Lack of standing does not bar certification of a class settlement in antitrust case

3rd Circuit approves settlement between De Beers and class of direct and indirect purchasers

On Dec. 20, 2011, the 3rd Circuit, meeting en banc, approved a classwide antitrust settlement between the diamond manufacturer De Beers and a large class of both direct and indirect purchasers, some of whom did not have legal claims in the states in which they filed.

In the seven suits filed between 2001 and 2005, plaintiffs accused De Beers of anti-competitive activity that resulted in purchasers being overcharged for diamonds. The Luxembourg-based company, which has a long history of claiming U.S. courts have no jurisdiction over it, initially refused to show up for court. But after courts entered default judgments against it in six of the seven cases, De Beers decided to settle the suits.

A district court approved the $295 million deal in November 2005, and objectors appealed to the 3rd Circuit, which overturned the settlement and then reviewed the decision en banc.

What’s interesting in Sullivan v. DB Investments is that the objectors, who came from within the class, were not contesting the fairness and accuracy of the settlement, but instead claimed that the class shouldn’t have been certified in the first place. Under federal antitrust law, only direct purchasers are allowed to sue for overcharge damages. So in Sullivan, the indirect purchasers brought their claims under a number of state laws. However, some members of the class lived in states where, the 3rd Circuit admitted, indirect purchasers were not allowed to recover in antitrust cases, and so they had no legal claims. Under the proposed settlement, these class members would receive the same payment as members with legitimate claims, which upset the objectors. The en banc panel of the 3rd Circuit approved the settlement anyway, in a 7-2 majority that reversed the court’s previous decision.

Claims Clash

It is improbable that a court would certify a similar class, in which there were members with no standing, in a litigation context. But in this case, De Beers wanted the settlement, likely because it would prevent class members from suing it individually for the same conduct. The court’s reasoning suggests that “it doesn’t matter if some of the people weren’t entitled in the first place, because De Beers itself doesn’t seem to care,” says Andrew Trask, counsel at McGuireWoods specializing in class action. Trask supposes that the court may have approved the settlement since De Beers did not challenge the certification— only members of the class did.

What’s more, because getting De Beers to subject itself to the jurisdiction of U.S. courts has been so difficult in the past, the court might not want to let the company get away when it is present and ready to settle. “The instant settlement appears to offer the most ‘efficient enforcement of the antitrust laws,’ when compared to the highly uncertain result the plaintiffs would encounter by engaging in protracted litigation against a party with a long track record of avoiding the jurisdiction of courts in the United States,” Judge Marjorie Rendell wrote in the majority opinion.

That’s the practical way to look at it. What remains is a technical dispute over whether the class should have been certified. The dissent wrote that the majority opinion established a “come one, come all” approach to class certification, “regardless of substantive legal rights.” It goes on to cite the precedent in the recent Dukes v. Wal-Mart Supreme Court case, saying that the “common questions” needed for a class to be certified according to Dukes also mean that each class member must have a “colorable legal claim.” The majority disagreed, claiming the dissent misread Dukes, and that “an inquiry into the existence or validity of each class member’s claim” is not required at the certification stage.

“You could argue that … the Supreme Court’s [Dukes decision], which empowers the court to look more closely at the merits of the case should have caused this particular circuit not to be so cavalier about certifying a class, even a settlement class, when they could not find any claim at all on the merits,” says Gary Halling, chair of Sheppard Mullin’s antitrust practice. “But on the other hand, it is a settlement and the defendants want a broad release, and that’s not unreasonable.”

Takeaway Lessons

Whether you believe the 3rd Circuit was right or wrong in certifying this class, Sullivan could be brought up in future cases. Plaintiffs may take this ruling to the district courts and try to argue that the 3rd Circuit is more lenient on the qualifications that plaintiffs need to meet for a class to be certified. However, Halling says this should be looked at as purely a settlement case.

“The mischief here would be for someone to try and take this settlement class case, make some analogies, and argue in a litigation class context that there’s some value to this analysis,” he says. “You really shouldn’t do that.”

Those looking to use Sullivan as precedent for a settlement class also should be careful because the facts in this case are so unique. Even though the settlement was arguably shaky, and still managed to pass, legal departments shouldn’t take the ruling to mean they can get away with questionable settlements.

“If we are going to reach a settlement, we better make sure that we have all our Is dotted and our Ts crossed because there’s so much in [the decision], people are going to be able to pull out things to use for their benefit,” says Dan Herling, a partner at Keller and Heckman.

However, “five years down the line, I think you’re going to see that this case isn’t particularly inf luential, because there are so many odd statements in there,” Trask says. So in the end, it might be unwise to rely on it too heavily.

Contributing Author

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