Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

Yesterday, the Supreme Court issued its opinion in Comcast Corp. v. Behrend, the antitrust case which commentators (including me) had expected would finally resolve the question of whether a trial court must apply the Daubert evidentiary standard to expert testimony in a certification debate.  It turns out we were wrong. Due to a procedural defect below (Comcast had not objected to the admissibility of the expert's testimony in the trial court), the Court ultimately did not decide the Daubert issue. But it did issue an opinion that, while limited, provides some help to defendants at certification.

Behrend in a nutshell: The plaintiffs filed a class action accusing Comcast of monopolizing the market for cable services in Philadelphia, driving up prices. (This was a violation of Section 2 of the Sherman Act.) During the certification debate, they offered expert testimony that showed the effects of four different practices on cable prices, although the report did not disaggregate those effects. The trial court certified a class based on only one of the four challenged practices, referred to as "overbuilding," in which the company provided more infrastructure than demand supported, driving prices down and keeping out competitors. When Comcast objected that plaintiffs had not provided classwide evidence that overbuilding had led to the price increases they challenged, the lower court held that the expert report was sufficient to serve as classwide proof, and delving any further would be an impermissible merits inquiry. The Third Circuit affirmed.

The majority, in a brief 5-4 opinion, began from the premise it articulated most recently in Dukes, that class actions require a rigorous inquiry that may overlap with the merits. While Dukes discussed the commonality standard of Rule 23(a),

[t]he same analytical principles govern Rule 23(b). If anything, Rule 23(b)(3)’s predominance criterion is even more demanding than Rule 23(a).

(Emphasis added.)  It then held that a plaintiff's theory must remain consistent enough that the class certified will reflect the actual case tried, including the theory of damages:

at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case, particularly with respect to the alleged anticompetitive effect of the violation.

(Internal quotation omitted.) This, held the Court, was where the lower courts had gone wrong. They had certified a class based on an expert opinion that did not actually match the theory of the case the class would be allowed to pursue. Moreover, the lower court had punted on the question of whether the expert's method made sense at all:

The Court of Appeals simply concluded that respondents “provided a method to measure and quantify damages on a classwide basis,” finding it unnecessary to decide “whether the methodology [was] a just and reasonable inference or speculative.” Under that logic, at the class-certification stage any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be. Such a proposition would reduce Rule 23(b)(3)’s predominance requirement to a nullity. 

(Emphasis added, internal citation omitted.)

This is not the last we've heard of the Daubert debate. As the dissent points out, before it learned that the admissibility question had been waived, the Court had reformulated the question on appeal specifically to address the admissibility of expert testimony. I would guess that the Court will remain vigilant for an opportunity to further clarify what expert testimony can support certification. Meanwhile, defendants can use the Court's discussion here to good advantage when challenging classes where individualized issues predominate.

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On Monday, the Supreme Court heard arguments in two different class actions, united by a common problem.

The first, Comcast Corp. v. Behrend, asked whether a trial court should hold plaintiffs to the Daubert standard for expert testimony at class certification, a question that has divided federal circuits for several years. Due in part to a difficult record below (Comcast had not actually registered a Daubert objection), the Justices argued back and forth about whether there was an issue to decide at all, and, if so, what it was. At one point, Justice Kagan remakes in frustration:

I am still in search of a legal question that anybody disagrees about here.

Taking a slightly different tack, Justice Kennedy questioned whether one can even impose a standard for the admissibility of evidence like Daubert on a trial judge who will simultaneously decide admissibility (which requires looking at evidence to determine its worth) and finding facts (judging the probity of the evidence):

the judge doesn't really have a gate -- what do you call it, a gatekeeper function here. There is no--there's no jury. And if the judge admits the evidence and if it turns out that that doesn't meet the standard of reliability, then he can exclude it.

I don't--I don't see why the judge has to say: All right, now first I'm going to do Daubert, and next I'm going to do whether this is reliable. This is just a magic words approach, it seems to me.

(Emphasis added.)  Meanwhile, Justice Scalia, like many lawyers, struggled with the threshold issue of how to pronounce "Daubert":

I never know how to say it. Is it [DAW-bert] or  [Doe-BEAR]?

While it's usually a fool's game to determine from the arguments which way the Court is leaning, it is remarkable that a number of Justices on both sides (including Kennedy, Scalia, Alito, Sotomayor, and Kagan) questioned whether a Daubert inquiry is necessary to a judge-conducted certification hearing.  In my limited experience, consensus like that at argument can imply consensus in chambers as well.

The second case, Amgen Inc. v. Connecticut Retirement Plans & Trust Funds (previously), asked whether a securities class-action plaintiff must demonstrate that the defendant's misstatements were material at the class certification stage (because the fraud-on-the-market theory many plaintiffs rely on requires a demonstration of materiality) or only at trial (where materiality is an element of the claim).

This question--when materiality is itself material to a securities class action--frustrated the Court so much that Justice Scalia suggested the solution may be to overrule the original fraud-on-the-market case, Basic Inc. v. Levinson:

If you have the same question, then maybe we shouldn't have this fraud-on-the-market theory. Because the whole purpose of it is--is to--to assume that--that the whole class was--was damaged and relied--because you can rely on an efficient market. But you can only rely on an efficient market where there has been a material misrepresentation. So maybe we should overrule Basic because it was certainly based upon a theory that--that simply collapses once you remove the materiality element.

(Emphasis added.)  Despite Justice Scalia's bold proposal, I'd say it is unlikely the Court will use Amgen as grounds to overrule Basic. That said, the argument does not provide a lot of clues as to which way most of the Justices lean. Justice Scalia seemed concerned about postponing the materiality inquiry given its likely effect on settlement; Justices Kagan and Sotomayor appeared more interested in whether materiality really needs to be decided before the merits.

Despite the disparate subject matters, there is a common thread to these two cases. Each asks what facts really need to be decided before a class action may be decided. And that makes them well worth watching this Term. Taken individually, these are technical questions that each arise only in certain kinds of class actions. But taken together, the Court may well make an important statement about the role of factual inquiry for class certification. And as class-action lawyers know, that factual inquiry dictates a number of tactical issues, from the extent of discovery to settlement posture.
 

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The last few weeks have been exceptionally busy for appellate decisions involving class actions. In addition to Judge Easterbrook's In re Aqua Dots opinion, the Sixth Circuit's Pipefitters opinion, the Second Circuit's Literary Works opinion, and the Ninth Circuit's reversal of the Bluetooth settlement, the Third Circuit has offered up a pair of opinions involving predominance and common evidence. In one, Behrend v. Comcast Corp., a panel appeared to limit the reach of In re Hydrogen Peroxide on expert evidence, affirming certification of an antitrust case again the cable provider in part because it held that a Daubert inquiry is not necessary at class certification. In the other, Gates v. Rohm & Haas Co., a different panel affirmed the denial of certification of an environmental class action. In doing so, it appeared to follow Hydrogen Peroxide in requiring a "rigorous analysis" of expert proof, even if the parties themselves had stipulated no Daubert hearing would be necessary.

In general, Gates is an extremely useful opinion for defendants. Leaving aside its implicit analysis of the Daubert issue (which is likely to be hotly contested for some time to come), the Third Circuit made a number of other statements explaining just how difficult it can be to demonstrate either cohesiveness (for a Rule 23(b)(2) class) or predominance (for a Rule 23(b)(3) class).

I blogged about this case last year when the trial court denied certification. So, since it remains applicable, I'll repeat the factual summary from there.

Gates is an environmental case, in which the plaintiffs sued Rohm & Haas for polluting the water and air around Ringwood, Illinois with chemicals including vinylidene chloride, a known carcinogen. The plaintiffs sued for violations of CERCLA and state law, and sought damages for medical monitoring and damage to property. The proposed class action – like many environmental class actions – would turn on questions of causation, which can pose a number of thorny individualized issues in toxic torts. So, in addition to seeking damages, the plaintiffs sought an injunction compelling Rohm & Haas to set up a medical monitoring regime.

The district court refused to certify a class, finding that the Rule 23(b)(2) class lacked "cohesiveness" and the 23(b)(3) class lacked predominance. The plaintiffs appealed.  The Third Circuit affirmed. Among its holdings:

The "cohesiveness" requirement for Rule 23(b)(2) is more stringent than the predominance requirement for Rule 23(b)(3).

As all class members will be bound by a single judgment, members of a proposed Rule 23(b)(2) injunctive or declaratory class must have strong commonality of interests.

The Third Circuit also noted that

Commentators have noted that certification requirements under Rule 23(b)(2) are more stringent than under (b)(3).

The plaintiffs could not rely on proof of a composite, "average" class member to establish factual predominance.

Plaintiffs cannot substitute evidence of exposure of actual class members with evidence of hypothetical, composite persons in order to gain class certification. … Averages or community-wide estimations would not be probative of any individual's claim because any one class member may have an exposure level well above or below the average.

Nor could plaintiffs use regulatory standards as shortcuts for common proof.

Although the positions of regulatory policymakers are relevant, their risk assessments are not necessarily conclusive in determining what risk exposure presents to specified individuals. … Thus, plaintiffs could not carry their burden of proof for a class of specific persons simply by citing regulatory standards for the population as a whole.

In short, the Third Circuit came out definitively against using some of the various shortcuts plaintiffs have employed to convince courts to certify a class despite the lack of actual common proof. As both a taxonomy of these shortcuts, and an explanation of why they don't work, this is a good opinion for class-action defense lawyers to keep in their toolkit.

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One of the key issues that many (including me) assumed would be resolve in Wal-Mart v. Dukes was the question of what kind of Daubert inquiry would be necessary at the class certification stage.

The 1993 case Daubert v Merrell Dow Pharmaceuticals, Inc., involved a challenge to the longstanding "general acceptance" test for scientific evidence articulated by the D.C. Circuit Court of Appeals in Frye v. United States. The litigation in Daubert concerned infants suffering from birth defects that allegedly resulting from their mothers' use of the anti nausea drug Bendectin. After extensive pretrial discovery, Merrell Dow moved for summary judgment because no evidence existed demonstrating Bendectin to be a human teratogen (that is, a substance that causes birth defects). Merrell Dow attached an affidavit by a toxicology expert stating that the scientific literature on Bendectin showed no teratogenic effects. The plaintiffs countered Merrell Dow's expert testimony with expert testimony of their own. Despite the conflicting testimony, the trial court granted summary judgment for Merrell Dow because the methods the plaintiffs' expert employed were not sufficiently established to receive general acceptance; the Ninth Circuit affirmed on appeal.

The Supreme Court held that the enactment of the "more liberal" Federal Rules of Evidence superseded the Frye "general acceptance test," and remanded the case. However, the Daubert Court offered the District Court further guidance. It ventured several "observations" to consider in determining the admissibility of scientific evidence that later courts have adopted as required, namely:

1. whether the methodology can be proven wrong (its falsifiability);
2. whether the method has undergone publication and peer review;
3. the method's known or potential rate of error; and even
4. whether the method enjoys general acceptance.

(Courts are also supposed to determine how well the evidence "fits" the subject matter, but they often enforce this prong less rigorously.)

Heading into the Supreme Court's opinion, there was a clear circuit split as to whether to engage in a full Daubert inquiry during class certification. The Fourth and Ninth Circuits (in Brown v. Nucor Corp. and Dukes) had held that a Daubert inquiry was premature at class certification. The Second, Third, and Seventh Circuits had held that a court should check the qualifications of any experts, including anything up to a full Daubert inquiry.

The Supreme Court declined to address the issue directly. But the majority opinion did strongly hint at how the issue should be resolved:

The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings. We doubt that is so.

(Internal citation omitted.)

Now, the Eighth Circuit has become the first appellate court to weigh in post-Dukes. And it has decided that the Supreme Court's hint was only a hint.

In re Zurn-Plex Plumbing Products Liability Litigation involved allegedly defective plumbing systems. (The brass fittings used to join pipes were allegedly ""doomed to leak within warranty" because of a phenomenon known as stress corrosion cracking.) The plaintiffs sued for breach of warranty, negligence, and violation of consumer fraud statutes. During the course of the pretrial litigation, the defendants moved to strike the testimony of two plaintiffs' experts. The trial court denied the motions, and then, based in part on those experts' testimony, it certified a Minnesota-only class for the negligence and breach-of-warranty claims.

The defendants appealed, but to no avail. The Eighth Circuit treated the Court's hint as dicta, and decided there was no reason to conduct at full Daubert inquiry at the certification stage. Instead, it held that the trial court's "focused inquiry" was sufficient:

The district court charted a middle course between the positions urged by the parties. After reviewing the evidence that had been produced, the court concluded that a full and conclusive Daubert inquiry would not be necessary or productive at this stage of the litigation, particularly since the expert opinions could change during continued discovery. The court instead conducted a focused Daubert inquiry to assess whether the opinions of Dr. Staehle and Dr. Blischke, based on their areas of expertise and the reliability of their analyses of the available evidence, should be considered in deciding the issues relating to class certification.

What does this mean for defense counsel? It means that the applicability of Daubert to certification proceedings is still a live issue. And that means that we are likely to see more expert evidence of questionable validity used to support certification motions. After all, in a class action, settlement--not trial--is plaintiffs' preferred endgame. And certified classes create "hydraulic pressure" to settle even questionable claims. So long as courts decline to test plaintiffs' expert testimony before certifying a class (particularly where it relates to the common issues in the class), plaintiffs will continue to use questionable testimony to buttress questionable claims.

(Hat tip to Jessie Kamens of BNA for drawing this case to my attention.)

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A group of Florida landowners sued Raytheon Company, accusing it of contaminating their groundwater by improperly disposing of hazardous waste. The plaintiffs put up an expert who testified that he could construct a statistical model that would demonstrate liability and damages on a classwide basis.  Raytheon put up its own experts, who argued that plaintiffs' method of defining the affected area was not consistent with "applicable professional standards," and that their expert's statistical method was unsound as well.  

The district court threw up its hands.  Declaring 

[i]t is not necessary at this stage of the litigation to declare a proverbial winner in the parties' war of the battling experts or dueling statistics and chemical concentrations

it certified the proposed class, and left the Daubert question for trial.

Raytheon appealed.  The Eleventh Circuit--in an opinion not designated for publication--reversed the trial court. Its primary reason to do so was 

Here, in its Rule 23 analysis, we find that the district court erred as a matter of law by not sufficiently evaluating and weighing conflicting expert testimony on class certification. It was error for the district court to decline to declare a proverbial, yet tentative winner. The Plaintiffs are required to prove, at the class certification stage, more than just a prima facie case, i.e., more than just a pretty good case.

Here the district court refused to conduct a Daubert-like critique of the proffered experts's qualifications. This was error. As we have noted, a district court must make the necessary factual and legal inquiries and decide all relevant contested issues prior to certification. The district court has not determined facts, from the often conflicting evidence, sufficient to determine whether class certification is or is not appropriate. The court erred in granting class certification prematurely. Tough questions must be faced and squarely decided. Such tough questions were side-stepped by the district court in this case. That was error.

The Eleventh Circuit remanded the case for further proceedings, and declined to express an opinion about whether certification would ultimately prove appropriate.  

It's interesting that the Eleventh Circuit has chosen not to publish the opinion.  It relied heavily on the Seventh Circuit's opinion in American Honda Inc. v. Allen, and this ruling aligns it with the Second and Third Circuits as well. And this opinion would put the Eleventh Circuit opposite the Ninth's opinion in Dukes v. Wal-Mart.  Since the Supreme Court is hearing that case next week, it's entirely possibly that, rather than picking a winner itself, the Eleventh Circuit decided to hedge its bets.

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If you'll forgive the second piece of self-promotion in a week: the Washington Legal Foundation (which keeps the always-interesting Legal Pulse blog) has just published a Legal Opinion Letter evaluating several of the arguments in favor of overturning the 9th Circuit's Dukes v. Wal-Mart decision, written by yours truly.  

I'll be participating in a briefing for the WLF on this issue in a few weeks (specific details when I get them), and another one a few days later for the American Constitution Society.   

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The tactic is more common that one might imagine: when plaintiffs file their motion for certification, they may include an expert report from a noted law professor, testifying that their case is ideally suited for certification under Rule 23. Now, on one side of the certification debate, you have practicing lawyers zealously representing their client, and on the other, a ostensibly neutral expert in civil procedure. How can a defendant effectively oppose a motion like this?

By excluding the expert, which is easier than it first appears. Take the case of Walsh v. Principal Life Insurance Co., 266 F.R.D. 232 (S.D. Iowa 2010). In this ERISA class action, the plaintiff alleged that the the defendants had violated the statute by persuading her (after letting her go from her job) to roll over her 401(k) [http://en.wikipedia.org/wiki/401(k)] contributions in order to buy their "proprietary" investment products.

To support her motion for class certification, the plaintiff offered two experts: Robert Klonoff, Dean of Lewis & Clark Law School in Oregon, and Mark Johnson, a "sought-after speaker on the topic of ERISA and benefits plans." She offered each expert to testify about how the case had met the standards of Rule 23. The defendants challenged the admissibility of both experts' testimony. They did not question their expertise on ERISA or Rule 23. (Nor could they credibly. Dean Klonoff, for example, is the author of Class Actions and Other Multi-Party Litigation in a Nutshell, and co-author of the casebook Class Actions and Other Multi-party Litigation: Cases And Materials.). But they did point out that both experts had been offered to testify about a legal conclusion: whether certification was appropriate in this case. And that is the one area for which expert testimony is not admissible because it cannot help the court. The court largely agreed:

"[E]xpert testimony on legal matters is not admissible. Matters of law are for the trial judge, and it is the judge's job to instruct the jury on them." S. Pine Helicopters, Inc. v. Phoenix Aviation Managers, Inc., 320 F.3d 838, 841 (8th Cir. 2003) (citing United States v. Klaphake, 64 F.3d 435, 438-39 (8th Cir. 1995)); see also Burkhart v. Washington Metro. Area Transit Auth., 112 F.3d 1207, 1213, 324 U.S. App. D.C. 241 (D.C. Cir. 1997) ("Each courtroom comes equipped with a 'legal expert' called a judge."). In distinguishing admissible testimony from inadmissible testimony, the task for the Court is to ask whether the expert's opinions bear on some factual inquiry or whether they bear solely on the legal conclusions that are urged. In other words, "an expert may offer his opinion as to facts that, if found, would support a conclusion that the legal standard at issue was satisfied, but he may not testify as to whether the legal standard has been satisfied." 

(Internal quotations left in to preserve the Burkhart parenthetical.) The court did find that Johnson had made some factual observations about ERISA plans, so it allowed his testimony for that limited purpose.  Then it denied plaintiff's motion for certification, because the question of how the defendants persuaded each class member was necessarily individualized.

So what's the takeaway in this case? When faced with an "expert" on Rule 23, remember: "Each courtroom comes equipped with a 'legal expert' called a judge." And his is the only opinion that matters.

[Full disclosure: Dean Klonoff very generously provided a blurb for The Class Action Playbook (first under Editorial Reviews).]

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In re Hydrogen Peroxide was an antitrust class action. Hydrogen peroxide is a chemical that is often used a bleach for pulp and paper. In this case, the plaintiffs, all purchasers of hydrogen peroxide and other chemicals, sued their suppliers, alleging that the defendants had sold them more expensive chemical grades when less expensive ones would have been sufficient.

Following extensive discovery, 3 plaintiffs moved to certify a class of direct purchasers of hydrogen peroxide, sodium perborate, and sodium percarbonate, over an eleven-year class period. In support of class certification, plaintiffs offered the opinion of an economist. Defendants, opposing class certification, offered the opinion of a different economist. Defendants separately moved to exclude the opinion of plaintiffs' economist as unreliable under Daubert v. Merrell Dow Pharmaceuticals, Inc. Concluding plaintiffs' expert's opinion was admissible and supported plaintiffs' motion for class certification, the District Court certified a class of direct purchasers of hydrogen peroxide, sodium perborate, and sodium percarbonate under Fed. R. Civ. P. 23(b)(3).

The defendants appealed, claiming that the district court had erred when it found that common issues predominated over individualized issues. The Third Circuit found that the trial court had committed three errors:

First, it had wrongly held that it could not inquire into the merits of plaintiffs' claims where they affected the certification inquiry.

An overlap between a class certification requirement and the merits of a claim is no reason to decline to resolve relevant disputes when necessary to determine whether a class certification requirement is met. Some uncertainty ensued when the Supreme Court declared in Eisen v. Carlisle & Jacquelin, that there is "nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action." Only a few years later, in addressing whether a party may bring an interlocutory appeal when a district court denies class certification, the Supreme Court pointed out that "the class determination generally involves considerations that are 'enmeshed in the factual and legal issues comprising the plaintiff's cause of action.'" As we explained in Newton, Eisen is best understood to preclude only a merits inquiry that is not necessary to determine a Rule 23 requirement.

(Internal citations omitted.)

Second, the district court had wrongly presumed that-when in doubt--it should err in favor of certifying an antitrust class action:

the District Court reasoned, "it is well recognized that private enforcement of antitrust laws is a necessary supplement to government action. With that in mind, in an alleged horizontal price-fixing conspiracy case when a court is in doubt as to whether or not to certify a class action, the court should err in favor of allowing the class." These statements invite error.

(Internal citations omitted.)

And finally, the district court had wrongly put off resolving the "battle of the experts" until trial, even though the experts disagreed about whether a class should be certified in the first place.

Expert opinion with respect to class certification, like any matter relevant to a Rule 23 requirement, calls for rigorous analysis. It follows that opinion testimony should not be uncritically accepted as establishing a Rule 23 requirement merely because the court holds the testimony should not be excluded, under Daubert or for any other reason. Under Rule 23 the district court must be "satisfied" or "persuaded" that each requirement is met before certifying a class. Like any evidence, admissible expert opinion may persuade its audience, or it may not. This point is especially important to bear in mind when a party opposing certification offers expert opinion. The district court may be persuaded by the testimony of either (or neither) party's expert with respect to whether a certification requirement is met. Weighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands.

(Internal citations omitted.)

The Third Circuit was not the only (or even the first) court to find that the "rigorous analysis" required for class certification might require an inquiry into the merits. But it was the one to explain most clearly how various courts had misread Eisen to prohibit any merits inquiry whatsoever. And it also explained in very succinct terms why a court must look into the merits of an expert's testimony if that will bear on whether it is appropriate to certify a class. Because of the clear way in which it describes how each of these factual inquiries is necessary to certification, In re Hydrogen Peroxide has earned the designation of Classic Case.

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