March 26, 2014
US Court dismisses motion for class action against Mahindra & Mahindra
In Automobile Leasing Corporation v. Mahindra and Mahindra [Click here for the judgment], the United States District Court, Northern District of Georgia, Atlanta Division (‘US Court’), has dismissed Automobile Leasing Corporation’s (‘Plaintiffs’) Motion for Class Certification against Mahindra and Mahindra Ltd (‘M&M’), on the ground that common question of fact and law were not satisfied by the Plaintiffs.
The Plaintiffs paid ‘appointment fees’ to M&M, through its distributor, Global Vehicles Inc. (‘Global’), to obtain the rights to distribute M&M made vehicles in USA. In 2006, M&M began marketing and along with Global collected $32 million in fees from 340 dealers. M&M was to enter the automobile market from 2009. However, in June 2010, M&M announced that it would not be entering the USA market and terminated the agreements. M&M and Global did not refund all of the fees that were collected from Plaintiffs. Therefore, the Plaintiffs approached the US Court and sought to be certified as a ‘class’, in order to seek restitution and damages, for all dealers that paid appointment fees to M&M. The Plaintiffs sought certification on four counts1:
Tests involved for Class Certification in USA
In order to maintain a ‘class action’, the party seeking class certification must satisfy each of the prerequisites of Rule 23(a) and at least one of the provisions of Rule 23(b) of US Federal Rules of Civil Procedure (‘FRCP’).
The tests to be satisfied in terms of Rule 23 (a) are Numerosity test, Commonality test, Typicality test, and Adequacy of Representation test. A failure to establish any one of the four factors precludes certification.2
In terms of Predominance and Superiority Requirement under Rule 23(b)(3)3, it has to be satisfied that:
The US Court concluded that the proposed class was sufficiently numerous in view of the fact that several dealers had sought action against M&M and observed that although there is no fixed numerosity rule, generally less than twenty one is inadequate and more than forty adequate, with numbers varying according to other factors.
However, the US Court held that the Commonality test was not satisfied and held that the Plaintiffs had failed to show that a common question of law arose. Specifically, Plaintiffs were unable to demonstrate that an equity-based Georgia law claims arose in respect of each of the Plaintiffs. The US Court concluded that all the Plaintiffs did not have a connection with Georgia and consequently Georgia law would not be applicable for all Plaintiffs. Further, Georgia law would not necessarily apply to all class members because:
The US Court also noted that even if a common question of law was raised based on the Federal Dealers’ Day in Court Act, in light of the fact that a variety of agreements were executed by M&M with each of the Plaintiffs and in view of the varying circumstances of many potential class members, the Plaintiffs did not meet the commonality requirement of Rule 23(a)(2).9
The US Court also held that the Plaintiffs failed to satisfy predominance and superiority requirement. The US Court observed that for claims made by putative class members, for unjust enrichment and promissory estoppel, it would require individualized due process determinations and therefore common issues of law did not predominate in respect of those claims. Further, class members sought to recover varying amounts that were paid at different times, these facts undermine the Courts ability to resolve the question of damages on a class wide basis.10
The US Court has applied well settled principles of ‘class action’ suits to the present case and dismissed claims against M&M. In the present case a contractual claim was rejected when raised in the form of a ‘class action’ suit. ‘Class action’ suits operate when the test laid down by the US Supreme Court is satisfied.11
Although representative suits are recognized in Indian law, the expression ‘class action’ has only recently been recognized in law. The law of ‘class action’ suits in the US and India although apparently similar, have certain material differences. Under the Companies Act 2013 (‘Act’), only a shareholder or a depositor can file a claim in the nature of ‘class action’ suit against a company. The requisite number of members and depositors, who can maintain a ‘class action’ is specified under Section 245(3)(i) and Section 245(3)(ii) of the Act, i.e. either 100 members/depositors of the company or 10% of the total members/shareholders of the company, whichever is less.12
Interestingly, the test for the purpose of Rule 23(b)(3) of FRCP is similar to the test for joinder of parties and consolidation of claims under the Code of Civil Procedure, 1908 under Order I.13 In 2005, the J.J. Irani Committee Report,14 suggested that representative action may be initiated by one shareholder/depositor on behalf of one or more of the shareholders/depositors, on the premise that they would all have the same locus standi to initiate an action against an erring company. Further, the Standing Committee on Finance (2011-12)15, discussed the issue whether ‘class action’ should be allowed on the applications of members or depositors only. The Committee remarked that it has been felt that since creditors can enforce their claims through contracts/ agreements with borrower companies, they may not be given statutory right for ‘class action’. On the other hand since depositors do not have any contractual rights and are mainly of unsecured nature, they are being proposed to be empowered with right to file ‘class action’ petitions before Tribunal. We will have to wait for Section 245 of the Act to be notified, its interpretation by the Courts, in order to comment on whether the concept of ‘class action’ has been brought in Indian Company law jurisprudence with sufficient ease.
Companies keen to do business in US should be sensitive to risk of ‘class action’ suits as well risk of litigation under commercial contracts. With more Indian companies seeking to engage in international trade, they will have to be mindful of risks of litigation from all possible corners. This judgment highlights the risks of doing business in different jurisdictions and the importance of being aware of local practices in each jurisdiction.
1 Plaintiffs proposed to define a class as ‘Any and all individuals and/or entities that paid money to Global and/or Mahindra for the right to sell and market vehicles, products, and accessories manufactures by Mahindra & Mahindra, Ltd. In the United States’.
2 Rule 23(a)
“(a) PREREQUISITES. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
4) the representative parties will fairly and adequately protect the interests of the class.”
3 The Plaintiffs did not argue that their proposed class should be certified under either Rule 23(b)(1) or 23(b)(2).
4 See Page 7 of the Judgment.
5 Ibid at Page 6
6 Ibid at Page 9 & 14
7 Ibid at Page 12
8 Ibid at Page 10
9 Ibid at Page 9 & 10
10 Ibid at Page 12 & 13
11 See Wal-Mart Stores, Inc. v. Dukes, U.S., 131 S.Ct. 2541, 2552 (2011)
12 Section 245(3)(i) of the Act
a) In the case of a company having share capital – a) not less than 100 members of the company, or b) not less than such percentage of the total number of its members as may be prescribed, whichever is less [Note: The Rules under the Act set out in Chapter XVI Rule 16.1 have prescribed the percentage as 10% of the total number of members of the company]; or c) any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed [Note: The Rules under the Act set out in Chapter XVI Rule 16.1(a) have prescribed the percentage as 10% of the issued share capital of the company];
b) In case of a company not having share capital- Not less than 1/5th of the total number of its member.
Section 245(3)(ii) of the Act
The requisite number of depositors that can maintain an action a) not less than 100 depositors; or b) not less than such percentage of the total number of depositors as may be prescribed, whichever is less [Note: The Rules under the Act set out in Chapter XVI Rule 16.1(b) have prescribed the percentage as 10% of the total number of depositors of the company]; or c) any depositor or depositors holding to whom the company owes such percentage of total deposits of the company as may be prescribed [Note: The Rules under the Act set out in Chapter XVI Rule 16.1(b) have prescribed the percentage as 10% of the issued share capital of the company].
13 See The Chairman, Tamil Nadu Housing Board, Madras v. T.N. Ganapathy, (1990)1SCC608
14 For details see,http://www.mca.gov.in/MinistryV2/chapter7.html
15 7th Report, Standing Committee on Finance (2011-2012) - The Companies Bill, 2011, (15th Lok Sabha), Ministry of Corporate Affairs.