Third Circuit Says Settlement Classes Can Include Class Members Who Would Not Prevail on the Merits

December 23, 2011

In a lengthy en banc opinion that largely reaffirms existing circuit case law on Rule 23(b)(3)’s predominance requirement-but emphatically rejects the analysis a two-judge majority made in a panel decision last summer-the Third Circuit has held it permissible under Rule 23 to certify a nationwide settlement class that includes some members whose individual claims would likely be barred by the governing state law.  Sullivan v. DB Investments, Inc. (3d Cir. Dec. 20, 2011).  To hold otherwise, the 7-2 decision said, “would effectively rule out the ability of defendants to achieve ‘global peace’ by obtaining releases from all who might wish to assert claims, meritorious or not.”  Slip op. at 66.

Sullivan involved a group of consolidated cases alleging federal and state antitrust, consumer protection, and unjust enrichment claims on behalf of direct and indirect purchasers of gem-quality diamonds against the De Beers companies.  Direct purchasers bought directly from a DeBeers company or one of its competitors; indirect purchasers bought further down the distribution chain, often from a distributor or retailer.  After the parties reached a settlement, the district court certified a nationwide settlement class of indirect purchasers, concluding that although the class members raised claims under varying state laws-some of which precluded indirect purchasers from recovering damages for antitrust violations-Rule 23(b)(3)’s predominance requirement was satisfied nonetheless.  The district court also certified a Rule 23(b)(2) class to implement a stipulated injunction that was part of the settlement.

On appeal last summer, a panel of the Third Circuit vacated both class certifications, finding:

  • It was improper to certify a nationwide Rule 23(b)(3) damages class when the applicable state laws would bar some class members’ right to recovery; and
  • The Rule 23(b)(2) injunction class could not be upheld because the market for gem-quality diamonds had become more competitive in recent years-eliminating the need for an injunction against anticompetitive practices and ending the class members’ standing to seek one.

Sullivan v. DB Investments, Inc., 613 F.3d 134 (3d Cir. 2010), reh’g en banc granted and vacated, 619 F.3d 287 (3d Cir. 2010).

The en banc majority rejected the panel’s Rule 23(b)(3) analysis as injecting an unwarranted merits inquiry-of the type more appropriate on a motion to dismiss or for summary judgment-into the predominance determination.  “The question is not what valid claims can plaintiffs assert; rather, it is simply whether common issues of fact or law predominate.”  Slip op. at 54.  The court reaffirmed that, under well-established Third Circuit case law, the need to apply varying state laws in a multi-state class action does not necessarily preclude a finding that common issues of fact and law predominate.  Moreover, when the parties have reached a settlement, and there will be no need to address the variations in state law at a trial, those state law variations “are largely ‘irrelevant to certification of a settlement class.'”  Id. at 52 (quoting In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 529 (3d Cir. 2004)).

Under Rule 23(b)(2), the rule that governs classes seeking injunctions, the court rejected the notion that, in the context of a settlement, it should “engage in fact-finding as to whether all class members could show an imminent threat of prospective antitrust injury.”  Slip op. at 83.  It noted that the parties to a lawsuit have “the right to agree to anything they please” in settling the claims asserted and that a district court could provide broader relief in a settlement than it could have awarded after a trial.  Id. at 80, 81.  Because the requirements of Rule 23(b)(2) were satisfied, the district court “acted within its discretion in accepting De Beers’s stipulation to the injunctive relief.”  Id. at 85.

The Sullivan decision reaffirms existing Third Circuit case law on the predominance inquiry in nationwide or multi-state cases when state laws differ.  More importantly, it likely will promote comprehensive settlements of class action claims-when the parties agree to settle-by eliminating barriers than might impede negotiated settlements.  This new decision will be especially important in indirect purchaser antitrust cases because some states’ antitrust laws allow indirect purchasers to sue, but others restrict suits to direct purchasers.  Now a defendant can settle claims by residents of all states at once even when a class could not be certified for trial due to state law differences.