New Supreme Court Decisions Reinforce Barriers to Class Certification

“[T]he fight over class certification” is described as “the key battle in most class action suits.”i  Last month, the Supreme Court dealt two significant blows to plaintiffs seeking class certification.  On March 19, 2013, the Supreme Court issued its decision in Standard Fire Ins. Co. v. Knowles,ii limiting the ability of plaintiffs to enter into pre-certification stipulations in order to circumvent the Class Action Fairness Act of 2005 (CAFA) and keep their representative actions in state courts with less stringent certification requirements.iii On March 27, 2013, the Supreme Court issued its decision in Comcast Corporation v. Behrend, reinforcing and expanding the rigorous class certification analysis required by federal courts.iv

Standard Fire Ins. Co. v. Knowles Limits the Ability of Class Plaintiffs to Seek Haven in State Courts

Prior to the passage of CAFA, putative class action plaintiffs sought haven in state courts that had developed reputations as being highly certification-friendly.v  CAFA expanded the jurisdiction of federal courts over class actions by:

  • setting a jurisdictional threshold of five million dollars, based on the aggregated claims of all individual class members,vi
  • discarding traditional complete diversity requirements in favor of minimal diversity, which exists when “any member of a class of plaintiffs is a citizen of a State different from any defendant”;vii
  • removing the bar on the removal of class actions based on diversity of citizenship more than one year after commencement of an action;viii
  • allowing defendants to remove cases brought in their home states;ix and
  • eliminating the requirement that all defendants consent to removal.x 

In just over two years, CAFA resulted in twice as many class actions proceeding in federal courts based on diversity of citizenship.xi  The plaintiffs bar quickly developed a strategic work-around to the first of these changes, by stipulating that class-wide damages would be less than the five million dollar threshold.  In Arkansas alone, more than eleven separate class actions were remanded by federal district courts following CAFA because of such stipulations.xii

Knowles involved such a stipulation.  The plaintiff filed a putative class action in an Arkansas state court against Standard Fire Insurance Company (Standard) alleging that it failed to pay the putative class contractor fees covered by their homeowners’ policies.  In describing the relief sought, the complaint stipulated that “he would limit any potential recovery for the class he would represent below the $5 million threshold.”xiii   Citing CAFA, Standard removed the case to the District Court for the Western District of Arkansas.  The plaintiff moved to remand on grounds that the suit did not meet CAFA’s five million dollar amount-in-controversy requirement, and the Western District Court agreed.  Standard appealed from the remand order, but the Eight Circuit declined to hear the appeal. 

The Supreme Court granted Standard’s writ, and reversed.  In a unanimous opinion authored by Justice Breyer, the Court concluded succinctly that, “[s]tipulations must be binding” and “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.”xiv  As a result, the plaintiff “lacked the authority to concede the amount-in-controversy issue for the absent class members” and his stipulation could not overcome the district court’s finding that the CAFA jurisdictional threshold had been met.xv  

Plaintiffs’ attorneys are not likely to abandon their pursuit of litigating class actions in state courts, but the Supreme Court’s decision in Knowles eliminates the possibility that diversity jurisdiction is thwarted by recovery-limiting stipulations. Importantly, once the jurisdictional threshold has been cleared, class action defendants remain safely in federal court even if later evidence reduces the potential aggregated award to less than five million dollars.xvi

Comcast Co. v. Behrend Strengthens the Barriers to Class Certification in Federal Court

Two terms ago, the Supreme Court issued a landmark decision in the class action arena in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), holding that a “rigorous analysis” of the class certification requirements is necessary at the class certification stage, and that the class analysis may, and indeed often does, overlap with inquiry into the merits of the case.xvii  Its decision last week in Comcast reaffirmed and arguably expanded the scope of the Wal-Mart “rigorous analysis” requirement. 

In a 5-4 majority opinion, the Court reversed the Court of Appeals for the Third Circuit and held that a class of Comcast cable subscribers in the Philadelphia area was improperly certified under Rule 23(b)(3), noting that the Third Circuit “ran afoul of our precedents” by refusing to entertain Comcast’s arguments against plaintiffs’ damage model solely because those arguments overlapped with the merits of the case.xviii  The Court held that the class of Comcast subscribers had been improperly certified because the damages model put forth by the putative class fell “far short of establishing that damages are capable of measurement on a classwide basis.”xix   

The Court found the proposed damages methodology was flawed, because it did not eliminate the need to determine damages on an individual basis for each class member. Although the lower court allowed certification to proceed under only one of plaintiffs’ four theories of antitrust liability, plaintiffs’ expert acknowledged that his damages model measured damages resulting from all four theories of alleged antitrust conduct and did not isolate damages resulting from the single theory for which the class was certified.xx  The Court explained that the damages model put forth by plaintiffs at the class certification stage must “measure only those damages attributable to” the theory of liability on which the class is sought to be certified, because “[i]f the model does not even attempt to do that, it cannot possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3).”xxi  Without the putative class presenting another damages methodology, the Court found that it could not show Rule 23(b)(3) predominance because “[q]uestions of individual damages calculations will inevitably overwhelm questions common to the class.”xxii 

Comcast largely reiterates the analysis of Wal-Mart, but it also expands its scope in two important ways.  First, it extends the “rigorous analysis” requirement to the 23(b) factors, including the predominance requirement under Rule 23(b)(3), which was not at issue in Wal-Mart but is often the key issue at the class certification stage.  Second, Justice Scalia’s majority opinion does not include any express limitations on the scope of its holding.  As a result, opponents of class certification will, no doubt, argue that the Court’s opinion rejects the position previously taken by many lower courts that individual damages issues do not prevent plaintiffs from satisfying the predominance requirement under Rule 23(b)(3).  While Justices Breyer and Ginsburg suggest in their joint dissent that the set of facts addressed by the decision render it “good for this day and case only,” lower courts bound to follow the majority opinion may not read the opinion so narrowly.xxiii  One result is certain—plaintiffs seeking class certification face an increasingly uphill battle after last month’s rulings.  

Contact Information

If you have any questions concerning this alert, please contact—

Larry E. Tanenbaum ltanenbaum@akingump.com 202.887.4109 Washington, D.C. W. Randolph Teslik rteslik@akingump.com 202.887.4287 Washington, D.C.
Ashley B. Vinson avinson@akingump.com 415.765.9561
San Francisco
Stanley E. Woodward, Jr. sewoodward@akingump.com 202.887.4502
Washington, D.C.

i Brent Austin and Michael Blankshain, Combatting Class Certification After CAFA Removal, Law 360 (June 10, 2010), available at http://www.law360.com/articles/169479/combating-class-certification-after-cafa-removal.
ii No. 11-1450, Opinion available at http://www.supremecourt.gov/opinions/12pdf/11-1450_9olb.pdf .
iii Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2551 (2011) (“[C]ertification is proper only if ‘the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.’”).
iv No. 11-864, Opinion available at http://www.supremecourt.gov/opinions/12pdf/11-864_k537.pdf .
v Austin and Blankshain, supra note 1.
vi Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 571 (2005) (CAFA “abrogates the rule against aggregating claims”).
vii 28 U.S.C. § 1332(d)(2)(A) (emphasis added).
viii 28 U.S.C. § 1453(b).
ix Id.
x Id.
xi Federal Judicial Center, Impact of CAFA on the Federal Courts: Fourth Interim Report 11 (April 2008), available at http://www.fjc.gov/public/pdf.nsf/lookup/cafa0408.pdf/$file/cafa0408.pdf.
xii Brief for Petitioner, Standard Fire Insurance Company v. Knowles, No. 11-1450, 18 n.6, available at http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs/11-1450_pet.authcheckdam.pdf.
xiii Supreme Liberal Washout, Wall Street Journal A14 (March 21, 2013), available at  http://online.wsj.com/article/SB10001424127887324103504578372593347541144.html.
xiv Opinion at 3-4.
xv Id. at 4.
xvi St. Paul Mercury Indemnity Co. v. Red Cab. Co., 303 U.S. 283, 293 (1938) (“[E]vents occurring subsequent to removal which reduce the amount recoverable, whether beyond the plaintiff's control or the result of his volition, do not oust the district court's jurisdiction once it has attached.”).
xvii Opinion at 6; Wal-Mart, 131 S.Ct. at 2551-52.
xviii Opinion at 6-7.
xix Id. at 7.
xx Id. at 9.
xxi Id. at 7.
xxii Id.
xxiii Andrew Longstreth, Plaintiffs’ bar dodges bullet in Comcast antitrust decision, Thomson Reuters (March 28, 2013), available at http://newsandinsight.thomsonreuters.com/Legal/News/2013/03_-_March/Plaintiffs__bar_dodges_bullet_in_Comcast_antitrust_decision/; Dissent at 5.