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Katz v. Carte Blanche Corp.


May 22, 1973



Author: Seitz

Before SEITZ, Chief Judge, ALDISERT, Circuit Judge and FISHER, District Judge


SEITZ, Chief Judge.

On this appeal,*fn1 defendant contends the district court erroneously granted plaintiff's pretrial motion to allow his suit to proceed as a class action pursuant to Fed. R. Civ. P. 23. Defendant asks us to reverse that determination and permit plaintiff to proceed only on his own behalf.

Defendant Carte Blanche Corporation is a national credit card company. Members must pay an annual membership fee and, in return, have the privilege of charging items at the company's associated establishments. As part of its billing procedures, defendant levies certain service charges and late fees. Plaintiff attacks the defendant's disclosure of its charges, and its membership fee as a component thereof, under the civil damage provisions of the Truth-in-Lending Act.*fn2 15 U.S.C. §§ 1601, 1640 (1971). Under the Act, anyone injured by a violation of its provisions is entitled to recover twice the amount of his damages, but not less than $100 nor more than $1,000 per plaintiff, plus reasonable attorney's fees.

The instant problem arises from an individual plaintiff's assertion of the right to at least minimum recovery for each of a potential class of 800,000 similarly situated members of Carte Blanche Corporation. Defendant claims Congress did not intend class enforcement of the minimum penalty provisions of this Act; in the alternative, it contends the class is unmanageable under Rule 23. The district court concluded that while the issues were difficult, pretrial doubts should be resolved in favor of allowing the class action.

The two issues presented for resolution at this juncture are: (1) the standard to be applied by this court in reviewing the district court's pretrial grant of the class action; and (2) under that standard, whether the district court erred in granting the motion. Subsumed into the latter issue is the question of whether Congress intended to bar any class enforcement of the provisions of this Act.


Rule 23(c)(1) mandates that the district court determine as soon as practicable after commencement of a suit whether a class action is to be allowed. However, the district court retains discretion to modify that determination at any time before a final decision on the merits. This includes the discretion to decide later that class status was improperly granted and to dismiss that element of the proceeding. Thus, although the initial determination must be made without benefit of actual litigation of the case, the district court may modify its initial judgment after watching the litigation unfold. If it subsequently decides that its initial impression was erroneous, it can take appropriate action to remedy the error.

The district court's opportunity to review its own decision throughout the proceeding is part of the scheme in Rule 23 to vest broad discretion in the district court when dealing with class actions. Clearly, this broad discretion is essential if the court is to cope with the problems inherent in managing a class suit. Consequently, where the district court has granted a pretrial motion to proceed as a class, and where immediate appellate review of that order has been permitted, we conclude the appellant must make a convincing showing that the district court committed an abuse of discretion in granting the motion. Only then will this court intercede. Cf. Interpace Corp. v. City of Philadelphia, 438 F.2d 401 (3d Cir. 1972)(mandamus).

Four factors militate in favor of this standard. First, the district court has considered whether, in addition to the other criteria imposed under Rule 23, the class is manageable. Since this involves a determination by the district court as to a litigation over which it will be presiding, this court should give great deference to that decision. Second, as previously discussed, the district court may itself review and modify or reverse its initial, pretrial determination throughout the pendency of the proceeding. This second point buttresses the policy of giving great deference to the district court's pretrial grant. Third, because of this continuing power of review and because of the procedural setting when the initial decision is made, the district court should generally resolve all doubts in favor of allowing the class. Thus, in challenging the pretrial grant, more than reasonable doubt as to the propriety of initially allowing the class must be shown. Fourth, there is no right to interlocutory appeal. This last factor, like the first and third, is reinforced by the presence of the second factor: the power of continuing self-review vested in the district court.

Therefore, where, as here, interlocutory review of the district court's initial grant of Rule 23 status has been permitted, there should be a high threshold for appellate intervention. We believe our decision to require clear and convincing evidence of an abuse of discretion is manifestly warranted in these circumstances.


As previously stated, the district court allowed this suit to proceed as a class action. In so doing, it properly resolved all doubts which it had at this initial stage as to the manageability of the class in favor of its allowance. Although defendant launches a broad scale attack upon the district court's determinations on the Rule 23 issues, the primary contention ripe for disposition in this appeal is defendant's claim that in fact the class is unmanageable. Two criteria set out in Rule 23(a) and (b) are crucial to a resolution of this issue: (1) whether the class is too numerous to handle in one action; and (2) whether common questions of law and/or fact predominate among the class members.

Defendant contends common questions of law or fact do not predominate among this class of potentially 800,000 members. Since the Act is expressly inapplicable to business-or commercially-related transactions, it claims each person purportedly a member of the class would have to be cross-examined as to whether he used his card for consumer credit purchases. Additionally, it argues it would have to bring counterclaims under Rule 13(a) for past due debts of some twelve million dollars against purported members of the class. Defendant asserts these complications, when coupled with the sheer size of the potential class, render this class presumptively unmanageable.

We do not find defendant's arguments persuasive at this juncture. Since the Act covers only consumer credit transactions, definitionally, only those who suffered injury in such transaction are members of the class. Whether any individual used his card for business or personal purposes does not go to the validity of the class or its claim. Rather, it goes to proof of membership in the class. The failure to ascertain the bona fides of each purported claimant's membership will not affect the interim class adjudication on legal liability, except perhaps as to selecting a class representative who will adequately and fairly protect its interests [Rule 23(a)(3) & (4)].*fn3 Only after a determination has been made that defendant in fact is liable under the terms of the Act will the bona fide nature of each purported claim have to be resolved. Thus, at least for the purpose of adjudicating the controlling legal issue, the class is not per se unmanageable.

Our conclusion on this point is reinforced by the structure of Rule 23. Merely because the district court has decided to litigate one issue of this suit in a class action does not freeze it into disposing of the remaining issues through this procedural vehicle. Indeed, class proceedings may well be inappropriate for litigating these issues; the district court legitimately could conclude that class litigation would not prove the superior and most efficient method of adjudicating these subsidiary controversies. However, because of Rule 23(c)(4)(A), these potentialities do not affect the validity of the district court's present decision to grant class status.

Rule 23(c)(4)(A) provides that "[when[ appropriate... an action may be brought or maintained as a class action with respect to particular issues,... and the provisions of this rule shall be construed and applied accordingly." The Rules Committee, in adding this subsection, expressly foresaw the use of the class mechanism to dispose of issues common to a class even though other issues essential to a final resolution of the suit would have to be litigated in independent actions. Proposed Amendments to Rules of Civil Procedure for the United States District Courts, 39 F.R.D. 69, 106 (1966).

Clearly, the controlling question of law as to defendant's liability in this case is readily amenable to disposition by class suit. The question of defendant's liability under the Act involves a single determination of law. Thus, the task facing a court in making the threshold determination is essentially the same whether one plaintiff be involved or whether a class of 800,000 be involved. The additional managerial tasks forced upon a court are more than offset by the judicial economy realized in disposing of the controlling legal issue in one consolidation proceeding. However, having approved initially the class action as the proper method to dispose of the issue of defendant's legal liability, the district court, as we have said, is not frozen into this mode for the disposition of the remaining issues involved in this suit. Therefore, we cannot accept, on these facts, defendant's claim that the class is per se unmanageable, at least at this stage.

The benefit for defendant in our present holding is two-fold. First, it is not exposed to the danger of repeated and possibly inconsistent adjudications on legal liability to those class members who do not elect to withdraw. Second, if the district court determines that defendant has incurred no legal liability under the Act for its conduct, the issue is res judicata as to any subsequent suit in any forum by any included member of the class on this cause of action.


Defendant contends that few members of the class have expressed an interest in these proceedings. It asserts that the plaintiff therefore seeks to impose an overwhelming and potentially disastrous liability on it on behalf of individuals who have no interest in the litigation.

The 1966 amendments to Rule 23 did not make positive assertions of interest the requirement for participation in the class. Rather, it installed the controversial "negative option" system. To be included, one need do nothing after receiving notice. Only if one wants to opt out is affirmative action required. The resultant thrust of the rule is not as to the quantity of the expressed interest. In fact, the absence of any affirmative manifestation by other members of the class at this initial stage seemingly would indicate their interest in being included. Instead, the central point of inquiry for the district court under the amended rule is the quality of the class representation. Therefore, we find the alleged lack of interest at this point immaterial to the question of whether this class action should be allowed to proceed.


Defendant contends Congress intended only independent enforcement of the Act. It claims the basic purpose of the class action under Rule 23 was to allow aggregation of small individual claims to create an amount in controversy sufficiently large to attract counsel to pursue the claim. Congress allegedly intended to obviate the need for the rule under the Act by providing for recovery of at least $100 to the successful suitor plus attorney's fees. Therefore, defendant argues that Congress, by its drafting, implicitly proscribed class enforcement of the Act.

Against this, defendant paints a scenario as to the potential result if class treatment is accorded this suit. It claims it will suffer liability of up to eighty million dollars and bankruptcy if liability be found even though the class suffered only minimal damage from the alleged violation. Further, it contends the alleged violation constituted no more than a breach of a technicality in the Act. It argues Congress could not have intended to put responsible credit institutions into the dilemma of charting their path between absolute compliance with every technical provision of the Act on the one hand and bankruptcy on the other. Therefore, says defendant, Congress implicitly intended that class enforcement of the Act not be available because of the severity of the remedy imposed.

Defendant's contention assumes a positive correlation between class litigation on the underlying legal issues posed by the Act and class litigation on the issue of damages. However, because of the earlier discussed structure of Rule 23, merely because class treatment has been afforded litigation of the underlying legal issues does not mean that the issue of damages must be similarly adjudicated. Although Congressional policy in the Act may militate against class enforcement of the damage provisions, we do not believe this alleged prohibition in any way affects our determination that the question of whether a violation of the Act's provisions occurred can be litigated in a class proceeding.

First, there is no express proscription against class treatment of private suits prosecuted under the Act. In allowing private suits, Congress intended the enforcement programs of the responsible agencies under the Act to be supplemented by the efforts of "private attorneys-general." Thus, Congress manifested a desire for strong and broadscale enforcement of the Act.

Second, and most importantly, Congress has expressed a strong interest in the efficient administration of justice, manifested in its authorization of the Federal Rules of Civil Procedure. Since the original enactment of that mandate, the succeeding revisions and streamlinings of the Federal Rules have been submitted to Congress after adoption by the Supreme Court and before implementation in the federal courts. Thus, Congress has expressly passed upon and implicitly approved the attempt in Rule 23 to utilize one consolidated proceeding, where appropriate, to dispose of multiple suits involving common elements.

Consequently, we believe we have an express mandate of Congress to use Rule 23 if that will effect the most efficient disposition of a controversy while protecting the rights of the individual litigants. Where there is such an express mandate, we must warily regard any argument that implications allegedly contained in the terms of another act countermand that explicit mandate. The implications allegedly militating against class enforcement of the Act, by defendant's own admission, go to the assessment of damages. However, they do not go to the issue of whether class actions should be allowed in the declaratory resolution of the underlying legal issue here in controversy.

Our conclusion is buttressed first by the presence of an analogous provision in the Clayton Antitrust Act. 15 U.S.C. § 15 (1971). That section provides for treble damages and award of attorney's fees to successful litigants; it has long been enforced in class suits. Imputing such knowledge to Congress, as we must, we believe if Congress had intended the provisions of the Act not be similarly enforced in class proceedings, it would have included an express proscription in the Act.

Our conclusion is buttressed secondly by the legitimate interest of the judiciary in preserving its resources and in the efficient administration of justice. We think it can be said those ends are served by having the one legal issue common to potentially hundreds of thousands of suits adjudicated in one consolidated proceeding. Consequently, as to litigation of legal liability, the policy of the Act fails to overcome the lack of an express prohibition when viewed in the context of events contemporaneous to the passage of the Act and when coupled with the interest of the judiciary in conserving its resources.

If there is any implicit Congressional bar against class enforcement of the Act, it is as to the element of determining individual damages. However, we need not reach that question at this point. Should liability under the Act ultimately be found in the class proceeding, the district court then will have to consider whether the remaining issues are appropriate for disposition in class proceedings. In so doing, it first will have to determine, purely under Rule 23 criteria, whether the positive factors in favor of, or the negative factors against, allowing continued litigation by the class predominate.

If the district court should ultimately determine under Rule 23 criteria that proof of membership and defendant's counterclaims are appropriate for class disposition, it next must consider whether Congress intended to bar absolutely class enforcement of the damage provisions of the Act. If it finds no absolute bar, it will have to determine the weight it will attach to those aspects in the Act which might undercut allowing the class as to litigating damages. Once it has assigned a weight to those factors, it must decide whether on balance, those factors, together with the negative factors under the Rule 23 criteria, outweigh the initial predominance of factors in favor of class adjudication of those remaining issues.

If the court ultimately determines these remaining issues should be disposed of in independent suits, it has the power to dismiss the class element of the proceeding at that point.*fn4 Each class member could then press his independent claim in any forum meeting venue requirements.


In sum, we conclude the district court did not abuse its discretion in its pretrial determination that plaintiff could proceed on behalf of the class. Further, we conclude that, at the least, there is nothing in the Act which militates against litigation of legal liability under the Act in a class proceeding. We have considered defendant's remaining contentions, as well as the points raised by plaintiff on cross appeal, and find them inappropriate for resolution by this court at this juncture.

The order of the district court allowing this case to proceed as a class action will be affirmed and the cause remanded to the district court for further proceedings not inconsistent with this opinion.

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