Tightening the Noose on Class Certification Requirements (I): Another Whack at the Fraud-on-the-Market Presumption in Securities Fraud Class Actions

Abstract

In Comcast Corp. v. Behrend, the Supreme Court is faced with several issues: (1) whether the Supreme Court should resolve a contested issue where the parties settled their underlying dispute two weeks before the Court granted certiorari review; (2) whether during class certification proceedings and on appeal, Comcast properly preserved the issue of the court’s role in resolving the admissibility of expert witness testimony; and (3) whether, if the Court agrees to hear the appeal, the trial court appropriately resolved the admissibility of expert witness testimony on classwide damages during the class certification proceedings.

Philadelphia Comcast cable television subscribers sued Comcast Corp. in an antitrust class action alleging that Comcast’s anticompetitive actions artificially inflated the cost of cable subscriptions. The Court will first determine whether the Court should hear Comcast’s appeal in light of a settlement or whether Comcast properly preserved a class certification issue for appeal. If the Court agrees to hear the case, then the Court will determine whether a trial court during class certification must resolve whether a plaintiff has introduced admissible expert witness testimony to show that damages may be awarded on a classwide basis.

If the Supreme Court decides to address Comcast’s stated issue on appeal, the Court will be addressing important issues of evidentiary proof at class certification left open by the Supreme Court in its 2011 Dukes decision, as well as the Third Circuit in Hydrogen Peroxide (and other appellate courts endorsing a more rigorous analysis standard for class certification). That issue ― whether a district court may certify a class without resolving whether the plaintiff has introduced admissible expert witness testimony to show that the case is susceptible to classwide damages ― has tremendous importance for the role of the court in receiving and evaluating evidence during class certification proceedings.

However, Behrend has raised a set of substantial threshold issues that may deflect the Court from deciding the issue upon which the Court granted certiorari at the end of June. Behrend argues that, in light of the parties’ settlement two weeks before the Court granted the certiorari petition, the Court should now not hear the case at all and instead determine that the writ of certiorari was “improvidently granted.” In support of this contention, Behrend argues that the law favors settlement; that settles moots a case; and that the parties’ settlement counsel restraint on the part of the Court, In addition, there is ample precedent for the Supreme Court, under these circumstances, to decline to hear an appeal and to instead decide that the writ was improvidently granted.

Over the past decade, some appellate courts have tightened the requirements for class certification by clarifying the rigorous analysis standard that courts must apply to determine whether litigation can be maintained as a class action. But an unresolved issue among federal courts centers on the evidentiary rules that apply during class certification proceedings. Because many class certification decisions involve expert witness testimony, the evidentiary rules governing the admissibility and use of such testimony is a highly important, yet unresolved issue, in federal class action jurisprudence.

Trial and appellate courts disagree concerning the nature, scope, and applicability of evidentiary rules to class certification proceedings. At one extreme, an older view that is still endorsed by some courts maintains that evidentiary rules do not apply to class certification hearings at all. At the other extreme, some courts require full-blown Daubert hearings for challenged expert testimony. In the middle, most judges merely allow all testimony into the certification record, deferring evidentiary challenges until some later point in the proceedings.

The Supreme Court, in its 2011 Wal-Mart decision, endorsed the rigorous analysis standard and articulated further criteria for evaluating the Rule 23(a) threshold commonality requirement. Although the Court in its decision commented extensively on the quality and the nature of the expert witness testimony that had been offered in support and opposition to class certification, the Court stopped short of issuing any pronouncements concerning the use of Daubert hearings at class certification. The Court left that issue open for another day, but signaled its interest in resolving this issue in a case properly presenting the Daubert evidentiary problem.

At first blush, the Comcast appeal seems to focus on this gap in class action jurisprudence and to press the Court to now decide the issue concerning what evidentiary standards apply when expert witness testimony is offered during class certification proceedings. Comcast would have the Court fashion a rule that would impose trial Daubert standards at class certification, and not defer such umpiring until sometime later in the trial proceedings.

The plaintiffs, however, urge the Court not to use the Comcast appeal as the vehicle to make broad pronouncements about evidentiary Daubert rules at class certification. Chiefly, the plaintiffs suggest that in light of the pending settlement, the Court should honor that settlement and dismiss the certiorari petition as improvidently granted. In addition, the plaintiffs argue that Comcast did not properly raise or preserve the important Daubert evidentiary issues in the lower courts. Thus, the Comcast appeal as a matter of law and fact is an inapt vehicle for the Court to now make broad pronouncements on important class certification issues.

If the Court agrees with the plaintiffs’ threshold arguments, then the Court may very well dismiss the writ of certiorari as improvidently granted, and save the problems of evidentiary standards at class certification for resolution in some other case where the issues are more clearly drawn.

Keywords: securities class actions, farud on the market presumption, Basic v. Levinson, Erica Fund v. Halliburton, burdens at class certification, materiality, Rule 23(b)(3) classes, predominance requirement