Johnston v. HBO Film Mgt Inc , 265 F.3d 178 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
9-14-2001
Johnston v. HBO Film Mgt Inc
Precedential or Non-Precedential:
Docket 00-8070
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"Johnston v. HBO Film Mgt Inc" (2001). 2001 Decisions. Paper 210.
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Filed September 14, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-8070
MARGARET L. JOHNSTON and PAUL E. FONTAINE, on
behalf of themselves and all others similarly situated,
Petitioners
v.
HBO FILM MANAGEMENT, INC., a Delaware corporation;
ENTERTAINMENT FINANCE SERVICES, INC., a Delaware
corporation; HOME BOX OFFICE, INC., a Delaware
corporation; KIDDER, PEABODY & CO., INCORPORATED,
a Delaware corporation; and SMITH BARNEY, INC., a
Delaware corporation,
On Appeal from the United States District Court
for the Western District of Pennsylvania
(Docket No. 95-1300)
District Judge: Honorable William L. Standish
Argued August 2, 2001
BEFORE: BECKER, MANSMANN, and GREENBERG,
Circuit Judges
(Filed: September 14, 2001)
Anthony P. Picadio (argued)
Tybe A. Brett
Picadio McCall Kane & Norton
600 Grant Street
4680 USX Tower
Pittsburgh, PA 15219-2702
Thomas W. Henderson
3975 One Oxford Centre
300 Grant Street
Pittsburgh, PA 15219
Attorneys for Appellants
Perry A. Napolitano (argued)
Gregory B. Jordan
Roy W. Arnold
Traci S. Rea
Reed Smith LLP
435 Sixth Avenue
Pittsburgh, PA 15219
Attorneys for Appellees HBO Film
Management, Inc., Entertainment
Finance Services, Inc. and Home
Box Office, Inc.
David A. Brownlee
Kenneth M. Argentieri
Michael J. Lynch
David L. McClenahan (argued)
Charles M. Tea
Paul E. Del Vecchio
Kirkpatrick & Lockhart LLP
535 Smithfield Street
1500 Oliver Building
Pittsburgh, PA 15222-2312
Attorneys for Appellees Kidder
Peabody & Co., Incorporated and
Smith Barney, Inc.
OPINION OF THE COURT
GREENBERG, Circuit Judge:
This case comes on before this court on an appeal from
an order of the district court entered on November 22,
2000, denying a motion for class certification filed by
plaintiffs Margaret Johnston and Paul Fontaine. The
plaintiffs were investors in Cinema Plus, a limited
2
partnership formed to finance the production of motion
pictures. They claim that the defendants made several
fraudulent misrepresentations in the marketing of Cinema
Plus, alleging various violations of the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. SS 1961-
1968, and state law claims. The plaintiffs filed a motion for
class certification which the district court, adopting the
report and recommendation of a magistrate judge, denied.
For the following reasons, we will affirm the district court's
order denying class certification.
I. BACKGROUND
Cinema Plus, a limited partnership, was formed in
Delaware in 1987 to produce and distribute feature-length
motion pictures. Defendants HBO Film Management, Inc.
and Entertainment Finance Services, Inc. were general
partners of Cinema Plus and, according to plaintiffs'
complaint, defendant Home Box Office, Inc. was a"de facto"
general partner of Cinema Plus. Defendants Kidder,
Peabody & Co., Inc. and Smith Barney, Inc. marketed
interests in Cinema Plus to the public.
The plaintiffs allege that the defendants made material
misrepresentations in marketing interests in Cinema Plus.
Specifically, the complaint claims that the brokers
distributed uniform marketing materials to their sales
representatives which, among other things, emphasized
Michael Douglas's participation in the production of films,
but failed to disclose that he was not under contract to
produce any films for Cinema Plus.1 See App. at 1398-1400
(amended compl. P 21); id. at 1403-04 (amended compl.
P 32). For instance, the marketing materials included such
statements as:
`Hell Drivers' to be produced by Michael
Douglas/Michael Phillips, will be the first partnership
production.
_________________________________________________________________
1. The remainder of the amended complaint is devoted to allegations of
misrepresentations regarding the relative risks involved in investing in
Cinema Plus. See App. at 1395-98. The plaintiffs, however, say very little
about these claims on this appeal, apparently choosing instead to focus
on their misrepresentation claims regarding Michael Douglas.
3
Michael Douglas is the hottest name in Hollywood
today, both as an actor who just won an Academy
Award and a producer. He has just announced his
newest production, `Hell Drivers,' and we own it!! That
kind of sizzle will get every client's attention.
Investors `could more than double [their] money' or
`earn a multiple of their investment' in three years
through films produced by Michael Douglas, Michael
Phillips, and Aaron Russo.
You know that Michael Douglas is one of the hottest
producers today in the movie business. But did you
know who was going to finance his next production?
You are.
Michael Douglas does not realize his profits as a
producer until the investor has been made whole.
Upside potential is a multiple of investment in three
years through films by Michael Douglas, Michael
Phillips, Aaron Russo and other top producers.
Id. at 1427-30. Similarly, the prospectus wrapper, a
summary of information contained in the prospectus
distributed to the brokers, included such statements as:
The Partnership has already signed three outstanding
producers: Michael Douglas, Michael Phillips and
Aaron Russo.
Cinema Plus has already contracted with three leading
producers: Michael Douglas . . . , Michael Phillips . . . ,
and Aaron Russo . . . .
Cinema Plus, L.P. is committed to working exclusively
with successful producers; only those with commercial
track records will produce the Partnership's films. The
Partnership has already signed Agreements with
Michael Phillips and Michael Douglas, through their
partnership, Mercury/Douglas Films . . . .
The producers already under contract to the
Partnership are responsible for a succession of hits
that have helped fuel revenue growth in the motion
picture industry.
4
Id. at 106-07; id. at 111. The sales representatives
purportedly relied upon these materials and represented to
the plaintiffs that Michael Douglas would produce two to
four films for Cinema Plus. The brokers, however, did not
disclose the alleged falsity of their statements.
Further, the plaintiffs claim written materials distributed
to the investors, namely the prospectus, created a false and
misleading impression, not otherwise rebutted, that Michael
Douglas was committed to produce films for Cinema Plus.
The prospectus states, in relevant part, that:
The Partnership has contracted for Michael S. Phillips
and Michael Douglas to render producing services for
a minimum of two and a maximum of four feature-
length motion pictures for the Partnership.
. . .
Either Mr. Phillips and/or Mr. Douglas will be actively
involved in a production capacity in all phases of
production of all Partnership Films produced under the
Mercury/Douglas Agreement.
Id. at 158, 173. The plaintiffs allege they relied
detrimentally on their brokers' misrepresentations and
omissions of material information as well as those in the
prospectus, in investing in Cinema Plus.
In fact, Michael Douglas did not produce any films for
Cinema Plus, although the limited partnership did finance
and market four films. The films were largely unsuccessful
financially, however, resulting in a loss for the partnership,
and ultimately, this lawsuit.
The plaintiffs' original complaint stated four counts,
alleging one claim arising under RICO, with the predicate
offenses of securities fraud, and state law claims for breach
of fiduciary duty, negligent misrepresentation and deceptive
business practices. The defendants filed motions to dismiss
the complaint which, in a report and recommendation filed
on January 30, 1996, a magistrate judge recommended be
granted. After objections were filed, the district court
adopted the magistrate judge's recommendations and
granted the defendants' motions. The plaintiffs then
appealed to this court.
5
On appeal, we reversed the district court's order as we
found that the facts alleged in the complaint stated a claim
under RICO. See Johnston v. HBO Film Mgmt., Inc. , 129
F.3d 1255 (3d Cir. 1997) (table). In our opinion, we
summarized the plaintiffs' claims:
In short, plaintiffs allege that the appellees
misrepresented that Cinema Plus was a safe and
prudent investment when, in reality, (1) its primary
purpose was to generate large commissions and fees
and create opportunities for self-dealing for the
defendants and (2) the `protection' of the [Assured
Return of Film Payments] was merely an illusory
benefit that obfuscated the risky nature of the
investment defendants were marketing.
Appellants' Br. Ex. A at 3 (magistrate judge's report &
recommendation). We, however, expressly did not address
the plaintiffs' claims regarding misrepresentations about
Michael Douglas's participation in Cinema Plus, finding
them to be outside the scope of our analysis. See id. at 3-4.
On remand, the defendants filed renewed motions to
dismiss, which the district court denied. Thereafter,
plaintiffs filed an amended complaint alleging the same four
counts. Then, they filed a motion for class certification,
which, in a report and recommendation filed October 18,
2000, the magistrate judge recommended be denied. On
November 22, 2000, the district court adopted the
recommendation and denied the plaintiffs' motion.
Therefore, on December 7, 2000, plaintiffs filed a petition
for permission to appeal from denial of class certification,
pursuant to Fed. R. Civ. P. 23(f). By order dated December
29, 2000, a motions panel of this court denied plaintiffs'
petition. See App. at 32. Then, on January 16, 2001,
plaintiffs filed a petition for rehearing. On March 15, 2001,
the motions panel vacated its earlier order and referred
plaintiffs' petition to a merits panel. See id. at 20.
Thereafter, on August 1, 2001, in light of our decision in
Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., No.
00-1586, ___ F.3d ___, 2001 WL 877524, at * 1-3 (3d Cir.
6
Aug. 6, 2001), we granted the plaintiffs' petition for leave to
appeal.2
II. DISCUSSION
In assessing whether the district court erred in denying
plaintiffs' motion for class certification, we apply the abuse
of discretion standard.3 See In re LifeUSA Holding Co., Inc.,
242 F.3d 136, 143 (3d Cir. 2001); Holmes v. Pension Plan
of Bethlehem Steel Corp., 213 F.3d 124, 136 (3d Cir. 2000).
A district court abuses its discretion if its decision " `rests
upon a clearly erroneous finding of fact, an errant
conclusion of law or an improper application of law to
fact.' " Newton, 2001 WL 877524, at *3 (quoting In re Gen.
Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55
F.3d 768, 783 (3d Cir. 1995)).
To obtain class certification, plaintiffs must establish all
four elements of Rule 23(a) along with one provision of Rule
23(b). See Georgine v. Amchem Prods., Inc., 83 F.3d 610,
624 (3d Cir. 1996); Wetzel v. Liberty Mut. Ins. Co., 508 F.2d
239, 248 (3d Cir. 1975). Rule 23(a) requires a showing of:
(1) numerosity; (2) commonality; (3) typicality; and (4)
adequacy of representation.4 See Fed. R. Civ. P. 23(a);
_________________________________________________________________
2. In 1998, the Supreme Court added a provision to Rule 23, governing
class actions, permitting interlocutory appeal of decisions granting or
denying class certification at a court of appeals' discretion. Recently,
in
Newton, we considered the standards for granting a petition to appeal
class certification decisions under Fed. R. Civ. P. 23(f). See Newton,
2001
WL 877524, at * 1-3. We indicated that a petition to appeal should be
granted to permit the court to address "the possible case-ending effect of
an imprudent class certification decision (the decision is likely
dispositive
of the litigation)," or an erroneous ruling by the district court, or
where
review would facilitate development of the law on class certification. Id.
at *3. Additionally, inasmuch as the court has the authority to grant or
deny petitions "on the basis of any consideration that [it] finds
persuasive," Fed. R. Civ. P. 23(f) committee note, the court may exercise
its discretion and grant interlocutory review outside of these
circumstances should it find other valid reasons for doing so. See id.
3. The district court had jurisdiction over this matter pursuant to 28
U.S.C. S 1331 and we have jurisdiction pursuant to 28 U.S.C. S 1292(e)
and Fed. R. Civ. P. 23(f).
4. Rule 23(a) provides:
One or more members of a class may sue or be sued as
7
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613, 117
S. Ct. 2231, 2245 (1997). If these requirements are satisfied,
the court also must find that the class action is
maintainable under Rule 23(b)(1), (2) or (3). See Fed. R. Civ.
P. 23(b). In this case, the plaintiffs sought certification
pursuant to Rule 23(b)(3), which requires that "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." Id.
In analyzing plaintiffs' motion, the magistrate judge
found that the plaintiffs failed to satisfy the"predominance"
requirement for class certification under Rule 23(b)(3). The
district court did not address expressly the certification
requirements of Fed. R. Civ. P. 23(a) or the superiority
element of Rule 23(b)(3). Nevertheless, because satisfaction
of each of the Rule 23 criteria is a necessary prerequisite to
class certification we address each criterion in turn.
A. Fed. R. Civ. P. 23(a)
1. Numerosity
To begin, proper class certification requires a finding of
numerosity, or that the putative class is "so numerous that
joinder of all members is impracticable." Fed. R. Civ. P.
23(a)(1). Here, inasmuch are there are thousands of
potential class members, joinder would be impracticable,
thereby satisfying this criteria.
2. Commonality
Second, the district court must find commonality, or that
"there are questions of law or fact common to the class."
_________________________________________________________________
representative parties on behalf of all only if (1) the class is so
numerous that joinder of all members is impracticable, (2) there
are
questions of law or fact common to the class, (3) the claims or
defenses of the representative parties are typical of the claims or
defenses of the class, and (4) the representative parties will
fairly
and adequately protect the interests of the class.
Fed. R. Civ. P. 23(a).
8
Fed. R. Civ. P. 23(a)(2). Commonality does not require an
identity of claims or facts among class members; instead,
"[t]he commonality requirement will be satisfied if the
named plaintiffs share at least one question of fact or law
with the grievances of the prospective class." In re the
Prudential Ins. Co. of Am. Sales Practices Litig. , 148 F.3d
283, 310 (3d Cir. 1998); Baby Neal v. Casey, 43 F.3d 48,
56 (3d Cir. 1994). In this case inasmuch as the question of
whether the defendants fraudulently misrepresented the
role of Michael Douglas in Cinema Plus is a factual and
legal claim common to the entire class this criterion also is
met.
3. Typicality
Third, in a properly certified class, the claims of the class
representatives must be typical of the class as a whole. See
Prudential, 148 F.3d at 310. In considering the typicality
issue, the district court must determine whether"the
named plaintiff[s'] individual circumstances are markedly
different or . . . the legal theory upon which the claims are
based differs from that upon which the claims of other
class members will perforce be based." Eisenberg v.
Gagnon, 766 F.2d 770, 786 (3d Cir. 1985) (internal
quotations omitted). This criteria does not require that all
putative class members share identical claims. Indeed, so
long as "the claims of the named plaintiffs and putative
class members involve the same conduct by the defendant,
typicality is established regardless of factual differences."
Newton, 2001 WL 877524, at *17 (citing Barnes v. Am.
Tobacco Co., 161 F.3d 127, 141 (3d Cir. 1998)); Baby Neal,
43 F.3d at 58 ("Commentators have noted that cases
challenging the same unlawful conduct which affects both
the named plaintiffs and the putative class usually satisfy
the typicality requirement irrespective of the varying fact
patterns underlying the individual claims."). Here, because
the claims of the plaintiffs and the putative class members
all arise from the alleged misrepresentations by the
defendants, the claims of the plaintiffs are typical of those
of the class.
4. Adequacy of Representation
Fourth, class representatives must "fairly and adequately
protect the interests of the class." Fed. R. Civ. P. 23(a)(4).
9
In analyzing this criteria, the court must determine whether
the representatives' interests conflict with those of the class
and whether the class attorney is capable of representing
the class. See Amchem, 521 U.S. at 625-26, 117 S.Ct. at
2250-51; Gen. Tel. Co. v. Falcon, 457 U.S. 147, 157 & n.13,
102 S. Ct. 2364, 2371 & n.13 (1982); Newton, 2001 WL
877524, at *18. Under the facts as described by the parties,
there are no foreseeable conflicts between the named and
putative plaintiffs. Further, there is no reason to conclude
that counsel would not suitably represent the class.
Accordingly, we find that this criterion, and therefore all of
the elements of Rule 23(a), are met.
B. Fed. R. Civ. P. 23(b)
Class certification also must satisfy the requirements of
Rule 23(b), specifically here the predominance and
superiority requirements of Rule 23(b)(3). Predominance
requires "that questions of law or fact common to the
members of the class predominate over any questions
affecting only individual members." Fed. R. Civ. P. 23(b)(3).
Superiority mandates that the district court determine that
the class action is the best method of fairly and efficiently
resolving the controversy. See id. To assist the court in
analyzing cases for predominance and superiority, Rule
23(b)(3) includes a nonexclusive list of relevant factors to
consider:
(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.
Id. Overall, as we have recognized repeatedly, "[i]ssues
common to the class must predominate over individual
issues, and the class action device must be superior to
other means of handling the litigation." Newton, 2001 WL
877524, at *19; Prudential, 148 F.3d at 313-14.
10
1. Predominance
The district court denied the plaintiffs' motion for class
certification based on its conclusion that individual issues
predominated over issues common to the class. See
Appellants' Br. Ex. A at 7 (magistrate judge's report &
recommendation). The court found that while the complaint
alleged that the prospectus and prospectus wrapper
contained representations that Michael Douglas would
produce between two and four movies for Cinema Plus, the
evidence indicated the plaintiffs' claims actually were based
on alleged oral misrepresentations.5 See id. The question,
then, was whether affirmative misrepresentations were
made to particular investors, an inquiry that necessarily
involves an individual review of what each investor was told
and what information was provided. See id. at 8. To that
end, the case was distinguishable from Prudential, 148 F.3d
283, where we upheld the certification of a class alleging
fraudulent insurance sales practices. See Appellants' Br.
Ex. A at 8 (magistrate judge's report & recommendation).
Moreover, because the plaintiffs claimed affirmative oral
misrepresentations, as opposed to omissions, determining
reliance necessarily required an individualized assessment.
See id. Finally, because issues of reliance and causation
predominated in the case, there would be "insurmountable
manageability problems" if it proceeded to trial. Id. at 9.
The soundness of the district court's decision turns on
two considerations: first, whether it was appropriate to look
beyond the plaintiffs' pleadings that alleged the defendants
made uniform oral and written misrepresentations and
determine whether the record supported their claims, and
_________________________________________________________________
5. The court also questioned, based on the representations made in the
prospectus and prospectus wrapper, whether the plaintiffs stated a
misrepresentation claim at all. See Appellants' Br. Ex. A at 7 & n.2
(magistrate judge's report & recommendation). Specifically, the court
looked to the prospectus and found that, when read as a whole, it was
clear that it stated that either Michael Douglas or Michael Phillips would
produce at least two movies for Cinema Plus. See id. at 7. Because
Michael Phillips indeed produced two movies for the partnership, the
court doubted whether there had been a misrepresentation. But,
because the defendants had not moved for summary judgment, the court
declined to decide the matter on this basis. See id.
11
second, whether the court determined correctly that
reliance could not be presumed.
As to the first issue, plaintiffs contend that class issues
predominate because the defendants made uniform oral
and written misrepresentations. Specifically, they point to
the prospectus and argue that because they, as investors,
are presumed to have read these materials, the defendants
made uniform misrepresentations to all putative class
members. Further, they point to the prospectus wrapper
and other uniform internal marketing materials distributed
to the brokers that also contain misrepresentations, and
claim the brokers relied upon them in making substantially
similar and misleading sales recommendations. The
evidence of record, however, simply does not support the
plaintiffs' claims.
The issue, then, is whether in making a class certification
decision the court must take as true the allegations in the
complaint where those allegations are unsupported, and in
some instances rebutted, by a well-developed record.
Specifically, we must decide whether the district court erred
in finding that notwithstanding plaintiffs' claim that the
brokers, relying upon uniform sales materials, made
materially similar misrepresentations, that plaintiffs' case
actually is based on individualized misrepresentations.
Recently, we addressed an issue of this nature in Newton
and held that "[i]n reviewing a motion for class certification,
a preliminary inquiry into the merits is sometimes
necessary to determine whether the alleged claims can be
properly resolved as a class action." Id. at 5; see Falcon,
457 U.S. at 160, 102 S.Ct. at 2372 (stating "it may be
necessary for the court to probe behind the pleadings
before coming to rest on the certification question"). In
Newton, faced with claims of a "common scheme" of
misrepresentation constituting a Rule 10b-5 private
securities fraud claim, we held that the case presented an
instance in which the court must probe beyond the surface
of plaintiffs' allegations. See id.
We began our analysis by examining the elements of the
underlying cause of action, noting that such an analysis is
critically important to the predominance determination
under Rule 23(b)(3). See id. at *8. This is so because:
12
the elements of the Rule 10b-5 claim which remain in
dispute, requiring proof of individualized reliance and
injury from each member of the proposed plaintiff class
effectively would prevent plaintiffs from proceeding with
a class action, since individual issues then would
overwhelm the common ones. On the other hand,
presuming these elements would resolve the problem of
balancing the substantive requirement of proof of
reliance and injury in securities cases against the
procedural requisites of Federal Rule of Civil Procedure
23. If proof of the essential elements of the cause of
action requires individual treatment, then class
certification is unsuitable.
Id. (internal quotations and citations omitted). Then, in
considering the elements of reliance and economic injury,
we looked to the parties' evidence and concluded, despite
plaintiffs' allegations that they had suffered economic
injury, that the plaintiffs were not entitled to a presumption
of class-wide injury. See id. at *15. Accordingly, we found
that because each individual claim would have to be
examined to ascertain whether or not there was injury,
individual issues overwhelmed common questions among
the class. See id. at *19. We therefore held that class
certification inappropriate. See id. at *24.
Our decision in In re LifeUSA Holding Inc., 242 F.3d 136,
also is instructive. There, the district court certified a class
of plaintiffs who had purchased annuity policies based on
the court's finding that "the gravamen of plaintiffs' claims is
that Defendant's sales techniques and advertising
constituted an allegedly fraudulent scheme." Id. at 138.
However, on appeal and for the first time, plaintiffs argued
their claims were not based on the sales presentations
made by the defendant's agents, but rather were predicated
on post-sale fraud and misconduct. See id. We therefore
vacated the district court's certification order and remanded
the matter for a redetermination of the issue utilizing the
proper post-sale fraud allegations. See id.
Nevertheless, we addressed the merits of the district
court's certification decision. See id. at 143-50. In doing so,
we first focused on whether there was predominance, and
therefore commonality, among the plaintiffs' claims. See
13
id. at 144-45 ("Because common questions (commonality)
must be established before predominance can be found, we
turn to that element."). Relying on Georgine and Barnes,
two mass-tort cases, we noted that class certification was
inappropriate in cases that present individualized issues of
liability. See id. at 145 (citing Georgine, 83 F.3d at 610;
Barnes, 161 F.3d at 149). In Georgine, which involved
certification of a nationwide settlement class of persons
exposed to asbestos, we held that the predominance
requirement was not satisfied because "each individual
plaintiff 's claim raises radically different factual and legal
issues from those of other plaintiffs." Georgine, 93 F.3d at
618. Similarly, in Barnes we affirmed the decertification of
a class of cigarette smokers who asserted claims against a
cigarette manufacturer, finding that the individual issues
involved made class treatment inappropriate. See Barnes,
161 F.3d at 149.
Applying these principles, in LifeUSA we found that
commonality did not exist, and therefore common questions
could not predominate over individual issues. See LifeUSA,
242 F.3d at 147. We stated that the plaintiffs' claims arose
"not out of one single event or misrepresentation, but
claims allegedly made to over 280,000 purchasers by over
30,000 independent agents where the District Court found
that the sales presentations (hence the alleged
misrepresentations) were neither uniform nor scripted." Id.
at 145-46.
Further, we found that the district court's reliance on
Prudential was "misplaced and unfortunate" as the factual
backgrounds, as demonstrated through depositions,
affidavits and declarations, were markedly different. Id.
Unlike in Prudential, the annuity in LifeUSA was not sold
according to standard, uniform, scripted sales
presentations. Compare In re the Prudential Ins. Co. of Am.
Sales Practices Litig., 962 F. Supp. 450, 514 (D.N.J. 1997),
with LifeUSA, 242 F.3d at 146. Further, the LifeUSA
annuities were sold by independent agents who learned
about the annuity from written materials, some of which
were not uniform or generated by the defendant, and from
voluntary defendant-sponsored seminars. See LifeUSA, 242
F.3d at 146. Moreover, selling agents did not utilize the
14
marketing materials uniformly; some agents discarded the
materials entirely while others tailored their presentations
to each customer's objectives. See id.
Finally, the plaintiffs testified that if they received
information from the sales agents prior to purchasing
annuities, they neither relied upon nor recalled its
substance. See id. Therefore, we found the record to be
"uncompromising in revealing non-standardized and
individualized sales `pitches' presented by independent and
different sales agents, all subject to varying defenses and
differing state laws, thus making certification of
individualized issues inappropriate." Id. at 147. Thus, we
vacated the district court's certification order. See id. at
148.
In Szabo v. Bridgeport Machines, Inc., 249 F.3d 672 (7th
Cir. 2001), the Court of Appeals for the Seventh Circuit
helpfully discussed the issue before us. There, the district
court certified a nationwide class of persons who had
purchased machine tools manufactured by defendant,
alleging that the defendant, through its agents, fraudulently
represented the tools' abilities and limitations. See id. at
673. In doing so, the district court assumed that because
"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." Id. at
675. Therefore, the district court rejected the defendant's
argument that because plaintiff 's claim was based on oral
misrepresentations, which would be different for each
potential class member, certification was inappropriate. See
id.
On appeal, the court of appeals held that "[b]efore
deciding whether to allow a case to proceed as a class
action . . . a judge should make whatever factual and legal
inquiries are necessary under Rule 23." Id. at 676. The
Supreme Court had recognized in Falcon 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." Falcon, 457 U.S. at 160, 102
S.Ct. at 2372. The Szabo court found the same to be true
for Rule 23(b) as "[c]ertifying classes on the basis of
15
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." Szabo, 249 F.3d at 677.
Therefore, the court vacated the district court's certification
order, finding "[n]agging issues of choice of law,
commonality, and manageability beset this case" as "[i]t is
unlikely that dealers in different parts of the country said
the same things to hundreds of different buyers." Id.
Turning to this case, it is apparent that not only was it
appropriate, but also necessary, for the district court to
examine the factual record underlying plaintiffs' allegations
in making its certification decision. See Newton , 2001 WL
877524, at *5; LifeUSA, 242 F.3d at 145-48; see also
Szabo, 249 F.3d at 676. Further, applying the framework
utilized in Newton, it is clear the district court did not
abuse its discretion in finding that the record failed to
establish that common issues predominated over individual
issues in the case.
Similar to Newton, this case involves private securities
fraud claims under the Securities Exchange Act of 1934, 15
U.S.C. S 78j(b), although here they are raised as predicate
acts under RICO. In order to establish their claims,
plaintiffs must show that the defendants made
misstatements or omissions of material fact, with scienter,
in connection with the purchase or sale of securities, and
that the plaintiffs injuriously relied on the misstatements or
omissions. See, e.g., Weiner v. Quaker Oats Co., 129 F.3d
310, 315 (3d Cir. 1997); Kline v. First W. Gov't Securities,
Inc., 24 F.3d 480, 487 (3d Cir. 1994). As proof of two of
these essential elements requires individual treatment, we
conclude class certification is unsuitable. See Newton, 2001
WL 877524, at *8.
First, plaintiffs allege the defendants made uniform oral
and written misrepresentations. They point to the
prospectus as evidence of a uniform written
misrepresentation made to all plaintiffs. Further, relying on
the marketing materials and prospectus wrapper, they
contend that these uniform written materials establish that
the brokers' statements were uniform, as the brokers
certainly must have relied upon these materials in making
16
their sales presentations. The problem, however, is that the
record simply does not support these claims.
When the court made its certification decision it had
deposition testimony or affidavits from each of the
plaintiffs, several brokers, and a Cinema Plus investor other
than the plaintiffs. At his deposition, plaintiff Fontaine
testified that he did not know whether he ever had received
a prospectus, but that even if he had, he had not read it.
See App. at 573; id. at 645. Further, he testified that he
made the decision to invest in Cinema Plus as a result of
one to four conversations with his broker, but he does not
recall what his broker told him about Cinema Plus. He
testified, "I don't remember specifically what he said, but he
must have mentioned to me about Cinema Plus, Michael
Douglas, the amount of money I can make, double my
money in three or four years. Michael Douglas was the big
guy involved with this." Id. at 566-67. The deposition
continued with defendants' counsel asking, "So what you
remember about what he said concerning Michael Douglas
was that he was the big guy and the person that was going
to push this?" and Fontaine answering, "I assume that he
meant to promote these movies and even act in them, I
assumed." Id. at 567. Moreover, Fontaine denied having
heard several representations alleged in the complaint to
have been made as part of a uniform script read to
investors pertaining to the risks involved in the investment.
See id. at 599-603.
Similarly, plaintiff Johnston testified at her deposition
that she did not recall whether she received a Cinema Plus
prospectus, and that if she had, she never read it. See id.
at 855; id. at 873-74; id. at 891-93. Johnston did testify
unequivocally, however, that her broker stated that Michael
Douglas was going to produce movies for Cinema Plus. See
id. at 849. But, she testified that she did not discuss the
relative investment risks with her broker because he knew
her individual tastes well enough to know that she would
not want to take a risk. See id. at 933.
Johnston's broker, Robert Kaiser, testified that he
received some, but not all, of the alleged uniform sales
materials, but that he did not read from or rely upon these
materials in making investment recommendations. See id.
17
at 1029-30; id. at 1031-32; id. at 1071-72. He testified that
instead his "typical practice [was] to make a list of bullet
points describing the pros and cons and to go over those
with a person," the information for which was derived from
marketing materials, scripts and prospectuses. Id. at 1009.
Nevertheless, he testified that he told Johnston that
Michael Douglas was going to produce two or more movies,
which was an important consideration regarding Cinema
Plus's investment potential. See id. at 77-80; id. at 93-95.
There were also affidavits before the court from several
brokers who sold units of Cinema Plus stating that they did
not use a standardized script or a uniform presentation in
selling shares of Cinema Plus. See id. at 1387 (Aff. of John
Jaeger) (stating his "presentation to various customers with
respect to Cinema Plus varied depending on the individual
circumstances of the customer and [his] relationship with
that customer."); id. at 1390 (Aff. of David Sysko) (same); id.
at 1392 (Aff. of Randall Carter) (same). Additionally, their
discussions with respect to Cinema Plus varied from
customer-to-customer depending on the questions and
comments of the customer. See id.
Finally, the court considered the affidavit of James
Gleason, a Cinema Plus investor. He stated expressly that
he did not base his decision to invest in Cinema Plus on
the likelihood that a particular producer would produce
movies for the partnership. See id. at 1379-80. Therefore,
the record from the plaintiffs' viewpoint is at best
inconclusive as to whether the defendants made uniform
oral representations in selling units of Cinema Plus.
In cases raising issues similar to those here, it has
become well-settled that, as a general rule, an action based
substantially on oral rather than written communications is
inappropriate for treatment as a class action. See, e.g.,
LifeUSA, 242 F.3d at 145-46; Simon v. Merrill, Lynch, Pierce,
Fenner & Smith, Inc., 482 F.2d 880, 882 (5th Cir. 1973);
Glick v. E.F. Hutton & Co., Inc., 106 F.R.D. 446, 449 (E.D.
Pa. 1985). For example, in Seiler v. E.F. Hutton & Co., 102
F.R.D. 880, 889 (D.N.J. 1984), the court rejected as
insufficient plaintiffs' allegations that the brokers allegedly
relied upon uniform marketing materials because the
record revealed that individual brokers made individual
18
decisions about upon what to rely and what to say to
customers.
Therefore, it is clear that the district court did not abuse
its discretion in finding that individual issues overwhelmed
issues common to the class with regard to the element of a
misstatement or material omission. We reach this
conclusion notwithstanding plaintiffs' reliance on
Prudential. The plaintiffs claim that the district court
erroneously distinguished Prudential on the ground that it
did not involve affirmative misrepresentations. Indeed, it
does appear that the district court took this clearly
unsupported view of Prudential in distinguishing it from the
present case. Compare Prudential, 148 F.3d at 310 n.48
(finding certification of settlement class was appropriate
where allegedly improper sales practices were carried out
by use of "substantially similar, and sometimes identical
oral and written misrepresentations," "the required use of
pre-approved written marketing materials," and material
omissions), with Appellants' Br. Ex. A at 8 (magistrate
judge's report & recommendation) (stating Prudential
involved only failure to disclose material facts and
allegations that specific information was withheld from all
investors). Nevertheless, the district court did not abuse its
discretion in finding that Prudential was distinguishable.
Prudential involved uniform, scripted and standard sales
presentations by the defendants. See id. at 310-11. Indeed,
in Prudential the district court found specifically that "the
oral component of the fraudulent sales presentations did
not vary appreciably among class members." Prudential,
962 F. Supp. at 514. Moreover, the agents in Prudential
were career agents who worked exclusively for and were
trained uniformly by Prudential, and who relied on uniform
sales materials. See id. at 514-15. Here, however, the
plaintiffs did not establish that Cinema Plus units were sold
according to standard, uniform, scripted sales
presentations. This much is apparent from the starkly
different accounts of plaintiffs Johnston and Fontaine as to
how and why they came to invest in Cinema Plus. Further,
the brokers denied using uniform presentations, and more
importantly, there is no evidence that, other than Kaiser
and Fontaine's broker, any made the alleged
19
misrepresentation about Michael Douglas at all. Finally,
Johnston and Fontaine both testified that if they received
written sales information or prospectuses from defendants
prior to purchase, they did not rely on them, nor could they
recall their substance. In this sense, this case is very
similar to LifeUSA, where we held Prudential was
distinguishable. See LifeUSA, 242 F.3d at 146. So, too, do
we here.
We have not overlooked our statement in Prudential that:
While individual questions may arise during the course
of this litigation, we agree with the district court that
the presence of individual questions does not per se
rule out a finding of predominance. In particular, the
`presence of individual questions as to the reliance of
each investor does not mean that the common
questions of law and fact do not predominate.'
Eisenberg v. Gagnon, 766 F.2d 770, 786 (3d Cir. 1985).
Prudential, 148 F.3d at 315. Here, however, we do not know
the content of the individual representations as they were
not standard or scripted but were oral and varied.
Moreover, we do not know whether or to what extent the
representations facilitated the sales of Cinema Plus units.
In the circumstances, we cannot say "that questions of law
or fact common to the members of the class predominate
over any questions affecting only individual members." Rule
23(b)(3). We emphasize this point to demonstrate that we
are in no sense undermining Prudential.
In addition to finding this case presented individual
questions regarding the alleged misrepresentations, the
district court found this case involved individual questions
of reliance. The plaintiffs dispute this finding, arguing
instead that they are entitled to a presumption of reliance.6
_________________________________________________________________
6. In addition to the argument described below, plaintiffs contend they
are entitled to a presumption of reliance based on the "fraud of the
market" theory. See Peil v. Speiser, 806 F.2d 1154, 1161 (3d Cir. 1986).
The plaintiffs concede that the traditional fraud on the market theory,
which applies where securities are traded on an open and developed
market and the market price of the securities incorporates the
misrepresentations, "does not technically apply here." Appellants' Br. at
20
In Affiliated Ute Citizens v. United States, 406 U.S. 128,
153-54, 92 S. Ct. 1456, 1472-73 (1972), the Supreme Court
held that in cases seeking to predicate Rule 10b-5 liability
upon omissions, reliance will be presumed from the
materiality of the information not disclosed. Conversely, no
presumption arises in cases of alleged misrepresentations.
See id.; Sharp v. Coopers & Lybrand, 649 F.2d 175, 187 (3d
Cir. 1981).7 The Court did not address, however, those
situations involving both misrepresentations and omissions.
Then, in Sharp, we held that in cases involving both
omissions and misrepresentations, the "proper approach to
the problem of reliance is to analyze the plaintiff 's
allegations, in light of the likely proof at trial, and
determine the most reasonable placement of the burden of
proof of reliance." Id. at 188. Otherwise, to maintain in
these cases an omission-misrepresentation dichotomy
"would require the trial judge to instruct the jury to
presume reliance with regard to omitted facts, and not to
presume reliance with regard to the misrepresented facts."
Id. By examining the plaintiffs' allegations and likely proof,
however, the court can decide, on a case by case basis,
whether the offenses can be characterized primarily as
omissions or misrepresentations, and therefore who most
appropriately bears the burden of proof. See id.
Applying the foregoing methodology, we concluded in
Sharp that plaintiffs were entitled to a presumption of
reliance. See id. at 189. There, plaintiffs brought a
securities fraud action against an accounting firm that
issued an opinion letter containing representations about
the deductibility of an investment. See id. at 178. The court
found that the opinion letter was intended to influence the
decisions of persons interested in the investment, and that
_________________________________________________________________
34. Nevertheless, they urge us to expand the theory to instances, such
as here, where the investment was sold during a closed period and the
initial price was set by the issuer rather than the market. See id. We
need not address this issue, however, as plaintiffs failed to raise it
before
the district court.
7. Sharp has been overruled on grounds not material here. See McCarter
v. Mitcham, 883 F.2d 196, 202 (3d Cir. 1989).
21
the defendant undoubtedly foresaw that it would have that
effect. See id. at 189. Because the defendant "facilitated the
transactions at issue but failed to disclose certain facts,"
and considering the likelihood that investors would rely on
the opinion letter, the court held that the burden of proving
reliance appropriately was placed on defendant. See id.
Similarly, in Hoxworth v. Blinder, Robinson & Co., Inc.,
903 F.2d 186, 202-03 (3d Cir. 1990), we applied the Sharp
analysis and concluded the plaintiffs were entitled to a
presumption of reliance. We found the case was predicated
on two allegedly fraudulent courses of conduct by
defendant: the failure to disclose excessive markups in
their purchases and sales of various penny stocks and the
failure to clarify true but misleading statements made
about its research department, namely that the department
consisted of one person who assembled information only
about companies whose securities the defendant had
underwritten. See id. at 202. The first of defendant's
actions involved pure omissions, making the Affiliated Ute
presumption fully applicable. See id. The second action
involved half-truths, which we held were "obviously closer
to omissions than are `pure' misrepresentations," and that
would foreseeably influence investors' decisions. Id.
Therefore, we held the district court did not err in"excusing
plaintiffs from their burden of proving reliance on those
nondisclosures and half-truths." Id.
More recently, in Joseph v. Wiles, 223 F.3d 1155, 1162-
63 (10th Cir. 2000), the Court of Appeals for the Tenth
Circuit addressed the issue, holding the plaintiff was not
entitled to a presumption of reliance. The plaintiff, an
aftermarket purchaser of debentures, brought a securities
fraud action alleging the seller misrepresented its financial
outlook and disseminated false information about the
company. See id. at 1162. The court expressly adopted the
Sharp analysis and "analyze[d] the complaint to determine
whether the offenses it alleges can be characterized
primarily as omissions or misrepresentations in order to
determine whether the Affiliated Ute presumption should
apply." Id. In doing so, the court noted that the analysis
was easier to describe than to apply because "every
misstatement both advances false information and omits
22
truthful information. Statements which are technically true
may be so incomplete as to be misleading (e.g., half-truths
or distortions)." Id.
Nevertheless, keeping in mind the principle that the
"presumption of reliance exists in the first place to aid
plaintiffs when reliance on a negative would be practically
impossible to prove," the court looked at the allegations in
the complaint and found that the plaintiff primarily alleged
misrepresentations. Id. at 1162-63. For example, the
complaint alleged that the defendant "consistently omitted
to disclose that its financial statements had been falsified
and that its sales, revenues, assets and shareholders'
equity had been artificially inflated. Defendants concealed
the existence of the unlawful scheme and the acts of
manipulation committed pursuant thereto." Id. at 1163.
Finally, the court concluded by noting that "[a]ny
fraudulent scheme requires some degree of concealment,
both of the truth and of the scheme itself," and that the
mere fact of this concealment cannot, and should not,
transform a misrepresentation into an omission. Id. "To do
otherwise would permit the Affiliated Ute presumption to
swallow the reliance requirement almost completely." Id.
Applying Sharp to this case, we find that plaintiffs'
allegations are based on misrepresentations, rather than
omissions, by defendants. Their primary claim is that the
defendants misrepresented that Michael Douglas would
participate in the production of two to four films for Cinema
Plus. This claim should not be transformed into an
omission simply because the defendants failed to disclose
that the allegedly misleading fact was untrue. Under an
approach of that nature nearly any misrepresentation could
become an omission, which, as the Joseph court noted,
would allow the presumption to swallow the reliance
requirement almost completely. See id. Further, the
omission alleged would have no impact absent the
misrepresentation, or in other words, a misrepresentation is
necessary to create the specific expectation that the
omission does not negate. Here, defendants' failure to
inform plaintiffs that Michael Douglas was not under
contract to produce movies for Cinema Plus is meaningless
without the representation that Douglas would produce
23
movies. Finally, this case is not one where reliance would
be difficult for the plaintiffs to prove, while it would be
extraordinarily difficult for the defendants to disprove, as
presumably plaintiffs know whether they acted on or as a
result of the information made available to them.
We emphasize that in reaching our result we have taken
into account our decisions in Sharp and Hoxworth. There,
we were presented with situations similar to that here,
namely failures to clarify misleading statements, but held
that the plaintiffs were entitled to a presumption of
reliance. See Hoxworth, 903 F.2d at 202; Sharp, 649 F.2d
at 189. In so holding, we looked to whether the defendants'
actions facilitated the transactions, and whether it was
foreseeable that defendants' actions would influence the
plaintiffs' decisions. See Hoxworth, 903 F.2d at 202; Sharp,
649 F.2d at 189. Here, arguably defendants'
representations that Michael Douglas would produce two to
four films facilitated the sale of Cinema Plus units and
influenced plaintiffs to invest therein. However, Sharp and
Hoxworth are distinguishable in that in both cases we
found the alleged misstatements and half-truths were
uniform. In Hoxworth, the defendant's brokers "were
trained to solicit new business in a carefully scripted
sequence of three consecutive phone calls made to
prospective customers." Hoxworth, 903 F.2d at 192.
Similarly, in Sharp, all of the plaintiffs received the
misleading opinion letter written by defendant. See Sharp,
649 F.2d at 178. Here, there is neither a finding, nor
evidence upon which we reasonably could find, that the
brokers utilized, and the plaintiffs received, a uniform sales
pitch or uniform representations regarding investing in
Cinema Plus. Therefore, it is questionable whether, or to
what extent, the alleged misrepresentation facilitated or
influenced the sales of Cinema Plus units. Accordingly, we
find that the district court did not err in concluding
plaintiffs were not entitled to a presumption of reliance, and
therefore did not abuse its discretion in concluding the
plaintiffs failed to establish the predominance requirement
of Rule 23(b).
2. Superiority
In light of the foregoing discussion, we need not discuss
the superiority requirement at length. A class action must
24
represent the best "available method[ ] for the fair and
efficient adjudication of the controversy." Fed. R. Civ. P.
23(b)(3). It is within this requirement that the court should
address "the difficulties likely to be encountered in the
management of a class action." Fed. R. Civ. P. 23(b)(3)(D).
The district court concluded that given the individualized
nature of proving misrepresentations and reliance, the case
would present "unsurmountable" manageability problems.
The court found that "[a]ssuming that the representative
plaintiffs are typical of all plaintiffs, individual inquiry
would be necessary with respect to each class member
concerning their receipt of the prospectus, whether they
read it, and whether they relied upon it." Appellants' Br.
Ex. A at 9 (magistrate judge's report & recommendation).
Because of the number of potential class members, the
court held that a trial involving this amount of individual
inquiry would be impracticable. See id. at 10. As the
foregoing discussion demonstrates, we conclude the district
court did not abuse its discretion in reaching this decision.
Trial of this case would involve essentially countless mini-
trials to determine what alleged misrepresentation was
made to each individual plaintiff, whether that person relied
upon the statement, and the applicability of any defenses.
Obviously, establishing proof of each of these elements and
defenses would present severe manageability problems for
the court.
III. CONCLUSION
In sum, we affirm the district court's order entered
November 22, 2000, denying class certification. Although
the plaintiffs allege uniform written and oral
misrepresentations by defendants, they failed to
substantiate their claims. Further, the district court
properly concluded plaintiffs were not entitled to a
presumption of reliance. Therefore, adjudication of
plaintiffs' claims necessarily would require an
individualized analysis of each claim, including the form of
the misrepresentation, whether it was relied upon, and the
availability of any defenses. Clearly, individual issues
predominate over issues common to the class and the class
action is not the superior method of adjudicating this case.
25
Therefore the district court did not abuse its discretion in
denying certification here.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
26