Co-authored by: John B. Lewis, Dustin M. Dow, Patrick T. Lewis, Danyll W. Foix, and Rodger L. Eckelberry
Editor’s Note: This Executive Alert was published by members of BakerHostetler’s Securities Litigation and Regulatory Enforcement Team, Employment Team, and BakerHostetler’s Class Action Team.
On March 27, 2013, the U.S. Supreme Court decided Comcast Corp. v. Behrend, Case No. 11-864, which provides a valuable tool for the defense in combatting class certification in antitrust cases and other types of class actions. Whether Comcast breaks new jurisprudential ground or simply clarifies what the law has been all along will be the subject of debate over the coming months and years, but there can be little doubt that the decision solidifies the trend established in the court’s 2011 decision in Wal-Mart Stores, Inc. v. Dukes that plaintiffs must be able to demonstrate that the case is susceptible to resolution by common proof.
In particular, Comcast provides guidance on several important questions: a) the level of scrutiny that federal courts must give to the factual basis behind expert opinions and other purported common evidence offered by the plaintiff; b) whether the more exacting standards for evaluating class certification that the Court announced in Wal-Mart apply to the resolution of questions of predominance under Rule 23(b) in addition to the question of commonality under Rule 23(a); and c) whether courts must evaluate the impact of individualized damages issues in determining whether class certification is appropriate. In addition, the majority’s opinion raises serious doubts about whether class certification is ever appropriate when there is no common method of calculating damages.
The opinion prompted an aggressive dissent from Justices Ginsburg and Breyer who attempted to minimize the impact of Justice Scalia’s opinion, arguing it was limited to merely the underlying antitrust case. Thus, while Comcast will affect class action jurisprudence across the board, just how far its defendant-friendly predominance and damages directives reach beyond the antitrust context will have to be played out in lower courts in the future.
The Comcast decision does leave key questions unanswered, however, including the question that many commentators hoped would be addressed: whether the Daubert standard for expert witnesses applied to expert testimony at the class certification stage.
THE COMMON DAMAGE ALLEGATIONS
The facts of Comcast illustrate how each case can alter the contours of class certification. Here, plaintiffs were a class of cable subscribers who brought a monopolization claim under Section 2 of the Sherman Act, claiming the defendant cable company used an anticompetitive “clustering strategy” that drove up prices in the Philadelphia media market. Plaintiffs sought to certify a Rule 23(b)(3) class and, to satisfy the predominance element, had to prove both that (1) the existence of individual injury resulting from the antitrust violation (antitrust impact) could be proven with evidence common to the class, and (2) damages to the class were measurable on a class-wide basis using a “common methodology.”
Plaintiffs argued that the challenged “clustering strategy” raised cable subscription rates via four theories of antitrust impact. To show that damages could be measured on a class-wide basis, plaintiffs relied upon a statistical regression model that measured the effect of the four antitrust impacts on cable prices. Ultimately, the District Court only accepted one of the four theories.
The defendant argued that plaintiffs failed to prove that damages resulting from one antitrust impact could be calculated on a class-wide basis. The defendant reasoned that plaintiffs’ model was designed to measure damages from all four antitrust impact theories and did not isolate damages resulting from the single allowed theory. The District Court certified the class anyway, and the Third Circuit affirmed, finding that inquiring into the merits of plaintiffs’ damages calculation methodology was inappropriate at the certification stage and that plaintiffs were not required to “tie each theory of antitrust impact to an exact calculation of damages.”
THE MAJORITY OPINION
The Court reversed. Justice Scalia began the opinion by reaffirming Dukes’ requirement that plaintiffs must “affirmatively demonstrate,” with evidentiary proof, that they have satisfied the Rule 23 requirements for class certification. While Dukes only addressed the four elements of Rule 23(a), the Comcast court specifically extended that rule to Rule 23(b), reasoning that a trial court’s duty to undertake a “rigorous analysis” of whether plaintiffs have satisfied Rule 23(a) certification requirements applies with equal force to Rule 23(b) requirements, uniquely Rule 23(b)’s predominance requirement. The majority found that the lower courts ran afoul of those requirements and sent a strong message to class action plaintiffs: an action cannot be certified under Rule 23(b)(3) for class treatment when it is evident that “individual damage calculations will inevitably overwhelm questions common to the class.”
Justice Scalia wrote, plaintiffs fell “far short of establishing that damages are capable of measurement on a classwide basis,” because plaintiffs statistical model could not separately measure the pricing injury caused by the one antitrust theory that was allowed. Thus, “in light of the model’s inability to bridge the differences between supra-competitive prices in general and supracompetitive prices attributable to the deterrence of overbuilding, Rule 23(b)(3) cannot authorize treating subscribers within the Philadelphia cluster as members of a single class.”
The majority also held that a district court may consider as much of the merits of a claim as necessary to determine whether a putative class of plaintiff’s meets the certification requirements of Rule 23. “Repeatedly,” Justice Scalia wrote, “we have emphasized that it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question.”
THE DISSENTING OPINION
The dissent took great effort in trying to minimize the impact of Comcast on all class action litigation. It seized on the majority’s factual interpretations regarding the specific damages model in the case, accusing it of “[i]ncautiously entering the fray” and, thereby, articulating “a profoundly mistaken view of antitrust law.” To the contrary, Justice Scalia wrote that analysis of the facts supporting the damages model was necessary, even at the class certification stage, because plaintiffs had to show that the model could be applied to measure damages on a class-wide basis. In response, Justices Ginsburg and Breyer made arguments to limit the Comcast majority’s influence by writing “the decision should not be read to require, as a prerequisite to certification, that damages attributable to a classwide injury be measurable on a class-wide basis.”
Yet, the dissent’s attempt to restrain the opinion’s influence is difficult to square with what the majority opinion actually says. In applying what Justice Scalia termed “the proper standard for evaluating certification,” he reversed a Third Circuit decision certifying an antitrust class where damages were “not capable of measurement on a class-wide basis.”
THE ABSENCE OF A RULING ON STANDARDS FOR EXPERTS AT CERTIFICATION
Notably, the majority did not explicitly address whether a district court must conduct a Daubert evidentiary analysis when considering a motion to certify a class. Both sides had briefed and presented oral arguments on whether a Daubert analysis, which examines whether expert evidence is admissible, should be required for certification. In addition, BakerHostetler attorneys filed an amicus brief on behalf of the Cato Institute, arguing that Daubert analyses are necessary prior to certification. The brief also asserted that the Court should enforce the basic commonality requirement of Rule 23.
It appears that Comcast’s lack of guidance on this issue may have been caused by an unforeseen procedural defect in the case. After oral argument in the case, the Court determined that it could not decide that precise question because the defendant did not object to the admissibility of the plaintiffs’ expert’s testimony, thereby failing to preserve the issue for appellate review. Resolution of that critical issue will therefore have to wait for another case.
THE IMPACT FOR ANTITRUST AND ALL CLASS ACTIONS
Although Justice Scalia labeled his opinion as a “straightforward application of class-certification principles” to the antitrust case before the court, it nevertheless works to raise the bar for certification of all other class actions. Before Comcast, several court decisions, including Wal-Mart v. Dukes, held that class certification could only occur if common questions of fact or law were applicable to the class from a liability standpoint. Whereas Dukes is widely viewed as a business-friendly decision for its strict common “question of law or fact” requirement with respect to class liability, Comcast takes Dukes a step further by applying that same commonality test to assess whether class-wide antitrust damages predominate over any individual issues.
Going forward, defense counsel can use Comcast as an example of just how important it is for a putative class to show that both liability and damages can be measured on a class-wide basis and that common questions are not overwhelmed by individualized determinations. This is true for all class actions, regardless of context.
The holding also provides defense counsel with another tool to emphasize the district court’s broad authority to analyze the merits of underlying claims in determining class certification, particularly when analyzing whether a proposed measure of damages is applicable class-wide based on common evidence.
While Comcast offers more tools to defense counsel in general, it remains unclear, however, just how much impact it will have on antitrust class actions. Comcast’s review standard for Rule 23(b)(3) appears to be no more rigorous than the standard federal courts presently apply to antitrust class actions. And, Daubert analyses of class certification experts, which Comcast stopped short of requiring, already is routine for antitrust cases.
It also remains unclear how much impact Comcast will have on the broader class action landscape, especially given the intensity of the dissent. While Comcast clarified the standard of proof for all Rule 23(b)(3) class actions, specifically in relation to predominating damages issues, the Court gives fairly little guidance to lower courts as to how plaintiffs must satisfy that burden with respect to damages — an important question, given that, as the dissent points out, courts have in the past certified classes that raise individualized damages issues.
However, Comcast has already affected one certified class action. On April 1, the Supreme Court summarily vacated and remanded for reconsideration, in light of Comcast the Sixth Circuit’s decision in Whirlpool Corp. v. Glazer, case No. 12-322, in which the Sixth Circuit had affirmed certification of design defect claims alleging Whirlpool’s front-loading washing machines had a “propensity” for mold-growth. Discounting Whirlpool’s evidence that approximately 97 percent of the putative class members never experienced mold growth in their washing machines, i.e., injury necessary for a liability determination, the Sixth Circuit opined that the plaintiffs “may” be able to show that each class member was injured at the point of sale by paying a “premium” for the machine as designed, even if some class members’ machines never developed mold problems. Reading between the lines, the Sixth Circuit’s standard for proof of common class-wide predominating injury may not suffice under Comcast.