United States - Market Insights

Defeating class certification: predominance and common impact defenses

Non-U.S. corporations must consider the risks of being named as a defendant in a U.S. federal court class action. Recent developments in the area of conspiracy-based personal jurisdiction mean that U.S. plaintiffs’ firms have succeeded in hauling foreign companies into U.S. courts with increasing ease and frequency. Foreign companies need to consider how they defend against class claims, which pose the risk of exposure at levels that can cripple operations and imperil corporate valuations.

A class action under the Federal Rule of Civil Procedure 23(a) allows for the adjudication of a group of similarly-situated individuals’ claims in a single proceeding in one forum, aggregating issues and claims that otherwise might be too expensive or difficult for individual plaintiffs to bring. If one or more classes are certified, the scope of the plaintiffs’ potential damages may be so high — especially if trebling and joint and several liability are in play — that, economically and practically, defendants must consider settlement. Conversely, if no class is certified, the case will proceed as an individual action, and the stakes might be low enough to warrant dismissal or a very low-value resolution. Accordingly, the issue of certification is what makes these matters “bet the company” cases.

This chapter focuses on predominance and its related question, common impact, and explains why defense counsel in U.S. class actions often build their certification opposition around these factors. As cross-border markets expand and U.S. counsel become more aggressive in joining parent companies and related entities in these types of cases, non-U.S. companies would do well to educate themselves in the procedural standards for defeating certification, and how best to deploy these strategies. (Separate procedural arguments may be available to exclude parent companies and related entities that were not involved in setting or enforcing the policies and procedures at issue in the underlying action. However, such arguments do not relate to the propriety of class certification and, accordingly, are not discussed here.)

Certifying a class action in U.S. federal court

A class action begins as a complaint filed by a plaintiff claiming to represent themselves and all “similarly situated” putative class members. The presiding court must then undertake a rigorous analysis under Federal Rule of Civil Procedure 23 to determine whether the plaintiff has shown that there are equitable and legal grounds to handle the claims on a class-wide basis. Key to the analysis is whether, pursuant to Rule 23(b), common questions predominate and a class action is superior to individual actions.

The importance of predominance and common impact

The predominance test requires a plaintiff to show that questions of law or fact common to class members predominate over questions affecting only individual members. For example, in the antitrust context, common questions may be:

• the existence of a conspiracy; and
• whether every member of the class can be said to have been overcharged (or undercharged) as a result of the conspiracy.

In the employment context, plaintiff might allege that a company-wide policy or practice resulted in class-wide violations. If these allegations are true, common issues can be said to predominate over individual issues specific to the class members. Put another way, plaintiffs would argue that conspiracy, impact, and non-compliance can be proven on a class-wide basis.

Plaintiffs will customarily use expert opinions and testimony to meet the predominance test. For example, to show artificial prices in a market, plaintiffs may offer an econometric analysis showing that, but for the conspiracy, prices in that market would have been lower (or higher) than what was observed. The calculated artificiality is then applied to prices paid or received by class members to show that they suffered a common impact (i.e., common injury (damages) in connection with each transaction entered into). If the court accepts plaintiffs’ experts’ opinions, the predominance test will be met and the class will likely be certified.

How to defeat allegations that common questions predominate

The most effective arguments to defeat predominance are:

• individual issues predominate over common ones;
• the class contains unimpacted members, even if the expert’s opinions are accepted; and
• the expert’s opinions are inapplicable to issues in this case and therefore prove nothing.

It is worth noting that courts have drawn a distinction between commonality in damages versus commonality in liability, holding that it is not appropriate to consider the consistency of damages among the putative class members, or the lack thereof, at the class certification stage. This means defense counsel must carefully focus the argument on whether the court can properly presume violations solely by looking at universal policies or by drawing presumptions from data, rather than conducting an individualized inquiry into the facts behind the economists’ conclusions.

Individualized inquiry

From the defense perspective, arguing that individualized inquiry is required is the gold standard. If the court conducts an inquiry into whether each class member was impacted, defendants can argue that individual issues predominate class-wide ones. For example, conspiracies are generally thought of as involving continuous wrongful conduct over a substantial period of time. But the conduct may actually be episodic: The record may show that defendants conspired on certain days or even at certain times within the day. Or there might be differences in policy enforcement or localized management practices that impact litigation issues. Defense counsel may argue that each class member’s experiences must be separately evaluated because they may have suffered differential or no impact.

For example, let us say that plaintiffs’ expert contends that prices in a market for commodity futures were depressed because of conspiratorial conduct. Plaintiffs may argue that everyone who held open futures positions at the start of the class period was impacted when they closed out those positions. But it may be the case that the prices impacted only class members with long positions that were underpaid when they exited. If they held short positions, they benefited from the lower prices when they closed out the position. Or they may have hedged their risk, or had both long and short positions, which raises issues of net impact. A class member might not have been economically harmed based on aggregated trading positions and transactions. Individual inquiry into each class member’s trading may be required.

Similarly, if data suggests employees missed meal breaks, it does not tell you whether the missed breaks were voluntary, which would not be illegal. One would have to ask each impacted employee if, in fact, they were prevented from exercising their statutory right to a break. Or if statistics show hiring practices negatively impacted older applicants, the statistics do not reflect other criteria that might neutralize the data-based presumption. Again, an individualized inquiry would be required.

Unharmed persons in the class

While there is no exact rule, U.S. courts have held that if 5–10% of the proposed class can be shown to have been unharmed, then the class should not be certified due to lack of common impact. And that raises two possible lines of defense: the misuse of averages, and how markets actually function.

Courts are skeptical of averages because they mask variability over time and across geographies. Let us say that plaintiffs’ expert contends that, over a five-year class period, using monthly prices, they can calculate an average underpayment in a national market. But if prices are examined on a daily basis, it may turn out that for significant periods of time, there was no underpayment; in fact, there may have been an overpayment. Anyone who transacted during those periods was not harmed and must be excluded from the class or it fails. Similarly, a national market may include regional or smaller markets where prices vary significantly from the national average.

In fact, it may be that no one transacted at the average price. In certain markets, buyers may pay lower prices as favored customers or enter into agreements that hedge price movements. Sellers may agree to discounts or rebates. Individual issues may overwhelm claims of common impact based on how certain complex markets operate.

An irrelevant opinion

As Mark Twain said, “Lies, damned lies, and statistics.” It is difficult to exclude an expert’s opinion altogether at the class certification stage. However, in our experience, pointing out flaws in an expert’s conclusory process can be persuasive. For example, consider a model that purports to translate artificial prices for commodities into artificial prices for derivatives contracts based on those commodities. It might be the case that the model works for contracts with near-term maturities. If the contracts have longer maturities, the model may not work at all, and there is no evidence before the court as to whether holders of those contracts were impacted. Defense counsel may be able to show that plaintiffs have failed to meet their burden because their model doesn’t supply any answers.

In the employment context, we see presumptions being applied without consideration for different scheduling and workplace experiences. Applying those facts to the statistics can help to undercut sweeping conclusions suggesting class-wide adjudication is appropriate. We find that strategic, individualized evidentiary submissions are the best way to dissect statistical suggestions submitted by plaintiff’s experts. Facts versus assumptions often carry the day.

A battle worth fighting

It is difficult to defeat a motion for class certification. It is also expensive, requires engaging in strategic class discovery, the retention of defense experts to attack plaintiffs’ experts’ opinions, and voluminous briefing. Clients may question whether it is worth the expense and whether it would be better to save resources for later stages of the litigation. But a successful opposition to a class certification motion can functionally terminate a case. Even if unsuccessful, a vigorous defense at the class certification stage may cause plaintiffs to revise their class definition as to scope or time in ways that eliminate a substantial portion of the claimed damages.