MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
     - and -
JEFFREY W. LAWRENCE (166806)
LISA C. ATKINSON (163320)
DAVID R. STICKNEY (188574)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

LAW OFFICES OF JAMES V.
BASHIAN, P.C.
JAMES V. BASHIAN
500 Fifth Avenue
Suite 2700
New York, NY 10110
Telephone: 212/921-4110

WOLF POPPER LLP
STEPHEN D. OESTREICH
PATRICIA I. AVERY
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600

I. INTRODUCTION AND BACKGROUND

II. DEFERRING CLASS CERTIFICATION WILL NOT PREJUDICE THE DEFENDANTS AND FULLY COMPORTS WITH RULE 23

A. Deferring Certification Until After Ruling On The Motions To Dismiss Will Not Prejudice The Defendants

B. Certification At This Time Is Impracticable Because Unresolved Issues Prevent Potential Class Members From Making Informed Decisions As To Whether To Opt-Out

III. IF NOTICE IS TO BE SENT AT THIS TIME, THE NOTICE MUST BE SENSITIVE TO THE PARALLEL ACTION IN STATE COURT

IV. CONCLUSION

I. INTRODUCTION AND BACKGROUND

Plaintiffs initially commenced an action in state court, seeking redress under California Corporations Code §§25400 and 25500.⁽¹⁾ Copperstone v. TCSI Corp., No. 775199-2 (Super. Ct. of Alameda Nov. 4, 1996). Plaintiffs believe that they can obtain complete relief for the class in the state action. However, because the California Supreme Court is presently considering whether plaintiffs may properly maintain a nationwide class under §§25400 and 25500, the plaintiffs also filed this action in federal court to protect the interests of non-California class members when expiration of the limitations period was imminent. Copperstone v. TCSI Corp., 97-3495-SBA (N.D. Cal. Sept. 24, 1997) (the "Complaint"). Plaintiffs, seeking to avoid duplicative litigation, offered to stipulate to stay the federal action pending resolution of the ongoing state court action, but the defendants refused. On January 13, 1998, the defendants moved to dismiss the Complaint.

The Court, on its own initiative, raised the issue of certifying the class before resolving the motions to dismiss, drawing the parties' attention to the Court's ruling in In re Diamond Multimedia Sys. Inc. Sec. Litig, No. C 96-2644 SBA, Order Re: Class Certification (N.D. Cal. Oct. 14, 1997) ("Order"). In response, the defendants urge the Court to follow its ruling in Diamond Multimedia and certify the class now.

Plaintiffs, however, respectfully suggest that the Court defer certification until after resolution of the motions to dismiss and, in support of that proposal, apprise the Court of factors and considerations which were not presented to the Court during briefing on the issue in Diamond Multimedia. In Diamond Multimedia, the plaintiffs did not address the impracticality of certifying the class before resolution of the motion to dismiss or the issue of "one-way intervention." Order at 5. Here, the plaintiffs explain that, if the Court grants the defendants' motions to dismiss, the defendants are in no real danger of being forced to litigate successive complaints. The defendants' desire for class certification prior to resolution of the motions to dismiss is a mere pretext to gain a perceived tactical advantage against the plaintiffs in the parallel state action. The defendants intend to argue that the dismissal of the federal Complaint has some sort of preclusive effect that will extinguish claims in state court.⁽²⁾

Defendants will suffer no real prejudice if class certification is deferred as it is highly unlikely that any class member will replead the same action if the Complaint is dismissed under Rule 12(b)(6). Indeed, it is more likely that class members will be prejudiced by being forced to make an opt-out decision at this time, when no meaningful information exists to assist them in making that decision.

II. DEFERRING CLASS CERTIFICATION WILL NOT PREJUDICE THE DEFENDANTS AND FULLY COMPORTS WITH RULE 23

A. Deferring Certification Until After Ruling On The Motions To Dismiss Will Not Prejudice The Defendants

The PSLRA created new procedures to govern securities class actions from the filing of the complaint through adjudication of the motion to dismiss. Unlike past practice, plaintiff may not obtain discovery in federal court until the complaint survives the motion to dismiss, and the defendants are spared the expense of discovery and "other proceedings" during the pendency of their motions to dismiss. 15 U.S.C. §77z-1(b)(1); 15 U.S.C. §78u-4(b)(3)(B). By enacting these and other provisions, Congress deliberately changed the procedures and timing of pre-trial practice in class litigation under the federal securities laws. To implement the PSLRA, the Northern District of California changed its Local Rules to reflect the new procedures and timing of securities litigation. For example, L.R. 16-1(g) specifies that the ordinary case management schedule established by L.R. 16-2 does not apply to actions under the PSLRA. Thus, parties no longer meet-and-confer within 90 days of the filing of the Complaint or file a case management statement within 110 days. Significantly, the Northern District also eliminated the rule which requires plaintiffs to move for class certification within six months of commencing the action, as previously required under former Local Rule 23-2.

Consistent with the PSLRA, the defendants in the present case immediately filed a motion to dismiss -- before a class had been certified. For this reason alone, there is no prejudice to the defendants in deferring class certification. Cf. Wright v. Schock, 742 F. 2d 541, 544 (9th Cir. 1984) (finding implicit waiver of the protection against one-way intervention when defendant filed a summary judgment motion before the class was certified).

Deferring class certification until after the Court determines whether the pleading is sufficient will not prejudice the defendants. It is extremely improbable, as a practical matter, that (with the statute of limitations tolled on the last day of the limitations period)⁽³⁾ individual class members will file successive complaints if the Court grants the defendants' motions to dismiss. The likelihood that, within one day of dismissal, another class member will come forward and file a second complaint is virtually nil.

For years, parties and courts alike have typically and without contention addressed the sufficiency of the complaint before addressing the certification issue. The legitimate concerns about the dangers of one-way intervention exist, not at the motion to dismiss stage, but at the summary judgment stage.⁽⁴⁾ Certifying the class now will afford negligible protection to the defendants. Whereas a summary judgment is res judicata to all later-filed suits based on the same cause of action, a Rule 12(b)(6) dismissal creates no such barrier. As explained by C. Wright & A. Miller:

[I]t is doubtful that Rule 12(b)(6) normally should dispose of more than the question of whether a particular statement constitutes a claim for relief. A court that thinks it convenient to test the merits under a preliminary motion should do so by converting the motion to dismiss into one for summary judgment, since this is the procedural device specifically designed to test the merits of the claim in advance of trial. Unless this has been done, application of res judicata seems to be a dubious path to follow.

5A C. Wright & A. Miller, Federal Practice & Procedure §1357 (2d ed. 1990) (emphasis added, footnotes omitted). Accordingly, to the extent that a Rule 12(b)(6) dismissal has any preclusive effect, the dismissal is res judicata only as to the particular allegations in the dismissed complaint. Abbott Lab v. Zenith Lab, 934 F. Supp. 925, 928 (N.D. Ill 1995), appeal dismissed without op., 78 F.3d 603 (Fed. Cir. 1996). If, therefore, an absent class member files a complaint containing new allegations, the doctrine of res judicata will not bar the new complaint.⁽⁵⁾

In short, the threat of one-way intervention at this stage in this case is almost entirely academic and does not justify the expense, delay, and confusion of class-wide notice and an opt-out procedure at this time. The real reason that defendants are eager to certify the class in federal court now is to derail the parallel state litigation. Defendants intend to argue, if this Court grants their motions to dismiss, that this Court's ruling will have some sort of preclusive effect in state court. Either they intend to argue that a Rule 12(b)(6) dismissal is res judicata (i.e., claim preclusion) against all subsequent claims in state court or they intend to argue collateral estoppel (i.e., "issue preclusion") to thwart specific issues in the state case. Claim preclusion, however, is plainly irrelevant to the parallel litigation because the state Complaint was filed before the federal Complaint, and claim preclusion bars only later-filed suits. See, e.g., Boccardo v. Safeway Stores, Inc., 134 Cal. App. 3d 1037 (1982); Merry v. Coast Community College Dist., 97 Cal. App. 3d. 214, 223 (1979).

That leaves only collateral estoppel. No California court has ever applied collateral estoppel following a Rule 12(6)(b) dismissal, and application of such preclusion is highly doubtful following dismissal of an action governed by the PSLRA because collateral estoppel applies only to identical issues that were actually litigated and decided.⁽⁶⁾ Lumpkin v. Jordan, 49 Cal. App. 4th 1223, 1230 (1996); Barker v. Hull, 191 Cal. App. 3d 221, 226 (1987). Rule 23, moreover, is neither designed for nor concerned with providing defendants with a possible issue preclusion defense in an earlier-filed and on-going parallel state action.⁽⁷⁾ The collateral estoppel affect envisioned by the defendants is, therefore, completely extraneous to the protections afforded them under Rule 23 and cannot justify certifying the class before resolution of the motions to dismiss.

B. Certification At This Time Is Impracticable Because Unresolved Issues Prevent Potential Class Members From Making Informed Decisions As To Whether To Opt-Out

Rule 23 requires certification "as soon as practicable," a standard which provides the Court with ample discretion to defer class certification when unresolved factual or legal questions make certification problematic. See Christensen v. Koewit-Murdock Investment Corp., 815 F.2d 206, 214 (2d Cir. 1987); Wright, 742 F.2d at 545-46. Rule 23 also requires that potential class members receive notice that satisfies due process requirements. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 174-75 (1974). Such notice must "advise class members of the risk of class membership" and "provide[] recipient class members with sufficient information to permit an intelligent decision" as to whether to opt out. 2 H. Newberg & A. Conti, Newberg on Class Actions §8.31 (3d ed. 1992).

If certified now, potential class members would learn only that a Complaint has been filed and that defendants contest whether that particular Complaint meets the pleading standards of the PSLRA. Based on this limited information, should potential class members be forced to make an opt-out decision at this stage? What should be said about the parallel state class action? How can class members be adequately apprised that the notice applies only to their participation in the federal action when the defendants have stated their intentions to argue that a dismissal precludes California Corporations Code claims in state court? Plainly, certifying the class now forces class members into a dilemma -- to decide either to opt- out of the federal class and obtain redress only as members of the state class or to remain in the federal class at the risk of losing their state claims. Insufficient information exists to assist potential class members in making an informed decision at this time, and there is no compelling reason to force class members to make that decision now.

Deferring certification until after testing the sufficiency of the Complaint is still early enough in the litigation to prevent potential class members from waiting to join the case until after the plaintiffs have prevailed on the merits. If the Court sustains the defendants' motions, the defendants will not be prejudiced for the reasons set forth in §II.A., supra.

III. IF NOTICE IS TO BE SENT AT THIS TIME, THE NOTICE MUST BE SENSITIVE TO THE PARALLEL ACTION IN STATE COURT

If the Court elects to proceed with class certification prior to rulings on the motions to dismiss, plaintiffs have an additional concern. Notice to potential class members, if sent, must inform them about the state litigation and that opting-out of the federal action will not affect their rights in the state action.⁽⁸⁾

The required contents of class notice are enumerated in Rule 23(c)(2) and must, at a minimum, advise each class member of his right to opt-out, of the res judicata effects of failing to do so, and of the right to appear in the action. In addition, sufficient information about the particular case must be provided to enable class members to make informed decisions about their participation. See Manual for Complex Litigation, 225 (3d ed. 1995).

Here, the notice must inform potential class members that joining or opting-out of the federal class will neither affect their membership in the state class, if and when that class is certified, nor affect their right to seek redress under state law. To prevent untoward confusion for potential class members, the notice must contain an explicit statement which (1) alerts potential class members to the pendency of the two distinct actions, one in federal court seeking redress under federal law and one in state court seeking redress under state law; (2) informs potential class members that the actions are separate and that success or failure in one forum does not mean success or failure in the other; (3) specifies that the current notice applies only to the federal case; and (4) explains that opting-out or remaining in the federal action will not affect the potential class member's ability to later opt-out or join the state class, if and when one is certified.

IV. CONCLUSION

For the foregoing reasons, plaintiffs respectfully request that the Court defer certification until after resolution of the defendants' motions to dismiss. If, however, the Court elects to certify the class now, the notice to the class must be sensitive to the plaintiffs' rights and remedies in the parallel state action.

TCSI\BM000371.BRF

1. The parties have been actively litigating the action in state court, including the adjudication of demurrers to plaintiffs' initial complaint and plaintiffs' amended complaint. The superior court rejected the host of arguments raised by the defendants in their demurrers and found that the amended complaint adequately alleged that the defendants issued false statements and that the defendants knew that their statements were false when made. To the extent that the superior court sustained the demurrers in part, the court provided the plaintiffs with leave to amend their complaint to plead facts which show that the defendants' stock transactions were connected to California.

2. In enacting the Private Securities Litigation Reform Act ("PSLRA"), Congress preserved actions and remedies under state securities laws. "The rights and remedies provided by this title shall be in addition to any and all other rights and remedies that may exist at law or in equity . . . ." 15 U.S.C. §78bb(a). The propriety of seeking redress simultaneously in both state and federal court was recently confirmed by the United States Supreme Court. "Congress plainly contemplated the possibility of dual litigation in state and federal courts relating to securities transactions." Matsushita Elec. Indus. Co. v. Epstein, 116 S. Ct. 873, 882 (1996) (emphasis added); accord Blake v. Pallan, 554 F.2d 947, 952 (9th Cir. 1977) (stating, with respect to the California and federal securities laws, "there is nothing to suggest that the two statutory schemes are to be interdependent rather than separate, autonomous systems").

3. The plaintiffs filed this action on September 24, 1997, and the one-year statute of limitations would have expired on September 25, 1997.

4. Indeed, the cases cited by the Court in Diamond Multimedia discussed one-way intervention in the context of summary judgment motions. Diamond Multimedia, Order at 4-5.

5. A second action is not barred by an earlier Rule 12(b)(6) dismissal when "new facts have come into existence or have been alleged for the first time and it was the absence of these facts that made the first complaint defective." 9 C. Wright & A. Miller, Federal Practice & Procedure §2373 (1995); Brazier v. Great Atlantic & Pac. Tea Co., 256 F.2d 96, 99 (5th Cir. 1958) (affirming dismissal with prejudice and noting that the dismissal and Fed. R. Civ. P. 41(b) would not affect "any right appellant might have to bring a new action if new facts should be discovered").

6. Even before the PSLRA, the California Supreme Court recognized that federal §10(b) claims differ from California §§25400 and 25500 claims. Mirkin v. Wasserman, 5 Cal. 4th 1082, 1103 (1993). For example, while federal law requires scienter, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 214 (1976), mere negligence will suffice for liability under §25400. Also, unlike §10(b), §25400 does not require that plaintiffs plead or prove reliance. Compare Mirkin, 5 Cal. 4th at 1103 with Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988). Similarly, no California appellate court has recognized the validity of the federal court's "bespeaks caution" doctrine. The PSLRA, of course, greatly exacerbated the procedural and substantive differences between private litigation under §10(b) and private litigation under §25400, making the application of issue preclusion even more unlikely. For example, federal law, unlike California law, provides some protection from liability, i.e., a "safe harbor," for false forward-looking statements. 15 U.S.C. §77z-2(c); 15 U.S.C. §78u-5(c). There are also significant procedural restrictions that exist in federal court which do not exist in state court. Under federal law, there is a presumptive stay of discovery for an indefinite period so long as a motion to dismiss is pending. 15 U.S.C. §77z-1(b)(1); 15 U.S.C. §78u-4(b)(3)(B). In state court, by contrast, plaintiffs are entitled to discovery to plead facts to state a cause of action. Mattco Forge v. Arthur Young & Co., 223 Cal. App. 3d 1429 (1990).

7. Rule 23 is designed to protect defendants from defending successive complaints. American Pipe & Construction Co. v. Utah, 414 U.S. 538, 550-51 (1974).

8. Rule 23(d) empowers district courts to enter appropriate orders in the handling of class actions. As for the cost of notice, allocating the cost of the notice to the defendants is appropriate. In Eisen, the Supreme Court observed that the "usual" rule is that the plaintiffs in a class action must initially bear the costs of notice to the class under Rule 23(c)(2). 417 U.S. at 178. By that same token, in Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 361 n.30 (1978), the court noted that "unwilling defendants" need not pay for the benefits of res judicata. The Court, however, did not rule out the possibility that unusual circumstances might justify a shifting of the cost of notice to the defendants. Eisen, 417 U.S. at 173-74. Unlike the defendants in Eisen and Oppenheimer Fund, the defendants are not "unwilling defendants." To the contrary, they are eager to certify the class to obtain a perceived tactical advantage in state court. Under these unusual circumstances, it seems fair that the defendants should bear the costs of notifying the class if the suit is dismissed at the pleading stage. If class certification is deferred or if the Court upholds the Complaint, then the usual rule should apply and the plaintiffs would pay the costs.

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.

2. That on March 2, 1998, declarant served the PLAINTIFFS' STATEMENT IN SUPPORT OF DEFERRING CLASS CERTIFICATION UNTIL AFTER RESOLUTION OF DEFENDANTS' MOTIONS TO DISMISS by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:

3. That there is a regular communication by mail between the place of mailing and the places so addressed.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 2nd day of March, 1998, at San Francisco, California.