Seventh Circuit Vacates Northshore Hospital Antitrust Class Certification Denial

Last week, the Seventh Circuit Court of Appeals vacated the district court’s class certification denial[1] in a case involving private antitrust claims for damages due to the merger between Northshore University HealthSystem and Highland Park Hospital.  Messner v. Northshore University HealthSystem, No. 10-2514 (7th Cir. January 13, 2012).  The district court denied class certification because it concluded that the plaintiffs’ expert’s proposed methodology could not address antitrust impact on a class-wide basis.  Id. at 2.  The district court “believed that plaintiffs’ proposed methodology required proof that defendant raised its prices at uniform rates affecting all class members to the same degree.”  Id. at 2-3.  The district court ruled that plaintiffs could not satisfy the Rule 23(b)(3) predominance requirement because plaintiffs could not show a uniform increase in prices.  Id. at 3.

Specifically, the plaintiffs’ expert[2] used a “difference-in-differences” (“DID”) method of calculating impact and damages.  Id.at 7.  This method looks to percentage changes in prices pre- and post-merger in a control group of local hospitals, then compares those price increases to percentage changes in prices at Northshore during the same period.  Id.  The expert analysis showed price increases at Northshore were higher by a “statistically significant amount.”  Id.  The district court, however, found this to be insufficient proof of predominance, and believed that individual issues precluded class certification.  Id. at 3.

The Court of Appeals  began its analysis with a telling lead reminder: “In conducting this analysis [Rule 23], the [district] court should not turn the class certification proceedings into a dress rehearsal for the trial on the merits.”  Id. at 9 (citing Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010); Kohen v. Pacific Investment Management Co., 571 F.3d 672, 677 (7th Cir. 2009); Payton v. County of Kane, 308 F.3d 673, 677 (7th Cir. 2002)).  The Court went on to examine the Plaintiffs’ two primary arguments: (1) that the district court erred in failing to determine whether the defense expert’s report and opinions were admissible under Federal Rule of Evidence 702, and (2) that the district court incorrectly applied Rule 23(b)(3)’s predominance requirement.  Id. at 10.  The Court agreed with the plaintiff on both errors. It held that the district court must make a conclusive ruling on any challenge to an expert’s qualifications when the expert’s report or testimony is critical to class certification[3], and  it held that the district court’s misapplied the Rule 23(b)(3) analysis as a matter of fact and law.[4]

Defendant constructed a novel argument that only plaintiffs’ experts were subject to Daubert scrutiny pre-class certification because plaintiffs carried the burden of proof.  In rejecting this argument, the Seventh Circuit noted, “[t]he fact that a defendant is not required to present evidence to defeat class certification does not give that defendant license to offer irrelevant and unreliable evidence.”  Id. at 15-16.

The Court’s predominance analysis was even more instructive, for plaintiffs and defendants alike.  The erosion of the Supreme Court’s Eisen rule,[5] and scattered judicial overreaction to the unsubstantiated in terrorem effect of class certification, has led to class certification denials that defy Supreme Court precedent, economic  logic, and are of questionable constitutional validity.  As the Court of Appeals pointed out:

Any consideration of the merits at the class certification stage also runs the risk of supplanting the jury as the finder of fact.  This risk is particularly troubling because the procedural protections available for such early judicial evaluations of the merits – such as the assumption under Rule 12(b)(6) that allegations in the complaint are true and the Rule 56 requirement to give the non-moving party the benefit of conflicting evidence – are not available under Rule 23. (Id. at 38.)

The Court quoted Amchem,[6] “’[p]redominance is a test readily met in certain cases alleging consumer or securities fraud or violations of the antitrust laws’” and explained, “[w]e understand the comment to mean that careful application of Rule 23 is necessary in antitrust cases, as in all cases, and that in antitrust cases, ‘Rule 23 when applied rigorously, will frequently lead to certification.’”  Id. at 18 (citing Robert H. Klonoff, Anti-trust Class Actions: Chaos in the Courts, 11 Stand. J.L. Bus. & Fin. 1, 7 (2005) (discussing Amchem); accord, Behrend v. Comcast Corp., 655 F.3d 182, 191 (3d Cir. 2011)).

Importantly, the Court rejected the notion that the presence of some individual issues is fatal to class certification: “Individual questions need not be absent. The text of Rule 23(b)(3) itself contemplates that such individual questions will be present. The rule requires only that those questions not predominate over the common questions affecting the class as a whole.”  Id. at 19.  The Court then undertook a thorough analysis of the complexity in the health care services industry, explaining that damages and impact were subject to a myriad of factors, including: (1) health service provider contract negotiation, (2) multi-year contract terms, (3) hospital location, reputation, and quality, and (4) prevalent improvements in the technology behind certain services.  Id. at 23.  Nonetheless, the Court rejected the defendant’s argument that common issues did not predominate in the litigation, holding that a preponderance of the evidence showed that the plaintiffs’ expert could use common evidence to show that all or most of the class suffered some antitrust injury as a result of the merger.  Id. at 27.

The Court refused the district court’s reasoning that a uniformity in price increases was required for class certification, noting, “…the district court asked not for a showing of common questions, but for a showing of common answers to those questions.  Rule 23(b)(3) does not impose such a heavy burden.” Id. at 28 (citations omitted).   This is a precise and accurate statement of the standard that should apply; as guaranteed by the Seventh Amendment, the “answers” to common questions should be left to the jury.

Defendant then argued that even absent the district court’s errors, the evidence still showed a number of class members were uninjured. Id. at 35-36.  Defendant pointed to supposed FTC findings that BCBS of Illinois did not suffer injury or damage from 2001-2005 as a result of the merger, but the Court held that the Defendant’s argument on this point was “at best an argument that some class members’ claims will fail on the merits if and when damages are decided, a fact generally irrelevant to the district court’s decision on class certification.” Id.at 37 (citations omitted).

The Defendant also argued that the class included members who could not have been injured: members who “met their annual plan out-of-pocket maximum or their deductible regardless of any price increase” and those individuals whose contracts “protect[ ] against any price increase.” Id.at 40. It was in addressing this point that the Court presented its most important analysis.

Defendants routinely raise the spectre of hypothetical, or extremely rare, uninjured class members in an effort to oppose class certification.  But the Seventh Circuit flatly rejected this argument, explaining the “critical” distinction between a proposed class that consists largely of members who are ultimately shown to have suffered no harm, and a proposed class that is defined so broadly as to include a “greatnumber” of members who for some reason could not have been harmed by the defendant’s conduct.  In the first case, the class is properly certified and the question of harm is a question on the merits; in the second case, the class is defined too broadly to permit certification.  Id. at 40-41.

The Court highlighted this distinction in a very useful way; it pointed out that the class would have been defined too broadly if it included a “high-percentage” of individuals who paid for medical services under pre-merger contracts — a time when the Defendant could not have been wielding merger-created market power. Id. at 41.  The “critical” distinction then, is “between class members who were not harmed and those who could not have been harmed” because this distinction draws the line between prohibited pre-certification merits analysis (who was harmed?) and allowable pre-certification class definition analysis (who could not have been harmed and do they make up a “great number” of the class?).  Id. at 41-42.

On the facts of the case, the Court rejected the Defendant’s argument because Northshore “has given us no indication how many such individuals [with contracts protecting them from price raises] actually exist…let alone provide any basis to believe that a ‘great many’ putative class members entered into such contracts.”  Id. at 43-44.  The Court also made a point that Northshore itself admitted that only about 2.4 percent of the putative class members paid their out-of-pocket maximums or deductibles.  Id. at 44.

This case provides counsel with instructive standards to apply to the class certification analysis, including a framework that helps outline allowable merits evaluation,[7] and clarifies the standing law that inclusion of a small number of uninjured class members is no bar to certification.  The Seventh Circuit has given a reasoned framework for analyzing predominance that is grounded in both historical and modern precedent, and attempts to strike an intelligent balance between the two.

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