Pending Rule 23(f) Petitions Do Not Divest District Courts of Authority to Revise Class-Certification Orders; Subclassing Purchasers and Exchangers Permissible in Merger-Related Securities Fraud

Introduction

In Nova Scotia Health Employees' Pension Plan v. McDermott International, Inc. et al., the Fifth Circuit addressed a knotty procedural and substantive mix arising in a Private Securities Litigation Reform Act (PSLRA) class action under Exchange Act § 10(b) and Rule 10b-5. The appeal stemmed from an interlocutory order that partially granted and partially denied class certification, in litigation over the 2018 McDermott–CB&I merger.

The lead plaintiff, Nova Scotia Health Employees' Pension Plan (NSHEPP), acquired its McDermott shares exclusively via share exchange in the merger (an “exchanger”), while other putative class members bought on the open market (the “purchasers”). After a magistrate judge first recommended denying class certification over a “fundamental conflict” between exchangers and purchasers and later issued a revised recommendation creating separate subclasses, the district court adopted the revised recommendation. Both sides petitioned for Rule 23(f) review.

The appeal presented seven principal issues: whether a district court retains authority to revise a class-certification order while a Rule 23(f) petition is pending; whether the district court violated binding precedent by withdrawing and reissuing its order; NSHEPP’s standing as an exchanger; the finding of a fundamental conflict and the remedy of subclassing; the permissibility of overlapping membership in both subclasses; the scope of issues reviewable on a Rule 23(f) interlocutory appeal; and whether modifications concerning damages-burden phrasing and deferral of market-efficiency/correctiveness determinations were proper. The Fifth Circuit affirmed.

Summary of the Opinion

The Fifth Circuit affirmed the district court’s class-certification rulings in all respects relevant on interlocutory review. Key holdings include:

A pending Rule 23(f) petition does not divest the district court of jurisdiction to reconsider and modify an interlocutory class-certification order; jurisdiction shifts only upon the appellate court’s grant of permission to appeal (FRAP 5).
NSHEPP, though an exchanger, has Article III standing at the certification stage because it advances a plausible theory of economic harm; whether McDermott’s inflation exceeded CB&I’s is a merits question for the trier of fact.
A fundamental conflict exists between exchangers and purchasers, warranting subclassing under Rule 23(c)(5). The court did not abuse its discretion in creating separate subclasses and deferring purchaser-specific issues (e.g., market efficiency and the correctiveness of certain later disclosures).
Unnamed class members may hold claims in both subclasses without multiplying conflicts; adequacy conflicts are assessed with respect to representative parties, and separate subclass representation addresses divergent interests.
Reopening the PSLRA lead-plaintiff/lead-counsel process for the purchaser subclass is a case-management decision not properly reviewable under a Rule 23(f) interlocutory appeal.
The court rejected arguments of forfeiture given that the magistrate judge had raised intraclass conflicts sua sponte and defendants promptly addressed them in objections.
The appellate court did not need to reach whether changes such as striking a phrase that framed a damages matter as an “affirmative defense” were independently reviewable; the district court’s authority to modify its interlocutory order was affirmed.

Analysis

Precedents Cited and Their Influence

Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982): Establishes that a notice of appeal divests the district court of jurisdiction over matters on appeal. The Fifth Circuit distinguished Griggs because Rule 23(f) petitions are permission-based and do not operate as notices of appeal.
Federal Rule of Civil Procedure 23(f) and Federal Rule of Appellate Procedure 5(d)(2): The court emphasized that a 23(f) petition is merely a request for permission to appeal, and that the jurisdictional “divestiture” occurs upon the appellate court’s grant; there is no automatic stay absent an order.
City of Los Angeles, Harbor Div. v. Santa Monica Baykeeper, 254 F.3d 882 (9th Cir. 2001), and Melancon v. Texaco, Inc., 659 F.2d 551 (5th Cir. 1981): Support a district court’s inherent power to reconsider interlocutory orders so long as it retains jurisdiction. The Fifth Circuit aligned with this authority.
Austin v. Kroger Texas, L.P., 864 F.3d 326 (5th Cir. 2017), and Rule 54(b): A district court may reconsider interlocutory orders “for any reason it deems sufficient,” even without new evidence or intervening changes in law. This undercut NSHEPP’s “no change in law or facts” argument.
Rule 23(c)(1)(C) and General Telephone Co. of the Southwest v. Falcon, 457 U.S. 147 (1982): Class certification orders are inherently tentative and may be altered or amended before final judgment.
Earl v. Boeing Co., 53 F.4th 897 (5th Cir. 2022): Used to frame standing’s plausibility threshold; the Fifth Circuit distinguished Earl and found NSHEPP’s injury theory plausible, not speculative.
Clapper v. Amnesty International USA, 568 U.S. 398 (2013), and TransUnion LLC v. Ramirez, 594 U.S. 413 (2021): Anchored the standing inquiry; the Fifth Circuit explained NSHEPP’s claimed harm is not a speculative future injury but a contest over the magnitude of price inflation.
Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), and Chavez v. Plan Benefit Services, Inc., 957 F.3d 542 (5th Cir. 2020): Require a rigorous analysis at certification.
Prantil v. Arkema Inc., 986 F.3d 570 (5th Cir. 2021): Courts must consider how a trial will be conducted when deciding certification—central to the court’s focus on managing exchanger-versus-purchaser issues.
Valley Drug Co. v. Geneva Pharms., Inc., 350 F.3d 1181 (11th Cir. 2003), and Ward v. Dixie Nat’l Life Ins. Co., 595 F.3d 164 (4th Cir. 2010): Articulate what constitutes a “fundamental conflict”—when the same conduct harms some but benefits others—and when it does not.
Langbecker v. Electronic Data Systems Corp., 476 F.3d 299 (5th Cir. 2007), and Berger v. Compaq Computer Corp., 257 F.3d 475 (5th Cir. 2001): Ground the adequacy inquiry and the need to identify conflicts between representatives and the classes they seek to represent.
In re Deepwater Horizon, 739 F.3d 790 (5th Cir. 2014), and In re Oil Spill by Oil Rig Deepwater Horizon, 910 F. Supp. 2d 891 (E.D. La. 2012): Confirm subclassing as a permissible tool to address intraclass conflicts; certification decisions are reviewed for abuse of discretion.
In re Literary Works in Electronic Databases Copyright Litigation, 654 F.3d 242 (2d Cir. 2011), and Johnson v. Meriter Health Services Employee Retirement Plan, 702 F.3d 364 (7th Cir. 2012): Support allowing overlapping subclass membership and explain subclass homogeneity and separate representation.
Regents of the University of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007), and Bell v. Ascendant Solutions, Inc., 422 F.3d 307 (5th Cir. 2005): Limit Rule 23(f) review to class-certification issues and findings made in connection with those requirements.
Hevesi v. Citigroup Inc., 366 F.3d 70 (2d Cir. 2004): Treats PSLRA lead-plaintiff decisions as case-management choices, not proper subjects of Rule 23(f) review.
In re TikTok, Inc., 85 F.4th 352 (5th Cir. 2023): Appellate courts do not second-guess reasonable inferences rooted in record evidence under abuse-of-discretion review.
NSHEPP’s reliance on Dayton Independent School District v. U.S. Mineral Products Co., 906 F.2d 1059 (5th Cir. 1990), and an unpublished district court decision (Glover v. Standard Federal Bank) was rejected; neither controlled here because a 23(f) petition does not vest appellate jurisdiction unless and until granted.

Legal Reasoning

1) District court authority while a Rule 23(f) petition is pending

The court’s starting point is procedural: a Rule 23(f) petition is a request for permission, not a notice of appeal. Under FRAP 5(d)(2), the “date when the order granting permission to appeal is entered serves as the date of the notice of appeal.” Until that grant, the district court retains jurisdiction over interlocutory matters and has inherent power (and under Rule 54(b) and Rule 23(c)(1)(C)) to reconsider, rescind, or modify an interlocutory order. There was no stay, and no permission had issued when the magistrate and district judge withdrew the first certification order and replaced it with a revised one. The Fifth Circuit therefore held that the district court acted within its authority; the “no change in law or facts” argument fails under binding Fifth Circuit law (Austin v. Kroger).

2) Standing of an exchanger-lead plaintiff

Defendants argued that exchangers necessarily benefited from any pre-merger inflation in CB&I stock that flowed into the exchange ratio; thus, they suffered no cognizable injury. The court rejected the premise as a matter of present record. NSHEPP posited a plausible theory: McDermott stock was inflated above and beyond any CB&I-related component due to misstatements; when corrective disclosures occurred, NSHEPP suffered losses on its McDermott holdings. Whether CB&I inflation exceeded McDermott’s, or vice versa, is an empirical merits determination for trial. At this stage, unlike in Earl v. Boeing (which involved speculative future conduct by third parties), the injury claim is not a “speculative chain of possibilities” but a factual dispute over relative inflation magnitudes. This sufficed for Article III.

3) Fundamental conflict and adequacy; subclassing as the remedy

The magistrate judge identified a fundamental conflict between exchangers and purchasers: exchangers may have been helped (or at least not harmed) by CB&I inflation embedded in the exchange ratio, whereas purchasers were allegedly harmed by McDermott-specific inflation. That divergence means a single representative could not fairly and adequately protect both groups’ interests. Consistent with Rule 23(c)(5), the court created two subclasses—exchangers (represented by NSHEPP) and purchasers (to be represented by a separately appointed lead plaintiff and counsel).

The court also approved deferring purchaser-specific questions—such as market efficiency for certain post-merger dates and the correctiveness of later disclosures—until a purchaser subclass was in place, because those issues do not affect exchangers. This approach comports with the rigorous analysis requirement and with Prantil’s instruction to consider trial management at certification.

4) Overlapping subclass membership does not multiply conflicts

The court rejected the contention that allowing unnamed class members who are both exchangers and purchasers to recover in both subclasses magnifies conflicts. Adequacy analysis focuses on whether the representative parties fairly and adequately protect the subclass they represent; it does not forbid an individual from holding multiple, distinct claims. Separate subclass representatives and counsel align incentives so that each category of claim is maximized for those who hold it (as articulated by the Second Circuit in Literary Works). The existence of a finite recovery pool does not create a legal bar to overlapping subclass membership.

5) Scope of Rule 23(f) review; PSLRA lead-plaintiff selection

The Fifth Circuit reiterated that Rule 23(f) review is confined to certification and findings made in connection with certification requirements. Decisions about opening or reopening the PSLRA lead-plaintiff/lead-counsel process are case-management matters, not ordinarily reviewable on a 23(f) interlocutory appeal (see Hevesi). The court therefore declined to review that aspect and, having affirmed the district court’s authority to modify its own order, found it unnecessary to reach whether changes like striking a reference to an “affirmative defense” characterization were independently reviewable under 23(f).

6) No forfeiture by defendants

Because the magistrate judge raised the intraclass conflict sua sponte in the revised recommendation, defendants did not forfeit responses by addressing them at their first opportunity (in objections to MR-2).

Impact

This decision meaningfully clarifies several recurrent issues in complex securities class actions and beyond:

District court authority during pending 23(f) petitions: Within the Fifth Circuit, parties should not assume that filing a 23(f) petition “freezes” the district court’s hand. Unless and until the court of appeals grants permission to appeal (or a stay is ordered), the district court retains full authority to alter, amend, and even rescind class-certification orders.
Subclassing in merger-related securities fraud: Where a putative class includes both exchangers and open-market purchasers, courts will scrutinize adequacy for fundamental conflicts tied to divergent economic incentives. Subclassing—often with separate lead plaintiffs and counsel—may become the default solution.
Overlapping subclass membership: Individuals who both exchanged shares in the merger and later purchased on the market may press claims in both subclasses. This has practical consequences for settlement architectures and allocation plans, which must account for two avenues of recovery and properly cabin each subclass’s funds to its own members’ claims.
Standing for exchangers: Defendants cannot defeat standing at certification merely by asserting that exchange participants necessarily benefited from target inflation. Plaintiffs who articulate a plausible theory that issuer-specific inflation exceeded any embedded target inflation will typically reach the merits where event studies can resolve the differential.
Modular certification and proof: Courts may defer purchaser-specific issues such as market efficiency or the correctiveness of later disclosures until a purchaser subclass is in place, enabling more precise, claim-specific proof and avoiding cross-subclass contamination of issues.
PSLRA lead-plaintiff practice: Judges retain discretion to reopen or adjust the lead-plaintiff and lead-counsel structure to reflect subclassing. Such case-management choices are generally insulated from Rule 23(f) review.

Complex Concepts Simplified

Rule 23(f) petition vs. notice of appeal: A Rule 23(f) petition is a request for permission to appeal an interlocutory class-certification order. It does not transfer jurisdiction to the appellate court unless granted. A standard notice of appeal (after final judgment) automatically divests the district court of jurisdiction over the matters on appeal.
Interlocutory order: A non-final order that can be revised by the issuing court before final judgment. Class-certification orders are interlocutory and expressly modifiable (Rule 23(c)(1)(C), Rule 54(b)).
Adequacy and fundamental conflict: The adequacy requirement ensures that the named representative and counsel will fairly protect absent class members’ interests. A fundamental conflict exists when the same challenged conduct harms some class members while benefiting others, such that a single representative cannot loyally advance all interests.
Subclass and overlapping membership: Courts may divide a class into subclasses to isolate conflicting interests. A person can belong to multiple subclasses if they hold multiple types of claims; each subclass requires its own adequate representative and counsel.
Exchanger vs. purchaser: Exchangers receive shares through a merger-conversion (e.g., CB&I shareholders receiving McDermott stock). Purchasers buy on the open market. Their economic incentives, reliance theories, and damages models can diverge.
Market efficiency and corrective disclosures: In fraud-on-the-market cases, plaintiffs often rely on the presumption that public, material misstatements affect market price in an efficient market. “Corrective disclosures” are revelations that allegedly dissipate the inflation, generating loss causation.
Standing injury-in-fact: To sue in federal court, a plaintiff must allege a concrete, particularized, and actual (or imminent) injury. Here, the injury theory turns on whether the price inflation in the acquired stock (McDermott) exceeded any embedded inflation from the target (CB&I)—a factual question suitable for trial.
PSLRA lead-plaintiff selection: The PSLRA presumes the “most adequate plaintiff” is the movant with the largest financial interest who meets Rule 23 requirements. Courts may adjust lead-plaintiff structures as a case evolves, including to accommodate subclasses.

Conclusion

The Fifth Circuit’s unpublished but thorough opinion in Nova Scotia Health Employees’ Pension Plan v. McDermott International delivers clear guidance on three fronts. First, a Rule 23(f) petition does not strip the district court of the power to revisit class-certification rulings; jurisdiction shifts only upon an appellate grant of permission to appeal. Second, where an asserted fraud may have affected exchangers and purchasers differently, subclassing is an appropriate and often preferable tool to manage fundamental conflicts—without barring overlapping subclass membership. Third, Rule 23(f) review is limited to certification issues; lead-plaintiff adjustments under the PSLRA are case-management choices that fall outside interlocutory review.

On the merits of class certification, the opinion strikes a pragmatic balance: it preserves NSHEPP’s standing and exchanger subclass while insisting that purchasers have their own representative and counsel to litigate purchaser-specific issues such as market efficiency and the correctiveness of later disclosures. Together, these holdings both respect the flexible, iterative design of Rule 23 and provide a roadmap for managing complex, merger-driven securities class actions where investor cohorts have materially different economic postures. The court’s approach prioritizes fairness and trial manageability without prematurely resolving nuanced, empirical disputes (like relative inflation magnitudes) that belong at the merits stage.