Szabo, John D. v. Bridgeport Machines ( 2001 )


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  • In the
    United States Court of Appeals
    For the Seventh Circuit
    No. 01-8003
    John D. Szabo, doing business as Zatron,
    Plaintiff-Appellee,
    v.
    Bridgeport Machines, Inc.,
    Defendant-Appellant.
    Appeal from the United States District Court
    for the Northern District of Indiana, Fort Wayne Division.
    No. 1:00cv200--William C. Lee, Chief Judge.
    Submitted April 4, 2001--Decided May 4, 2001
    Before Posner, Easterbrook, and Williams, Circuit
    Judges.
    Easterbrook, Circuit Judge. The district court
    has certified a nationwide class of all persons
    who since the beginning of 1996 have bought
    machine tools that include a "DX-32 Control Unit"
    manufactured by Bridgeport Machines. 2001 U.S.
    Dist. Lexis 308 (N.D. Ind. Jan. 12, 2001). The DX-
    32 unit combines computer hardware and software
    to direct machine tools in performing complex
    tasks, such as milling metal in three dimensions.
    Plaintiff John Szabo believes that all DX-32
    units sold during the past five years are
    defective and that Bridgeport (or its agents)
    also committed fraud in describing to customers
    the abilities (and limitations) of milling
    machines equipped with DX-32 units. According to
    Szabo the class contains "hundreds" of customers,
    and the complaint seeks more than $100,000 from
    Bridgeport in damages for each. Bridgeport has
    filed a petition under Fed. R. Civ. P. 23(f) and
    Fed. R. App. P. 5 asking us to review the
    district court’s order certifying the class.
    A nationwide class in what is fundamentally a
    breach-of-warranty action, coupled with a claim
    of fraud, poses serious problems about choice of
    law, the manageability of the suit, and thus the
    propriety of class certification. See In re
    Rhone-Poulenc Rorer Inc., 
    51 F.3d 1293
     (7th Cir.
    1995). The warranty action is itself governed by
    Connecticut law, as each contract provides.
    (Connecticut is Bridgeport Machines’ home state.)
    But claims for fraud and negligent
    misrepresentation may depend on who made the
    representations, where, and on whose behalf. Most
    of the machine tools apparently were sold, and
    the representations in question made, by
    Bridgeport’s distributors rather than by
    Bridgeport’s own employees. Were these
    representations made with Bridgeport’s approval
    (or knowledge)? If so, then Connecticut law might
    apply across the board (as the district court
    concluded), but if not then the applicable law
    likely would be supplied by the state in which
    the statements were made. Connecticut law
    recognizes negligent misrepresentation as a
    distinct tort. D’Ulisse-Cupo v. Notre Dame High
    School, 
    520 A.2d 217
    , 223-25 (Conn. 1987).
    Indiana, where Szabo purchased and uses his
    milling machine, does not. Darst v. Illinois
    Farmers Insurance Co., 
    716 N.E.2d 579
    , 584 (Ind.
    App. 1999). States also differ substantially in
    their willingness to permit buyers of commercial
    products to recover in tort for defects that are
    covered by warranties. Compare GTE Mobilnet of
    South Texas LP v. Texas Cellular, Inc., 
    955 S.W.2d 286
     (Tex. App. 1997), with Creative Demos,
    Inc. v. Wal-Mart Stores, Inc., 
    142 F.3d 367
     (7th
    Cir. 1998) (Indiana law). Differences of this
    kind cut strongly against nationwide classes, as
    we held in Rhone-Poulenc Rorer. Moreover, oral
    representations may vary substantially from one
    dealer (or occasion) to another, destroying the
    commonality of the claims. See, e.g., Nagel v.
    ADM Investor Services, Inc., 
    65 F. Supp. 2d 740
    ,
    746 (N.D. Ill. 1999), affirmed, 
    217 F.3d 436
     (7th
    Cir. 2000). To top this off, the DX-32 control
    units may work differently in different machine
    tools, and they may do well for some kinds of
    work (with a given tool) even if they are
    unsuited to others. These and other potential
    sources of variation account for the fact that
    few warranty cases ever have been certified as
    class actions--let alone as nationwide classes,
    with the additional choice-of-law problems that
    complicate such a venture.
    The district judge recognized that the request
    for class certification presented difficult
    problems, and that on key points Szabo’s position
    had been contested. Szabo asserts, for example,
    that all oral representations by all Bridgeport
    distributors everywhere have been either
    authorized or ratified by Bridgeport itself;
    Bridgeport contends that this is untrue.
    Resolution of this dispute is vital to any
    sensible decision about class certification.
    Szabo contends that the DX-32 unit is unsuited to
    any machine tool with which it may be mated;
    Bridgeport contends that its operation depends at
    least in part on the tool it is controlling.
    Again the propriety of a class comprising all
    buyers of all machine tools that include DX-32
    control units depends on the outcome of this
    disagreement. There are other important disputes
    that we need not discuss, for the district court
    handled all of them in the same way: the judge
    assumed that whatever Szabo alleges must be true.
    Proceeding as if class certification under Rule
    23 were governed by the same principles as
    evaluating the sufficiency of the complaint under
    Rule 12(b)(6), the district judge stated:
    since the class determination is made at
    the pleading stage of the action, the
    substantive allegations in the complaint
    are accepted as true for purposes of the
    class motion. In re Synthroid Marketing
    Litig., 
    188 F.R.D. 287
    , 290 (N.D. Ill.
    1999); Jefferson v. Security Pacific
    Financial Svcs., Inc., 
    161 F.R.D. 63
    , 66
    (N.D. Ill. 1995).
    2001 U.S. Dist. Lexis 308 at *7. The opinion
    contains several variations on the same theme,
    such as:
    Bridgeport relies on Szabo’s deposition,
    wherein he indicated that numerous oral
    representations were made to him by
    Bridgeport’s alleged agent (Advanced
    Machinery), as well as a demonstration of
    the product. Bridgeport then concludes
    that Szabo’s claim is one based on oral
    misrepresentations, which oral
    misrepresentations would be different for
    each potential Class member, and,
    therefore, class certification is not
    permissible. Clearly, Bridgeport is
    forgetting that this court must accept the
    substantive allegations of Szabo’s
    complaint as true. In re Synthroid Mktg.
    Litig., 
    188 F.R.D. 287
    , 290 (N.D. Ill.
    1999).
    Id. at *15. And this passage:
    [The court follows] the principle that, in
    ruling on a class certification, the
    question is ’whether plaintiff is
    asserting a claim which, assuming its
    merit, will satisfy the requirements of
    Rule 23. . . .’ Eggleston v. Chicago
    Journeymen Plumbers’ Local No. 130, 
    657 F.2d 890
    , 895 (7th Cir. 1981) (emphasis
    added). . . . Bridgeport is not permitted,
    at this stage, to contest the validity of
    [Szabo’s] theory that the local dealer
    with whom [Szabo] dealt was Bridgeport’s
    agent.
    Id. at *40. In sum, the district judge certified
    the class without resolving factual and legal
    disputes that strongly influence the wisdom of
    class treatment. The judge stated that he had no
    other option.
    For two reasons, we have granted Bridgeport’s
    request for discretionary appellate review under
    Rule 23(f). First, the class certification turns
    a $200,000 dispute (the amount that Szabo claims
    as damages) into a $200 million dispute. Such a
    claim puts a bet-your-company decision to
    Bridgeport’s managers and may induce a
    substantial settlement even if the customers’
    position is weak. This is a prime occasion for
    the use of Rule 23(f), not only because of the
    pressure that class certification places on the
    defendant but also because the ensuing settlement
    prevents resolution of the underlying issues. See
    Blair v. Equifax Check Services, Inc., 
    181 F.3d 832
    , 834-35 (7th Cir. 1999). Accepting an appeal
    in a big-stakes case is especially appropriate
    when the district court’s decision is
    problematic, as it is here. Second, the district
    court’s decision to certify the class implies
    that important legal principles have evaded
    attention by appellate courts. Id. at 835. At
    critical junctures the district judge cited only
    decisions by other district judges, most in cases
    later settled and thus not subject to appellate
    consideration. By granting review now, we can
    consider whether these cases correctly understood
    the applicable principles.
    Which, we hold, they did not. The proposition
    that a district judge must accept all of the
    complaint’s allegations when deciding whether to
    certify a class cannot be found in Rule 23 and
    has nothing to recommend it. The reason why
    judges accept a complaint’s factual allegations
    when ruling on motions to dismiss under Rule
    12(b)(6) is that a motion to dismiss tests the
    legal sufficiency of a pleading. Its factual
    sufficiency will be tested later--by a motion for
    summary judgment under Rule 56, and if necessary
    by trial. By contrast, an order certifying a
    class usually is the district judge’s last word
    on the subject; there is no later test of the
    decision’s factual premises (and, if the case is
    settled, there could not be such an examination
    even if the district judge viewed the
    certification as provisional). Before deciding
    whether to allow a case to proceed as a class
    action, therefore, a judge should make whatever
    factual and legal inquiries are necessary under
    Rule 23. This would be plain enough if, for
    example, the plaintiff alleged that the class had
    10,000 members, making it too numerous to allow
    joinder, see Rule 23(a)(1), while the defendant
    insisted that the class contained only 10
    members. A judge would not and could not accept
    the plaintiff’s assertion as conclusive; instead
    the judge would receive evidence (if only by
    affidavit) and resolve the disputes before
    deciding whether to certify the class. What is
    true of disputes under Rule 23(a)(1) is equally
    true of disputes under Rule 23(b)(3). A court may
    certify a class under Rule 23(b)(3) only if it
    finds that all of the prerequisites (such as
    numerosity) have been demonstrated, and in
    addition
    the court finds that the questions of law
    or fact common to the members of the class
    predominate over any questions affecting
    only individual members, and that a class
    action is superior to other available
    methods for the fair and efficient
    adjudication of the controversy. The
    matters pertinent to the findings include:
    (A) the interest of members of the class
    in individually controlling the prosecution
    or defense of separate actions; (B) the
    extent and nature of any litigation
    concerning the controversy already
    commenced by or against members of the
    class; (C) the desirability or
    undesirability of concentrating the
    litigation of the claims in the particular
    forum; (D) the difficulties likely to be
    encountered in the management of a class
    action.
    Questions such as these require the exercise of
    judgment and the application of sound discretion;
    they differ in kind from legal rulings under Rule
    12(b)(6). And if some of the considerations under
    Rule 23(b)(3), such as "the difficulties likely
    to be encountered in the management of a class
    action", overlap the merits--as they do in this
    case, where it is not possible to evaluate
    impending difficulties without making a choice of
    law, and not possible to make a sound choice of
    law without deciding whether Bridgeport
    authorized or ratified the dealers’
    representations--then the judge must make a
    preliminary inquiry into the merits.
    Courts make similar inquiries routinely under
    Rule 12(b)(1) and 12(b)(2) before deciding
    whether they possess jurisdiction over the
    subject matter of the case and the persons of the
    defendants, the location of the proper venue,
    application of forum non conveniens, and other
    preliminary issues. Often personal jurisdiction
    is closely linked to the nature, and merit, of
    the claim being asserted, see, e.g., Sheet Metal
    Workers’ National Pension Fund v. Elite Erectors,
    Inc., 
    212 F.3d 1031
     (7th Cir. 2000), but this
    does not mean that the judge will just take the
    plaintiff’s word about what happened. Nor will
    the court accept the plaintiff’s say-so when
    deciding how much could be recovered (and thus
    whether the amount in controversy for diversity
    jurisdiction is present), even though the maximum
    recovery depends strongly on the merits. See,
    e.g., Pratt Central Park Limited Partnership v.
    Dames & Moore, Inc., 
    60 F.3d 350
     (7th Cir. 1995).
    When jurisdiction or venue depends on contested
    facts--even facts closely linked to the merits of
    the claim--the district judge is free to hold a
    hearing and resolve the dispute before allowing
    the case to proceed. A motion under Rule 12(b)(6)
    is unique in requiring the district judge to
    accept the plaintiff’s allegations; we see no
    reason to extend that approach to Rule 23, when
    it does not govern even the other motions
    authorized by Rule 12(b).
    The district judge thought that Eisen v.
    Carlisle & Jacquelin, 
    417 U.S. 156
    , 177-78
    (1974), adopts the approach of Rule 12(b)(6) for
    decisions under Rule 23. We do not read Eisen so.
    The Court observed that the 1966 amendment to
    Rule 23 departed from the earlier handling of
    class claims by placing certification ahead of a
    decision on the merits. A class thus can lose as
    well as win, while in a permissive-intervention
    system the case is decided on the merits before
    the identities of the parties to be bound are
    known. The success of the 1966 amendments (which
    are still in force) depends on making a
    definitive class certification decision before
    deciding the case on the merits, and on judicial
    willingness to certify classes that have weak
    claims as well as strong ones. A court may not
    say something like "let’s resolve the merits
    first and worry about the class later" (Rule
    23(c)(1) requires the certification decision to
    be made "[a]s soon as practicable after the
    commencement of an action brought as a class
    action") or "I’m not going to certify a class
    unless I think that the plaintiffs will prevail."
    But nothing in the 1966 amendments to Rule 23, or
    the opinion in Eisen, prevents the district court
    from looking beneath the surface of a complaint
    to conduct the inquiries identified in that rule
    and exercise the discretion it confers.
    Plaintiffs cannot tie the judge’s hands by making
    allegations relevant to both the merits and class
    certification. We said as much in Eggleston:
    "Eisen has not been interpreted so broadly . . .
    as to foreclose inquiry into whether plaintiff is
    asserting a claim which, assuming its merit, will
    satisfy the requirements of Rule 23 as
    distinguished from an inquiry into the merits of
    plaintiff’s particular individual claim." 657
    F.2d at 895.
    The district court’s approach, by contrast, is
    reminiscent of the "across-the-board" rule
    jettisoned by General Telephone Co. v. Falcon,
    
    457 U.S. 147
     (1982). In circuits following the
    across-the-board rule, district judges were
    required to assume that all members of a proposed
    class were situated similarly to plaintiff and to
    certify classes "across the board." Falcon held,
    however, that similarity of claims and situations
    must be demonstrated rather than assumed. The
    Court pointedly observed that "sometimes it may
    be necessary for the court to probe beyond the
    pleadings before coming to rest on the
    certification question. . . . [A]ctual, not
    presumed, conformance with Rule 23(a) remains .
    . . indispensable." 457 U.S. at 160. That is
    equally true of Rule 23(b). Certifying classes on
    the basis of incontestable allegations in the
    complaint moves the court’s discretion to the
    plaintiff’s attorneys-- who may use it in ways
    injurious to other class members, as well as ways
    injurious to defendants. Both the absent class
    members and defendants are entitled to the
    protection of independent judicial review of the
    plaintiff’s allegations.
    Szabo’s proposed class is highly problematic,
    for reasons given in Rhone-Poulenc Rorer and
    sketched above. Nagging issues of choice of law,
    commonality, and manageability beset this case.
    It is unlikely that dealers in different parts of
    the country said the same things to hundreds of
    different buyers. (Szabo stresses that Bridgeport
    accepted each order at its home office, but this
    does not demonstrate that Bridgeport knew of or
    ratified any particular representation by any
    given dealer.) It is unlikely that other models
    of milling machines exhibit the same problems
    that Szabo says that the DX-32 unit has caused in
    his model. And it is unnecessary to certify a
    nationwide class. Each buyer has a substantial
    claim, of the sort that could be, and often is,
    pursued independently. If any class treatment is
    appropriate, a class limited to a single state
    (or customers of a single dealer) would be more
    practical--though buyers in a single state (or of
    a single kind of machine) may be too few to
    justify class treatment. Now that the district
    court is free to pierce the allegations of the
    complaint, it may find these and other daunting
    obstacles good reasons to deny Szabo’s request
    for class certification or certify a more limited
    class. The order certifying the class accordingly
    is vacated, and the case is remanded for further
    proceedings consistent with this opinion.