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October 13, 2016 Practice Points

Third Circuit: Lack of Damages “Predominance” in Law School Employment Statistics Case

The court also clarifies the appropriate level of District Court “scrutiny” at class certification

by Joshua S. Levy

In a recent panel decision affirming denial of class certification, the U.S. Court of Appeals for the Third Circuit examined the predominance requirement vis-à-vis proof of damages and provided some direction to courts scrutinizing certification motions generally.  Harnish v. Widener Univ. Sch. of Law, __ F.3d __, 2016 WL 436133 (3d Cir. Aug. 16, 2016).

In Harnish, the putative class alleged that Widener School of Law published misleading employment statistics, thereby inflating the price of tuition in violation of the New Jersey and Delaware Consumer Fraud Acts (NJFCA and DCFA).

Despite evidence regarding the alleged misrepresentations and an economic expert report speaking to “the statistically significant relationship between employment rates and tuition prices” across 64 private law schools, the New Jersey District Court declined to certify the class.  The court found that the plaintiffs had “not shown that they c[ould] prove the proposed class members’ damages by common evidence” for two reasons: (1) Some Widener graduates did obtain full-time legal employment, while others did not; and (2) plaintiffs’ damages case hinged on the viability of a “fraud-on-the-market theory”—which relevant courts have rejected as a method of proving damages outside the context of federal securities fraud.

The Third Circuit tinkered a bit with the reasoning for rejecting certification.  (For example, the court disagreed that the level of the plaintiffs’ variations in employment undermined predominance and, separately, interpreted plaintiffs’ damages theory as “efficient market,” not “fraud-on-the-market,” a distinction—here—without a difference.). But ultimately, the Court of Appeals came to same conclusion as the District Court: Plaintiffs’ had failed to make a case that common issues of damages predominated over individual ones, and the putative class was thus undeserving of certification.

In the course of the Third Circuit’s opinion, three points of emphasis are worth noting.

First, the Court analogized the certification analysis to “a court’s preview of the merits of a case when imposing a preliminary injunction,” and rejected the argument that the District Court had been too exacting with its inquiries: “The District Court’s analysis of the evidence was in service of predicting whether the class-wide proof would ultimately suffice, which it was required to do.  And whatever distinction the plaintiffs are attempting to draw between ‘viable’ class-wide proof and ‘valid’ class-wide proof, the law is clear that a class-wide method of proof must be more than ‘plausible in theory.’”

Second, the Third Circuit shined a light on the plaintiffs’ conflation of the “fact of damage” (appropriate for the District Court to assess, in the context of the relevant consumer fraud statutes’ injury requirements) and the “measure/amount of damages” (not an obstacle to certification, and not underlying the District Court’s decision in Harnish).

Third, the court extensively addressed the viability of securities-type damages theories (by whatever name) in the consumer fraud class action context, concluding that “the ascertainable-loss and causal-relationship elements of the NJCFA and the DCFA are not met by the kind of price-inflation theory . . . advanced by the plaintiffs.”

Harnish is an instructive decision on certification and predominance—especially as related to consumer fraud—and provides needed clarity in a thorny area of the law.

Joshua S. Levy is an associate with Gibbons P.C. in Newark, New Jersey.

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