NC Supreme Court Issues Class Action Opinion

The so-called “Northern Beltway” around Winston-Salem – in part from litigation efforts and in part from lack of funding – has never really gotten off the ground. But property owners whose land and homes are affected by the future project complained that the State’s actions in putting them on the map for the roadway constitute a “taking” under inverse condemnation principles. And they brought a multi-count class action challenging the DOT’s actions. The trial court denied class certification, and a unanimous Court of Appeals affirmed in Beroth Oil Company v. NC DOT, 725 S.E. 2d 651 (N.C. Ct. App. 2012). After accepting review, the Supreme Court – in an April 11 decision – affirmed the class certification decision, but chastised the trial court for going a bit too far in commenting on the merits of the claims. Beroth Oil Company v. NC DOT, No. 390PA11-2 (April 11, 2014).

How far a trial court can go in examining the merits of the claims in analyzing class certification issues is a perennial conundrum. Since 1974, the Supreme Court has made it clear that a determination is not a “merits” determination, Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), but that determination does depend on a “rigorous analysis,” often “requires a court to probe behind the pleadings,” General Telephone Co. of the Southwest v. Falcon, 457 U.S. 147, 160 (1982), and “involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause of action.” Coopers & Lybrand v. Livesay, 437 U.S. 463, 469 (1978).

Winston-Salem SmallSo that means that the concept of a “taking” – and whether one occurred that affected Northern Beltway property owners – is a question that is integral to and must be considered in deciding whether class certification is appropriate in the case. What the majority didn’t like was that the trial court seemed to make a declarative, merits-based ruling related to the taking issue.

But the more lasting import of the 7-2 decision is that the Supreme Court reaffirmed the inappropriateness of class certification when the analysis of a “taking” depends upon consideration of individual issues affecting a myriad of different property owners. In so ruling, the Court clarified the meaning of the abuse of discretion standard of review in the Rule 23 context – reaffirming that legal errors are reviewable “de novo” and detailing that a ”competent evidence” standard, not ”clear error,” should be applied in reviewing factual determinations, citing Blitz v. Aegean, Inc., 197 N.C. App. 296 (2009). That discussion forecasts greater appellate scrutiny of otherwise discretionary decisions regarding class certification.

Notably, the court cited with approval the Fourth Circuit’s decision in Gariety v. Grant Thornton, LLP, 368 F.3d 356 (2004), which could provide an important precedent on commonality issues going forward.

A bone of contention between the dissent and the majority was whether the debate was really about another perennial issue – whether commonality or predominance is affected by individual damages issues. The majority “generally agreed” that differences in the amount of damages won’t preclude class certification, but – unlike the dissent – found that the liability issues were inextricably tied to the damages determination. State trial judges may be puzzled a bit by the Supreme Court’s declaration that the Superior Court erred in adopting “any test” to determine damages at “this stage of the proceedings.” And, since class certification decisions are conditional, it is unclear whether – at some later point in the proceedings – the class certification ruling might be revised after such a test is determined.

An infrequently analyzed issue under Rule 23 is the so-called “superiority” requirement, and that prong gets a boost from the Court’s decision. Citing Crow v. Citicorp Acceptance Co., 319 NC 274 (1987), the court reemphasizes that the “usefulness of the class action device must be balanced . . . against inefficiency or other drawbacks” and specifically notes the pendency of a consolidated Rule 2.1 case involving 52 landowners pending before Superior Court Judge John O. Craig III. The Court seemed troubled that plaintiffs’ counsel was simultaneously pursuing a series of individual, “exceptional” cases and still promoting the class action device as the most efficient way to resolve the claims.