A federal appeals court has set aside a $295 million settlement of a class action antitrust suit alleging a price-fixing conspiracy in the international market for diamonds that was allegedly orchestrated by the De Beers group of companies headquartered in South Africa.
In its 75-page opinion in Sullivan v. DB Investments Inc., the 3rd U.S. Circuit Court of Appeals ruled that the settlement must be vacated because the lower court had improperly certified a nationwide class of indirect purchasers despite recognizing that some of those plaintiffs would be barred from pursuing such indirect claims under the laws of their own states.
As a result, the 3rd Circuit found that a single objector from Texas had identified a fatal flaw in the lower court's class certification analysis by showing that the common issues did not "predominate."
"The objection regarding the lack of predominance of class issues in this case raises an insurmountable hurdle to certification of the indirect purchaser class," U.S. Circuit Judge Kent A. Jordan wrote.
"Two plaintiffs cannot be joined in a single class to adjudicate the same set of facts when those facts give only one of them a legally cognizable claim," Jordan wrote in an opinion joined by visiting U.S. District Judge Donetta Ambrose of the Western District of Pennsylvania.
U.S. Circuit Judge Marjorie O. Rendell concurred in the judgment, but wrote a separate opinion that said she disagreed with Jordan's decision to undertake his own analyses of predominance and the plaintiffs' entitlement to injunctive relief, rather than allowing the lower court on remand to evaluate these issues in the first instance.
The ruling is a victory for attorneys Howard J. Bashman of Willow Grove, Pa., and George M. Plews and Christopher J. Braun of Plews Shadley Racher & Braun in Indianapolis, who represented objector Susan M. Quinn. Bashman writes a monthly column for The Legal Intelligencer.
It's also a major setback for the team of plaintiffs lawyers led by Joseph J. Tabacco Jr. of Berman DeValerio in San Francisco, along with William Bernstein and Eric B. Fastiff of Lieff Cabraser Heimann & Bernstein, also in San Francisco.
In the suits, the plaintiffs alleged that De Beers, a privately held group of foreign-based companies, had monopolized the international diamond business through its control of mines and a web of agreements with diamond suppliers in other countries. De Beers denied the allegation and maintained that it is not subject to the jurisdiction of United States courts.
According to court papers, De Beers initially refused to appear in the lawsuits, asserting that courts in the United States lacked personal jurisdiction over it and that any judgment entered by those courts would be a legal nullity. By September 2004, defaults or default judgments had been entered against De Beers in six of the seven actions.
But in May 2005, counsel for De Beers approached the plaintiffs counsel to discuss settlement of the indirect purchasers' claims.
Those discussions produced a settlement of the indirect purchasers' claims in four of the cases.
Under the terms of the indirect purchaser settlement, De Beers agreed not to contest certification of a settlement class of indirect purchasers and promised to establish a settlement fund of $250 million to be paid to class members. De Beers also agreed to a stipulated injunction that restrained it from violating U.S. antitrust law.
In May 2008, U.S. District Court Judge Stanley R. Chesler granted final approval to the settlement.
But on appeal, the objector contended that Chesler had been too quick to certify the class and, in doing so, had ignored differences among class members that rendered the certification of a national class impossible.
Specifically, Quinn argued that since the national class was premised on the state law claims of each plaintiff, the court had a duty to scrutinize the potential for claims from each state. In doing so, she said, it would have become clear that many of the class members would have no legal right to pursue an indirect purchaser claim.
Now the 3rd Circuit has agreed, saying the appeal forced the court to "consider for the first time whether a national class of indirect purchaser claimants under state law is 'sufficiently cohesive to warrant adjudication by representation.'"
In approving the settlement, Chesler found that the shared antitrust harm sustained by all indirect purchasers predominated over other issues in the case, making those claims appropriate for class treatment.
But Jordan found Chesler's approach was flawed because it effectively "grouped antitrust claims under the laws of all 50 states and the District of Columbia into a single class."
"There can be no certification of a nationwide class of state indirect purchaser plaintiffs because there is no common question of law or material fact," Jordan wrote.
"It is improper to certify a nationwide class when the legal right shared by class members purportedly arises under the laws of multiple jurisdictions, but only some of those jurisdictions extend standing to class members to enforce that right."
Jordan said the plaintiffs lawyers tried to minimize the legal disparities "by characterizing them as little more than impediments to litigation that would make trial management difficult but that may safely be ignored for settlement purposes."
That argument failed, Jordan said, because it "places management issues above the more basic question of substantive law. It is akin to suggesting that a really good cook, by means of superior kitchen management, can make a cake out of nothing."
The lack of substantive rights, Jordan said, "cannot be wished away by the promise of easier litigation management."
Tabacco, who argued the appeal for the plaintiffs, could not be reached for comment by press time.
