The power of plaintiffs to negotiate favorable settlements in federal securities fraud actions depends to a significant extent on whether a district court certifies the action as a class action. In its 2007 opinion in Oscar Private Equity Investments v. Allegiance Telecom Inc. , the 5th U.S. Circuit Court of Appeals sought to “tighten the requirements” for class certification to limit the ability of plaintiffs to put pressure on defendants to settle.
The 5th Circuit held that the class certification process established by Federal Rule of Civil Procedure 23 “requires the court to ‘find,’ not merely assume, the facts favoring class certification.” Under Oscar , a plaintiff class may not be certified until the district court examines each Rule 23 requirement on the merits, “resolves factual disputes” and finds that the relevant underlying facts “have been established.” Judge Frank H. Easterbrook, writing for the 7th Circuit in an Aug. 20 opinion in Schleicher v. Wendt , firmly rejected this view, stating that “The chance, even the certainty, that a class will lose on the merits does not prevent its certification.”
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