By Anne Sherry, J.D.
A securities-fraud plaintiff seeking class certification should be required to present a model of class-wide damages, not just promise that one is possible, the U.S. Chamber of Commerce argues in an amicus brief in the Ninth Circuit. The Chamber supports Oracle Corporation’s appeal of the district court’s decision to certify a class notwithstanding the plaintiff’s failure to provide a model of damages. Under Comcast Corp. v. Behrend (U.S. 2013), the brief argues, a plaintiff must show a class-wide damages model tailored to its liability theory (In re Oracle Corporation Securities Litigation, May 31, 2022).
Oracle has appealed a California district court’s grant of class certification in a securities fraud action alleging that Oracle and its management misrepresented the company’s cloud business. Oracle disputed that the plaintiff met the predominance requirement of Federal Rule of Civil Procedure 23(b)(3), arguing that far from meeting Comcast’s requirement of showing a class-wide damages model, the plaintiff and its expert failed to provide any damages model at all. The court agreed with the plaintiff that its expert showed that a class-wide “out of pocket” damages methodology was feasible, satisfying Comcast.
In its amicus brief in support of the petition, the Chamber claims a strong interest in the outcome of the appeal because its members are frequently defendants of securities-fraud class actions. The brief posits that the Basic presumption of reliance allows class counsel to obtain class certification without direct evidence that a misrepresentation affected the stock price. Comcast then guards against the risk that courts will certify classes in which there is no realistic way to calculate damages. Here, however, the district court certified a class based on the expert’s speculation that a damages model might exist, even though the expert did not explain what the model actually was. This decision would effectively nullify Comcast in securities-fraud class actions, the Chamber argues.
According to the Comcast Court, a plaintiff is entitled only to those damages that arise from the asserted theory of liability. In Comcast, the proffered damages model encompassed aggregate class-wide damages arising from four different theories of antitrust injury, but the district court ruled that only one of those theories was legally viable. The Supreme Court held that the class should not have been certified because the plaintiff failed to isolate the damages arising from the viable theory. As the Chamber puts it, a class-wide proceeding in Comcast would have led to one of two scenarios: either the court would conduct a mini-trial for every class member or it would have adjusted the total damages award and apportioned the result evenly among class members, nullifying the plaintiff’s burden of proving damages as to each class member.
Although Comcast involved an antitrust claim, the Chamber argues that it interpreted Rule 23, which applies to all class actions, including for securities fraud. If the district court in Oracle had properly applied Comcast, it could not have certified the class because the plaintiff’s expert did not propose a particular damages model, instead speculating that he could hypothetically do so by conducting an event study. “Under Comcast, this is insufficient,” the Chamber writes. “The plaintiff must provide proof of a damages model, not an assertion that proof might be provided at some future point.”
The Chamber called the district court’s reading of Comcast implausible as it turned on the fact that the Comcast plaintiff made no reference to a tailored damages model, whereas the Oracle plaintiff’s expert represented that a model could be constructed. If this is the distinguishing factor, all the plaintiff would have had to do in Comcast would have been to assert that it was possible to provide a damages model, even without explaining what it was. To have relevance, Comcast requires evidence of a tailored damages model, not a promise that it will come later.
Furthermore, although the district court correctly observed that loss causation is a merits issue and that the Comcast analysis will overlap with the loss-causation analysis, it erred in disregarding Comcast on this basis, the Chamber argues. The Supreme Court rejected a similar argument last Term, writing that under Comcast, “a court has an obligation before certifying a class to determine that Rule 23 is satisfied, even when that requires inquiry into the merits.”
The Chamber urged the Ninth Circuit to grant review under Rule 23(f) because the case presents an important question of law. If followed by other courts (as the district court’s citation suggests is already the case), the reasoning would allow plaintiffs to instruct their experts to represent that they could, if necessary, prepare a damages model. The defendant will then face settlement pressure from class certification whether or not the damages model comes to fruition.
The case is No. 22-80048.