Two Recent Supreme Court Cases Sow Confusion About the Standard for Certifying Class Actions


Two recent Supreme Court rulings that were handed down barely one month apart address the same, important topic: Under what circumstances may federal district courts insist on proof of matters that go to the merits of the case as a precondition for allowing the plaintiffs to proceed via a class action, rather than through a series of individual lawsuits?  Although the two rulings are theoretically reconcilable, they adopt very different attitudes towards class action litigation.  Yet surprisingly, the second case—Comcast Corp. v. Behrend—does not even cite the first case—Amgen Inc. v. Connecticut Retirement Plans & Trust Funds.  The likely result will be to sow confusion in the lower federal courts.

What explains the fact that the Supreme Court’s right hand does not seem to know what its left hand is doing?  As I shall explain in this column, two factors appear to account for the mess.

First, despite language in past cases announcing a rule that class certification decisions should be made without regard to the substantive merits of the case, the Supreme Court has now recognized an exception that nearly swallows the rule.  And for good reason: the applicable federal rule of civil procedure itself frequently cannot be applied without reference to the merits of the case.

Second, the notion that the Court’s “left” and “right” hands are acting independently of one another is more than a metaphor in this instance.  The Comcast and Amgen cases both divided the Court on roughly ideological grounds.  The decision pattern reflects conservative hostility towards, and liberal acceptance of, class actions.

The Two Decisions’ Superficial Agreement on the Standard to Be Applied

Federal Rule of Civil Procedure 23 permits plaintiffs (and in circumstances not relevant here, defendants) to litigate as a class of persons, rather than as individuals, so long as the trial judge certifies that the plaintiffs satisfy criteria set forth in the rule.  For some kinds of proposed class actions, those criteria include a requirement that “questions of law or fact common to class members predominate over any questions affecting only individual members” of the class.

How should a trial judge decide whether common class issues predominate?  In the 1974 case of Eisen v. Carlisle & Jacquelin, the Court said that, whatever else he or she does, the district judge lacks “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.”

But questions relevant to class certification sometimes intertwine with the merits of the underlying case.  Hence, in a footnote in the 2011 case of Wal-Mart Stores, Inc. v. Dukes, the Court announced an important exception to the Eisen prohibition.  As restated in the recent Amgen case, under this exception, “[m]erits 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.”

Although none of the Justices appears to disagree with that proposition, there is real disagreement among them over what it means.  To understand the nature of that disagreement, consider what the two most recent cases decided.

The Fraud on the Market Theory in Securities Law and Its Relevance to the Amgen Case’s Class Action Certification

Amgen was a securities fraud case brought by investors who purchased Amgen stock at a time when, they alleged, share prices were artificially inflated as a result of fraudulent statements by the company about the safety of two of its products.  When the truth came to light, the stock price fell.  A successful plaintiff in a securities fraud case must prove that he or she relied on the allegedly fraudulent statement or statements, and one might therefore think that securities fraud cases would never be appropriate for class certification.  After all, each investor will have made the purchase decision based on a different combination of factors.  How then, can common class issues be said to “predominate” in such a case, as required by Rule 23?

The Court’s cases permit class certification because they recognize that in an efficient market, share price reflects all publicly available information.  Thus, even if some particular investor did not know about the allegedly fraudulent statements the company had made, and thus did not directly rely on them in making his or her purchase decision, indirect reliance can be presumed, because the share price reflected the market’s reaction to the allegedly fraudulent statements.  Accordingly, Amgen did not challenge the plaintiffs’claim to have established the element of reliance.

Instead, Amgen argued that class certification should be denied because the putative class representative had not established that the allegedly false statements were material—i.e., that they misstated or omitted information on which prudent investors in fact would rely. The majority in Amgen rejected this argument, however, on the ground that materiality is a merits issue.  All that Rule 23 requires is that common questions predominate, the Court noted, and the question of materiality will be potentially dispositive of every class member’s case: If, in a trial on the merits, the plaintiff class is unable to show that the allegedly fraudulent statements were material, then every member of the class will lose.

The High Court Finds Allegations of Cable Monopolization in the Comcast Case Insufficient to Support a Class Action

Comcast was a case filed on behalf of over two million cable television subscribers in the Philadelphia area, alleging that Comcast had colluded with other cable providers to obtain a regional monopoly.  The case sought damages for the difference between the price that subscribers paid Comcast and what they would have paid in a competitive market.  The plaintiffs offered four mechanisms by which Comcast allegedly leveraged its monopoly to charge higher prices, but the district judge only accepted one of them as potentially valid.  Yet the plaintiffs’ expert calculated the damages that Comcast customers suffered as a result of monopoly pricing based on a model that assumed that all four mechanisms were in play, rather than solely based on the model that the district judge had accepted.  Accordingly, the Supreme Court held that the expert’s testimony—which was the basis for the conclusion that class issues would predominate in the damages portion of the litigation—was inadequate for establishing such predominance, and thus that class certification was improper.

The dissenters in Comcast thought that the high Court never should have agreed to hear the case because it presented a highly artificial issue.  The plaintiffs had (perhaps foolishly) conceded that they needed to establish the predominance of classwide damages issues over individual damages issues.  Yet courts routinely certify cases as class actions for liability only, relegating plaintiff class members to individual litigation when the time comes to calculate damages.

But even assuming the case was properly before the Court, the dissenters thought that the majority’s resolution was wrong. They considered the expert’s reliance on rejected theories of monopolization irrelevant to the commonality question.  Because the expert was comparing prices that were actually paid by customers in areas with more cable competition, the expert’s  model should have produced the same results, regardless of the mechanism by which monopolization enabled the monopolist to charge higher prices.

Whatever one thinks of the substance of this disagreement, it is hard to read Comcast alongside Amgen without thinking that the Court is suffering from judicial multiple personality disorder.  In Amgen the Court bent over backwards to minimize the burden for class certification, while in Comcast the Court applied Rule 23 strictly. What explains the two very different tones that the Court took in the two cases?

The Inevitable Intertwining of Class Certification and Merits Issues

When jurists agree in principle on an unclear rule of law, we can expect to see differences in their application of that rule.  Rule 23 is a case in point.  The Court’s cases say that a prospective class need not prove the merits of its case in order to obtain class certification—except to the extent that the merits are relevant to class status.  The problem is that, by its terms, the predominance requirement of Rule 23 almost always makes the merits relevant to class certification.

Consider a schematic example.  Suppose that you are a judge who is faced with a prospective class action by victims of accidents involving some allegedly defective product.  In order to prevail on the merits of their liability case, the plaintiffs must ultimately prove that the product was defective and that the defect caused the injuries of the various plaintiffs.  The defectiveness question will be common to all cases, but the question of causation typically will not be.  Does the common defectiveness question predominate over the causation question, which will differ for individuals?  Answering that question will require the judge to imagine how the trial will likely go.  What issues will take the most time in discovery and in trial?  Which questions will be easy, and which difficult?  These sorts of second-order questions are not exactly merits questions, but they are closely intertwined with the merits, because you cannot foretell how easy or difficult it will be to establish some point without a view about the merits of that point itself.

Accordingly, merits views will very frequently color the class-certification inquiry.  The Court’s admonition that trial judges may consider merits issues “only to the extent” that doing so is necessary to resolve class certification issues under Rule 23 thus turns out to be not much of a limitation at all, because merits issues very frequently are—or at least very frequently can be seen as—relevant to class certification.

The Ideological Stakes

Given the wiggle room that Rule 23 affords for consideration of the merits, it is not surprising that the Justices’ ideological druthers prove quite predictive of their votes on questions of class certification.  With one exception and one caveat, Amgen and Comcast broke on left/right ideological grounds.

The exception is Chief Justice Roberts.  He was the only Justice who unequivocally voted with the majority in both cases.  In Amgen, he joined the Court’s more liberal members (Justices Ginsburg, Breyer, Sotomayor, and Kagan) to form a majority.  The caveat here is that the Amgen majority also included one other conservative, Justice Alito—but Justice Alito wrote separately to say that he was declining to join a dissent by Justice Thomas (joined by Justice Kennedy) only because the parties had not sought the overruling of a case on which the majority relied.  Justice Scalia penned his own dissent.

Meanwhile, in Comcast the Court broke strictly on ideological lines, with Justice Scalia writing for a 5-4 conservative majority and all of the more liberal Justices dissenting.  That result precisely mirrored the breakdown of the Justices’ votes in another class certification ruling, the 2011 Wal-Mart decision noted above.

In the Wal-Mart case, the Court rejected certification of a nationwide class of female employees of Wal-Mart, all of whom were alleging sex discrimination. Justice Scalia wrote the opinion for a 5-4 conservative majority.

To be sure, the Wal-Mart case did not directly involve the “predominance” question that was at issue in Amgen and Comcast, because the Court addressed different sub-parts of Rule 23, but Wal-Mart did implicate the related question of whether there were any common questions of law or fact.  Writing for the Court’s four more liberal members, Justice Ginsburg accused the majority of importing the predominance requirement into the threshold commonality inquiry.

That accusation is itself telling, because the dueling opinions in Wal-Mart look very much like a disagreement about the merits.  Justice Scalia’s reasoning closely tracked a substantive view of the underlying employment discrimination law—a view rejecting employer liability for a pattern or practice of tolerating a sexist corporate culture.  Justice Ginsburg, in contrast, appeared to endorse such a theory of liability.  The very fact that this substantive-law argument looked to Justice Ginsburg like a battle over the predominance issue shows that predominance itself is merits-laden.

The interpenetration of Rule 23 and merits questions ensures that we can expect more ideologically-divided class action rulings from this Supreme Court.  Liberals tend to view class actions as a useful tool for plaintiffs to invoke in order to hold bad actors accountable, whereas conservatives tend to view them as a means by which greedy lawyers extort exorbitant settlements from innocent corporate actors. The fuzzy line between Rule 23 and the merits thus gives the Justices a double opportunity to vote their policy preferences: once on their views about class actions in general, and then again on their views of the merits of any particular case.  As recent rulings illustrate, the Justices have seized that opportunity enthusiastically.

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