Opinion ID: 620898
Heading Depth: 2
Heading Rank: 3

Heading: Predominance and Antitrust Impact

Text: Rule 23(b)(3) permits class certification only if the questions of law or fact common to class members “preNo. 10-2514 17 dominate” over questions that are individual to members of the class.5 There is no mathematical or mechanical test for evaluating predominance. See 7AA Wright & Miller, Federal Practice & Procedure § 1778 (3d ed. 2011). The Supreme Court has discussed predominance in broad terms, explaining that the Rule 23(b)(3) “inquiry trains on the legal or factual questions that qualify each 5 Rule 23(b)(3) also conditions class certification on whether the class action device is superior to other available methods for fairly and efficiently resolving the dispute in question. We need not consider whether plaintiffs have shown superiority in this case, as this issue was neither considered by the district court nor raised by either party on appeal. There are so many common issues of law and fact relating to the issue of Northshore’s liability, however, that the superiority requirement likely poses no serious obstacle to class certification here. See Klay v. Humana, Inc., 382 F.3d 1241, 1269 (11th Cir. 2004) (finding superiority under Rule 23(b)(3) and noting that “the more common issues predominate over individual issues, the more desirable a class action lawsuit will be as a vehicle for adjudicating the plaintiffs’ claims”). And this case, at least on its face, implicates none of the specific concerns that we have previously said will prevent a finding of superiority. See, e.g., Harper v. Sheriff of Cook County, 581 F.3d 511, 516 (7th Cir. 2009) (finding no superiority where plaintiff’s challenge to defendant’s allegedly illegal jail management practices “can be satisfied in an individual suit without the management issues of a class action”); Andrews v. Chevy Chase Bank, 545 F.3d 570, 577 (7th Cir. 2008) (finding no superiority where class action seeking rescission of home mortgages would require a “multitude” of “individual rescission procedures”). 18 No. 10-2514 class member’s case as a genuine controversy,” with the purpose being to determine whether a proposed class is “sufficiently cohesive to warrant adjudication by representation.” Amchem Products, Inc. v. Windsor, 521 U.S. 591, 623 (1997). While similar to Rule 23(a)’s requirements for typicality and commonality, “the predominance criterion is far more demanding.” Id. at 623-24. At the same time, the Supreme Court also commented in Amchem: “Predominance is a test readily met in certain cases alleging consumer or securities fraud or violations of the antitrust laws.” Id. at 625. We understand the comment to mean that careful application of Rule 23 is necessary in antitrust cases, as in all cases, and that in antitrust cases, “Rule 23, when applied rigorously, will frequently lead to certification.” Robert H. Klonoff, Antitrust Class Actions: Chaos in the Courts, 11 Stan. J.L. Bus. & Fin. 1, 7 (2005) (discussing Amchem); accord, Behrend v. Comcast Corp., 655 F.3d 182, 191 (3d Cir. 2011). Rule 23(b)(3)’s predominance requirement is satisfied when “common questions represent a significant aspect of [a] case and . . . can be resolved for all members of [a] class in a single adjudication.” Wright & Miller, supra, § 1778. Or, to put it another way, common questions can predominate if a “common nucleus of operative facts and issues” underlies the claims brought by the proposed class. In re Nassau County Strip Search Cases, 461 F.3d 219, 228 (2d Cir. 2006), quoting Waste Mgmt. Holdings, Inc. v. Mowbray, 208 F.3d 288, 299 (1st Cir. 2000). “If, to make a prima facie showing on a given question, the members of a proposed class will need to present evidence that varies from member to member, then it is No. 10-2514 19 an individual question. If the same evidence will suffice for each member to make a prima facie showing, then it becomes a common question.” Blades v. Monsanto Co., 400 F.3d 562, 566 (8th Cir. 2005). Individual questions need not be absent. The text of Rule 23(b)(3) itself contemplates that such individual questions will be present. The rule requires only that those questions not predominate over the common questions affecting the class as a whole. Analysis of predominance under Rule 23(b)(3) “begins, of course, with the elements of the underlying cause of action.” Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011). Section 4 of the Clayton Act, 15 U.S.C. § 15, requires plaintiffs to prove: (1) that Northshore violated federal antitrust law; and (2) that the antitrust violation caused them some injury. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 311 (3d Cir. 2008); Blades, 400 F.3d at 566; Bell Atlantic Corp. v. AT&T Corp., 339 F.3d 294, 302 (5th Cir. 2003). The same cases, and many others, also show that plaintiffs also must show damages, but individual proof of this element of a claim under the Clayton Act is not an obstacle to a showing of predominance. It is well established that the presence of individualized questions regarding damages does not prevent certification under Rule 23(b)(3). See Wal-Mart v. Dukes, 131 S. Ct. at 2558 (deeming it “clear that individualized monetary claims belong in Rule 23(b)(3)”); Arreola, 546 F.3d at 801 (recognizing that “the need for individual damages determinations does not, in and of itself, require denial of [a] motion for certification” under Rule 23(b)(3)); Hardy v. City Optical, Inc., 20 No. 10-2514 39 F.3d 765, 771 (7th Cir. 1994) (“There have been many antitrust class actions in which the relief sought was damages, and the fact that the damages would generally be different for each member of the class was not deemed an insuperable obstacle.”); Allapattah Servs. v. Exxon Corp., 333 F.3d 1248, 1261 (11th Cir. 2003) (“numerous courts have recognized that the presence of individualized damages issues does not prevent a finding that the common issues in the case predominate”), aff’d, 545 U.S. 546 (2005); see also Klay v. Humana, Inc., 382 F.3d 1241, 1260 (11th Cir. 2004) (only in rare, extreme cases would individual issues of damages be so complex as to defeat class certification under Rule 23(b)(3)). In this case, common questions clearly predominate in regard to whether Northshore’s merger violated federal antitrust law. The focus of the dispute here is on the second element, referred to as “antitrust impact,” Hydrogen Peroxide, 552 F.3d at 311, or “fact of damage,” Bell Atlantic, 339 F.3d at 302 n.12. Under Rule 23(b)(3), plaintiffs had to show that it was possible to use common evidence to prove that Northshore’s merger injured the members of the proposed class. To do so, plaintiffs presented Dranove’s expert report and opinion. Dranove claimed that “if [Northshore] overcharged an insurer by a certain percentage, all or substantially all class members covered by that insurer will be overcharged by approximately the same percentage.” App. 1900. As a result, he said, “Overcharges to an insurer result in injury to that insurer as well as to all or substantially all other class members who are covered by that in- surer.” App. 1901. As the issue was developed further No. 10-2514 21 in the district court, however, it became considerably more complex. If the market for health care services functioned like a market for a generic, undifferentiated commodity (i.e., corn, wheat, or pork bellies) traded on an exchange with standard contract terms and little opportunity for individual bargaining, showing antitrust impact through such overcharges would have been relatively simple. In such a market, one can in theory, at least, estimate simple supply and demand curves to show that an ac- quisition of market power raised price and lowered supply. That’s antitrust impact from monopolization. Real markets are not as simple and elegant as the classic economic model, and the market for hospital services seems to be particularly complex. Insurers and other third-party payors negotiate sophisticated contracts with health care providers. Through multi-year contracts for health care services, the parties may lock those prices in place or negotiate for long-term price changes significantly different than would have been agreed if the prices were renegotiated each year. Factors such as a hospital’s location, quality of services, and reputation also can affect the price of a particular service. Adding even more complexity is the fact that insurers and health care providers negotiate contracts that cover not a single service but complex bundles of many different services and products. See, e.g., John C. Render & Neal A. Cooper, Survey of Recent Developments in Health Care Law, 37 Ind. L. Rev. 1161, 1189 (2004). A hypothetical bill for a Caesarian section, for example, might consist of 22 No. 10-2514 a variety of bundled items: anesthesia, operating room use, surgeon’s fee, post-operative care for the mother, newborn care for the baby, etc. A hospital could unbundle and re-bundle those items in different ways, adding some items in the overall charge and removing others, so that a later bill for a service still called a Caesarian section would charge for a different set of items and have a very different overall price. The record here reflects such complexity. For example, one contract repriced cardiology services after the physicians’ fees were “unbundled” from the prices and were charged separately. The nominal prices of the hospital’s charges for cardiology services dropped, but after accounting for the unbundling to ensure an apples-to-apples comparison, the overall prices increased significantly. Even without such unbundling or re-bundling, the prices of the individual component items are themselves subject to a wide variety of market influences. For example, an advance in anesthesia technology might result in a sharp decrease in the cost of anesthesia at the same time that a new and higher standard of care for a related service requires expensive new machinery. Without any exercise of market power, therefore, the price for the bundled service (say, a Caesarian section or a cardiac catheterization) might go up, go down, or stay level, despite substantial changes in the prices of the components. As a result of these complexities, changes in the nominal prices charged for particular services might actually conceal rather than reveal a health care proNo. 10-2514 23 vider’s exercise of unlawful market power. The price for a service may remain nominally the same or even decrease, but only because changes in the prices of the underlying components of that service have changed or because the service has been restructured in a way that conceals the anticompetitive price increase. Dranove proposed to account for these complexities by conducting what is known as a “difference-in-differences” or “DID” analysis. He would compare prices at Northshore’s hospitals with prices at a control group of comparable area hospitals not party to the merger but otherwise presumably subject to the same market forces affecting prices in hospitals. App. 1901, 1904. The difference between price changes for Northshore and the control group, he explained, would estimate the average overcharge imposed on Northshore’s patients due to Northshore’s exercise of increased market power after the merger. App. 1904. “For example,” he explained, if Northshore’s hospitals “raise prices by 30% after the merger and a control group of hospitals raises price by 10%, . . . the ‘difference-in-differences’ is approximately 20%” and represents the approximate amount of Northshore’s overcharges. App. 1921. If Northshore overcharged an insurer by this percentage, he explained, “all or substantially all class members covered by that insurer will be overcharged by approximately the same percentage.” App. 1926. Accordingly, Dranove concluded, a contract’s “increase in average price will have a common impact on all or substantially all class members.” Id. 24 No. 10-2514 As things turned out, however, even that approach does not deal sufficiently with all of the relevant variations that could confound the antitrust impact analysis. In denying class certification, the district court concluded that the viability of Dranove’s methodology turned on “whether [Northshore] increased prices at a uniform rate across services.” Evanston Northwestern Healthcare, 268 F.R.D. at 85. The court added: “Dranove’s method of proving classwide impact . . . rests on an assumption that [Northshore] increased prices at a uniform rate across services.” Id. Such uniformity was absent, the district court concluded, noting for example that “even a cursory examination of the 2000 Payor A contract and the September 22, 2002 Payor A contract makes clear that the prices of some services changed at a variable rate.” Id. at 86.6 To the extent that Dranove claimed that the prices increased uniformly, the court believed that he “focused primarily on price changes within contracts — changes that are usually attributable to escalator clauses.” Id. Price changes controlled by escalator clauses “were not due to an exercise of market power,” Northshore’s expert testified, because Northshore “had the opportunity to exercise market power not within a contract period, but only at the time of renegotiation.” Id.7 6 The published opinion refers to “Payor A” because much of the relevant pricing and contractual evidence was subject to a protective order. 7 The district court and Noether appear to have believed that escalator clauses — increasing contract prices during a long- (continued...) No. 10-2514 25 Because plaintiffs’ proposed method for proving classwide impact “relies on an assumption that [Dranove has] not been able to validate,” the district court concluded, plaintiffs failed to establish predominance in regard to antitrust impact, so class certification was denied. Id. at 87. On appeal, the parties raise two general arguments regarding the district court’s denial of class certification. For their part, plaintiffs contend that the district court applied an incorrect standard of predominance under Rule 23(b)(3) when it made uniformity of price increases a condition for class certification. In response, Northshore contends that the district court was correct to 7 (...continued) term contract — can never reflect the exercise of market power because they take effect long after contract negotiations have concluded. This is not correct. The fact that an escalator clause may be triggered months or even years after contract negotiations occurred does not necessarily mean that the escalator clause was immune from one contracting party’s exercise of market power. Like the initial prices set in the contracts, the terms of the escalator clauses — the services to which those clauses would apply, the frequency of any price increases, and the magnitude of those price increases — were the products of the negotiations between the parties to those contracts. A firm may use market power to ensure that those negotiations result in an initial contract price higher than it might have otherwise been able to obtain. We see no general reason such a firm could not also use that market power to obtain escalator clauses more generous than would have been possible otherwise. 26 No. 10-2514 require uniformity of price increases because plaintiffs conceded that such uniformity was necessary to Dranove’s methodology for showing impact to members of the class. We explain first that the district court applied too stringent a standard in evaluating predominance. We explain second that plaintiffs did not agree to or invite the use of the wrong standard.
The district court misapplied Rule 23(b)(3)’s predominance standard when it made uniformity of nominal price increases a condition for class certification. Under the proper standard, plaintiffs’ “burden at the class certification stage [was] not to prove the element of antitrust impact,” but only to “demonstrate that the element of antitrust impact is capable of proof at trial through evidence that is common to the class rather than individual to its members.” Behrend v. Comcast Corp., 655 F.3d at 197, quoting with emphasis Hydrogen Peroxide, 552 F.3d at 311-12; accord, Schleicher, 618 F.3d at 686 (noting that Rule 23’s present structure is the result of a “decision . . . to separate class certification from the decision on the merits”); Blades, 400 F.3d at 566 (“To determine whether common questions pre- dominate . . . the court must look only so far as to determine whether . . . common evidence could suffice to make out a prima facie case for the class.”). Through his proposed difference-in-differences or DID analysis of the contracts between Northshore and its insurers, Dranove claimed that he could show whether No. 10-2514 27 and to what extent Northshore’s post-merger price increases were the result of increased market power resulting from the merger. In other words, Dranove claimed that he could use common evidence — the postmerger price increases Northshore negotiated with insurers — to show that all or most of the insurers and individuals who received coverage through those insurers suffered some antitrust injury as a result of the merger. App. 2541. That was all that was necessary to show predominance for purposes of Rule 23(b)(3). See Hydrogen Peroxide, 552 F.3d at 311-12. Contrary to Northshore’s view, Dranove’s ability to use common evidence to show impact on the class did not ultimately depend on assuming the uniformity of the nominal price increases imposed under any individual contract. For reasons we explained above, such uniformity would certainly simplify matters. It would allow Dranove to plug a single percentage — the uniform price increase imposed on all patients covered under an individual contract — into his DID analysis to calculate the antitrust impact on those patients covered by that contract. But as Dranove explained in his report, a lack of uniformity would only require him to do more DID analyses for each contract — one analysis for each individual non-uniform price increase imposed in the contract being analyzed. App. 2540. As a simple example, if one post-merger contract raised the cost of hypodermic needles by 30 percent but increased the cost of saline solution by only 20 percent, DID comparison to price changes for the control group for those individual price increases could still be used to show any 28 No. 10-2514 antitrust impact those price increases had on all patients who paid for hypodermic needles, saline solution, or both under that contract. App. 2540-41. In a more complex world, multiple analyses would be needed to show more accurately a contract’s precise impact on class members. That need does not change the fact that those analyses all rely on common evidence — the contract setting out the non-uniform price increases — and a common methodology to show that impact. The ability to use such common evidence and common methodology to prove a class’s claims is sufficient to support a finding of predominance on the issue of antitrust impact for certification under Rule 23(b)(3). See Hydrogen Peroxide, 552 F.3d at 311-12. By requiring uniformity of nominal price increases within and across contracts, the district court misread Rule 23(b)(3) to require a greater showing of common evidence than is contemplated by that rule. Under the district court’s approach, Rule 23(b)(3) would require not only common evidence and methodology, but also common results for members of the class. That approach would come very close to requiring common proof of damages for class members, which is not required. To put it another way, the district court asked not for a showing of common questions, but for a showing of common answers to those questions. Rule 23(b)(3) does not impose such a heavy burden. See Blades, 400 F.3d at 566 (“The nature of the evidence that will suffice to resolve a question determines whether the question is common or individual.”); see also Rule 23(b)(3) (requiring that common “questions” predominate). Because the No. 10-2514 29 district court applied the wrong legal standard when analyzing plaintiffs’ motion for class certification, the district court abused its discretion when it denied the motion. See Ervin, 632 F.3d at 976; Hydrogen Peroxide, 552 F.3d at 312.
Northshore argues that these principles do not matter in the end because, it says, plaintiffs conceded that their case for common impact depended on uniform nominal price increases. In support, Northshore relies primarily on Dranove’s confirmation at the hearing on the motion for class certification that “the viability of [his] method” came down to whether Northshore “really [did] increase prices at a uniform rate across services.” Dkt. 418 at 41. On cross-examination, however, Dranove clarified that his “DID analysis can be performed with or without the uniformity.” Id. at. 57. These statements, seemingly contradictory on their face, are easily reconciled once it is remembered that Dranove proposed two alternative methodologies: one in which the uniformity of mergerrelated price increases was presumed, and another in which such uniformity was absent. Which method to use depended on the degree of uniformity. If price increases were, as Dranove initially believed, entirely or largely uniform, then he proposed to show the merger’s impact on the individual class members by simply plugging the average price increase imposed by any given contract into his DID analysis. App. 1904-06, 1909, 1926, 1931, 2523-25, 2530, 2584. In those circum30 No. 10-2514 stances, the average price would accurately reflect the individual price increases found in that contract. If the average contract price went up an average of 20 percent, and all of the services in that contract experienced uniform price increases, each individual service also went up 20 percent in price. App. 1909, 2523, 2571. This specific methodology relied on uniform nominal price increases, but the actual evidence was not that simple. As Dranove implicitly acknowledged in his reply report, if a contract’s individual service prices went up at non-uniform rates due to Northshore’s unequal exercise of market power, then DID analysis using that contract’s overall average price increase would reveal little about the merger’s antitrust impact on individual class members covered by that contract. App. 2523 n.1. According to Dranove, however, it would be most unusual for a firm possessing market power in a geographic market to exercise that power selectively to increase the prices of only some of its services. App. 193133, 2539. For this reason, Dranove believed that any non-uniform price increases observed in Northshore’s contracts with insurers could be explained by what he called “restructuring,” or changes in price resulting from variations in Northshore’s marginal costs or the re-bundling of component services discussed above. App. 2530, 2543-45. Such restructuring, he said, was unrelated to market power, meaning that services exhibiting non-uniform price increases could be treated as if they were subject to the same percentage price increase imposed on all other No. 10-2514 31 services covered in the same contract. App. 2543-44. If, for example, the price for one service went up 30 percent while all other services in that same contract went up only 20 percent, that additional 10 percent increase would not be treated as an exercise of market power for purposes of his DID analysis. Only the 20 percent increase shared by all other services in the same contract would reflect the use of market power. App. 2544. As a result, he explained, any non-uniform price increases imposed in a single contract with an insurance provider did not foreclose his use of that contract’s average price increase to calculate accurately the impact to all patients covered by that contract. App. 2545. Even if non-uniform price increases in a contract resulted not from restructuring but from Northshore’s differential exercise of market power across different services, Dranove explained that he could still use those contracts to show impact on the class members. At his deposition, Dranove explained that if his review of documents revealed a lack of uniformity unexplained by restructuring, he would simply “adapt the methodology.” Dkt. 284, Ex. I at 113, 157-58. In his initial report, Dranove explained that he could adapt his analysis if needed to accommodate “selective” price increases regarding certain services. App. 1932. And his reply report showed exactly how he would do that. The reply report emphasized that the DID analysis was fully capable of addressing non-uniform price increases: “it is still possible to apply a common methodological framework to measure impact even [when Northshore] increased prices for different services at different rates.” App. 2539. As noted 32 No. 10-2514 above, he would do so simply by conducting as many DID analyses as there were non-uniform price increases in a particular insurer’s contract with Northshore. App. 2540. In this way, Dranove explained, he would be able to calculate “different overcharges across different service categories” despite any non-uniform increase in the prices charged for those services. App. 2540-41. In other words, uniformity of nominal price increases was not necessary to Dranove’s proposed methodology for determining antitrust impact to the proposed class. This explains why Dranove was willing (though perhaps a little too reluctant for his own good) to concede the non-uniformity of the price increases in Northshore’s post-merger contracts. In fact, Dranove acknowledged several times that Northshore’s prices did not always increase uniformly, explaining that Northshore “almost invariably increase[d] prices at the same rate,” App. 2523, and that price increases “are applied across-the-board for all or nearly all services,” App. 2524, in the “vast majority of cases.” App. 2525 (emphases added). He acknowledged that one contract called for “a dramatic decrease in the price” for some services at the same time it “impose[d] a significant increase in the price of other service[s].” App. 2543.