On September 13, a divided panel of the U.S. Court of Appeals for the Third Circuit presiding over In re Modafinil Antitrust Litigation, No. 15-345 (3d Cir. Sept. 13, 2016), vacated the district court’s decision to certify a 22-member class. In doing so, it became the first Court of Appeals to list factors relevant to determining whether a class is “so numerous that joinder for all members is impracticable” under Federal Rule of Civil Procedure 23(a)(1). Judge Rendell, who authored a strident dissent, noted that she was “perplexed” by the majority’s decision, which she perceived to be “erecting roadblocks” to class certification “that do not exist.” Modafinil, slip op. at 1, 11 (Rendell, J., dissenting). The direct purchaser plaintiffs have already requested an extension of time to file a petition for rehearing of the court’s numerosity decision.

Background

The antitrust litigation regarding the drug modafinil began more than 10 years ago, when a handful of direct purchasers brought a purported class action against modafinil’s branded and generic manufacturers. The direct purchasers alleged that the manufacturers conspired to delay generic competition when they entered settlements to resolve patent infringement cases brought by the brand manufacturer against the generic manufacturers to enforce modafinil’s patents. The named direct purchaser plaintiffs in the antitrust litigation do not include the three largest stakeholders, which together hold more than 97 percent of the total value of the class claims. The total number of potential class members, including those “big three,” hovers just above 20.

The direct purchasers’ motion for class certification nonetheless met success, convincing Judge Goldberg of the U.S. District Court for the Eastern District of Pennsylvania that the proposed class fulfills the numerosity and predominance requirements. As to numerosity in particular, the district court reasoned, in part, that judicial economy would be served if the case proceeded as a class action, given the extensive discovery that had already occurred and that class members would be unlikely to pursue individual suits. The defendants filed a successful Rule 23(f) petition seeking immediate review of Judge Goldberg’s class certification decision.

Numerosity

The Third Circuit’s majority opinion stresses the oft-cited principle that the “class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.” Modafinil, slip op. at 21 (quoting Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 348 (2011)). In that vein, the majority emphasized both the plaintiffs’ burden to show by a preponderance of the evidence that the proposed class meets each Rule 23 element and the lower court’s duty to conduct a “rigorous analysis” that requires resolving “all factual or legal disputes relevant to class certification, even if they overlap with the merits” of the case. Id. at 22. With regard to the numerosity element in Rule 23, the majority held that “the inquiry into impracticability [of joinder] should be particularly rigorous when the putative class consists of fewer than forty members.” Id. at 25-26. The district court’s analysis fell short, the Third Circuit concluded, because it focused on the wrong facts.

Although the Third Circuit had previously noted three core purposes of the numerosity requirement, see Marcus v. BMW of N.A., LLC, 687 F.3d 583, 594-95 (3rd Cir. 2012), never before had the court listed factors that lower courts should consider when evaluating the impracticability of joinder. The majority opinion’s nonexhaustive list includes the following factors: “judicial economy, the claimants’ ability and motivation to litigate as joined plaintiffs, the financial resources of class members, the geographic dispersion of class members, the ability to identify future claimants, and whether the claims are for injunctive relief or for damages.” Modafinil, slip op. at 31-32. But not all factors are created equal. Two of the six — judicial economy and the ability and motivation for potential claimants to litigate as joined parties — should receive more weight than the others, the court held. Id. at 33.

With respect to judicial economy, the majority explained that district courts must ask “whether a class action would have been a substantially more efficient mechanism of litigating [the relevant] suit than joinder of all parties.” Id. at 35. The district court in Modafinil abused its discretion when it instead took into account the sunk costs of litigation and the additional delay that would occur if the court did not certify the class. Allowing courts to rest judicial economy conclusions on the extensive discovery often necessary to conduct Rule 23 analyses in complex cases “would place a thumb on the scale in favor of a numerosity finding for no reason other than the fact that the complex nature of a case resulted in the class certification decision being deferred for years.” Id. at 37.

With respect to the ability and motivation to litigate as joined parties, the majority opinion directs district courts to consider the stakes at issue for individual claimants and the complexity of the litigation, which together serve as a good proxy for the cost of pursuing the claims. Id. at 42. The majority was careful to note, however, that analyzing this second key factor does not involve determining whether plaintiffs could have brought their own individual suits. Rather, the economics of joining the claimants to the existing suit should be examined. Id. at 32. The majority ultimately concluded that the direct purchasers of modafinil were “likely to have the ability and incentive to bring suit as joined parties,” relying on the facts that three class members with claims of more than $1 billion each hold the overwhelming majority of the total value of class claims and that more than two-thirds of the remaining direct purchasers have claims of more than $1 million each. Id. at 45-46. Because the district court did not appropriately analyze “the two most important numerosity factors,” the Third Circuit vacated the decision certifying the direct purchaser class and remanded with instructions to conduct a rigorous analysis with the newly stated factors in mind. Id. at 47.

Judge Rendell dissented. In her view, the district court did not abuse its discretion by making a “close call” after thoughtful consideration of the numerosity requirement’s purposes articulated in Marcus. Modafinil, slip op. at 2-3 (Rendell, J., dissenting). The dissenting opinion takes issue with both facets of the majority’s numerosity analysis, first concluding that district courts should consider the late stage of the proceedings when examining whether judicial economy favors class litigation and then characterizing the district court opinion as indeed focused on the impracticability of joinder, notwithstanding the majority opinion’s contrary position. Id. at 6. “[N]othing about [the case] cries out for anything but class treatment,” Judge Rendell concluded. Id. at 12.

On September 15, the direct purchaser plaintiffs requested an extension of time to file a petition for rehearing and rehearing en banc, strongly suggesting that they intend to seek review of the court’s numerosity decision.

Predominance

Although not the focus of either opinion, it bears noting that all three judges voted to affirm the district court’s conclusion that the proposed class met Rule 23(b)’s predominance requirement. The defendants argued on appeal that the plaintiffs’ damages model, which did not allocate harm to particular defendants or particular settlement agreements, did not match the theory of liability, which no longer included a global conspiracy claim. This mismatch created an issue akin to the one that prevented class certification in Comcast v. Behrend, 133 S. Ct. 1426 (2013), the defendants argued. All three panel members rejected that argument, however, concluding that theories of joint and several liability do not violate antitrust standing principles and that the plaintiffs’ theory that each individual settlement agreement contributed to the marketwide harm indeed matched the damages model they offered.

Conclusion

The Modafinil decision bodes well for defendants, especially defendants facing purported class claims by direct purchasers in industries where relatively few entities serve that function. The decision also is another step toward increased scrutiny of the use of the class action device. In recent years, the Third Circuit has shown a willingness to push the class action envelope, prompting several jurisprudential shifts with nationwide impact. See, e.g., Carrerra v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013). Whether Modafinil starts a similar trend, it will undoubtedly lead litigants on both sides of the “v” to rethink their strategies regarding class-related discovery in cases that may give rise to numerosity issues.