In a ruling that is sure to be required reading for antitrust lawyers, the 3rd U.S. Circuit Court of Appeals has vacated a lower court's decision to certify a class action over an alleged price-fixing conspiracy in the market for hydrogen peroxide.
In its 55-page opinion in In re Hydrogen Peroxide Antitrust Litigation, the unanimous three-judge panel found that U.S. District Judge Stewart Dalzell had erred by failing to conduct a sufficiently "rigorous analysis" before concluding that the proposed class would be able to prove "antitrust impact" through common rather than individual evidence.
Significantly, the appellate court found that Dalzell appeared to have erred by accepting the testimony of the plaintiffs' expert witness without considering the contradictory testimony of the defense expert.
Dalzell will now get the case back on remand, to apply the 3rd Circuit's newly announced standards for class certification.
Lawyers in the case disagreed about the impact of the decision, with the plaintiffs' team saying they remain confident that Dalzell will again certify the class, while defense lawyers predicted that the plaintiffs will never be able to satisfy the strict new standards announced by the 3rd Circuit.
Writing for the 3rd Circuit, Chief Judge Anthony J. Scirica found that Dalzell focused first on whether the testimony of the plaintiffs' expert was admissible under Daubert and that in doing so Dalzell said it would be improper to "weigh the relative credibility of the parties' experts."
But after deciding that the plaintiffs' expert satisfied the Daubert test, Scirica said, Dalzell failed to confront the defense expert's rebuttal.
The experts had offered sharply different views on the issue of whether antitrust impact was susceptible to classwide proof.
Scirica found that Dalzell "appears to have assumed" that he was barred from weighing the defense expert's opinion against the expert for the plaintiff for the purpose of deciding whether the requirements of Rule 23 had been met.
"This was erroneous," Scirica wrote in an opinion joined by Judges Thomas L. Ambro and D. Michael Fisher.
"Expert opinion with respect to class certification, like any matter relevant to a Rule 23 requirement, calls for rigorous analysis. It follows that opinion testimony should not be uncritically accepted as establishing a Rule 23 requirement merely because the court holds the testimony should not be excluded, under Daubert or for any other reason," Scirica wrote.
The ruling is a victory for attorneys Steven E. Bizar, Landon Y. Jones III, Thomas P. Manning and Howard D. Scher of Buchanan Ingersoll & Rooney, who represented defendant Arkema Inc.
Prior to the appeal of Dalzell's class certification ruling, four of the defendants named in the suit had agreed to settle, paying more than $87 million.
But Arkema and FMC Corp. continued to fight and took an immediate appeal of the class certification decision to the 3rd Circuit.
The suit stems from a criminal antitrust investigation by the European Union that resulted in price-fixing charges against 18 hydrogen peroxide manufacturers.
In the wake of those charges, nearly three dozen lawsuits were filed in U.S. federal courts. Soon after, all of the cases were consolidated and assigned to Dalzell by the Judicial Panel on Multidistrict Litigation.
Since then, two of the companies -- Akzo Nobel Chemicals International and Solvay S.A. -- have pleaded guilty to charges brought by the U.S. Justice Department. (No more guilty pleas are expected because the Justice Department announced last week that it has closed the investigation.)
Akzo later agreed to pay more than $23.3 million to settle claims brought by direct purchasers, and Solvay paid more than $38 million. The plaintiffs also struck a $21 million settlement with Evonik Degussa and a $5 million settlement with Kemira Chemicals.
Dalzell awarded more than $26 million in interim attorney fees in October.
But now the plaintiffs have suffered a significant setback in their pursuit of the remaining defendants.
Scirica opened his opinion by saying that the issue in the appeal was "the standards a district court applies when deciding whether to certify a class."
"Although it is clear that the party seeking certification must convince the district court that the requirements of Rule 23 are met, little guidance is available on the subject of the proper standard of 'proof' for class certification," Scirica said.
The U.S. Supreme Court has described the inquiry as a "rigorous analysis," and a "close look," Scirica said, "but it has elaborated no further."
Scirica set out to offer the missing guidance, saying: "We recognize that the able district court did not have the benefit of the standards we have articulated."
In deciding whether to certify a class under Rule 23, Scirica said, trial judges "must make whatever factual and legal inquiries are necessary and must consider all relevant evidence and arguments presented by the parties."
The court's opinion, Scirica said, was intended to clarify "three key aspects" of class certification procedure.
"First, the decision to certify a class calls for findings by the court, not merely a 'threshold showing' by a party, that each requirement of Rule 23 is met. Factual determinations supporting Rule 23 findings must be made by a preponderance of the evidence," Scirica wrote.
"Second, the court must resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits -- including disputes touching on elements of the cause of action. Third, the court's obligation to consider all relevant evidence and arguments extends to expert testimony, whether offered by a party seeking class certification or by a party opposing it."
The hydrogen peroxide purchasers, Scirica noted, had sought certification under Rule 23(b)(3), which is permissible when the court "finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."
In the appeal, the defense lawyers focused on predominance, which requires a showing that the class is "sufficiently cohesive."
In antitrust cases, Scirica found that predominance often hinges on the issue of impact "because it is an element of the claim that may call for individual, as opposed to common, proof."
Scirica noted that both sides had presented the opinions of expert economists who disagreed on the key disputed predominance issue -- whether antitrust impact was capable of proof at trial through evidence common to the class, as opposed to individualized evidence.
Although Dalzell had properly described the class certification decision as requiring "rigorous analysis," Scirica found that "some statements" in Dalzell's opinion "depart from the standards we have articulated."
Dalzell wrote: "So long as plaintiffs demonstrate their intention to prove a significant portion of their case through factual evidence and legal arguments common to all class members, that will now suffice. It will not do here to make judgments about whether plaintiffs have adduced enough evidence or whether their evidence is more or less credible than defendants'."
On the issue of predominance, Dalzell said the plaintiffs "need only make a threshold showing that the element of impact will predominantly involve generalized issues of proof, rather than questions which are particular to each member of the plaintiff class."
Scirica took issue with those statements, saying: "[I]t is incorrect to state that a plaintiff need only demonstrate an 'intention' to try the case in a manner that satisfies the predominance requirement. Similarly, invoking the phrase 'threshold showing' risks misapplying Rule 23."
A "threshold showing," Scirica said, "could signify, incorrectly, that the burden on the party seeking certification is a lenient one (such as a prima facie showing or a burden of production) or that the party seeking certification receives deference or a presumption in its favor."
As a result, Scirica concluded that the term "threshold showing" is "an inadequate and improper standard."
Dalzell had also cited Cumberland Farms Inc. v. Browning-Ferris Industries in finding that "private enforcement of [antitrust] laws is a necessary supplement to government action," and that "in an alleged horizontal price-fixing conspiracy case when a court is in doubt as to whether or not to certify a class action, the court should err in favor of allowing the class."
Scirica disagreed, saying "these statements invite error. Although the trial court has discretion to grant or deny class certification, the court should not suppress 'doubt' as to whether a Rule 23 requirement is met -- no matter the area of substantive law."
In an interview, lead plaintiffs attorney Gregory K. Arenson of Kaplan Fox & Kilsheimer in New York said he has always believed that Dalzell applied the correct standards and that the appellate court's decision simply means that Dalzell must now "show his work."
On the issue of the expert witnesses, Arenson said Dalzell's opinion clearly showed that he had rejected the defense expert's views, and that, on remand, he expects Dalzell to follow the appellate court's instructions by making that explicit.
But Bizar predicted that the remaining defendants will ultimately prevail either by defeating the motion for class certification or by winning a dismissal on summary judgment because the plaintiffs cannot prove that any of the remaining defendants joined the alleged price-fixing conspiracy.