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Archive for November, 2011

David H. Kaye, Distinguished Professor of Law and Weiss Family Faculty Scholar at the Penn State School of Law, recently published a fascinating commentary in the BNA Insights section of the BNA Product Safety & Liability and Class Action Reporters, entitled Trapped in the Matrixx: The U.S. Supreme Court And the Need for Statistical Significance.  In the article, Professor Kaye applies his vast expertise in the areas of scientific evidence and statistics in the law to add some color to the U.S. Supreme Court’s March 2011 decision in the securities class action Matrixx Initiatives, Inc. v. Siracusano

For those not familiar with Matrixx, the case involved allegations that the makers of the cold remedy product, Zicam, withheld information from investors suggesting that the product may cause a condition called anosmia, or loss of smell.  At the risk of oversimplifying, the holding of Justice Sotomayor’s unanimous opinion can generally be summarized as follows: in a securities fraud action arising out of an alleged failure to disclose information about a possible causal link between a product and negative health effects, the plaintiff need not allege that the omitted information showed a statistically significant probability that the product causes the ill effects in order to establish that the information was material.  The decision reaffirms the applicability of the reasonable investor standard for materiality announced in Basic Inc. v. Levinson, which looks to whether the omitted information would have “significantly altered the ‘total mix’ of information made available” to investors. 

Thus, Matrixx eschews a bright-line rule (statistical significance) in favor of a more flexible “reasonable investor” standard.  Professor Kaye does not take issue with the Court’s rejection of a bright line rule requiring a plaintiff to plead (and ultimately, prove) statistical significance of omitted information in the securities context.  Instead, he is critical of the Court’s failure to articulate in better detail the technical shortcomings of using statistical significance as a bright-line rule, and he cautions against interpreting Matrixx as suggesting that something less than statistical significance would be appropriate to prove a causal link between a product and disease in other contexts.  In other words, it is one thing to say that the causal link does not have to be statistically significant in order for information about an association between the product and disease to be meaningful to investors or consumers.  It is another thing to say that statistical significance is unimportant when it is necessary to actually show evidence of a causal link itself, such as in the toxic tort context.

Although I followed and generally agreed with Professor Kaye’s article from a legal perspective, there were some technical concepts discussed in the article that were admittedly a bit over my head.  Fortunately, I knew just who to ask for more insight, having recently worked with Justin Hopson of Hitachi Consulting on two CLE presentations discussing the use of statistics in class actions.  Here are some of Justin’s observations after reading the article:

  • The article is well-written.  Professor Kaye would make a good expert witness.
  • Kaye identifies studies showing that zinc sulfate caused anosmia.  He does not comment on zinc acetate, nor zinc gluconate, the active ingredients in Zicam.  It sounds like the causal link may have been known, and available to use.  So, this was not a case about “arbitrary statistics.”  Instead, the issue had to do with the measurement of an understood, causal relationship.
  • Kaye describes the standard applied in Matrixx as looking to whether a reasonable investor would find the omitted information “sufficiently extensive and disturbing” to induce him to make a different investment decision.  Nonlawyer experts may be tempted to ask for a formulaic definition for this phrase, and it may not be obvious without explanation that the standard would leave the question about what is “sufficiently extensive and disturbing” to the factfinder.
  • Kaye talks about the historical treatment of .05 as the threshold “significance level” that makes something statistically significant.  I’ve often thought of “significance level” associated with the relative degress of the “risks”.  If the risk of being wrong is death, then is 1-in-20 OK?  You really have to think through: What does Type I and Type II error look like in my experiment?  What are the implications?
  • If one were really attempting to compute the potential causal connection between Zicam and anosmia, it might help to understand why the FDA suggested a background rate in “all cold remedies”.  If the causality is related to zinc sulfate, then isn’t that the common population?
  • The point that the 0.05 “convention” is somewhat arbitrary is an important one.  Kaye observes that “[a] useful rule of complaint drafting must avoid inquiries into the soundness of expert judgments about the population, the test statistic, and the model.”  Hmm…so how do we get a useful rule if you cannot attack the fundamentals?  Indeed, Kaye’s next point is that Bayesian analysis should be used sometimes.  All inferential statistics have assumptions, and any appropriate standard of pleading or proof should be flexible enough to allow the opposing lawyer to challenge every single assumption. 
  • The observation that “the p-value, by itself, cannot be converted into a probability that the alternative hypothesis is true” is also very important.  This is a common misunderstanding in beginning stats because we teach, “I fail to reject the null hypothesis.  Or I reject the null, and accept the alternative hypothesis.”  It becomes very important to correctly specify null/alternative in exhaustive and exclusive terms.  Otherwise some other non-specified conclusion should be reached.
  • The one thing I might challenge is the assertion that adverse event reports (AERs) are “haphazardly collected data”.  I’m not sure why Kaye chose this phrase.  The AERs should be observations.  It is only their cause that is in doubt.  It is not their function to establish the causal link.  Instead, the link would have to be established with other data, such as through a clinical trial using a well-organized data collection process.

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For those of you interested in trends in class and collective actions in other parts of the world, check out the recent article by Manuel A. Gómez, Associate Professor at Florida International University College of Law, entitled Will the Birds Stay South? The Rise of Class Actions and Other Forms of Group Litigation Across Latin America (available for download at SSRN).  Professor Gómez’s article discusses the common features of collective action regulations across Latin America and surveys the unique features of the collective action procedures in several key Latin American countries.

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The Baker Hostetler class action practice team issued a new Executive Alert today authored by Columbus Partner Mark Johnson entitled Fifth Circuit Restricts Cy Pres Doctrine in Class Action Settlements.  The alert discusses the Fifth Circuit’s recent decision in Klier v. Elf Atochem North America, Inc., restricting the use of the cy pres doctrine to distribute unclaimed class action settlement funds in the absence of express terms in the settlement agreement.

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Ever since the U.S. Supreme Court issued its decisions in Smith v. Bayer and Wal-Mart Stores, Inc. v. Dukes, I have wondered aloud whether we would start to see a significant divergence between the standards applicable to class certification in the state and federal courts.  (See the Parting Thoughts Section of this August 31 SCOTUSBlog Post).  My home state of Colorado has been the first to end this speculation, adopting a decidedly more liberal standard for class certification in its decision yesterday in Jackson v. Unocal Corp. than the standards discussed in Dukes and many other lower federal court decisions. 

The main holding of the Colorado Supreme Court’s decision in Jackson can be summarized with the court’s statement that:

A trial court must conduct a rigorous analysis of the evidence and find to its satisfaction that each C.R.C.P. 23 requirement is established.

Jackson, Slip Op. at 18.  At first glance, this statement may not seem out of step with the “rigorous analysis” standard commonly recognized by the federal courts.  However, the majority’s intentional use of the phrase “to its satisfaction” rather than “by a preponderance of the evidence” makes the Colorado standard a potentially far less exacting hurdle.  A large portion of Justice Martinez’s majority opinion is dedicated to explaining why the court chose to make the class certification decision a matter of pure judicial discretion by the trial court rather than a matter of evidentiary proof.  The majority opinion makes reference no less than four times to the state’s “policy of favoring the maintenance of class actions” and juxtaposes this policy against a federal policy that the majority characterizes as “limiting class actions.” 

Also key to the majority’s analysis was the language of Colorado’s rule 23 allowing the court to make a “conditional” class certification order, language that has recently been removed from the federal rule.  Because certification can be tentatively granted and later revoked by the trial court in Colorado, the court reasoned, the applicable evidentiary standard should be more flexible and less definitive than the “preponderance” of the evidence standard applied in most federal courts, where (the Jackson court reasoned) the rule requires a single class certification decision.

The majority addressed two other issues that are closely related to the standard of review.  The first was whether a trial court may resolve factual disputes that overlap with the merits of the case.  On that issue, the majority reached the relatively uncontroversial conclusion that a court may consider disputes about facts that overlap with the merits, but “only to the extent necessary to satisfy itself that the requirements of C.R.C.P. 23 have been met.”  Slip op. at 27.   

The second issue was whether the trial court should resolve expert witness disputes in reaching its determination on class certification.  On this issue, the court’s holding was nuanced.  Although it recognized that the trial court must evaluate the competing experts’ opinions in order to determine whether the evidence at trial can be presented in a way to resolve the class claims through a common set of facts, the majority held that a trial court should not rule on the admissibility of the plaintiffs’ expert’s testimony at the class certification phase.  The majority again recognized that this holding was contrary to the holdings of several federal court decisions, but it reasoned that a different standard was justified under the Colorado rule because a trial court had the power to reconsider a preliminary certification order following a pretrial Shreck (the Colorado equivalent of Daubert, not to be confused with Shrek, the surly but loveable ogre) hearing on the admissibility of a plaintiffs’ expert’s testimony.  See id. at 31-32.

A strongly-worded dissent from Justice Eid, who was joined by Justice Rice, criticized the decision by stating, in summary, that:

the majority’s standardless approach makes class certification in Colorado essentially unreviewable by appellate courts and raises serious procedural due process concerns.

Slip Op. at 1 (Eid, J., dissenting).  Justice Eid’s dissent contains a wealth ammunition for academics, commentators, and the courts of other jurisdictions to question the majority’s reasoning.  But alas, for litigants in Colorado, it does not have the force of law.  So, rather than discuss it in depth, I simply commend it to your reading.

There are a host of questions that arise out of Jackson that will likely be the subject of future litigation in the Colorado courts, and I’ll address a few of them now.  However, I’ll apply the Colorado Supreme Court’s class certification standard to the following remarks by saying that they are preliminary and tentative and subject to later reconsideration as the record develops.

Does the Jackson decision mean that trial courts in Colorado should take a “certify first, ask questions later” approach to the certification question?  

This is a position that any party seeking class certification will likely take in the wake of Jackson.  However, a review of all four companion cases decided by the Colorado Supreme Court on Monday makes clear that this is not a permissible approach.  Jackson vests wide discretion in the trial court to grant or deny certification depending on whether the class certification elements are met to the court’s satisfaction, but it also requires the trial court to consider evidence presented by both sides in analyzing whether class treatment is appropriate.  These conclusions are reflected by the results in State Farm Mutual Automobile Insurance Co. v. Reyher, in which the court applied its new standard and held that a trial court had acted within its discretion in denying class certification after a rigorous analysis, and Garcia v. Medved Chevrolet, Inc., in which it determined that the trial court had erred by granting class certification without taking into consideration the evidence presented by the defendant showing that individual questions would predominate.

Is the “rigorous analysis” standard meaningless in light of the trial court’s vast discretion under Jackson?

 Justice Eid’s dissent argues that the majority’s decision renders the “rigorous analysis” requirement a purely procedural requirement.  In other words, as long as the trial court goes through all the motions, the court still has relatively unfettered discretion to grant or deny certification.  This may be true as an analytical matter, but as a practical matter, performing the “rigorous analysis” requires the trial judge to think critically about how the trial is actually going to be conducted.  It also prevents the trial judge from glossing over what may turn out to be insurmountable practical problems in fairly adjudicating the case through common, class-wide evidence.  Thus, even if a “rigorous analysis” is a purely procedural requirement, that does not mean that it will have no impact on the outcome of class certification motions.

Has the Colorado Supreme Court resurrected the pre-Dukes misinterpretation of Eisen as prohibiting any analysis of the merits of the case?

That the answer to this question is no may not be completely clear from the majority’s opinion in Jackson itself, but it becomes clear when Jackson is read in combination with Justice Martinez’s companion opinion in Reyher.  While, curiously, the majority opinion in Jackson makes no reference to Dukes, the opinion in Reyher cites Dukes approvingly in holding that a trial court cannot simply accept the plaintiff’s allegations as true.  The line that can’t be crossed is that the trial court cannot prejudge the merits, a conclusion that is consistent with the Supreme Court’s recent ruling in Erica P. John Fund, Inc. v. Halliburton Co.

Is class certification now effectively unreviewable in the Colorado appellate courts?

The widely disparate outcomes in the three companion cases decided along with Jackson reflect that appellate review will still have a function after Jackson.  An appellate court may clearly find 1) that the trial court conducted a rigorous analysis of the evidence and acted within its discretion in either granting (Jackson, Patterson) or denying (Reyher) class certification; or 2) that the trial court failed to conduct a rigorous analysis of the evidence and therefore the case must be remanded (Garcia).   What is less clear is whether there ever going to be circumstances in which an appellate court could find that a trial court performed a rigorous analysis but abused its discretion in deciding the outcome of the class certification motion, and whether, if so, the appellate court could dictate the result of the class certification motion rather than remanding that decision to the trial court.

What are the practical implications of Jackson?

There many potential practical implications of the Jackson decision.  First, the standard in Colorado is clearly less stringent than the federal court standard.  This raises the prospect that plaintiffs will view Colorado as a favorable forum for class action litigation, and it will almost certainly raise the stakes in battles over forum selection and federal jurisdiction.  Moreover, given the trial court judge’s broad discretion over the class certification, the particular leanings and predispositions of the trial court judge become pivotal in the likely success or failure of a class action.

Second, the court’s emphasis on the tentative nature of class certification decisions under Colorado Rule 23 means that even once they are certified, class actions in Colorado are likely to be subjected to repeated efforts at decertification as the case progresses.

Third, the emphasis on the “rigorous analysis” standard increases the likelihood that, despite the lack of a clear standard for resolving the issue, class certification will necessitate a mini-trial involving the presentation of live witnesses and a fully-developed record, likely increasing the cost of discovery and the class certification process itself.

On the other hand, none of these potential impacts would be a drastic change from the way that class actions are already being litigated in the Colorado Courts.  Parties already fight over removal and forum selection, courts already conduct evidentiary hearings on class certification motions, and defendants already make repeated efforts at decertifying a class.  Thus, the legacy of  Jackson may ultimately be merely to validate the existing customs and practices for litigating  class actions in Colorado.

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