In recent years, defendants in securities class action litigation have increased their attempts to obtain discovery from absent class members, purportedly either to defeat class certification or for use at trial. This is also known as “absent class member discovery.” However, absent class member discovery is rarely permitted,1 especially because many courts properly treat absent class members as non-parties.2 As such, defendants’ tactic of seeking discovery from these non-parties runs contrary to the purpose of class actions.3 Indeed, the U.S. Supreme Court has held that, in a normal civil suit, an absent class member is “not required to do anything” and “may sit back and allow the litigation to run its course, content in knowing that there are safeguards provided for his protection.”4 Despite this principle, courts have found limited exceptions where discovery from absent class members is warranted where those members have injected themselves into the action and defendants met their high burden of showing that such discovery is warranted.
This article explains the origins of absent class member discovery and recent jurisprudence on the factors courts consider when determining whether to allow this exceptionally rare discovery. This article will also provide strategic considerations for avoiding absent class member discovery.
The History of Absent Class Member Discovery
Although not strictly forbidden, absent class member discovery is generally disfavored—and often proscribed— because to allow discovery from absent class members would frustrate the very purpose of Rule 23 to allow unnamed class members to remain passive.5 In the 1970s, however, limited exceptions began to appear.
Clark v. Universal Builders, Inc. is a seminal case often cited by courts as the starting point to the analysis of whether to permit discovery from absent class members.6 In Clark, the Seventh Circuit Court of Appeals overturned the district court’s order “dismissing with prejudice class members who failed to answer interrogatories or appear for depositions.”7 The Seventh Circuit had previously held in Brennan that in “appropriate circumstances” discovery may be sought from absent class members “on a showing that the information requested is necessary to trial preparation and that the [discovery] is not designed ‘as a tactic to take undue advantage of the class members or as a stratagem to reduce the number of claimants[,]’” but the “party seeking discovery has the burden of demonstrating its merits.”8 Given its prior holding in Brennan, the Seventh Circuit found that the district court failed to consider whether the information sought from the absent class members was: (1) necessary; or (2) designed to reduce class size.9 Moreover, the Seventh Circuit found that the discovery: (3) would have required technical and legal assistance and advice in understanding and formulating responses; (4) sought information that could be proved through other means (e.g., expert testimony); and (5) sought information already known to the defendants.10
Although not explicitly mentioned in Clark, courts, in applying Clark and its progeny, began to focus on whether the absent class members actively involved themselves in the action. In other words, absent class members must “inject” or “insert” themselves into the litigation to be subject to discovery; membership in the class alone does not justify discovery.11 The reasoning behind this factor is absent class members can potentially waive their Rule 23 protections12 when they inject or insert themselves into the action.
Recent Jurisprudence on Factors Determining the Permissibility of Absent Class Member Discovery
The “injection” inquiry provides a good starting point for this analysis. But what level of injection is needed? Case law in this area is varied and fact-specific; however, most, if not all, the cases turn on whether the absent class member is participating in a substantive way in the litigation.13 In other words, the key question courts ask is whether the absent class member supported the plaintiff in prosecuting any of the substantive allegations or theories of liability in the case. Common examples seen in the case law include absent class members previously, although no longer serving as a named plaintiff, filing declarations in support of class certification, or participating or even being identified as witnesses.14 If the court does find the prerequisite injection, then the court must apply jurisdiction-specific factors that help determine the permissibility of discovery from the absent class member.
In recognition of the general prohibition against absent class member discovery, courts have created various factors to determine when the rare exception of absent class member discovery may be allowed that, in many ways, mimic Clark. Interestingly, there are no uniform factors to consider as neither the U.S. Supreme Court nor most Circuit Courts of Appeals have provided guidance on this issue.15 However, most courts apply similar tests with slight differences in the factors that are considered and applied.
One good example is the Ninth Circuit, where district courts apply different tests to determine the permissibility of absent class member discovery. Courts in the Northern District of California focus on whether the proponent can show that discovery from the absent class member is: (1) relevant; (2) not readily available from other sources or the class representative; and (3) not unduly burdensome and made in good faith.16 Courts in the Southern District of California look at similar factors, including whether the discovery: (1) is not designed to take undue advantage of class members or reduce class size; (2) is necessary; (3) would require the assistance of counsel in responding to it; and (4) seeks information not already known to the proponent of the discovery.17 Eastern District of California courts analyze other similar factors, including whether the discovery is: (1) reasonably necessary; (2) not for an improper purpose; and (3) not unduly burdensome.18 Finally, Central District of California courts look at whether the discovery is both: (1) necessary; and (2) for a purpose other than taking undue advantage of class members.19
Some courts have tried to find a common denominator among the cases, pointing to the fact that various tests turn on whether the proponent can make a showing that the discovery from absent class members is necessary, not burdensome, and for a proper purpose.20 Until the U.S. Supreme Court addresses the issue directly, creating uniformity in the test, it would be prudent to assume that a court may consider all the factors described above.
Strategic Considerations for Avoiding Absent Class Member Discovery
Counsel for investors should be aware of the potential for absent class member discovery when advising their clients. To avoid a situation where an investor may be subject to such discovery, and consequently the costs associated with non-party discovery, it is important to guide clients in situations where their substantive participation in a case may be construed as injection.
The following are a few examples of pitfalls absent class members can avoid to limit the potential for a court finding the necessary level of injection:
- Avoid accepting solicitations to participate in discovery, such as being a declarant in support of (or opposition to) a class certification motion, unless they are willing to subject themselves to discovery by the parties;21
- Serve written objections to any document, or move to quash any deposition subpoena, within the time constraints under Rule 45;22 and
- Avoid adding anything unique or different than the verbatim requirements for PSLRA certifications in support of a lead plaintiff motion.23
Lead Plaintiffs should also be careful in drafting their Rule 26 initial disclosures and otherwise during the action to avoid referencing absent class members unless their testimony is needed.24
Implications of Absent Class Member Discovery
Overall, defendants’ attempts to obtain absent class member discovery is on the rise. What was once a rare occurrence has now become a strategic defense maneuver, at best intended to support defendants’ affirmative defenses and at worst meant to harass lead plaintiffs and absent class members. Understanding what triggers absent class member discovery is key to avoiding the pitfalls of this defense tactic through careful planning for investors. Simply put, outside of the context of being the lead plaintiff, investors should avoid substantive involvement in the case. If an investor is serving as lead plaintiff, they should consider whether absent class members’ substantive involvement in the litigation—whether submitting declarations in support of class certification or being identified as percipient witnesses—opens the door to costly and time-consuming discovery. By maintaining awareness and planning carefully, investors can preclude defendants’ attempts to obtain absent class member discovery.