Lead Opinion
Judge JACOBS, dissents in a separate opinion.
Defendants-appellants Visa U.S.A. Inc. (“Visa”) and MasterCard International Incorporated (“MasterCard”) appeal from an order of the United States District Court for the Eastern District of New York (Gleeson, J.) granting plaintiffs-appellees’ (“plaintiffs”) motion for class certification. We hold that the district court did not abuse its discretion by finding that plaintiffs had established that this action is maintainable as a class action under Federal Rule of Civil Procedure 23(b)(3). We therefore affirm.
BACKGROUND
Plaintiffs — a number of large and small merchants and three trade associations— bring this antitrust class action against defendants Visa and MasterCard, alleging that defendants have created a tying arrangement in violation of § 1 of the Sher
The underlying facts are drawn from plaintiffs’ Second Amended Consolidated Class Action Complaint. Although Visa and MasterCard are separate associations, their rules permit “duality,” which allows banks to be members of both associations and to issue both brands of credit cards. There is a 95 percent overlap between Visa’s and MasterCard’s memberships, and virtually every retailer that accepts one of defendants’ credit cards also accepts the other’s credit cards. Additionally, as a result of the duality policy, Visa and MasterCard coordinate many of their policies.
Visa and MasterCard, through member banks, issue different types of payment cards, including credit cards and debit cards. Member banks, called card-issuing institutions, rather than defendants themselves, issue payment cards to consumers and set the cardholders’ interest rates and fees. Other member banks, called acquiring institutions, contract on behalf of Visa and MasterCard with retailers to accept their payment cards. When a cardholder makes a purchase with his or her Visa or MasterCard payment card at a merchant’s store, the acquiring institution reimburses the merchant the purchase price less a “discount fee” and the acquiring institution pays the card-issuing institution an “interchange fee.”
This action centers around a class of debit cards issued by Visa and MasterCard. A debit card is an access device which enables a cardholder, among other things, to withdraw cash from his or her bank account at an automated teller machine and to make purchases at a point of sale (“POS”) which are debited against the cardholder’s bank account. POS debit card transactions can either be “on-line” or “off-line.” In an on-line debit card transaction, the cardholder enters his or her “personal identification number” (“PIN”) into a PIN pad and then, during the retail transaction, the card-issuing institution
Defendants have an “honor all cards” policy, which requires any merchant accepting any of their credit cards to accept all of their payment cards, including Visa Check and MasterMoney. According to plaintiffs, retailers are even prohibited by the defendants’ “honor all cards” policy from asking customers whether they would mind using a different payment system. Defendants have set the interchange fees for Visa Check and MasterMoney at or near the same level as the interchange fees for their respective credit cards despite the fact that, according to plaintiffs, credit card transactions — which rely on the extension of credit — involve far more risk. The interchange fees for competing on-line debit cards — where the risk of non-payment is substantially eliminated — is far lower.
Plaintiffs contend that if Visa Check and MasterMoney were not tied to defendants’ credit cards by the “honor all cards” rule, retailers would refuse to pay the high Visa Check and MasterMoney fees, and as a result, defendants would have to lower those fees. Plaintiffs also allege that defendants have undertaken measures to deceive retailers into accepting their off-line debit cards. Specifically, plaintiffs contend that defendants designed their offline debit cards to be indistinguishable from their credit cards by making them visually and electronically identical and by setting identical interchange fees for their credit and off-line debit cards.
Thus, plaintiffs allege that defendants have created an illegal tie between Visa Check and MasterMoney and defendants’ credit cards and have attempted and conspired to monopolize the debit card market in violation of sections 1 and 2 of the Sherman Act. Plaintiffs request both in-junctive relief and money damages.
Plaintiffs moved to certify a class pursuant to Rule 23 consisting of “all persons and business entities who have accepted Visa and/or MasterCard credit cards and therefore are required to accept Visa Check and/or MasterMoney debit cards under the challenged tying arrangements, during the fullest period permitted by the applicable statutes of limitations.” In support of their motion for class certification, plaintiff?, submitted an expert report from Dennis Carlton, Ph.D in economics. (“Carlton”). Defendants opposed the motion for class certification and moved to strike Cariton’s report. Defendants offered an expert report from Richard L. Schmalensee, Ph.D in economics (“Schmalensee”), in opposition to plaintiffs’ motion for class certification and in support of their motion to strike. The district court issued a memorandum and order granting plaintiffs’ motion for class certification and denying defendants’ motion to strike Carlton’s expert report. In re Visa Check/MasterMoney Antitrust Litig.,
DISCUSSION
I. Standard of Review
This Court reviews a district court’s grant or denial of a motion for class certification under a deferential standard. “Provided that the district court has applied the proper legal standards in deciding whether to certify a class, its decision may only be overturned if it constitutes an abuse of discretion.” Caridad v. Metro-North Commuter R.R.,
II. Standards for Class Certification
To qualify for certification, plaintiffs must prove that the putative class action meets the four requirements set forth in Federal Rule of Civil Procedure 23(a):
(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or de*133 fenses 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.
Fed.R.Civ.P. 23(a); see also Caridad,
(A) the interest of the members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and (D) the difficulties likely to be encountered in the management of a class action.
Id. “In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.” Eisen v. Carlisle & Jacquelin,
III. Sufficiency of Plaintiffs’ Expert Evidence
A. The Expert Reports
The district court set forth in detail the contents of plaintiffs’ and defendants’ expert reports. In re Visa Check/Master-Money Antitrust Litig.,
Based on the allegations in the complaint, plaintiffs’ expert, Carlton, theorized that absent the tying arrangement, a large number of retailers would have refused to accept Visa Check and MasterMoney and, as a result, defendants would have had to reduce their interchange fees in order to maintain merchant acceptance of those cards. Carlton concluded, therefore, that all class members have been injured by paying higher interchange fees for Visa Check and MasterMoney than they would have absent the tie. Based on this theory, Carlton stated that the following issues are subject to class-wide determination: (1) whether credit and debit cards have distinct characteristics; (2) whether Visa and MasterCard, individually and/or jointly, have market power in credit cards; and (3) whether Visa and MasterCard’s tying policies injure all class members.
Defendants’ expert, Schmalensee, maintained that Carlton’s model of how the debit card market would operate absent the alleged tie did not adequately take into account the following consequences that would have accompanied the cessation of the tie: (1) there would be less usage of Visa Check and MasterMoney if their interchange fees decreased because banks would issue fewer cards and defendants would spend less money advertising the cards; (2) credit card interchange fees would increase as debit card interchange fees decreased if credit cards were no longer tied in a “package” to debit cards; and (3) the existence and extent of each individual merchant’s injuries are not amenable to class-wide determination because damages depend on the merchant’s mix of credit and debit transactions.
In response to Schmalensee’s assertion that the usage of off-line debit cards would decrease absent the tie' to credit' cards, Carlton pointed to two real-world instances in which a reduction in interchange fees for a particular payment card led to an
increase in its usage, rather than a decrease, as Schmalensee’s model would predict: (1) usage of Visa’s on-line POS debit card increased after Visa dramatically lowered its interchange fees in 1997; and (2) usage of Visa’s off-line POS debit card significantly increased after Visa cut its interchange fees- for that card in 1992. Carlton also presented the following empirical evidence contradicting Schmalen-see’s theory that credit and debit cards are tied in a “package” where the interchange fees for credit cards would increase as that of off-line POS debit cards decreased: (1) credit card interchange fees are not higher in Canada, despite the fact that Canadian banks do not issue off-line POS debit cards and thus do not have a “package” of debit and credit cards; and (2) in the United States between 1991 and 1998, interchange fees for off-line debit transactions greatly increased while credit card interchange fees generally stayed the same or increased slightly, as opposed to decreasing as Schmalensee’s model would predict.
B. Analysis
Defendants contend that the district court erroneously relied on Carlton’s report in granting plaintiffs’ class certification motion because, according to defendants, the district court improperly limited its scrutiny of the report and Carlton’s expert opinion “failed to provide a credible basis for class certification.” Al
To the extent that defendants’ contention is that the court did not sufficiently examine whether Carlton’s methodology was fatally flawed, and thus inadmissible even for class certification purposes, we reject this argument as meritless. The district court, in an almost fifty page opinion, thoroughly considered each of defendants’ criticisms of Carlton’s theory and Carlton’s response to each of those criticisms and concluded in each case that Carlton’s response sufficiently addressed the criticism. The district court correctly noted that its function at the class certification stage was not to determine whether plaintiffs had stated a cause of action or whether they would prevail on the merits, but rather whether they had shown, based on methodology that was not fatally flawed, that the requirements of Rule 23 were met. In re Visa Check/MasterMoney Antitrust Litig.,
IV. Rule 23(b)(8) Certification
After finding that plaintiffs had shown that they met the requirements of Rule 23(a), the district court determined that the putative class is maintainable under Rule 23(b)(3) because plaintiffs had “establish[ed] that the common questions of law
A. Predominance
“The Rule 23(b)(3) predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation.” Amchem Prods. Inc. v. Windsor,
1. Violation of Antitrust Law
The district court examined whether plaintiffs could establish each of the three required elements of an antitrust claim— (1) a violation of antitrust law; (2) injury and causation; and (3) damages — using common evidence. In re Visa Check/MasterMoney Antitrust Litig.,
2. Injury-in-fact
The district court also determined that plaintiffs’ overcharge theory would permit them to establish injury-in-fact on a class-wide basis. Id. at 81-87. The court noted that although defendants argued that the overcharge theory was too speculative, defendants conceded in their briefs that the theory “is not unknown” and they did not “contend that no plaintiff could ever recover” under such a theory. Id. at 83. Defendants also claimed that injury-in-fact could not be established using common proof because the district court would be required to examine a number of issues on an individual basis, including whether a
The district court further found that plaintiffs had responded persuasively to defendants’ other argument regarding injury-in-fact-that credit card interchange fees would increase if off-line debit card interchange fees decreased without the tie. Id. at 84. The court explained that plaintiffs had presented empirical evidence showing that credit card interchange fees do not necessarily increase when debit card interchange fees decrease; had informed the court that as part of their attempt-to-monopolize claim, they would demonstrate that the defendants had attempted to monopolize the debit card market in part to keep credit card interchange fees high; and had impeached Schmalen-see on this issue by pointing to his deposition testimony that, although he thought it was likely credit card interchange fees would increase absent the tie, he had not “pushed it far enough to have an opinion.” Id. at 84. Thus, the district court concluded that plaintiffs had met their burden of showing that injury-in-fact was amenable to common proof and that class treatment was therefore appropriate. Id.
3. Causation
The district court also considered and rejected defendants’ arguments that causation could not be proven on a class-wide basis. The court found that defendants’ contention that, absent the tie, they would have selectively reduced fees as necessary to retain individual merchants’ business was too speculative because defendants had not previously engaged in such merchant-specific pricing. Id. at 85. The court also observed that although defendants do have broad pricing categories for different classes of merchants, Carlton’s damage formula could “easily be adjusted to account for that fact.” Id. Further, the court found that defendants’ claim that the usage of Visa Check and MasterMoney would decrease absent the tie was contradicted by empirical evidence and was not relevant to Carlton’s overcharge theory. Id.
The court further found that defendants’ contention that a merchant’s ability to “steer” makes it impossible for plaintiffs to prove causation on a class-wide basis was without merit. Defendants argued that if a merchant did not want to accept off-line debit cards because of the allegedly inflated fees it would have to pay, the merchant could “steer” its customers to other forms of payment by, for example, converting the transaction to on-line debit by asking for a PIN or for another form of payment. Id. at 85-86. The court found, however, that if a customer refused to be steered, the merchant would have to allow the customer to complete the off-line debit transaction under defendants’ “honor all cards” rule. The court stated that “[t]he presence of injury and causation is binary; it is either there or it is not.- According to Carlton’s theory, injury and causation is present for every putative class member.” Id. at 86. The court observed, however, that if defendants “repackaged” their
Defendants’ arguments on appeal regarding the district court’s finding that the existence of injury and causation can be established by class-wide proof appear merely to rehash their many criticisms of Carlton’s theory. Because we find that the district court’s resolution of these issues did not constitute an abuse of its discretion, see supra Section III.B., we affirm the district court’s determination that the existence of injury and causation can be proven on a class-wide basis.
4. Damages
The heart of defendants’ predominance argument is that the common issues in this action do not predominate over the individual damages questions, primarily the defense of mitigation of damages by steering.
Defendants’ mitigation defense goes only to the calculation of damages. In re Visa Check/MasterMoney Antitrust Litig.,
Common issues may predominate when liability can be determined on a class-wide basis, even when there are some individualized damage issues. See, e.g., Bertulli v. Indep. Ass’n of Cont’l Pilots,
[I]f defendants’ argument (that the requirement of individualized proof on the question of damages is in itself sufficient to preclude class treatment) were uncritically accepted, there would be little if any place for the class action device in the adjudication of antitrust claims. Such a result should not be and has not been readily embraced by the various courts confronted with the same argument. The predominance requirement calls only for predominance, not exclusivity, of common questions.
In re Alcoholic Beverages Litig.,
Under Carlton’s theory of the case, which the district court found to be sufficiently reliable for class certification purposes, plaintiffs can prove on a class-wide basis: (1) the substantive elements of the antitrust violations; (2) injury-in-fact and causation; (3) viability of the mitigation defense; and (4) general application of the overcharge formula for damages. In contrast, the only issues that might require some individualized inquiry under Carlton’s theory are: (1) the extent to which a particular merchant could have steered customers away from off-line debit card transactions, assuming the mitigation defense is viable; and (2) the calculation of damages using the overcharge formula and, if necessary, mitigation. Under these circumstances, we cannot say that the district court’s conclusion that the common issues of law and fact predominated over the individualized issues constitutes an abuse of its discretion.
B. Manageability
Defendants also argue that the calculation of individualized damages makes this case unmanageable as a class action. We disagree. There are some situations where courts have determined that a case is not manageable as a class action because of the necessity for individualized damages determinations. See, e.g., II Areeda et al., supra, ¶ 331, at 283 n. 22; 8 von Kalinowski et al., supra, § 166.03[3] (collecting cases). Nevertheless, failure to certify an action under Rule 23(b)(3) on the sole ground that it would be unmanageable is disfavored and “ ‘should be the exception rather than the rule.’ ” In re S. Cent. States Bakery Prods. Antitrust Litig.,
The district court recognized that although it appeared at this preliminary stage that damages could be determined with the aid of a class-wide formula, it had the flexibility to address any individualized damages issues, including the steering mitigation defense, that might arise. In re Visa Check/MasterMoney Antitrust Litig.,
Defendants erroneously suggest that our decision in Abrams v. Interco, Inc., 719
In stark contrast, the action before us involves only two products (credit cards and off-line POS debit cards) with set interchange fees and class members who can be identified by defendants’ own records. In this action, unlike in Abrams, there are no individualized issues relating to each plaintiffs’ relationship with Visa and MasterCard because defendants’ “honor all cards” rule contractually applied to each of the plaintiffs in the putative class. Additionally, plaintiffs here, unlike in Abrams, have alleged a common practice affecting each member of the class and have proffered a damages formula to assist with the calculation of damages. Thus, we find defendants’ reliance on Abrams is misplaced.
We conclude that the district court did not abuse its discretion in finding that the action will be manageable as a class action.
C. Adequacy of Representation
The dissent discusses an issue not raised by the parties regarding adequacy of representation. Rule 23(a)(4) provides that, in order to certify a class, its proponents must show that “the representative parties will fairly and adequately protect the interests of the class.” Fed. R.Civ.P. 23(a)(4). This rule requires courts to ask whether “plaintiffs interests are antagonistic to the interest of other members of the class.” Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp.,
As the dissent points out, and the district court recognized, there are two basic methods that courts use to measure damages in tying cases. One method is the “tied product” approach, as referred to by the district court. In re Visa
The question of whether to apply the “tied product” or “package” approach is a complex issue that has long divided the circuits. Compare Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc.,
The district court discussed these competing lines of cases when it considered whether the alleged injury-in-fact was amenable to class-wide treatment. See In re Visa Check/MasterMoney Antitrust Litig.,
The dissent contends that choosing a damage measure was essential to the disposition of this case and that failure to do so was an abuse of discretion. In the dissent’s view, the correct measure of damages is the “package” approach. See post, at 155. The dissent argues that if the district court had properly decided this issue and had correctly chosen the “package” approach, certification would have been defeated because the interests of the class members would have conflicted, causing inadequacy of representation. Id. Because this is a variable proportion tying case, according to the dissent, class members who have transacted predominantly with credit cards would have interests differing from those who have processed mostly debit cards.
There is no need on this interlocutory appeal from class certification for this
As an initial matter, we note that the dissent’s concerns turn largely on the sufficiency of the plaintiffs’ expert opinion. We have already affirmed the district court’s finding regarding the sufficiency of that opinion, concluding that it was not fatally flawed. This expert opinion, adequate to support our finding of predominance under Rule 23(b)(3), is likewise sufficient to uphold a finding of adequacy of representation under Rule 23(a)(4).
The dissent maintains, however, that the very choice to adopt this expert theory is symptomatic of intractable conflicts within the class, causing certification to run afoul of Rule 23(a)(4). See post, at 158. The dissent divides the class into three groups of merchants, based on the merchants’ proportion of debit card sales to credit card sales. The interests of these three groups, according to the dissent, would be fundamentally at odds if the “package” measure of damages were applied at trial.
The dissent overstates the potential conflict. The three types of merchants discussed by the dissent have much in common-not only as to liability, but as to damages as well. All class members, regardless of their debt/credit proportion, wish to prove that the debit card fees would be significantly lower without the tie. Every member also has an interest in establishing the hypothetical, “untied” price as low as possible in order to maximize recovery of damages. As for establishing the hypothetical, “untied” price of credit cards, the tension is not nearly as pronounced as the dissent contends. It may be less vital for merchants with predominantly debit card sales to prove that credit cards would be no more expensive without the tie. It is, however, still in the interest of these merchants to show that credit card fees would not have increased, because any finding to the contrary would likely reduce, though not decimate, their damage awards if the “package” measure were applied. It would seem to maximize the potential recovery for all three groups to argue, as they do here, that credit card prices would not increase without the tie. Other theories may or may not be simpler to prove. Even if they are, the debit-heavy merchants would not necessarily choose to concede that credit card prices
Even if a level of conflict may exist among the three groups, that potential for conflict need not defeat certification. While Rule 28(a)(4) is designed to ferret out potential conflicts between representatives and other class members, see Amchem,
In the event that the district court does find conflicts arising of the type identified by the dissent, there are a variety of devices available to resolve the problem. We discussed a battery of options in Part IV.B. of this opinion. Of particular relevance here are the possibilities of bifurcating liability and damage trials, decertifying the class after the liability trial, and creating subclasses. The availability of this range of options sufficiently addresses the dissent’s concerns regarding adequacy of representation.
Having determined that the district court did not abuse its discretion in finding that common issues of law and fact predominate, that the action will be manageable as a class action, and that choosing a measure of damages was not required before certification, we affirm the district court’s certification of the class under Rule 23(b)(3).
D. Effect of Certification
Given these conclusions regarding the soundness of the class under Rule 23, the dissent’s comments about the possibility that certification will coerce defendants into settlement are largely inapposite. The effect of certification on parties’ leverage in settlement negotiations is a fact of life for class action litigants. While the sheer size of the class in this case may enhance this effect, this alone cannot defeat an otherwise proper certification. The dissent notes that, in our recent decision in Sumitomo, we listed as a basis for granting a Rule 23(f) appeal the fact that “the certification order will effectively terminate the litigation.”
Meanwhile, the dissent underestimates the powerful policy considerations that favor certification, and ignores the exhaustive analysis performed by the district court, carefully applying the Rule 23 requirements for class certification. While both the district court and this Court have acknowledged that difficulties in managing this large class action may arise, these problems pale in comparison to the burden on the courts that would result from trying the cases individually. See In re Visa Check/MasterMoney Antitrust Litig., 192 F.R.D. at 88 (observing that “[w]ithout class certification, there are likely to be numerous motions to intervene, and millions of small merchants will lose any practical means of obtaining damages for defendants’ allegedly illegal conduct”).
It is not as though the class members were haphazardly thrown together, nor “herded” or “agglomerated” as the dissent contends. Post, at 157, 158. They were, after all, allegedly aggrieved by a single policy of the defendants. Given the strong commonality of the violation and the harm among the merchants, this is precisely the type of situation for which the class action device is suited.
V. Rule 23(b)(2) Certification
Certification under Rule 23(b)(2) is permissible when defendants have acted on grounds generally applicable to the class, making final injunctive or declaratory relief appropriate. Fed.R.Civ.P. 23(b)(2). Certification under Rule 23(b)(2) is not appropriate, however, in “cases in which the appropriate final relief relates exclusively or predominantly to money damages.” Fed.R.Civ.P. 23(b)(2) advisory committee’s notes to 1966 Amendments.
The district court found that the putative class is certifiable under Rule 23(b)(2), in addition to Rule 23(b)(3), because “[t]he ‘honor all cards’ rule is ‘generally applicable’ to all members of the class, and the request for an injunction ending it is central to the plaintiffs’ suit.”
Neither the Supreme Court nor this Circuit has delineated the precise circumstances under which a putative class requesting both injunctive and monetary re
In any event, the primary concern about certifying a class with significant damages under Rule 23(b)(2) is the absence of mandatory notice and opt-out rights. See Lemon v. Int’l Union of Operating Eng’rs,
CONCLUSION
For these reasons, we affirm the district court’s grant of plaintiffs’ motion for class certification pursuant to Rule 23(b)(3).
Notes
. When a bank acts as both a card-issuing and an acquiring institution, it retains the entire discount fee.
. As the district court noted, the complaint includes the following illustration of the chain of transactions:
Bank A issues a Visa credit card to Consumer X, who purchases a garment for $100 at Store Y, which was "acquired” for Visa by Bank B. Visa rules mandate that Bank B must pay Bank A an interchange fee of 1.25% of the amount of the transaction, i.e., $1.25. Bank B will charge Store Y a “discount fee” higher than $1.25 in order to recover the mandated interchange fee and other fees that Visa rules mandate Bank B to pay Visa on each and every Visa credit card (and debit card) transaction and to earn a profit for itself. Thus, Bank B may charge a discount fee of 1.60% of the transaction amount (or $1.60) to Store Y. When Store Y presents Consumer X's $100 Visa transaction to Bank B, the bank will credit Store Y's account for $98.40, send the Visa mandated $1.25 interchange fee to Bank A and retain the $.35 balance of the "discount fee.”
In re Visa Check/MasterMoney Antitrust Litig.,
. Rule 23(f) provides "[a] court of appeals may in its discretion permit an appeal from an order of a district court granting or denying class action certification under this rule if application is made to it within ten days after entry of the order.” Fed.R.Civ.P. 23(f). After the defendants' petition to appeal was granted, the appeal briefed and argued, but before we rendered this decision, this Court established a standard for determining whether to grant a Rule 23(f) petition: Petitioners must demonstrate either ''(1) that the certification order will effectively terminate the litigation and there has been a substantial showing that the district court’s decision is questionable, or (2) that the certification order implicates a legal question about which there is a compelling need for immediate resolution.” In re Sumitomo Copper Litig.,
. Defendants petitioned this Court under Rule 23(f) to review the district court's grant of plaintiffs' motion for class certification. This Court granted defendants permission to appeal the district court’s grant of plaintiffs’ motion for class certification, not the district court's denial of defendants' motion to strike. Under these circumstances, we have no jurisdiction to review the motion to strike. We note that a motion to strike expert evidence pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc.,
. The substantive elements of plaintiffs’ illegal per se tying claim are: (1) that the tying arrangement affects a substantial amount of interstate commerce; (2) the two products are distinct; (3) the defendant actually tied the sale of the two products; and (4) the seller has appreciable market power in the tying market. See United. States v. IBM Corp.,
. We do not separately discuss the requirements of Rule 23(a). On appeal, defendants’ arguments primarily focus on whether the class is maintainable under either Rule 23(b)(2) or (b)(3). To the extent that defendants contend that plaintiffs failed to establish commonality and typicality as required by Rule 23(a) because individualized questions will arise regarding each plaintiff, we, like the district court, address these arguments in the context of the predominance requirement of Rule 23(b)(3). In re Visa Check/MasterMoney Antitrust Litig.,
. Plaintiffs contend that defendants waived this argument by raising below the issue of steering only in the context of plaintiffs’ ability to prove injury-in-fact on a common basis and not as a mitigation defense that would preclude a finding of predominance and make the class unmanageable. See Kraebel v. New York City Dep't of Hous. Pres. and Dev.,
. Plaintiffs dispute defendants' claim that the "honor all cards" rule permits individual merchants to steer customers to other forms of payment. Plaintiffs’ motion for summary judgment to dismiss this mitigation defense is pending before the district court.
. A district court’s ability to bifurcate a trial is limited by the Seventh Amendment. See Blyden v. Mancusi,
. The dissent concedes that, under the "tied product” approach, "the interests of the class members would be aligned.” Post, at 155.
. The court noted that because it found certification appropriate under both Rule 23(b)(2) and (3), its inclination was to provide general notice to the class but to provide opt-oul only as to the damages claims. It stated, however, that it would solicit the parties' views on the question. Id. at 89.
Dissenting Opinion
dissenting:
I respectfully dissent.
In In re Sumitomo Copper Litigation, we recently held that “petitioners seeking leave to appeal pursuant to Rule 23(f) must demonstrate either (1) that the certification order will effectively terminate the litigation and there has been a substantial showing that the district court’s decisions is questionable, or (2) that the certification order implicates a legal question about which there is a compelling need for immediate resolution.”
Appellants here have made a more than sufficient showing under Sumitomo (A) that the certification order tends to termi
(A) Rule 23(f) was adopted in part to alleviate the danger that an erroneous “order granting certification” may force a defendant “to settle rather than incur the costs of defending a class action and run the risk of ruinous liability.” Fed.R.Civ.P. 23 advisory committee’s note. One sound basis for granting jurisdiction under Rule 23(f) is thus the circumstance that the class certification “places inordinate or hydraulic pressure on defendants to settle, avoiding the risk, however small, of potentially ruinous liability.” Newton v. Merrill Lynch,
(B) The district court’s decision is rendered “questionable” by two errors of law that render grant of the certification an abuse of discretion.
First, the district court inadequately considered whether the class action can be manageably tried and has certified the four million member class without identifying a “ ‘practical means’ ” for calculating the extent of each merchant’s damages. See Abrams v. Interco,
Second, the district court ruled on certification without deciding a threshold question of law that determines whether the class members’ interests will be aligned and therefore whether litigation by representative is appropriate. Courts are split on whether a tying plaintiffs injury must be measured (as I believe) by how much the tie increased the combined cost of buying both the tying and the tied products. If that is the correct measure, there can be no class here because the putative members used the tying and tied products in different proportions, and therefore have conflicting interests when it comes to how the fact and extent of any injuries are to be proven.
Because of these two legal errors, and because the majority opinion is so deferential that this appeal is no check at all on the coercion that Rule 23(f) is designed to curb, I cannot join the majority opinion.
I.
Certification Prior to Identification of a “Practical Means” for Trying Four Million Claims
In ruling on certification, a court is required to consider “the difficulties likely to be encountered in the management of a class action.” Fed. R. Civ. Pro. 23(b)(3)(D). And unless a court is “con
Any case of this size and numerosity is beset by potentially intractable problems of manageability. The crucial, unresolved difficulty in this litigation concerns individualized proof of damages, an issue that “can be critical in determining whether a class of antitrust claimants should be certified.” Manual for Complex Litigation § 33.11, at 303 (3d ed.1995); see Windham v. American Brands, Inc.,
The law is “settled that affirmative defenses should be considered in making class certification decisions.” Waste Mgmt. Holdings v. Mowbray,
The asserted defense — which the district judge acknowledged may “have force” — is that the merchants had a duty to mitigate their losses by encouraging at least some
Just as we assume for purposes of class certification that the illegality of the tie is litigable, we must assume that defendants will be entitled to try their mitigation defense. The rule against pre-certification decisions on the merits is non-partisan and serves neutrally to avoid the risk that a “court’s tentative findings, made in the absence of established safeguards, may color the subsequent proceedings.” Eisen v. Carlisle & Jacquelin,
The majority recites the principle that a court “must examine ... defenses in determining whether a putative class meets the requirements of Rule 23(b)(3),” but finds no abuse of discretion because the district court “specifically recognized its ability to modify its class certification order, sever liability and damages, or even decertify the class if such an action ultimately became necessary.” Majority Op. at 138, 139 (emphasis added) (citing In re Visa Check/MasterMoney Antitrust Litig.,
This approach reflects a serious misinterpretation of Rule 23(c)(1), which permits courts to enter a “conditional” certification and then alter or amend the certification as the case proceeds. But as other circuits have repeatedly explained, individual questions “must be resolved before a class is certified, even if certification is conditional.” In re Hotel Tel. Charges,
The manageability problem in this case has been “apparent” from the outset and is apparent right now. The record developed so far reveals that Mastercard encouraged merchants to channel customers
It makes no sense to provide individualized notice to millions of merchants before the court has devised a “practical means” for trying the issues presented. See Fed. R. Civ. Pro. 23(c)(2) (requiring “individual notice to all [Rule 23(b)(3) damages class] members who can be identified through reasonable effort”). Certification that is premature does no favor to the millions of absent class members because “[undesirable consequences may follow” if the class “is later decertified or redefined.” Manual for Complex Litigation § 30.11, at 215. Class members who are “eliminated from the litigation as a result of decertification or reduction in the size of a class may be confused at best or prejudiced at worst.” Id. Even if relief is eventually obtained for a pared down class, “those who were initially in the larger class may attempt to reverse the decision that excluded them from the class; such a reversal may be particularly troublesome if the relief was obtained by settlement.” Id.
The majority opinion’s view of conditional certification also seriously impairs our ability to conduct a meaningful interlocutory review under Rule 23(f). Conditional certification is not a hedge against present error. Our power of interlocutory review was conferred for a case such as this, where scores of billions of dollars are thought to be at stake and no procedure has been conceived for a fair merits adjudication. A purpose of our interlocutory look is to assure that defendants are not coerced into settlement by an improvident certification, conditional or otherwise. But if district courts can simply postpone consideration of difficult issues by making certification “conditional” (as all certifications tend to be anyway), it is unlikely that we would ever vacate such an order. At a minimum, the approach in the majority opinion will lead unnecessarily to multiple requests for appellate intervention in large-scale class actions: one after the conditional certification, and others as the district judge eventually confronts issues that were apparent before conditional certification was given.
Finally, unless there is a “practical means” of trying the case, certification leads to unfairness and injustice: if the district court later finds that a trial is unmanageable, the named plaintiffs and their counsel lose nothing, but in the meantime they have in hand the means to extract a favorable settlement of what may be weak claims. See Eisen v. Carlisle & Jacquelin,
Finally, -de-certification would not doom this litigation; this is not a case in which the named plaintiffs’ claims are “far smaller than the costs of litigation.” Fed. R.Civ.P. 23(f) advisory committee’s note. For instance, if named plaintiff Wal Mart Stores processed even 10% of its sales with credit and off-line debit, and if it established an (average) one-half percent overcharge on those transactions, its claim would reach a quarter billion dollars (with trebling and before attorneys’ fees) for 1999 alone.
II.
Conflicts Among Class Members in Proving the Fact and Extent of Injury
Certification of this class is untenable for another, entirely independent reason: under the correct measure of injury in a tying ease, the class members face irreconcilable conflicts in proving the fact and extent of any injury caused by the tie. Rule 23(a) therefore prohibits litigation by representative because no representative can adequately protect the interests of the millions of absent class members. See General Tel. Co. v. Falcon,
There is little dispute that plaintiffs can use common proof to litigate the threshold question as to whether there is an illegal tie.
In many tying cases, measuring the impact of the tie is fairly mechanical because the buyers have used the two products in fixed proportions. See, e.g., United States v. Microsoft Corp.,
In my view: (1) The court’s failure to decide how injury in fact would be -measured was an error of law and thus an abuse of discretion; (2) the correct measure of injury is the extent to which a merchant would have paid less for the “package” of the tying and tied products in the absence of the tie; and (3) plaintiffs who use tied and tying products in varying proportions have conflicting interests in how the class goes about proving the fact that they would have paid less for their particular “package,” as well as in showing the extent of any disparity. Since Rule 23(a) requires that members of a class “possess the same interest and suffer the same injury,” class certification is not an option in this case. Amchem Prods. v. Windsor,
A. The “Measure of Injury” Applied in the District Court
The need to show injury to all class members has been problematic for plaintiffs from the outset, and their theory of injury has mutated as class counsel has tried gamely to fix the problem. The Second Amended Class Action Complaint alleged that “absent the tie, virtually all members of the putative class would have refused the off-line debit cards and processed the same transactions using cash, checks, on-line debit, or other payment forms.” In re Visa Check/MasterMoney Antitrust Litig.,
Plaintiffs then sponsored an expert’s affidavit positing that all plaintiffs would have continued to accept off-line debit cards even absent the tie, but that the defendants would have charged a lower fee for them. See id. Specifically, the expert
Defendants responded that the tied product “overcharge” measure of injury is flawed because it ignores what would happen to the price of the tying product in the untied world. “As a matter of elementary economic theory,” defendants argued that a seller who “has market power in the tying product and overcharges on the tied product will do two things if the tie is broken: decrease the price of the tied product and increase the price of the tying product.” Id. at 83. And since a plaintiff cannot show injury in fact if “his ‘loss’ from the defendant’s violation is offset by his ‘gain’ in the very transaction he attacks,” II Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 365c, at 245 (rev. ed.1995), the defendants contended that the tying product price had to be considered. Several authorities agree that injury must be measured by reference to the “package” price of the two products. See, e.g., Kypta v. McDonald’s Corp.,
If credit card fees would have been higher in the untied world, certification would depend (as the district court fully recognized) on which measure of injury is adopted because under the “package” measure
the fact of injury would no[t] be susceptible to class-wide proof. Specifically, merchants with relatively high amounts of credit card transactions vis a vis debit card transactions (e.g., jewelry stores) would have suffered little or no injury from the tie; indeed, they would have benefitted from it to the extent it kept credit card interchange fees down.
Id. at 83.
The district court did not decide which measure of injury applies, however, because in its view the question was obviated by a new proffer in plaintiffs’ expert’s reply declaration. According to plaintiffs new (third) conception of the untied world, defendants would have lowered off-line debit fees but “would not have raised the credit card” fees. Id. at 84 (emphasis added). The district court deemed this a “sufficient theory of class-wide injury under either the ‘package’ or the ‘tied product’ measure of injury” because under this theory even merchants with relatively high credit card volume would have been injured. Id. at 85 & n. 15. Accordingly, the
The district court’s refusal to decide how injury in fact would be measured was an error of law and thus an abuse of discretion. See Castano v. American Tobacco Co.,
If the court had decided this question, and decided (correctly) that injury is measured by the package price (rather than by the price of the tied product alone), see Part II.B below, it would have encountered a subtle problem, unique to variable proportion tying cases, that is fatal to certification, see Part II.C below.
B. The Correct Measure of Injury
I would hold that the correct measure of injury in fact is the package price of the tying and tied products. The statutory text compels this rule. The injury in fact requirement is derived from § 4 of the Clayton Act, 15 U.S.C. § 15, which provides a damages cause of action only to plaintiffs who have been “injured in [their] business or property by” an antitrust violation. Id.; see J. Truett Payne Co. v. Chrysler Motors Corp.,
The price of the tying product must be taken into account because it usually does rise if the tie is broken. A rational person cannot be made to pay more for a package of two products than he would pay for the two products separately. So if a tie causes the buyer to pay more than the market price for the tied product, the buyer is most likely paying less than the price that the seller could profitably charge for the tying product if sold separately. Otherwise, the buyer would avoid the tie.
Based on the text of § 4 and these economic principles, “an increasing number of courts have correctly held that the purchaser has not been injured in fact, and thus cannot recover damages, unless he shows that the combined ‘payment for both
C. The “Package” Measure of Injury Applied to Variable Proportion Tying Cases
If injury were measured (erroneously) by reference to the tied product alone, the interests of the class members would be aligned. Every class member processed at least some off-line debit transactions, so every class member would want the class representatives to prove that in the absence of the tie, the price of the tied product would have been as low as economic theory could support. The fact that the class members happened to process credit cards and off-line debit cards in varying proportions would be irrelevant. Indeed, as compared to the “package” measure or to a non-price theory of injury, a “claim of overcharge on the tied product is the most likely prospect for common treatment of the fact of damage.” John H. Matheson, Class Action Tying Cases: A Framework for Certification Decisions, 76 Nw. U.L.Rev. 855, 885-86 (1982) (emphasis added).
However, under the package measure described in Part II.B above, the variation among merchants of the proportion of sales using credit cards (versus off-line debit cards) has great bearing on proof of common injury. See Matheson, supra at 887; cf. Herbert Hovenkamp, Tying Arrangements and Class Actions, 36 Vand. L.Rev. 213, 249-50 (1983) (concluding that buyers subject to “variable proportion tie-in[s]” cannot prove injury in fact on a class-wide basis, and suggesting as an alternative attack the use of offensive collateral estoppel under Parklane Hosiery Co. v. Shore,
Any given set of credit and debit fees that class counsel might seek to prove would have different anticipated impacts (i) on the merchant whose debit-card sales predominate, (ii) on the merchant whose credit-card and debit-card sales are in parity, (iii) on the merchant whose credit-card sales predominate-and on each merchant along the continuum. In proving injury and damages, any given economic assumption or analysis will (as the case may be) enhance, impair or preclude the antitrust claim of a merchant depending on that merchant’s location along the continuum.
Like other class members, the merchant whose debit-card sales predominate benefits by showing that the debit charge would have been much lower; but, unlike other class members, the merchant whose
In contrast, the merchant whose credit-card and debit-card sales are in parity would get nothing if decoupling caused credit charges to rise by as much as debit prices fell. To establish injury in fact, this merchant would be compelled to undertake the “ ‘elusive and seldom attempted’ ” proof that the sum of the untied prices would have been lower. As to the extent of injury, he would be indifferent to the relative prices of credit and debit and would do best by proving that the combination would have been as low as possible.
The merchant whose credit-card sales predominate faces the toughest constraints. For this merchant, it is necessary but insufficient to make the “ ‘elusive
The three merchants at these three points on the continuum thus have different cases; their anticipated recoveries depend on and are maximized by different theories and economic assumptions; those theories and assumptions are incompatible or (at best) incoherent when advanced at once; there are winners and losers within the class; and the distribution of these competing interests creates a problem that cannot be resolved by m&class representatives even if one had a thousand of them. See Amchem Prods, v. Windsor,
Certification does no service for the absent class members’ claims, viewed separately. Already, the difficulty of having to prove injury under the package measure has led plaintiffs’ counsel to propose a least-common-denominator analysis that is theoretically capable of bestowing some benefit on all class members, to the detriment of class members who would have a superior claim of recovery under other, competing analyses. Thus, plaintiffs undertake to make the “ ‘elusive and seldom attempted’ ” showing that the sum of the two fees would have been lower and that the credit card price would not have risen at all. If, as plaintiffs’ counsel evidently believes, this analysis is the only way to keep the class together, I take the point as proven that the interests of the class members are fractured and conflicted. As to the analysis itself, I have no view of its merits in this particular case. But for most absent members of the class, the analysis is unnecessary and impedes recovery under other theories that offer better prospects of recovery.
In light of the intractable conflict, I would order the district court to decertify the class. But lacking a majority on this Court for that result, I am relieved to think that the certification order is conditional and that nothing inhibits the district court from considering and reconsidering all of these issues over time, as indeed the district court is evidently disposed to do.
Conclusion
The majority opinion exudes confidence that there is some way to bring this unmanageable and conflict-ridden litigation to an end, and that it will materialize one day in the district court. I think that is probably right, but I intuit that the only case-management tool that will bring about that end will be settlement, and that it will be coerced by abuses that Rule 23(f) was specifically designed to correct.
. Many district courts have ignored Judge Friendly's admonition in Abrams. But as the trial judge in this case recognized, those courts “state the rule that individual damages questions will not bar class certification In conclusory fashion without assessing whether individual questions would predominate if each damages action had to be tried separately.” In re Visa Check/MasterMoney Antitrust Litig.,
. The right to assert the defense against each and every class member is guaranteed by the Rules Enabling Act. See Eisen v. Carlisle & Jacquelin,
. I agree with the majority that the "honor all cards” rule precluded any merchant from mitigating his alleged losses down to zero, Majority Op. at 17, but the issue that challenges manageability is the effect of channeling on the amount of damages. See in re Visa Check / Mastermoney Antitrust Litig.,
. I also assume arguendo that plaintiffs can use common proof to show that the tie had an anticompetitive effect on the relevant market, a showing required of all private antitrust enforcers regardless of whether they pursue a "per se” or rule of reason claim. See Balaklaw v. Lovell, 14 F.3d 793, 801 & n. 17 (2d Cir.1994).
. The Areeda treatise offers the following example:
Suppose a defendant's profit maximizing price for product A alone is $100 and that the prevailing market price for product B is $20. If the defendant’s version of product B is worth $ 1 less to the plaintiff than rival brands (or if a tie is otherwise burdensome in the amount of $1), the defendant tying the two together cannot profitably charge more than $119 for the package. Phrased another way: if he charges $25 for tied product A, he must reduce the price of tying product A to $94.
II Areeda & Hovenkamp, supra ¶ 365 at 246 n. 48 (emphasis added). Thus, if the tie is broken, the price of the tying product will increase back to $100.
This example describes a fixed proportion tie, but even in the variable proportion context "tied-product premiums are often offset by tying-product discounts below the price that would have prevailed without tying.” X Areeda et al., supra ¶ 1769 at 431.
. Suppose that the interchange fees in the tied world (the actual world) are $10 per $100 purchase for both credit cards and offline debit cards (in fact, the percentages are much smaller but the $10 figure is useful for illustrative purposes). Thus, regardless of an individual merchant's mix of credit and debit, for every 100 transactions he pays 100 x $10 or $1000.
To establish injury in fact under the package measure, any merchant would have to show that in the untied world, he would have paid less than $1,000. As noted in the text, this will require establishing what both interchange fees would have been in the untied world, i.e., the fee on credit cards would have been "$C” and the fee on off-line debit cards would have been "$D”.
To assess the effect of different price combinations on the merchant "whose debit-card sales predominate,” let us say that for every 100 transactions, he processes 30 by credit and 70 by off-line debit. In showing the fact of injury, this merchant could select (if provable) combinations of "$C” and "$D” that would sum over $20, thus obviating the need to make " 'elusive and seldom attempted' " showing that "the sum of tying and tied product prices would have been lower” absent the tie. In re Visa Check/MasterMoney Antitrust Litig.,
In terms of the extent of his injury, the 30%/70% merchant would greatly prefer a theory positing that C would have been $16 and D would have been $3 to a theory that the prices would have been $10 and $9, even though in both cases the sum would be $19. He could recover $310 under the former version of events (30 x $16 + 70 x $3 = $690), but only $70 under the latter (30 x $10 + 70 x $9 = $930).
. By plugging in the hypothetical prices of credit and debit discussed in the previous footnote, it is easy to see how the interests of this merchant differ from those of the merchant whose debit sales predominate. For every 100 transactions, this merchant processes 50 credit sales and 50 debit sales. If C would have been $19 and D $4, this merchant would actually have paid more in the untied world then he did under the tie (50 x $19 + 50 x $4 = $1,150). In the words of the district court, he "would have benefitted from [the tie] to the extent it kept credit card interchange fees down.” In re Visa Check/Master-Money Antitrust Litig.,
And while the respective prices of credit and debit mattered a great deal to 30%/70% merchant in showing the extent of injury, they would not matter at all to the 50%/50% merchant. The latter would recover $50 by advancing an economic theory that the prices would have been $16 and $3 (50 x $16 + 50 x $3 = $950) or $10 and $ 9 (50 x $10 + 50 x $9 = $950). The 50%/50% merchant could make a disinterested determination of which of the two theories would be easier to prove.
. Assume that this merchant processed 70 credit transactions for every 30 debit sales. If decoupling would have resulted in prices of $19 and $4, then this merchant would have been hurt by a whopping $450 (70 X $19 + 30 x $4 = $1,450). He also would have been hurt if the prices had been $16 and $3 (70 x $16 + 30 X $3 = $1,210) or even $16 and $0 because 70 x $16 is more than $1000. On the other hand, if the prices were $10 and $9, he could recover $30 (70 x $10 + 30 x $9 = $970), placing his preferences directly at odds with the preferences of the 30/70 merchant (who preferred the $16 and $3 prices to the $10 and $9). By extension, a merchant whose ratio of credit to off-line debit transactions was extremely high would not be able to recover under any theory positing a credit card fee of over $10 unless the debit card fee became virtually a free good.