Key Points:

• Defendants in antitrust cases may be able to defeat class certification by demonstrating that the plaintiffs’ damages model yields false positives – i.e., that the model calculates injury where none could exist.
• Courts must consider each of defendants’ arguments in opposition to class certification or risk reversal.

The U.S. Court of Appeals for the D.C. Circuit recently vacated the certification of a direct purchaser class in In re Rail Freight Fuel Surcharge Antitrust Litigation.¹ This decision represents the first significant federal appeals court application of the Supreme Court’s opinion in Comcast Corp. v. Behrend² to overturn class certification.

In Rail Freight, the defendants argued that the plaintiffs’ damages model yielded false positives – i.e., that it found injury where none could exist – but the district court’s class certification opinion ignored this issue. The D.C. Circuit found this to be reversible error and remanded the case with instructions for the district court to reconsider certification in light of Comcast. In doing so, the D.C. Circuit indicated that if the plaintiffs’ damages model in fact yielded false positives, then the model could not reliably measure impact from the alleged conspiracy, and certification would be inappropriate. The court stated in no uncertain terms:

If accurate, this critique would shred the plaintiffs’ case for certification. Common questions of fact cannot predominate where there exists no reliable means of proving classwide injury in fact. When a case turns on individualized proof of injury, separate trials are in order.³

In the wake of Rail Freight, defendants opposing class certification should try to develop evidence showing that the plaintiffs’ damages model yields false positives – i.e., that the model finds injury where none could exist, and therefore must be measuring something other than impact caused by the alleged antitrust violation. While such efforts have long been common, in the past courts often gave them short shrift. Rail Freight sends a strong message that these types of arguments must be carefully considered and that proof of false positives will defeat class certification.

Background

The plaintiffs in Rail Freight were shipping companies which claimed to have been injured by an alleged conspiracy among four rail freight carriers to impose anticompetitive fuel surcharges that bore no connection to their actual fuel costs. Following discovery, the district court certified a class consisting of persons and entities that “purchased rate-unregulated rail freight transportation services directly from one or more of the Defendants, as to which Defendants assessed a stand-alone rail freight fuel surcharge applied as a percentage of the base rate for the freight transport.”⁴

The second half of this definition was important because some shippers had so-called legacy contracts, entered into before the alleged conspiracy began.⁵ These legacy contracts used different formulas for determining whether and when a fuel surcharge would be imposed. Any shipper that paid a surcharge pursuant to a legacy contract could not have been injured by reason of the alleged conspiracy, because the contractual surcharge formula was adopted at a time when the conspiracy did not yet exist.

The district court certified the class under Federal Rule of Civil Procedure 23(b)(3), finding that the prerequisites to certification – numerosity, commonality, typicality, and adequacy – were met; that common questions of law or fact predominated over any individual questions; and that a class action was superior to other available methods of adjudicating the controversy.⁶ The predominance finding was based on two regression models developed by the plaintiffs’ expert. One model, called “the common factor model,” attempted to isolate the common determinants of prices shippers paid to the defendants. The other was a “damages model” intended to quantify, in percentage terms, the overcharge due to conspiratorial conduct at various points in time. The two models were designed to operate in conjunction “to set forth a persuasive inference of causation: certain common factors predominate in the determination of freight rates; controlling for those common factors, analysis of defendants’ transaction data reveals that there was a structural break in the relationship between freight rates and fuel prices around 2003.”⁷

Interlocutory Appeal to the D.C. Circuit

Although the defendants mounted a “medley of attacks” on the class certification decision, the D.C. Circuit focused mainly on one: defendants’ assertion that, when applied to shippers with legacy contracts, the plaintiffs’ model calculated damages, even though such shippers could not have been injured by the alleged conspiracy.⁸ If true, the court reasoned, certification could not stand, because there would be “no reliable means of proving classwide injury in fact.”⁹

The defendants had raised this argument below but the D.C. Circuit could not tell from the district court’s opinion whether it had been considered. For this reason, and because the district court lacked the guidance of the Comcast decision at the time of its certification decision, the D.C. Circuit remanded the case for a fresh consideration of these issues.¹⁰

Implications of the Decision

• Defendants in antitrust cases may be able to defeat class certification by demonstrating that the plaintiffs’ damages model yields false positives – i.e., that the model calculates injury where none could exist.

Rail Freight illustrates the increased difficulty antitrust plaintiffs face in obtaining class certification after Comcast. Courts will no longer blindly accept the representation of plaintiffs’ experts that their models show class-wide impact caused by the alleged antitrust violation. Now courts must scrutinize those models to satisfy themselves that the models actually do what they are alleged to do. Defendants can defeat certification by showing a disconnect between plaintiffs’ liability and damages theories, as in Comcast, or the existence of false positives, as in Rail Freight. Courts will conduct a rigorous analysis to ensure the plaintiffs’ models support an inference of causation and injury to all members of the class.

• Courts must consider each of defendants’ arguments in opposition to class certification or risk reversal.

Rail Freight also offers a lesson for district courts. In certifying a class they must address each of the defendants’ arguments and explain why they do not present obstacles to certification. Courts that fail to do so risk reversal.

• Rail Freight is the continuation of a trend that began before Comcast and will only intensify as courts continue to apply Comcast.

As noted by the Rail Freight court, the Supreme Court believed that the Comcast opinion was grounded in “an unremarkable premise.”¹¹ Indeed, since the decision of the Third Circuit in In re Hydrogen Peroxide Antitrust Litigation,¹² courts have increasingly required more from purported class plaintiffs to demonstrate classwide impact, particularly in antitrust cases. But, as noted by the Rail Freight court, many courts were still “far more accommodating to class certification under Rule 23(b)(3).”¹³ Comcast, however, clarified for these courts the proper standard to apply. While Rail Freight is the first circuit court to apply Comcast in this way, it is clear that there will be more decisions decided on similar grounds.

1. --- F.3d ----, 2013 WL 4038561 (D.C. Cir. Aug. 9, 2013).

2. 133 S. Ct. 1426 (2013).

3. 2013 WL 4038561, at *5.

4. 2013 WL 4038561, at *2 n.3.

5. See id. at 4.

6. See 287 F.R.D. 1, 12, 20, 43-71 (D.D.C. 2012).

7. Id. at 69.

8. 2013 WL 4038561, at *5.

9. Id.

10. Id.

11. 133 S. Ct. at 1433.

12. 552 F.3d 305 (3d Cir. 2008).

13. 2013 WL 4038561, at *8 (citing examples).