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Eisen v. Carlisle & Jacquelin

decided: March 8, 1968.


Lumbard, Chief Judge, Medina and Hays, Circuit Judges. Lumbard, Chief Judge (dissenting).

Author: Medina

MEDINA, Circuit Judge:

On this appeal we are presented with significant questions involving the interpretation of recently amended Rule 23 of the Federal Rules of Civil Procedure. Morton Eisen instituted this action seeking damages and injunctive relief on behalf of himself and all other purchasers and sellers of "odd-lots" on the New York Stock Exchange against Carlisle & Jacquelin and DeCoppet & Doremus, alleging that the two brokerage firms had combined and conspired to monopolize odd-lot trading, and had fixed the odd-lot differential at an excessive amount in violation of the Sherman Act. 15 U.S.C. Sections 1, 2. A third count alleged that the defendant New York Stock Exchange had failed to discharge its duties under the Securities Exchange Act of 1934 by neglecting to adopt rules protecting investors in odd-lots. 15 U.S.C. Sections 78f(b), 78f(d), 78s(a).

Following a motion by defendants for a determination pursuant to Rule 23(c)(1) of the Federal Rules of Civil Procedure, Judge Tyler held that the suit could not be brought as a class action. Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147 (S.D.N.Y. 1966). A motion to dismiss the present appeal because the decision below constituted a non-final order has previously been denied by this Court. Eisen v. Carlisle & Jacquelin, 370 F.2d 119 (2d Cir. 1966), cert. denied 386 U.S. 1035, 18 L. Ed. 2d 598, 87 S. Ct. 1487 (1967). In dismissing the class action the District Court found that plaintiff failed to demonstrate that he would be able fairly and adequately to protect the interests of the class, Fed. R. Civ. P. 23(a)(4); that the notice required by due process and the rule, Fed. R. Civ. P. 23 (c)(2), could not be given and that questions common to the class did not predominate over questions affecting individual members. Fed. R. Civ. P. 23(b)(3).

At the outset, it is necessary briefly to describe the mechanics of odd-lot trading on the New York Stock Exchange. The regular unit of trading on the Exchange is the "round lot" of 100 shares. An "odd-lot" is the term used to designate transactions involving less than 100 shares. Odd-lot orders do not form part of the "regular auction market" but are exclusively count as principals. In order to purchase or sell an odd-lot an individual first contacts a brokerage firm which then places an order with the odd-lot dealer. The cost to the customer includes both a standard commission payable to the brokerage firm and the odd-lot differential which is received by the odd-lot dealer. The differential is a figure amounting to a fraction of a point for each share traded, which is added to the customer's purchase price and deducted from the sale price. During the period of time in which plaintiff had alleged he was involved in the odd-lot market, covering the years 1960-1966, the differential was 1/8th of a point (12 1/2 cents) per share on stock selling below $40 per share and 1/4 of a point (25 cents) per share on stock selling at $40 or above per share.*fn1 Over the years odd-lot trading has accounted for a fairly steady percentage of the total volume on the Stock Exchange, ranging from a high of 12.9% in 1937 to a low of 7.9% in 1950 and 1958. For example, recent figures indicate that in 1961 the volume of odd-lot transactions totalled 214,018,834 shares. SEC, Report of Special Study of Securities Markets, H.R. Doc. No. 95, Pt. 2, 88th Cong. 1st Sess. 171-202, 393 (1963), hereinafter cited as SEC Special Study. Defendants Carlisle & Jacquelin and DeCoppet & Doremus are engaged exclusively in odd-lots and collectively they handled 99% of the volume in odd-lot transactions. SEC Special Study at 172. Various alleged abuses in odd-lot trading disclosed by the SEC in 1963, form, in large part, the basis of the present action. See SEC Special Study at 171-202.


Class actions serve an important function in our judicial system. By establishing a technique whereby the claims of many individuals can be resolved at the same time, the class suit both eliminates the possibility of repetitious litigation and provides small claimants with a method of obtaining redress for claims which would otherwise be too small to warrant individual litigation. Nevertheless, Rule 23 of the Federal Rules of Civil Procedure, as it was originally enacted, did not effectively achieve either of the above two objectives. Class actions were divided into various categories reflecting the "jural relationships of the members of the class." See 3 Moore, Federal Practice par. 23.08 at 3434 (2d ed. 1953). Only after a determination of the nature of the rights: "joint, common or secondary" in the true class action, "several related to specific property" in the hybrid class action, and "several affected by a common question and related to common relief" in the spurious class action, was a court able to proceed. Advisory Committee's Note, Proposed Rules of Civil Procedure, 39 F.R.D. 98 (1965), hereinafter cited as Advisory Committee's Note. There were significant differences in the res judicata effects accorded to the various class actions. Thus while a judgment in a true class action was binding on the entire class, the spurious class action only concluded the rights of parties. 3 Moore, Federal Practice par. 23.11 at 3472 (2d ed. 1953). Since the great majority of cases fell into this latter category, the objective of determining all questions in one suit was effectively frustrated. In essence, the spurious class action was interpreted as merely a permissive joinder device.*fn2 See Carroll v. American Federation of Musicians, 372 F.2d 155 (2d Cir. 1967); Fox v. Glickman Corp., 355 F.2d 161 (2d Cir. 1965), cert. denied 384 U.S. 960, 16 L. Ed. 2d 672, 86 S. Ct. 1585 (1966); Nagler v. Admiral Corp., 248 F.2d 319 (2d Cir. 1957); Oppenheimer v. F.J. Young & Co., 144 F.2d 387 (2d Cir. 1944). But see Weeks v. Bareco Oil Co., 125 F.2d 84 (7th Cir. 1941) (dictum).

To avoid the problems associated with the original rule the Advisory Committee on the Rules of Civil Procedure has completely redrafted Rule 23 in order to provide a thoroughly flexible remedy. Throughout the course of a proceeding courts are given complete control to give assurance that the procedures adopted are fair, reasonable and effective. All actions will result in judgments binding on the entire group of individuals found by the court to be members of the class. Fed. Rule C.P. 23 (c)(3). While the new concepts incorporated in the rule have not as yet been passed upon by any federal Court of Appeals,*fn3 they have received somewhat less than an enthusiastic reception in the District Courts. Compare School District of Philadelphia v. Harper & Row Publishers, Inc., 267 F. Supp. 1001 (E.D. Pa. 1967), expressing grave doubts about the propriety of a rule which binds absent but described class members, with Siegel v. Chicken Delight, Inc., 271 F. Supp. 722 (N.D. Cal. 1967) which upholds a class action brought by 5 franchise dealers on behalf of a class of over 700 dealers, alleging anti-trust violations. Nevertheless, the majority of courts have upheld the validity of representative actions brought under the new rule. See, e.g., Van Gemert v. Boeing Co., 259 F. Supp. 125 (S.D.N.Y. 1966); Fischer v. Kletz, 41 F.R.D. 377 (S.D.N.Y. 1966); Kronenberg v. Hotel Governor Clinton, Inc., 41 F.R.D. 42 (S.D.N.Y. 1966); Brennan v. Midwestern United Life Insurance Co., 259 F. Supp. 673 (N.D. Indiana 1966); Booth v. General Dynamics Corp., 264 F. Supp. 465 (N.D. Ill. 1967). But see Richland v. Cheatham, 272 F. Supp. 148 (S.D.N.Y. 1967); Hohmann v. Packard Instrument Co., 43 F.R.D. 192 (N.D. Ill. 1967); Jacobs v. Paul Hardeman, Inc., 42 F.R.D. 595 (S.D.N.Y. 1967); Berger v. Purolator Products, Inc., 41 F.R.D. 542 (S.D.N.Y. 1966). Although representing a totally different approach to class actions, the new rule does retain two standards which were embodied in the old rule, namely, the class must be so numerous as to make it impracticable to bring every member before the court, and the representative party must be able fairly and adequately to protect the interests of the entire class. Necessarily the old case law will furnish some guidance in defining these concepts.

To be maintainable as a class action a suit must meet all the requirements set forth in Section 23(a)*fn4 and also fall within one of the subsections of 23(b).*fn5

Plaintiff has alleged that he was engaged in odd-lot trading during the years 1960-1966. Though estimates of the number of class members similarly engaged in this activity during those years have varied, all the litigants concede "the class is so numerous that joinder of all members is impracticable." Fed. R. Civ. P. 23(a)(1). Defendants' "rough" approximation, not disputed by plaintiff, would place 3,750,000 individual and corporate buyers and sellers of odd-lots in the class. Similarly, the allegation that a conspiracy, whose object was to charge excessive rates on odd-lot transactions existed between the two brokerage firms, satisfies the requirement that there be "questions of law or fact common to the class." Fed. R. Civ. P. 23(a)(2). Furthermore, plaintiff's claim is "typical of the claims * * * of the class." Fed. R. Civ. P. 23(a)(3). Although there are varying fact patterns underlying each individual odd-lot transaction, the same allegedly unlawful differential is charged to all buyers and sellers. However, defendants have argued that different members of the class will have varying theories as to what constitutes the "excessive price," and other class members may be satisfied with the present price policy.*fn6 Nonetheless, all members of the class, including those who would otherwise prefer to abide by the status quo, will be helped if the rates are found to be excessive.

Inability on the part of the plaintiff to "fairly and adequately protect the interests of the class," Fed. R. Civ. P. 23(a)(4), was considered by the District Court to be one of the primary reasons for dismissing the class action. We believe the court employed incorrect standards in reaching this result.

Since Eisen had not alleged with specificity the nature of his various odd-lot transactions, the court below felt it lacked sufficient information properly to assess his qualifications as a representative, and, even if such information were alleged, "the diverse rights and interests of other members of the claimed class plainly could not be reasonably protected by plaintiff in this litigation." Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147, 150 (S.D.N.Y. 1966). The District Judge also felt it was impossible to assume that plaintiff "alone with a comparatively minuscule and limited interest in odd-lot transactions" could represent a class numbering at least in the hundreds of thousands, which encompassed individuals with much larger and different interests. Eisen v. Carlisle & Jacquelin, 41 F.R.D. 147, 151 (S.D.N.Y. 1966).

Traditionally, courts have expressed particular concern for the adequacy of representation in a class suit because the judgment conclusively determines the rights of absent class members. See Hansberry v. Lee, 311 U.S. 32, 85 L. Ed. 22, 61 S. Ct. 115 (1940). Of course, understandably, the standards for representation under the old spurious class action were not as rigorously enforced, due to the minimal res judicata effects given to the judgments in these suits. See Oppenheimer v. F.J. Young & Co., 144 F.2d 387 (2d Cir. 1944). However, as a result of the sweeping changes in Rule 23, a court must now carefully scrutinize the adequacy of representation in all class actions.

What are the ingredients that enable one to be termed "an adequate representative of the class?" To be sure, an essential concomitant of adequate representation is that the party's attorney be qualified, experienced and generally able to conduct the proposed litigation. Additionally, it is necessary to eliminate so far as possible the likelihood that the litigants are involved in a collusive suit or that plaintiff has interests antagonistic to those of the remainder of the class. See Hansberry v. Lee, 311 U.S. 32, 85 L. Ed. 22, 61 S. Ct. 115 (1940). Courts, on occasion, have also required that the interest of the representative party be co-extensive with the interest of the entire class, but this amounts to little more than an alternative way of stating that the plaintiff's claim must be typical of those of the entire class, an element we have already discussed. See Richland v. Cheatham, 272 F. Supp. 148 (S.D.N.Y. 1967). However, we believe that reliance on quantitative elements to determine adequacy of representation, as was done by the District Court, is unwarranted. Language to the effect that a small number of claimants cannot adequately represent an entire class has frequently been cited, see, e.g., Pelelas v. Caterpillar Tractor Co., 113 F.2d 629 (7th Cir.), cert. denied 311 U.S. 700, 85 L. Ed. 454, 61 S. Ct. 138 (1940), but we fail to understand the utility of this approach. If class suits could only be maintained in instances where all or a majority of the class appeared, the usefulness of the procedure would be severely curtailed. As has previously been stated, one of the primary functions of the class suit is to provide "a device for vindicating claims which, taken individually, are too small to justify legal action but which are of significant size if taken as a group." Escott v. Barchris Construction Corp., 340 F.2d 731, 733 (2d Cir. 1965), cert. denied 382 U.S. 816, 86 S. Ct. 37, 15 L. Ed. 2d 63 (1966). Individual claimants who may initially be reluctant to commence legal proceedings may later join in a class suit, once they are assured that a forum has been provided for the litigation of their claims. See Siegel v. Chicken Delight, Inc., 271 F. Supp. 722 (N.D. Cal. 1967). But to dismiss a class suit in its incipiency before claimants have been given an effective opportunity to join would be a disservice to the class action as envisioned in the new rule. Indeed, we hold that the new rule should be given a liberal rather than a restrictive interpretation, Escott v. Barchris Construction Corp., 340 F.2d 731, 733 (2d Cir. 1965), cert. denied 382 U.S. 816, 86 S. Ct. 37, 15 L. Ed. 2d 63 (1966), and that the dismissal in limine of a particular proceeding as not a proper class action is justified only by a clear showing to that effect and after a proper appraisal of all the factors enumerated on the face of the rule itself.

We are not persuaded that it is essential that any other members of the class seek to intervene. Absent class members will be able to share in the recovery resulting in the event of a favorable judgment, and, if they wish to avoid the binding effect of an adverse judgment they may in various ways and at various times that we need not now attempt to particularize, attack the adequacy of representation in the initial action or disassociate themselves from the case. Hansberry v. Lee, 311 U.S. 32, 85 L. Ed. 22, 61 S. Ct. 115 (1940); see Weinstein, Revision of Procedure: Some Problems in Class Actions, 9 Buffalo L. Rev. 433, 436 (1960). If we have to rely on one litigant to assert the rights of a large class then rely we must. The dismissal of the suit out of hand for lack of proper representation in a case such as this is too summary a procedure and cannot be reconciled with the letter and spirit of the new rule.

Necessarily, a different situation is presented where absent class members inform the court of their displeasure with plaintiff's representation, see Hess v. Anderson, Clayton & Co., 20 F.R.D. 466 (S.D. Cal. 1957), but the representative party cannot be said to have an affirmative duty to demonstrate that the whole or a majority of the class ...

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