Supreme Court focuses on proof at class certification stage

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November 15, 2012

Supreme Court focuses on proof at class certification stage 

Courtney L. Davenport

The level of evidence required by class action plaintiffs at the certification stage is under consideration by the Supreme Court in two separate cases that could be the corporate world’s opportunity to expand the class action limits of Wal-Mart v. Dukes. However, several justices seemed reluctant to use either case as a platform for broad change.

The Supreme Court heard oral arguments last week in two cases that examine the level of evidence class action plaintiffs must produce at the certification stage. The cases had been widely viewed as the corporate world’s first chance to expand the class action limitations imposed in Wal-Mart v. Dukes, but several justices seemed reluctant to use either case as a platform for broad change.

In an antitrust case against Comcast Corp. and other cable providers, a class of Philadelphia consumers alleged the companies “swapped” market share in major cities so that each provider covered a major metropolitan area, and then stifled competition from providers that didn’t participate in the swap. After a four-day evidentiary hearing, including testimony from several experts and fact witnesses and a review of 32 expert reports, a federal trial court certified the class, finding that common issues predominated. Although the plaintiff had alleged four theories of antitrust impact, the court dismissed three and accepted only the claim that the swap deterred competition from providers trying to serve the area.

Comcast appealed, arguing the court was required to resolve whether the plaintiffs had common proof of damages before certifying the class. The Third Circuit affirmed certification, holding that the trial court conducted a rigorous analysis and properly concluded that the class had shown the antitrust claim was capable of proof at trial through evidence common to the class. The court found that at certification, a class is required to show only that it has evidence that could prove the alleged illegal conduct through common evidence. Plaintiffs aren’t required to prove the merits of the case, which would turn class certification into a trial and run “dangerously close to stepping on the toes of the Seventh Amendment by preempting the jury’s factual findings.”

Comcast sought certiorari on whether “a district court may certify a class action without resolving ‘merits arguments’ that bear on Rule 23’s prerequisites for certification, including whether purportedly common issues predominate over individual ones under Rule 23(b)(3).” Corporate lobbyists were hoping the Court would apply Wal-Mart’s stringent limitations on class actions to the certification realm, especially because the majority in Wal-Mart made a passing comment about doubting the Ninth Circuit’s holding that a Daubert hearing is inappropriate at certification. (Comcast Corp. v. Behrend, No. 11-864 (U.S. oral arg. Nov. 5, 2012).)

But when the Court granted certiorari, it reformulated the question to “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.” In other words, do courts have to hold Daubert hearings for evidence admitted at the certification stage?

The problem is that Comcast admits it never requested a Daubert hearing or objected to the admissibility of the plaintiffs’ expert opinions, leaving the justices without a true legal dispute to resolve. After much discussion during Comcast’s argument about whether the plaintiffs’ damages model was sufficient and whether a class must prove common damages at certification if it has a common liability question, Justice Elena Kagan said she wondered whether those issues were relevant.

The Court “reformulated in a way which said that what we wanted to talk about was whether a district court at a class certification stage has to conduct a Daubert inquiry, in other words, has to decide on the admissibility of expert testimony relating to class-wide damages . . . your clients waived their argument that this was inadmissible evidence,” Kagan said. She later said that “this is a case where it seems to me that except for the question of how good the expert report is, none of the parties have any adversarial difference as to the appropriate legal standard . . . usually we decide cases based on disagreements about law, and here I can’t find one.”

Chief Justice John Roberts also seemed unsure how the Court should proceed. “We are having an elaborate discussion, and you did in the briefs about whether or not this was a claim waived below. No court has addressed that yet. We’re a court of review, not first view,” he said. “So 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 court to determine whether or not the parties adequately preserved that objection or not.”

“The Supreme Court struggled to get an answer to a question it hadn’t asked. It asked about [admissibility] under Rule 703 when it wanted to ask about Rule 23,” said John Vail of the Center for Constitutional Litigation in Washington, D.C., which wrote an amicus brief for AAJ. “I don’t know what they’re going to do, but the good thing is that judging by the oral argument, it’s not going to be a wide-ranging opinion that hurts plaintiffs.”

The second case of the day, however, might yield a substantive opinion that impacts many securities class actions. A pension fund that filed a class action against drugmaker Amgen, Inc., for artificially inflating stock prices by misrepresenting the safety of two drugs sought to invoke the fraud-on-the-market doctrine. That doctrine presumes common reliance if a defendant made material misstatements that caused the plaintiff to buy stock at a higher price. The trial court certified the class, and the Ninth Circuit affirmed, holding that plaintiffs are not required to prove materiality at certification because it’s clear that materiality is a common question—if the statements were material, every plaintiff has proven reliance, while if they are found to be immaterial, every plaintiff’s claim fails. The Court granted certiorari to decide whether materiality must be proven before certification. (Amgen, Inc. v. Conn. Ret. Plans & Trust Funds, No. 11-1085 (U.S. oral arg. Nov. 5, 2012).)

Justices Scalia and Kennedy expressed doubts about allowing a presumption that materiality is common, saying the same could be said for other elements of the fraud-on-the-market doctrine, such as proof that the market was efficient, which plaintiffs must prove for certification. But Roberts, Kagan, and Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Stephen Breyer questioned Amgen’s counsel extensively about why materiality isn’t automatically a common question that meets the predominance requirement.

“I am really nonplussed by your answer that if the judge says it’s immaterial, that doesn’t end it for everybody. Certainly it ends it for the class . . . so if it’s immaterial, the case ends. And if it is material, then it is material to everybody in the class,” said Ginsburg. Invoking Wal-Mart’s holding that it is a question of coherence, Kagan agreed. “It’s a question of whether the class wins or loses together. And here, for materiality, the class wins or loses together,” she said.


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