Justice Scalia, acting in his capacity as Circuit Justice for the Fifth Circuit, recently issued a stay of a state-court judgment in a class action to allow the defendants to file a petition for certiorari. See Philip Morris USA Inc. v. Scott, No. 10A273 (U.S. Sept. 24, 2010). In an accompanying opinion, Justice Scalia suggested that the Supreme Court likely would review whether it violates due process for a state appellate court to hold that absent class members need not prove the element of reliance to establish their fraud claims.

Scott is a class action filed in Louisiana state court against several tobacco companies. The lawsuit alleges that the defendants defrauded Louisiana smokers by misrepresenting nicotine’s addictive effects. The Louisiana court entered a judgment requiring the defendants to pay more than $240 million to fund a smoking-cessation program for class members. Defendants argued, and the Louisiana Court of Appeal recognized, that as a matter of Louisiana law, a plaintiff is ordinarily required to prove that he or she relied on a defendant’s misrepresentations to his or her detriment in order to make out a claim for fraud. But the Louisiana court held that the absent class members need not prove that element because, in its view, the class as a whole could be deemed to have relied on the defendants’ alleged “distort[ion of] the entire body of public knowledge.”

Justice Scalia concluded that the tobacco companies had met the heavy burden of demonstrating that a stay was warranted. Justice Scalia pointed out that defendants have a federal due process right to “an opportunity to present every available defense,” and that by dispensing with the reliance element of the fraud claims, the Louisiana court may have deprived the defendants of a defense based on that element. He observed that “[t]he apparent consequence . . . is that individual plaintiffs who could not recover had they sued separately can recover only because their claims” were part of a class action.

Because “[t]he extent to which class treatment may constitutionally reduce the normal requirements of due process is an important question,” Justice Scalia concluded that it was “reasonably probable” that the Court would grant certiorari, and “significantly possible” that it would reverse the judgment below. Justice Scalia then found that defendants would be irreparably harmed because a significant portion of the fund would have been spent before the Court could review the judgment. Finally, Justice Scalia concluded that a stay would not injure class members because the defendants had established (and the plaintiffs did not dispute) that similar smoking-cessation methods are freely and readily available from other sources in Louisiana.

Scott is of interest to any business that may be the target of a class-action lawsuit involving fraud claims that present individual questions of reliance. More generally, businesses often argue that class certification is improper when a class-wide trial could not proceed without altering the elements of the underlying substantive law. If the Supreme Court grants certiorari in Scott, it will have the opportunity to decide whether federal due process principles prohibit states from displacing or altering the burden of proof that would ordinarily apply in an individual action as to particular elements of a claim. Mayer Brown LLP has argued and is awaiting a decision in another case raising related issues in the Ninth Circuit. For more information about Scott or any other matter raised in this Legal Update, please contact Evan Tager, Donald Falk, John Nadolenco, or Archis Parasharami. In addition, readers may find of interest an article by Evan Tager on "The Constitutional Limitations On Class Actions."

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