March 27, 2013

Supreme Court Requires Close Examination of Class-Wide Damages Proof

Earlier today, the U.S. Supreme Court handed down its ruling in Comcast Corp. v. Behrend, No. 11-864. In a decision written by Justice Scalia, and joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito, the Court ruled that where a party seeks to prove harm to a class via a class-wide damages model, the proponent of the model must demonstrate that the model actually measures the harm from the challenged conduct, even if that analysis overlaps with the merits of the action. The Court also found that the damages model at issue did not meet this requirement because it did not measure damages resulting from the plaintiffs' theory of liability.

The plaintiffs filed antitrust claims, alleging that Comcast violated the Sherman Act in four different ways, which gave Comcast monopoly power that allowed it to overcharge cable subscribers in the Philadelphia area. The plaintiffs' expert provided a model to show that damages could be measured on a class-wide basis, which compared the prices paid by Philadelphia-area subscribers to prices paid by subscribers in areas that were not affected by any of the four types of allegedly unlawful conduct.

The District Court held that only one of the four theories could be proved on a class-wide basis, and allowed the putative class action to proceed on that basis alone. Comcast argued that this ruling rendered the plaintiffs' damages model useless, because it measured the harm caused by all four types of allegedly unlawful action, not just the one that remained in the case. The District Court nevertheless found the plaintiffs' damages model sufficient, and certified the class. The Third Circuit affirmed, finding that at the class certification stage, the plaintiffs did not need to prove that their damages methodology was closely tailored to their liability theory, even though that type of proof would be required at trial.

The Supreme Court reversed, finding that the class should not have been certified. It initially underscored several important principles of class action law that the Court has clarified in other recent decisions, namely, that a party seeking class certification must “affirmatively demonstrate” that Rule 23 is satisfied based on a “rigorous analysis” of the record, which analysis may “overlap with the merits of the plaintiff’s underlying claim.”  The Court then said that “a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to [the] theory” of liability on which the plaintiffs were proceeding.  It criticized the lower courts for failing to require that the plaintiffs’ damages model be limited to measuring the harm from the conduct that the plaintiffs were challenging, and it held that those courts were wrong to have refrained from conducting this analysis out of a concern about prematurely addressing the merits of the underlying dispute.  The Court said that this reluctance “flatly contradicts our cases requiring a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim.”

Next, the Court applied these principles to the antitrust damages model at issue. The Court held that the model did not “measure damages resulting from the particular antitrust injury on which [Comcast’s] liability in this action is premised” because the model “assumed the validity of all four theories of antitrust impact initially advanced by” the plaintiffs, even though the District Court had accepted only one such theory.  This disconnect between the plaintiffs' sole theory of liability and what the damages model measured was, in the Court's view, sufficient to defeat class certification.

In dissent, Justices Ginsburg, Breyer, Sotomayor, and Kagan argued that Court should have dismissed the writ of certiorari as improvidently granted because the question on which the parties’ briefing had focused — the standards for admission of expert opinion under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals — had been waived below.  They also urged that the majority’s decision should not be read as holding that proof of class-wide damages is always required in order for common issues to predominate under Rule 23(b)(3), because the plaintiffs in Comcast did not dispute that they needed to make such a showing, and therefore the majority did not actually address and resolve this question.  Finally, the dissenting Justices argued that the District Court’s conclusions about what the damages model showed were findings of fact, which should not be disturbed on appeal.

Comcast is the latest in a line of recent Supreme Court decisions insisting on strict compliance with Rule 23, supported by a hard look at the actual evidence that would be presented at a class-wide trial and whether that evidence will, in fact, govern the resolution of the claims on a class-wide basis. Moreover, the dissent notwithstanding, the Court's opinion appears to support the view that a plaintiff seeking certification under Rule 23(b)(3) must demonstrate that damages can be addressed by a class-wide method based on common evidence — or, at least, that the absence of a class-wide method of addressing damages will count heavily against certification in the predominance analysis. (If that were not the Court's view, it could certainly have dismissed the writ of certiorari as improvidently granted, as the dissent urged.)  In this regard, the decision should be helpful to defendants in a wide-range of class action cases where the plaintiff may have a class-wide liability theory, but in which assessing damages would still require the type of individualized litigation that cannot be undertaken in a class action.