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By D. Matthew Allen and Amanda Arnold Sansone, Carlton Fields
Without a doubt, the term “rigorous analysis” has become a buzzword in current class action jurisprudence. In recent years, the Supreme Court has issued landmark class action decisions in Wal-Mart Stores, Inc. v. Dukes1 and Comcast Corp. v. Behrend2 that further entrenched the phrase into the lexicon of class action practitioners. But do these most recent “rigorous analysis” decisions signal a sea change in class action jurisprudence? We think not. Rather, we see Comcast, Wal-Mart, and even a decision many observers consider an outlier, Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds,3 as a natural progression of the slow evolution of the class action device. This article describes that progression.
Historically speaking, we see judicial treatment of class actions under Rule 23 in terms of four distinct phases: the Innovation Phase (1966 to early 1970s), the Realistic Phase (mid-1970s to early 1980s), the Formalism Phase (early 1980s to 1995), and, most recently, the Rigorous Analysis Phase (1995 to present).4 Based on recent Supreme Court precedent, the Rigorous Analysis Phase is not going away anytime soon.
During the Innovation Phase, courts viewed the class action device as an exciting new tool to efficiently manage and resolve complex cases—and also to advance social justice. Courts in this phase emphasized the virtue of the class action as opening the door to the courthouse to litigants who otherwise would be precluded from bringing their claims.
At the same time, courts in the Innovation Phase dismissed potential management difficulties associated with the trial of multiple, diverse claims at one time, particularly in such areas as injury, causation and damages. For example, in Siegel v. Chicken Delight, Inc.,5 an early antitrust class action, the defendants argued that there were “immense difficulties and complexities” in determining the amount of damages actually suffered as a result of an alleged antitrust violation. The district court responded—in language that would be repeated in multiple decisions—that “any detailed discussion of the subject at this juncture of the proceedings would be premature.”6 The courts in the Innovation Phase were confident that whatever difficulties were predicted by defendants, they would not materialize in practice or would be worked out down the road.
These assumptions, of course, proved unduly optimistic. One commentator of the day reported in 1973 that more than 53 percent of the class actions filed in 1966 were still pending in 1971, observing that “this is certainly not the kind of increased efficiency which the framers of the amended Rule had in mind.”7 These difficulties led Second Circuit Chief Judge Lumbard to write in dissent from the reversal of the district court's denial of certification in Eisen v. Carlisle and Jacquelin that he considered the case to be a “Frankenstein monster posing as a class action.”8
So what did courts do to get a handle on management difficulties? They tried innovative techniques. One proposed method was to try common issues first and save individual issues for later determination. Another was to permit plaintiffs to recover aggregate damages under a fluid recovery concept. Eventually, many courts and commentators alike recognized that these innovations did not make unmanageable class actions more manageable. Instead, they made settlements more likely.
As the excesses of the Innovation Phase became apparent, in the late 1970s, the courts moved into a new phase—the Realistic Phase. This Phase is characterized by retrenchment as courts and commentators began to better appreciate some of the limits of the class action device. Indeed, in this phase, notably in antitrust cases, several courts of appeal began to caution district courts against too-quick certification decisions.9 The Ninth Circuit, among others, warned that treating class members collectively without consideration of individual issues “significantly alters substantive rights,” and such “enlargement or modification of substantive … rights by procedural devices is clearly prohibited by the Enabling Act that authorizes the Supreme Court to promulgate the Federal Rules of Civil Procedure.”10
The culminating case in this phase was the Supreme Court's 1982 decision in Gen. Telephone Co. of Southwest v. Falcon.11 In that case, the district court had certified an employment discrimination class action. Some members of the class were denied promotion allegedly because they were Mexican-American. Others allegedly were denied being hired altogether because of their race. They were lumped together in the same class based on an “across the board” rule that a named plaintiff employee complaining of one allegedly discriminatory practice could represent class members complaining of a different practice. This across the board rule was based on a presumption that all the class claims were fairly encompassed within the named plaintiff's claim, satisfying Rule 23(a)(3) typicality. The Supreme Court rejected the rule and its presumption of discrimination. The Court made two important pronouncements in doing so. First, it stated: “Actual, not presumed, conformance with Rule 23(a) remains … indispensable.”12 Second, it announced that district courts are to undertake a rigorous analysis before certifying a class under Rule 23(a).13
Eventually, Falcon would lay the foundation for the current Supreme Court attitude of healthy skepticism toward certification of broad, diverse classes. In the immediate aftermath, however, courts merely gave lip service to Falcon. And beginning in the early 1980s, district courts began to abandon the carefully crafted, fact-driven framework established by the circuit courts in the Realistic Phase of the late 1970s. In Phase 3, the Formalism Phase, certification decisions were more driven by pigeon-holing cases into wooden legal categories rather than engaging in fact-intensive analysis.
This phase is characterized by an unusual deference to plaintiff's allegations and experts. Courts' analyses tended to consist primarily of repeated legal pronouncements from prior opinions, building on one another, but often pieced together in a formalistic, uncritical way without substantial consideration of whether the facts and circumstances of one case truly apply to another.
Courts throughout the country emphasized several dubious legal principles that stacked the deck in favor of certification. Those legal principles included, for example, that the court cannot prejudge the merits,14 that the court must accept the facts in the complaint as true,15 that doubtful cases should be certified,16 that liability is the overriding issue over causation and damages,17 and that plaintiff's expert testimony should be given deference.18 And these decisions were essentially unreviewable. Until the enactment of Rule 23(f) in 1998, there was no vehicle to appeal a class certification decision other than go to trial and judgment first. Very few defendants were willing to take that risk.
By 1995, though, the appellate courts had had enough. In a three-year period, from 1995 to 1997, the Fifth, Sixth, Seventh, Ninth and Eleventh Circuits had all decertified major, ambitious mass tort products liability and race discrimination class actions.19 What made several of these decisions even more extraordinary is that they were decided on writs of mandamus, before the enactment of Rule 23(f). This was the advent of the Rigorous Analysis Phase, which took hold in fits and starts in various subject areas and which has accelerated over the past three years.
In 1997 and 1999, the Supreme Court joined the fray, issuing landmark opinions that decertified two massive settlement classes in Amchem Products v. Windsor20 and Ortiz v. Fibreboard Corp.21 Amchem is a fascinating case because it was never intended to be litigated. It was prepackaged as a settlement class when filed. The case involved a global settlement of all then-current and future asbestos-related claims in the entire federal court system.
It was the most ambitious settlement reached under the auspices of Rule 23. The settlement involved something for everyone. But not equally. Future claimants, for example, received far less in compensation than already injured claimants. The district court approved the certification of a settlement class over numerous objections. The Third Circuit reversed because the Rule 23 adequacy and predominance requirements were not satisfied.
The Supreme Court agreed with the Third Circuit. It held that the district court had improperly substituted fairness and efficiency concerns for an evaluation of the Rule 23 requirements, which had to be satisfied even in the settlement context. The court forcefully reminded trial courts that they “are not free to amend a rule outside the process Congress ordered, a process properly tuned to the instruction that rules of procedure ‘shall not abridge … any substantive right.’ ”22 The court concluded its analysis with the not too subtle warning that “the rulemakers' prescriptions for class actions may be endangered by ‘those who embrace [Rule 23] too enthusiastically just as [they are] by those who approach [the rule] with distaste.’”23
In 1998, Rule 23(f) was enacted, giving litigants the right to seek permission to appeal class certification decisions to the courts of appeals. But it took 13 years after the enactment of Rule 23(f) for the next significant class action appeal to reach the Supreme Court. That case was Wal-Mart Stores, Inc. v. Dukes in 2011.
By 2011, the federal courts of appeals had brought some sense of stability to much of class action jurisprudence. Many federal courts took seriously the Supreme Court's admonition in Falcon that rigorous analysis was required before a class could be certified. Frankly, most of the problem cases were in the state courts. Then, after years of failed attempts, in 2005, Congress passed the Class Action Fairness Act, which made it easier to get state law class actions into federal court under a relaxed diversity jurisdiction standard. So things were better. But every now and then a decision like the California district court's Wal-Mart Stores, Inc. decision would pop up.
In 2000, a 54-year-old worker at a California Wal-Mart Store, Betty Dukes, alleged that she was a victim of sex discrimination. She had six years of positive performance reviews. Nonetheless, she was denied the training she needed to advance to a higher salary position. Wal-Mart argued that she was denied the opportunity to advance because she clashed with a female supervisor and was disciplined for returning late from lunch breaks. Ms. Dukes argued that Wal-Mart had a policy of discriminating against women. She filed a lawsuit in San Francisco district court, along with three other women, seeking to represent 1.6 million women who worked or previously had worked at a Wal-Mart store since 1998. The plaintiffs sought on behalf of this massive, sprawling class injunctive relief, a declaratory judgment, backpay, and punitive damages.
In June 2004, the district court certified under Rule 23(b)(2) the largest employment discrimination class in history.24 In 2007, the Ninth Circuit affirmed the class certification in a split decision 2–1.25 In 2009, the full Ninth Circuit granted rehearing en banc and voted 6–5 to affirm the certification.26 The Supreme Court reversed.27
There are a number of significant features to the decision:
Was Wal-Mart a sea change in class action law? Yes and no.
On commonality, the Wal-Mart opinion represented a significant change—and tightening—of the prior understanding of the Rule 23(a)(2) requirement. In the two years since the decision was issued, there have been over 500 cases citing the new commonality standard. Many undoubtedly come out the same way they would have before Wal-Mart. But not all do. At least three circuits, the Fourth, Fifth and Eighth, have reversed certification decisions precisely because the district court did not sufficiently rigorously analyze commonality after the change in standard announced in Wal-Mart.37
Other than its tightening of the commonality requirement of Rule 23(a), Wal-Mart was actually not that novel. With respect to the other four points highlighted above, the decisive trend in the circuit courts already was to hold the same way as the Supreme Court did. And yet, at the level of ethos, Wal-Mart is terribly important. What Wal-Mart did was solidify in the minds of district judges that the Court meant what it said a long time ago in Falcon that rigorous analysis requires a close application of the detailed factual record to the precise elements of the cause of action, not just on commonality but on all the elements of Rule 23.
Two cases decided by the Supreme Court this year prove the point. They reach seemingly disparate results, but when viewed closely against the framework of rigorous analysis that we have outlined, they graphically illustrate how this works.
Taking the second decided case first, in Comcast v. Behrend,38 cable TV consumers alleged that their cable provider Comcast violated the antitrust laws by conspiring with other cable systems to increase Comcast's share of the Philadelphia market. The plaintiffs offered four theories of anticompetitive conduct. But the district court ruled that only one theory—deterring overbuilders (companies that build over an existing cable company's geography)—was capable of common treatment. The plaintiffs presented expert economic testimony to show classwide impact and damages. The district court certified a class even though the plaintiff's expert conceded that his modeling did not allocate classwide damages among the four different theories of anticompetitive conduct, and did not identify damages specifically attributable to the overbuilder theory.
The Third Circuit affirmed, rejecting Comcast's argument that the court had to perform a Daubert analysis of the plaintiff's expert testimony at the class certification stage. Many observers were hoping that the Supreme Court would expand on its statement in Wal-Mart that a Daubert hearing is required to evaluate expert testimony at the class certification stage.39 They were disappointed. But they may have gotten something even better.
In a 5–4 decision, the Supreme Court reversed the certification. Although the court ducked the Daubert issue, it did hold that, under the rigorous analysis standard, there was not a close fit between the plaintiffs' liability theory and its causation or impact analysis. In both Falcon and Wal-Mart, the Supreme Court had cited the rigorous analysis requirement in the context of applying the Rule 23(a) typicality and commonality requirements. In Comcast, for the first time, the court said the same analytical principles applied in the 23(b)(3) context and then added that (b)(3) predominance is even more demanding. Effectively, the Supreme Court has now declared that all the Rule 23 elements require a searching factual analysis, whether the procedural posture is a litigation class or settlement class, whether the class certification inquiry overlaps with the merits or not. Many observers believe that after Comcast and Wal-Mart, class certification hearings will become increasingly evidence-intensive and will require searching examination under Daubert of expert testimony.
The other case is Amgen, Inc. v. Connecticut Retirements Plans and Trust Funds.40 The question in that case was whether plaintiffs in securities fraud class cases are required to prove at the class certification stage that the defendant made a material misstatement before the fraud on the market presumption could be triggered that would permit the plaintiff to rely on a presumption of reliance. The theory is that in an efficient market, the market price will reflect all publicly available information. Therefore, in Basic v. Levinson,41 the court had long ago decided that in an efficient market, the plaintiff is entitled to a rebuttable presumption that all purchasers of the security relied on the alleged misstatement in making their purchase. In Amgen, the Supreme Court ruled 6–3 that the plaintiffs do not have to prove materiality. Why? Because, according to the court, materiality is inherently a common question. It is an objective inquiry based on the significance of the misrepresentation to the reasonable investor.
Amgen does not signal a retreat from the healthy skepticism signaled in Wal-Mart. Rather, the decision is simply a function of the present nature of securities litigation as a matter of substantive law.
In other contexts, the courts have jettisoned procedural presumptions that support class certification in most contexts. The across the board presumption in the employment discrimination context is gone after Falcon. The “Bogosian shortcut” that allows an assumption of presumed impact in price-fixing cases is gone as well, for the most part.
These and other presumptions so common in the earlier, more activist periods have gradually been rejected or ignored by the courts, clearing the way for defendants to vigorously defend against class certification by arguing that, on the critical question of predominance, individual issues of impact and damages predominate over supposed common issues of liability. But the fraud on the market presumption in securities cases is not a procedural presumption designed to aid class certification, it is a substantive law presumption applicable to all securities cases, class actions or otherwise. The Supreme Court in Basic expressly grounded the presumption—not on the convenience of obtaining certification under Rule 23—but on “the congressional policy embodied in the 1934 Act.”42 Ominously for plaintiffs, Justice Alito said in concurrence in Amgen that it may be time to reconsider the fraud on the market theory,43 which many scholars consider to be outdated and resting on a shaky economic foundation.
Be that as it may, one thing the Supreme Court has emphasized over and over is that the class action device is purely procedural and cannot impinge upon the substantive requirements of the cause of action—either to aid the plaintiffs, as in Amchem, or to aid the defendants, as in Amgen. In other words, the Supreme Court continues to insist that class action litigants take very seriously the explicit requirements of the cause of action in analyzing whether a class should be certified. The bottom line, in our opinion, is that Amgen does not weaken Wal-Mart's constraints on class certification. This was confirmed when the court decided Comcast after Amgen.
So where does this leave us? We have a solid body of federal law jettisoning the formalistic line drawing of the early 1970s and the late 1980s and focusing heavily on how the case practically will be tried—the application of the substantive elements of the cause of action to the specific facts of the claim. This means more up-front discovery in most cases. It means the class decision is pushed back to later in most cases. It means expert fights in most cases. But for the foreseeable future in federal class action jurisprudence, rigorous analysis remains the watchword.
D. Matthew Allen, co-chair of Carlton Fields' Class Actions task force, practices in class action and antitrust litigation, focusing on deceptive trade practice law, insurance litigation, appellate law, and general business disputes. Amanda Arnold Sansone focuses on complex commercial litigation, with an emphasis on class action defense. The authors are available at firstname.lastname@example.org and email@example.com, respectively.
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