Class Actions - Thomas M. Byrne and Stacey Mcgavin Mohr

JurisdictionUnited States,Federal
Publication year2011
CitationVol. 62 No. 4

Class Actions

by Thomas M. Byrne* and Stacey McGavin Mohr**

The United States Court of Appeals for the Eleventh Circuit's 2010 decisions in class actions further developed the law on the requirements for class certification, the scope of the Class Action Fairness Act of 2005 (CAFA),1 and the preclusive effects of class settlements and judgments.2

I. Rule 23(b)(3) Certification: Sacred Heart

The year's leading class action case was Sacred Heart Health Systems, Inc. v. Humana Military Healthcare Services, Inc.3 The court accepted an appeal by the defendant, Humana, from the district court's order granting class certification. The class representatives were hospitals that claimed that Humana systematically underpaid them for medical services they provided to veterans under a federal program and thereby breached its contracts with them. The controversy arose from a change in payment policy by Humana that resulted in lower payments to the hospitals. Humana announced the change in a letter that Humana claimed had been sent to all of the hospitals, which a large majority of

* Partner in the law firm of Sutherland Asbill & Brennan LLP, Atlanta, Georgia. University of Notre Dame (A.B., cum laude, 1978; J.D., magna cum laude, 1981). Law clerk to the Hon. Robert A. Ainsworth Jr. of the United States Court of Appeals for the Fifth Circuit and to the Hon. Morey L. Sear of the United States District Court for the Eastern District of Louisiana. Member, State Bar of Georgia.

** Associate in the law firm of Sutherland Asbill & Brennan LLP, Atlanta, Georgia. Emory University (B.A., 2001), Duke University School of Law (J.D., magna cum laude, 2007). Law clerk to the Hon. Karen Nelson Moore of the United States Court of Appeals for the Sixth Circuit. Member, State Bar of Georgia.

1. Pub. L. No. 109-2, 119 Stat. 4 (2005) (codified in scattered sections of 28 U.S.C.).

2. For a review of class actions during the prior survey period, see Thomas M. Byrne & Stacey A. McGavin, Class Actions, 2009 Eleventh Circuit Survey, 61 Mercer L. Rev.

1055 (2010).

3. 601 F.3d 1159 (11th Cir. 2010). The opinion by the court was authored by Judge Stanley Marcus. Id. at 1164. An interlocutory appeal was granted under Federal Rule of Civil Procedure 23(f). Sacred Heart, 601 F.3d at 1169.

1108 MERCER LAW REVIEW [Vol.62

the hospitals acknowledged receiving. Several hospitals instituted a class action asserting that Humana's contention that it was mandated by the government program to increase its prices was false.4 The Eleventh Circuit ultimately agreed with Humana that "many important uncommon questions raised by this litigation overwhelm the one common issue and render the case unsuitable for class treatment" and vacated the class certification order.5

The court focused its analysis on Rule 23(b)(3)'s6 requirement that questions of law or fact common to class members predominate over questions affecting only individual members.7 To assess the impact of a common question on the class members' claims, a district court "obviously must examine not only the defendant's course of conduct towards the class members, but also the class members' legal rights and duties."8 As the court further explained,

A plaintiff may claim that every putative class member was harmed by the defendant's conduct, but if fewer than all of the class members enjoyed the legal right that the defendant allegedly infringed, or if the defendant has non-frivolous defenses to liability that are unique to individual class members, any common questions may well be submerged by individual ones.9

The court pointed out that this principle emerged clearly from its cases and those from other circuits.10 The court agreed with Humana that variations in the contract terms and the parties' course of dealings overwhelmed any common issue concerning the justifications for the change in pricing, reasoning that "common questions rarely will predominate if the relevant terms vary in substance among the contracts."11 The court contrasted Humana's case with a prior decision, Allapattah Services, Inc. v. Exxon Corp.,12 in which the court upheld the certification of a class of 10,000 Exxon dealers who claimed that Exxon had breached their individual sales agreements by overcharging them.13 The contractual provision in Allapattah Services, the court reasoned, was

4. Sacred Heart, 601 F.3d at 1164-66.

5. Id. at 1164.

6. Fed. R. Civ. P. 23(b)(3).

7. Sacred Heart, 601 F.3d at 1169-70.

8. Id. at 1170.

9. Id.

10. Id.

11. Id. at 1170-71.

12. 333 F.3d 1248 (11th Cir. 2003), affd, 545 U.S. 546 (2005).

13. Sacred Heart, 601 F.3d at 1171 (citing Allapattah Servs., 333 F.3d at 1252, 1264).

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substantially the same for all class members.14 The Humana contracts differed with respect to the key payment clauses, with a minimum of roughly thirty-three variations in contract language among the 260 potential class members.15 After examining the differences in detail,16 the court concluded that the substantial variation found in the material terms of the many contracts made the case "a close relative" of Brous-sard v. Meineke Discount Muffler Shops,17 a Fourth Circuit decision vacating a $390 million jury verdict on the ground of improper class certification of multiple disparate contract claims.18

The Eleventh Circuit concluded that the district court erred by focusing solely on the defendant's course ofconduct while neglecting the substantial differences in the contracts and the corresponding rights and duties provided therein.19 The court rejected the district court's suggestion of using subclasses corresponding to the six categories of payment clauses, finding that "the six subclasses proposed here mask a staggering contractual variety."20 Again citing Broussard, the Eleventh Circuit noted that the plaintiffs are not permitted "to stitch together the strongest contract case based on language from various [contracts], with no necessary connection to their own contract rights."21 The court reasoned that the Rules Enabling Act22 and due process prevent using class actions to infringe upon the substantive rights of any party.23 The court held that, based on the record, "an abridgment of the defendant's rights seems the most likely result of class treatment."24

While the variations in the contractual terms alone are fatal to class certification, the court also noted that individualized extrinsic evidence is problematic when evaluating the class members' agreements.25 "The risk of voluminous and individualized extrinsic proof runs particularly high where a defendant raises substantial affirmative defenses to breach."26 The court detected a similar difficulty in applying multiple

14. Id.

15. Id.

16. Id. at 1172-74.

17. Id. at 1175; see Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331

(4th Cir. 1998).

18. Broussard, 155 F.3d at 334.

19. 601 F.3d at 1176.

20. Id.

21. Id. (alteration in original) (quoting Broussard, 155 F.3d at 344) (internal quotation marks omitted).

22. 28 U.S.C. § 2072 (2006).

23. Sacred Heart, 601 F.3d at 1176.

24. Id.

25. Id. at 1176-77.

26. Id. at 1177.

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states' laws to the extrinsic evidence.27 Furthermore, contrary to the district court's finding, Humana's two principal affirmative defenses, ratification and waiver, involved more than merely damages issues because the two affirmative defenses could preclude liability.28 The Eleventh Circuit determined that there was "no support in the text of Rule 23 or interpretive case law for the district court's rigid distinction between liability and damages."29 The court noted that there was no formula or statistical analysis to resolve the individualized damages questions, and that it was "a clear error ofjudgment to brush them aside as mere 'damages' issues."30

The court also concluded that choice of law presented another barrier to class certification. The court reasoned that there could be considerable variations in state law governing extrinsic evidence, and that courts have expressed skepticism about class certification in substantive areas where the content of state law tends to differ.31 Although only six states were involved, the court noted that more than a perfunctory analysis was required of whether differences in state law would pose insuperable management obstacles.32 The court cited a procedural error by the district court in omitting a "serious analysis of the variations in applicable state law relative to Humana's affirmative defenses."33 As an illustration of the problem, the court reviewed the law of waiver in the six states and the differences among the states in its application.34

The court briefly turned to the question, under Rule 23(b)(3), of the superiority of class adjudication and concluded that a finding of lack of superiority was dictated by the outcome of its predominance analysis.35 The court pointedly offered the additional observation that the class members were hospitals with potentially high value claims against Humana, "even in a borderline case, that fact might well counsel against class treatment."36

27. Id.

28. Id. at 1177-78.

29. Id. at 1178.

30. Id. at 1179.

31. Id. at 1180.

32. Id.

33. Id.

34. Id. at 1180 & n.14.

35. Id. at 1183-84 (quoting Klay v. Humana, Inc., 382 F.3d 1241, 1269 (11th Cir. 2004)).

36. Id. at 1184.

2011] CLASS ACTIONS 1111

Sacred Heart is probably the court's most significant class action opinion since Klay v. Humana, Inc.37 Judge Marcus's tour de force opinion is likely to frame the issues in many future class certification controversies. The court's exacting and detailed analysis exhibits little tolerance for deferring the hard questions of how a case could be tried as a class action until after certification. Sacred Heart is the court's first extended recognition of the due process issues lurking when a court certifies a class by "glossing over" material differences in the claims of class members.38 The Eleventh Circuit's heavy reliance on...

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