Class actions present litigants with unique incentives. Because the risk of class-wide liability is often substantial, defendants may have an incentive to settle even a meritless case to avoid the risk of potentially crippling liability. On the other hand, if individual class members’ damages are small, as they often are in class cases, plaintiffs may lack a monetary incentive to pursue their claims unless they can proceed as a class. These competing concerns make class allegations a critical feature in any case. And they encourage defendants to try to defeat class action allegations early in the lawsuit. The rationale is simple: take away the class claims, and you take away the plaintiff’s incentive to pursue the lawsuit.
But how early in a case can defendants challenge class allegations? This article explores that question in light of recent Supreme Court precedent.
Traditionally, courts considered the viability of class action allegations only after plaintiffs had the chance to gather evidence in discovery. Because plaintiffs frequently need that discovery to develop facts – such as the size of the class, specific policies or practices that may have impacted class members, or the extent of class members’ damages – to support their class claims, complaints commonly lack detailed class action allegations. That lack of detail, however, runs headlong into the Supreme Court’s decisions Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Iqbal v. Ashcroft, 556 U.S. 662 (2009), which revised the pleading rules in a way that requires plaintiffs to allege enough facts in the complaint to show the plaintiff’s claim is “plausible.”
Recognizing that class action allegations often may be developed only after discovery, many courts have given class allegations a pass on Twombly’s and Iqbal’s requirement that allegations contain enough facts to show that relief is plausible. But the Supreme Court’s March 2013 decision in Comcast v. Behrend, 133 S. Ct. 1426 (2012), may give courts cause to reconsider this reluctance to dismiss class allegations on the pleadings. Comcast, like the Supreme Court’s earlier decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), was not a motion to dismiss the case. But, as explained below, some interpret Comcast as making it more difficult for plaintiffs to obtain class certification by requiring courts to (1) take a closer look at the case’s underlying merits, and (2) find that class members’ damages are not too individualized before certifying a class. This interpretation has prompted some defendants to argue that Comcast, along with Dukes, narrows the types of claims likely to be certified as class claims after discovery and gives courts new leeway – at the pleadings stage – to dismiss class allegations with no plausible hope of ever being certified.
After first reviewing the Comcast decision, this article examines four different approaches that courts have followed when analyzing such arguments in the wake of Comcast. As discussed below, courts, with few exceptions, have been reluctant to jettison their hesitancy to dismiss class claims on the pleadings, even in the face of a steady stream of Supreme Court authority making it more difficult for plaintiffs to obtain class certification.
The Comcast Decision
Comcast reached the Supreme Court on an appeal of a district court’s order granting the plaintiffs’ motion for class certification. The case involved allegations that Comcast “clustered” its cable television operations in the Philadelphia area by swapping its systems outside of the region for a competitor’s systems within the region in violation of antitrust laws. The plaintiffs sought to certify a class under Federal Rule of Civil Procedure 23(b)(3), which requires courts to find that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” To that end, they advanced four theories of antitrust impact that supposedly increased the putative class’s cable subscription rates. But after considering each theory, the district court concluded that only one theory, relating to claims that Comcast’s activities dissuaded competitors from building networks in areas where Comcast operates, was capable of proof using common evidence. Accordingly, it certified a class under that theory and “rejected the rest.”
Importantly, however, the damages model that the plaintiffs offered to support their claims reflected their original four-theory approach to the case and “did not isolate damages resulting from any one theory of antitrust impact.” On appeal, the Third Circuit refused to find that the class was improperly certified because the damages model failed to attribute damages to the sole theory of liability remaining in the case. To do so, the Third Circuit reasoned, would constitute an “attac[k] on the merits” of the methodology that had “no place in the class certification inquiry.”
The Supreme Court, in a 5–4 decision, disagreed. As a threshold matter, the Court categorically rejected the Third Circuit’s conclusion that the merits have no place in the class certification analysis. Drawing on Dukes, the Court reiterated that courts must conduct a “rigorous analysis” to ensure that the requirements of Rule 23 are satisfied. That analysis, moreover, “will frequently entail ‘overlap with the merits of the plaintiff’s underlying claim.’”
While this finding was significant because it removed any doubt that courts may inquire “into the merits of the claim” when deciding class certification, it was nothing that the Court had not determined before in earlier opinions. The Court’s discussion of the role of damages in class certification was more novel, and thus opened the door to new arguments to attack class allegations.
Specifically, the Court cautioned that courts should not certify class actions when “questions of individual damage calculations will inevitably overwhelm questions common to the class.” Therefore, unless “damages are capable of measurement on a classwide basis,” class certification under Rule 23(b)(3) is inappropriate.
The four dissenting justices were clearly troubled by the potential breadth of the majority’s discussion of damages, particularly with regard to its possible use as a sword to defeat class claims early in a case. Noting the “well nigh universal” recognition that individual damages calculations did not preclude class certification under Rule 23(b)(3) that appears to conflict with the majority’s opinion, the dissenters urged that the Court’s holding should “not be read to require, as a prerequisite to certification, that damages attributable to a class wide injury be measurable ‘on a class-wide basis.’”
Testing Individualized Damages on the Pleadings
As the Comcast dissenters seemed to predict, defendants quickly looked to individualized damages issues as a means of obtaining early dismissal of class claims on the pleadings. But they did not receive the reception one might have expected in light of what the Comcast majority had to say about damages.
Consider, for example, Smith v. Washington Post Co., 962 F. Supp. 2d 79 (D.D.C. 2013), which was decided four months after Comcast. In Smith, the plaintiff, a newspaper distributor, alleged that the Washington Post Company unilaterally changed contract terms and refused to reimburse him and a putative class of other distributors for unsold newspapers. The Washington Post maintained that to determine individual breach of contract claims and – perhaps equally significant – failure to reimburse damages, the court needed to consider individualized evidence. Thus, the Washington Post argued that the court should strike or dismiss Smith’s class claims on the pleadings because they were “untenable under any theory” and “would require individualized determinations precluding class-wide adjudication.”
While not citing Comcast, the court’s consideration of this argument implicated the broadest interpretation of Comcast: that class certification is inappropriate whenever individualized damages calculations are necessary. The court did not reject that interpretation, but it was nevertheless “hesitant to delve deep into the merits of the plaintiff’s class allegations” because there had “been no discovery whatsoever.” And in the absence of discovery, it refused to find that “individualized proof of injury or damages w[ould] overwhelm common issues and preclude class certification.” For those reasons, the court held that class resolution was premature and that Smith was “entitled to discovery before deciding class certification.”
Another early post-Comcast case illustrates courts’ unwillingness to shed their historic reluctance to dismiss class allegations before discovery. In Blagman v. Apple, Inc., et al., No. 12 Civ. 5453(ALC)(JCF), 2013 WL 2181709 (S.D.N.Y. May 20, 2013), the plaintiff, Blagman, brought putative class claims asserting that Apple, Inc., and other digital music retailers illegally infringed upon his copyrights. Consistent with the Supreme Court’s admonishment in Twombly that allegations must be plausible to state a claim for relief, Apple and the other defendants moved to dismiss the class allegations, which consisted of a one-paragraph allegation that they had “also willfully infringed on at least thousands of . . . copyrighted” materials.
While courts have come to routinely dismiss substantive claims predicated on such conclusory allegations, the Apple court declined to dismiss the class claims. The court reasoned that “[d]ismissal of class allegations at the pleading stage should be done rarely as ‘the better course is to deny such a motion because the shape and form of a class action evolves only through the process of discovery.’”
Further, the Apple court found that Comcast actually supported its decision to delay consideration of the class claims’ viability. Noting that Comcast reached the Supreme Court only after the plaintiffs had the opportunity to gather and present evidence supporting their class claims, the court concluded that Comcast “reinforce[d] class certification as the proper stage for these questions.”
Is Denial of Class Certification Really Proper Whenever Damages Are Individualized?
The Apple and Smith cases demonstrate that at least some courts do not see the Supreme Court’s recent class action precedent as a basis to dismiss class claims before discovery. But other courts have been reluctant to accept the broadest reading of that precedent – that class certification should be denied whenever damages require individual calculations – as a basis to dismiss class claims on the pleadings.
In Sherrard v. Boeing Co., No. 4:13-CV-1015 CEJ, 2013 WL 5786642 (E.D. Mo. Oct. 28, 2013), for instance, the plaintiff, Sherrard, asserted a variety of employment-related discrimination claims, including class claims, against Boeing. Boeing moved to dismiss the class claims, arguing that they failed “to state a plausible claim for class-wide relief.” Echoing the arguments at issue in Comcast, Boeing moved to dismiss or strike the class claims on the pleadings because Sherrard had failed to assert a plausible claim for relief since “individualized damages calculations would overwhelm any common questions of fact or law, precluding a showing of ‘predominance’ under Rule 23(b)(3).”
But the court rejected that argument. As a threshold matter, consistent with other courts’ general reluctance to decide class issues on the pleadings, the court found that it was “not clear” that individualized issues would predominate. Equally important, however, the court declined to hold that individualized damages preclude class certification. Relying on the authority that the Comcast dissenters said reflected a “universal” precept of class action law, the court concluded that “‘[c]ommon issues may predominate when liability can be determined on a class-wide basis, even when there are some individualized damages issues.’”
Whether this is an accurate statement of the law after Comcast remains a source of considerable debate. Judge Posner has concluded, for example, that Comcast cannot possibly mean that class certification is inappropriate whenever individual damages calculations are required because such a rule “would drive a stake through the heart of the class action device, in cases in which damages were sought rather than an injunction or a declaratory judgment.” Butler v. Sears, Roebuck & Co., 727 F.3d 796 (7th Cir. 2013). But other courts, such as the court in Roach v. T.L. Cannon Corp., 3:10-CV-0591 TJM/DEP, 2013 WL 1316452 (N.D.N.Y. Mar. 29, 2013), have embraced the broader view that class certification is inappropriate if damages are “highly individualized.” Either way, as Sherrard reflects, the uncertainty over Comcast’s meaning continues to contribute to courts’ reluctance to dismiss class claims on the pleadings.
Drawing the Line Between Rule 12 and Rule 23
As the debate over Comcast’s breadth continues, some courts have focused on an issue that would permit them to continue to deny motions to dismiss class allegations regardless of the debate’s outcome: the different standards that govern Rule 12 and Rule 23. As noted above, in Comcast the Supreme Court emphasized, as it had done earlier in Dukes, that courts must conduct a “rigorous” analysis when determining whether class claims satisfy the requirements of Rule 23. In contrast, to pass muster under Rule 12, a complaint need only give fair notice of its claims and allege enough factual matter to demonstrate that its allegations are “plausible” when viewed in the light most favorable to the non-moving party.
Another breach of contract case illustrates one court’s view of the relationship between these standards on motions to dismiss class allegations. In Anderson Living Trust v. ConocoPhillips Co., 952 F. Supp. 2d 979 (D.N.M. 2013), interest holders on oil and gas leases brought a putative class action against oil producers regarding a dispute over royalty payments. ConocoPhillips moved to dismiss the class claims under Rule 12(b)(6) on the basis that, among other things, the plaintiffs had “only restated rule 23(a)’s requirements in their class action allegations, and have failed to ‘allege even a single question of law or fact that purportedly is common to the class.’” In response, the plaintiffs maintained that they had stated a plausible claim for relief by alleging that the defendants had “systematically” failed to pay applicable royalties.
In evaluating the ConocoPhillips’s motion, the court began by noting that the standards that apply to Rule 12 and Rule 23 motions are different. To that end, the court noted that the two rules are concerned with different things – with Rule 12 being concerned primarily with substantive issues and Rule 23 being concerned primarily with procedural issues. Seizing this distinction to support why Rule 12’s substantive standards should not apply to Rule 23 class allegations, the court explained that Rule 23 enables plaintiffs to “take advantage of a procedural device, not a new cause of action.”
The court’s sharp distinction between the substantive and class allegations stands in some tension with Comcast’s emphasis that courts must look to the case’s merits when deciding class certification. But the court fortified its decision with a discussion of damages. Although the court did not cite Comcast, its analysis touched on the damages issues that animated the Comcast decision. Specifically, the court found that the plaintiffs did not need to plead a damages theory capable of supporting a class action with specificity. To require the plaintiffs to do so, the court reasoned, would “‘result in a near wholesale abandonment of the concept of notice pleading.’” Thus, although the plaintiff’s class allegations were “rather pro forma,” the court declined to dismiss them because the “heavy lifting is done at the class certification hearing, rather than on a motion to dismiss.”
The “Rare” Case Supporting Dismissal of Class Allegations on the Pleadings
Although most courts have not responded to Comcast – or Dukes – by granting motions to dismiss class allegations, there are some exceptions. Ladik v. Wal-Mart Stores, Inc., 291 F.R.D. 263 (W.D. Wisc. 2013), is one such exception. The plaintiffs in Ladik were current and former Wal-Mart employees who asserted that they had been denied opportunities for promotions based on their gender. All of the plaintiffs were once members of the class that the Supreme Court found had been improperly certified in Dukes. After the Dukes decision, the plaintiffs “refined” their proposed class so that it included only employees from four Midwestern states rather than the entire country. But they continued to assert the same substantive claims that were at issue in Dukes – namely, that Wal-Mart perpetuated gender discrimination by permitting individual managers to make promotion decisions based on subjective criteria.
Wal-Mart moved to dismiss the class allegations, arguing that Dukes demonstrated that the plaintiffs’ claims were not amenable to class certification. The plaintiffs responded by pointing to cases supporting the “proposition that courts should be wary of making a definitive determination about class certification at the pleading stage.” Notably, the court agreed that “it is the rare case in which it is clear from the pleadings that the plaintiffs may not proceed as a class.” But it found that Ladik was one of those cases. Although the court concluded that the plaintiffs had not alleged “more than sheer possibly” that their proposed class differed from the class rejected in Dukes, it placed special emphasis on the fact that the plaintiffs could “not explain how discovery could make a difference to the issue of certification.” The court thus saw “no reason to delay the inevitable” and granted Wal-Mart’s motion to dismiss the class claims.
So far, Comcast, and Dukes for that matter, have done little to advance courts’ willingness to grant motions to dismiss class allegations. It remains the “rare” case – as in Ladik – in which the plaintiff’s allegations are so obviously deficient as to support dismissal of the class claims on the pleadings. But one should not presume that this will always be so. Seven years after Twombly, courts are still trying to figure out how to apply it, but it is undeniable that courts grant more motions to dismiss today than they did in Twombly’s immediate aftermath. Comcast holds similar potential. Whatever its full meaning, Comcast, together with Dukes, evidences an unmistakable trend in favor of raising the bar for obtaining class certification. As time passes, more and more cases will likely deny class certification based on the principles set forth in Comcast. And as that happens, it will become more difficult for plaintiffs to explain how discovery will distinguish their class allegations from those in cases in which courts rejected class claims. That may well leave a growing number of courts with “no reason to delay the inevitable” and to dismiss class claims on the pleadings.