Decision is a Positive Development for Management in the Defense of Class Action Litigation
 

In Comcast Corp. v. Behrend, No. 11-864, decided on March 27, 2013, the U.S. Supreme Court again rejected certification of a very large plaintiff class. In so doing, the Court held that the predominance requirement in Federal Rule of Civil Procedure 23(b)(3) requires that damages must be capable of measurement on a class-wide basis and be specifically tied to the theory of liability underlying the case. The Court further held that class certification inquiries require a rigorous analysis, which may include an analysis of the merits of the underlying claim, in order to satisfy the prerequisites of Rule 23(b)(3).

Background

In this antitrust matter, Comcast Corporation, a provider of cable-television services to residential and commercial customers throughout the country, engaged in a series of swap transactions in which it traded its subscribers in certain markets to other cable television providers in return for their subscribers in the Philadelphia market. This enabled Comcast to aggregate a concentration of 60 percent of the Philadelphia cable market. Comcast's Philadelphia market subscribers filed a class action antitrust suit claiming that Comcast's swap agreements violated the Sherman Act by monopolizing or attempting to monopolize cable services within the Philadelphia market. They argued that Comcast’s clustering harmed subscribers there by eliminating competition and keeping prices for cable services above competitive levels.

The plaintiffs advanced four theories of antitrust impact, only one of which survived, namely that Comcast’s actions reduced the level of competition from "overbuilders," i.e., companies that build competing cable networks in areas where an incumbent cable company already operates. The district court found validity in the overbuilder theory because Comcast's anticompetitive clustering conduct effectively deterred the entry of overbuilders in the Philadelphia market. The district court found that damages resulting from the overbuilder-deterrence impact could be calculated on a class-wide basis, which was established by expert testimony; however, the model did not isolate damages by theory and therefore might include damages attributable to one or more of the three rejected theories. Regardless, the district court certified the class, Comcast appealed and the U.S. Court of Appeals for the Third Circuit affirmed.

The Third Circuit rejected Comcast’s argument attacking the damages model because it failed to account for damages resulting solely from overbuilder deterrence, the only theory of liability remaining in the case. The court noted that an attack on the merits of the damages model was inappropriate at the class certification stage and further noted that an exact calculation of damages was not required. Rather, the Third Circuit said, the plaintiffs need only assure the court that "if they prove antitrust impact, the resulting damages are capable of measurement" on a class-wide, as opposed to an individualized, basis.

The Supreme Court Decision

The Supreme Court reversed the Third Circuit, finding that a "rigorous analysis" of the prerequisites of Rule 23(b) will frequently entail "overlap with the merits of the plaintiff’s underlying claim." Accordingly, the Court found it incumbent upon the district court to entertain arguments against the damages model that bore directly on the propriety of class certification and noted that failure to do so would allow plaintiffs to present a general damages theory, with nearly endless permutations, instead of one tailored to the common claims of all the class members.

Applying what it characterized as a "straightforward application of class-certification principles," the Court required that any damages model must measure only those damages attributable to the theory of liability. If the model fails to meet this standard, it cannot establish that damages are susceptible of measurement across the entire class. For purposes of Rule 23(b)(3), courts must conduct a "rigorous analysis" to determine the efficacy of the damages model, even if that requires an inquiry into the merits of the underlying claim. Anything less, the Court indicated, would reduce Rule 23(b)(3)’s predominance requirement to a nullity.

Practical Implications and Open Questions

Proponents of a class action must not only satisfy the numerosity, commonality, typicality and representativeness prerequisites of Rule 23(a), but they must also satisfy one of three additional requirements in Rule 23(b). In Comcast, the plaintiffs failed to bring their purported class within Rule 23(b)(3), which requires that "the questions of law or fact common to class members predominate over any questions affecting only individual members" and that the class action will most "fairly and efficiently adjudicate the controversy." Taken together, the Comcast decision — and its predecessor in the Supreme Court, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), an employment discrimination case — signal rough sledding for mega-class actions like Comcast's and Walmart's proffered classes, respectively, of two million and one and a half million members. The common thread in both cases is the Supreme Court's insistence on rigorous analysis of both the Rule 23(a) and (b) prerequisites at the class certification stage of the litigation, even where such analysis involves getting into the merits of the case, and its rejection of expert-developed models as insufficient in reliably demonstrating uniform class-wide applicability.

In Wal-Mart, where the commonality requirement of Rule 23(a)(2) was at issue, the Court held that the class members must be shown to "have suffered the same injury," which it further refined as a demonstration that the claims depend upon a common contention whose resolution is central to each claim and will, therefore, necessarily resolve the litigation for all class members. Putting it another way, the Court said that what matters "'is not the raising of common 'questions' . . . but rather the capacity of a classwide proceeding to generate common answers apt to" resolve the litigation. This demands a "rigorous analysis" that will frequently overlap, the Court noted, with the merits of the underlying claim. Significantly, in Wal-Mart, the Court also held that backpay claims could not be pursued under Rule 23(b)(2), and were available only under 23(b)(3).

In Comcast, where the predominance requirement of Rule 23(b)(3) was at issue, the Court accepted without issue the District Court's finding that satisfaction of the predominance requirement (i.e., that the commonality of law or fact issues predominate over individual class member issues) would necessitate demonstrating both that proof of the injury could be established at trial through evidence common to the class and "that the damages resulting from that injury are measurable "'on a class-wide basis'" through use of a '"common methodology.'" Ultimately, the Court found that the expert model developed for proving damages was premised upon the four theories of antitrust impact originally advanced in the litigation, and not the single overbuilder theory that remained in the case after the other three theories had been rejected.

The Supreme Court's tightening of Rule 23(b)(3) requirements in Comcast, coupled with Wal-Mart's restricting backpay claims solely to Rule 23(b)(3), should ease considerably the threat to employers from potential class action mega-judgments.

The question remains as to whether Daubert hearings on expert testimony, which are intended to test the validity of the opinions of experts, will necessarily become part of class certification proceedings. Although the Supreme Court did not decide this issue in either Wal-Mart or Comcast, it expressed skepticism in Wal-Mart at the district court's conclusion that Daubert did not apply to expert testimony at the class certification stage of the litigation. This skepticism and the Court's requirement of a rigorous analysis of both Rule 23(a) and (b) requirements that will frequently overlap with the underlying merits of the case suggest that the Court would, if faced squarely with the issue, hold that Daubert hearings must be part of the certification proceeding in appropriate circumstances.

It appears that the combination of Wal-Mart and Comcast will dampen the appetites of the plaintiffs' bar to pursue class actions for damages on a nationwide basis in all but the rarest of circumstances. Indeed, Comcast also indicates that even regionally based class action litigation may be problematical. Perhaps the stringent requirements of these cases will force the plaintiffs' class action bar to think in even smaller terms, e.g., individual employment facilities or several locally geographic employment facilities under common management control. In any event, Comcast, like Wal-Mart, is a positive development for management in the defense of class action litigation.