Schleicher and Antitrust Class Certification

November 5, 2010
Demetrius Lambrinos
Law360

In its recent decision, Schleicher v. Wendt, 2010 U.S. App. LEXIS 17367 (7th Cir.), the Seventh Circuit Court of Appeals weighed in on the extent to which district courts should evaluate merits-based issues when considering whether to certify a class under Fed. R. Civ. Proc. Rule 23(b)(3). While Schliecher is a securities case, its analysis may be applied to antitrust cases. 

For example, in antitrust class actions, defendants may argue that the issue of antitrust impact requires an examination of merits-based issues such as whether all class members actually paid inflated prices for priced-fixed goods. The Schliecher court held that while district courts may look beyond the pleadings in determining the appropriateness of class certification, it should not make the class certification decision hinge on “likely success on the merits.” Id. at *13, 17. 

According to the Seventh Circuit, a case can go “down in flames on the merits” and yet still be deserving of certification. Id. at 14. Under Schliecher, class plaintiffs may assert that the questions of whether class members actually paid inflated prices for price-fixed goods, or whether they will ultimately establish at trial that every class member was injured by the defendants’ alleged misconduct, miss the point. Rather, the relevant question is whether antitrust impact is susceptible to common proof at trial or whether proof of impact will vary from class member to class member, which is a fundamentally different inquiry. 

Since the enactment of the Class Action Fairness Act of 2005 (“CAFA”), 28 U.S.C. §1332(d)(2), an increasing number of antitrust class actions have found their way into federal court. One of the more complicated issues these courts are struggling with is how far to delve into the merits when deciding whether to certify classes under Rule 23(b)(3). 

The Supreme Court first addressed this issue in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974), where it stated that “[w]e find nothing in either the language or history of Rule 23 that 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.” Id. at 177. 

The scope of Eisen’s holding came under question in 1978 in Coopers & Lybrand v. Livesay (Livesay), 437 U.S. 463 (1978). In Livesay, the court stated that “[e]valuation of many of the questions entering into determination of class action questions is intimately involved with the merits of the claims,” and that “the class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action.” Id. at 469 and n. 12. 

The court’s statements in Eisen and Livesay created some “uncertainty” among the circuits “as to whether district courts are categorically prohibited from evaluating the merits of a class claim at the class certification stage, even where the merits questions overlap with a Rule 23 requirement.” In re: Community Bank of Northern Virginia, 2010 U.S. App. LEXIS 19708 at *42 (3d Cir.). 

Because of this uncertainty, circuit courts have taken different approaches to this issue and thus permitted varying degrees of merits-based analysis at class certification.[1] The result of these opinions is that parties face a scattershot of subtly different formulations of the proper scope of merits inquiry at the class certification stage. Id. 

In Schleicher the Seventh Circuit Court of Appeals attempted to define the proper scope of merits-based determinations at the class certification stage. Schleicher was a securities-fraud class action suit, which alleged that managers at Conseco, a publicly traded financial services company, violated the securities laws by making “unduly rosy statements that led investors to pay too much for the[ir] shares.” 2010 U.S. App. LEXIS 17367 at *4. 

The district court certified a proposed class of investors and the defendants appealed. Id. The defendants argued, inter alia, the district court erred by failing to determine whether the contested statements “actually caused material changes in stock prices.” Id. at *6. The Schleicher court held that district courts are not required to definitively resolve merits-based issues such as whether the contested statements actually caused material changes in stock prices. Id. at *13-14. 

According to the court, it would put the “cart before the horse” to insist that such determinations be made before a class can be certified. Id. at *19. The court held that whether the statements in question were false; whether those falsehoods were intentional; whether those falsehoods affected stock prices; and whether “the magnitude of any effect shows that the false information was material” were all merits-based questions that can and should be resolved on a classwide basis because they affect all investors in common. Id. at *2. 

According to Judge Frank Easterbrook, who authored the opinion, “[t]he chance, even the certainty, that a class will lose on the merits does not prevent its certification.” Id. at *19. He further explained that “certification is largely independent of the merits,” that “a certified class can go down in flames on the merits” and that “[t]he possibility that individual hearings will be required for some plaintiffs to establish damages does not preclude certification.” Id. at *14. 

The court also held that the inclusion of short sellers in the class also did not preclude certification. The defendants argued that short sellers were not impacted by the alleged conduct because short sellers, by definition, expect to profit from falling stock prices. Id. at *10-11. 

The court found that whether a given investor was a long seller or a short seller was irrelevant to the question of whether the class should be certified. Id. In the court’s view, “[b]oth the long and the short are affected by news that influences the price they pay or receive. It may turn out that the shorts do not suffer compensable losses — that, indeed, the shorts’ gains should be subtracted from the longs’ losses, and only the net treated as damages — but this does not imply that the class definition is defective.” Id. at *11. 

This holding was consistent with the court’s earlier ruling in Kohen v Pacific Investment Management Co., 571 F.3d 672, 677 (7th Cir. 2009), which held that a class of investors may include within it persons, such as short sellers, who were not injured by the defendant’s conduct. Under Kohen and Schleicher, such questions of quantum of injury go to individual damages determinations and do not affect class certification as to common questions such as liability and impact. 

Class plaintiffs in antitrust class actions may argue that under Schleicher district courts may look beyond the pleadings to determine whether plaintiffs’ claims are susceptible to common proof, but the courts should not decide merits issues in the class certification context. In the antitrust context, for example, class plaintiffs may assert that determining whether class members actually paid artificially inflated prices is not permitted, but evaluating whether determination a price effect is susceptible to common proof at trial is permitted. 

Similarly, class plaintiffs faced with a claim that the putative class includes persons or entities that were not harmed by the alleged anticompetitive conduct, may nevertheless argue, under Kohen and Schleicher that the fact that certain class members may not suffer compensable losses does not automatically defeat class certification. In response, defendants may assert that issues of antitrust impact and damages are so enmeshed in the factual and legal issues comprising the plaintiff's cause of action, that courts must resolve them to decide class certification. 

While such an argument may continue to find support in some Circuits, Schleicher appears to continue a trend in the Seventh Circuit, started with Kohen, which seeks to distance merits determinations from the evaluation of common issues in class certification proceedings. 



[1] Compare In re: New Motor Vehicles Canadian Export Antitrust Litigation, 522 F.3d 6, 24 (1st Cir. 2008)(“It is a settled question that some inquiry into the merits at the class certification stage is not only permissible but appropriate to the extent that the merits overlap the Rule 23 criteria. It is less settled what degree of merits inquiry is required at the class certification stage, and the Supreme Court has not yet addressed the issue”); Oscar Private Equity Invs. V. Allegiance Telecom Inc., 487 F.3d 261, 268 (5th Cir. 2007)(“A district court still must give full and independent weight to each Rule 23 requirement, regardless of whether that requirement overlaps with the merits”); Szabo v. Bridgeport Machines, 249 F.3d 672, 677 (7th Cir. 2001) (“Nothing in ... Eisen[] prevents the district court from looking beneath the surface of a complaint to conduct the inquiries identified in [Rule 23] and exercise the discretion it confers”); Vallario v. Vandehey, 554 F.3d 1259, 1266 (10th Cir. 2009) (the merits of the class claims “may not serve as the focal point of [the] class certification analysis”).