In Suit Alleging Misleading Employment Rates, Third Circuit Rejects Class Certification Premised Upon Invalid Damages Theory

The Third Circuit recently affirmed a decision from the District Court of New Jersey denying class certification in an action alleging that Widener University School of Law defrauded its students by publishing and marketing misleading statistics about graduates’ employment rates. In its precedential opinion adjudicating plaintiffs’ interlocutory appeal pursuant to Fed. R. Civ. P. 23(f), the Third Circuit concluded that although the District Court misconstrued plaintiffs’ damages theory, the error was harmless because the Court would have nonetheless concluded that plaintiffs failed to satisfy the predominance requirement. This opinion, authored by Circuit Judge Chagares, is an example of defendants defeating class certification when plaintiffs cannot proffer a valid method of proving class-wide damages, as required by the U.S. Supreme Court in Comcast v. Behrend several years ago.

By way of background, plaintiffs were graduates of Widener Law who alleged that the school violated the New Jersey Consumer Fraud Act (“NJCFA”) and the Delaware Consumer Fraud Act (“DCFA”) by advertising misleading statistics about alumni employment rates; they claimed that the statistics included non-legal and part-time positions without categorical break down, thereby causing students to believe that the statistics were for full-time legal employment. Plaintiffs alleged that the misleading statistics allowed Widener Law to charge higher tuition than it would have received if the accurate statistics were marketed and published. Plaintiffs sought damages in the amount of overpaid tuition.

In support of their motion for class certification, plaintiffs relied upon an economics expert “to estimate the extent to which Widener’s misleading statistics inflated the tuition, which could serve as a class-wide estimate of every class member’s damages insofar as every class member, by definition, paid tuition.” The expert concluded that “there was a statistically significant relationship between employment rates and tuition prices” and that “regression methodology would be a reliable means of arriving at a final estimate of class-wide damages.”

The District Court denied class certification based upon plaintiffs’ failure to satisfy the predominance and typicality elements of Fed. R. Civ. P. 23. The District Court rejected the proposed class-wide damages theory because some graduates obtained full-time employment, so their damages, if any, would be different from other graduates. The District Court also concluded that the proposed damages theory relied on a “fraud-on-the-market” theory that New Jersey state courts rejected outside of the federal securities context.

Plaintiffs alleged that the District Court’s finding of a lack of predominance was erroneous for three reasons, and did not challenge the typicality finding:

First, plaintiffs argued that “the District Court applied an improperly burdensome legal standard under Rule 23(b)(3) by scrutinizing their class-wide evidence prior to full merits discovery and demanding that they ‘conclusively prove class-wide damages.’” The Third Circuit rejected this argument, explaining that an analysis of proposed class-wide evidence “will often resemble a merits determination, in that it relates to plaintiffs’ ability to prove the elements of their claims,” but reiterated that “the analysis is not a merits determination” because the court’s findings for class certification purposes are not binding, and do not reach “‘beyond what is necessary to determine preliminarily whether certain elements will necessitate individual or common proof.’”

Moreover, Judge Chagares concluded that it was “entirely appropriate” for the District Court to consider the proposed damages theory and its supporting proof because ascertainable loss and causation are core elements of claims under the NJCFA and DCFA, therefore, they are the “predominant issues” in the case. The Third Circuit then rejected plaintiffs’ claim that “‘individual damages calculations do not preclude class certification under Rule 23(b)(3).’” Judge Chagares clarified that this “general rule” of damages encompassed “two distinct concepts: the ‘fact of damage’ and the measure/amount of damages.” The Judge explained that the “fact of damage” equates to injury, impact, or in most instances, an element of liability for plaintiffs to prove, such as an ascertainable loss. The Judge clarified that “[o]nly if the fact of damage is established does a court reach the question of remedy and the exact calculation of each plaintiff’s damages.”

Second, plaintiffs claimed that the District Court ignored that the proposed theory of damages was unrelated to graduates’ actual employment because the Court mistakenly considered the fact that some graduates obtained full-time employment, which created an individual question that was not at issue. The Third Circuit agreed that “employment outcomes” were not at issue since plaintiffs sought “out-of-pocket” damages, which are the difference between the “price paid” in tuition and the “actual value” of tuition, and that neither component relied upon employment following graduation. Nevertheless, the Third Circuit held that the District Court’s error was harmless because “the crucial overarching issue in this case – proving that each class member suffered damages as a result of Widener’s actions – still must be shown to be susceptible to class-wide proof,” and the actual, proffered price-inflation theory failed this test.

Third, plaintiffs challenged the District Court’s characterization of their “inflated-tuition” theory of damages as a reliance-based “fraud-on-the-market” theory, and claimed that they proffered sufficient class-wide evidence to support their non-reliance-based “inflated-tuition” theory. The Third Circuit agreed that the District Court erroneously labeled plaintiffs’ damages theory as “fraud-on-the-market,” and that plaintiffs were not required to pursue a reliance-based theory of damages under the NJCFA or DCA because reliance is not an element of those claims.

Despite the Third Circuit’s agreement with plaintiffs that the District Court mischaracterized their damages theory, the Third Circuit explained that state courts have held that a price-inflation theory cannot satisfy the ascertainable loss and causal relationship elements of NJCFA and DCFA claims. Judge Chagares reasoned that allowing “price inflation” to be a “cause” of “ascertainable loss” is basically the equivalent of extending the fraud-on-the-market presumption to all consumer fraud cases, which state courts will not extend beyond federal securities fraud actions.

The takeaway from the Third Circuit’s precedential opinion is clear: plaintiffs seeking class certification must propose a theory of damages that is susceptible to class-wide proof, as emphasized by the Supreme Court in Comcast, or defendants should be able to defeat class certification because a court will likely conclude that individual questions will predominate over common ones. Moreover, defendants should bear in mind the Third Circuit’s distinction between the “fact of damage” and the measure or amount of damage when opposing class certification, since class plaintiffs often argue that individual damages calculations will not preclude certification. Stay tuned to this blog for updates on how District Courts in the Third Circuit cite and apply this recent decision.