January 30, 2014 Articles

The Law and Economics of Class Actions: Yesterday, Today, and Tomorrow

A summary of important cases and developments featured at the 2013 Class Action Landscape conference.

By James Langenfeld and Raleigh Richards

Legal and economic analyses overlap and interact in many areas. Recent U.S. Supreme Court and lower court decisions on class action lawsuits clearly focus on the critical role that economic analysis serves in determining the outcome of class actions. Class action decisions, such as Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend have made national headlines and are affecting how class action cases are evaluated and managed. These and other recent decisions have arguably raised the bar in class certification for showing common impact and predominance through expert testimony, as they have turned on the adequacy of the analyses put forth by expert economists, finding the basic economic and statistical analyses of the plaintiffs’ economists to be insufficient. The decisions are likely to have significant implications for use of expert testifiers in class certification and in estimation of monetary damages. They will also present challenges to both attorneys and economists in antitrust and other class actions going forward.

On October 25, 2013, Research in Law and Economics and Navigant Consulting sponsored the conference Class Action Landscape: Yesterday, Today, and Tomorrow in Boston, Massachusetts. The conference was composed of four sessions, each focused on one or more articles related to class actions that had been refereed and accepted for publication in a forthcoming issue of Research in Law and Economics. Along with the authors presenting their research, discussants involved in class actions and related research offered comments and critiques. Together, these articles and comments examined elements of class action law from diverse viewpoints, featuring defendant and plaintiff perspectives, written by both lawyers and economists, concerning domestic and international law. The balance of this article briefly summarizes the articles and comments that were offered at the conference.

Well known defense class action attorneys James Keyte, Paul Eckles, and Karen Lent of Skadden, Arps, Slate, Meagher and Flom LLP in “From Hydrogen Peroxide to Comcast: the New Rigor in Antitrust Class Actions” collect, assess, and categorize U.S. Rule 23(b)(3) direct purchaser antitrust cases since Hydrogen Peroxide and in the wake of the Supreme Court’s decision in Comcast. They find that economic testimony has become a critical part of class certification, and the U.S. Supreme Court has raised the standard for these analyses. The authors explore the meaning of “rigor” as it is used today in antitrust cases. They also suggest future developments based on current principles and envision an increasingly important role for Daubert motions that are used to attempt to exclude experts and expert testimony. The new rigor the authors see suggests a more step-wise analytical framework for assessing class certification beginning with Daubert issues, proceeding to questions surrounding issues of common proof of impact, and finally, if necessary, concluding with a rigorous an analysis of proffered class-wide proof concerning damages.

Professor Joshua Paul Davis, of the University of San Francisco School of Law, is the author of several class action articles. He submitted a formal comment on the Keyte, Eckles, and Lent article, titled “The Class Cert Games: Coach, Commentator, or Critic?” In his comment, Davis finds that Keyte, Eckles, and Lent have done an excellent job presenting a “playbook” for defense counsel to challenge plaintiffs’ attempts to get class certification and to exclude plaintiffs’ experts. However, Davis does not see the authors as completely objective in their reading of the relevant cases, and he raises questions about some of the policy implications in their article.

In “Antitrust Class Proceedings—Then and Now,” leading plaintiffs’ attorney Michael Hausfeld of Hausfeld LLP and economists Gordon Rausser and Gareth Macartney of OnPoint Analytics track the evolution of Rule 23 on class certification since its inception and analyze the impact of the Hydrogen Peroxide and Wal-Mart decisions on the rule’s interpretation. The authors then examine the current and future role of economics in post-Comcast antitrust class certification, specifically in the areas of liability, common impact, and damages. They explain how liability evidence can be used by economists to support a finding of common impact for certification purposes, and how statistical techniques such as averaging, price-dispersion analysis, and multiple regressions have and should be employed to establish common proof of damages. They make several policy recommendations and conclude that the emerging class-certification standards require greater diligence and impose greater obligations on both the parties and the courts.

Robert Kneuper of Navigant Economics provided comments about the economic analyses needed to certify classes after Comcast and related decisions. First, he argued that showing common impact and damages needs to be based on sound economic analyses that apply reliable economic and statistical techniques. A second point was that any economic analysis of common impact and damages must be done in the context of specific liability and causation theories of the case and the appropriate scope of the proposed class. Given these constraints and what the courts have found unacceptable, he believes it will often be better to narrowly focus the liability theory of the case so the class certification analysis does not have to stretch to take into account too many different effects for different class members. Kneuper concluded that defining a smaller class based on a clear liability theory is better than a larger class with a less precise liability theory with more chances for members that may not be impacted.

Statistical and econometric analyses are often used in class certification to estimate the impact of an alleged wrongful act independent of other potential market influences, and now may be more important if there is increased rigor required. In “Econometric Tests for Detecting the Existence of Common Impact,” Kevin Caves and Hal Singer of Navigant Economics propose econometric methods and statistical tests for detecting the existence of common impact across class members and determining what proportion of a proposed class suffered injury. This work addresses the tension between today’s standard econometric methods that measure the average effect of challenged conduct on prices, and the legal standard of common impact that is concerned with determining whether individual class members were harmed. They propose a specific econometric approach for class certification analyses that allows for the systematic estimation of differing effects of an action on the prices paid by individual class members, and controls for the average impact of other market forces on prices on class members.

Laila Haider of Edgeworth Economics is the coauthor of an article commenting on the Caves and Singer approach, where she evaluates the feasibility of systematically estimating the impact of an allegedly wrongful act. Haider argued that Caves and Singer’s approach inappropriately assumes influences other than the allegedly wrongful act should be estimated as the average across class members. Haider’s proposed econometric testing differs from Caves and Singer’s in that it allows not only the impact of the allegedly wrongful act to vary across class members, but also allows for the possibility that other influences on prices vary from customer to customer. The added complexity of her model can place additional demands on the amount of data needed to perform reliable tests, and this approach can find individual inquiry is needed when the Caves and Singer approach does not.

Jeff Leon of Complex Litigation Group LLP has worked with both plaintiffs and defendants in his career. He commented on the work of both Caves and Singer and Haider, attempting to put the disagreements as to which model is more appropriate in the context of litigation and what is most effective in that forum. Given the complexity of the econometrics methods, Leon explained the need for economists to be simple and clear, or run the risk of being ignored. He raised some questions about whether Haider’s approach would almost invariably find a need to engage in individual inquiry.

“Assessing Market Efficiency for Reliance on the Fraud-On-the-Market Doctrine after Wal-Mart and Amgen” is authored by Mukesh Bajaj and Sumon Mazumdar of Navigant Economics and the Haas School of Business at the University of California-Berkley, and Daniel McLaughlin of Sidley Austin LLP. Although not presented at the conference, the article concerns class actions and will appear in the forthcoming issue of Research in Law and Economics. The authors address specific aspects of the certification of securities class actions that have been discussed in Supreme Court cases as recently as 2013 in Amgen v. Connecticut Ret. Plan & Trust Funds. In particular, the authors explain the economic analyses they believe are required for class plaintiffs to invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the market” doctrine] to prove class-wide reliance. They find that lower courts have frequently granted class certification on the basis of a mechanical review of some factors that are considered intuitive “proxies” of market efficiency but do not actually show market efficiency according to recent studies. The authors argue that plaintiffs must first establish that the security traded in an efficient market using well-accepted economic tests before invoking fraud-on-the market. Only then do event study results, which are commonly used to demonstrate “cause and effect” across a class, have any merit. To show full class-wide reliance, plaintiffs must additionally prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint. The authors point out that these issues have major policy implications because defendants frequently settle once a class is certified to avoid the magnified costs and risks associated with a trial.

Ethan Litwin and Morgan Feder of Hughes Hubbard Reed LLP have a great deal of experience with class actions in the United States and the European Union. In “European Collective Redress: Lessons Learned from the US Experience,” they raise a number of questions about the effectiveness of class action lawsuits in the United States and propose alternative approaches to reimburse class members using other approaches. Litwin and Feder describe the steps already taken by the European Commission to research and develop European standards of compensatory collective redress, and then also propose, as well as criticize, alternatives to class actions based on both US and European Union experiences. Litwin and Feder argue that the “opt-out” system does not allow litigants to meaningfully participate in the adjudication of their rights (or even to decide whether a case should be brought at all) and therefore promotes just the kind of wasteful, unmeritorious over-litigation that EU lawmakers expressly wish to avoid. However, the authors also see the EU proposal as not being workable because of the limitations on third-party funding, preventing contingency fees, the opt-in rule, and the “loser pays” principle. Litwin and Feder instead describe how alternatives to class action litigations such as SEC Fair Funds and the September 11th Victim Compensation Fund could eliminate many of the disadvantages of the U.S. system and the problems with the EU proposals for collective redress.

Barbara Hart, Lowey Dannenberg securities litigator and vice-chair of the Executive Committee of the New York State Antitrust Committee, raised questions about how well the Litwin and Feder proposals could be implemented and whether the US mass tort system experience is as flawed as many imply. Hart sees this article as a conscientious effort to propose a middle ground in light of the foreign aversion to adopting the contingent class action model. However, she believes that aversion to the U.S. system is born of false belief that the state of class actions has not evolved beyond its inception and the incidental abuses for which it is pilloried. Other countries should not stay focused on past shortcomings of what the Rule 23 practice was. The old practice of simple oral argument and bare bones economic analysis for class certification are being supplanted by full or multi day evidentiary hearings and detailed economic analyses based on the facts of the case. Litigating a class case is complex, but Hart sees class actions as the best and an ever-improving model to address large-scale legal matters. She argues that opt-in and government-sponsored victim redress funds cannot, have not, and will not succeed to the same measure as US class actions.

Heidi Dalenberg, partner with Schiff Hardin, LLP, has extensive experience representing clients in asserted class actions involving breach of contract, consumer fraud, and common law fraud. Unlike Hart, she sees many of the same problems with the mass tort redress system in the U.S. that Litwin and Feder discuss. Dalenberg agreed with Hart that the EU proposals with an opt-out system would not achieve the goal of providing redress to class members. Dalenberg also agreed that the Litwin and Feder proposals were not likely to be workable in most instances.

Finally, Professor John Connor of Purdue University contributed “Cartel Overcharges,” which is a comprehensive study of overcharges in antitrust cartel cases that surveys economic studies and judicial decisions and contains more than 2,000 estimates of overcharges from 532 cartels from the 19th century through present day. Many of these matters involve class actions, and the author finds the median overcharge due to the cartel activity in these cases to be approximately 23 percent. The analysis indicates that average overcharges are much higher than the average level presumed by antitrust authorities. This sizable overcharge suggests that fines and damages may not adequately compensate class members or deter illegal behaviors such as price-fixing and bid-rigging. Among other interesting aspects of the data, Connor finds that international cartels on average impose higher overcharges and that overcharges on average have fallen slowly since the nineteenth century.

Professor John Kwoka of Northeastern University has a distinguished career as a scholar, former FTC economist, and widely published author on antitrust issues, including price fixing class actions. Kwoka pointed out that before Connor’s work, the Chicago school of economics concluded, without an empirical basis, that cartels are hard to form and impossible to sustain. Kwoka noted that the United States Sentencing Commission concluded in the 1980s that average gain from a cartel was a 10 percent overcharge. However, Connor’s work shows that cartels have existed with many members, have been long lasting, and have had a price effect well above 10 percent in many instances. Kwoka raised some questions about the reliability of a number of the studies that Connor includes in his data set, and how Connor counts different episodes of price fixing in the same industry during different periods and by different authors. Nevertheless, Kwoka doubted that addressing these potential shortcomings would substantially affect one of the main implications of Connor’s work: fines and damage awards under-deter cartel behavior, and more aggressive enforcement is merited.

Terry Calvani practices law in antitrust and class actions at Freshfields, and has served as Acting Chairman of the Federal Trade Commission and as a member of the Irish Competition Authority and director of the Criminal Cartels Division. Calvani pointed out that fining cartel firms does not always benefit class members, especially in instances where the money may largely go to attorneys or antitrust think tanks through cy pres funds. Calvani also disagreed with insufficient deterrence of cartel activity in light of corporate fines usually being lower than the estimated overcharges. Calvani explained that individuals, and not corporations, form cartels. Companies are often fined for actions by individuals who no longer work for the company when the cartel actions are discovered. Instead, Calvani reasoned that sanctions should primarily be placed on the individuals who engaged in the illegal acts and not the companies.

In general, there does not appear to be a consensus on how well the current US approach to class actions is working or on how to address shortcomings. However, the articles and the comments agree that recent Supreme Court decisions appear to require more rigorous economic analysis to certify a class and that this trend started several years ago with lower court decisions. As the lower courts now begin to apply these more rigorous standards, one can anticipate the development of more sophisticated economic approaches and more extensive discovery for class certification. The full impact of these developments on the number of successful class actions will likely depend on how effective the economic approaches prove to be, and on whether alternative approaches to consumer redress can be successfully implemented. These changes may have a substantial impact on the parties involved, and on the overall economy.

James Langenfeld and Raleigh Richards – January 30, 2014


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