Today, in a much anticipated decision, the Supreme Court determined that lower federal courts may not certify a class action without assessing whether the plaintiffs have shown that the impact and damages to the class by the particular theory of harm alleged can be proven on a classwide basis. In a 5-4 opinion in an antitrust case, the Court held that certification of the class under Fed. R. Civ. P. 23(b)(3) was inappropriate because the damages model constructed by the plaintiffs' expert did not show common classwide damages caused by the only theory of antitrust impact which the district court had determined was suitable for class treatment.
Procedural History: Plaintiffs, cable television consumers, brought a class action antitrust suit which alleged that defendants, Comcast and related entities, violated §§ 1 and 2 of the Sherman Act by engaging in a series of transactions with other cable systems that increased Comcast's market share in the Philadelphia cable television market through swaps of Comcast assets with cable systems in other markets. The plaintiffs alleged that Comcast's so-called "clustering" strategy eliminated competition in four different ways. The district court determined that only one theory—deterrence of competition from "overbuilders," or companies that build and offer to telecommunications customers a competitive alternative to existing cable—was capable of class action treatment. Plaintiffs claimed that by eliminating competition and raising barriers to entry, Comcast was able to charge customers supra-competitive prices for cable television services, and they presented expert economic testimony and modeling to show classwide impact and damages. The district court certified the class, even though the plaintiffs' expert conceded that his model did not allocate classwide damages among the four different theories of anticompetitive conduct alleged and did not identify damages specifically attributable to the "overbuilder" theory.
The Third Circuit Court of Appeals affirmed. It found that the plaintiffs had presented econometric evidence demonstrating that prices were elevated above competitive levels for all class members. Accordingly, it affirmed the district court's finding that antitrust impact was susceptible to proof at trial through evidence common to the class. In addition, the appeals court determined that plaintiffs' damages expert had presented a model that was able to measure damages on a classwide basis, and would "not require labyrinthine individual calculations." The Third Circuit also held that the district court was not required to perform an analysis under Daubert v. Merrell Dow Pharmaceuticals, Inc. when evaluating expert testimony at the class certification stage. It held that a district court is merely required to determine if the plaintiffs have presented a damages methodology "which could evolve" to become admissible evidence. Accordingly, to obtain class certification, the Third Circuit held that a plaintiff is not required to present admissible evidence which establishes damages on a classwide basis.
The Supreme Court's Decision: In a 5-4 opinion authored by Justice Scalia, the Court reversed and held that the proposed class was not properly certified under Fed. R. Civ. P. 23(b)(3). The Court began its opinion by explaining that, when seeking class certification, the plaintiffs proposed four theories of antitrust impact caused by Comcast's anticompetitive conduct. Critically, for purposes of Rule 23(b)(3), the district court found that only the "overbuilder" theory of antitrust impact was capable of proof at trial through evidence that was common to the class. However, the damages model presented by the plaintiffs' expert assumed the validity of all four theories of anticompetitive harm and was incapable of proving on a classwide basis the damages caused exclusively by the alleged deterrence of overbuilders.
The Court determined that the class was improperly certified because the plaintiffs failed to establish that damages were capable of measurement on a classwide basis:
If respondents prevail on their claims, they would be entitled to damages resulting from reduced overbuilder competition, since that is the only theory of antitrust impact accepted for class-action treatment by the District Court. It follows that the model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory. If the model does not even attempt to do that, it cannot possibly establish that damages are susceptible for measurement across the entire class for purposes of Rule 23(b)(3).
Thus the majority opinion was able to conclude that class certification was inappropriate, without addressing the precise evidentiary standard—Daubert or something else—to be applied to the admissibility of plaintiffs' evidence of commonality.
The Court rejected the argument that by requiring the plaintiffs to tie each theory of antitrust impact to a calculation of damages at the class certification stage it was improperly considering the merits of plaintiffs' claims. Citing its recent decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), the Court explained that "[r]epeatedly we have emphasized that it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question and that certification is proper only if the trial court is satisfied, after a rigorous analysis," that Rule 23 has been satisfied. Thus, the Court held that "by refusing to entertain arguments against [plaintiffs'] 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."
The dissent authored by Justices Ginsburg and Breyer contended that the majority overstepped the procedural bounds it set for itself in agreeing to hear the case, and also erred substantively in its analysis of what common proof of impact requires in antitrust cases. Justice Scalia responded to the latter criticism by stating that the majority's decision "turns on the straightforward application of class-certification principles," and was not dependent upon substantive antitrust law, indicating the broad sweep the Court intends for its ruling.
The majority opinion several times cites Wal-Mart and Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), which now with Comcast form a troika of decisions that collectively hold that Rule 23, and especially Rule 23(b), requires a searching factual analysis by a district court before a class is certified, whether for a settlement class or a litigation/merits class (Amchem), regardless of whether the class inquiry arguably overlaps with the merits (Wal-Mart), and which requires substantial commonality across the proposed class members in the impact of the alleged wrongdoing (Comcast). While the Court did not decide the question of the evidentiary standard which the district court must apply in the class certification inquiry, we anticipate that class certification hearings will be increasingly evidence-intensive, and logically would require application of the usual Federal Rules of Evidence, and decisions such as Daubert interpreting the expert rules.