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The Third Circuit issued a gem of an opinion on class certification last month, and we like it because it puts a laser focus on what a plaintiff has to prove to get a class certified and the district court’s duty to examine and resolve disputes at the class certification stage.  In In re Lamictal Direct Purchaser Antitrust Litigation, No. 19-1655, 2020 WL 1933260 (3d. Cir. Apr. 22, 2020), the Third Circuit reaffirmed the very sound rule that a plaintiff bears the burden of proving the requirements of Rule 23 by a preponderance of the evidence and that the court must resolve all disputes—legal or factual—relevant to class certification, even if they overlap with the merits.

It’s an antitrust case, which is not our usual cup of tea, but it involves prescription drugs and, again, is very useful on class certification.  In Lamictal, the innovator manufacturer of an anti-epilepsy drug had a dispute with a generic manufacturer who attempted to enter the market before the innovator’s patent expired.  Id. at *1-*2.  To make a long story short, the parties compromised:  They settled with an agreement that allowed the generic manufacturer to start selling its product later than it wanted, but before it would have been allowed had the innovator won in litigation.  Id. at *2.  In addition the innovator manufacturer agreed that it would not launch its own authorized generic product to compete.  Id.

Hence, the antitrust dispute.  Companies that purchased the products filed a class action alleging that the lack of competition caused them to pay too much.  Id.  As the theory goes, had the innovator not “paid” the generic manufacturer to wait and had the innovator not agreed to refrain from launching its own authorized generic, the purchasers would have paid less for the medicine.  Id.

It’s a nice theory, but the truth is considerably more complex.  The price that purchasers actually paid depended on multiple factors, and the purchasers actually paid dramatically different prices when taking into account such variables as discounts and charge-backs.  Particularly relevant was the innovator’s strategy to compete directly against the generic manufacturer by contracting directly with certain pharmacies to offer significant discounts.  Still further, the generic manufacturer learned about the innovator’s “contracting strategy” before it was implemented and preemptively lowered its own drug prices to compete.  Id. at *3.  These market pressures yielded differences in price from purchaser to purchaser, and some purchasers never paid more for the products then they would have but for the manufacturers’ settlement agreement.  Id. at *6.

You can start to see the class certification arguments forming.  The plaintiffs moved to certify a class and predictably relied on expert opinion that brushed over the complexity of drug pricing and instead relied on “an average hypothetical price” based on economic literature and sales data.  Id. at *5 (emphasis in original).  By using an average, the expert purported to conclude that the entire class suffered a competitive injury.  Id.  The manufacturers countered with an expert of their own, who opined that it was not possible, absent individualized inquiry, to determine whether any particular purchaser actually paid a higher price than it would have paid absent the settlement.  Id. at *6.  According to the defendants’ expert, the purchasers’ expert wrongly relied on averages and general information, instead of pricing information specific to the product.  Id.

The district court certified the class, but in doing so, it made no attempt to analyze whether it was appropriate to use averages.  That was error.  The Third Circuit laid out the standard in a clear and useful way:

To determine whether the putative class has satisfied predominance (indeed, all applicable Rule 23 requirements), the District Court must conduct a “rigorous analysis” of the evidence and arguments presented. . . .  That involves three key aspects. First, the court must “find[ ]” that the requirements of Rule 23 are met and any “[f]actual determinations supporting Rule 23 findings must be made by a preponderance of the evidence.”  . . . Second, “the court must resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits.” . . .  Third, the court must consider “all relevant evidence and arguments,” including “expert testimony, whether offered by a party seeking class certification or by a party opposing it.” . . .

Id. at *4 (citations omitted).  If after undertaking this “rigorous analysis” the court is convinced, by a preponderance of the evidence, that the plaintiff’s claims are capable of common proof, then the plaintiff has met its burden of proving predominance.  Id.

In setting forth this rule, the Third Circuit followed its own precedent in In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3d Cir. 2009), on which we blogged way back in the day here.  At the same time, the Third Circuit rejected the purchasers’ citation to a Fair Labor Standards Act case, Tyson Foods v. Bouaphakeo, 136 S. Ct. 1036 (2016), where the Supreme Court suggested that the predominance standard is satisfied “unless no reasonable juror could believe the common proof at trial.”  According to the Third Circuit, that lower standard has no application outside of FLSA cases.  Id. at *4-*5.  As the Third Circuit held, “Our non-FLSA case certification decisions that post-date Tyson Foods have reiterated that district courts are required, per Hydrogen Peroxide, to resolve factual determinations by a preponderance of the evidence at the class certification stage.”

From here, the Third Circuit reversed the class certification order on two bases.  First, the district court abused its discretion when it failed to apply a “rigorous analysis” that examined the expert opinions, scrutinized the underlying evidence, and resolved the factual disputes.  Id. at *6.  Second, the district court confused injury with damages.  While damages do not always need to be “susceptible to measurement across the entire class for purposes of Rule 23(b)(3),” that is not true when determining whether injury is capable of common proof on a classwide basis.  Id. at *7.

The Third Circuit remanded for further proceedings, which may or may not include another motion for class certification.  Either way, the Third Circuit has clarified the applicable rules in a clear and helpful way.