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Defeating Class Certification in Complex Commercial Litigation

Most everyone in the business world understands the significance of class certification. If a class is certified, the risk of tremendous monetary exposure may outweigh any potential benefit of taking a case to trial. As a result, the class certification stage of many cases is, in a real sense, dispositive. If a class is certified, plaintiffs’ counsel may conclude the company cannot risk taking the case to trial and may demand exorbitant settlement amounts. If a court denies class certification, cases can be handled either in “one-off” fashion or in small groups or, in the commercial context, many cases lose all monetary value for plaintiffs’ counsel and the case is put to rest.

In most jurisdictions, there is a significant trend away from certifying class actions in traditional product liability actions involving prescription pharmaceuticals or medical devices. Although there are variations, many courts now recognize that questions of individual causation and exposure render class treatment inappropriate in personal injury cases. 1 But a new wave of class actions is becoming prevalent. Almost weekly, one sees class action complaints alleging price fixing, market manipulation, anti-competitive control of generic products, and other commercial-based claims. These cases represent a serious threat: There is no trend away from certifying class actions in these purely commercial disputes. Moreover, because there is less likelihood that individual questions may dominate and render class treatment inappropriate, plaintiffs in these cases may be able to satisfy the traditional Rule 23 requirements for class certification (numerosity, commonality, typicality, and protection of class interests by the representative parties).

In recent years, courts have begun to recognize that the decision to certify a class is often equivalent to or worse than a jury verdict against a defendant.2 This realization has led many courts, including several United States Courts of Appeals, to apply greater scrutiny at the class certification stage, even when expert testimony is offered in support of or in opposition to class certification. This article discusses the developing case law on how courts treat class certification in complex commercial cases and suggests that the greater scrutiny now applied at the class certification stage presents a higher hurdle than that previously imposed on plaintiffs seeking to certify a class.

“Rigorous Analysis” at Class Certification Stage

Beginning in 1982, the United States Supreme Court in General Telephone Co. v. Falcon recognized that a “rigorous analysis” is required in determining whether to certify a class. 3 Over the past several years, the federal courts of appeals have come to a general consensus that, at the class certification stage, the “rigorous analysis” standard set forth in General Telephone requires trial courts to look behind the pleadings to resolve any factual and legal issues necessary to determine whether the requirements of Rule 23 are satisfied. In other words, courts may no longer employ a deferential, 12(b) (6)-like standard, where the plaintiff’s allegations in support of certification are construed in the light most favorable to the plaintiff, at the class certification stage. Instead, courts must now identify and resolve factual disputes that affect the decision on class certification. The following cases illustrate this trend:

  • Regents of the Univ. of California v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007) — examination of factual and legal issues at class certification stage “enjoys wide acceptance in the courts of appeals”;
  • In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2nd Cir. 2006) — disavowing earlier decision holding that court did not have authority to weigh competing expert submissions on class certification question (see In re Visa Check/MasterMoney Antitrust Litigation, 280 F.3d 124 (2nd Cir. 2001)) and holding that district judge is required to assess “all of the relevant evidence admitted at the class certification stage and determine whether each Rule 23 requirement has been met”;
  • Unger v. Amedisys Inc., 401 F.3d 316, 321 (5th Cir. 2005) — “Rule 23 requires the court to ‘find,’ not merely assume, the facts favoring certification”;
  • Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 675 (7th Cir. 2001) — holding that it is error for the district court to certify a class without “resolving factual and legal disputes that strongly influence the wisdom of class treatment.”

Although there are cases — particularly at the district court level — that ignore this trend, 4 these circuit court decisions provide a fairly wide swath of authority for the proposition that courts must resolve factual and legal disputes necessary to decide Rule 23 certification issues.

Dueling Experts

Particularly in complex commercial cases involving technical issues, litigants regularly seek to introduce expert testimony at the class certification stage either to establish or challenge the requirements for class certification. Although General Telephone and its progeny support a rigorous analysis at class certification, courts have grappled with how to handle such expert testimony. Some courts have employed a “Daubert-light” standard, 5 while others require the trial courts to assess the reliability of an expert’s proposed testimony before ruling on class certification.6 The treatment of expert testimony at the class certification stage is fairly characterized as a “tricky question,” 7 but case law supports the argument that courts may no longer rubber-stamp expert opinions offered in support of class certification. Two recent examples involving price fixing and antitrust allegations shed light on how courts are addressing this issue, and they illustrate how litigants may best prepare for and defend against class certification efforts.

In re Hydrogen Peroxide Antitrust Litigation (“Hydrogen Peroxide Litigation”)8

In the Hydrogen Peroxide Litigation, the plaintiffs sought to certify a class of purchasers who claimed that various chemical manufacturers conspired to fix prices of hydrogen peroxide and other products. The core issue at the class certification stage was whether the plaintiffs could show that the element of antitrust impact required to prevail on their claims could be demonstrated at trial by evidence that was common to the class rather than to individual members. In support of their argument for class certification, the plaintiffs offered the opinion of an expert economist who identified two potential approaches (regression analysis and bench-mark analysis) to prove that the alleged conspiracy to fix prices would have impacted all purchasers of the defendants’ products. The defendants offered the opinion of their own economist, who criticized the plaintiffs’ expert’s “potential” approaches for estimated damages on a class-wide basis and conducted an empirical analysis showing that the alleged transactions and conspiratorial acts did not affect purchasers in the same way. Finding it inappropriate to weigh the conflicting testimony of the parties’ experts, the lower court certified a class in favor of the plaintiffs.

On appeal, the Third Circuit emphasized that weighing conflicting expert testimony at the class certification stage may be “integral” to the rigorous analysis required under Rule 23:

Resolving expert disputes in order to determine whether a class certification requirement has been met is always a task for the court — no matter whether a dispute might appear to implicate the ‘credibility’ of one or more experts, a matter resembling those usually reserved for the trier of fact. Rigorous analysis need not be hampered by a concern for avoiding credibility issues […]. 9

Applying this standard, the Third Circuit determined that the district court had improperly declined to resolve the competing expert opinions offered for and against class certification. As a result, the court vacated the district court’s ruling on class certification and remanded for a resolution of these issues.

In re EPDM Antitrust Litigation (“EPDM”) 10

Like the Hydrogen Peroxide Litigation, EPDM involved antitrust allegations of price fixing by purchasers of synthetic materials. But instead of offering “possible” approaches to addressing damages at trial, the plaintiffs in EPDM offered regression analyses from economic experts demonstrating that damages could be proven on a class-wide basis to demonstrate class-wide impact. In response, the defendants offered expert testimony that challenged the results of the plaintiffs’ regression analyses, instead arguing that appropriate regression methodologies indicated there was no class-wide impact from the alleged conduct. The case therefore presented classic “dueling expert” opinions. One expert’s results produced a plaintiff-friendly answer; another expert’s results produced a defendant-friendly answer.

The district court recognized its obligation to conduct a rigorous analysis and, when necessary, to resolve conflicting expert opinions affecting class certification. The court acknowledged the Third Circuit’s directive in the Hydrogen Peroxide Litigation, but it emphasized that the questions it confronted were different from those in Hydrogen Peroxide. In Hydrogen Peroxide, the plaintiffs’ expert had only offered possible statistical approaches to proving class-wide damages and impact while the defendants’ expert had actually conducted the analyses to show such an approach was impossible. Here, the plaintiffs’ expert actually conducted a statistical analysis purportedly demonstrating the existence of class-wide damages, while the defendants’ expert conducted separate analyses showing that there were not class-wide damages and that the methodologies used by the plaintiffs’ experts were fundamentally flawed. The court was thus faced with conflicting expert opinions.

Given these “polar opposite” opinions, the court refused to make what it concluded was a merits decision. Fundamental to its conclusion was the court’s view that the plaintiffs’ expert had demonstrated a way to prove class-wide damages through generalized proof. The defendants contended that their expert showed that the plaintiffs’ expert employed flawed methodologies and therefore had not shown that class-wide damages could be proved, but the court viewed it differently. The court reasoned that, rather than disputing the possibility of proving class-wide damages through individualized proof, the defendants’ position was that they disputed the results of the plaintiffs’ model and, in the alternative, offered their own model to show the absence of class-wide impact. Based on this view, the court was not convinced that it was methodologically impossible for the plaintiffs to utilize a single formula to prove class-wide damages. The court declined to make the plaintiffs prove that their expert analysis was the correct one. That they proposed a workable methodology — apparently even if wrong — was enough to meet their burden at class certification. The court determined that it would be up to a jury to determine which of the experts’ methodologies and conclusions were correct. The district court’s decision to certify a class is presently on appeal to the United States Court of Appeals for the Second Circuit.

Where Are We Going Now?

There is now a trove of case law supporting the proposition that plaintiffs cannot rely on bare allegations to satisfy Rule 23 and obtain class certification. Instead, courts must conduct at least some inquiry into the merits to determine if the facts support class certification. This support has helped and will continue to help many defendants defeat class certification.

The precise degree of scrutiny which courts must apply at the class certification stage, however, remains an open question. Decisions such as the EPDM ruling suggest that a court may not be required to decide which expert opinion is correct when faced with “polar opposite” opinions. But In re IPO lends support to the position that conflicting expert opinions that affect the requirements for class certification must be resolved at the class certification stage — regardless of whether they also implicate the merits of the case. Given the implication of rulings on class certification, the decisions will continue to be appealed, and appellate rulings will shed more light on how lower courts are to address these issues at class certification. In the interim, there is ample authority supporting the position that courts must do far more than rubber stamp decisions on class certification. Some degree of heightened scrutiny is required, and in many instances that scrutiny must overlap issues affecting the merits of the underlying claims in the litigation


[1] See, e.g., Henry v. Dow Chemical Co., __N.W.2d__, 2009 WL 2356729 (Mich. July 31, 2009) (overturning certification of class action where trial court failed to apply “rigorous analysis” standard now applied by federal courts in determining whether each of the prerequisites for class certification is satisfied); In re Welding Fume Products Liability Litigation, 245 F.R.D. 279 (N.D. Ohio 2007) (declining to certify class where plaintiffs’ exposures to fumes generated during welding processes were vastly different and thus could not satisfy the typicality requirement).

[2] See In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305, 310 (3rd Cir. 2008) (“Careful application of Rule 23 accords with the pivotal status of class certification in large-scale litigation, because denying or granting class certification is often the defining moment in class actions (for it may sound the ‘death knell’ of the litigation on the part of plaintiffs, or create unwarranted pressure to settle nonmeritorious claims on the part of defendants”).

[3] See General Telephone Co. v. Falcon, 457 U.S. 147, 161 (1982).

[4] See, e.g., Bentley v. Honeywell Int’l, Inc., 223 F.R.D. 471 (S.D. Ohio 2004) (stating that it was inappropriate for the court to inquire into the merits of underlying claims at the class certification stage and refusing to resolve factual disputes); In re Natural Gas Commodities Litigation, 231 F.R.D. 171, 182 (S.D.N.Y. 2005) (“At the class certification stage, the court should not delve into the merits of an expert’s opinion, or indulge in ‘dueling’ between opposing experts”).

[5] See Turner v. Murphy Oil, 2006 WL 91364 (E.D.La. Jan. 12, 2006).

[6] See In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2nd Cir. 2006).

[7] Fogarazzo v. Lehman Brothers, Inc., 2005 WL 361205, *1 (S.D.N.Y. Feb.16, 2005) (although “rigorous analysis” required, class certification is not an occasion for resolution of the merits of a case; as a result the “question of whether an expert opinion is an appropriate tool in determining whether a class may be certified is a tricky one”).

[8] In re: Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3rd Cir. 2008).

[9] Id. at 324.

[10] In re Ethylene Propylene Diene Monomer (EPDM) Antitrust Litigation, 256 F.R.D. 82 (D. Conn. 2009).

Finis

Citations

  1. See, e.g., Henry v. Dow Chemical Co., __N.W.2d__, 2009 WL 2356729 (Mich. July 31, 2009) (overturning certification of class action where trial court failed to apply “rigorous analysis” standard now applied by federal courts in determining whether each of the prerequisites for class certification is satisfied); In re Welding Fume Products Liability Litigation, 245 F.R.D. 279 (N.D. Ohio 2007) (declining to certify class where plaintiffs’ exposures to fumes generated during welding processes were vastly different and thus could not satisfy the typicality requirement). Jump back to footnote 1 in the text
  2. See In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305, 310 (3rd Cir. 2008) (“Careful application of Rule 23 accords with the pivotal status of class certification in large-scale litigation, because denying or granting class certification is often the defining moment in class actions (for it may sound the ‘death knell’ of the litigation on the part of plaintiffs, or create unwarranted pressure to settle nonmeritorious claims on the part of defendants”). Jump back to footnote 2 in the text
  3. See General Telephone Co. v. Falcon, 457 U.S. 147, 161 (1982). Jump back to footnote 3 in the text
  4. See, e.g., Bentley v. Honeywell Int’l, Inc., 223 F.R.D. 471 (S.D. Ohio 2004) (stating that it was inappropriate for the court to inquire into the merits of underlying claims at the class certification stage and refusing to resolve factual disputes); In re Natural Gas Commodities Litigation, 231 F.R.D. 171, 182 (S.D.N.Y. 2005) (“At the class certification stage, the court should not delve into the merits of an expert’s opinion, or indulge in ‘dueling’ between opposing experts”). Jump back to footnote 4 in the text
  5. See Turner v. Murphy Oil, 2006 WL 91364 (E.D.La. Jan. 12, 2006). Jump back to footnote 5 in the text
  6. See In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2nd Cir. 2006). Jump back to footnote 6 in the text
  7. Fogarazzo v. Lehman Brothers, Inc., 2005 WL 361205, *1 (S.D.N.Y. Feb.16, 2005) (although “rigorous analysis” required, class certification is not an occasion for resolution of the merits of a case; as a result the “question of whether an expert opinion is an appropriate tool in determining whether a class may be certified is a tricky one”). Jump back to footnote 7 in the text
  8. In re: Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3rd Cir. 2008). Jump back to footnote 8 in the text
  9. Id. at 324. Jump back to footnote 9 in the text
  10. In re Ethylene Propylene Diene Monomer (EPDM) Antitrust Litigation, 256 F.R.D. 82 (D. Conn. 2009). Jump back to footnote 10 in the text