While the ripples from the United States Supreme Court’s 2011 decision in Wal-Mart v. Dukes are still being felt, the Court may make further class action waves this term with its pending decision in Comcast v. Behrend. This paper focuses on what cases like Wal-Mart and Comcast may have in store for the class certification stage on issues such as burden of proof and expert testimony.
I. Consideration of the Merits and the Burden of Proof at Class Certification
A. Can a Court Consider the Merits When Evaluating Rule 23?
The Supreme Court’s 2011 decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), reinforces and makes clear that a “rigorous analysis” of Rule 23’s requirements is the standard for getting a class certified and this “rigorous analysis” “frequently…will entail some overlap with the merits of the plaintiff’s underlying claim.” Id. at 2551. The Court cleared up any confusion from its language in Eisenv. Carlisle & Jacquelin, 417 U.S. 156, 177-78 (1974), that some have contended means any pretrial consideration of the merits is prohibited. The Court described that statement as “the purest dictum,” 131 S.Ct. at 2552 n.6, and the Wal-Mart decision unequivocally holds there is no such prohibition to the extent there is overlap between the merits and the factual and legal issues applicable to any Rule 23 element. Indeed, the Court wrote: “In this case, proof of commonality necessarily overlaps with respondents’ merits contention that Wal-Mart engages in a pattern or practice of discrimination.” Id. at 2552. Still, the Court has not yet endorsed any broader shift towards pretrial evaluation of the merits at class certification, and furthermore in Erica P. John Fund v. Halliburton, 131 S. Ct. 2179 (2011), the Court made clear that when there is no overlap between the merits and Rule 23’s requirements, the lower court should not stray into the merits of the action at class certification.
B. What is the Burden of Proof at Class Certification?
The Wal-Mart Court did not specifically address the required burden of proof for plaintiffs’ contentions at class certification. It did state, however, that the plaintiff “must be prepared to prove that” the requirements of Rule 23(a) were satisfied. Id. at 2551. Since the issue is proving something in a civil proceeding, the Court’s directive logically suggests a preponderance of the evidence standard.
The Circuits are split on this question. On the burden of proof at class certification, the Second, Third, Fifth and, most recently, the Seventh Circuits have clearly placed that burden on the plaintiff and adopted a preponderance of the evidence standard. See In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 320 (Dec. 30, 2008) (rejecting “threshold showing” and requiring the resolution of all factual issues by a preponderance of the evidence standard): Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., 546 F.3d 467, 476 (2d Cir. 2010); Messner v. Northshore University HealthSystem, 669 F.3d 802, 811 (7th Cir. 2012). Other Circuits, however, namely the First, Sixth, and Ninth, have refused to adopt the preponderance standard and have relied on the failure of Wal-Mart to expressly to adopt such a standard to justify their refusal. Thus, last year, in Gooch v. Life Investors Ins. Co. of Am. 672 F.3d 402, 418 (6th Cir. 2012), the Sixth Circuit expressly declined to adopt the preponderance standard, explained that it instead used a “rigorous analysis” standard with regard to Rule 23’s requirements, and added: “We see no reason to superimpose a more specific standard than the Supreme Court . . ” Id. at 418.
In those Circuits endorsing the preponderance standard, the standard’s principal effect is to “frontload” issues (such as damage theories or market efficiency) that once would have only been contested at trial, shifting them up front to the class certification stage. This frontloading benefits defendants who were traditionally reluctant to go to trial in a large class action and so often lost the ability to litigate these issues effectively. For example, complex defenses regarding damages may be over the heads of a typical jury (and may not be sufficiently clear- cut to merit summary judgment), but now defendants may be able to contest these issues at class certification and insist that plaintiffs bear the burden of proof. If this is not yet clearly the law, as discussed below, Comcast could make it so.
II. Will a Daubert Analysis Be Required at Class Certification?
The stage is also set for a battle of experts at class certification. Even Circuits that have not yet endorsed the preponderance standard have required that challenges to a critical expert’s competence be resolved at class certification and have granted appeals under Rule 23(f) to do so. See American Honda Motor Co. v. Allen, 600 F.3d 813 (7th Cir. 2010). Comcast may present the occasion on which the Supreme Court finds that Daubert v. Merrell Dow Pharmaceuticals, Inc. applies to the class certification stage and requires the district court to resolve any challenge to expert testimony relied upon to establish a necessary finding at that stage. The Court may have provided a glimpse into its position on this issue in a passing comment in Wal-Mart. In Wal-Mart, the Ninth Circuit had accepted expert testimony after concluding that a Daubert hearing to determine the admissibility of the testimony for purposes of trial was inappropriate at the class certification stage. The Supreme Court, on the other hand, rejected the expert testimony and in questioning the Ninth Circuit’s position that a Daubert hearing was not appropriate, stated: “[we] doubt that is so.” 131 S.Ct. at 2554.
A. Comcast Case Summary
In this long-running case, plaintiffs brought a class action alleging Comcast violated federal antitrust laws by “clustering” in the Philadelphia area, a practice involving buying other cable providers or swapping subregions with other cable providers in order for Comcast to be the only provider in the area. Behrend v. Comcast Corp., 655 F.3d 182, 185, 187 (3d Cir. 2011). Using these practices, Comcast increased its market share from 24% to 70% from 1998-2007. Id. at 186. Plaintiffs proposed four theories to establish that Comcast’s clustering practice had an anticompetitive effect. The only theory certified by the district court for the class action was that clustering deterred competitors (known as “overbuilders”) from entering the area. Id. at 195. The district court also found that antitrust impact – i.e., that the alleged antitrust violation injured the class members – could be proven with evidence that was common for the entire class. Id. This finding necessarily allowed the court to conclude that common issues predominated over issues unique to individual class members, meaning class certification was appropriate per Fed. R. Civ. P. 23(b)(3). To reach its predominance finding, the district court relied upon the damages model propounded by plaintiffs’ expert that failed to exclude the other three theories of anticompetitive effect rejected by the Court. The court also did not find that plaintiffs’ damages model was admissible under Daubert. Comcast argued the class should not be certified because, inter alia, plaintiffs cannot claim common damages and the proposed damages model is unreliable.
A majority of the Third Circuit panel agreed a Daubert hearing was unnecessary and, in fact, would have impermissibly allowed the court to assess the merits of the case in a mini trial. Id. at 199-200, 204. The Third Circuit therefore affirmed the class certification. The dissent, however, citing Wal-Mart among other authority, opined that the plaintiffs’ damages expert’s testimony should be inadmissible at trial pursuant to Rule 702 and Daubert and thus, “it cannot constitute common evidence of damages.” Id. at 215. In addition to criticizing the proposed damages model’s failure to isolate the damages caused by the lone certified theory, the dissent also queried whether any damages model could prove impact on a common basis given the wide variation in relative market shares across the relevant area. Id. at 216, 223.
Upon granting certiorari, the Supreme Court narrowed the question posed by Comcast, meaning the issue before the Court is: “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.” (emphasis added).
B. Daubert or not Daubert: That is the Question
The Supreme Court heard oral argument in Comcast on November 5, 2012. During oral argument, counsel for both parties devoted great attention to the damages model at issue, with Comcast arguing it was “bunk” and Plaintiffs contending the model would apply regardless of which antitrust theory was certified. Eventually, Justice Sotomayor asked “what rule we [should] announce” so that courts know what to do when faced with challenges to expert reports on damages at class certification hearings. (Oral Argument Tr. at 22:5-11.)
Setting aside what the analysis should be called (Daubert or not), Comcast argued the analysis must look at “fit” and “reliability,” consistent with Comcast’s position that plaintiffs’ model was so unreliable as to not be usable at all. (Id. at 20:23-21:2, 23:12-18.) Plaintiffs, on the other hand, pressed for a standard where the district court is persuaded “[m]ore likely than not that [the damages model] will be admissible at trial, and it will meet the standard that’s required to get to a verdict.” (Id. at 44:23-25.) This latter point caused the Justices to wonder if a court could ever be “persuaded” by evidence that was unreliable or not probative and whether a report could even be probative if it did not satisfy Daubert. (Id. at 26-30, 48-22-25.) There was also discussion of a “conditional” approach, described by Justice Scalia as one where the district court focuses on Daubert’s reliability prong at the certification stage, but defers any Daubert motion until later. (Id. at 50:9-22.)
C. What Does This All Mean?
Though Comcast is an antitrust case, this decision will cut across all class litigation given its potential to have a significant impact on the level of scrutiny given to expert testimony on damages at the class certification stage. The possibility that the Supreme Court will decide to require a full-blown Daubert analysis has understandably attracted the attention of numerous class action constituencies. Indeed, seven amicus briefs, which include several trade groups, advocated for the application of a Daubert test (i.e. a rigorous review of admissible evidence) in order to prevent plaintiffs from “blackmailing” defendants into settlement – a concern many feel results from class certification. Arguing against the “blackmail” effect were two amici who not only denied the presence of such an effect, but argued that the imposition of a Daubert-style requirement would make it more difficult to file antitrust actions, thereby diminishing the enforcement of federal antitrust laws.
For the future, if Comcast makes it more difficult to prove damages through common proof on a class-wide basis, one response of plaintiffs may be to seek partial certification and later prove damages in individual trials.
The bottom line is that if the Court were to now say that plaintiffs always have to prove damages on a classwide basis in order to win certification, that wave will reach the shores of all areas of class litigation.