delivered the Opinion of the Court.
Introduction
In this case, we review whether the court of appeals erred in holding that the trial court abused its discretion when it decerti-fied the plaintiff's class. Benzing v. Farmers Ins. Exch.,
The trial court initially certified the class, accepting as true the plaintiffs allegation that he and the class of insureds purchased UM/UIM cоverage on additional vehicles that provided no meaningful benefits. The case was then transferred to another trial judge who, after the parties undertook partial discovery, ruled that the UM/UIM coverage on additional vehicles did in fact provide a benefit UM/UIM protection for guests and nonresident family members traveling in those vehicles. Concluding that "mini-trials" would be necessary to determine if the defendants' alleged failure to disclose DeHerrera caused injury to any of the insureds, the court ruled that the plaintiff's original class certification was inappropriate.
On appeal, the court of appeals reversed. Benzing,
Upon review, we hold that, under the circumstances of this case, the fraud on the market theory cannot be applied to maintain a class action. The fraud on the market theory is a judicially created presumption typically employed by plaintiffs in securities class actions to prove the reliance element of a section 10(b) and rule 10b-5 securities fraud claim. Here, the plaintiff class did not allege reliance on both the market price of the policies and the integrity of the market. Rather, the class alleges reliance upon the defendant's omissions in face-to-face transactions. Thus, market price is not the causal impetus of the plaintiff class's reliance. In addition, a plaintiff class attempting to invoke the fraud on the market theory must demonstrate that thе market at issue is efficient; that is, the market price promptly reflects all available material public information. The class here did not and cannot demonstrate that the market for commercial UM/UIM insurance is efficient. Lastly, our decision in DeHerrera was public information at the time of the class's alleged reliance, and so the success of the plaintiff class's substantive CCPA claims actually depends on the inefficiency of the market for commercial UM/UIM insurance.
In addition, the plaintiff argues to us an alternate theory of causation. The plaintiff argues that causation may be presumed on a
Because the plaintiff advanced no theory of class-wide causation sufficient to maintain a class action, we hold that the trial court did not abuse its discretion when it decertified the class. Hence, the court of appeals' judgment is reversed. We remand this case to the court of appeals to be returned to the trial court with directions to enter judgment consistent with this opinion.
Facts and Proceedings Below
The plaintiff, Mark Benzing, sued Mid-Century Insurance Company and its parent company, Farmers Insurance Exchange, alleging that the insurers sold him UM/UIM coverage using deceptive trade practices by failing to disclose to him this court's decision in DeHerrera v. Sentry Insurance,
Benzing and his wife bought automobile insurance from Farmers on a first vehicle in 1997, and then bought additional coverage for a second vehicle in 1999. Both policies contained UM/UIM insurance. Benging alleged that, after the DeHerrera and Jaimes decisions, Farmers continued to sell UM/ UIM coverage on a per vehicle basis without telling insureds that they need not purchase UM/UIM insurance on each household vehicle to cover the insureds and their resident relatives. Benzing brought this lawsuit claiming, inter alia, that Farmers committed a deceptive practice under the Colorado Consumer Protection Act (CCPA), sections 6-1-101 to-1120, C.R.S. (2006), by selling UM/ UIM coverage on a per vehicle basis without disclosing the implications of DeHerrera and Jaimes to the insureds. 3
Benzing then moved for class certification pursuant to C.R.C.P. 23. The trial court
Following partial discovery, the defendants moved to decertify the class on the basis that benefits did acerue at least to some class members purchasing additional policies with UM/UIM insurance. DeHerrera and Jaimes only require that the insureds and their rеsident family members are covered on all vehicles after they purchase one policy with UM/ UIM coverage. Purchasing UM/UIM coverage on additional vehicles extends UM/UIM protection to guests and nonresident relatives of the insureds traveling in the added vehicles.
Defendants cited Benzing's own deposition testimony that, if given the choice between purchasing UM/UIM coverage that protected his guest passengers and nonresident relatives and coverage that did not, he would choose the broader, additional coverage. The defendants also introduced under seal statistical evidence obtained from another company, State Farm Insurance, which indicated that after State Farm's mass mailing to Colorado policyholders disclosing the import of DeHerrera, there were relatively few requests for cancellation of UM/UIM cоverage on additional vehicles. Because a plaintiff asserting a private cause of action under the CCPA must show that the defendant's deceptive trade practice caused an injury to the plaintiff, the defendants argued liability could not be established on a class-wide basis because the class would not be able to show that defendants' alleged non-disclosure of DeHerrera's implications affected their decisions to purchase additional coverage. See Hall v. Walter,
'Opposing decertification, Benzing argued that lability could be shown on a class-wide basis because the complaint alleged that the same illegal conduct was directed to all policyholders. He further argued that all insureds who purchased additional policies consisting of UM/UIM coverage were entitled to full refunds of their premiums. Alternative ly, he argued that he and other insureds were "duped into paying more than they would have paid" had the market been fully informed of the product's worth, and alleged that the harm to the class could be measured in the aggregate through statistical evidence as to the value of coverage actually sold.
. In support of this theory, Benzing, by way of affidavit, stated that, with knowledge of DeHerrera, he would want UM/UIM coverage on a second vehicle to protect guests and nonresident family members only if the price reflected the nature of the diminished coverage.. The plaintiff's expert averred that, like Benzing, "no consumer ... would pay approximately the same premium for just the second unit of [UM/UIM] protection if it provides no benefit to the individual or his/ her resident family members." This factual setting formed the basis for the plaintiffs fraud on the market theory, which he later argued on appeal to the court of appeals.
Nonetheless, the trial court, with a different judge presiding, ruled that Benzing was no longer an adequate class representative, and that his claims were not typical of other class members', because he would have purchased the additional insurance despite knowledge of DeHerrera. In doing so, the trial court implied that Benzing, and others who would have purchased the additional in
The trial court reasoned that replacing Benzing with another representative who would not have purchased the additional insurance would not support the maintenance of the class because individual findings still would be necessary to determine what coverage each class member would have chosen had full disclogure of DeHerrera occurred. To support this conclusion, the trial court cited the State Farm evidence, which indicated that most consumers did not cancel multiple UM/UIM policies even after DeHerrera was disclosed. As a result, the trial court concluded that the plaintiff could not show how causation could be established on a class-wide basis. Thus, the court held that individual issues predominated over common ones, and decertified the class. See C.R.C.P. 23(b)(3). 4
On appeal, a division of the court of appeals held that the trial court abused its discretion in decertifying the class. Benzing,
As a preliminary matter, the court stated that the defendants' argument for decertifi-cation, i.e., that the additional UM/UIM coverage did in fact provide "meaningful benefits" by covering guests and nonresident relatives, was not based on new evidence and thus should not have been considered by the second trial judge. Id. at 109.
The appellate court went on to rule that, even if the "meaningful benefits" argument made by the defendants was properly considered by the trial court, the trial court abused its discretion when it decertified the class. Id. It reasoned that some class members might be entitled to full refunds of premiums for UM/UIM coverage on additional policies because had DeHerrera been disclosed they would not have wanted coverage for guests and nonresident family members. Id. at 112. The court stated that although the plaintiff's deposition testimony indicated that he was not entitled to a full refund, the plaintiff might recover a partial refund under the fraud on the market theory. Id.
Proceeding on the fraud on the market theory, the court of appeals stated the plaintiff could establish "the causation element [necessary for his CCPA claims] by proof of how defendants' alleged non-disclosure affected the market pricе for additional vehicle coverage." Id. at 112. Thus, it held that the plaintiff's claims were typical of other class members' claims because the focus of the litigation would not be whether or how the plaintiffs injury differed from those who might be entitled to a full refund. Id. The court of appeals furthef held that the trial court abused its discretion when it ruled that individual issues predominated over common ones because the court of appeals reasoned that causation and damages might be demonstrated on a class-wide basis using the fraud on the market theory. Id. at 113-14. Although the court questioned whether the plairitiff would ultimately succeed in applying the fraud on the market theory to a case outside of the securities fraud context, it found this legal theory sufficient to maintain a class action. Id. at 111-12.
From this decision, the defendants appeal. 5
Standard of Review
We review a trial court's decision to certify a class in the first instance for an abuse of discretion. See, e.g., State v. Buckley Powder Co.,
Overview of Class Action Certification Requirements
As a prerequisite to class certification, the plaintiff must show that: (1) the class is so numerоus that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. C.R.C.P. 23(a).
The plaintiff must also demonstrate that it meets one of the three subsections of 23(b) necessary to maintain a class action. Here, the second trial judge and the court of appeals focused on C.R.C.P. 23(b)(3), which requires that questions of law or fact common to the class predominate over any questions affecting only individual class members, and that a class action is superior to other available methods for the fair and efficient resolution of the controversy.
While the burden is on the plaintiff to demonstrate that the requirements for a class action have been met, C.R.C.P. 23 should be liberally construed in light of its policy of favoring the maintenance of class actions. LaBerenz v. Am. Family Mut. Ins. Co.,
The rules provide that the trial court's certification order on the maintainability of a class action "may be conditional, and may be altered or amended before the decision on the merits." C.R.C.P. 23(c)(1). The trial court's order "is not final or irrevocable, but rather, it is inherently tentative." Officers for Justice v. Civil Serv. Comm'n of City & County of S.F.,
Procedural and Evidentiary Issues Relevant to Class Certification
The second trial judge decertified the class based on the defendants' argument that, contrary to the first trial judge's assumption, some purchasers received "meaningful benefits" on UM/UIM policies for additional vehicles and thus individual inquiries would be necessary to determine the extent to which each class member relied on the insurer's alleged failure to disclose DeHerrera's impli
The court of appeals suggests that this evidence should not have been considered because the defendant could have, but did not, present its "meaningful benefits" argument prior to the initial certification order. Benzing,
Generally, we agree that trial courts should not consider decertification without the discovery of new facts or changes in the law or positions of the parties. Under the сireumstances of this case, however, we conclude that the second trial judge possessed sufficient new information to exercise his discretion to re-examine the certification order as part of his "continuing obligation to review whether proceeding as a class action is appropriate." Ellis,
Here, central to the first trial judge's certification order was the plaintiff's theory that the additional coverage provided no meaningful benefits. The defendants' tendered evidence indicated that this basic premise of the initial certification was questionable. This evidence also appeared to support the defendants' argument that individual inquiries as to whether the defendants caused injury to each of the class members might be required, and thus that issues individual to the class might predominate over common ones. Henсe, based upon consideration of the reasoning of the first judge and the presentation of this evidence, we conclude that it was within the decertification court's discretionary authority to re-examine the rationale of the first judge's order 'of certification. As a result, we address the primary basis of the court of appeals' reversal of the decertification order. '
Predominance 6
At the crux of both the trial court's decer-tification order and the court of appeals' re
We note at the outset that, in considering whether to maintain a class under C.R.C.P. 23(b)(3), a court may not decide the substantive claims and defenses of the parties. Medina,
Some inquiry into the plaintiff's theory of the case, however, is necessary to ensure that common class issues predominate over individual ones. See Varacallo v. Mass. Mut. Life Ins. Co.,
Here then, the issue most relevant to the predominance requirement, and thus the maintenance of the class question, is whether the plaintiff has a method to establish, on a class-wide basis, that the defendants caused injury to insureds by failing to disclose DeHerrera's implications to them. The court of appeals held that the plaintiff's fraud on the market theory might demonstrate causation on a class-wide basis. Id. at 110, 112-14. The plaintiff argues that we should affirm the court of appeals' holding on this issue. In addition, the plaintiff, for the first time, puts forth an alternate theory of causation based on a presumption similar to the presumption established by the Supreme Court in Affiliated Ute,
A. Fraud on the Market
The plaintiffs argue that the class could rely on the fraud on the market theory to maintain class certification. We summarize why the fraud on the market theory fails here. First, the plaintiff class relied on the defendants' alleged omissions in face-to-fаce transactions; the class did not rely on the market price of the insurance policies. Second, commercial auto insurance does not trade in an efficient market and, therefore, the plaintiff class could not rely upon the price of the policies as reflecting all publicly available information. Third, even if we were to assume that commercial auto insurance did trade in an efficient market, our decision in DeHerrera was public information at the time the plaintiff class purchased or renewed their policies. Thus, if the fraud on the market theory were applicable, the market price of the policies would reflect our decision and, consequently, the class could not have suffered any harm. Indeed, the
The fraud on the market theory is a judicially created presumption of reliance allowing investors who were induced to trade securities, not by any direct reliance on a misrepresentation by the defendant, but rather in reliance on the market price of the securities, to nonetheless state a claim under section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b) (2009), and rule 10b-5(b) thereunder, 17 C.F.R. § 240.10b-5 (2009). Basic, Inc. v. Levinson,
In the present case, application of the fraud on the market theory is inappropriate. The class members all allege direct reliance on the material omissions of the defendant in face-to-face transactions, rather than reliance on the market price of the UM/UIM policies in an impersonal and efficient market. Hence, the plaintiff class may not couch proof of their reliance in terms of indirect reliance on market price because market price is not the accurate causal impetus of plaintiffs' reliance in this case.
Indeed, in the securities context, where face-to-face transactions are concerned, plaintiffs will ordinarily be required to demonstrate familiarity with an allegedly false or misleading statement in order to state a claim under section 10(b) and rule 10b-5. See, e.g., Basic,
Additionally, a plaintiff class's sue-cessful invocation of the fraud on the market theory in the section 10(b) and rule 10b-5 context hinges on the premise that the issuer's securities traded in a well-developed, impersonal, and efficient market. See, e.g., Basic,
The market for commercial UM/UIM insurance is not simply a "thinly traded" one. Commercial insurance is not traded. There is no "market," within the meaning of the fraud on the market theory, for commercial insurance at all. This is fatal to plaintiff class's ability to rely on the fraud on the market theory to prove reliance because there is no mechanism by which all available public information is promptly impounded into the price of commercial automobile insurance. 8
At the time the insureds purchased or renewed their UM/UIM policies, our decision in DeHerrera was published and publicly available. Thus, the market price would have incorporated our decision, and would have dropped to reflect its holding. If the market for commercial UM/UIM insurance were efficient, the defense of truth on the market would be available to the defendants. See Basic,
B. Class-Wide Presumption of Causation Stemming from the Defendants' Alleged Material Omission
The plaintiff asserts an alternate theory of class-wide causation. He argues that the class members are entitled to a presumption or inference that they were harmed by the defendants' purported failure to disclose DeHerrera, an allegedly material omission. The plaintiff and an amicus cite the Supreme Court's decision in Affiliated Ute, which held that in a class action for securities fraud brought under rule 10b-5, reliance could be presumed where the defendant withheld material information it was under some duty to disclose.
Although the plaintiff acknowledges that the Supreme Court's holding applied only to rule 10b-5 securities fraud class actions, he notes that other states have looked to Affiliated Ute in state consumer protection and fraud class actiоns. See, e.g., Dix v. Am. Bankers Life Assurance Co.,
We hold that this argument, articulated for the first time in briefs to this court and not considered by the court of appeals, was insufficiently raised in the trial court and therefore we reach no opinion as to the merits of this argument. See, e.g., People v. Salazar,
Conclusion
Upon review, we conclude that the court of appeals erred. The fraud on the market theory cannot be applied to maintain a class action under the facts of this case. For reasons stated, we do not consider the plaintiff's alternate theory of causation. In the trial court the plaintiff advanced no theory to establish causation and injury on a class-wide basis that could be used to maintain a class action. Hence, although we disagree with parts of the decertification order, we hold that the trial court did not abuse its discretion in decertifying the class.
We reverse the court of appeals' judgment and we remand this case to that court to be returned to the trial court with directions to enter judgment consistent with this opinion.
Notes
. In DeHerrera v. Sentry Insurance Co., we considered whether an insurance company was required to pay UM/UIM benefits where the named insured's son, while riding an uninsured motorcycle, was-struck by an underinsured motor vehicle.
. In Jaimes v. State Farm Mutual Automobile Insurance Co., the plaintiff owned two cars; one insured in his name with a UM/UIM limit of $25,000, the other insured under a separate policy in his wife's name with a limit $100,000.
. Benzing also brought claims for declaratory relief, breach of contract, and bad faith breach of contract based on Farmers' decision to pay only the lower level of UM/UIM insurance as contained in his second vehicle's policy after Benz-ing was injured by an uninsured motorist. After this lawsuit was initiated, Farmers paid the higher amount of UM/UIM coverage, and only Benz-ing's CCPA claims are at issue in this appeal.
. 'The trial court also did not allow a class action to be maintained under either C.R.C.P. 23(b)(1) or (b)(2). However, neither of these decisions was raised on appeal to this court.
. We granted certiorari on the following three issues:
1. Whether Colorado should extend the federal securities-law doctrine of "fraud-on-the-market" to relieve plaintiffs of the burden of proving causation of injury in class actions alleging non-securities claims such as insurance bad faith and violation of the Colorado Consumer Protection Act.
2. Whether a trial court is precluded from decertifying a class based on a ground that dеfendants did not assert at the initial certification hearing, where the evidence supporting that ground was not discovered until after the hearing.
3. Whether the court of appeals improperly reweighed the evidence and substituted its assessment for the trial court's in reviewing the trial court's decision to decertify a class.
. In this opinion, we address C.R.C.P. 23(b)(3)'s predominance requirement for the maintenance
. Form S-3 registration is available to so-called "seasoned issuers," issuers who have been reporting for at lеast one year and, if they are offering new equity securities, have a public float of at least $75 million. 17 C.F.R. § 239.13 (2008).
. We are aware that some courts, including the Tenth Circuit, have allowed plaintiffs to rely on the fraud on the market theory in the absence of an efficient market in the rare circumstance where the defendants' fraud created the very market itself for the securities, that is, the securities were worthless and wholly unmarketable but for the defendants' fraud. See, e.g., Ross v. Bank
. Compare Vasquez v. Superior Court of San Joaquin Cty.,