Thus far, 2010 has been an intriguing year for the development of antitrust class action law, and some of this jurisprudence may be significant if predictions are borne out that recent economic pressures have substantially increased anticompetitive activity, particularly in price-fixing cases involving consumer purchases. As a brief review demonstrates, this year has brought decisions with potential impact in the courts in which antitrust class actions are brought, the manner in which they are settled, the potential damages to which defendants are exposed, and the availability of the class action vehicle in the first instance.

Shady Grove: Federal Rule 23 Carries the Day

The class action decision potentially bearing on antitrust law that has received the most attention this year, not surprisingly, was one issued by the U.S. Supreme Court: the March 31, 2010 decision in Shady Grove Orthopedic Associates v. Allstate Insurance Co.[1] The fractured Shady Grove decision created heightened uncertainty, particularly as to whether and when New York’s state antitrust statute, the Donnelly Act, allows for class actions.

At the center of Shady Grove was Section 901(B) of New York’s Civil Practice Law Rules (CPLR), which provides that in the absence of an express statutory authorization, “an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action.” For decades, a consistent line of New York authority declared that treble damages under the Donnelly Act constitute a “penalty” under Section 901(B), and, therefore, that treble damage class actions under New York’s antitrust statute were impermissible. This was so even though the courts acknowledged, after New York enacted an “Illinois Brick repealer statute” in 1998 allowing for damages recovery by indirect purchasers, that consumer plaintiffs would rarely suffer such significant damages as to be in an economic position to sue in the absence of the class action vehicle. In 2007, the New York Court of Appeals spoke definitively on the issue, holding that Donnelly Act treble damage cases are actions to recover a “penalty” for purposes of Section 901(b), which could and probably would have been the end of the road for private indirect purchaser consumer actions in New York.

However, there was also a host of attempts by plaintiffs in federal courts to get Donnelly Act claims certified as class actions under Rule 23 of the Federal Rules of Civil Procedure. And over and over again, in prominent disputes (the Microsoft and Dentsply litigations among them), the federal district courts applied Section 901(b) and refused class certification. But in Shady Grove, the Supreme Court was presented with the question of whether, in a case that was filed in federal court, Section 901(b) would operate to bar class certification — the subject of a motion pursuant to Fed. R. Civ. P. 23 — of a claim that arose under a New York Insurance Law penalty provision. When the justices’ votes are cobbled together, the result is a holding that Section 901(b) does not apply in a federal court case, and that therefore a federal district court could certify a class, even though a New York state court could not do so.

Briefly, Justice Scalia, Chief Justice Roberts, Justice Sotomayor and Justice Thomas applied Rule 23, notwithstanding Section 901(b), because they found Section 901(b) to be a “procedural” provision, and, of course, federal courts follow federal, not state, procedure. The deciding fifth vote, in a 4-1-4 split, was that of the Court’s retiring antitrust scholar, Justice Stevens, who wrote separately that simply classifying Section 901(b) as “procedural” was not enough. In Justice Stevens’ view, there are instances in which a state law could control, but this is not one of them because Section 901(b) is not “so intertwined with a state right or remedy that it functions to define the scope of the state-created right.” Justice Ginsberg, along with Justices Alito, Breyer, and Kennedy dissented, concluding that Section 901(b) essentially determined whether a particular type of remedy – here, the class action judgment – was available for violation of a New York state-created right. That remedy would be the province of the state legislature, as opposed to the makers of the federal rules.

Consequently, the Supreme Court decided that the class action could be maintained in federal court pursuant to Rule 23, notwithstanding the penalty provision in New York’s Insurance Law. What remains to be seen is where the Shady Grove decision leaves the future of Donnelly Act class actions in federal courts. On the one hand, there are four votes — and those four justices remain on the Court — saying that Section 901(b) is “procedural.” That would appear to end the debate, and Donnelly Act class actions could proceed, just as ones under other New York laws. However, that’s only a plurality and of course, Justice Stevens, who provided the fifth vote, has since retired. Looking to Justice Stevens’ analysis and accounting for the settled issue in New York that the treble damage provision under the Donnelly Act is a “penalty,” perhaps the only avenue for a defendant to argue against the availability of certification for a Donnelly Act class action seeking treble damages and filed in federal court would be to assert that, unlike the Insurance Law penalty provision in Shady Grove, the relationship between Section 901(b) and the Donnelly Act is one in which they are so intertwined as to define the scope of the right. That may indeed be a tough forest to navigate.

Clayworth: The Buck Stops Here Under California’s Cartwright Act

This past summer, the California Supreme Court’s unanimous opinion in Clayworth v. Pfizer, Inc.,[2] involving alleged price-fixing of brand-name pharmaceutical products, decided an issue of first impression: whether under California’s state antitrust law, the Cartwright Act, which authorizes claims by both direct and indirect purchasers, the defendants had a defense that a direct purchaser plaintiff (there, pharmacies) “passed on” any overcharge (there, to consumers). The California Supreme Court, reversing a summary judgment dismissal below, found that generally no pass-on defense was available to a defendant supplier against a direct purchaser.

While that conclusion parallels the unavailability of the pass-on defense to a Sherman Act claim,[3] the circumstances arguably are quite different. The U.S. Supreme Court’s decision predated the flood of “Illinois Brick repealer” statutes beginning in 1977 that permitted indirect purchasers to sue for damages under state law, like the Cartwright Act provision at issue in Clayworth. And although “double recovery” for the same alleged wrong by both direct and indirect purchasers has for years been possible in instances in which both federal and state claims have been filed — a situation that has not appeared to date to trouble the U.S. Supreme Court, as it was a natural outgrowth of its ARC America[4] decision allowing state antitrust statutes to permit suits barred under the federal Sherman Act — the prospect for double exposure under the same statute in the same case may well have been a concern to the California Supreme Court. In addition to the potential exception that may permit a pass-on defense in the case of “cost-plus” contracts (preexisting contracts with fixed markups and quantities), the California high court also stated:

cases may arise where application of the Hanover Shoe rule raises the prospect of duplicative recovery. . . . In such cases, if damages must be allocated among the various levels of injured purchasers, the bar on consideration of pass-on evidence must necessarily be lifted; defendants may assert a pass-on defense as needed to avoid duplication in the recovery of damages.

Unfortunately, the court provided no guidance on determining when the “prospect” of duplicative recovery is raised or how the pass-on defense would be applied (e.g., as a defense or as a damages argument), noting that it “need not address in detail the scope of these two [duplicative recovery and cost-plus] exceptions, for neither applies here.”

DB Investments: Settlor Beware

Those who might have presumed a special deference to class certification in the context of settlement took notice of the July opinion in Sullivan v. DB Investments, Inc.,[5] in which the U.S. Court of Appeals for the Third Circuit set aside a $295 million class settlement in an action alleging a price-fixing conspiracy in the international diamond market led by South Africa’s De Beers companies. The Third Circuit ruled that the district court erred by certifying a nationwide class of indirect purchasers (consumers and jewelry retailers who purchased either polished or rough-cut gems, but not directly from De Beers or its competitors) despite some of those purchasers being precluded from pursuing indirect purchaser claims under the laws of their home states.

The indirect purchasers in DB Investments sought recovery for the same antitrust injury as did direct purchasers, but brought claims under various states’ antitrust, consumer protection, and unjust enrichment laws because they lacked standing to bring a federal antitrust claim for damages under Section 4 of the Clayton Act (and could only seek injunctive relief pursuant to Section 16 of the Clayton Act under the federal antitrust laws).[6] The laws at issue vary from state to state, and not all states permit indirect purchasers to recover damages under their antitrust statutes. Thirty-four objections were filed to the proposed De Beers settlement, arguing, among other things, that the differences among the state statutes were of such magnitude that common questions of law or fact did not predominate with regard to the indirect purchaser settlement class, thus making certification inappropriate under Fed. R. Civ. P. 23(b)(3).

The district court overruled the objections and approved the settlement, placing emphasis on the common issues of fact regarding whether De Beers actually fixed the price of rough gem diamonds and whether such price-fixing caused the plaintiffs to suffer an antitrust injury. The lower court also noted that De Beers had demanded a release of potential damage claims in all 50 states as a condition of the settlement, and therefore certification of a nationwide class was appropriate notwithstanding the limitations in numerous jurisdictions of the right of in direct purchasers to recover for antitrust injuries.

The Third Circuit disagreed, observing that the varying statutes “represent fundamental policy differences among the several states, and they are in consequence as different as it is possible to be, with some states giving substantive antitrust rights to indirect purchasers, other states giving more limited rights, and others denying such rights altogether.”[7] The district court had abused its discretion in certifying the settlement class, according to the Third Circuit decision, and could not place case management issues [as in a settlement] above the more basic question of substantive law.

It is akin to suggesting that a really good cook, by means of superior kitchen management, can make a cake out of nothing. The lack of substantive rights cannot be wished away by the promise of easier litigation management. Proponents of class certification for any purpose, including settlement, retain the burden of demonstrating that all class members share common legal or factual issues and that those issues predominate over matters requiring individual proof.[8]

In August, the Third Circuit granted en banc rehearing in DB Investments, and on November 10, the appellate court issued an order for supplemental briefing that directs the parties to address, among other things: whether “predominance does not examine the ‘claims,’ as such, of all potential plaintiffs, but focuses on the ‘predominance’ of common, versus individualized, issues of fact or law that will be presented by a certain class action, as framed in the complaint, and as anticipated to be tried”; whether, in a settlement class, the district court is required to assure itself that each class member has a valid claim under the applicable substantive law; whether the district court ran afoul of the Rules Enabling Act, or principles of federalism, by effectively granting relief to individuals to whom De Beers had no antitrust liability; and whether De Beers’ decision to enter into a settlement is relevant to the class requirements of commonality and predominance.

In other words, nothing is settled yet in the Third Circuit.

Cappuccitti: Eleventh Circuit Nearly Becomes De-CAFA-Nated

Finally, one of the most interesting and controversial class action decisions of the year was also one of the shortest-lived. On July 19, the U.S. Court of Appeals for the Eleventh Circuit issued a decision that — had it stood — would have had the potential to effectively eliminate the impact of the Class Action Fairness Act of 2005 (CAFA) in courts within its jurisdiction. In the first appellate decision in Cappuccitti v. DirecTV, Inc., the panel held that at least one member of a proposed class in a case filed in federal court under CAFA must individually have a claim exceeding $75,000 in order to satisfy the diversity jurisdiction threshold of 28 U.S.C. § 1332(a).

Briefly, Cappuccitti involved an alleged class action by two Georgia consumers of subscription television services challenging early-termination charges in their subscriber agreements with the defendant, a California corporation. The fees at issue for each of the individual plaintiffs were alleged to be only in the hundreds of dollars (the alleged maximum cancellation penalty was $480), although the damages sought on behalf of the class were allegedly in excess of $5 million. The plaintiffs invoked the jurisdiction of the U.S. District Court for the Northern District of Georgia under 28 U.S.C. § 1332(d)(2), which incorporates CAFA’s provisions allowing for original jurisdiction in federal court over a class action (under Fed. R. Civ. P. 23) of 100 or more class members, so long as there is minimal diversity (a difference in citizenship between any member of a class and any defendant) and an amount in controversy in excess of $5 million (exclusive of interest and costs).

However, on an interlocutory appeal of the district court’s denial of the defendant’s motion to compel arbitration in Cappuccitti, the Eleventh Circuit considered the threshold question, apparently on its own initiative, of whether the district court possessed subject matter jurisdiction under CAFA — and concluded that it did not. According to the appellate court, the plaintiffs had the burden of demonstrating the federal court’s original jurisdiction, and they had failed to do so because no member of the class alleged an individual amount in controversy in excess of $75,000. The panel in Cappuccitti declared that there was no evidence of congressional intent to obviate the $75,000 requirement as to at least one plaintiff in the class, but rather Congress’s primary concern was that some federal courts of appeals were requiring each plaintiff in a class action to demonstrate that it met the diversity threshold.

The Cappuccitti decision could have caused class plaintiffs to seek to thwart original jurisdiction, and thus potentially removal, by filing in state courts and affirmatively pleading that no individual class member has damages exceeding $75,000. Indeed, if Cappuccitti had stood as controlling precedent in the Eleventh Circuit, many, if not most, of the class actions filed under CAFA in the Eleventh Circuit would have been dismissed for lack of subject matter jurisdiction, and refiled in the state courts of Alabama, Florida and Georgia (within the geographic boundaries of the Eleventh Circuit).

That never came to pass. On October 15, after both sides had filed petitions for en banc rehearing, the original Eleventh Circuit panel, construing those petitions to include petitions for panel rehearing, vacated its own earlier opinion. The panel stated that CAFA is a “statuory labyrinth” and that “[s]ubsequent reflection has led us to conclude that our interpretation was incorrect.”[9] In short, the court held, consistent with other circuits, that although the aggregate amount in controversy (i.e., the amount sought on behalf of the putative class as a whole) under CAFA must exceed $5 million, there “is no requirement in a class action brought originally or on removal under CAFA that any individual plaintiff’s claim exceed $75,000.”