Catholic Healthcare West v. US Foodservice Inc.
729 F.3d 108
| 2d Cir. | 2013Background
- USF (U.S. Foodservice) sold products to ~75,000 customers under “cost-plus” contracts where price = supplier “invoice cost” + markup; some contracts permitted USF to retain supplier promotional allowances.
- Plaintiffs allege that USF created/controlled six shell companies (VASPs) that issued inflated invoices; USF used those VASP invoices to set the “cost” and received kickbacks disguised as promotional allowances.
- Ahold (USF’s parent) and auditors uncovered the VASP arrangements in 2003; Ahold consolidated the VASPs and disclosed the transactions publicly.
- Multiple putative class suits were consolidated; plaintiffs asserted RICO (mail/wire fraud predicate acts) and state/tribal contract claims and sought certification of a nationwide Rule 23(b)(3) class of cost-plus customers who were billed using VASP transactions.
- The district court certified the class after finding common issues susceptible to generalized proof (including concealment, uniform contract terms, and a class-wide damages model); the Second Circuit reviewed the certification for abuse of discretion and affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Predominance — RICO misrepresentation | Misrepresentation was uniform: invoices concealed VASP mark‑ups; generalized proof can show scheme and concealment | Reliance/causation and misrepresentation are individualized because customers and contracts differ; many customers knew or accepted pricing practices | Court: misrepresentation and concealment are common, susceptible to generalized proof; payment and concealment support classwide reliance inference; predominance satisfied |
| Predominance — RICO damages | Damages = overcharge (amount paid minus amount should have been billed); calculable by classwide formula using USF data | Damages require market-by-market, product-by-product price comparisons across time and customers — too individualized | Court: proper measure is overcharge due to VASPs; damages model acceptable for classwide calculation; predominance satisfied |
| Predominance — contract claims & choice-of-law | Contracts materially similar (UCC governs), duty of good faith common; breach inquiry overlaps with RICO common issues | Contracts vary; extrinsic evidence, minimum‑purchase clauses, and multiple state/tribal laws create individualized inquiries | Court: contracts substantially similar; minimum‑purchase terms were not enforced; most jurisdictions adopt UCC provisions at issue; common issues predominate |
| Tolling / fraudulent concealment | Concealment by USF was common and prevented discovery; tolling can be proved classwide | Tolling standards vary by jurisdiction and some require individualized proof of discovery/diligence | Court: generalized concealment evidence suffices; variations manageable (subclasses possible); predominance maintained |
| Expert evidence / Daubert at certification | Experts (damages and industry practice) show classwide calculability and concealment; admissibility considered on papers | Court should have held a Daubert hearing before relying on experts at certification | Court: district judge exercised gatekeeping on the papers, adequately evaluated experts for certification purposes; no abuse of discretion |
| Superiority | Class action is needed because individual suits are impractical and common issues will be resolved efficiently | USF: no economies because individual suits would not be brought; manageability concerns | Court: class action superior — economies, uniformity, and manageability support certification |
Key Cases Cited
- United States v. Kaiser, 609 F.3d 556 (2d Cir.) (context for related criminal conviction of a USF executive)
- Parker v. Time Warner Entm't Co., L.P., 331 F.3d 13 (2d Cir. 2003) (standard of review for class certification)
- In re Initial Public Offerings Sec. Litig., 471 F.3d 24 (2d Cir. 2006) (rigorous Rule 23 analysis and district court discretion)
- Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) (damages model must fit classwide theory of liability)
- McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008) (reliance and individualized issues in fraud-class context)
- Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004) (systemic corporate scheme susceptible to classwide proof)
- Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S. Ct. 1184 (2013) (predominance does not require proving every element classwide)
- Allapattah Servs., Inc. v. Exxon Corp., 333 F.3d 1248 (11th Cir. 2003) (contract class certification where duty of good faith common)
- Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008) (mail/wire fraud RICO predicates and causation principles)
- Commercial Union Assurance Co. v. Milken, 17 F.3d 608 (2d Cir. 1994) (measure of RICO damages for injury to business or property)