For the second time in two weeks, the Supreme Court delivered a win to class-action defendants. Two weeks ago, in Standard Fire Insurance Co. v. Knowles, No 11-1450, 568 U.S. ___ (March 19, 2013), the Court rejected a named plaintiff’s attempt to thwart removal to federal court by stipulating to damages below the Class Action Fairness Act’s $5 million jurisdictional threshold. Last week, in Comcast Corp. v. Behrend, No. 11-864, 569 U.S. ____ (March 27, 2013), the Court (in a 5-4 decision) made clear that the “rigorous analysis” first called for in General Telephone Co. v. Falcon, 457 U.S. 187 (1982) and reaffirmed in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) applies to damages issues, even when those issues overlap substantially (or even completely) with the merits.
Behrend likely will reshape lower courts’ treatment of damages issues at class certification. As the dissenting justices in Behrend noted, the need for individual damages calculations has seldom deterred courts from certifying a class under Rule 23(b)(3).1 Behrend should change that: By requiring courts to determine at class certification whether a damages model fits the contours of the plaintiffs’ liability theory, the decision demands a level of scrutiny at the class stage that many district courts have routinely avoided. After Behrend, we expect that district courts will be more willing to reject speculative or unreasonable damages models at class certification and will demand proof (not just a promise) that damages are susceptible to classwide determination.
That heightened scrutiny probably will have the most immediate impact in antitrust class actions like Behrend that involve complex damages models, but it should also apply to the spectrum of class cases. Nothing in the majority’s decision suggests that Behrend applies only to antitrust actions.
The lower courts’ decisions in Behrend: No touching the merits of plaintiffs’ damages model.
In 2003, a group of Comcast subscribers from the Philadelphia area sued Comcast under the Sherman Act alleging that the cable company’s expansion efforts in the area harmed competition and resulted in artificially inflated prices for Comcast cable services. The plaintiffs sought damages for those purported overcharges.
In every antitrust case, the plaintiff must prove “antitrust injury”—which requires a showing that the defendant’s conduct harmed competition and that the plaintiff suffered damages (in Behrend, higher prices) flowing from that anticompetitive harm.2 In many class actions—including in antitrust class actions—courts deciding the certification question have required evidence showing that the fact of injury is susceptible to classwide proof but have noted that variations in the amount of individual damages are not a bar to class certification. As the Behrend dissenters put it, “[r]ecognition that individual damages calculations do not preclude class certification under Rule 23(b)(3) is well nigh universal.”3
The Behrend plaintiffs proposed four different theories of antitrust injury, but the district court held that only one was susceptible to classwide proof and rejected the others.4 To establish damages on their one surviving theory of antitrust injury, the plaintiffs relied solely on an expert damages model that purported to calculate overcharges arising from all four theories of impact—including the three that the district court said were not susceptible to common proof. The expert acknowledged that his damages model didn’t isolate damages resulting from any one theory of impact. The district court nevertheless held that damages resulting from the remaining theory of impact could be calculated on a classwide basis, so it certified a class of 2 million Comcast subscribers.
A divided panel of the Third Circuit affirmed. On appeal, Comcast contended that the class shouldn’t have been certified because, among other things, the plaintiffs’ damages model failed to isolate damages resulting from the only theory of antitrust injury susceptible to classwide proof. The appellate court refused to consider Comcast’s argument because, in its view, an “attac[k] on the merits of the methodology [had] no place in the class certification inquiry.”5 According to the court, the plaintiffs “were not required to tie each theory of antitrust impact to an exact calculation of damages” at class certification.6
The Supreme Court’s rule: No skipping damages issues simply because they overlap with the merits.
In a 5-4 decision (Justice Scalia for the majority), the Supreme Court reversed. Emphasizing (as it had in Dukes) that the Rule 23 analysis “will frequently entail overlap with the merits of the plaintiff’s underlying claim,”7 the Court held that “by refusing to entertain arguments against [the plaintiffs’] damages model that bore on the propriety of class certification, the Court of Appeals ran afoul of our precedents requiring precisely that inquiry.”8 Because the plaintiffs’ model did not even purport to tie damages to the remaining theory of antitrust injury, the Court reasoned, it could “not possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3).”9 Explaining that speculative or unreasonable damages calculations have no place in the Rule 23 analysis, the Court rejected the notion that “any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be.”10 That approach, the Court concluded, “would reduce Rule 23(b)(3)’s predominance requirement to a nullity.”11
Justices Ginsburg and Breyer authored a joint dissent in which Justices Sotomayor and Kagan joined. Accusing the majority of deciding a different question than the one presented to the Court, the dissenters emphasized through citations to cases, treatises, and the advisory notes to Rule 23 that individual damages calculations do not normally preclude class certification.12 The dissenters also criticized the majority’s deconstruction of the plaintiffs’ damages model, contending that the plaintiffs’ expert didn’t have to “show precisely how Comcast’s conduct led to higher prices in the Philadelphia area” but rather “that Comcast’s conduct brought about higher prices.”13
Merits, merits, and more merits: Three takeaways.
Time, of course, will tell, but we see three things coming out of Behrend:
1. Using Eisen to dodge the merits is (or at least should be) a thing of the past.
For years, many district courts wanting to avoid a “rigorous analysis” under Rule 23 misconstrued the Supreme Court’s decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), to say that a merits inquiry is inappropriate at class certification. In Dukes, the Court specifically repudiated lower courts’ use of Eisen to avoid merits issues at class certification.14 But old habits (like old cases) die hard: Even after Dukes, courts have continued to cite Eisen to avoid the merits at class certification.15
Behrend should put an end to the Eisen zombie march. The Behrend Court strongly reaffirmed Dukes’s teaching that the Rule 23 analysis frequently will entail a merits inquiry—you could say that the Court took an “enough already!” tone with lower courts that continue to shirk a merits analysis at the class stage. But more than that, the Court demonstrated its teaching by undertaking a searching, summary-judgment-like inquiry into the plaintiffs’ damages model. Lower courts will be hard-pressed to ignore that example.
2. Damages issues could (and probably will) become a new battleground at class certification.
The Behrend dissenters were right: Before Behrend, individual damages calculations often have not precluded class certification.16 Indeed, it had become commonplace for courts to make that very point in the face of challenges to class damages models.
That may change in Behrend’s wake. With the renewed call for a searching inquiry into damages issues at the certification stage, we expect that many of the speculative or unreasonable damages models and formulas that survived cursory review before Behrend will wither under the rigorous analysis that Behrend demands. That change should occur across the spectrum of class cases. Behrend’s impact may be seen most immediately in antitrust class actions—where plaintiffs often propose damages models that are loosely tethered to (or incongruent with) their liability theory—but the decision likely will have cascading effects outside the antitrust context. Many other areas of law present complex damages issues akin to those in many antitrust cases, and Behrend will shape the law in those areas, too.
More to the point, the principle that a plaintiff’s damages model must match their liability theory is a universal one, so courts will have a tough time confining Behrend to antitrust cases.
3. It will become commonplace for defendants to pair a summary judgment or Daubert motion on damages issues with their class certification opposition.
We also believe that Behrend’s call for a summary-judgment-type inquiry under Rule 23 into the reasonableness of a plaintiff’s damages model will lead to more summary judgment and Daubert motions at the certification stage. Following Dukes—in which the Court essentially assumed the propriety of full-blown Daubert challenges at class certification—defendants increasingly have added Daubert and summary judgment motions to their class-opposition toolkit. Even though Behrend didn’t deliver a definitive announcement about Daubert at class certification, the Court’s analysis was in many respects Daubert-like—testing as it did the fit between the expert’s damages model and the facts of the case.
In all events, we think that, after Behrend, pairing Daubert and summary judgment motions with class briefs will become par for the course, with many parties pressing “Behrend challenges” to expert reports that don’t fit the facts on the ground. This should also accelerate the trend toward merging “class” and “merits” discovery.