A class action lawsuit was filed in the United States District Court with the Eastern District of North Carolina against Pyxus International, Inc. (“Pyxus”). The lawsuit focuses on those persons who acquired shares in Pyxus between June 7, 2018 and November 8, 2018, a period which coincides with steep drops in the company’s share price. Class action lawsuits are common shareholder litigation, but what exactly is a class action lawsuit?
State or Federal Court?
Class action lawsuits are available in state court – including North Carolina state court – as well as in federal court. Since its effective date, the Class Action Fairness Act of 2005 (the “Act”) states that a class action should be brought in federal court when the amount in controversy exceeds $5,000,000 and the litigants are citizens of different states. Rule 23 of the Federal Rules of Civil Procedure provides the requirements and process of a federal class action suit, for which the plaintiff bears the burden of proof, explained in further detail below.
Class Action Prerequisites
Rule 23(a) lists four “prerequisites” to initiate a federal class action lawsuit. First, the size of the class of plaintiffs must be “so numerous that joinder of all members [of the class] is impracticable[.]” Second, the questions of law and/or fact in the claims or defenses must be common to the class. Third, the claims or defenses of those individuals serving as representative parties for the class are typical of the claims or defenses of the entire class. Finally, those individuals serving as representative parties for the class must “fairly and adequately protect the interests of the class.” All four prerequisites must be met; however, an analysis of Rule 23(b) is also required to determine if a class action may be brought.
Categories of Class Action Cases
In addition to satisfying all four prerequisites in Rule 23(a), the Act requires that a lawsuit fall in to one of three permissible categories of class actions.
The first class action category exists where concerns over negative consequences to the litigants, if required to participate in separate lawsuits, justifies class action as a more fair and consistent alternative. This category is further divided into two subcategories: those actions which create the risk of inconsistent standards and those which would dispose of or substantially impede nonparty members from protecting their interests if tried separately. The first subcategory permits a class action where separate actions would risk varying court judgments and likely create incompatible legal standards. Practically speaking, as applied to the case against Pyxus, a class action is permissible if separate plaintiffs could win on their claim that Pyxus made materially false or misleading statements and failed to disclose material adverse facts about the company’s bottom line based on differing theories of liability. For example, if some plaintiffs’ claims succeed because Pyxus lacked adequate internal controls over financial reporting, but the claims of others succeed because Pyxus failed to inform shareholders about longer shipping cycles and their potential impact on the company’s profit margins, Pyxus would be left with two different standards to avoid further liability. The first subcategory seeks to avoid this problem. The second of these subcategories addresses problem of plaintiffs with limited means – if each plaintiff filed a separate action, and thus bore the full financial burden of litigation – would financial limitations, rather than the strength of their legal arguments, prohibit or impair their ability to hold the opposing party accountable? Permitting the class members to join forces (and resources) avoids this problem.
The second class action category involves lawsuits in which the class is seeking injunctive or declaratory relief (i.e., damages other than an award of money). Case law in other circuits indicates that this is not a strict exclusion of monetary damages. A class action may still fall into this category even if the class is seeking monetary damages, as long as those monetary damages are incidental to the overall relief sought.
The final class action category involves lawsuits in which the common questions of law or fact among the class members “predominate” over questions of law or fact which are distinct between the class members. Further, a lawsuit fits this category if the class action process is the superior method for obtaining a fair and efficient adjudication of the dispute. Although seemingly straightforward, the requirements of predomination and superiority set a deceptively high bar. For example, if the damages sought or calculated are too individualized, even if the basis for the damages is largely the same, the United States Supreme Court ruled that such a class fails the predomination requirement.
Certification: Does the Purported Class Meet the Act’s Requirements?
Certification is the court’s determination as to whether the perquisites are met and the class action falls into at least one of the three permitted categories. The process of certification of a class is governed by Rule 23(c). In the interest of avoiding delay, Rule 23(c) requires the court to make this determination at “an early practicable time after a person sues or is sued as a class representative[.]” Notice of the court’s certification differs between the categories of class actions, with a more burdensome notice requirement applied to the predomination and superiority category. The certification is appealable pursuant to Rule 23(f). Finally, pursuant to Rule 23(g), upon successful certification, the court must appoint class counsel to represent and serve the interests of the class.
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