Opinion ID: 201963
Heading Depth: 2
Heading Rank: 2

Heading: Level of Inquiry by the District Court

Text: In determining whether to certify the class, the district court went well beyond the four corners of the pleadings, considering both parties' expert reports and literally hundreds of pages of exhibits focused on market efficiency. Before we can decide whether the district court correctly certified Plaintiff's class based on a finding of market efficiency, we must determine whether this detailed level of inquiry was appropriate at the class-certification stage. Plaintiff, relying on the Second Circuit's decision in In re Visa Check/MasterMoney Antitrust 9 We recognize that several courts, including the district court in this case, have characterized the determination of whether a particular market is efficient as a question of fact. See, e.g., In re PolyMedica Corp. Sec. Litig., 224 F.R.D. 27, 42 (D. Mass. 2004) (citing In re Laser Arms Corp. Sec. Litig., 794 F. Supp. 475, 490 (S.D.N.Y. 1989) (stating that [w]hether in fact [defendant company] traded in an efficient market is a question of fact)). Because this determination involves the application of the definition of efficiency to a particular market, however, we think it is more accurate to characterize this determination as a mixed question of law and fact. -9- Litigation, 280 F.3d 124 (2d Cir. 2001), argues that a district court should not engage in a weighing of competing evidence at the class-certification stage, and should instead confine its review to the allegations raised in the plaintiff's complaint. At that stage, according to the Second Circuit, a district court may not weigh conflicting expert evidence or engage in 'statistical dueling' of experts. Id. at 135 (quoting Caridad v. Metro-North Commuter R.R., 191 F.3d 283, 292-93 (2d Cir. 1999)). In support of its position, the Second Circuit looked to Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), in which the Supreme Court held that Rule 23 did not authorize courts to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. Id. at 177; see also J.B. ex rel. Hart v. Valdez, 186 F.3d 1280, 1290 n.7 (10th Cir. 1999) (recognizing that when deciding a motion for class certification, the district court should accept the allegations contained in the complaint as true). PolyMedica, on the other hand, argues that we should follow the majority of courts of appeals that have addressed this issue. According to these courts, a district court is not limited to the allegations raised in the complaint, and should instead make whatever legal and factual inquiries are necessary to an informed determination of the certification issues. See Unger, 401 F.3d at 321 (stating that while [c]lass certification hearings should not -10- be mini-trials on the merits of the class or individual claims. . . . '[g]oing beyond the pleadings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues') (quoting Castano v. Am. Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996)); accord Cooper v. Southern Co., 390 F.3d 695, 712 (11th Cir. 2004); Gariety v. Grant Thornton, LLP, 368 F.3d 356, 365 (4th Cir. 2004); West v. Prudential Sec., Inc., 282 F.3d 935, 938 (7th Cir. 2002) (Tough questions [at classcertification stage] must be faced and squarely decided, if necessary by holding evidentiary hearings and choosing between competing perspectives.); Johnston v. HBO Film Mgmt., Inc., 265 F.3d 178, 189 (3rd Cir. 2001); see also Wagner v. Taylor, 836 F.2d 578, 587 (D.C. Cir. 1987) (noting that a decision on class certification cannot be made in a vacuum, and that some inspection of the circumstances of the case is essential to determine whether the prerequisites of Federal Civil Rule 23 have been met). In support of this more demanding inquiry at the classcertification stage, many of these courts rely on General Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982), in which the Supreme Court noted that since the class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action. . . . sometimes -11- it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question. Id. at 160 (internal quotation marks and citations omitted); see also Amchem, 521 U.S. at 616 (noting that Rule 23(b)(3) involves a close look at predominance and superiority criteria). We have already expressed our preference for the majority view. In Waste Management Holdings, Inc. v. Mowbray, 208 F.3d 288 (1st Cir. 2000), we upheld a district court's decision to certify a class, where the court engaged in a case-specific analysis that went well beyond the pleadings. Id. at 297. In that case, we also squared the Supreme Court's holdings in Eisen and Falcon, noting that while Eisen prohibits a district court from inquiring into whether a plaintiff will prevail on the merits at class certification, it does not foreclose consideration of the probable course of litigation, as contemplated by Falcon. Id. at 298. After all, we explained, a district court must formulate some prediction as to how specific issues will play out in order to determine whether common or individual issues predominate in a given case. Id. Three years later, in Smilow v. Southwestern Bell Mobile Systems, 323 F.3d 32 (1st Cir. 2003), we noted that [a] district court must conduct a rigorous analysis of the prerequisites established by Rule 23 before certifying a class. Id. at 38 (citing Falcon, 457 U.S. at 161). And last year, in Tardiff, we -12- noted the split between circuits, reasoning that while [i]t is sometimes taken for granted that the complaint's allegations are necessarily controlling . . . in our view a court has the power to test disputed premises early on if and when the class action would be proper on one premise but not another. 365 F.3d at 4-5. Therefore, in light of our prior precedent, we conclude that the district court was entitled to look beyond the pleadings in its evaluation of the applicability of the fraud-on-the-market presumption of reliance, and its resolution of the classcertification question.