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From Antitrust Law Daily, August 9, 2013

Class certification in rail freight surcharge case vacated on interlocutory review

By Jeffrey May, J.D.

The U.S. Court of Appeals in Washington, D.C. has vacated the certification of a class of shippers who paid purportedly inflated fuel surcharges as a result of a price fixing conspiracy among four major freight railroads. In an unusual move, the appellate court conducted an interlocutory review of the certification decision and remanded the case so that the lower court could reconsider its decision in light of the U.S. Supreme Court's recent decision in Comcast Corp. v. Behrend (In Re: Rail Freight Fuel Surcharge Antitrust Litigation, August 9, 2013, Brown, J.).

The class action litigation was brought against the railroads—BNSF Railway Co.; CSX Transportation, Inc.; Norfolk Southern Railway Co.; and Union Pacific Railroad Company—by customers who paid the allegedly inflated fuel surcharges between 2003 2008. In June 2012, the federal district court in Washington, D.C. certified a proposed class (2012-1 Trade Cases ¶77,945).

As the appellate court explained, much of the debate in the certification proceedings centered on the predominance requirement of Federal Rule of Civil Procedure 23(b) and whether the plaintiffs could show, through common evidence, injury in fact to all class members from the alleged price fixing. This set up a “classic battle of the experts.” Dr. Gordon Rausser, a professor at the University of California at Berkeley, argued for the complaining purchasers, and a Princeton University economics professor, Dr. Robert Willig, argued for the defending railroads.

The plaintiffs’ case for certification hinged on two regression models prepared by Rausser to isolate the common determinants of the prices shippers paid to the defendants and to quantify, in percentage terms, the overcharges due to conspiratorial conduct. Willig contested various aspects of Rausser’s methodology and conclusions, but the district court accepted Rausser’s models as “plausible” and “workable” and certified the class.

After the district court’s decision to certify, the U.S. Supreme Court decided Comcast Corp. v. Behrend, 133 S. Ct. 1426, 2013-1 Trade Cases ¶78,316. In Behrend, which also involved certification of an antitrust class action based on regression modeling, a divided Supreme Court ruled that a class was improperly certified because the damages model did not allow for a calculation of damages across the class. “Before Behrend, the case law was far more accommodating to class certification under Rule 23(b)(3),” the appellate court explained.

Under Behrend, a district court must scrutinize the evidence before granting certification, even when doing so “requires inquiry into the merits of the claim,” it was noted. “No damages model, no predominance, no class certification.”

Before reaching the merits, the appellate court explained the three situations warranting interlocutory appeal from a class certification order: (1) when the decision to certify is “questionable” and is accompanied by a “death-knell” that places “substantial pressure on the defendant to settle independent of the merits”; (2) when the certification decision presents an unsettled and fundamental issue of law relating to class actions, that is likely to evade end-of-the-case review”; and (3) when a certification decision is “manifestly erroneous.” In this case, immediate review was warranted under multiple theories, it was noted.

This case “qualifies as even more than a death-knell situation,” in the appellate court's view. The plaintiffs demanded a vast sum in damages, which were subject to trebling, and at least some of the defendants would risk a damages award that “would wipe out a substantial portion of their market capitalization.”

In addition, the certification decision was questionable. The defending railroads contended that Rausser’s damages model was defective. The model purported to quantify the injury in fact to all class members attributable to the defendants’ collusive conduct; however, the same methodology also detected injury where none could exist, the appellate court explained.

The appellate court pointed out that the district court failed to address the defendants’ concern that the damages model yielded certain false positives. “As we see it, Behrend sharpens the defendants’ critique of the damages model as prone to false positives,” according to the appellate court.

Even though interlocutory appeals were generally disfavored, the appellate court decided to exercise its discretion to hear the appeal. It granted interlocutory review “[i]n light of Behrend, the pressure to settle posed by the threat to the defendants’ market capitalization, and the identified defect in the damages model.”

Noting that Behrend commands “a hard look at the soundness of statistical models that purport to show predominance,” the appellate court vacated the certification order. On remand, the lower court could consider the flaw in the damages model and take into consideration the Supreme Court’s guidance.

This is Case No. 12-7085.

Attorneys: Carter G. Phillips (Sidley Austin LLP) and Theodore J. Boutrous, Jr. (Gibson, Dunn & Crutcher LLP) for petitioners. Stephen R. Neuwirth, of Quinn, Emanuel, Urquhart & Sullivan, LLP and Michael D. Hausfeld (Hausfled LLP) for respondents.

Companies: BNSF Railway Co.; CSX Transportation, Inc.; Norfolk Southern Railway Co.; and Union Pacific Railroad Co.

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