The United States Supreme Court’s decision last week in Comcast Corp. v. Behrend, No. 11-864, was a profoundly significant and positive development for companies facing class actions. In holding that a plaintiff seeking certification of a damages class under Rule 23(b)(3) must establish, through “evidentiary proof,” that damages can be measured on a classwide basis, Comcast imposes a bar to certification in cases where individual damage calculations are required. Comcast also makes clear that the trial court must probe the merits of the claim at the certification stage to ensure that the method for measuring damages fits the underlying substantive legal theories remaining in the case and is not arbitrary.

Class action defendants know all too well that the certification of a class often unfairly pressures them to settle meritless cases to avoid the risk of losing a huge verdict at trial. The Court’s decision will make it substantially more difficult for many purported classes to obtain certification, and will render vulnerable many classes that have already been certified.

BACKGROUND

In Comcast, plaintiffs brought federal antitrust claims, alleging that defendants engaged in conduct excluding and preventing competition by monopolizing Philadelphia’s cable market through “anticompetitive clustering.” See Behrend v. Comcast Corp., 655 F.3d 182, 187 (3d Cir. 2011). Although plaintiffs offered four theories of class-wide antitrust impact, the district court rejected all but one of these. Id. at 187-88. The only theory the district court did not reject was that defendants deterred competition from “overbuilders” that would have extended services into areas serviced by defendants but for the alleged misconduct. Id. The court certified a class of more than two million current and former subscribers, and defendants appealed under Rule 23(f). Id. at 188.

The Third Circuit affirmed in a divided decision, concluding in part that plaintiffs “provided a common methodology to measure and quantify damages on a class-wide basis.” Id. at 201-07. The court rejected defendants’ arguments that plaintiffs’ damages model could not support class certification because it was based in part on theories of antitrust impact that the district court rejected: “[a]t the class certification stage we do not require that Plaintiffs tie each theory of antitrust impact to an exact calculation of damages, but instead that they assure us that if they can prove antitrust impact, the resulting damages are capable of measurement and will not require labyrinthine individual calculations.” Id. at 203, 205-06.

THE SUPREME COURT’S HOLDING

The Supreme Court reversed. In an opinion authored by Justice Scalia and joined by Chief Justice Roberts and Justices Kennedy, Thomas and Alito, the Court began by reaffirming the standards that apply when determining whether Rule 23’s requirements are satisfied. Comcast, slip op. at 5-7. In accord with its 2011 decision in Wal-Mart v. Dukes, the Court explained that a party seeking class certification must “be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, typicality of claims or defenses, and adequacy of representation, as required by Rule 23(a)” and that courts must undertake a “rigorous analysis” that will “frequently entail overlap with the merits” when determining whether Rule 23(a)’s requirements are met. Id. at 5-6 (citing Wal- Mart v. Dukes, 564 U.S. ____ (2011) (citation and internal quotations omitted)).

The Court then held that “[t]he same analytical principles govern Rule 23(b).” Id. at 6. Thus, the plaintiff seeking certification “must also satisfy through evidentiary proof at least one of the provisions of Rule 23(b).” Id. at 5-6 (emphasis added). According to the Court, Rule 23(b)(3) (the provision in issue in the case), which requires a court to find that “the questions of law or fact common to class members predominate over any questions affecting only individual members,” is an “adventuresome innovation” that has criteria “even more demanding than Rule 23(a).” Id. at 6.

The Court continued by holding that a party seeking class certification must offer a class-wide means for calculating damages. Id. at 7. According to the Court, the Third Circuit erred when it failed to consider the sufficiency of plaintiffs’ damages proof simply because defendants’ criticisms overlapped with the merits: “[b]y refusing to entertain arguments against respondents’ 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.” Id. at 6-7. The Court then explained that “under the proper standard for evaluating certification, respondents’ model falls far short of establishing that damages are capable of measurement on a classwide basis.” Id. at 7. The Court thus held that “[w]ithout presenting another methodology, respondents cannot show Rule 23(b)(3) predominance” because “[q]uestions of individual damage calculations will inevitably overwhelm questions common to the class.” Id.

In reaching its decision, the Court emphasized that plaintiffs’ damages model did not match their theory of liability because the model measured damages resulting from all four original theories of antitrust impact and not only the overbuilder theory: “It follows that a 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 of measurement across the entire class for purposes of Rule 23(b)(3).” Id. at 7-8. The Court explained that the Third Circuit erred by failing to require such a relationship: “[u]nder [the Third Circuit’s] logic, at the class-certification stage any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be. Such a proposition would reduce Rule 23(b)(3)’s predominance requirement to a nullity.” Id. at 8.

IMPLICATIONS

Comcast will have significant implications not only for antitrust class actions, but all class actions in which plaintiffs seek class certification of damages claims under Rule 23(b)(3). The decision confirms that the party seeking class certification must offer “evidentiary proof” to demonstrate that the requirements of Rule 23(a) and Rule 23(b) are satisfied and that the court must conduct a rigorous analysis when evaluating that evidence. Moreover, the decision establishes that individual issues of damages can defeat class certification where those issues are not amenable to class-wide resolution. In the past, some courts have held that individual issues related to the amount of damages should not preclude class certification, and arguments that the amount of damages raises individual issues defeating class certification have been rejected.The Court’s decision in Comcast should reverse this trend, thereby making it significantly more difficult for plaintiffs to obtain certification of damages classes.

The Court also made clear that trial courts must take a hard look at expert evidence to (among other things) determine whether the expert sufficiently tied his damages analysis to the theory of liability accepted by the court, because otherwise the methodology impermissibly “identifies damages that are not the result of the wrong.” Id. at 10. This will present another significant hurdle for plaintiffs’ lawyers to overcome.

Footnote six of the opinion potentially adds yet another hurdle to certification. In it, the Court stated that “even if the model had idenified subscribers who paid more solely because of the deterrence of overbuilding” – i.e., even if the model had properly tied the damages analysis to the theory of liability – it still might be insufficient to establish the “requisite commonality of damages unless it plausibly showed” that the impact of the wrongful conduct was the same for all class members.

Congress’s 2005 enactment of the Class Action Fairness Act (CAFA) magnifies the impact Comcast will have. By greatly expanding federal diversity jurisdiction over class actions, CAFA has succeeded in its goal of diverting to federal court an enormous number of class actions that otherwise would have been heard in state courts, many of which impose less rigorous class action requirements. Absent CAFA, the plaintiffs’ class action bar would respond to Comcast simply by filing cases in state court. That option is largely no longer open to them.

The significance of the Court’s decision can be measured by the remarkable dissent it provoked. Authored by Justices Ginsburg and Breyer and joined by Justices Sotomayor and Kagan, the dissent tries to deny the existence of the Court’s main holding, and alternatively purports to eliminate any precedential effect of the opinion. It first states that the decision “breaks no new ground on the standard for certifying a class action” and “should not be read to require, as a prerequisite to certification, that damages attributable to a classwide injury be measurable ‘on a classwide basis.’” Dissent at 3. But proof that “damages attributable to a classwide injury [are] measurable on a classwide basis” is precisely what the decision requires, and the dissent offers no suggestion as to how else the decision may reasonably be read. It next states that “[t]he Court’s ruling is good for this day and this case only” (id. at 5) – a pronouncement that dissenters obviously have no authority to make. Nor do the dissenting Justices explain why, if the opinion breaks “no new ground,” they embark on such a highly unusual attempt to limit its impact.

Nevertheless, the plaintiffs’ class action bar will be sure to rely on the dissent to argue that the majority did not mean what it said, that courts should not follow Comcast, and that, as the dissent maintains, “[r]ecognition that individual damages calculations do not preclude class certification under Rule 23(b)(3) is well nigh universal.” Id. at 4. But to the extent this proposition was ever correct, it certainly is not correct now – not when the highest court in the land has just recognized the exact opposite.