Beware the Averages: Third Circuit Vacates Class Certification Due to Inadequate Antitrust Injury Analysis
With increasing frequency, district and circuit courts across the country are grappling with whether class certification is appropriate when the proposed class contains – or may contain – uninjured persons or entities. In just the past year and a half, the First Circuit and the D.C. Circuit have both weighed in, with each court finding class certification impermissible given the presence of a more than de minimis number of uninjured class members.1 With its April 22, 2020 decision vacating class certification in the In re Lamictal Direct Purchaser Antitrust Litigation, the Third Circuit has now added its voice to this important discussion.2 Like the First and D.C. Circuits, the Third Circuit has now stated unequivocally that “every plaintiff must be able to show antitrust injury,” and that such injury must be shown through evidence that is common to the class.3
Sending the class certification decision back down for “a redo,” the unanimous Third Circuit panel found that the district court failed to conduct a sufficiently rigorous analysis to resolve key factual disputes and weigh conflicting evidence and expert testimony bearing on the predominance element required for class certification under Rule 23(b)(3). Without this analysis, the Third Circuit could not discern whether the plaintiffs had met their burden of showing that they could prove class-wide antitrust injury through common evidence.
Pay-for-Delay Injury Alleged in In re Lamictal
Injury is an element of every antitrust claim. In a class action setting, Rule 23(b)(3) mandates that antitrust injury must be capable of being established via common evidence – that is, evidence applicable to all class members. If an individualized analysis is required to establish injury (or any other element of the antitrust claim), class certification is not appropriate. Determining whether common evidence predominates is a question firmly within the purview of the district court. The Third Circuit’s In re Lamictal decision reads like a roadmap providing guidance to district courts on how to conduct this necessary analysis.
In re Lamictal is a pay-for-delay case. Defendants GlaxoSmithKline (“GSK”) and Teva Pharmaceuticals (“Teva”) manufacture, respectively, the brand and generic versions of the anti-epilepsy drug Lamictal. Direct purchasers of Lamictal and of the generic version, called lamotrigine, brought a putative class action against GSK and Teva alleging that the companies violated the antitrust laws when they settled brand vs. generic patent litigation with an agreement that delayed entry of the GSK’s authorized generic and agreed on a date on which Teva would begin selling lamotrigine. Notably, the entry date they agreed upon was before the date on which GSK’s patent would expire, but also later than the date Teva could have entered the market if it had prevailed in the patent litigation against GSK.4
Predominance – The Key Issue on Class Cert Appeal
In the class action lawsuit that followed, the plaintiffs claimed that the settlement constituted an unlawful “reverse payment agreement,” in which Teva was paid to stay out of the market in exchange for GSK’s no-authorized generic (“AG ”) promise. According to plaintiffs, but for the settlement, Teva would have launched its generic much earlier than July 2008, thus driving down the price of brand Lamictal, and GSK, in turn, would have launched its own AG to compete with Teva’s generic, lamotrigine. As a result, purchasers of Lamictal and of lamotrigine alleged that they paid more than they would have absent the settlement.
The plaintiffs moved to certify a class of two subsets of direct purchasers: companies that purchased Lamictal directly from GSK, and companies that purchased the generic directly from Teva. The district court granted class certification, ruling on the papers without oral argument. On appeal, GSK and Teva challenged certification and disputed the district court’s finding that the essential element of antitrust injury was capable of being proved through evidence common to the class. The Third Circuit agreed to consider the interlocutory appeal under Rule 23(f). For the purposes of the appeal, the key class certification issue is whether the plaintiffs met the Rule 23(b)(3) “predominance” requirement – that common questions of law or fact predominate over individual ones in proving the essential element of antitrust injury.5
Competing Factual and Evidentiary Disputes Must be Resolved at Class Certification
Assessing whether any Rule 23 requirement, including predominance, is satisfied requires the district court to conduct a “rigorous analysis” involving three key aspects.6 Specifically, the district court must
- Determine that the requirements of Rule 23 are met, with “any factual determinations … made by a preponderance of the evidence;”
- “[R]esolve all factual or legal disputes relevant to class certification, even if they overlap with merits;” and
- Consider “all relevant evidence and arguments, including expert testimony,” offered by the moving and opposing parties.7
The Third Circuit’s decision vacating class certification emphasizes that the predominance requirement is satisfied only if, after conducting the full analysis above, the district court is convinced by a preponderance of the evidence that the plaintiffs’ claims are capable of common proof.8 The district court failed, however, to conduct the necessary analysis.
To satisfy Rule 23(b)(3), the plaintiffs must prove that they are able to establish their alleged antitrust injury via common evidence. In this, plaintiffs were required to show, through class-wide evidence, that absent the settlement agreement, GSK in fact would have launched an authorized generic and that the presence of GSK’s AG in the market would have caused purchasers of Teva’s lamotrigine to pay less for that generic. In support of certification, the plaintiffs offered expert testimony that summarily concluded that common evidence demonstrated that the prices paid by all or nearly all purchasers of lamotrigine were inflated because of the no-AG agreement.
In opposing the motion for class certification, GSK and Teva argued that the plaintiffs’ evidence impermissibly relied on average prices. According to the defendants, in reality, pricing in this particular drug market is heavily impacted by individual negotiations, and thus reliance on averages is neither accurate nor appropriate. They further argued that, prompted by concerns that launching an AG would be ineffective because market research showed that doctors were reluctant to switch patients from the brand version to a generic, GSK had developed a strategy to try to encourage Lamictal purchasers not to switch from Lamictal to lamotrigine. Specifically, in an effort to compete aggressively on pricing, GSK planned to contract with pharmacies to offer significant discounts and rebates if they agreed to sell Lamictal instead of lamotrigine. According to Teva, it learned of GSK’s marketing and pricing strategy before launching lamotrigine and, in response, “preemptively lowered” its prices in some areas in order to compete.9 GSK and Teva argued that, as a result of the competitive pricing maneuvering by both manufacturers, at least some direct purchasers of lamotrigine paid the same or less for the generic than they would have absent the settlement (and were therefore uninjured). Moreover, and fatal to class certification if true, the defendants asserted that determining the amount each purchaser would have paid but for the settlement required an individualized analysis, thereby rendering the plaintiffs unable to prove injury via common evidence.
The Third Circuit rejected the district court’s unquestioning acceptance of the averages put forward by the plaintiffs. While “averages may be acceptable where they do not mask individualized inquiry,” the district court failed to conduct the necessary inquiry to determine whether the averages put forward by the plaintiffs could prove injury to all or substantially all class members.10 In order to make this determination, the district court needed to resolve by a preponderance of the evidence the material factual and expert disputes, including whether individual pricing negotiations are indeed prevalent in the particular market, whether Teva did in fact preemptively lower its lamotrigine prices after learning about GSK’s plans to offer rebates and discounts to Lamictal purchasers to discourage switching, and whether GSK in fact would or could have pursued an AG absent the settlement agreement.11 Without this analysis, the district court could not reasonably conclude that the common evidence put forward by the plaintiffs was capable of establishing class-wide injury. Compounding its error, the district court also conflated injury and damages – seemingly applying to the injury question the more lenient predominance standard used to assess damages.12
Our research reflects that, since 2008, predominance has been the main issue in about 20% of cases in which the Third Circuit has granted a Rule 23(f) petition to consider an interlocutory appeal on class certification. More generally, during that same timeframe, approximately 30% of Rule 23(f) petitions filed in the Third Circuit have been granted, and nearly 40% of those granted petitions have resulted in the Third Circuit vacating the district court’s class certification decision below.
Certification is a critical point in any class action. The prevailing party gains considerable leverage in the litigation; however, if defendants successfully oppose class certification, the litigation may lose steam as plaintiffs’ counsel see little value in proceeding on behalf of individual claimants. In contrast, if certification is granted, the liability exposure becomes much more significant, and the plaintiffs may be able to extract significant settlements. Antitrust injury – and specifically whether such injury is class-wide – remains a key issue in the class certification determination.
The Third Circuit’s In re Lamictal decision highlights the importance for parties on both sides of the motion to present not only evidence about whether the proposed class contains uninjured class members, but also well-developed facts that bear on whether the element of injury is – or is not – capable of being proven through common evidence. In In re Lamictal, the defendants had persuasive evidence that some putative class members would not have paid higher prices but for the alleged reverse payment. Plaintiffs and defendants should expect district courts to conduct a thorough and rigorous probing of both sides’ arguments, facts, and evidence, including an assessment of the merits where necessary to resolve factual disputes by a preponderance of the evidence. A district court’s failure to meaningful engage with and resolve material disputes will likely be grounds for a successful 23(f) petition to challenge the class certification decision.
1 With its decision in In re Asacol Antitrust Litigation, the First Circuit held that certifying a class containing uninjured persons would deny the defendant’s right to challenge whether a plaintiff has in fact suffered antitrust injury. In re Asacol Antitrust Litig., 907 F.3d 42 (1st Cir. 2018). And in August 2019, the D.C. Circuit upheld a trial court’s decision not to certify a proposed class of railroad shippers in which 12% of the proposed class members were uninjured. In re Rail Freight Fuel Surcharge Litig., 934 F.3d 619 (D.C. Cir. 2019).
2 In re Lamictal Direct Purchaser Antitrust Litig., No. 19-1655, 2020 WL 1933260 (3d Cir. Apr. 22, 2020).
3 Id. at *7 (citing In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 311 (3rd Cir. 2009)). See also id. at *5 (requiring direct purchaser plaintiffs to prove that all class members would have paid less for the generic drug at issue absent the defendants’ alleged conduct).
4 Id. at *1.
5 Id. at *3-4.
6 Id. at *4.
7 Id. (internal quotations omitted) (citing In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 207 (3d Cir. 2009)).
8 Id. at *4, 5.
9 Id. at *3, *5-6.
10 Id. at *6 (internal citation omitted).
11 Id. at *6.
12 Id. at *6-7.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.