Last November 5, the Supreme Court Justices spent the morning
listening to two important class action cases that may offer the
opportunity for the Court to impose stricter standards for the
certification of class actions.
Comcast Corp. v. Behrend is a Sherman antitrust claim
brought by cable subscribers in the Philadelphia market asserting
that they paid too much for cable.1 The plaintiffs
alleged a conspiracy to "cluster" licenses in
geographical areas where the company could then more effectively
control cable prices. At the outset of the case, the plaintiffs
advanced four theories to support their damages claim. The lone
theory found creditable by the district court was that
Comcast's clustering deterred
"overbuilders"—companies that can offer a
competitive alternative where a cable company already
operates—from entering the Philadelphia market. On the basis
of that theory of damages, the district court certified the class
under Fed. R. Civ. P. 23(b)(3).
On appeal to the Third Circuit, Comcast argued that the plaintiffs
had not satisfied Rule 23(b)(3)'s predominance requirement.
According to Comcast, the plaintiffs' expert relied on a
damages model tied to all four theories but could not measure
damages under the sole remaining theory credited by the district
court. A divided panel affirmed class certification. It did so on
the heels of Wal-Mart Stores, Inc. v. Dukes, where the
Supreme Court suggested that Daubert's standards for
the admission of expert testimony applied in class certification
proceedings.2 The Third Circuit, however, refused to
fault the district court for not scrutinizing the expert's
damages model under Daubert standards. The panel stated,
"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." (Emphasis supplied.)
Rather, according to the Third Circuit, expert opinions need only
be "plausible" at the class certification
stage.
The majority's rationale elicited a strong dissent from Judge
Jordan. He found the evidentiary standard which had been applied to
be deficient, noting that "simple logic indicates that a court
may consider the admissibility of expert testimony at least when
considering pre-dominance [under Rule 23(b)(3)]." In the
dissent's view, a "court should be hard pressed to
conclude that the elements of a claim are capable of proof through
evidence common to a class if the only evidence proffered would not
be admissible as proof of anything."
Thus, Comcast raises the critical question of whether the
"plausible" prospect that admissible evidence will be
admitted at trial can satisfy the standards for class
certification, or whether admissible evidence, including competent
expert opinion, must be advanced at the time certification is
considered by the district court.
In the second case, Amgen Inc. v. Connecticut Retirement Plans
and Trust Funds, the plaintiffs claimed to be representatives
of a class of securities holders suing under Section 10(b) of the
Exchange Act and Rule 10b-5. They alleged that false and misleading
public statements made by an officer of the company fraudulently
inflated its stock price.3 The plaintiffs sought class
certification under Rule 23(b)(3) partly on the basis of the
fraud-on-the-market theory of reliance. This theory, accepted by
the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224
(1988), relieves plaintiffs of the need to show actual reliance
where there is a public market for the stock, a so-called
"efficient market," and where the offending statements or
misrepresentations were made into that market. The assumption
implicit in the theory is that the market takes account of such
statements and that their impact is reflected in the price of the
stock.
Amgen argued that, in addition to proving that an efficient market existed and the alleged misstatements were public, plaintiffs must also prove—at the certification stage—that those misrepresentations were material. According to Amgen, immaterial statements do not affect stock price. Thus, there is no basis for presuming that investors relied in common on immaterial misstatements when they bought or sold the stock. The district court rejected that argument, refused Amgen's attempt to offer admissible evidence of immateriality, and certified the class.
A unanimous panel of the Ninth Circuit affirmed the certification, reasoning that materiality is an "element of the merits of [a] securities fraud claim," whereas the efficient-market and public-statement predicates to the fraud-on-the-market theory are not. Because materiality is an element of a claim, the panel reasoned, its merits can be addressed only "at trial or by summary judgment motion."4
Each of these cases raises the question as to the quantum of
proof required at the class certification stage. Each challenges
the pre-existing practice of certifying a class with something less
than admissible evidence. The Court's decisions in
Comcast and Amgen could dramatically modify the
class action landscape. What is troubling to certain of the
Justices is the fact that class certification becomes the defining
moment in class action cases because the act of certification can
increase risk monumentally and exert unwarranted pressure on
defendants to settle claims that may have little chance of success
on the merits. In many high-stakes class actions, including both
antitrust and securities class actions, certification hinges on
expert testimony. Permitting class certification on the basis of
plausible but inadmissible expert opinions and/or alleged
misrepresentations that may be immaterial to market price
serves as an obvious opportunity for what Judge Henry Friendly
described as "blackmail settlements."5
The class certification issues raised by Comcast and
Amgen have split the circuits. In Comcast, the
Third Circuit's decision itself created the split. The emerging
trend, both pre- and especially post-Dukes, has been to
apply Daubert in class certification proceedings, although
the circuits differed as to the level of scrutiny required. For
example, in American Honda Motor Co. v. Allen, the Seventh
Circuit held that when expert testimony is critical to class
certification, "the district court must perform a full
Daubert analysis before certifying the
class."6 The Eleventh Circuit subsequently adopted
that approach.7 And the Ninth Circuit, after tinkering
with a contrary view, ultimately agreed with the Seventh and
Eleventh Circuits.8
Other circuits have been less exacting but still apply
Daubert in some form or another. The Eighth Circuit, for
instance, has endorsed a "focused Daubert
inquiry." According to the panel, "an exhaustive and
conclusive Daubert inquiry before the completion of merits
discovery cannot be reconciled with the inherently preliminary
nature of pretrial evidentiary and class certification
rulings."9 And, although the First Circuit has not
addressed this precise question, it has held that when predominance
turns on "a novel or complex theory as to injury . . . the
district court must engage in a searching inquiry into the
viability of that theory and the existence of the facts necessary
for the theory to succeed."10
In Amgen, the Ninth Circuit compounded the pre-existing
circuit split. Its decision aligned the Ninth Circuit with the
Seventh and Third Circuits, both of which view materiality as a
merits element of a securities fraud claim that has no place in the
certification inquiry.11 In doing so, the Ninth Circuit
disapproved of contrary holdings in the Second and Fifth Circuits
(and contrary dictum in a First Circuit
decision).12 Those circuits require a plaintiff to prove
materiality at the certification stage on the basis of a footnote
in the Supreme Court's decision in Basic,13
which they have read as suggesting a materiality criterion for the
fraud-on-the-market theory. The Ninth, Seventh, and Third Circuits,
however, say that reading Basic in that way is
unwarranted.
If oral argument is any gauge of how the Court will rule, the
defendants in both Comcast and Amgen have reason
for cautious optimism.14 In Comcast, the
defense counsel argued that the plaintiffs' model for
determining damages could not pass muster under Daubert,
adding that the certified class covered subscribers in hundreds of
franchise areas facing different competitive conditions. "If
you drop a stone in the water, you're going to have ripples all
the way out," Comcast argued. "That doesn't mean all
the ripples are the same." Justice Kennedy, who often casts
the deciding vote in close cases, appeared sympathetic to this line
of reasoning, stating, "The judge has to make a determination
that in his view the class can be certified. And that includes some
factual inquiries as to the damages alleged." The
plaintiffs' counsel responded with a procedural argument,
namely, that Comcast had waived the Daubert issue by
failing to raise it below. Chief Justice Roberts, however,
suggested that the Court could simply answer the admissibility
question and then remand for a finding on the waiver issue.
Later that same morning, in Amgen, the defense counsel
argued that the fraud-on-the-market theory does not make sense
without materiality: "Absent materiality, the market price
cannot be presumed to reflect the statement in question." That
argument drew pointed questions from Justices Ginsburg and Kagan,
who appeared reluctant to require plaintiffs to prove materiality
before trial. Justice Ginsburg in particular said that she was
"nonplussed" by Amgen's argument because a finding of
immateriality at the class certification stage would be dispositive
of the merits: "Of course, [the finding is] going to bind the
class representative. So if it's immaterial, the case
ends." But the plaintiffs' counsel was subject to harsher
treatment when he took the podium. Indeed, Justice Scalia told the
plaintiffs' counsel that there is "good reason" to
decide the question of materiality before a class is certified:
"The reason is the enormous pressure to settle once the class
is certified. In most cases, that's the end of the
lawsuit"—an observation that applies equally to the
question of materiality in Amgen and the question of
admissibility in Comcast.
Footnotes
1 Comcast Corp. v. Behrend, No. 11-864 (U.S. June 25, 2012). For the decision below, see Behrend v. Comcast Corp., 655 F.3d 182 (3d Cir. 2011).
2 Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2553–54 (2011) (discussing Daubert v. Merrell Dow Pharm., 509 U.S. 579 (1993)).
3 Amgen Inc. v. Conn. Ret. Plans & Trust Funds, No. 11-1085 (U.S. June 11, 2012). For the decision below, see Conn. Ret. Plans & Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011).
3 Reflecting the Supreme Court's recent focus on class action litigation, Comcast and Amgen are only two of the class action cases under review this Term. Another important case is Standard Fire Insurance Co. v. Knowles, No. 11-1450 (U.S. Aug. 31, 2012), a breach-of-contract case brought as a putative class action in Miller County, Arkansas, labeled by some as a plaintiff-friendly "magnet jurisdiction." After the defendant removed the case under the Class Action Fairness Act of 2005 ("CAFA"), the plaintiff obtained a remand on the basis of a "stipulation" purportedly for the absent class that the class damages were less than $5 million, the threshold for federal jurisdiction. The question presented in Knowles is whether such a stipulation can defeat a defendant's right of removal under CAFA. Jones Day filed an amicus brief in Knowles on behalf of the National Association of Manufacturers suggesting reversal. For a copy of that amicus brief, see http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs/ 111450_reversal_amcu_nam.authcheckdam.pdf (all web sites herein last visited January 23, 2013).
5 In re Rhone-Poulenc Rorer, 51 F.3d 1293, 1298 (7th Cir. 1995) (Posner, J.) ("Judge Friendly, who was not given to hyperbole, called settlements induced by a small probability of an immense judgment in a class action 'blackmail settlements.' ") (quoting Henry J. Friendly, Federal Jurisdiction: A General View 120 (1973)). Accord In re New Motor Vehicles Canadian Export Antitrust Litig., 522 F.3d 6, 26 (1st Cir. 2008) (recognizing the "irresistible pressure to settle" on the part of defendants in high-stakes class actions).
6 Am. Honda Motor Co. v. Allen, 600 F.3d 813, 815–16 (7th Cir. 2010).
7 Sher v. Raytheon Co., 419 F. App'x 887, 890–91 (11th Cir. 2011).
8 Ellis v. Costco Wholesale Corp., 657 F.3d 970, 982 (9th Cir. 2011).
9 In re Zurn Pex Plumbing, 644 F.3d 604, 610 (8th Cir. 2011).
10 New Motor Vehicles, 522 F.3d at 25–26. District courts in the First Circuit have read New Motor Vehicles to require a Daubert-like inquiry when class certification depends on expert testimony. See, e.g., In re Neurontin Mktg., Sales Practices & Products Liab. Litig., 257 F.R.D. 315 (D. Mass. 2009); Natchitoches Parish Hosp. Serv. Dist. v. Tyco Intl., Ltd., 262 F.R.D. 58 (D. Mass. 2008).
11 Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010); seeIn re DVI, Inc. Sec. Litig., 639 F.3d 623, 631 (3d Cir. 2011).
12 In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 264 (5th Cir. 2007), abrogated on other grounds, Erica P. John Fund v. Halliburton, 131 S. Ct. 2179, 2183, 2186 (2011); see also In re PolyMedica Corp. Sec. Litig., 432 F.3d 1, 8 n.11 (1st Cir. 2005) (noting in a dictum that to invoke fraud-on-the-market presumption at class certification stage, plaintiff must prove materiality).
13 Basic, 485 U.S. at 248 n.27 ("The Court of Appeals held that in order to invoke the presumption, a plaintiff must allege and prove . . . that the misrepresentations were material . . . .").
14 For the transcript of the oral argument in Comcast, see http://www.supremecourt.gov/oral_arguments/argument_transcripts/11-864.pdf. For the transcript of the oral argument in Amgen, see http://www.supremecourt.gov/oral_arguments/argument_transcripts/11-1085.pdf .
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