Petrobras and Foreign Recognition
The Southern District of New York’s 2016 In re Petrobras decision represents a significant and largely unexplored shift in the manner by which courts assess foreign res judicata concerns.
A 2016 decision involving an oil company may have significant consequences for international disputes. Photo: Loic Manegarium, Pexels.
By: Joshua Plastrik
In 2018, Petrobras, a Brazilian state oil company, settled a U.S. securities class action for $2.95 billion. This was the fifth-largest U.S. securities class action settlement ever. Unsurprisingly, it has received a commensurate degree of both media and scholarly attention. However, the historic settlement does not tell the whole story of the litigation which preceded it. In particular, little attention has been paid to the 2016 decision in the Southern District of New York which addressed the plaintiffs’ motion for class certification. This decision, while later abrogated and remanded by the Second Circuit (on grounds other than those which are the subject of this post), nonetheless represents a shift in how courts in the Southern District of New York assess the res judicata concerns regarding a U.S. class action judgment’s foreign recognition. This post will 1) explain these concerns; 2) provide a brief overview of their traditional treatment within the Second Circuit; and 3) examine the implications of the Petrobras decision on the future of class action litigation.
The Res Judicata Issue
Most class actions in the United States are “opt-out.” That is, the results of U.S. class actions bind not only the participating defendants and plaintiffs but also any plaintiff who failed to affirmatively opt-out of the litigation. Opt-out class actions provide a greater deterrent effect and maximize the number of plaintiffs receiving some amount of compensation. While an opt-out class action regime may result in more substantial judgments against unsuccessful defendants, successful defendants benefit from the more extensive resolution of claims and the broader preclusive effect of the judgment. In exchange for assuming the risk of a more substantial judgment against it, a successful defendant is awarded a more sweeping judgment in its favor. The defendant can rest assured that no new litigation will be initiated against it by parties that failed to opt-out of the class action. But the situation is not necessarily as promising for prevailing defendants as this summary would suggest.
While Full Faith and Credit guarantees the preclusive effect of a U.S. court’s judgment domestically, it provides no such guarantee internationally. Normally, this is not a problem; U.S. judgments are ordinarily recognized abroad. However, the notion of an opt-out class action is rejected by most countries’ legal systems, and there is reason to believe that some of these countries might not recognize such a judgment. Accordingly, if a plaintiff class in an opt-out class action is composed in part of foreign plaintiffs, those plaintiffs might have the opportunity to relitigate the matter abroad—even if the U.S. court enters a judgment in favor of the defendant.
The Traditional Approach(es)
The uncertainty regarding foreign recognition of U.S. class action judgments is not a new phenomenon, and courts within the Second Circuit have grappled with it ever since Judge Friendly’s 1975 decision in Bersch v. Drexel Firestone Inc. In Bersch, thousands of plaintiffs—most of whom were neither U.S. citizens nor U.S. residents—filed a complaint alleging securities fraud. One of the issues before Judge Friendly on appeal was whether class certification was appropriate in light of the preponderance of foreign plaintiffs. Judge Friendly resolved this issue under a novel theory proposed by neither the defendants nor the plaintiffs.
He held that because successful defendants are “entitled to a victory no less broad than a defeat would have been,” a U.S. must “abstain from entering judgment” when it is a “near certainty” that a foreign court will not recognize the judgment. Accordingly, if a foreign plaintiff’s country of citizenship’s nonrecognition of an opt-out class action judgment was found to be a “near certainty,” that plaintiff needed to be removed from the plaintiff class.
In Bersch, only the defendants submitted evidence about to the likelihood of foreign recognition. In the absence of any evidence to the alternative, it was easy for Judge Friendly to find that the defendants had met their burden under his “near certainty” standard, and to substantially reduce the size of the plaintiff class. However, following Bersch, litigants became aware of the need to introduce expert testimony and affidavits regarding the likelihood of foreign recognition. Confronted with dueling affidavits, courts found the “near certainty” standard to be unworkable in practice.
In 2007, the In re Vivendi Universal court, faced with a securities class action with predominantly foreign plaintiffs, aimed to address the impracticability of the Bersch standard. Following Bersch, the defendants opposed class certification on the grounds that that “all foreign plaintiffs must be excluded from the class because it is a ‘near certainty’” that their resident countries would fail to recognize the court’s judgment. The court responded that it would “consider this aspect of their opposition to be an attack on the superiority of class action treatment of the claims of foreign purchasers.” In other words, the court considered the resolution of the res judicata to be a part of the superiority prong of the Rule 23(b)(3) analysis for class certification. In so doing, the Vivendi court adopted what had already become the dominant approach in the years following Bersch.
But in addition to “grafting” the res judicata issue into the Rule 23(b)(3) analysis, the Vivendi court went further: it explicitly dispensed with Bersch’s “near certainty” standard. The court shifted the degree of certainty required from a “near certainty” of nonrecognition to a showing that recognition is “more likely than not.” Further, because plaintiffs bear the burden of proof under Rule 23(b)(3), the court shifted the burden of proof from the defendants to the plaintiffs. Until the 2016 Petrobras decision, this remained the dominant standard.
Petrobras
Like the Bersch and Vivendi decisions, the 2016 Petrobras decision concerned the certification of a class of plaintiffs alleging securities violations who were situated “around the globe.” Among other arguments for a denial of certification, the defendants cited to Vivendi for the proposition that, under Rule 23(b)(3), the plaintiffs must “establish a probability that a foreign court will recognize the res judicata effect of a U.S. class judgment.” This was, by the time of the Petrobras decision, an altogether conventional argument. Scholars had observed a continued judicial embrace of the Vivendi standard. It is thus surprising that, when faced with an opportunity to resolve the issue of class certification through the tried-and-true application of Vivendi, the Petrobras court wrote that it “is not aware of any binding precedent that sets out such a requirement.” The remainder of this section answers the following question: why did the Petrobras court reject the Vivendi standard and what did it insert in its place?
The rationale for the court’s abandonment of the Vivendi standard followed an argument raised by the plaintiffs in their response to the defendant’s motion to deny class certification. The plaintiffs argued that a departure from Vivendi was necessitated by the Supreme Court’s 2011 decision in Morrison v. National Australia Bank. In Morrison, the Supreme Court “held that the antifraud provisions of the U.S. federal securities laws reached only securities transactions that occurred in the U.S.,” so “many litigants formerly covered were now barred from recovery in U.S. courts.” The result of the Morrison decision was a decrease in the total number of transnational class actions reaching U.S. courts. Because “Morrison materially lessens the foreign res judicata concerns animating” Vivendi, the Petrobras court declined to follow the traditional standard. In its place, the court, citing to In re IndyMac Mortg.-Backed Sec. Litig, shifted the initial burden of proof from the plaintiffs to the defendants, which in turn necessitated the removal of the res judicata inquiry from the Rule 23(b)(3) superiority analysis.
The net result of this burden shift is that fewer foreign plaintiffs will be removed due to concerns of foreign nonrecognition, as the initial burden to demonstrate the likelihood of nonrecognition now rests with the defendants. In 2019, another decision within the Southern District of New York, Villella v. Chemical and Mining Company of Chile Inc., cited to Petrobras in reiterating its rejection of the Vivendi standard. But it does not follow, as the Petrobras decision suggests, that the decrease in the number of transnational class actions brought on by Morrison indicates that the standard for assessing these concerns when they do arise should be modified. Still, this is not to say that Petrobras’ rejection of Vivendi’s placement of the burdens cannot be otherwise supported.
As Professor George Bermann has observed, “[f]or any number of practical reasons, [foreign relitigation of a U.S. judgment] is not likely to be brought, and so predicting the preclusive effect of the U.S. judgment may be an entirely academic exercise.” The Vivendi court observed much the same when it listed various “practical realities” which decrease the likelihood of foreign relitigation. If this rationale (or any number of other rationales rooted in the traditional class action values of deterrence, fairness, and efficiency) is accepted as a sufficient basis for removing fewer foreign plaintiffs from U.S. class actions, there is no apparent reason why the rejection of the Vivendi standard should be limited to the securities context (wherein it has thus far been understood as cabined due to its purported reliance on Morrison).
Conclusion
The 2016 Petrobras decision removed the res judicata inquiry from its traditional place in the Rule 23(b)(3) superiority analysis. While the court’s own justification for the Petrobras decision may be flawed, the decision can be supported on other grounds. Still, the reader may be left wondering: what exactly is the current standard? It is true that Petrobras rejected Vivendi and shifted the parties’ burdens, but what standard are courts now to use in assessing the likelihood of foreign recognition? The unfortunate answer is that there has been no actual articulation of the degree of certainty required under Petrobras. Thus far, both the Petrobras and Villella courts have resolved the res judicata issue based on the defendants’ failure to submit evidence of nonrecognition. Litigants have been placed in a position where they cannot know whether to expect a court to apply the “near certainty” or “more likely than not” standard—or even apply an entirely novel standard. This is not a tenable state of affairs; it remains to be seen how courts will resolve it.
Joshua Plastrik is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. He graduated from Reed College in 2019.