One of the “hot” issues in class actions today is whether, or to what extent, a class can be defined to include members who were not injured, and do not have standing to sue. The First Circuit recently addressed this in a 2-1 decision, concluding that “class certification is permissible even if the class includes a de minimis number of uninjured parties.” In re Nexium Antitrust Litigation, 2015 U.S. App. LEXIS 968, *6-7 (1st Cir. Jan. 21, 2015). But how do you determine what is “de minimis”? And how do you properly identify those people and ensure that they do not obtain relief? The answers to those questions remain unclear even in the First Circuit. This is the type of issue that may be bound for the Supreme Court, either in this case or another similar case. This decision also addresses important issues concerning standing in class actions, but without fully analyzing them (at least in my view). These issues will continue to be a major battleground in class certification law in the coming years.
The Nexium case involved antitrust claims asserting that settlement agreements entered into between companies selling generic drugs and the original manufacturer of the drug (Nexium) violated state antitrust laws. Under the settlement agreements entered into during the course of patent litigation between the drug manufacturers, the original manufacturer agreed to make payments to the generic drug companies, one of which was over $1 billion. In return, the generic companies agreed to delay the launch of the generic drugs. Id. at *9-10. The plaintiffs asserted that these settlements were unlawful agreements not to compete, and caused insurance plans and individual consumers to pay more for the name brand drug during the period when the generic version was not available. Id. at *4.
The district court certified a class under Rule 23(b)(3). The central issue on appeal was whether it was proper to include in the class persons who were not injured because, for example, they would have chosen to continue to buy the name brand drug even after the generic versions were on the market. The First Circuit majority concluded that such persons could be included in the class definition, but “[a]t the class certification stage, the court must be satisfied that, prior to judgment, it will be possible to establish a mechanism for distinguishing the injured from the uninjured class members.” Id. at *19. The majority further recognized that no evidence was presented below as to whether or how this could be done. The court suggested, however, two methods: (1) a rebuttable “presumption that consumers would purchase the generic if it were available,” similar to the rebuttable presumption of reliance in certain securities class actions; or (2) testimony from each class member, perhaps by affidavit or declaration. Id. at *21-22. The court found this permissible because the number of potentially uninjured parties was “de minimus.”
So what is “de minimus”? According to the majority, “de minimus” should be defined “in functional terms,” and in this case the evidence suggested that the number of uninjured class members was somewhere between 2% and 5.8% of the class. Id. at *50-51. But where would they draw the line? What if it were 10% or 20% of the class?
Significantly, the majority further found that standing was satisfied because “[t]o the extent that it is necessary that each and every member of the class who secures a recovery also has standing, the requirement will be satisfied – only injured class members will recover.” Id. at *55. But, as the Supreme Court has explained, standing must be satisfied “at the outset of the litigation,” or the “commencement of the litigation . . . .” Friends of the Earth, Inc. v. Laidlaw Environ. Servs. (TOC), Inc., 528 U.S. 167, 180, 189 (2000). When does litigation commence for purposes of the absent class members? This likely occurs when a class is certified and the opt-out process has taken place—that is when class members become parties to the litigation. Smith v. Bayer Corp., 131 S. Ct. 2368, 2379 (2011). This was not addressed by the First Circuit, but potentially could support an argument that, when a class is certified, or at least after the opt-out period has expired, the class members must have standing. That issue, however, is for another day.
Judge Kayatta wrote a strong dissent. He disagreed with the result reached by the majority because: (1) the purportedly “de minimus” number of uninjured class members was estimated at over 24,000; (2) “the district court has not identified—much less rigorously analyzed—any method for identifying and excluding these thousands of consumers prior to entry of judgment”; and (3) it was improper, in his view, for an appellate court to create its own proposed method for culling out uninjured class members that was never proposed by the plaintiffs or considered by the district court. Judge Kayatta also noted that, during the pendency of this interlocutory appeal, the district court had taken the case to trial without conducting any culling method. The most colorful sentence of the dissent wrote that “the majority affirms a certification order based entirely on a fiction that we know to be false.” Id. at *67.
The issues presented in this opinion are an important arrow in defendants’ quiver. Many proposed class actions, including insurance cases, involve significant numbers of uninjured or potentially uninjured putative class members. In the context of insurance claims, for example, many consumers who were affected by an allegedly unlawful practice were not necessarily injured when you review how the claim was handled in its entirety. The problems in identifying those who were not injured, and whether they are even properly part of a class at all, including whether they have standing, potentially can be strong grounds for defeating class certification.