the notice must be clear and objective, because it is sent under the imprimatur of the Court. Manual For Complex Litigation § 30.211 ("notice should be accurate, objective and understandable to class members"); see Fed. R. Civ. P. 23(c)(2) ("the court shall direct to the members of the class the best notice practicable under the circumstances").³

The parties agree on the basic contents of the notice, including the following: (1) potential class members should be notified about the pendency of the federal case and the parallel state action, and the nature of the claims brought in those respective actions; (2) notice in the federal case only applies to membership in the class bringing the federal action; and (3) a class member's decision to join or opt-out of the federal action will not impair their ability to join or abstain from membership in the state class should a class ever be certified. Joint Case Mgmt. Stmt. at 4-5.

The parties disagree as to whether the notice should discuss the effect of this Court's decisions on the viability of the state court class claims. Plaintiffs argue that notice should inform potential class members that "success or failure in one forum does not mean success or failure in the other." Joint Case Mgmt. Stmt. at 5. Defendants strongly disagree. Plaintiffs' proposed statement is likely to confuse prospective class members by implying that a decision in this court has no effect on the state court action. Not only would plaintiffs' proposed notice mislead prospective class members, it essentially would require Defendants to waive any right to raise res judicata arguments before the state court. Neither plaintiffs nor Defendants can prejudge the preclusive effect that a state court would give to this Court's decision on a motion to dismiss. Therefore, Defendants believe that a neutral and accurate notice must omit all discussion about the effect of rulings in one court on the status of the action in the other court.

III. PLAINTIFFS MUST BEAR THE COST OF NOTICE TO CLASS MEMBERS

In accordance with the general rule, plaintiffs here should be required to bear the cost of notice to class members. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178-79 (1974) (overturning the district court's ruling that defendants should pay ninety percent of the cost of notice to the plaintiff class). The general rule rests on the fundamental premise that the cost of notice is an ordinary and anticipated cost of maintaining a class action under Rule 23(b)(3), and must be borne by the party bringing the action. Id. at 179.⁴

Plaintiffs attempt to shift the burden of financing class notice to Defendants as if it were a price to be paid for purchasing preclusive effect. Joint Case Mgmt Stmt. at 6. 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.

Plaintiffs attempt to distinguish Eisen on the ground that Defendants here are not "unwilling" participants in the certification process; plaintiffs apparently mean that Defendants are "willing" because Defendants want a favorable ruling on the motion to dismiss to have preclusive effect. The supposed distinction between "willing" and "unwilling" defendants is meritless. Eisen made no distinction. The only exception to the general cost allocation rule that the Supreme Court recognized (but declined to render an opinion about) involved the circumstance where the parties were fiduciaries, rather than true adversaries. Eisen, 417 U.S. at 178-79. Absent a fiduciary relationship, which is not alleged here, the Court clearly addressed and settled the cost allocation of notice to class members: "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." Id. at 179. 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 the motion to dismiss. Having filed this class action, Plaintiffs should bear the cost of notifying the absent class members they purport to represent.

For the foregoing reasons, Defendants respectfully request that this Court order a class to be certified prior to ruling on Defendants' motion to dismiss; that the notice contain no mention of the preclusive effects of this Court's rulings on the state action because such determination must be made by the state court at some future date; and that plaintiffs pay for the cost of notice to the class as an ordinary litigation expense.

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 See also 2 H. Newberg & A. Conte, Newberg on Class Actions § 8.31 (3d ed. 1992) ("notice content should be neutral in tone"); Schaefer v. Overland Express Family of Funds, 169 F.R.D. 124, 131 (S.D. Cal. 1996) (rejecting proposed notice of pending class action in securities fraud action because notice "was not sufficiently complete nor neutral") (citations omitted); In re Gypsum Antitrust Cases, 565 F.2d 1123, 1125 (9th Cir. 1977) (same).

⁴ 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).

Securities Class Action Clearinghouse

U.S.D.C. N.D. Cal.

Robert Crown Law Library

Stanford University School of Law