District Court Erred in Denying Class Action Motion because Plaintiffs were Assignees of Original Plaintiffs, who were Members of the Class, and in Determining that Common Issues as to Damages did not Predominate Second Circuit Holds
Plaintiffs filed an antitrust class action lawsuit against certain initial public offering (IPO) underwriters alleging violations of the Sherman Act “by agreeing to charge all corporations conducting mid-size IPOs who used their services a fee equal to seven percent of the proceeds of the offering.” Cordes & Co. Fin. Services, Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 94-95 (2d Cir. 2007). Plaintiffs’ assignees (Cordes) assumed control of the class action litigation and sought class certification, id.; defense attorneys opposed class action treatment arguing, inter alia, that Cordes were not adequate class representatives because they were not members of the class and that common issues did not predominate, id., at 95. Cordes presented an expert opinion that the class action was susceptible to common proof because a formula, “common to all class members,” could be utilized to determine “the difference between the fee actually paid and the ‘but-for fee’ – the fee that would have been charged to the putative class members in connection with the IPO in the absence of the alleged conspiracy.” Id., at 97. The defense expert countered that a preliminary inquiry must be made – viz., “the fee that the underwriter would have charged but for the conspiracy” – and that this would require “an individualized, plaintiff-by-plaintiff analysis of ten factors, including underwriter costs, price stabilization, and the risk of the offering.” Id. The district court agreed with defense counsel and denied the motion for class action certification, id., at 95. The Second Circuit reversed.
The issues on appeal were whether the district court properly determined the adequacy of representation issue and whether it properly analyzed the predominance requirement. Cordes, at 98. With respect to the Rule 23(a)(4) adequacy of representation test, the district court held that the putative class representatives did not fall within the scope of the class defined in the complaint, id., at 99. The Second Circuit noted, however, that the original class representatives “were indisputably members of the class they sought to represent,” and concluded that they could subsequently assign their “claims and interests in this litigation” to other parties who then could prosecute the class action. Id., at 99-100. Put simply, “By virtue of the assignments, [plaintiffs-assignees] do…possess the same interest [as the assignors] and thus may continue to assert a claim for the same injury shared by all members of the class.” Id., at 101. The bottom line is that Cordes were not precluded from acting as class representative solely because they are assignees. Id., at 103.
With respect to predominance under Rule 23(b)(3), the Second Circuit began by observing that antitrust claims require “(1) a violation of antitrust law; (2) injury and causation; and (3) damages,” and that horizontal price-fixing agreements are per se violations of the Sherman Act thus satisfying the first element of the test. Cordes, at 105 (citations omitted). But it found the second element to be “more complicated.” Id. Based on its analysis of case law, the Circuit Court concluded at page 106 that the second element presents two distinct questions: “One is the familiar factual question whether the plaintiff has indeed suffered harm, or ‘injury-in-fact.’ The other is the legal question whether any such injury is ‘injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.’” Id., at 106 (citation omitted).
The district court had focused on the question of whether common issues existed as to the antitrust injury allegedly suffered by the class; in this regard, it relied on defendant’s expert (who addressed injury) rather than Cordes’s expert (who addressed damages) “because only he had ‘addresse[d] the question before the Court – which is whether antitrust injury… can be proved by evidence common to the class.’” Cordes, at 106. The Second Circuit disagreed, holding that the experts addressed “the same question: whether injury-in-fact is susceptible to common proof in this case.” Id. In the opinion of the Circuit Court, “Neither expert offered any views on the legal question of whether common evidence could prove that the injury allegedly suffered was ‘of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.’” Id. (citation omitted). The Circuit Court explained that differences addressed by the experts go to amount of damages, but the predominance inquiry should focus on whether a comparison (without inserting actual numbers) would be sufficient to demonstrate a common question of injury-in-fact – a question it directed the district court to resolve on remand. Id., at 107. But the Second Circuit further held that the “legal question raised by the antitrust element” in this case was common to the class: because the class action complaint alleged only horizontal price-fixing, “each class member allegedly suffered the same type of injury,” id.
The Second Circuit also concluded that common questions did predominate in this case, as it requires only “‘issues in the class action that are subject to generalized proof, and thus applicable to the class as a whole, … predominate over those issues that are subject only to individualized proof,’” Cordes, at 107-08 (citation omitted), which is “‘a test readily met in certain cases alleging … violations of the antitrust laws,’” id., at 108 (citation omitted). Here, even if the district court determines on remand that individual questions must be resolved to determine the issue of injury-in-fact, common issues may be still predominate, explaining at page 108: “These questions, at least, are common: (1) all factual and legal questions that must be resolved to determine whether the defendants violated Section 1 of the Sherman Act; and (2) all factual and legal questions that must be resolved to decide whether, assuming a plaintiff paid supracompetitive prices, that payment was caused by the defendants’ antitrust violation and constitutes the kind of injury with which the antitrust laws are concerned.”
Finally, the Second Circuit held that the district court could also consider granting class action certification as to “particular issues” only, rejecting the Fifth Circuit’s view that class action treatment under Rule 23 “is available only if common questions predominate in the claim as a whole.” Cordes, at 108-09 (citation omitted). In the end, the Circuit Court remanded the action for further proceedings, id., at 109.