The U.S. Court of Appeals for the Third Circuit recently affirmed a denial of class certification, holding that the plaintiffs’ theory was insufficiently supported by class-wide evidence to demonstrate the fact of damages whether on the issues of “ascertainable loss” or “causal relationship,” and failed to establish that common questions would predominate over individual questions.

A copy of the opinion in Harnish v. Widener Univ. Sch. of Law is available at: Link to Opinion.

A group of former law students filed a class action against their law school, alleging that the school violated the New Jersey Consumer Fraud Act (NJCFA) and the Delaware Consumer Fraud Act (DCFA) by allegedly intentionally publishing and marketing misleading employment statistics of its graduates. More specifically, the students alleged that between 2005 and 2011, the school reported that 90-97 percent of its students were employed after graduation, when in fact, only 50-70 percent of graduates during that time were actually employed in full-time legal positions, which the school knew.

The law students alleged that publishing these misleading statistics enabled the school to charge its students inflated tuition – that is, higher tuition than what the school would have been able to charge had accurate employment statistics been published instead. The students sought damages equal to the amount of the alleged tuition overpayments.

The district court below denied class certification to the students, holding that the students could not meet Federal Rule of Civil Procedure 23(b)(3)’s requirement that common questions predominate over individual questions because they had not shown that they could prove the students’ damages by common evidence. The district court noted that the students’ proposed theory of damages relied on a “fraud-on-the-market” theory, which state courts had consistently rejected outside of the federal securities fraud context.

The students filed for interlocutory review of the denial of class certification under FRCP 23(f), which the Third Circuit granted.

As you may recall, an NJCFA/DCFA claim consists of “(1) an unlawful practice, (2) an ascertainable loss, and (3) a causal relationship between the unlawful conduct and the ascertainable loss.” See Gonzalez v. Wilshire Credit Corp., 25 A.3d 1103, 1115 (N.J. 2011).

The Third Circuit addressed three alleged errors raised by the students:

First, the students argued that the district court below applied an improperly burdensome legal standard under FRCP 23(b)(3) by scrutinizing their class-wide evidence prior to full merits discovery.

The Third Circuit began its analysis by finding that, contrary to the students’ argument, it was entirely appropriate for the district court below to examine the students’ theory of damages and proof supporting it, since ascertainable loss and a causal relationship are core elements of liability under the NJCFA/DCFA.

The Court noted that the district court below was properly concerned with the students’ ability to demonstrate the fact of damage from the “ascertainable loss” and “causal relationship” elements class-wide.

Next, the students alleged that the district court erroneously attributed significance to the fact that some graduates do obtain full-time legal employment, supposedly ignoring that the students’ actual theory of damages – i.e., that all putative class members were charged inflated tuition, regardless of employment outcomes — is unrelated to the students’ actual employment outcomes.

The Third Circuit agreed with the students to the extent that the district court discussed the full-time legal employment of some graduates in reaching its decision below, but found that this error was harmless. The Court noted that the inflated tuition argument was not adequately supported by class-wide evidence, precluding class-wide certification.

Finally, the students alleged that the district court below erred in equating their theory of damages with the non-cognizable “fraud-on-the-market” theory, contending that they had sufficient evidence to support a non-reliance-based inflated tuition theory.

Here, the Third Circuit agreed with the students that “fraud-on-the-market” was not the correct terminology for the students’ theory; rather, it belongs to the “price-inflation” category of theories.

However, the Court noted, like the fraud-on-the-market theory, the price-inflation theory has been consistently rejected by New Jersey and Delaware state courts outside of the federal securities fraud context. These state courts have held that the ascertainable loss and causal relationship elements of the NJCFA and DCFA are not met by a price inflation theory. See, e.g., Int’l Union of Operating Eng’rs Local No. 68 Welfare Fund v. Merck & Co., Inc., 192 N.J. 372, 389, 929 A.2d 1076 (N.J. 2007) (per curiam); Teamsters Local 237 Welfare Fund v. Astra Zeneca Pharm. LP, 136 A.3d 688 (Del. 2016).

In Merck, consumers were allegedly overcharged for prescription medications. There, the New Jersey Supreme Court rejected the consumers’ attempt “to prove only that the price charged for Vioxx was higher than it should have been as a result of defendant’s fraudulent marketing campaign, and… thereby to be relieved of the usual requirements of proving an ascertainable loss.” See Int’l Union of Operating Eng’rs Local No. 68 Welfare Fund v. Merck & Co., Inc., 192 N.J. at 1088. There, the rejection of the consumers’ price inflation theory removed it as a potential common question entirely, leading the New Jersey Supreme Court to hold that individualized questions about how the diverse group of class members reacted to the alleged fraud predominated instead, precluding class certification. Id. at 1087-1088.

Thus, the Third Circuit held that the students in the case at hand failed to meet the predominance requirement of Rule 23(b)(3) because the only class-wide evidence of damages offered by the students supported the non-cognizable theory of price inflation, and as such, the students were properly denied class certification.

Accordingly, the district court’s denial of class certification was affirmed.