The admissibility and weight of expert testimony in class certification hearings has become an outcome determinative issue in some litigation. Expert testimony can play an enormously important role in assisting a judge’s determination of whether a putative class action meets the requirements of Rule 23 of the Federal Rules of Civil Procedure (FRCP).
A recent judicial pronouncement on this topic, In re Hydrogen Peroxide Antitrust Litigation, leaves no question that the courts will subject expert testimony to a rigorous review in the class certification analysis, even where such testimony touches on “merits” issues. Thus, the practitioner should carefully consider the strategic use of expert testimony and recognize that Daubert hearings, traditionally reserved for evaluating the admissibility of expert testimony immediately before trial, plays an increasingly important role in determining whether an action will proceed on a class basis.
In light of the significance of the class certification decision, this article examines the courts’ changing attitudes toward consideration of expert testimony in deciding whether to certify a class.
Certification Requirements and ‘Eisen’
As noted above, the decision of whether or not to certify a class action has tremendous impact on the parties’ strategic decisions on whether to litigate or settle a case. FRCP 23 sets forth the requirements that must be met before a court may certify a class action.2
In 1974, the U.S. Supreme Court issued a decision in Eisen v. Carlisle & Jacquelin, and noted that “nothing in either the language or history of Rule 23 [] gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.”3 Following the directive in Eisen, courts did not probe expert evidence or testimony where they touched on substantive issues when analyzing the question of whether to grant class certification. In the years immediately following Eisen, district courts concluded that they could not consider “any aspect of the merits,” and viewed themselves as obliged to accept plaintiffs’ unsubstantiated merits contentions.4
In 1982, the Court issued a seemingly conflicting directive to Eisen in General Telephone Company Southwest v. Falcon.5 In Falcon, the Court instructed that district courts must perform a “rigorous analysis” in assessing class certification issues.6 These edicts (to refrain from making any inquiry into the merits of the case, while also performing a rigorous analysis of the proof) left the trial courts with inconsistent authority on how to handle the admissibility and weight accorded to expert opinions at the certification stage. The effects of Eisen, however, were apparent in these certification decisions. Courts remained reluctant to probe merits issues, which constrained the judicial scrutiny of expert testimony, permitted easy class certification, and threatened defendants with the “in terrorem” effects of a certified class.
The Procedure Has Shifted
Nearly three decades after the Supreme Court issued its decision in Eisen, the lower courts finally began modifying their interpretation of it. Rather than reading Eisen to prohibit any inquiry where such could be considered a “preliminary inquiry into the merits,” courts began to explain that the Eisen prohibition applies only where the issue is solely related to the merits.7 In a growing trend, there is now a general recognition that even where the issues are related to an inquiry of the merits of the claim, courts are obliged to consider evidence, including expert evidence, if the issues overlap with the class certification question.8
One major consequence of this evolving interpretation of Eisen is that courts now look beyond the pleadings to “consider the substantive elements of the plaintiffs’ case in order to envision the form that a trial on those issues would take.”9 And, faced with greater judicial scrutiny at the class certification stage, plaintiffs are proffering expert evidence in an effort to show that the prerequisites of numerosity, commonality, typicality, adequacy and predominance have been satisfied.10
Defendants, meanwhile, are proffering experts to show that these pre-requisites have not been satisfied. This kind of close judicial scrutiny of expert evidence was previously seen only in formal Daubert hearings, and often timed near the close of all discovery. The courts’ increasing acceptance of their role in rigorously analyzing class certification issues (and related expert evidence) highlights the need for practitioners to recognize the importance of this new battleground of expert testimony, the class certification hearing.
In its oft-cited In re Initial Public Offering Securities Litigation decision in 2006, the Second Circuit addressed the “surprisingly unsettled” issue as to how a district court should adjudicate a motion for class certification.11 Previously, the Circuit had suggested that a Daubert review at the class certification stage would be premature and inappropriate (as it would likely require an impermissible consideration of the merits under Eisen).12
The IPO court made clear that “the district judge must receive enough evidence, by affidavits, documents, or testimony, to be satisfied that each Rule 23 requirement has been met.”13 Thus, according to the Second Circuit, a trial court has an affirmative obligation to consider and make determinations regarding expert testimony, even if such testimony relates to an issue that has merits significance.14
Other courts, including the Ninth Circuit, have since adopted the Second Circuit’s approach.15 And in an apparently growing trend, district courts have explicitly used the IPO analysis to order Daubert examinations of experts.
In Rhodes v. E.I. Dupont de Nemours and Co., the Southern District of West Virginia faced the question of whether to grant class certification in a proposed class action seeking medical monitoring involving the release of the chemical perfluoroctanoic acid.16 Plaintiffs sought to introduce expert testimony on issues related to exposure, risk of disease and the need for medical monitoring. Plaintiffs also sought to use this clear example of merits-related expert testimony for the purpose of showing that the “elements of the medical monitoring cause of action can be proven commonly.”17
The court aptly noted that “the question of when an expert opinion is an appropriate tool in determining whether a class may be certified is a tricky one.”18 Ultimately, the Rhodes court ordered a full Daubert hearing to “test the plaintiffs’ key experts’ methodology and assumptions.”19 Following the Daubert hearing, the Rhodes court found that plaintiffs failed to meet their burden of satisfying Rule 23 and denied the motion for class certification.20
Scrutinizing the Expert Proof
The critical importance of evaluating expert testimony at the class certification stage is further evidenced by the Third Circuit’s Hydrogen Peroxide decision. In that case, the district court found that plaintiffs had met their burden and fulfilled the requirements for certification pursuant to FRCP 23. The class certification issue on appeal concerned the question of predominance pursuant to FRCP 23(b)(3), and whether the district court properly considered competing expert evidence on the issue of whether purchasers of hydrogen peroxide were particularly vulnerable to anticompetitive activity.21
The Third Circuit acknowledged three main grounds on which defendants challenged the district court’s finding of predominance:
(1) the district court applied too lenient a standard of proof in deciding to grant class certification;
(2) the district court failed to “meaningfully” consider the competing testimony of defendants’ expert; and
(3) the district court erroneously interpreted Third Circuit precedent by applying a presumption of antitrust impact.22
At the class certification proceedings, plaintiffs proffered an expert economist to offer opinions on merits issues at the very heart of their antitrust case. Specifically, plaintiffs’ expert testified to using a “market analysis” and examination of “pricing structure,” and concluded that “antitrust impact was capable of proof at trial through evidence common to the class.”23 His “market analysis” suggested that this industry was vulnerable to an antitrust conspiracy for a number of reasons:
(1) hydrogen peroxide was a fungible product, which meant that producers were competitive on price rather than other features;
(2) there were relatively few manufacturers;
(3) there were high barriers to entry by potential competitors in the industry; and
(4) geographic markets overlapped.
Further, his examination of the “pricing structure” showed that pricing fluctuations, across all producers and across all grades and concentrations of hydrogen peroxide, had moved suspiciously in similar ways over time, suggesting a conspiracy that would have impacted all class members.24
The defendants’ economist challenged these findings. Defendants’ expert argued that hydrogen peroxide was not in fact fungible, and, moreover, that plaintiffs’ pricing structure analysis used an improper methodology and had failed to implement any benchmark or regression analyses. Defendants further argued that plaintiff had not shown that the market would be commonly affected by the alleged conspiracy to fix prices. Defendants challenged the factual accuracy of plaintiff’s expert and also sought to exclude his testimony as unreliable pursuant to Daubert.
Following presentations by both experts, the district court concluded that the predominance requirement of FRCP 23(b)(3) was met, finding that plaintiffs’ presentation of either the market analysis or pricing structure analysis was “independently sufficient at this [class certification] stage.”25 Notably, although the district court recognized that defendants had presented competing evidence, and that plaintiffs had not presented any benchmark or regression analyses, it determined that it was sufficient that plaintiffs propose a method to show that their case could prove antitrust impact and damages. The district court did not require that plaintiffs actually show their expert’s theories would work.26
On appeal, defendants noted the district court’s analysis improperly granted class certification where plaintiffs merely made a “threshold showing” of proof that their theories might have merit. In so doing, defendants argued, the district court also failed to consider their expert’s competing evidence.
As to whether the district court applied too lenient a standard of proof, the Third Circuit ultimately determined that it had applied the incorrect standard of review. The Circuit reviewed its law on class certification and instructed that a Rule 23 analysis requires that the district court “resolve factual disputes by a preponderance of the evidence and make findings that each Rule 23 requirement is met or is not met, having considered all relevant evidence and arguments presented by the parties.”27
The panel criticized the district court’s decision, which allowed that plaintiff “need only make a threshold showing that the element of impact will predominantly involve generalized issues of proof . . . .”28 Noting that the use of “threshold showing” misleadingly suggests that a lesser pleading standard or presumption for class certification may be applied, and that such suggestion is contrary to the “rigorous analysis” and “close look” required under FRCP 23, the circuit court concluded that the district court erred.29
With respect to the question of whether the district court properly considered the experts’ opinions, the Third Circuit concluded that the district court failed to conduct a rigorous analysis of their competing opinions, noting that “opinion testimony should not be uncritically accepted.”30 The panel then reemphasized the movement away from the prohibition of reviewing merits related issues as stated in Eisen, by recognizing that a district court “may find it unnecessary to consider certain expert opinion with respect to a certification requirement, but it may not decline to resolve a genuine legal or factual dispute because of concern for an overlap with the merits.”31
Moreover, the use and growing importance of expert evidence, even at the preliminary stages of class certification, is evident in the Hydrogen Peroxide decision. Echoing the standards and analysis used in Daubert, the Third Circuit acknowledged that “[r]esolving expert disputes in order to determine whether a class certification requirement has been met is always a task for the court – no matter whether a dispute might appear to implicate the ‘credibility’ of one or more experts, a matter resembling those usually reserved for a trier of fact.” Moreover, the Circuit admonished that “[w]eighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands.”32
Based on the district court’s erroneous analysis of all relevant evidence, including the evidence and testimony presented by the experts, the panel vacated the order granting class certification and remanded the matter back to the district court. In so doing, the Third Circuit made plain that district courts must actively evaluate the admissibility and strength of expert evidence, and even consider credibility, as necessary to conduct rigorous evaluation of class certification issues.
Conclusion
As litigants approach the class certification hearing, they should carefully consider whether their experts’ opinions will pass muster under FRE 702, and whether to challenge the opposing experts under Daubert. Defendants can expect plaintiffs to continue to argue that the court should not consider merits questions, and may rely on older rulings that suggest that they need make no more than a “threshold showing” at the certification stage.
As discussed above, such arguments are out of sync with recent judicial pronouncements, most recently in the Third Circuit’s In re Hydrogen Peroxide decision. A rigorous evaluation of expert testimony must be undertaken when the expert issues touch on the viability of a class action, even where such expert testimony may also touch on substantive merits issues.
Eric M. Kraus is a partner and Soo Y. Kim a senior associate in the New York office of Sedgwick, Detert, Moran & Arnold.
Endnotes:
1. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir. 2008) (quoting Newton v. Merrill Lynch, Pierce, Fenner & Smith Inc., 259 F.3d 154, 162 (3d Cir. 2001)) (hereinafter Hydrogen Peroxide).
2. The four FRCP 23(a) pre-requisites are commonly referred to as numerosity, commonality, typicality, and adequacy.
One or more members of a class may sue or be sued as representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable,
(2) there are questions of law or fact common to the class,
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.
In addition to the above, an oft debated element of class certification is whether predominance exists pursuant to FRCP 23(b)(3), which permits certification if “[t]he 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 . . . .”
3. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 157 (1974).
4. In re Initial Public Offering Sec. Litig., 471 F.3d 24, 34 (2d Cir. 2006) (hereinafter IPO).
5. General Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982).
6. Falcon, 457 U.S. at 161; see also Amchem Prods. Inc. v. Windsor, 521 U.S. 591, 615 (1997) (observing that the district court must take a “close look” to determine whether to certify a class).
7. See Hydrogen Peroxide, 552 F.3d at 317 (“Eisen is best understood to preclude only a merits inquiry that is not necessary to determine a Rule 23 requirement.”); IPO, 471 F.3d at 34 (“Unfortunately, the statement in Eisen that a court considering certification must not consider the merits has sometimes been taken out of context and applied in cases where a merits inquiry either concerns a Rule 23 requirement or overlaps with such a requirement.”); Gariety v. Grant Thornton, LLP, et al., 368 F.3d 356, 366 (4th Cir. 2004); Szabo v. Bridgeport Machines Inc., 249 F.3d 672, 677 (7th Cir. 2001).
8. See Hydrogen Peroxide, 552 F.3d at 323; Dukes v. Wal-mart Inc., et al., 509 F.3d 1168, 1178 (9th Cir. 2007); see also Rhodes v. E.I. Dupont de Nemours and Co., Memorandum Opinion and Order granting Daubert hearing, at 15 (S.D.W.V. June 11, 2008) (quoting Szabo, 249 F.3d at 677, “Plaintiffs cannot tie the judge’s hands by making allegations relevant to both the merits and class certification”).
9. Hydrogen Peroxide, 552 F.3d at 317 (internal quotation and citation omitted); see also Dukes, 509 F.3d at 1168 n.2 (“Of course, we recognize that courts are not only ‘at liberty to’ but must ‘consider evidence which goes to the requirements of Rule 23 [at the class certification stage] even [if] the evidence may also relate to the underlying merits of the case.”) (internal citation omitted); In re Welding Fume Prods. Liab. Litig., 245 F.R.D. 279, 289 (N.D. Ohio 2007) (quoting Castano v. American Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996), the district court noted that “[g]oing beyond the pleadings is necessary because a court ‘must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues’”); 5 Moore’s Federal Practice §23.80[2] (“The 2003 amendment [to FRCP 23] clarifies that courts should not grant certification except after searching inquiry, and that courts should not rely on later developments to determine whether certification is appropriate”).
10. Generally, a party may submit the testimony of an expert if the expert’s knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue. FRE 702.
Federal Rules of Evidence Rule 702 states:
