The U.S. Court of Appeals for the Third Circuit recently issued an important decision clarifying the legal standards a district court must apply when deciding whether to certify a class. Written by Chief Judge Scirica, the decision in In re Hydrogen Peroxide Antitrust Litigation (3d Cir. Dec. 30, 2008) vacates a class certification order and addresses "three key aspects of class certification procedure." The court summarized its holdings in these three areas as follows:
- "First, the decision to certify a class calls for findings by the court, not merely a 'threshold showing' by a party, that each requirement of Rule 23 is met. Factual determinations supporting Rule 23 findings must be made by a preponderance of the evidence."
- "Second, the court must resolve all factual disputes relevant to class certification, even if they overlap with the merits - including disputes touching on elements of the cause of action."
- "Third, the court's obligation to consider all relevant evidence and arguments extends to expert testimony, whether offered by a party seeking class certification or by a party opposing it."
Standard of Proof. The court emphasized that class certification requires a "rigorous analysis" and a "thorough examination of the factual and legal allegations" before a district court can certify a class. In the court's view, this "[c]areful application of Rule 23" is necessary and appropriate given the "pivotal status of class certification in large-scale litigation" and the "decisive effect" it can have on the litigation irrespective of the merits.
The court made clear that "the requirements set out in Rule 23 are not mere pleading rules," and the idea that a district court should accept the allegations of the complaint as true has no place in a class certification analysis. Rather, a district court must make explicit "findings" that each element of Rule 23 has been met before a class can be certified. The court instructed that a "threshold showing" was "an inadequate and improper standard," and that this phrase should not be used because "'threshold showing' could signify, incorrectly, that the burden on the party seeking certification is a lenient one (such as a prima facie showing or a burden of production) or that the party seeking certification receives deference or a presumption in its favor."
Instead, agreeing with the Second Circuit, the court stated that "factual determinations necessary to make Rule 23 findings must be made by a preponderance of the evidence." (citing Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., (2d Cir. 2008)). "In other words, to certify a class the district court must find that the evidence more likely than not establishes each fact necessary to meet the requirements of Rule 23." Retreating from a passage in Eisenberg v. Gagnon (3d Cir. 1985), where another panel of the court had stated, "in a 'doubtful' case" a district court "should err, if at all, in favor of certification," the Third Circuit in Hydrogen Peroxide held that such statements "invite error" and that "the court should not suppress 'doubt' as to whether a Rule 23 requirement is met." The court distinguished Eisenberg as predating the 2003 amendments to Rule 23, which "reject tentative decisions on certification and encourage development of a record sufficient for informed analysis."
Rule 23 Issues Which Overlap With The Merits. Citing precedent from the First, Second, Fourth, Fifth, and Seventh Circuits, the Third Circuit thoroughly rejected the idea that a district court should not resolve issues at the class certification stage that might overlap with the merits of the case. The court explained that the Supreme Court's decision in Eisen v. Carlisle & Jacquelin was not to the contrary, and that Eisen is "best understood to preclude only a merits inquiry that is not necessary to determine a Rule 23 requirement." (Emphasis added). Indeed, the court instructed that a district court has an obligation to resolve disputed issues of fact or law relating to class certification requirements, regardless of whether those issues overlap with the merits of the case. The court held, "because each requirement of Rule 23 must be met, a district court errs as a matter of law when it fails to resolve a genuine legal or factual dispute relevant to determining the requirements."
Expert Opinions. The Third Circuit extended this principle to disputes involving expert testimony, holding that, although a district court may "find it unnecessary to consider certain expert opinion with respect to a certification requirement ... it may not decline to resolve a genuine legal or factual dispute because of concern for an overlap with the merits." The panel held that, even if expert testimony is not excluded under Daubert or for any other reason, "opinion testimony should not be uncritically accepted as establishing a Rule 23 requirement." In this respect, the court concluded it was error for the district court to "have assumed it was barred from weighing [defendants'] expert opinion against [plaintiffs'] for the purpose of deciding whether the requirements of Rule 23 had been met."
With this decision, the Third Circuit now clearly stands with a growing number of federal circuit courts which insist that Rule 23 class certification requirements be applied with an evenhandedness that observes a defendant's due process rights.