The Seventh Circuit last week held that class certification in a class action alleging unlawful price increases does not require a showing that prices increased uniformly for all products at issue or for all members of the class. In doing so, the court reversed a denial of class certification arising out of a Chicago-area hospital merger.

In Messner v. Northshore University HealthSystem, the class seeks damages for a 2000 hospital merger that the Federal Trade Commission found to be in violation of Section 7 of the Clayton Act. Rather than unscramble the merger, however, the FTC ordered the component hospitals to use separate and independent negotiating teams to negotiate future contracts with the third-party payors. The class, alleging monopolization and attempted monopolization in violation of the Sherman Act, consists of Northshore patients and third-party payors who purchased or paid for hospital services at Northshore after the merger, claiming that the lessening of monopolization that resulted from the unlawful merger caused class members to pay higher prices for services.

At class certification, the district court found that the class met all four of the requirements of Rule 23(a). The court denied certification, however, on the ground that the class failed to demonstrate, under Rule 23(b)(3), that legal and factual questions common to the class predominated over individual questions regarding the antitrust impact of the merger.

In support of their argument that common questions predominated, class counsel relied on expert economic testimony to the effect that if Northshore overcharged an insurer a certain percentage, all or substantially all class members covered by that insurer would be overcharged by approximately the same percentage. The market for hospital services, however, complicated this testimony, given that hospital prices are typically determined through multi-year contracts with third-party payors, the length of which may have a significant impact on price. Moreover, contracts between hospitals and insurers typically involve a wide variety of services and products, and are not uniform in the manner in which they bundle those services and products into groups for pricing purposes. (For example, the Seventh Circuit noted, a comparison among different hospital-insurer contracts of the price of a "Caesarean section," on its face, would be meaningless, because contracts vary as to whether "Caesarean section" includes charges for anesthesia, operating room use, surgeon's fee, post-operative care for the mother, or newborn care for the baby.) In addition, external market factors specific to some of the component services at issue, such as an anesthesia technology that decreases the cost of anesthesia or a new and higher standard of care that requires new expensive machinery, might serve to mask a hospital's exercise of market power.

The class' expert proposed to account for these variables through a "difference-in-differences" (DID) analysis, which would compare Northshore's prices to those at a "control group" of comparable area hospitals to determine which changes in Northshore's prices were attributable to external market factors, and which were attributable to the merger. The difference would constitute the unlawful overcharge. The district court rejected this approach on the ground that it assumed Northshore increased its prices at a uniform rate across all services. This premise, the district court determined, could not be validated, and was indeed inconsistent with the variable manner in which Northshore prices increased.

The Seventh Circuit held, however, that price increase uniformity was not required. All that the class was required to show, the court said, was that its expert could establish "whether and to what extent Northshore's post-merger price increases were the result of increased market power resulting from the merger." In other words, it was sufficient that the class expert could demonstrate "that all or most of the insurers and individuals who received coverage through those insurers suffered some antitrust injury as a result of the merger."

The panel noted that the class expert's methodology did not require uniform price increases, as a lack of uniformity would merely require him to perform more DID analyses for each contract—one for each non-uniform price imposed in the contract. This additional requirement, the court said, "does not change the fact that those analyses all rely on common evidence—the contract setting out the non-uniform price increases—and a common methodology to show that impact," which is what Rule 23(b)(3) requires. The district court's opinion to the contrary, the panel held, "asked not for a showing of common questions, but for a showing of common answers to those questions. Rule 23(b)(3) does not impose such a heavy burden."

The court also rejected Northshore's argument that even despite the district court's errors, the class could not be certified because a large number of members did not suffer any injury. Northshore relied on an affidavit from the largest putative class member, Blue Cross, which stated that it was not injured and did not pay any artificially inflated prices. The court held that this argument was "at best an argument that some class members' claims will fail if and when damages are decided, a fact generally irrelevant to the district court's decision on class certification." Northshore also noted that the class contained a number of individuals who could not have been harmed, such as individuals who paid their out-of-pocket maximum or deductible. The court rejected this argument for similar reasons, saying that "if a proposed class consists largely (or entirely, for that matter) of members who are ultimately shown to have suffered no harm, that may not mean that the class was improperly certified but only that the class failed to meet its burden of proof on the merits." The court distinguished such a class from a hypothetical overbroad class consisting largely of members who "could not" have been harmed, such as members who purchased services after the merger but under Northshore's premerger contracts with insurers. As long as members "could" conceivably have been harmed, the court held, the fact that they possibly, or even probably, were not harmed is immaterial to class certification.

In addition, the court reversed the district court's denial of the plaintiffs' motion to exclude the defendants' economic expert on Daubert grounds. The district court found that the defense expert report contained "some misleading information and analysis" but concluded that the plaintiffs had ample opportunity to respond in their reply brief and at oral argument, and the court thus gave the report "the weight it believes it is due." The Seventh Circuit rejected this approach, stating that an explicit Daubert ruling is required whenever an expert's report is critical to class certification—and that if the district court has any doubt about whether the report is critical, it should err on the side of making the Daubert ruling. Here, the testimony of the defendants' economist was undoubtedly critical in that it "laid the foundation for Northshore's entire argument in opposition to class certification," and the district court relied heavily on the expert report in its decision. While Northshore suggested that a Daubert ruling is required only prior to granting class certification, but not prior to denying it, the panel criticized this approach as requiring a plaintiff seeking class certification to rely on expert testimony that satisfies Daubert, but allowing a defendant to rely on unreliable expert testimony in opposition.

In addition to helping clear a path for antitrust class actions in complex industries, the timing of the Messner opinion is interesting. In the wake of last year's Supreme Court ruling in Wal-Mart v. Dukes, some lower courts have been quick to deny class certification where the common impact on class members is in doubt—even though Wal-Mart imposed no such requirement. Messner pushes back against this post-Wal-Mart backlash, reminding that while the evidence and methodology must have class-wide applicability in order to satisfy Rule 23(b)(3), the results of the analysis need not be uniform across the class.

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