View From Proskauer: U.S. Supreme Court Provides Defendants With More Ammunition for Defeating Class Certification by Requiring Classwide Proof of Damages

by Proskauer - Employee Benefits & Executive Compensation Blog
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The U.S. Supreme Court recently ruled in Comcast Corp. v. Behrend, 2013 WL 1222646 (U.S. Mar. 27, 2013) that, in order to obtain class certification, plaintiffs carry the burden of establishing not only that they have proof of classwide liability, but also that their potential damages are tied to their theory of liability and capable of classwide proof. The Court’s ruling follows on the heels of its ruling in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), in which it suggested that the admissibility standard for expert evidence outlined in Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993), should apply at the class certification stage. Instead of ruling on the Daubert issue, the Court provided what could prove to be an even more effective means for defeating class certification.

The Lower Courts’ Opinions

In Comcast, a claim was brought on behalf of a group of more than two million current and former Comcast subscribers, alleging that Comcast unfairly eliminated competition and overcharged customers in violation of the Sherman Act. Specifically, plaintiffs alleged that Comcast obtained a monopoly through a series of transactions with competitors pursuant to which regional cable markets were allocated in a manner that excluded and prevented competition. Plaintiffs offered four theories of antitrust violations that they claimed caused cable subscription rates to increase. Plaintiffs’ expert calculated plaintiffs’ potential damages by comparing the market as it was with Comcast’s monopoly power against a market without Comcast’s alleged anticompetitive activity, but admitted that he had not isolated the damages resulting from each of plaintiffs’ four theories of antitrust injury. Of the four theories of liability alleged, the district court certified a class claim only with respect to one theory: that Comcast’s activities reduced the level of competition from “overbuilders” (companies that build competing cable networks in areas where an incumbent cable company already operates).

Defendants were granted leave, pursuant to Rule 23(f) of the Federal Rules of Civil Procedure, to immediately appeal the district court’s class certification ruling. A divided panel of the Third Circuit affirmed. The court reasoned that, at the class certification stage, it need not consider Comcast’s argument that plaintiff’s damages model failed to attribute damages resulting from the overbuilder
theory because such an “attac[k] on the merits of the methodology [had] no place in the class certification inquiry.”

The Supreme Court’s Decision

Comcast petitioned for certiorari to the U.S. Supreme Court. It asked the Court to rule on the following issue: “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).”

The Supreme Court agreed to hear the case, but rephrased the question for the parties to address. The question posed for the parties to brief and to be argued before the Court was: “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.”

The Majority’s Opinion

In a 5-4 decision, a majority of Justices (Justices Scalia, Roberts, Kennedy, Thomas, and Alito) reversed the decision of the Third Circuit and held that the class was improperly certified. In light of the way in which the Court rephrased the question presented, the Court appeared poised to address whether plaintiffs’ expert testimony must satisfy the Daubert standards on a motion for class certification. The Court, however, did not address that issue. Rather, it stated that it would address Comcast’s argument that plaintiffs’ purported damages could not be measured on a classwide basis.

The Court held that plaintiffs could not satisfy Rule 23(b)(3)’s requirement that common issues predominate because they could not show that their purported damages were capable of classwide proof. The Court elaborated that plaintiffs’ damages model must be consistent with plaintiffs’ liability model, and that any model proffered as classwide damages evidence must measure damages exclusively attributable to the class-wide theory of harm. Here, plaintiffs’ damages model failed to “bridge the differences between supra-competitive prices in general and supra-competitive prices attributable to deterrence of overbuilding,” the only damages theory the district court found was capable of classwide proof. The Court found that the failure of plaintiffs’ damages model to measure damages exclusively attributable to overbuilding meant that plaintiffs failed to meet Rule 23(b)(3)’s requirements that damages be susceptible to classwide measurement.

The Dissent’s Opinion

The four dissenting Justices (Justices Ginsburg, Breyer, Sotomayor, and Kagan) believed that the Court should have dismissed the petition as improvidently granted. The rephrased question, which purported to shift the focus of the dispute to the admissibility of the expert testimony, was “inapt,” according to the dissent, because Comcast failed to object to (or move to strike) the admission of the damages model offered by plaintiffs’ expert. As a result, the dissent stated that the majority’s decision “should not be read to require, as a prerequisite to certification, that damages attributable to a classwide injury be measurable ‘on a class-wide basis.’” Instead, the dissent stated that since, in its view, Comcast had never challenged the need to prove damages on a classwide basis through a common methodology, the majority’s ruling “is good for this day and case only.”

Proskauer’s Perspective

Although Comcast was an antitrust lawsuit, it is likely to have an impact on class certification proceedings across all disciplines, including claims under the Employee Retirement Income Security Act of 1974 (ERISA). At a minimum, the Supreme Court’s ruling should make considerations of damages a component of the class certification analysis. This alone represents a considerable departure from the approaches of many lower court rulings, which have tended to focus exclusively on liability issues when addressing a class certification motion. Furthermore, while not directly addressing the Daubert issue that was originally presented, the Supreme Court’s ruling clearly tends to increase the scrutiny accorded to expert testimony at the class certification stage, in order to determine whether, on the strength of the expert testimony, the plaintiff has claims that can be established on a classwide basis.

Comcast may present insurmountable obstacles to certification in certain types of ERISA class actions. For example, for claims based on alleged faulty or misleading ERISA disclosures, unless plaintiffs can prove that all class members relied to their detriment or suffered some other type of class-wide harm in the same way, class certification may be inappropriate. Similarly, in cases alleging that imprudent investments were offered in 401(k) or similar defined contribution plans, the different investment strategies, circumstances, and impact of these investments on individual participants may make class certification inappropriate after Comcast.

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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