Fail-Safe Classes Are Fundamental

Last month, the D.C. Circuit deepened a circuit split on the issue of fail-safe classes. The decision, In re White, 64 F.4th 302 (D.C. Cir. 2023), rejected a categorical rule against all fail-safe classes in favor of a case-by-case approach rooted in the text of the federal rules. With this ruling, the D.C. Circuit called for a return to the fundamentals of Rule 23 in the analysis of fail-safe classes.

A fail-safe class is one in which membership can’t be determined until the case is resolved on the merits. Whether someone qualifies as a member of a fail-safe class depends on whether they have a valid claim against the defendant. For example, in a case we previously discussed, the Court rejected a class defined as including employees who were involuntarily terminated and not timely paid final wages, a violation of state law. Because membership in the class turned on whether an employee had a valid claim on the merits, this was a fail-safe class.

The primary problem with fail-safe classes is that members either win their claims or, by virtue of losing, escape being bound by the judgment. This creates a “heads I win, tails you lose” dynamic that’s inherently unfair to defendants. Fail-safe classes also frustrate the requirement that the court determine class certification at “an early practicable time.” See Fed. R. Civ. P. 23(c)(1)(A). To decide whether there’s an ascertainable and adequately represented class, the court has to resolve the merits, which often isn’t possible until late in the litigation.

The First, Third, Sixth, and Eighth Circuits treat the existence of a fail-safe definition as an independent bar to class certification. The Fourth, Seventh, Ninth, and Eleventh Circuits have not expressly adopted or rejected this categorical rule, but they at least recognize that fail-safe definitions cause trouble. The Fifth Circuit—and now the D.C. Circuit—reject the categorical rule. See White, 64 F.4th at 309-10 (discussing the circuit split and collecting cases).

In White, the plaintiffs brought ERISA claims against their employer, a hotel chain. The plaintiffs moved for certification of a class that included all employees who had “been denied vested rights to retirement benefits.” The district court denied the motion, concluding that the class was impermissibly fail-safe because membership depended on a merits issue: whether retirement benefits had vested under ERISA.

On interlocutory appeal, the D.C. Circuit acknowledged the unfairness and administrative issues inherent in fail-safe classes. But the Court rejected a bright-line rule against fail-safe definitions, which it described as a “textually untethered” rule with “disuniform criterion” that can be applied differently from case to case. In the Court’s view, a categorical rule against fail-safe classes is a judge-made solution to a policy problem, and judges aren’t supposed to deviate from the federal rules to address policy concerns.

Instead of adopting the categorical rule followed by the majority of courts, the D.C. Circuit held that the existing requirements of Rule 23 are adequate to address all of the concerns raised by fail-safe classes. It directed the lower court to reexamine the proposed class definition under the fundamental requirements set forth in the explicit text of Rule 23:

  • Under Rule 23(a)(1), classes must be so numerous that joinder of all members is impracticable. If the fail-safe class could have zero members (because no one has a meritorious claim), then it fails the numerosity requirement.
  • Rule 23(a)(2) requires the class to present common issues of law or fact. If the plaintiffs try to define the class based on liability instead of something narrower, this suggests that potential liability is the only truly common issue, and thus that the class fails the commonality requirement. See Walmart Stores, Inc. v. Dukes, 564 U.S. 338, 350 (2011) (class definitions are too broad when they merely allege that all class members suffered a violation of the same provision of law).
  • To comply with Rule 23(a)(3), the claims of the class representatives must be typical of the claims of the class members. A fail-safe class might fail this requirement if there’s a chance the representatives will not even be members of the class come final judgment.
  • Class treatment isn’t superior, as required for Rule 23(b)(3) classes, if the class could collapse by virtue of the plaintiffs losing on the merits.

The Court also urged lower courts to correct fail-safe definitions where possible. If there’s a truly fail-safe class that otherwise meets all the requirements of Rule 23, instead of denying class certification based only on the fail-safe definition, the district court should revise the definition to remove any fail-safe aspects.

Companies defending class actions on a regular basis may be disappointed to hear that another court has rejected a bright-line rule against fail-safe classes. Fortunately, the White decision does not declare open season on fail-safe classes in the D.C. Circuit. It recognizes the unfairness and administrative issues posed by fail-safe definitions and empowers lower courts to deal with them under the fundamental rubric set forth in the text of Rule 23. Stay tuned to the blog for more developments in the ongoing, inter-circuit debate regarding fail-safe classes.