The Supreme Court’s 5-4 decision last week to overturn the certification of a class of cable television subscribers is extraordinary—not because it continues the Court’s exhortations to lower courts to make merits determinations at the class certification stage, but because of the level of merits-related scrutiny the Court is now requiring.
In Comcast Corp. v. Behrend, the plaintiffs alleged that Comcast violated the federal antitrust laws through a “clustering scheme” that systematically increased Comcast’s share of subscribers in the Philadelphia-area through the targeted acquisition of cable systems within the area. The scheme allegedly eliminated competition among cable service providers in the Philadelphia area and resulted in artificially high prices.
The plaintiffs articulated four different methods in which the clustering alleged increased subscription rates to consumers. The district court, however, held that only one of these four theories was capable of classwide proof, and limited its certification order accordingly: the argument that Comcast’s clustering reduced competition from “overbuilders,” companies that build competing cable networks in areas where an incumbent cable company already operates. The district court further found that damages resulting from decreased overbuilder competition could be calculated on a classwide basis, relying on a regression model that established hypothetical prices that would have existed in a competitive market.
Although the Third Circuit affirmed the district court’s certification order, the Supreme Court found a fatal flaw in the regression model: it did not allow a court to distinguish between damages resulting from overbuilder deterrence and damages resulting from the three other forms of antitrust impact that the district court found incapable of classwide proof. Justice Scalia, writing for the majority, reasoned that because only one theory of damages was accepted for class action treatement, “a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory.” Otherwise, the Court held, the plaintiffs “cannot show Rule 23(b)(3) predominance: Questions of individual damage calculations will inevitably overwhelm questions common to the class.”
The Court’s opinion was largely a rebuke to the Third Circuit for what the Court perceived as a disregard for the Court’s opinions requiring review of merits issues relevant to class certification. The Court characterized the Third Circuit as setting too low a bar for the evaluation of an expert damages model in assessing predominance, criticizing the Third Circuit for failing to require the plaintiffs to tie their damage model to a particular theory of antitrust impact. Justice Scalia wrote that the Third Circuit’s reasoning “flatly contradicts our cases requiring a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim.”
What makes the majority opinion extraordinary, however, is the import of its holding in light of the underlying allegations and theories. Remember that the plaintiffs’ regression model established the prices that allegedly should have prevailed in a competitive market. Such a model, if admissible, is therefore evidence that the difference between its hypothetical prices and the actual prices is due entirely to Comcast’s anticompetitive behavior. Yet the Court held, in essence, that unless the plaintiffs can devise a damage model at the class certification stage that distinguishes one type of anticompetitive behavior from another, they cannot proceed as a class to challenge any of Comcast’s anticompetitive behavior.
The Court’s opinion acknowledged as much: “For all we know, cable subscribers in Gloucester County may have been overcharged because of [Comcast’s] elimination of satellite competition . . . ; while subscribers in Camden County may have paid elevated prices because of [Comcast’s] increased bargaining power vis-à-vis content providers . . . .” Although all such subscribers arguably would have paid higher prices as a result of antitrust violations by Comcast, the Court has placed the burden on plaintiffs at the class certification stage not only to articulate a theory of damages, but to come forward with a damage model that discounts all other potential lawful and unlawful causes of those damages. One is left to wonder whether the result would have been different if the plaintiffs had alleged only that Comcast’s clustering deterred overbuilders, and had not even raised the other three theories.
Justices Ginsburg and Breyer’s dissent, in addition to criticizing the majority for reaching factual conclusions about the significance of an expert report, made another point: In the district court, Comcast argued that the three “rejected” theories of injury had no impact on prices. “If Comcast was right,” argued the dissenters, then the damages identified in the regression model “must have stemmed exclusively” from conduct that deterred overbuilders.
The lesson to class counsel may be that in class actions, pleading or arguing in the alternative can have serious adverse consequences, as the Supreme Court has essentially instructed lower courts to flyspeck class certification evidence for inconsistencies with discarded liability theories. The lesson to defense counsel, conversely, is that any suggestion that an expert report—or any other piece of evidence—should be given anything less than full scrutiny is subject to attack.