Friday, August 26, 2005

Rule 702 Meets Rule 23(f)

In an interlocutory appeal, the Fifth Circuit has published a decision upholding denial of class certification in a securities case -- an outcome the panel reaches while simultaneously pleading a lack of appellate jurisdiction over the district court's order excluding the expert testimony on which plaintiffs' underlying motion for class certification was reliant. See Bell v. Ascendant Solutions, Inc., No. 04-11078 (5th Cir. Aug. 23, 2005) (Garwood, Smith, & Clement, JJ.).

If we understand this opinion correctly, then a representative plaintiff whose expert testimony in support of class certification is excluded by the trial court is without appellate recourse in the Fifth Circuit, except upon eventual entry of final judgment, even though the appellate court does possess interlocutory jurisdiction over the class certification decision under Fed. R. Civ. P. 23(f).

That outcome seems plainly wrong.

Here's what happened in Bell:
(1) Ascendant Solutions, Inc. ("ASI"), committed alleged securities fraud.

(2) Plaintiffs sued and moved for class certification under Fed. R. Civ. P. 23(b)(3).

(3) ASI opposed class certification, relying in part on its expert's opinion that ASI's common stock did not trade in an efficient market -- on the basis of which ASI argued that the "fraud-on-the-market" theory was unavailable to plaintiffs, and that plaintiffs therefore could not show reliance on a class-wide basis.

(4) Plaintiffs countered with an expert of their own, who opined that ASI's stock did in fact trade in an efficient market.

(5) The district court: (a) struck plaintiffs' expert testimony as unreliable under Daubert; (b) found that plaintiffs lacked sufficient alternative evidence to show an efficient market; and (c) denied class certification.

(6) Plaintiffs took an interlocutory appeal under Fed R. Civ. P. 23(f).

The Fifth Circuit's opinion first holds that plaintiffs may not simply rely on the pleadings in support of class certification, but must rather come forward with evidence to show that Rule 23's criteria are satisfied -- even where that evidence may overlap with merits issues. On the specific issue of market efficiency, the opinion says:

[A]lthough "there is no requirement for expert testimony on the issue of market efficiency ... many courts have considered it when addressing this determination, which may often benefit from statistical, economic, and mathematical analysis." [Unger v. Amedisys, Inc., 401 F.3d 316, 323 n.6 (5th Cir. 2005).] Indeed, though Unger admonishes district courts "not to insist upon a 'battle of the experts' at the class certification stage," id., we quoted with approval a statement from the district court's opinion in this case in defense of considering at least the reliability of expert testimony on market efficiency at the class certification stage. Id. at 323-24 n.6 ....

Under Unger, in other words, market efficiency may not simply be presumed from the bare allegations of the complaint. Under Unger, the "market efficiency" issue is sufficiently integral to the class certification analysis that district courts should consider devoting special scrutiny to the parties' expert evidence on that subject.

So far, so good. Reasonable people could perhaps differ over just how deeply the district courts should scrutinize expert evidence at the certification stage. Cf. In re Visa Check / Mastermoney Antitrust Litig., 280 F.3d 124 (2d Cir. 2001) (district courts deciding class certification should merely ensure that basis of expert opinion is not so fatally flawed as to render it inadmissible as a matter of law). But the level of scrutiny contemplated by the Fifth Circuit does seem rationally defensible.

The Bell opinion goes on, however, in the very next breath, to say:

Because we hear this appeal on an interlocutory basis, ... our review is bridled by rule 23(f). Under that rule, "a party may appeal only the issue of class certification; no other issues may be raised." Bertulli v. Indep. Ass'n of Cont'l Pilots, 242 F.3d 290, 294 (5th Cir. 2001). Consequently, as plaintiffs concede, we may not review the exclusion of their expert report, so we must look to the remainder of their market efficiency showing and determine whether the district court abused its discretion in finding it wanting.

This second thought seems in significant tension with the first. Does the panel's refusal to review the district court's Daubert ruling rest entirely on the claimed concession, by plaintiffs in Bell, that such review is impermissible? If that were so, there would be little reason to cite Bertulli. In the event, there's little reason to cite it anyway. Nothing in Bertulli, it transpires, deals with the question whether the admissibility of evidence offered in support of class certification may be reviewed in connection with a Rule 23(f) appeal of the district court's class certification ruling.

Indeed, the principal reason given by the Bertulli panel for limiting the scope of Rule 23(f) appeals (and its principal guidance defining what those limits are) is that merits issues should not be addressed at the class certification stage under Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974). (Take a look at footnote 7 in Bertulli.) Of course, if Eisen meant that the courts must be agnostic on every Rule 23 issue that happens to overlap with a merits question, then it would be error for the courts even to consider the "market efficiency" issue at the class certification stage (because "market efficiency" is indeed a merits issue). Plaintiffs in Bell, that is, would be right, and the Fifth Circuit wrong. But if Eisen's prescription of agnosticism on the merits requires (as the Bell opinion insists) only that the certifying court rest its ruling on the evidence relating to the elements of Rule 23, and not on the perceived strength of the underlying claims, then little reason appears for reading Bertulli as the Bell panel does. In other words, if Eisen's mandated agnosticism on merits questions does not preclude the district court's consideration of the reliability of expert evidence on market efficiency, it doesn't preclude appellate consideration of that issue either.

Once in a great while, logic harmonizes with practicality. The idea behind interlocutory appeals under Rule 23(f) is to permit early appellate resolution of class certification issues, without requiring either party to wait until final judgment. Defendants want early appellate review, it has been said, because they must meanwhile live under the in terrorem effect of any class certification order. Plaintiffs want prompt appellate review of adverse certification rulings too, because their claims may not be economically viable for trial as individual actions. To permit interlocutory review of certification orders, while delaying until final judgment all appellate review of the evidentiary rulings on which the class certification orders depend, pointlessly escalates transaction costs and maximizes uncertainty.


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Fed. R. Evid. 702: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.