The United States Court of Appeals for the Second Circuit this week squarely rejected the trend within that circuit to limit the showing that plaintiffs must make when seeking class certification. The new decision holds that plaintiffs must offer proof for each of the Rule 23 elements and may not satisfy the rule by making only "some showing" as to the elements. In re Initial Public Offering Securities Litigation, 2006 WL 3499937 (2d Cir. Dec. 5, 2006) ("IPO Litigation").
Following the Supreme Court’s pronouncement in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974), that "nothing in either the language or history of Rule 23 gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action," courts have split as to how thorough an examination of the Rule 23 elements is required. While the Fourth, Seventh, and Eleventh Circuits have required a rigorous analysis of the Rule 23 elements, the Second Circuit had suggested that less was required, that a plaintiff need only make "some showing" to support certification, and that district courts were prohibited by Eisen from addressing the merits of the case.
Applying precedent within the circuit, District Judge Shira A. Scheindlin had certified six of 310 consolidated class actions alleging a widespread fraudulent scheme by issuers, underwriters, and others to drive up the price of the stock of hundreds of issuers following initial public offerings. The Second Circuit reversed, rejecting the contention that a court should limit its inquiry into the Rule 23 elements where there is an overlap with merits issues. According to the Second Circuit, the district court must rule on each element of Rule 23, must assess all of the evidence (including conflicting evidence provided by experts), and may not satisfy itself with "some showing" or a lesser standard of proof. The appeals court then rejected class certification for the six cases, finding that, at least with respect to reliance and the required lack of knowledge of the scheme, plaintiffs could not satisfy the predominance requirement.
In its opinion, the Second Circuit expressly aligned itself with the decisions of the Fourth and Seventh Circuits and cited the Eleventh Circuit favorably. IPO Litigation, 2006 WL 3488837, at *15. The Second Circuit’s clarification of its approach to Rule 23 at least partly
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