Two recent decisions from the U.S. Supreme Court may give employers additional arguments in defending class action litigation. Lower courts must conduct a “rigorous analysis” to determine whether damages can be proven on a class-wide basis, the U.S. Supreme Court has reaffirmed in a 5-4 decision. The Court thereby imposed a high standard on plaintiffs in demonstrating that their claims are appropriate for class action litigation. Comcast Corp. v. Behrend, No. 11-864 (Mar. 27, 2013). In the second decision, the high court ruled unanimously that class action plaintiffs cannot evade a procedural requirement that claims exceeding $5 million be adjudicated in federal court by binding a not-yet-certified class to a damages cap of less than that amount. Standard Fire Insurance Co. v. Knowles, No. 11-1450 (Mar. 19, 2013).
Rigorous Analysis Requirement
In Comcast Corp. v. Behrend, the plaintiff-respondents filed a class action antitrust suit on behalf of more than 2 million cable-television subscribers. They sought to certify the class of subscribers under Rule 23(b)(3) of the Federal Rules of Civil Procedure, which permits class certification where “questions of law or fact common to class members predominate over any questions affecting only individual members.”
According to the district court, to meet Rule 23(b)(3)’s predominance requirement, the plaintiffs must show that individual injury resulting from the alleged antitrust violation was “capable of proof at trial through evidence that [was] common to the class rather than individual to its members” and that damages were measurable “on a class-wide basis” through use of a “common methodology.” The district court ultimately certified the class, and a divided panel of the U.S. Court of Appeals for the Third Circuit affirmed. The U.S. Supreme Court granted review.
Justice Antonin Scalia, who authored the Court’s decision in Wal-Mart Stores, Inc. v. Dukes (Supreme Court Reverses Certification of Nationwide Class of 1.5 Million Female Workers), wrote on behalf of the majority. He reiterated the key holding of Dukes and faulted the Third Circuit for not adhering to precedent when it “refus[ed] 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.” Before a class can be certified under Rule 23, he explained, the lower court must conduct a rigorous analysis of any models proffered by the plaintiffs claiming damages are calculable on a class-wide basis, even if this inquiry touches on the merits of the case. Further, at the class certification stage, Justice Scalia wrote, damage calculations “need not be exact,” although the rigorous analysis of Rule 23 requires the model used to determine such damages be consistent with the theory of liability.
The four dissenting justices stressed that “[t]he Court’s ruling is good for this day and case only,” that “the opinion breaks no new ground on the standard for certifying a class action under [Rule] 23(b)(3),” and that “it remains the ‘black letter rule’ that a class may obtain certification under Rule 23(b)(3) when liability questions common to the class predominate over damages questions unique to class members.” According to the dissent, it is recognized “well nigh universal[ly]” that “individual damages calculations do not preclude class certification under Rule 23(b)(3).”
Applicability of Behrend to employment class actions remains to be seen, but the Court’s decision makes clear that lower courts cannot ignore the message in Dukes that class actions are the exception to individual litigation “rule” and that Rule 23 demands a “rigorous analysis.”
Amount in Controversy
The named plaintiff in Standard Fire Insurance Co. v. Knowles filed a class action in Arkansas state court alleging the defendant underpaid “hundreds, and possibly thousands” of policyholders in their homeowner’s insurance loss payments. In an affidavit, the plaintiff said he would not seek damages for the class in excess of $5 million.
The defendant removed the case to federal court under the Class Action Fairness Act of 2005 (CAFA), which gives federal courts jurisdiction over class actions where the matter in controversy exceeds $5 million. CAFA provides that, in determining the amount in controversy, a court must aggregate the claims of individual class members.
In this case, the district court remanded the case to state court even though it found the amount in controversy would have exceeded CAFA’s threshold without the plaintiff’s stipulation. The U.S. Court of Appeals for the Eighth Circuit refused to hear the case on appeal, and the U.S. Supreme Court granted review to resolve a split among the circuit courts on the issue.
According to a unanimous U.S. Supreme Court, the plaintiff did not have authority to bind a class that had not yet been certified to a predetermined cap on potential recovery. A nonbinding stipulation to limit damages, the Court said, could not serve to defeat federal jurisdiction under the CAFA.
“To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective: ensuring ‘Federal court consideration of interstate cases of national importance,’” wrote Justice Stephen Breyer on behalf of the Court. “It would also have the effect of allowing the subdivision of a $100 million action into 21 just-below-$5 million state-court actions,” he continued, “simply by including nonbinding stipulations.”
Courts cannot “rubber stamp” certification or jurisdiction-related questions. Employers should consider all available procedural arguments to obtain the most favorable forum for resolving class action claims.