The Third Circuit recently affirmed the denial of class certification in a suit alleging that a law school made misrepresentations about the employment status of its graduates, thereby inducing students to pay inflated tuition in violation of the New Jersey and Delaware consumer fraud statutes. Much of the decision centered on damages; plaintiffs claimed they could show damages on a class-wide basis by estimating the amount by which tuition was inflated due to the misleading statistics. The district court denied class certification, finding, in part, that plaintiffs could not meet the predominance requirement of Federal Rule of Civil Procedure 23(b)(3). In particular, the district court held that plaintiffs had not shown that damages could be proven by common evidence in light of the fact that students experienced different employment outcomes.
On appeal, the Third Circuit panel first clarified that the district court had not erred in scrutinizing plaintiffs’ evidence regarding damages, citing both Supreme Court and Third Circuit precedent requiring courts to engage in a rigorous analysis of Rule 23’s requirements before certifying a class, even when this analysis overlaps with the merits. The Third Circuit panel then considered whether plaintiffs’ “price inflation” damages theory met the ascertainable loss and causation requisites to prove consumer fraud under the relevant state consumer fraud statutes. In essence, plaintiffs claimed they did not have to show that the school’s misrepresentations induced each putative class member to pay an inflated tuition; rather, by showing the existence of an efficient market for law school tuition, they could prove that the misrepresentations allowed the school to charge everyone inflated rates.
The Third Circuit agreed with the district court that plaintiffs’ price inflation damages theory was akin to a “fraud-on-the-market” theory, which enables a party to invoke a presumption of reliance (i.e. that the misrepresentation affected price, the purchaser relied on price to determine value, and such reliance was reasonable). The panel opinion noted that “recognizing ‘price inflation’ as a ‘cause’ of ‘ascertainable loss’ is essentially the same as extending the fraud-on-the-market presumption to all consumer-fraud cases.” The panel noted that – like the fraud-on-the-market theory – the price-inflation theory of damages has been rejected by courts in New Jersey and Delaware outside the context of securities fraud.
Because plaintiffs had not shown they could prove an ascertainable loss causally connected to the school’s alleged misrepresentations on a class-wide basis, the Third Circuit panel affirmed the district court’s holding that individual issues would predominate and the class could not be certified.