the Amgen and Comcast Decisions Navigating the Issues of Predominance and the Role of the Merits Inquiry at Certification

Transcription

1 Presenting a live 90 minute webinar with interactive Q&A Class Action Certification Following the Amgen and Comcast Decisions Navigating the Issues of Predominance and the Role of the Merits Inquiry at Certification TUESDAY, APRIL 16, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Deborah H. Renner, Partner, Baker & Hostetler, New York Andrew J. Trask, Counsel, McGuire Woods, London, England The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Class Certification After Amgen and Comcast Strafford Webinar April 16, 2013 Deborah H. Renner

6 Introduction The Supreme Court s recent Amgen and Comcast decisions take different approaches to predominance and on where to draw the line between class and merits issues. Reflect struggle between liberals l and conservatives on ease of class certification. Reflect continued difficulty in drawing the line between class and merits issues in the wake of Eisen. 6

7 Amgen: Background Connecticut Retirement alleged that Amgen artificially inflated the market price for its stock by making misrepresentations regarding the safety of two Amgen products. The district court certified ed a money damages ages class allowing Connecticut Retirement to establish through its pleading alone that the Rule 23(b)(3) predominance criterion was met as to classwide reliance through the Basic fraud-on-the-market presumption. 7

8 Amgen: Background The district court held that Connecticut Retirement could invoke Basic s presumption of reliance because to trigger the presumption, Connecticut Retirement t need only establish that t an efficient i market exists. The district court held that: [T]he inquiries Defendants urge the Court to make do not concern the requirements of Rule 23, but instead concern the merits of the case. 8

9 Amgen: Background On appeal, the Ninth Circuit held that Connecticut Retirement had only to allege materiality with sufficient plausibility to withstand a 12(b)(6) motion. Materiality was thus viewed as a merits issue: materiality is an element of the merits of [a] securities fraud claim, whereas other Basic requirements are not. Because materiality need not be proven at the class stage, rebuttal evidence was not allowed. 9

10 Amgen: Background The Circuits had been split on whether e materiality was a class or merits issue. The Ninth Circuit in Amgen and the Seventh Circuit in Schleicher v. Wendt, 618 F.3d 679 (7 th Cir. 2010), had held that materiality was a merits question. 10

11 Amgen: Background The Second and Fifth Circuits had held ed that plaintiff must demonstrate that the alleged misrepresentation is material before a class may be certified. In re Salomon Analyst Metromedia Litig.,, 544 F.3d 474 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc.,, 487 F.3d 261 (5 th Cir. 2007). 11

12 Amgen: Background The Third Circuit gave defendant e da the opportunity to rebut the fraud-on-the-market presumption, p by demonstrating a lack of materiality at the class phase. In re DVI, Inc. Sec. Litig.,, 639 F.3d 623 (3d Cir. 2011). 12

13 Amgen: Decision The Supreme e Court granted certiorari to address two issues: (1) whether a Rule 10b- 5 plaintiff was required to present proof of materiality for a class to be certified based on the fraud-on-the-market presumption; p and (2) whether the court must also consider a defendant s rebuttal evidence on the same issue before certifying a class. 13

14 Amgen: Decision Justice Ginsburg wrote the opinion of the Court, holding: Because materiality is judged according to an objective standard, the materiality of fa Amgen s alleged misrepresentations and omissions is a question common to all members of the class.... The alleged misrepresentations and omissions, whether material or immaterial, would be equally so for all investors composing the class. 14

15 Amgen: Decision The Court admitted that it has come out differently on different aspects of the Basic factors, e.g., whether a named plaintiff must establish that he or she executed trades at the relevant time. Justice Ginsburg reasoned that that aspect of the Basic presumption goes to the Rule 23(a)(3) and (4) criteria of typicality and adequacy of representation, making them preliminary inquiries appropriate for the certification decision. 15

16 Amgen: Decision As to a defendant s e da ability to rebut materiality allegations at the class phase, the Court held that: just as a plaintiff class s inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class. 16

17 Amgen: Decision Speaking to the Eisen question, Justice Ginsburg reasoned: Rule 23 grants courts no license to engage g in free-ranging g merits inquiries at the certification stage. Merits questions may be considered to the extent but only to the extent that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied. 17

18 Amgen: Decision Justice Thomas filed a dissent in which he interpreted Basic as requiring proof of materiality in order to get the benefit of the fraud-on-the-market presumption at the class certification state. He reasoned that, without the presumption of reliance, questions of reliance are individualized: Without materiality, there is no fraud-on-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible. 18

19 Amgen: Decision Justice Scalia, meanwhile, in his own dissent, reasoned that the Basic decision itself applied to class certification and that it was thus improper to confine it to the merits stage of the action. Moreover, e he urged that allowing a plaintiff to meet the Basic presumption purely through a pleading is contrary to the rigorous analysis called for in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011) and previous Supreme Court cases. 19

20 Comcast Corp. v. Behrend Andrew Trask McGuireWoods London

21 Behrend v. Comcast in a Nutshell Antitrust t case; alleged that t Comcast had monopolized markets for cable services in Philadelphia area. Four different theories of liability: (1) Clustering: Allowed Comcast to withhold local sports programming, reducing competition from satellite. (2) Overbuilding: discouraged competing cable networks. (3) Reduced benchmark: Less competition means less price comparison. (4) Clustering: increased Comcast's s bargaining power relative to content providers 21

22 District court certified the overbuilder theory Only theory capable of classwide proof. Problem: Plaintiffs had only one expert, John McClave. His report calculated damages ($875,576,662) based on all four theories. Admitted he could not isolate damages from overbuilding. 22

23 Predominance post-dukes Difference between predominance and commonality unclear: The Court blends Rule 23(a)(2)'s threshold criterion with the more Wal-Mart Stores, Inc. v. Dukes, 131 S. demanding criteria of Rule Ct , 2566 (2011) 23(b)(3). (Ginsburg, J. dissenting). The Court's emphasis on differences between class members mimics the Rule 23(b)(3) inquiry into whether common questions predominate over individual issues. 23

24 Third Circuit on predominance Predominance tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation. It is a test readily met in certain cases alleging consumer or securities fraud or violations of the antitrust t laws, but a court may not relax its certification analysis as to each element of Rule 23. To assess whether common or individual issues predominate, a district court must examine the nature of the evidence and formulate some prediction as to how specific issues will play out. Behrend v. Comcast Corp.,, 655 F.3d 182, 191 (3d Cir. 2011) (emphases added, internal citations & quotations omitted). 24

25 Third Circuit viewed expert reports as preliminary [A]lthough the Supreme Court recently hinted that Daubert may apply for evaluating expert testimony at the class certification stage, [w]e understand the Court's observation to require a district court to evaluate whether an expert is presenting a model which could evolve to become admissible evidence, and not requiring a district court to determine if a model is perfect at the certification stage. stage [w]e understand the Behrend v. Comcast Corp., 655 F.3d 182, 205 n.13 (3d Cir. 2011) (emphasis added, internal quotation omitted). 25

26 The Supreme Court granted certiorari to examine the role of experts Whether a district i t court may certify a class action without t resolving whether the plaintiff class had introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a classwide basis. Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *10 n.4 (Mar. 27, 2013). 26

27 But Comcast had not objected to the admissibility ibilit of the damages model on Daubert grounds. 27

28 So the question became role of predominance. The same analytical principles govern Rule 23(b). If anything, Rule 23(b)(3) s predominance criterion is even more demanding than Rule 23(a). That explains Congress's addition of procedural safeguards for (b)(3) class members beyond those provided for (b)(1) or (b)(2) class members (e.g., an opportunity to opt out), and the court's duty to take a "'close look'" at whether common questions predominate over individual ones. Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *13 (Mar. 27, 2013). 28

29 Evaluation of expert testimony part of predominance inquiry "t "at the class-certification stage (as at trial), any model supporting a plaintiff s damages case must be consistent with its liability case, particularly with respect to the alleged anticompetitive i i effect of the violation." i Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *15 (Mar. 27, 2013). 29

30 Evaluation of expert testimony part of predominance inquiry But such assurance is not provided d by a methodology that t identifies damages that are not the result of the wrong. Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *19 (Mar. 27, 2013). 30

31 Evaluation of expert testimony part of predominance inquiry "The Court of Appeals simply concluded d that t respondents provided a method to measure and quantify damages on a classwide basis, finding it unnecessary to decide whether the methodology [was] a just and reasonable inference or speculative. Under that logic, at the class-certification stage any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be. Such a proposition would reduce Rule 23(b)(3) s predominance requirement to a nullity." Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *16 (Mar. 27, 2013). 31

32 Class action story has to make sense Can t pull bait & switch on theories. Close enough is not good enough. The District i t Court and the Court of Appeals saw no need for respondents to "tie each theory of antitrust impact" to a calculation of damages.. That, they said, would involve consideration of the "merits" having "no place in the class certification inquiry. That reasoning flatly contradicts our cases requiring a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim. Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *15-16 (Mar. 27, 2013). 32

33 Damages alone can predominate Without t presenting another methodology, respondents cannot show Rule 23(b)(3) predominance: Questions of individual damage calculations will inevitably overwhelm questions common to the class. Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *14 (Mar. 27, 2013). 33

34 Conclusion: The Predominance Dialogue Amgen and Comcast show the battle on the Court between liberals and conservatives on the ease of class certification played out visà-vis the predominance requirement of Rule 23(b)(3). The debate started with Wal-Mart and continues to be played out in Amgen and Comcast. 34

35 Conclusion: The Predominance Dialogue Wal-Mart was a watershed decision in a number of ways, including the way in which the Court evaluated the commonality requirement of Rule 23(a). Justice Scalia held in Wal-Mart that t for commonality, there must be a class based on a common contention, and that common contention must drive the resolution of the class-wide issue that is central to the claims at stake. 35

36 Conclusion: The Predominance Dialogue In Amgen, as Justice Kagan put it at argument: for materiality, the class wins or loses together. If it s material, it s material as to everybody. If it s not material, it s not material as to everybody. And where that s the case, it seems to me that the Wal-Mart test, whichis, when whenyouruleonthe on issue, do you rule on each of the claims in one stroke? The answer to that is yes. This use of Wal-Mart is echoed in the Amgen decision itself. 36

37 Conclusion: The Predominance Dialogue In Comcast, Justice Scalia strikes back, again strengthening the predominance requirement:... it is clear that, under the proper p standard for evaluating certification, respondents model falls short of establishing that damages are capable of measurement on a classwide basis.... respondents cannot show Rule 23(b)(3) predominance: Questions of individual dua damage age calculations cu a will inevitably overwhelm questions common to the class. 37

38 Conclusion: The Predominance Dialogue In dissent, Justice Ginsburg attempts to confine Comcast to the antitrust context. The dissent reasons that individualized damages historically have not led to the defeat of class certification. 38

39 Conclusion: The Predominance Dialogue Where are we now on predominance? Commonality versus predominance? Are Amgen and/or Comcast confined to securities and antitrust areas, respectively? 39

40 Chicago Cincinnati Cleveland Columbus Costa Mesa Denver Houston Los Angeles New York Orlando Washington, DC Baker & Hostetler LLP 40

41 The Role of the Merits Inquiry in Predominance

42 Behrend has already affected two cases RBS Citizens v. Ross (7th Cir.) Court granted cert, vacated, & remanded for decision in light of Comcast v. Behrend. (2013 U.S. LEXIS 2640 (Apr. 1, 2013)) Whirlpool Corp. v. Glazer (6th Cir.) Court granted cert, vacated, & remanded for decision in light of Comcast v. Behrend. (2013 U.S. LEXIS 2695 (Apr. 1, 2013)) 42

43 RBS Citizens v. Ross Plaintiffs alleged they were denied overtime pay. 7th Cir. affirmed class certification; held that allegation of no-overtime policy would predominate over any individualized reasons to deny overtime. Cert petition sought review on: (1) Whether it is consistent with Dukes to hold a defendant to a Rule 23(b)(3) class action cannot raise individualized affirmative defenses if the class seeks only monetary relief; and (2) whether a court can conclude commonality is satisfied when a class claims denial of overtime pay, without resolving whether dissimilarities would preclude class from establishing class-wide liability. 43

44 Whirlpool Corp. v. Glazer Plaintiffs alleged that Duet washing machines got moldy, ruining clothes & making homes smell. 6th Cir. affirmed class certification; held that district court did not have to investigate proximate cause of moldiness, and that unharmed class members might have overpayment theory. Cert petition i sought review on: (1) Whether a class may be certified under Rule 23(b)(3) even though most class members were not harmed and could not sue; (2) whether a class may be certified without resolving factual disputes that bear directly on the requirements of Rule 23; and (3) whether a class may be certified without determining whether factual dissimilarities among putative class members give rise to individualized issues that predominate over any common issues. 44

45 Court struggled with role of merits inquiry Amgen argument: If you have the same question, then maybe we shouldn't have this fraud-on-the-market theory. Because the whole purpose of it is to assume that the whole class was damaged because you can rely on an efficient market. But you can only rely on an efficient market where there has been a material misrepresentation. Justice Scalia (emphasis added; ellipses for readability) 45

46 Court struggled with role of merits inquiry Behrend argument: the judge doesn't really have a gatekeeper function here. There is no jury. And if the judge admits the evidence and if it turns out that that doesn't meet the standard of reliability, then he can exclude it. I don't see why the judge has to say: All right, now first I'm going to do Daubert, and next I'm going to do whether this is reliable. This is just a magic words approach, it seems to me. Justice Kennedy (emphasis added; ellipses for readability) 46

47 Likely areas of effect Mt Materiality ilit shifts inquiry i to other stages of litigation Experts more rigor from judges, regardless of label Damages more concern about individualized proof 47

48 Predominance standard More demanding di than commonality Common answers must outweigh individualized answers Have to go into merits to determine whether issues can be decided on classwide basis Shouldn t decide whether the claim is still valid 48

49 Materiality is no longer a certification issue Can still be decided: During a motion to dismiss (12(b)(6) standard, with some assistance from the PSLRA, which requires plaintiffs to plead specific facts supporting loss causation) During a motion for summary judgment ( no contested material facts ) During trial ( preponderance of the evidence ) Finding of no materiality = finding of no liability Contrast with, e.g., market efficiency. Can still have fraud in a non-efficient market, but can t presume reliance. 49

50 Experts at certification The debate Behrend was supposed to decide: Seventh Circuit: Daubert inquiry required at certification. Am. Honda Motor Co., Inc. v. Allen, 600 F.3d 813 (7th Cir. 2010) ( the district i t court must perform a full Daubert analysis before certifying the class if the situation warrants ). Fourth Circuit: No Daubert inquiry required. Brown v. Nucor Corp., 576 F.3d 149, 156 (4th Cir. 2009) ( evidence need not be conclusive to be probative, and even evidence that is of relatively weak probative value may be useful in meeting the commonality requirement ). 50

51 Supreme Court has dropped strong hints [A]t the class-certification stage (as at trial), any model supporting a plaintiff's damages case must be consistent with its liability case, particularly with respect to the alleged anticompetitive i i effect of the violation. i And for purposes of Rule 23, courts must conduct a "'rigorous analysis'" to determine whether that is so. Comcast Corp. v. Behrend, 2013 U.S. LEXIS 2544, *15 (Mar. 27, 2013) (internal quotations omitted). 51

52 Supreme Court has dropped strong hints The District i t Court concluded d that t Daubert did not apply to expert testimony at the certification stage of class-action proceedings. We doubt that is so Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, (2011). 52

53 Role of damages at certification Plaintiffs have long argued that individualized damages should not matter to certification: Courts have routinely rejected this argument, concluding, as we have in previous cases, that the need for individualized proof of damages alone will not df defeat class certification. i Gunnells v. Healthplan Servs. Inc., 348 F.3d 417, 429 (4th Cir. 2003). A particularly significant aspect of the Rule 23(b)(3) approach is the recognition that individual damages questions do not preclude a Rule 23(b)(3) class action when the issue of liability is common to the class. 6 ALBA CONTE & HERBERT B. NEWBERG, NEWBERG ON CLASS ACTIONS 18:27 (4th ed. 2002). 53

54 The problem of zero damages. If no damages, plaintiffs have not proven an essential element of liability. So when variations in damages include no damages, really a question of liability. 54

55 Damages more rhetorical than analytical If justifying i certification: Variations are damages-related and so inconsequential [T]o the extent that TPCM's causation argument is that individual inquiry is necessary to establish whether the collapse of the Plan caused Plaintiffs any damages, this is precisely the same argument made by almost all defendants in mass tort cases: determining damages will require an individualized inquiry. Gunnells v. Healthplan Servs. Inc., 348 F.3d 417, 429 (4th Cir. 2003). 55

56 Damages more rhetorical than analytical If justifying no certification Variations are liability-oriented. [W]here the issue of damages and impact does not lend itself to such a mechanical calculation, but requires separate minitrials of an overwhelming large number of individual claims, courts have found that the staggering problems of logistics thus created make (the) damage aspect of the case predominate, and render the case unmanageable as a class action. Windham v. Am. Brands, Inc., 565 F.2d 59, 69 (4th Cir.1977). Quoted in Gunnells dissent. 56

57 Damages have long been part of certification debate In this case, proof of injury, or whether plaintiffs have been harmed, is bound up in proof of damages, or by how much plaintiffs have been harmed. McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 227 (2d Cir. 2008). In antitrust class actions, vague dividing line between liability and damages, meaning individualized id d damages questions can pose real problem. Alabama v. Blue Bird Body Co., 573 F.2d 309, 318 (5th Cir. 1978). 57

58 Other areas for debate Adequacy Standing can you decide standing? Unique defenses. Predominance Must each class member have a colorable legal claim? Sullivan v. DB Investments, Inc., 667 F.3d 273, 297 (3d Cir. 2011). 58