Courts should look to Rule 23 for class certification decisions

A district court must evaluate a class certification request based solely on the face of the complaint and consider whether the complaint’s allegations satisfy Federal Rule of Civil Procedure 23(a) and (b)’s requirements as a matter of law, the 4th U.S.
Circuit Court of Appeals has ruled.

Nine applicants for residential mortgage products sued Fairfax County-based Navy Federal Credit Union alleging systematic discrimination against racial minorities. The facts of each applicant’s case varied, including their race, where they lived and what type of mortgage product they applied for.

Navy Federal moved to strike the class allegations under Rules 12(f) and 23(d)(1)(D), arguing that the differences across loan programs precluded class certification because the applicants failed to explain how an undefined underwriting process could produce discriminatory effects for class members who applied for different products.

The district court agreed, denying class certification, but the 4th Circuit affirmed in part and reversed in part.

“[W]e conclude the district court acted within its discretion when it denied class certification under Rule 23(b)(3) and struck the corresponding allegations from the complaint,” Judge Toby J. Heytens wrote. “But we conclude that the court acted prematurely — and thus exceeded its discretion — in denying class certification under Rule 23(b)(2).”

The 47-page opinion issued Feb. 9 is Oliver v. Navy Federal Credit Union (VLW 026-2-043). Senior Judge Norman K. Moon joined the opinion, while Judge Julius N. Richardson authored a separate opinion, concurring in the judgment and dissenting in part.

Chicago attorney Daniel R. Schwartz of DiCello Levitt, who represented the plaintiffs, said the “significant” decision from the federal appellate panel “recognized that courts should not shut down class allegations in cases like this before plaintiffs have any opportunity to access the evidence.”

It also serves as a reminder that class allegations will be closely scrutinized from the outset of litigation, he added, requiring plaintiffs “to plead accordingly.”

“When drafting the complaint, we anticipated that a Rule 23(b)(2) class was the most viable path to certification, given the unique challenges a Rule 23(b)(3) class presents in a disparate-impact race-discrimination case,” Schwartz said. “Our complaint reflected that recognition, which ultimately led to the reversal here.”

Daniel S. Volchok of WilmerHale in Washington, D.C., who represented Navy Federal, did not respond to a request for comment on the decision.

Nine applicants file suit

In their complaint, the nine applicants alleged that the semi-automated underwriting process used by Navy Federal involved collecting certain forms of data from every applicant, some of which “can be proxies for race.” Navy Federal then “runs the data … through its proprietary underwriting algorithm,” which produces a “uniquely discriminatory result.”

Beyond asserting individual claims of intentional discrimination and disparate impact, the complaint also sought classwide declaratory and injunctive relief under Rule 23(b)(2) and damages under Rule 23(b)(3).

In addition to living in different states and being of different races, the applicants’ debts, income and credit scores varied. They also applied for different products: Six applied for a first mortgage; one applied for a first mortgage and a cash-out refinance, one applied for a Veterans
Affairs (VA) first mortgage, and one applied for a VA cash-out refinance.

These differences across loan programs precluded class certification, Navy Federal told the district court, seeking to strike the class allegations.

The district court granted the motion, and the federal appellate panel granted interlocutory review.

Scope of district court discretion

It is common ground that district courts may sometimes make class certification decisions based solely on the pleadings and before any discovery has occurred. The source of authority to make such determinations: Rule 23(c)(1)(A), the court explained, which grants district courts “considerable discretion about the timing of their class certification decision, including whether to entertain requests to make such decisions at the pleading stage.”

Navy Federal relied upon Rules 12(f) and 23(d)(1)(D), but neither of these “authorize a district court to resolve class certification questions at the pleading stage (or, indeed, at any other time),” the court said, as Rule 12(f) “has nothing to do with those questions,” and Rule 23(d)(1)(D) operates as “an optional housekeeping provision” that comes into play only after the district court has made its mandatory class certification decision under Rule 23(c)(1)(A).

“[W]e hold that ‘the appropriate procedure for a defendant to challenge class certification’ — at the pleading stage or any other time — is to make ‘a motion to deny class certification under 23(c)(1)(A), coupled with a motion to strike under 23(d)(1)(D) should the motion to deny class certification be granted,’” the court wrote.

When district courts consider such a motion, they “may consider only the face of the complaint and ask whether its allegations make a prima facie showing that satisfies Rule 23(a) and (b)’s requirements,” the court added, relying on its 1978 decision in Goodman v. Schlesinger and citing similar authority from the 1st and 11th Circuits.

While Rule 23 grants district courts broad discretion in deciding whether to certify a class, Goodman provides legal standards that limit that discretion.

“[J]ust as a district court may never grant class certification based on the face of the complaint, a court may deny class certification at the same stage only if the complaint’s class action allegations show ‘non-compliance with [Rule] 23 as a matter of law,’” the court said.

Predominance and commonality

Applying those standards, the court found the district court acted within its discretion in denying class certification under Rule 23(b)(3) but “acted prematurely” by granting Navy Federal’s request to deny class certification under Rule 23(b)(2).

The district court was not clear about which requirements for class certification were deemed lacking, but the court viewed the ruling as homing in on the requirements unique to a (b)(3) class: predominance and superiority.

“We conclude this is the unusual case in which the district court could determine — based solely on the face of the complaint — that any request to certify a (b)(3) class fails as a matter of law,” the court wrote. “The nine named plaintiffs alone are residents of five different States who applied for at least four different products and had different      outcomes with Navy Federal.”

However, the complaint also sought relief under Rule 23(b)(2), which does not have a predominance or superiority requirement, the court pointed out. While Navy Federal argued that the denial of (b)(2) certification could be affirmed on the grounds of a lack of commonality, the court disagreed.

The district court never used the word “commonality” or referenced the provision that imposes that requirement, and the court couldn’t say that the complaint failed to make a prima facie commonality showing as a matter of law. Its allegations that Navy Federal used a singular underwriting process and that all data was run through its proprietary underwriting algorithm suggested common question of law or fact that were capable of classwide resolution, the court said.

Affirming the denial of certification on Rule 23(b)(3) grounds, the court reversed denial of class certification under Rule 23(b)(2). In his separate opinion, Judge Richardson wrote that the district court permissibly struck all the class allegations, including those under Rule 23(b)(2).