Class Actions: A Tougher Row To Hoe

by Pepper Hamilton LLP
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Comcast v. Behrend, ______ S. Ct. _______ (2013)

On March 27, the United States Supreme Court, in a 5-4 opinion, further heightened plaintiffs’ burden in seeking class certification. The Court held that, under Rule 23, plaintiffs must “‘tie each theory of antitrust impact’ to a calculation of damages,” even when that requires an inquiry into the merits of the claim. The decision raises serious doubts about the long-standing principle that the need for individualized damages should not preclude class certification.

History of the Case

In 2003, the plaintiffs, six non-basic cable customers of Comcast, brought a putative class action against Comcast in the United States District Court for the Eastern District of Pennsylvania, alleging anticompetitive and monopolistic conduct in violation of Sections 1 and 2 of the Sherman Act.1 The district court certified the class in 2007.2

The anticompetitive activity, alleged by the plaintiffs, began in 1998 when Comcast entered a series of business transactions to increase its market share of cable television services in the Philadelphia Designated Market Area (DMA). Specifically, Comcast purchased some of the service providers who were competing in the Philadelphia DMA. It also contracted to “swap” Comcast cable systems located outside the Philadelphia DMA with cable systems owned by competitors within the Philadelphia DMA – a practice known in the industry as “clustering.” The plaintiffs alleged that as a result of those transactions, Comcast’s share of cable subscribers in the Philadelphia market increased from 23.9 percent in 1998 to 77.8 percent in 2002.3

In 2008, the Third Circuit issued its opinion in Hydrogen Peroxide in which it outlined the standards that a district court should apply in deciding whether to certify a class.4 Subsequently, Comcast moved for the district court to reconsider its certification opinion in light of Hydrogen Peroxide.5 In 2010, following evidentiary hearings, the district court recertified the proposed class.6 In recertifying the class, the district court credited the testimony of the plaintiffs’ damages expert and found that the plaintiffs could establish antitrust injury and damages for the entire class using common evidence on a class-wide basis, thereby satisfying Rule 23(b)(3). With respect to the issue of damages, however, the district court accepted only one of four of the plaintiffs’ theories of class-wide damages, namely, that Comcast engaged in anticompetitive “clustering” conduct in the Philadelphia DMA, which resulted in deterring other competitors, called “overbuilders,” from entering the market.7

Comcast filed an interlocutory appeal with the Third Circuit, and in 2011, the appellate court affirmed. One of Comcast’s primary arguments in its appeal before the Third Circuit was that the district court abused its discretion in concluding that the plaintiffs had met the predominance requirement of Rule 23(b)(3) with respect to damages. Specifically, Comcast contended that the court should not have relied upon plaintiffs’ expert’s damages model in determining whether damages could be measured and quantified on a class-wide basis.8 In support of its position, Comcast argued, among other things, that because plaintiffs’ expert’s model could not isolate damages for individual theories of harm, and was therefore based on the cumulative effect of all four of the plaintiffs’ damages theories (including the three theories that had been rejected by the district court), the district court erred in accepting the damages model.9

The Third Circuit rejected Comcast’s arguments. The appellate court concluded that the district court had not committed an error since the expert model was a “but-for” model that calculated supra-competitive prices regardless of the type of anticompetitive conduct. Furthermore, the model employed benchmark and multiple regression analyses, which were standard econometric methodologies for calculating damages in antitrust class actions.10 Notably, the Third Circuit stated that “[a]t the class certification stage we do not require that Plaintiffs tie each theory of antitrust impact to an exact calculation of damages, but instead that they assure us that if they can prove antitrust impact, the resulting damages are capable of measurement and will not require labyrinthine individual calculations. We are satisfied that Plaintiffs’ damages model meets this burden.”11

The Supreme Court granted certiorari and, in a narrow opinion, reversed the Third Circuit.12 In a notably short majority opinion, Justice Antonin Scalia explained that the Third Circuit failed to apply the properly rigorous evidentiary review of class certification findings, including the need to examine the underlying merits of the case: “By refusing to entertain arguments against respondents’ damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination, the Court of Appeals ran afoul of our precedents requiring precisely that inquiry.”13

The majority further held that plaintiffs’ expert model could not satisfy the predominance requirement of Rule 23(b)(3) because it failed to measure injury and damages based upon the specific theory of injury that the district court found viable, as opposed to plaintiffs’ other, rejected theories of harm. As Justice Scalia explained:

There is no question that the model failed to measure damages resulting from the particular antitrust injury on which petitioners’ liability in this action is premised. ... In light of the model’s inability to bridge the differences between supra-competitive prices in general and supra-competitive 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. Prices whose level above what an expert deems “competitive” has been caused by factors unrelated to an accepted theory of antitrust harm are not “anticompetitive” in any sense relevant here.14

The Supreme Court’s opinion is an important, perhaps even game-changing, development for parties to class action litigation. Historically, courts allowed cases to proceed as class actions where common evidence could be used to demonstrate a number of common questions even though individualized damages questions plainly or likely existed. Justice Ruth Bader Ginsburg’s dissent opinion discusses much of this case law and expresses concern over the clear shifting of the class-action landscape.

The Comcast opinion makes clear that district courts addressing class certification must conduct a thorough analysis of plaintiffs’ expert damages model, even if doing so overlaps with the merits, and must further find that the damages model ties specifically to the alleged theory of particular harm, and not merely to a generalized claim of loss or wrongdoing.

More in Store for Class Actions in 2013

Comcast will not be the last antitrust class action case decided by the Supreme Court this year. Next up will be In re American Express Merchants’ Litigation, where the Court will consider whether a class arbitration waiver can be held invalid if it prevents plaintiffs from enforcing their federal statutory rights. In In re American Express Merchants’ Litigation, the Second Circuit rejected a class arbitration waiver on the ground that the waiver had the practical effect of precluding potential class members from maintaining their Sherman Act claims.

It could be a long hard year for plaintiffs’ class action lawyers. In the near term, defendants will likely seek decertification of pending class cases, plaintiffs’ expert economists will be hard at work ensuring that they carefully analyze the applicable antitrust theories and how they will tie to class members’ damages, defendants will closely examine damages issues and expand the scope of expert work at the earliest stage of the case, and district courts will be digging more deeply into the merits and scrutinizing carefully the relationship between the expert reports and specific circumstances underlying the antitrust claims at issue. The Comcast majority decision will be a powerful tool for defendants’ attorneys. The Comcast dissent will be relied upon by creative plaintiffs’ attorneys and district courts will, over time, determine the ultimate effect the decision, but plaintiffs clearly have their work cut out for them.

Endnotes

1 Behrend v. Comcast, 655 F.3d 182, 186 (3d Cir. 2011).

2 Id. at 187.

3 Id. at 185-86 (3d Cir. 2011).

4 See In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008).

5 Behrend, 655 F.3d at 188.

6 Id.

7 Id.

8 Id. at 200.

9 Id. at 203.

10 Id. at 205.

11 Id. at 206 (citation omitted).

12 Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544 (U.S. Mar. 27, 2013).

13 Id. at *13-14.

14 Id. at *16-21.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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