Vol. 27 No. 5 May 11, 2012 RULING COULD EMPOWER “ZOMBIE ...

Legal Backgrounder

WLF Washington Legal Foundation

Advocate for freedom and justice?

2009 Massachusetts Avenue, NW Washington, DC 20036 202.588.0302

Vol. 27 No. 5

May 11, 2012

RULING COULD EMPOWER

"ZOMBIE INDIRECT PURCHASERS"

IN ANTITRUST CLASS ACTIONS

by J. Brady Dugan

Last year, the U.S. Court of Appeals for the Third Circuit rejected the settlement of a class action antitrust suit brought by alleged victims of a diamond cartel. The three-judge panel put a stake through the heart of these plaintiffs' so-called "indirect purchaser" claims because, for a number of the plaintiffs, the claims would not be cognizable under either federal or state law. However, an en banc decision by the Third Circuit last December reanimated the claims of the indirect diamond purchasers. The en banc court held that, in the context of a settlement, the distinction between states that allow indirect purchaser claims and those that do not is irrelevant. All plaintiffs are welcome ? these "zombie" indirect purchaser claims live on. The U.S. Supreme Court recently declined to accept certiorari of the matter, so the en banc decision, which allows plaintiffs lacking an antitrust cause of action to be part of a class action settlement, may become influential in determining the fate of indirect purchaser plaintiffs in future cases.

The Panel Opinion. In Sullivan v. DB Investments, Inc., et al.,1 the Third Circuit considered a class action settlement of claims alleging a diamond cartel orchestrated by the DeBeers family of companies. The plaintiffs included both direct and indirect purchasers of diamonds, and each type of purchaser was a separate settlement class. The direct purchasers bought rough gems directly from DeBeers or another member of the cartel; the indirect purchasers bought either rough or finished gems from a middleman or a diamond retailer. The indirect purchaser class included, for example, individuals who purchased diamond jewelry from a retailer that may have purchased the diamond either from a middleman or directly from DeBeers.

113 F.3d 134 (3d Cir. 2010), vacated by 619 F.3d 287 (3d Cir. 2010), on reh'g en banc 667 F.3d 273 (3d Cir. 2011), cert. denied sub nom. Murray v. Sullivan, 2012 WL 779996 (U.S. Apr. 2, 2012) (hereinafter "Diamonds").

J. Brady Dugan is a partner in the Washington, D.C. office of the law firm Akin Gump Strauss Hauer & Feld LLP.

Federal and state law differs on whether indirect purchasers can recover damages for cartel violations. The Supreme Court has made clear that for a plaintiff to bring a federal action alleging an antitrust conspiracy, he must have purchased directly from a conspirator, rather than indirectly through a middleman ? the so-called "indirect purchaser" rule announced in Illinois Brick Co. v. Illinois.2 State laws differ on the indirect purchaser rule. Some states allow indirect purchasers to sue, others follow the federal rule and do not allow indirect purchasers to recover under their antitrust laws. The Diamonds class action settlement did not distinguish indirect purchasers by state; all indirect purchasers constituted a single class. Thus, the settlement would have allowed recovery for any indirect diamond purchaser, even those whose claims would have been barred by their state's antitrust laws.

A number of the indirect purchasers from states allowing indirect purchaser recoveries objected to the settlement. They feared that their recovery would be unfairly reduced by allowing into the class indirect purchasers from states that forbid indirect purchaser claims. The objectors argued that the Federal Rules would not allow such a class to proceed.

According to the objectors, the settlement violated the "predominance" requirement of Rule 23(b)(3). Rule 23 governs what kinds of cases can be brought as class actions. Rule 23(a) sets forth certain minimum requirements that all class actions must meet. If those thresholds are met, then class plaintiffs must also show that the case is one of the types described in Rule 23(b). Typically, antitrust class actions are brought under Rule 23(b)(3), which requires that common issues of law or fact "predominate over any questions affecting only individual members," and that class treatment is "superior to other available methods for fairly and efficiently adjudicating" the matter.

After the district judge overruled the objectors and approved the settlement, the objectors appealed to a three-judge panel of the Third Circuit. The panel focused on the considerable divergence among the states regarding whether indirect purchasers have standing to sue. Some allow such suits, others do not, and still other states allow indirect purchasers to sue only when joined in the suit by the state as parens patriae. In other words, the settlement approved by the district judge would have included plaintiffs who never would have had standing to sue had they brought an action on their own in state court.

The panel found that the conflicting state laws under which the different plaintiffs sued made it impossible for the settlement to meet the requirement of Rule 23(b)(3) that common issues predominate the class. So, the panel voted unanimously to remand the matter to the district court for further proceedings. The panel judges split in their rationales for remand. The opinion of the court, authored by Judge Jordan, found that the difference in state laws prevented common issues from predominating the class. The concurrence, by Judge Rendell, rejected the majority's view, but joined in the order to remand as she was unsatisfied with the district court's predominance analysis.

The En Banc Opinion. Soon after the panel opinion issued, the Third Circuit vacated the opinion and granted a request for rehearing en banc. In late December last year, the court issued an en banc opinion. Judge Rendell, who concurred in the decision by the panel to remand but rejected the panel's rationale, authored the en banc opinion. This time, the court affirmed the district court's decision to approve the settlement. And in April, the Supreme Court declined to wade into the dispute, denying a petition for certiorari.

2431 U.S. 720 (1977).

Copyright 82012 Washington Legal Foundation

2

ISBN 1056 3059

Judge Rendell's 48-page majority opinion made clear that the court viewed her DB Investments Inc. panel colleagues'[ prior opinion as not just wrong, but hopelessly off base. The court began by noting that the predominance inquiry at issue is in fact an easy question ? "the straightforward application of Rule 23 and our precedent should result in affirming the District Court's order certifying the class."3 And later the court commented on the need to discuss the vacated opinion in depth since the panel majority ? which became the dissent in the en banc opinion ? improperly "reflected, accepted, and elaborated upon one or more of the views advanced by the objectors, with which [the majority] take[s] issue."4

According to the en banc majority, the panel erred by improperly insisting that each plaintiff have a "colorable legal claim."5 The court found no reason to think the Rule 23(b)(3) inquiry into whether common issues of law or fact predominate the proposed class should turn on whether each of the proposed class members could have brought a claim individually. Instead, the court focused on whether the defendant's conduct and the resulting injuries were common to all class members.6

The court relied heavily on the Third Circuit's prior ruling in In re Warfarin Sodium Antitrust Litig.7 That case involved an antitrust class action suit brought against DuPont based on federal and state antitrust and consumer protection statutes. DuPont was accused of engaging in a campaign to deceive the public into believing that generic warfarin is not equivalent to DuPont's branded Coumadin. The court approved a settlement over the objection of certain plaintiffs who, like the objectors in the Diamonds case, claimed that variations in state antitrust laws precluded class certification. The Warfarin court affirmed the approval of the settlement because liability depended on evidence that is common to all class members, thus common issues predominated the class despite the differences in state law.8

In Diamonds, the en banc majority felt that Warfarin and related cases held much of the answer to whether common issues predominate the class. As in Warfarin, the conduct of the defendants in Diamonds, which resulted in a diamond cartel, is susceptible of proof common to all plaintiffs. "[The] conduct resulted in a common injury as to all class members ? inflated diamond prices ? in violation of federal antitrust law, and the antitrust, consumer protection, or unjust enrichment laws of every state and the District of Columbia."9 Thus, the existence of a proof scheme common to all defendants is at least suggestive of common issues predominating for 23(b)(3) purposes. But on the other hand, the now-vacated Diamonds panel opinion distinguished Warfarin by noting that the proposed settlement classes in that case did not attempt to include indirect purchaser claims under the laws of states which do not allow such claims.10 In other words, the Diamonds panel found Warfarin to be of limited use when deciding whether common issues of

3667 F.3d 285. 4Id. at 293. 5See Id. at 285, 297, 299, 305, 308, 310-12. 6Id. at 298-301. 7391 F.3d 516, (3d Cir. 2004). 8Id. at 528. 9667 F.3d at 300. 10613 F.3d at 152 n. 15.

Copyright 82012 Washington Legal Foundation

3

ISBN 1056 3059

law or fact predominate a class that includes plaintiffs who lack standing to sue.

In addition to looking at the conduct of the defendants when determining whether common issues predominate, the en banc majority also supported much of its reasoning with the posture of the case: settlement. The court determined that problems caused by conflicting state laws "largely dissipate" when the court is considering a settlement class.11 Again relying heavily on Warfarin, the court found that in a class settlement, variations in state laws do not present "the types of insuperable obstacles" which, were there no settlement, could render class litigation unmanageable. In other words, while differences in state laws could defeat Rule 23(b)(3) predominance in a litigated matter, those differences are insufficient to defeat predominance in a class action settlement. But as the dissent pointed out, this is a distinction the Supreme Court seems to have rejected in Amchem Products, Inc. v. Windsor.12 "Class action settlements `demand undiluted, even heightened, attention ...,' especially when there is a risk of `unwarranted or overbroad class definitions.'"13

Implications for the Future. What happens next is uncertain. The Third Circuit has unleashed the zombie indirect purchaser claims ? that is, claims that would be dead under state law, yet live on to recover damages in a federal class action. How far the zombies will travel throughout the federal judiciary is unknown. If DB Investments can be cited for the proposition that it is not necessary to have a cognizable claim in order to join an antitrust class action, there remains the possibility that this case will be used to greatly expand the size of a plaintiff class in contested matters. Further litigation to flesh out this point is a possibility. But ultimately, it seems unlikely that the zombies will roam too far down that path. Given the en banc majority's emphasis on the difference between finding 23(b)(3) predominance in a settlement class versus a litigation class, courts in the Third Circuit and elsewhere could easily limit this precedent to class action settlements.

11667 F.3d at 297. 12521 U.S. 591 (1997). 13667 F.3d at 356 citing Amchem Prods., Inc., 521 U.S. at 620.

Copyright 82012 Washington Legal Foundation

4

ISBN 1056 3059

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download