The Dialogue Continues: Predominance Strengthened Under Comcast Decision

On March 27, 2013, the U.S. Supreme Court handed down its much awaited decision in Comcast Corp. v. Behrend, No. 11-864, an antitrust case out of the Third Circuit.  Comcast  makes it clear, building on the Court’s seminal decision in Wal-Mart Stores, Inc. v. Dukes, that class certification cannot rest on the pleadings, but must be based on evidence, even when that evidence would lead a court to consider the merits of a case.  Further — in what appears to be a continuing battle within the Court on the predominance requirement – the Court determined that the lack of a classwide methodology to demonstrate damages meant that the predominance criterion of Rule 23(b)(3) could not be met, and reversed the certification of the class.

Comcast was brought by Philadelphia cable subscribers alleging that Comcast had violated the Sherman Act by monopolizing Philadelphia’s cable market. The district court certified a class of 2 million current and former Comcast subscribers in the Philadelphia area, holding “that the element of antitrust impact is capable of proof at trial through evidence that is common to the class . . ., and  . . . there is a common methodology available to measure and quantify damages on a class-wide basis.”  A divided panel of the Third Circuit affirmed on July 11, 2011, after Wal-Mart, and distinguished Wal-Mart, holding that it was inapplicable:  “The factual and legal underpinnings of Wal-Mart—which involved a massive discrimination class action and different sections of Rule 23—are clearly distinct from those of this case.  Wal-Mart  therefore neither guides nor governs the dispute before us.”

The question before the Supreme Court, as recast by the Court, was “whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”

On the Wal-Mart merits issue, the Court was very clear that: “Repeatedly, we have emphasized that it ‘may be necessary for the court to probe behind the pleadings before coming to rest on the certification question,’ and that certification is proper only if ‘the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.’”  As to predominance, Justice Scalia held:  “The same analytical principles govern Rule 23(b).  If anything, Rule 23(b)(3)’s predominance criterion is even more demanding than Rule 23(a)” precisely because money damages class actions were considered to be “adventuresome” unlike injunctive and declararatory relief class actions.

On the predominance requirement, there is a not-so-subtle dialogue taking place on the Court betweeen the liberal and conservative justices.  Recall that in Wal-Mart, Justice Scalia announced a much more stringent commonality requirement under Rule 23(a): there must be a claim that is based on a “common contention, and that common contention must drive the resolution of the classwide issue that is central to the claims at stake.”  In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, a securities class action,  Justice Ginsburg reasoned that materiality was a merits question, and that the only issue for class certification was whether the question of materiality was a predominant one, or an individualized one.  She emphasized that predominance is to viewed in terms of whether common questions predominate.  She then reasoned that materiality is an objective question that can be proved through evidence common to the class, and that individual questions can never predominate as to materiality because even if down the road that common proof fails, the case simply would end.  As I have previously blogged about, Amgen arguably lowered the predominance requirement, at least in the securities context.

The Amgen decision was met with strong dissents from Justices Thomas and Scalia.  And in Comcast, we see Justice Scalia coming back to say that the predominance criterion is a difficult one to meet. Accordingly, the Court rules that when damages are so individualized that they outweigh any common elements of the case, a class may not be certified under the predominance requirement of Rule 23(b)(3): “By refusing to entertain arguments against respondents’ damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination, the Court of Appeals ran afoul of our precedents requiring precisely that inquiry.  And it is clear that, under the proper standard for evaluating certification, respondents’ model falls short of establishing that damages are capable of measurement on a classwide basis…. respondents cannot show Rule 23(b)(3) predominance:  Questions of individual damage calculations will inevitably overwhelm questions common to the class.”

The Comcast dissent, led by Justice Ginsburg, argues that individualized damages have not historically meant that class treatment was not available, and then tries to cabin the opinion to the antitrust context.  As Justice Scalia counters:  “This case … turns on the straighforward application of class-certification principle; it provides no occasion for the dissent’s extended discussion… of substantive antitrust law.”

Notwithstanding the dissent’s best efforts, there is no reason why Comcast should be confined to the antitrust context, and the dissent fails to provide any real reason.  Thus, predominance is strengthened again… at least for now.

Supreme Court Closes CAFA Loophole

In The Standard Fire Insurance Co.v. Knowles, No. 11-1450, a unanimous decision yesterday written by Justice Breyer, the Supreme Court held that a plaintiff cannot stipulate to an amount of damages for a putative class in order to avoid federal jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).

CAFA was enacted, in part, to ensure that class actions were filed in federal court unless they met a limited number of exceptions, thus avoiding often pro-plaintiff state courts.  As previously described on this blog, in Knowles, plaintiff’s counsel tried to avoid the federal jurisdiction mandated by CAFA — in favor of Arkansas state court — by stipulating that the damages sought by the putative class would be less than the $5 million CAFA threshold.

The Supreme Court held that stipulations must be binding to be effective and that the “stipulation Knowles proffered to the District Court . . . . does not speak for those he purports to represent.  Relying on its recent decision in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), the Court held that “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.”  Significantly, this is in contrast to individual actions in which stipulations are binding and thus can affect the jurisdictional analysis.  The Court spoke loudly and definitively — named plaintiffs in uncertified classes cannot speak for the class because they do not represent the class.

The Court squarely rejected the argument that any issues with the validity or binding nature of the stipulation would be considered in the class certification process:  “We do not agree that CAFA forbids the federal court to consider, for purposes of determining the amount in controversy, the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process… To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance.’”  In addition, the Court rejected a similar plaintiff’s tactic — dividing up a class into smaller classes to avoid CAFA jurisdiction through the use of non-binding stipulations.

Knowles is  significant not just in its limitations on plaintiff’s tactics to avoid federal jurisdiction, but because it clearly holds that pre-certification representations purportedly made on behalf of a class are not valid or binding.  The decision thus could have broader ramifications.

 

Class Action Waivers Revisited: Supreme Court Argument on American Express Case

Last week, the Supreme Court heard argument in American Express Co. v. Italian Colors Restaurant, No. 12-133.  The case stems from the Second Circuit’s February 1, 2012 decision that American Express (“AMEX”) could not compel a putative class of merchants to arbitrate their antitrust claims. In re Am. Express Merchants Litig., 667 F.3d 204 (2d Cir. Feb. 1, 2012) (“Amex III“).   The Second Circuit had held that the class action waiver contained in AMEX’s Card Acceptance Agreement—which tied the acceptance of its credit card to its charge card, which charged a higher rate—was unenforceable because it “would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.” The Second Circuit’s decision was based on an affidavit from plaintiffs’ expert showing that the cost of individual litigation far exceeded any potential individual recovery.

The Supreme Court heard argument on the following question:  “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”

At argument, the Court appeared divided.  Justice Kagan was concerned, as was the Second Circuit, with a plaintiff’s ability to vindicate a federal statutory right, repeatedly asking Petitioners’ counsel about how far an arbitration agreement can go to preclude a plaintiff from bring a Sherman Act claim.  For example, she asked:  “Do you think that if in your arbitration agreement you had a clause which just said, I hereby agree not to bring any Sherman Act claim against American Express…could your arbitration agreement do that?”  At the other end of the spectrum, Justice Scalia asked questions which focused on the fact that the Sherman Act existed before the class actions rules, from which one could infer that there was no right to bring such claims in a class action at all, let alone to make them possible if otherwise costly:  “I don’t see how a Federal statute is frustrated or is unable to be vindicated if it’s too expensive to bring a federal suit.  That happened for years before there was such a thing as a class action in Federal courts.  Nobody thought the Sherman Act was a dead letter, that it couldn’t be vindicated.”

Meanwhile, the other Justices (except Justice Sotomayor, who recused herself given her involvement with the case when she sat on the Second Circuit), focused their questions on the costliness of the arbitration procedure, with the questioning led by Justice Breyer.  Justice Breyer also expressed concern with the erosion of the law of arbitrability:  “You are saying the thing that keeps him out is his own theory of wrong, which will involve hiring a lot of experts and others.  Now, once that’s adopted, it seems to me in practice we reversed in many, many cases the proposition that you can in fact require Federal causes of action to be arbitrated, because all you have to do to get out of the arbitration is to allege a theory of your case which is hard and complicated to prove.  Now you are back in court.”

The Supreme Court’s recent jurisprudence in this area has been defendant friendly, enforcing class action arbitration waivers and standing for the proposition that class arbitration cannot be imposed on a party.  Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010); AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).  However, this case may carve out an exception, or at least provide further guidance for companies to know how to draft such waivers.  Significantly, the Court is slated to hear another class arbitration case, Oxford Health Plans LLC v. Sutter, shortly, on the related issue of whether class arbitration can be imposed without express contractual language which permits it.

 

Supreme Court Rules That Materiality Is a Merits Question in Securities Class Actions

Last week the Supreme Court decided Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085.  As previously discussed on this blog, Amgen is an extremely important case dealing with the divide between what is appropriately decided at class certification versus on the merits.  The Supreme Court, in a 6-3 decision authored by Justice Ginsburg, held that in a Rule 10(b) securities fraud class action, materiality is a merits question and that plaintiffs need not show at the class ceritifcation stage that the misprepresentation or omission on which they allegedly relied was material to their decision to purchase or sell the security at issue.  The import of the decision is that classes that could never meet the materiality standard can nevertheless proceed.  In some ways, the decision is consistent with the Court’s decision last year in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), in which the Court held that a plaintiff need not prove loss causation at the certification stage.  But, the decision in Amgen is different from Halliburton because of the way in which the Court discusses the Rule 23 predominance requirement generally, and plaintiffs’ counsel will no doubt argue that Amgen’s meaning goes beyond the securities context.

Amgen is best viewed as a continuation of the “Eisen”  debate as to whether merits issues can be reviewed at the class certification stage.  In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the Court noted that Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), had been misread to mean that courts could not consider the merits when determining whether to certify a class.  Instead, the Court held, in conducting a rigorous class certification anlysis, courts could and should, when necessary, consider the merits of the underlying claim:  a rigourous anlaysis will “[f]requently . . . entail some overlap with the merits of the plaintiff’s underlying claim.”  Dukes, 131 S. Ct. at 2551.  In Amgen, Justice Ginsburg added the following gloss:  “… the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the ‘metho[d]‘ best suited to adjudicate the controversy ‘fairly and efficiently.’”  Further, she reasoned:  “Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage.  Merits questions may be considered to the extent — but only to the extent — that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied.”

Echoing the views that she and Justice Kagan expressed at oral agument, Justice Ginsburg reasoned that materiality was a merits question, and that the only issue for class certification was whether the question of materiality was a predominant one, or an individualized one:  “Because materiality is judged according to an objective standard, the materiality of Amgen’s alleged misrepresentations and omissions is a question common to all members of the class…. The alleged misrepresentations and omissions, whether material or immaterial, would be equally so for all investors composing the class.”  Justice Ginsburg emphasized that predominance is to viewed in terms of whether common questions predominate.  She then reasoned that materiality is an objective question that can be proved through evidence common to the class, and that individual questions can never predominate as to materiality because even if down the road that common proof fails, the case simply would end.

In dissent, Justices Scalia and Thomas go back to the ”basics,” discussing the meaning of the decision in Basic  Inc. v. Levinson, 485 U.S. 224 (1988), which invented the presumption of reliance in fraud-on-the-market securities cases. Under Basic, plaintiffs in securities class actions are entitled to a presumption of reliance (which is virtually always an individualized inquiry otherwise) if they could meet certain factors, including showing that the alleged misrepresentation or omission was material.  In dissent, Justice Scalia reasoned that Basic itself applies not only to the merits, but to the certification decision.  Moreover, he reasoned, that reading is consistent with the notion, expressed most recently in Wal-Mart, that “‘Rule 23 does not set forth a mere pleading standard.’”  Similarly, Justice Thomas reasoned that the plaintiff should not get the benefit of the presumption of reliance at the certification stage unless it can show that it meets the criteria for the presumption.  And without the presumption, questions of reliance remain individualized: “Without materiality, there is no fraud-on-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible.”

The Court admittedly has come out differently on different aspects of the Basic  factors, e.g., whether a named plaintiff must establish that he or she executed trades at the relevant time.  Justice Ginsburg argues that that aspect of the Basic presumption goes to the Rule 23(a)(3) and (4) criteria of typicality and adequacy of representation, making them preliminary inquiries appropriate for the certification decision.  The dissent sees this as a meaningless distinction.  Meanwhile, Justice Alito, in a concurring opinion, asks whether the Basic presumption needs to be re-examined, an issue which was not raised to the Court.

While Amgen is a securities case, it likely will have a broader impact. Fraud class actions generally fail because of the question of the individualized nature of reliance, and plaintiffs’ counsel will now argue that reliance need not be shown until the merits phase of a case.  Defendants will argue that Amgen should be confined to the securities context given that it involves a presumption of reliance that itself is confined to that context.  The Eisen debate thus will continue to be played out in the courts.

 

 

Supreme Court to Hear SLUSA Case

On January 18, 2013, the U.S. Supreme Court granted certiorari in Chadbourne & Parke LLP v. Troice, No. 12-79. The case arises from the Stanford Ponzi scheme. The Court of Appeals for the Fifth Circuit had held that the Securities Litigation Uniform Standards Act (“SLUSA”) did not preclude the plaintiffs from proceeding with their action. SLUSA precludes certain class actions that sound in state law and allege “a misrepresentation … in connection with the purchase or sale of a covered security.” 15 U.S.C. Section 78bb(f)(1). At issue before the Supreme Court is the meaning of SLUSA’s “in connection with” language.

The question presented is as follows:

“Whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions in SLUSA-covered securities.”

In their Petition, Chadbourne & Parke argued that “the circuits … are divided over the standard for determining whether an alleged misrepresentation is sufficiently related to the purchase or sale of a covered security to satisfy the ‘in connection with’ requirement.”

This case provides the Supreme Court with an opportunity to clarify the SLUSA standard it articulated in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006), and the decision likely will have a significant impact on the viability of state-law class actions that involve securities.

Supreme Court Hears Argument on CAFA Evasion

On January 7, 2013, the U.S. Supreme Court heard argument in The Standard Fire Insurance Company v. Knowles, No. 11-1450. The case is important because it pits a named plaintiff’s right to be “master of the complaint” against an absent class member’s right to due process and also tests whether the Court will allow creative plaintiffs’ lawyers to circumvent Congress’ mandate that federal jurisdiction is required in cases exceeding the $5 million threshold set forth in the Class Action Fairness Act of 2005 (“CAFA”). (See my post from Sept. 7, 2012.)

At argument, most of the Justices expressed concern with a plaintiff’s ability to avoid federal jurisdiction through stipulations and other tactics. As Justice Breyer put it when speaking about plaintiff’s reliance on the master of the complaint argument to avoid federal jurisdiction: “this is just a loophole because it swallows up all of Congress’s statute, which is what their problem is, all you have to do, . . . you file a complaint, you say it is for $4,900,00; in fact, it’s worth 10 million.”

While the ways plaintiffs circumvent CAFA was clear to the Court, there was concern on where to draw the line between what a named plaintiff could and could not do prior to class certification. As Justice Kagan stated: “… you really are asking us to blow up the whole world. . . . Because you are saying: Next time we will be back and tell you that the named plaintiff can’t define the class. Next time we are going to be back and tell you that they can’t name the defendants.” Justic Kagan was also adamant that CAFA did not get rid of the master of complaint rule. Counsel for Petitioner pointed out that “[t]he master of the complaint doctrine has never been applied by this Court where an unappointed named plaintiff . . . seeks to try to alter claims and judgments of other people and the rights of them to recover.”

Other members of the Court, too, questioned why the class certification process itself, as well as later removal under CAFA, could not address plaintiffs’ efforts to do an end-run around CAFA’s mandate for federal jurisdiction. Justice Sotomayor, for example, asked: “… why doesn’t the normal class certification process protect adequately the absent class members? First of all, counsel has to prove he or she is adequate. So doesn’t that mean that if they enter a stipulation that is grossly unfair to the class that the judge is not going to certify the case?” As Justice Ginsburg understood the problem posed by Petitioner, it would be the state court that would make the determination of adequacy, not a federal court. As counsel for Petitioner stated: “… that’s what Congress was concerned about, too…” Justice Roberts then commented: “Well, you’re assuming that it’s a bad thing for class members to have their claims limited. but it may well be a good thing for them to have their claims limited if that gets them into what would reasonably be regarded as a more sympathetic forum.” As for removal, while removal is possible at any time under CAFA, counsel for Petitioner pointed to the discovery that would have been had to that point, from which one could infer a reward to the plaintiff who had successfully gamed the system.

The Court’s decision, expected by June, likely will define the limits of a named plaintiff’s ability to circumvent CAFA, at least in the context of a stipulation as to damages, but potentially with respect to other tactics, too, such as breaking a class up into smaller classes to avoid federal jurisdiction.  In any event, it is likely to be an important decision which could impact the number of cases in federal as opposed to state court.

2012 Through a Wal-Mart Lens

The Supreme Court’s 2011 decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), set the stage for many of the important class action issues of 2012.

 
First, Wal-Mart heightened the commonality requirement under Rule 23(a)(2) for all proposed classes, leading some courts to certify “issues” under Rule 23(c)(4) when a class otherwise may not be certifiable.
 
Second, Wal-Mart made the standard for injunctive or declaratory relief under Rule 23(b)(2) more stringent.  Courts continue to struggle with Wal-Mart’s mandate, and circumventing its analysis, as the standards for certification for a declaratory injunctive relief class remains unclear.
 
Third, Wal-Mart also makes it clear that courts can and should inquire into the merits of a case as part of the “rigorous analysis” required for class certification.  Yet, again, not all courts will do so, and one of the cases before the Supreme Court, the Comcast case, brings this issue to the fore.  Nevertheless, how to draw the line between what is necessary at the class certification versus the merits stage remains an issue – Amgen, a securities case before the Supreme Court, looks at this divide.
 
Fourth, the other area addressed by the Wal-Mart decision, which also should be addressed in Comcast, is whether expert evidence submitted at the certification stage must be admissible, which means meeting the Daubert standard when it comes to expert testimony.
 
Fifth, in Wal-Mart, we see the Court reiterating its concern with the due process rights of absent class members by refusing to allow for a class with a damages component to be certified under Rule 23(b)(2),  a standard that does not call for class notice.  Notably, the Supreme Court is likely to address the issue of due process for absent class members, at least in the CAFA context, in the Standard Fire case that is currently before the Court.
 
The Wal-Mart decision
 
Wal-Mart, of course, was an employment discrimination case brought under Title VII.  Former and current female employees alleged that they were discriminated against in pay and promotion because local supervisors would make those decisions, and the result, allegedly, was to favor men.  The class included 1.5 million female employees.
 
The Ninth Circuit had upheld the certification of the class under Rule 23(b)(2) in an en banc decision.  As to commonality, the majority opinion for the Ninth Circuit held that the common question was whether Wal-Mart’s female employees were subjected to a single set of corporate policies that caused them to be discriminated against.  The Supreme Court reversed.
 
As for the commonality requirement—Rule 23(a)(2), the Court split 5-4, with Justice Scalia writing for the majority.  He found commonality to be lacking in the class because of the localized nature of the issue – each local manager was making pay and promotion decisions and those decisions could be for any reason at all.
 
Under Justice Scalia’s standard, there must be a claim that is based on a “common contention, and that common contention must drive the resolution of the classwide issue that is central to the claims at stake.”  In the context of Wal-Mart, the question of whether Wal-Mart’s decentralization of pay and promotion decisions allowed for a disparate impact, was not enough to satisfy commonality.  With that low of a standard, arguably, any class could meet the commonality requirement.
 
In her dissent, Justice Ginsburg, joined by Justices Sotomayor, Breyer and Kagan, reasons that Justice Scalia has transformed the commonality requirement into the predominance requirement.  For the dissent, only a single common question would be necessary to satisfy Rule 23(a)(2).  Here, that question was whether Wal-Mart’s practice of delegating discretion to local supervisors on pay and promotion decisions led to a disparate effect on women employees.
 
For the dissent, going back to the Court’s seminal Amchem decision, the Rule 23(b)(3) predominance standard tests whether the proposed class is cohesive enough to warrant representative adjudication.  Justice Ginsburg states that “[i]f courts must conduct a ‘dissimilarities’ analysis at the Rule 23(a)(2) stage, no mission remains for Rule 23(b)(3).”  Justice Scalia’s retort is that he has not changed the commonality requirement, he has just made it matter.
 
While the Court split on the commonality piece of the decision, they were unanimous in holding that the Wal-Mart class did not pass muster under Rule 23(b)(2) because, given that decisions were local and situations differed among class members, there could not be a single injunction or declaration that would provide relief to every woman in the class.  Here, too, money damages were individualized and were not merely incidental to the injunctive relief sought.
 
Issue Certification
 
Soon after Wal-Mart was decided, the Seventh Circuit, in a decision written by Judge Posner, decided a factually similar case in McReynolds v. Merrill Lynch, 672 F.3d 482 (7th Cir. 2012).  In McReynolds, some 700 African American brokers, both current and former employees, filed a class action against Merrill Lynch claiming racial discrimination in its employment practices in violation of Title VII.
 
Plaintiffs claimed that the company’s “teaming” and “account distribution” policies – which allowed brokers to form their own sales teams and which allowed allegedly biased criteria to determine the distribution of accounts of departing brokers — had a disparate impact on African American brokers.
 
The Seventh Circuit reversed the district court’s denial of class certification under Rule 23(b)(2) and (c)(4).  The court held that certain issues could be resolved on a class-wide basis.  Judge Posner reasoned that, as opposed to Wal-Mart, where “there was no company-wide policy to challenge,” Merrill Lynch’s teaming and account distribution policies were alleged to be implemented company-wide and were well suited to a class-action challenge.  Although the brokers’ compensation was determined at the local level by managers with company-delegated discretion, that did not preclude a class action challenge to the two policies.  The court rejected defendants’ argument that any discrimination would result from the “local, highly-individualized implementation of policies rather than the policies themselves.”  It held that, even if there would have been racial discrimination on the local level in the absence of the corporate policies, “[t]he incremental causal effect . . . of those company-wide policies—which is the alleged disparate impact—could be most efficiently determined on a class-wide basis.” The Seventh Circuit held that the issue of liability can be certified even though damages are individualized.
 
Judge Posner recognized that, assuming the plaintiffs were to succeed in their challenge, each of the class members would have to prove their compensation was adversely affected by the corporate policies in separate, individual actions.  The court reasoned that judicial efficiency favored permitting certification of an injunctive relief class and a class concerning the determination of issues that were susceptible to class-wide treatment, with damages to be determined separately:  “Obviously a single proceeding, while it might result in an injunction, could not resolve class members’ claims…. So should the claim of disparate impact prevail in the class-wide proceeding, hundreds of separate trials may be necessary…. But at least it wouldn’t be necessary in each of those trials to determine whether the challenged practices were unlawful.”
 
But Judge Posner puts a limit on issue certification because class certification is a critical juncture in a litigation, often pressuring defendants to settle if the class is certified.  Relying on In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1020 (7th Cir. 2002) and In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1299-1300 (7th Cir. 1995), the Court held:  “If resisting a class action requires betting one’s company on a single jury verdict, a defendant may be forced to settle; and this is an argument against definitively resolving an issue in a single case if enormous consequences ride on that resolution.”
 
Issue certification arguably undermines the commonality and predominance requirements of Rule 23, and is a problematic new trend for defendants.
 
Evidence
 
Wal-Mart also discussed whether courts can and should inquire into the merits of a case as part of the rigorous analysis required for the class certification analysis.  Courts had been struggling with whether to look into the merits at the class certification stage since the Supreme Court’s decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974).  While a number of courts had made it clear that a rigorous analysis of the class certification criteria mandated an inquiry into the merits as necessary, such as the IPO decision in the Second Circuit, the Supreme Court had not spoken on this issue.  In Wal-Mart, in a footnote, it finally does.
 
The Eisen case, which had been misconstrued for years by the district courts, merely held that a court could not shift the cost of class notice based on its view of which side would ultimately prevail in the case.  Justice Scalia rejected any broad reading of Eisen that would prohibit a court from looking into the merits at the class certification stage, acknowledging that “[f]requently [a] … ‘rigorous analysis’ will entail some overlays with the merits of the plaintiffs’ underlying claim.  That cannot be helped.”
 
While it is now clear where the Supreme Court comes out on looking at the merits of a case for class certification purposes, what is less clear is the level of evidence required at the class certification stage.  Justice Scalia considered the level of expert testimony in Wal-Mart, but did not decide on that level, except to say:  “The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class action proceedings.  We doubt that this is so.”
 
Under Daubert v. Merrell Dow, 509 U.S. 579 (1993), of course, now codified in Federal Rule of Evidence 702, the court acts as a gatekeeper, precluding expert testimony when it is not “scientifically valid.”
 
Several cases have been decided since Wal-Mart that struggle with both Eisen and Daubert.
 
In re Zurn Pex Plumbing Products Liability Litig., 644 F.3d 604 (8th Cir. 2011), homeowners brought a products liability action against various manufacturers, alleging consumer protection and other claims. The Eighth Circuit rejected a full Daubert analysis at the class certification stage, holding that the district court need only examine the reliability of the expert opinions in light of the preliminary issues at hand, not whether those opinions would ultimately be admissible at trial.  The Court further rejected the notion that Wal-Mart called for a different analysis, and reasoned that a full Daubert analysis was premature because subsequent discovery could have an impact on the ultimate admissibility of the expert opinions.
 
Meanwhile, Ellis v. Costco Wholesale Corp., 657 F.3d 970 (9th Cir. 2011), a Ninth Circuit decision, concerned present and past employees of the company who brought a Title VII class action alleging gender discrimination in the company’s promotion and management practices.  There were competing expert reports from plaintiff and defendant. The district court had granted class certification, granting portions of Costco’s motions to strike with respect to plaintiff’s expert.  The Ninth Circuit held that the district court had applied Daubert correctly when deciding the motions to strike, but it held that it misapplied Daubert in granting class certification because it had limited its Daubert analysis “to a determination of whether Plaintiffs’ evidence on [commonality] was admissible.”  Such a limitation was inappropriate, as the district court should have rigorously analyzed the persuasiveness of the presented evidence, not just its admissibility.
 
Messner v. Northshore University Health System, 669 F.3d 802 (7th Cir. 2011), arose from a merger of Illinois hospitals in 2000.  In 2007, the FTC ruled that the merger violated the Clayton Act by substantially decreasing competition for hospital services.  While the FTC did not require that the merger be dissolved, class actions were filed and consolidated, challenging the merger.  Plaintiffs moved to certify a Rule 23(b)(3) damages class, relying on expert testimony from an economist who compared prices of the merged hospital to those of a control group of hospitals.  Defendants presented expert testimony as well.  The district court denied certification and plaintiffs appealed.  The Seventh Circuit reversed, holding that the district court had improperly denied plaintiffs’ motion for class certification without first ruling on plaintiffs’ Daubert motion to exclude defendants’ expert.  The district court had found the defendants’ expert report “misleading,” but had not undertaken a Daubert analysis, instead giving the report the weight the court believed it was due. The Seventh Circuit held that a district court must make a conclusive ruling on an expert’s qualifications and the admissibility of an expert report prior to making a class certification decision, where the report or testimony is “critical” to the certification analysis.
 
Behrend v. Comcast Corp., which is now before the Supreme Court, was brought by Philadelphia cable subscribers alleging that Comcast monopolized Philadelphia’s cable market in violation of the Sherman Act. The district court certified a class of 2 million current and former Comcast subscribers in the Philadelphia area, holding “that the element of antitrust impact is capable of proof at trial through evidence that is common to the class . . ., and  . . . there is a common methodology available to measure and quantify damages on a class-wide basis.”  A divided panel of the Third Circuit affirmed on July 11, 2011, after Wal-Mart, and distinguished Wal-Mart, holding it inapplicable:  “The factual and legal underpinnings of Wal-Mart—which involved a massive discrimination class action and different sections of Rule 23—are clearly distinct from those of this case.  Wal-Mart therefore neither guides nor governs the dispute before us.”

  As to the Eisen issue, the Third Circuit followed its own 2008 In re Hydrogen Peroxide Antitrust decision:  “Although in Hydrogen Peroxide we heightened the inquiry a district court must perform on the issue of class certification, nothing in that opinion indicated that class certification hearings were to become actual trials in which factual disputes are to be resolved.  [A] district court may inquire into the merits only insofar as it is ‘necessary’ to determine whether a class certification requirement is met….Eisen still precludes further inquiry.”
 
The Third Circuit did not apply any Daubert analysis to the expert testimony presented.  In a footnote, the court stated: “[A]lthough the Supreme Court recently hinted that Daubert may apply for evaluating expert testimony at the class certification stage, it need not turn class certification into a mini-trial…We understand the court’s observation to require a district court to evaluate whether an expert is presenting a model which could evolve to become admissible evidence, and not requiring a district court to determine if a model is perfect at the certification stage.  This is consistent with our jurisprudence which requires that at the class certification stage, we evaluate expert models to determine whether the theory of proof is plausible.”

  The Supreme Court finally took the Comcast case for review after relisting the case seven times, rephrasing the question presented, narrowing it.  The question had been whether a district court may certify a class without resolving merits arguments that bear on Rule 23.  The Supreme Court recast the question as “whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”  

The Supreme Court heard argument on November 5, 2012.  The Court appeared divided on whether there was, indeed, a legal issue to be decided. Justice Ginsberg honed in on the damages aspect of the question presented, stating her view that “if the liability question can be adjudicated on a class basis, then the damages question may be adjudicated individually.” Justice Kagan went further, to say that the court below had actually provided a more favorable rule to Petitioner, as it called for plaintiffs to show by a preponderance of the evidence that damages could be measured classwide: “I understand that you have problems with the way in which the plaintiffs met that burden. But it seems to me that the legal standard was exactly the legal standard you wanted, that the plaintiffs had to come in and show by a preponderance that they had a class-wide way to measure damages in this case.”

  As the argument concluded, Justice Roberts observed that remand may be the answer here: “…it seems to me that one option for the Court, since we did reformulate the question, is to answer the question and then send it back for the [district] court to determine whether or not the parties adequately preserved …[the] objection [to the admissibility of the expert's evidence] or not.”

  Comcast could have broad impact on whether a Daubert analysis is necessary at the class certification stage, and may lead to class certification motions being made later, once a case is more fully developed.
 
The other class action case heard on November 5, 2012 by the Supreme Court was Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, a securities class action, on appeal from the 9th Circuit.  There were two questions presented which, like Comcast, deal with the evidence to be presented at the class certification stage.  First, “whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff case based on the fraud-on-the-market theory.” Second, “whether, in such a case, the district court must allow the defendants to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.”
 
The fraud-on-the-market theory allows a rebuttable presumption of class-wide reliance in a securities case dealing with stocks traded on efficient markets, the theory being that the market conveys information about the stock which people rely on.  The presumption comes from the Supreme Court’s seminal decision in Basic v. Levinson, 485 U.S. 224 (1988).
 
Last year, in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court held that a plaintiff does need to show some elements of fraud-on-the-market to get the benefit of the presumption of reliance, including that the alleged misrepresentations were public and therefore taken into account by the market, that the stock traded on an efficient market, and that the relevant transaction took place between the time the misrepresentation was made and the truth was revealed.  Importantly, the Erica P. John Fund case was similar to this one, addressing whether loss causation needed to be proved at the class certification stage.  In that case, Justice Roberts sided with the plaintiffs, holding that loss causation was not relevant to the class certification decision.
 
In Amgen, the Ninth Circuit held that proof of materiality was not a prerequisite for establishing the fraud-on-the market presumption.  Rather, the Ninth Circuit held plaintiff must allege materiality with sufficient detail to survive a motion to dismiss.  Because the court held that materiality was not a prerequisite to the fraud-on-the market presumption, it held that defendants could not seek to rebut materiality at the class certification stage.
 
Defendant argued that just like the other prerequisites to the fraud-on-the-market theory, materiality must be shown at the outset, because it, too, affects the market price—if the disclosure of the information has no effect on the market price, it was immaterial as a matter of law. It is more efficient to end the case at the class certification stage than later, and class certification could force a defendant to settle on a case that ultimately had no legs.
 
This is much like the Comcast argument—why allow a case to proceed on inadmissible evidence or when it is clear that a basic component of the claim cannot be made out?  Plaintiffs argue that this would amount to a trial on the merits at the class certification stage.  After all, the argument goes, class certification is only supposed to measure whether the case can proceed collectively, it is not designed to weed out meritless claims.
 
In Amgen, at oral argument, the Court seemed divided on whether the materiality of a purported misrepresentation had to be demonstrated at the class certification stage.   As Justice Kagan put it:  “…for materiality, the class wins or loses together. If it’s material, it’s material as to everybody.  If it’s not material, it’s not material as to everybody…. And where that’s the case, it seems to me that the Walmart test, which is, …when you rule on the issue, do you rule on each of the claims in one stroke? The answer to that is yes.” At the other end of the spectrum, Justice Scalia pointed out that the presumption of reliance allowed under the fraud on the market theory is a “shortcut” to getting a class certified, and, therefore, is properly considered at the class certification stage:  “You don’t have to prove it to get the class certified.  You only have to prove it to get the class certified with the benefit of the fraud-on-the-market theory.”
 
Amgen could have an impact beyond the fraud-on-the-market theory, depending on what the Court says about evidentiary considerations at the class certification stage generally.
 
At a minimum, a review of the arguments in Comcast and Amgen reveals a deep split in the Court on the burden on a plaintiff to get a class certified.  The question remains as to what evidence is properly presented at the class certification stage as opposed to the merits phase, and the level necessary for that evidence.  These cases hopefully will provide much needed guidance on the evidence required for a class to be certified.
 
Due Process
 
In addition to the evidentiary thread in Wal-Mart that was picked up by the Supreme Court this term, there is also a concern with due process rights.  As concerns absent class members, this comes out in the Court’s refusal to allow the certification of an injunctive relief class under Rule 23(b)(2) because of the back-pay damages component of the class and the fact that 23(b)(2) classes are mandatory classes, without notice or the opportunity to opt out.
 
The Supreme Court accepted certiorari in the Standard Fire case, which will be heard in January.  The case, Knowles v. Standard Fire, No. 11-1450, revolves around the question of whether a named plaintiff and his counsel in an uncertified class may enter into a binding stipulation on behalf of the class they do represent, that their case is worth less than $5 million in order to avoid federal jurisdiction under the Class Action Fairness Act of 2005.
 
Under the Court’s seminal decision in Philips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985), due process in a money damages class action requires notice and an opportunity to exclude oneself from the class. This fundamental rule is based on the notion that actions that are taken prior to a class certification decision and an opportunity for a putative class member to opt out of a class, cannot bind that person.  Part of the class certification determination is whether the named plaintiff and counsel adequately represent the class.  Unless and until they do represent the class, they cannot enter into binding stipulations, as the named plaintiff did in Knowles.
 
Looking beyond the CAFA context, we all know that a named plaintiff, or more accurately, the named plaintiff’s counsel, often make decisions for the class that could have a res judicata effect down the line.  For example, causes of action are often not pursued because they cannot be certified. See, e.g., Pearl v. Allied Corporation, 102 F.R.D. 921, 922–923 (E.D. Pa. 1984); Feinstein v. Firestone Tire and Rubber Co., 535 F. Supp. 595, 606 (S.D.N.Y. 1982).  While defendants argue due process, plaintiffs argue that they are masters of their complaints, and that if class members do not like what they have done, they can opt out of the class, at least in money damages class actions.
 
While Knowles surely will have an important impact on CAFA, its ramifications could be larger based on what the Court says about due process and what a named plaintiff and his counsel can and cannot do prior to class certification.
 
What are the take-aways?
 
First, as to commonality, courts continue to struggle with the more stringent commonality requirement, and, as we saw in Amgen, Justice Kagan used Justice Scalia’s Wal-Mart reasoning when she stated that materiality is a common question under Wal-Mart and that that was all that needed to be demonstrated at the class certification phase.  In the securities context, we may, nevertheless, see the materiality requirement fought out at the class certification stage.  Like the issue of Daubert, moving this piece of a securities case up is consistent with the trend we have seen in Twombly and Iqbal, for example, to know, sooner rather than later, which cases are not meritorious.
 
Second, we see courts continuously trying to get around various aspects of Wal-Mart.  Issue certification cannot be consistent with notions of a rigorous analysis.  But we will have to wait to see where that one turns out because the Supreme Court declined to review the McReynolds decision.  In the meanwhile, defendants are likely to see more motions for partial certification, especially in the Second and Seventh Circuits.
 
Third, we may see additional clarity on the lingering question of the import of the Eisen case on looking at the merits on class certification.  The question now is where to draw the line.  What is appropriately decided at the class certification stage versus the merits stage?
 
Fourth, we should soon have some guidance from the Supreme Court on whether evidence must be admissible at the class certification stage, such that expert evidence, for example, would have to meet the Daubert standard.  If admissible evidence is required, expect to see class certification motions made later in a case.
 
Fifth, as to b(2) certification, given the premium placed on class notice in Wal-Mart and the due process issues in Standard Fire, we may begin to see more courts calling for the sending of class notice in the Rule 23(b)(2) context.
 
Finally, the due process issue raised in the Standard Fire case may significantly impact what a named plaintiff and counsel can do purportedly representing the class before there is a certification decision or notice and an ability to opt out of the class.  Even if the Court confines its ruling to the CAFA context, it will help defendant companies stay out of forums like Arkansas, in which a rigorous analysis is not applied at the class certification stage and the courts will not look at the merits of a case at all.  If the Court goes beyond CAFA, it could put an end to other plaintiff tactics, like selecting causes of action that are more likely to be certified while potentially precluding others.

Supreme Court To Review Power of Arbitrator to Determine Class Arbitration

As discussed throughpout this blog, the Supreme Court has been actively taking and deciding cases impacting the contours of class action law.  In addition to hearing the Comcast and Amgen cases this year, dealing with evidentiary issues at the class certification stage, the Court also has taken review in the Standard Fire case, dealing with the limits of a named plaintiff’s ability to make representations about the putative class prior to class certification, at least in the CAFA context.
 
In November of this year, the Court, then, decided to review the American Express Co. v. Italian Colors Restaurant decision from the Second Circuit, which held that class arbitration waivers are not effective if they would deny plaintiff the ability to try to vindicate his or her federal statutory rights.  That case presents the following question:  “Whether the Federal Arbitration Act permits courts, invoking the ‘federal sustantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”
 
Now, on December 7th, the Court took certiorari in Oxford Health Plans LLC v. Sutter, on a question arising from the Court’s decision in Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1775 (2010), in which the Supreme Court held that, under the Federal Arbitration Act, “a party may not be compelled … to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”
 
 The question to be addressed in Oxford Health Plans is:
 
“Whether an arbitrator acts within his powers under the Federal Arbitration Act (as the Second and Third Circuits have held) or exceeds those powers (as the Fifth Circuit has held) by determining that parties affirmatively ‘agreed to authorize class arbitration,’ Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., based solely on their use of broad contractual language precluding litigation and requiring arbitration of any dispute arising under their contract.”
 
In Sutter, the lower courts found a contractual basis for class arbitration, despite the fact that the contract at issue did not expressly address class arbitration. 675 F.3d 215, 222 (3d Cir. 2012). Oxford moved the district court to vacate the arbitrator’s ruling, arguing that the arbitrator had exceeded its powers under 9 U.S.C. § 10(a). The district court denied the motion, and the Third Circuit affirmed.
 
As Petitioner described the conflict among the circuit courts in its Petition: “The Second and Third  Circuits give arbitrators effectively unfettered discretion to impose class proceedings so long as the arbitrator purports t o find an implicit “agreement” in the language of the parties’ contract—even where that language says nothing more than that the parties will resolve all disputes through arbitration, not litigation. In contrast, the Fifth Circuit recognizes that Stolt-Nielsen requires a court applying the FAA to provide meaningful review of an arbitrator’s reasoning, to ensure that there is a true contractual basis for compelling class proceeding — not including a mere broad arbitration provision. That conflict calls for review by this Court.”
 
The Court’s rulings in American Express and now, Oxford Health Plans, should provide further clarity on the requirements for class arbitration and whether a defendant can contractually ensure that all actions must be arbitrated, and only on an individual basis.  In the meanwhile, defendants are cautioned to carefully draft their arbitration clauses to preclude class arbitration.