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(Article from Securities Law Alert, July 2017) 

For more information, please visit the Securities Law Alert Resource Center

On July 7, 2017, the Second Circuit relied on Morrison v. National Australia Bank, 561 U.S. 247 (2010) to vacate certification of two classes to the extent they included purchasers of notes that were not traded on a domestic exchange.[1] In re Petrobras Securities, 2017 WL 2883874 (2d Cir. 2017) (Garaufis, J.). The Second Circuit held the district court “erred in conducting its predominance analysis without considering the need for individualized Morrison inquiries” as to the “domesticity” of each note purchase.

The Second Circuit also held that Rule 23’s implied ascertainability requirement does not demand “a showing of administrative feasibility at the class certification stage.”

When Securities Are Not Traded on a Domestic Exchange, Individual Morrison Questions May Predominate Over Common Questions  

Rule 23(b)(3) requires that “questions of law or fact common to class members predominate over any questions affecting only individual members.” The Second Circuit explained that “[a] proper assessment of predominance in this action involves two predicate questions about the role of Morrison inquiries.” The first is whether “the determination of domesticity [is] material to” the class claims. The second is whether “that determination [is] subject to generalized class-wide proof such that it represents a common question rather than an individual one.”

With respect to the first question, the Second Circuit found the district court properly recognized that “a putative class member only has a viable cause of action if the specific [securities] sued upon were purchased in a qualifying ‘domestic transaction.’” The district court therefore limited the class definitions to those who purchased securities in “domestic transactions.”

However, the Second Circuit held “the district court failed to meaningfully address the second question” of whether domesticity is susceptible to class-wide proof. The Second Circuit explained that “a plaintiff may demonstrate the domesticity of a particular transaction by producing evidence ‘including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.’” Id. (quoting Absolute Activist Value Master Fund v. Ficeto, 677 F.3d 60 (2d Cir. 2012)). The Second Circuit found “[t]hese transaction-specific facts are not obviously susceptible to class-wide proof, nor did [p]laintiffs suggest a form of representative proof that would answer the question of domesticity for individual class members.”

The Second Circuit determined that “[o]n the available record, the investigation of domesticity appears to be an individual question requiring putative class members to present evidence that varies from member to member.” In reaching this conclusion, the Second Circuit found it significant that the district court had “already adjudicated several individualized Morrison inquiries.” The Second Circuit held “the potential for variation across putative class members—who sold them the relevant securities, how those transactions were effectuated, and what forms of documentation might be offered in support of domesticity” would likely “generate a set of individualized inquiries that must be considered within the framework of Rule 23(b)(3)’s predominance requirement.” The court vacated the district court’s order to the extent it included investors who purchased securities in “domestic transactions.”

Third Circuit’s “Heightened” Two-Step Ascertainability Test Does Not Apply in the Second Circuit 

“Rule 23 contains an implicit threshold requirement that the members of a proposed class be readily identifiable, often characterized as an ascertainability requirement.”

The Second Circuit recognized that the Third Circuit has “formally adopted a ‘heightened’ two-part ascertainability test under which plaintiffs must not only show that ‘the class is defined with reference to objective criteria,’ but also that ‘there is a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.’”  Id. (quoting Byrd v. Aaron’s, 784 F.3d 154 (3d Cir. 2015)). The Second Circuit joined the Sixth, Seventh, Eighth and Ninth Circuits in holding that the ascertainability requirement does not demand a showing of administrative feasibility.[2]

The Second Circuit noted that in Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), it previously stated that “[a] class is ascertainable when defined by objective criteria that are administratively feasible and when identifying its members would not require a mini-hearing on the merits of each case.” Id. (quoting Brecher, 806 F.2d 22). The Second Circuit found the Brecher court’s “language about ‘administrative feasibility’ and ‘mini-hearings’ was not strictly part of the holding, and was not intended to create an independent element of the ascertainability test.” “[R]ather, that language conveyed the purpose underlying the operative requirements of definiteness and objectivity.”

The Second Circuit “conclude[d] that a freestanding administrative feasibility requirement is neither compelled by [Second Circuit] precedent nor consistent with Rule 23.”