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.
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.
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.
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.