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Defendant Class Actions Are Dead in Maryland State Courts

May 16, 2019

The Maryland Court of Appeals voted on Wednesday to adopt a new rule abolishing all defendant class actions in Maryland state courts. The new Rule 2-231, which is effective prospectively, explicitly limits the availability of class actions to plaintiff classes and bans lower courts from certifying defendant classes. This is welcome news to all businesses operating in Maryland, as businesses are no longer subject to the vagaries of liability as a member of a defendant class.  Previously, under the defendant class procedure, class defendants could be held liable without proper notice of the lawsuit, without the ability to choose their own representatives, and without the ability to test plaintiffs’ evidence and present their own defenses in court. The rule change has the primary effect of shoring up the due process rights of all defendant businesses in Maryland.

Background

Until May 15, 2019, Rule 2-231 of the Maryland Rules permitted members of a class to sue or be sued via parties representing the entire class if certain requirements were met. Thus, like the Federal Rules of Civil Procedure, Maryland rules permitted plaintiff class actions as well as defendant class actions. But, unlike federal practice, Maryland courts have no mechanism for interlocutory appeals of class certification determinations by the trial court, and Maryland law does not permit the Court of Appeals to create such a mechanism by rule. Most class action lawsuits involve a class of plaintiffs suing named defendants, but sometimes a plaintiff or plaintiffs will sue a class of defendants in federal courts or other state courts. A defendant class action had never before been certified in Maryland state courts, prior to Yang v. G & C Gulf, Inc., Case No. 403885V, where the Circuit Court for Montgomery County (Rubin, J.) certified a defendant class in January 2018.

Morgan Lewis represents one of many defendants in Yang, which involved a bilateral class action—where a class of plaintiffs sued a class of defendants—for monetary damages from allegedly unlawful “trespass tows” by a now-defunct tow operator. Car owners whose vehicles were towed from Maryland businesses sued the towing company for violations of state and county law, and after securing a consent judgment for $22 million in damages, they amended their claims to add the tow customers—the business property owners—on the theory that they are jointly liable for the tow company’s alleged violations. In a decision unprecedented in Maryland, the circuit court not only certified a plaintiff class of customers whose cars were towed, but also granted the plaintiffs’ request to certify a defendant class of businesses from whose property cars were towed by the tow company defendant. A subsequent settlement between the class representatives meant that absent defendant class members were liable for damages on claims they had no opportunity to challenge, and for which many received no notice.

Given the inherent inequities, the Maryland Rules Committee reviewed the case for potential changes to the rules governing defendant class actions. The committee considered whether Rule 2-231 could be amended to permit interlocutory appeals of orders certifying or refusing to certify a class, but interlocutory appeals are not permitted in Maryland. (See Rules Committee, Notice of Proposed Rules Changes, at 1-2.) With no ability to appeal a class certification decision, the most likely path to appellate review would be proceeding to final judgment, only to argue on appeal that the trial should be redone without certification. As an order granting certification of a defendant class increases pressure on the representative to settle on behalf of the entire class, this “death knell doctrine” recognized by federal courts, see Microsoft v. Baker, 137 S. Ct. 1702 (2017), is even more troublesome in the defendant class action context.

Due Process and Fairness Concerns

After reviewing Yang and defendant class actions more generally, the Rules Committee recommended abolishing defendant class actions altogether. (See Notice of Proposed Rule Changes, at 3-4 & n. 2-4.) The Rules Committee identified three due process concerns attendant to every defendant class action—the ability to opt out of a defendant class, the manner in which a defendant class representative is selected, and the notice sent to class members—and concluded that actions against defendant classes should not be permitted.

Morgan Lewis was deeply involved in submitting comments to the Rules Committee and the Maryland Court of Appeals on the proposal, supporting the rule change on account of the due process concerns identified by the committee as well as other inherent inequities between plaintiff class actions and defendant class actions, including that an absent plaintiff in a plaintiff class stands to gain while an absent defendant in a defendant class stands to lose without its participation. It is especially troubling to hold a defendant liable when it was never able to present defenses on its own behalf. The absent defendant class members also are unable to choose their class representative; the representative is often chosen by the plaintiffs, raising unique adequacy questions. And notice under the existing rule is purely a matter of discretion—absent defendant class members (as in Yang) may not receive any notice before the case has settled and they are liable for damages. Last, while the efficacy of defendant classes is diminished, perhaps completely, by respecting class members’ ability to opt out of the class, due process mandates such notice and opt out protections. For that reason, we submitted, Defendant classes are largely incompatible with fairness and due process.

Despite all these serious due process concerns, defendant class actions also did not serve any real efficiency or judicial economy purpose, given that plaintiffs already may join multiple defendants in a single action where appropriate under Rules 2-503, 2-504.1, or 2-212. The difference is that those rules preserve the due process rights of defendants to present their own defense that class actions do not.

On May 15, 2019, the Maryland Court of Appeals—the state’s highest court—voted to accept the proposed rule change to do away with defendant class actions. The vote was 5–1, with the Chief Judge not voting. Thus, plaintiffs may no longer may certify a defendant class absent legislative action.

Key Takeaways

While this issue arose in a case about joint liability for towing vehicles—an issue already broadly applicable to all property-owning businesses that permit towing companies to tow cars from their lots—the rule change is more broadly relevant. It is good news for every business operating in Maryland that may be a defendant in state court. As federal courts account for only about 10% of all litigation nationally, this exposure is and should be a significant focus. Absent legislative action to overturn the court’s decision, new defendant class actions lack any procedural vehicle in Maryland, and thus will not proceed. Defendants will have the opportunity to defend themselves in every case where they may be held liable, and avoid the perils of being lumped in with hundreds or thousands of others for settlement or liability purposes. While the Rules Committee left open the possibility that defendant class actions may return after another rule change if a “clearer picture” arises of how to deal with these due process concerns—an event we think is unlikely—for now, defendant classes are effectively dead in Maryland.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Jason R. Scherr
Patrick A. Harvey
James D. Nelson

Chicago
Kenneth M. Kliebard
Scott T. Schutte

Philadelphia
J. Gordon Cooney, Jr.

San Francisco
Molly Moriarty Lane

Los Angeles
Joseph Duffy