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Third Circuit says sunk discovery costs not a proper factor in class certification analysis

It is not every day that antitrust plaintiff classes fail to win certification due to lack of numerosity under Federal Rule of Civil Procedure 23(a)(1).  Yet this week, absence of numerosity was the reason a Third Circuit panel reversed an order from the Eastern District of Pennsylvania certifying a class of 22 plaintiffs.  The putative class included direct purchasers allegedly injured by reverse-payment agreements between Cephalon and four generic manufacturers of Cephalon’s narcolepsy drug Provigil.

The case is in somewhat of a twilight zone for numerosity analysis.  The Third Circuit had indicated that a proposed class of more than 40 members will usually meet the requirement, while Supreme Court dicta suggests that one of 15 or fewer will not.  Also notable is the fact that many of the class members have individual claims of millions of dollars—not a scenario where prosecution of one-off cases would often be economically irrational.

Acknowledging “a paucity of precedent on the numerosity issue,” the Third Circuit panel “provide[d] a framework for district courts to apply when conducting their numerosity analyses.”  At the heart of that analysis is the question of whether compulsory joinder of all interested parties would be “impracticable.”  For the first time, the Third Circuit provided a “non-exhaustive list” of the factors relevant in answering that question:  “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.”  Of these, “judicial economy and the ability to litigate as joined parties are of primary importance.”

Here, said the panel, the district court abused its discretion by basing its “judicial economy” analysis on the advanced stage of fact and expert discovery at the time of the class certification decision.  This “sunk cost,” said the Third Circuit, is not in itself a proper factor in the numerosity determination.  In complex antitrust cases, where the certification decision is often delayed, the district court’s approach would place a “thumb on the scale” in favor of a finding of numerosity.

Regarding the other “primary” factor—i.e., the ability and motivation of plaintiffs to pursue litigation via joinder rather than as a class—the panel again said the district court erred in its analysis.  Rather than considering the practicability of joinder, as required by Rule 23, the district court inappropriately focused on the prospect of separate individual suits.  Here, the panel said, the record indicates that joinder would be practicable, given that three of the unnamed class members each has a claim estimated at over $1 billion and 13 have claims of more than $1 million.  As to the plaintiffs whose claims are for less than $1 million where individual litigation may not be economical, the panel directed the district court to consider whether joinder of those claims presents a practicable alternative to a class action.

Although numerosity is not often a stumbling block in class certification decisions, the Third Circuit decision adds teeth to the requirement in cases where the proposed class members number fewer than 40.  Those proposed classes (in the Third Circuit, at least), will no longer be buoyed by the “sunk costs” of already-conducted discovery when seeking certification.