When a federal court grants preliminary approval to a proposed class action settlement, can it enjoin parallel state court proceedings while the notice and final approval process take place?  Judge Fallon of the Eastern District of Louisiana recently found such an injunction appropriate in In re Chinese-Manufactured Drywall Products Liability Litigation, 2011 U.S. Dist. LEXIS 62222 (E.D. La. June 9, 2011). 

In this case, a proposed class action settlement was reached between the Plaintiffs’ Steering Committee and Interior Exterior Building Supply, LP, Arch Insurance Company and Liberty Mutual Fire Insurance Company, involving tendering the policy limits for the coverage provided by Arch and Liberty Mutual.  Southern Homes, LLC, a homebuilder, had also sued Interior Exterior in Louisiana state court in Orleans Parish, and had a summary judgment motion pending in state court when the federal class action settlement came up for preliminary approval.

Judge Fallon’s opinion focuses on the exception to the Anti-Injunction Act that allows a federal court to enjoin state proceedings “where it is necessary in aid of jurisdiction.”  The opinion states that ordinarily this exception is applicable where the federal court has in rem jurisdiction, and is rarely applicable to in personam jurisdiction.  Judge Fallon explains that there is a circuit split on the question of whether, or under what circumstances, such an injunction is appropriate in aid of an MDL court’s jurisdiction given the nature and complexity of MDL proceedings.  Judge Fallon concludes that the injunction in the Chinese Drywall litigation was appropriate because the MDL proceeding was analogous to an in rem proceeding:

The Court finds that a conceptional res has been created in this MDL litigation, as evidenced by the complexity of the proceedings and claims, the fact the litigation has been underway for almost two years, and the substantial amount of effort and expense put into the litigation by the parties and Court alike. The MDL litigation, as it more specifically pertains to the present Motion, is sufficiently progressed: the parties have engaged in extensive discovery and depositions, a motion for class certification seeking to create a class with claims against InEx was filed and set for hearing, a trial against InEx was scheduled and a case management order issued, and most importantly, the InEx Settlement Agreement is a class action settlement agreement of the InEx-related claims, the Court has preliminarily approved this Agreement, and notice is in the process of issuance. Additionally, an actual res has been created now by the InEx Settlement Agreement which involves the tendering of all of InEx’s primary insurance coverage. Because there is a possibility that Southern’s state court hearing and proceedings could affect and potentially disrupt the InEx Settlement Agreement and the res created thereby, these proceedings should be stayed. Notably, the stay is only temporary and contingent upon the successful final approval by the Court of the InEx Settlement Agreement; thus, in the case the Court does not give its final approval, Southern will then be free to pursue its state court case against InEx, and if the Agreement is finally approved then presumably Southern will benefit as a class member or choose to opt-out.  (In re Chinese-Manufactured Drywall Litigation, 2011 U.S. Dist. LEXIS 62222, at *18-19.)

This is an important issue because when a class action settlement is reached, both sides understandably want to bring other litigation on the same issues to a halt, both to avoid litigation costs and to prevent developments in parallel litigation that might impact the settlement or its approval.  The availability of this kind of temporary stay to allow a proposed class action settlement to be considered should not depend on whether the litigation is an MDL or other complex litigation, or how much work has been done in the case.  An amendment to the Anti-Injunction Act or to the Federal Rules of Civil Procedure might be appropriate to address this narrow but important issue.