August 03, 2009
In what has already become an influential and highly-cited decision, the Third Circuit issued a sweeping opinion announcing clear standards for class certification, including the requirement that District Courts resolve expert disputes related to the class certification inquiry before certifying a class. In re Hydrogen Peroxide Litig., 552 F. 3d 305 (3d Cir. 2008) likely will have significant impact on all class action litigation far beyond the antitrust context of the case, including in employment discrimination class claims. Just last month, the Third Circuit applied Hydrogen Peroxide in reversing a District Court’s granting of class certification in an employment discrimination claim brought under the Americans with Disabilities Act. See Hohider v. United Parcel Service, Inc., No. 07-4588, 2009 WL 2183267, at *19 (3rd Cir. July, 23, 2009). This opinion may be given even greater because it was authored by Chief Judge Anthony Scirica, who has been extensively involved with the reform of Rule 23 of the Federal Rules of Civil Procedure.
District Court’s Holding
In Hydrogen Peroxide direct purchasers of hydrogen peroxide and related chemicals brought an antitrust action against chemical manufacturers alleging that the manufacturers conspired to fix prices from 1994 through 2005. After extensive discovery and a class certification hearing that included conflicting expert testimony, the District Court certified the class under Rule 23(b)(3) of the Federal Rules of Civil Procedure. See In re Hydrogen Peroxide Antitrust Litig., 240 F.R.D. 163 (E.D. Pa. 2007).
Class Certification Arguments
Defendants focused their opposition to class certification on Rule 23(b)(3)’s requirements that questions of law or fact common to the class members predominate and that the proposed class action be superior to other available methods of adjudication. Specifically defendants’ expert opined that the fact of damage, i.e., impact, could not be proven using evidence common to all or virtually all class members. The plaintiffs countered that impact was provable through common evidence of a conspiracy and common proof based on generalized industry characteristics.
The plaintiffs’ expert opined that his “market analysis” suggested that the conditions in the hydrogen peroxide industry favored a conspiracy and that the “pricing structure” exhibited by the hydrogen peroxide market showed that prices charged by manufacturers moved similarly over time. See Hydrogen Peroxide, 552 F.3d at 312-13. The plaintiffs’ expert relied on list price increase announcements and average transaction prices to analyze the market’s “pricing structure” and did not take into account individual transaction prices for any given purchaser. The plaintiffs’ expert also did not provide any particular formula or process which the plaintiffs could use to prove common impact, but rather offered a generalized opinion that generally recognized benchmark and regression analyses were two approaches that could be used to provide an estimate of damages on a class-wide basis. See id. at 313.
Defendants challenged plaintiffs’ expert’s market analysis and argued, through their own expert, that common proof was not available to the class members. See id. at 313-14. The defendants’ expert presented empirical analyses of transaction prices and determined that list price increases did not always result in higher transaction prices and that the plaintiffs’ use of average prices masked the reality that, for many customers, prices stayed the same or decreased during the relevant time period. Id. The defendants’ expert opined that the statistical methods proposed by plaintiffs to demonstrate common impact were not feasible, and that an individualized inquiry was required to determine whether any particular class member paid an artificially inflated price. Id.
District Court’s Reasoning
The District Court concluded that the predominance requirement was met because plaintiffs’ “market analysis” and “pricing structure analysis” were each sufficient at the class certification stage. Id. at 315. The District Court held that it was sufficient that plaintiffs’ expert proposed reliable methods for proving impact and damages; it did not matter that the expert had not completed any benchmark or regression analyses, and the District Court would not require plaintiffs to demonstrate at the class certification stage that either method would actually work. Id.
The Court refused to “weigh the relative credibility of the parties’ experts” and did not address defendants’ expert’s report in determining whether the Rule 23 requirements had been met, stating, “So long as plaintiffs’ demonstrate their intention to prove a significant portion of their case through factual evidence and legal arguments common to all class members, that will now suffice.” Id. at 321-22. The District Court elaborated that with respect to the predominance requirement, “[p]laintiffs need only make a threshold showing that the element of impact will predominantly involve generalized issues of proof, rather than questions which are particular to each member of the plaintiff class.” Id.
The defendants sought an interlocutory appeal, arguing, inter alia, that the District Court had applied too lenient a standard of proof and had failed to meaningfully consider defendants’ expert’s views while crediting the plaintiffs’ expert. The Third Circuit granted interlocutory review to consider “the standards a district court applies when deciding whether to certify a class.” Id. at 306.
Third Circuit’s Holding
The Third Circuit held that the District Court erred by, inter alia, (1) failing to meaningfully consider the views of defendants’ expert while crediting plaintiffs’ expert and (2) applying too lenient a standard of proof for class certification. Id. at 312.
In its holding, the Third Circuit articulated three standards district courts must apply when considering class certification motions: (1) a 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; (2) 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, and factual determinations supporting Rule 23 requirements must be based on a preponderance of the evidence; and (3) a court must resolve all factual and legal disputes relevant to class certification, even if they overlap with the merits – including disputes touching on elements of the cause of action. Id. at 307.
Battle of the Experts
The Court unambiguously stated that the District Court’s assumption that it was not permitted to weigh the opinions of the parties’ experts in deciding whether the requirements of Rule 23 had been met was erroneous. Id. at 322. The Court held that expert opinions with respect to class certification, like any other matter relevant to a Rule 23 determination, must be subjected to rigorous analysis. Id. at 323. A district court should not uncritically accept an expert opinion merely because the expert passes muster under a Daubert analysis, but rather, the district court must determine whether it is persuaded by the expert testimony or not, even if that inquiry implicates the credibility of the experts. Id. at 323-24.
In sum, the Court held that “[w]eighing conflicting expert testimony at the class certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands.” Id.
Preponderance of the Evidence
The Circuit Court reiterated that “[c]lass certification is proper only ‘if the trial court is satisfied, after a rigorous analysis, that the prerequisites’ of Rule 23 are met.” Id. at 309 (quoting Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161 (1982)). The Court further noted that Rule 23’s requirements are not “mere pleading rules” and a trial court must “delve beyond the pleadings to determine whether the requirements for class certification are satisfied.” Id. at 316 (internal quotations omitted). The Court elaborated that factual determinations necessary to make Rule 23 findings must be supported by a preponderance of the evidence: “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.” Id. at 320.
The Court observed that some uncertainty may have ensued because of the Supreme Court’s directive that “there is nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.” Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974). However, the Court explained that Eisen is best understood to preclude only a merits inquiry that is not necessary to determine a Rule 23 requirement. 552 F.3d at 317. As such, an “overlap between a class certification requirement and the merits of a claim is no reason to decline to resolve relevant disputes when necessary to determine whether a class certification requirement is met.” Id. at 316. The Court reiterated that a “contested requirement is not forfeited in favor of the party seeking certification merely because it is similar or even identical to one normally decided by the trier of fact.” Id. at 317.
The Court rejected the District Court’s holding that plaintiffs’ intention to prove impact through common evidence was sufficient, stating that “a party’s assurance to the court that it intends or plans to meet the [Rule 23] requirements is insufficient.” It criticized the District Court’s use of the term “threshold showing,” since it could signify that the burden on the party seeking certification is a lenient one, which it is not. Id. at 321.
Because the plaintiffs’ burden was to demonstrate that the element of impact was capable of proof at trial through evidence common to the class rather than individual to its members, the Court stated that deciding this issue “calls for the district court’s rigorous assessment of the available evidence and the method or methods by which plaintiffs propose to use the evidence to prove impact at trial.” Id. at 311-12.
Impact of this Decision
The Hydrogen Peroxide decision is likely to impact federal courts’ class action jurisprudence nationwide because the author of the opinion, Chief Judge Anthony J. Scirica, oversaw extensive revisions to Rule 23 as chair of the Standing Committee on Rules of Practice and Procedure. The decision relied on the 2003 Amendments to Rule 23, which eliminated language that class certification “may be conditional” and could be granted on a tentative basis, and altered the language regarding the timing of class certification decisions to allow for more thorough evaluations of the Rule 23 factors and to make clear that Rule 23 does not require or encourage premature certification decisions.
The decision is also consistent with a growing trend in circuit court class action holdings that demand resolution of conflicting expert reports and testimony before class certification. See, e.g., In re Initial Public Offering Sec. Litig., 471 F.3d 24 (2d Cir. 2006); West v. Prudential Sec., Inc., 282 F.3d 935 (7th Cir. 2002). The principal case at odds with this trend is the 9th Circuit’s decision in Dukes v. Wal-Mart, Inc., 474 F.3d 1214 (9th Cir. 2007), which is currently under en banc review.
Implications For Litigants
The Third Circuit’s decision establishes a clear standard for district courts to apply when ruling on contested class certification motions, and the standard enunciated is one likely to be welcomed by class action defendants, as it emphasizes the “rigorous analysis” that district courts must conduct when determining whether all the requirements of Rule 23 have been met. The opinion makes clear that its holding applies across all substantive areas and is not limited to antitrust actions. Hydrogen Peroxide, 552 F. 3d at 321.
While the standard generally should be beneficial to defendants, the opinion also is likely to result in increased discovery prior to class certification and correspondingly, motions for class certification will likely occur later in the litigation. Defendants will be hard-pressed to limit class discovery given the broad inquiry required of district courts, and they may not wish to do so given the arguments they may want to put forth in opposing plaintiffs’ class certification motions.
District courts also are more likely to consider the need to hold evidentiary hearings to resolve factual disputes. With an expansive inquiry at the class certification stage, litigants should approach these evidentiary hearings as they would a trial on the merits. Given the possibility of an interlocutory appeal under Rule 23(f), parties should ensure that the record contains all of their evidence on disputed Rule 23 requirements.
As the Third Circuit noted, an increasing number of district courts have begun requiring the submission of a “trial plan” that describes the issues likely to be presented at trial and assists a court in determining whether they are susceptible to class-wide proof. Id. at 319. As more courts follow the standard enunciated by the Third Circuit, the number of district courts requiring trial plans will likely grow as well. Defendants will benefit significantly from courts’ insistence on specific recitals as to how plaintiffs’ intend to prove their cases using common evidence.
Other aspects of the decision also will benefit class action defendants, particularly the requirement that district courts must resolve a “battle of the experts,” as it will no longer be sufficient for plaintiffs to put forward a competent expert who merely passes muster under Daubert. Rather, plaintiffs’ experts will now need to persuade courts that their opinions are more sound than those provided by defendants’ experts.
In sum, the Third Circuit’s decision reinforces the growing consensus that the scope of the class certification inquiry is broad and requires district courts to conduct a thorough examination of whether each of the Rule 23 requirements have been met.
Reprinted with permission from August 3, 2009 edition of the New York Law Journal © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com or visit www.almreprints.com.