A question of numbers

Class actions can save courts and parties a lot of time and money. But what if the class includes just a few members? How much time and money will the class action device save then?

The Third Circuit grappled with that “numerosity” question in In re Modafinil Antitrust Litig., 837 F.3d 238 (3d Cir. 2016).

The answer it gave — that a class with 20+/- mostly big members may not pass the test — could reshape how courts handle antitrust cases worth billions of dollars.

Modafinil

The case arose out of “reverse-payment” pacts for Provigil, a Cephalon drug that helps people with narcolepsy stay awake.

After four drug makers disclosed plans to sell a generic version of Provigil, Cephalon had sued them for infringing its patents on delivery of modafinil, the agent in Provigil. Cephalon settled with all four, but instead of requiring the infringers to pay royalties to it, Cephalon agreed to pay each millions of dollars to them — if they delayed the launch of their generic modafinil. Hence the name “reverse-payment” or “pay-for-delay”.

A blur of lawsuits followed. They fell into two groups: direct and indirect. The direct-purchaser plaintiffs bought modafinil straight from at least one of the five makers — Cephalon and the four generic outfits. The others did their commerce through the first group, thus buying indirectly.

Certification

In re Modafinil Antitrust Litigation landed in the U.S. District Court for the Eastern District of Pennsylvania, which sits in Philadelphia. After more than $500 million in settlements with Cephalon and two of the generic manufacturers, U.S. District Judge Mitchell S. Goldberg certified the direct-purchaser class for treble damages under Rules 23(a) and 23(b)(3).

Regarding numerosity under Rule 23(a)(1), Judge Goldberg concluded that “[t]he complexity and extensive history of this case, the expansive discovery conducted, and the geographic dispersion of the parties all favor class treatment.” Although Rule 23(a)(1) requires proof that “the class is so numerous that joinder of all members is impracticable”, the court ruled that “geographic dispersion” of the about 20 class members among 13 states and Puerto Rico “would certainly present challenges” to coordinating “the litigation”. Judge Goldberg further found that class treatment would foster the “judicial economy” aspect of the numerosity test by avoiding new rounds of discovery, delay of trial on the merits, and duplicative lawsuits in other courts.

The court additionally held that the direct-purchaser plaintiffs had met their burden of showing the other requirements of Rule 23(a) — commonality, typicality, and superiority — and that common questions predominated over individuals ones, satisfying Rule 23(b)(3).

Appeal and reversal

The Third Circuit panel split 2-1 on the numerosity issue. Judges Smith and Jordan agreed that the district court had abused its discretion in concluding that plaintiffs had proved the impracticability of joining all class members. Judge Rendell begged to differ.

The dispute boiled down to two points: whether the late “stage of the proceedings” should count in favor of “judicial economy” and whether all class members could “practicably” join the lawsuit before Judge Goldberg in view of their size and savvy and the dollar value of their claims. As Judge Smith summed up:

The District Court abused its discretion in analyzing the two most important numerosity factors when it considered the late stage of the litigation as relevant to the judicial economy factor and failed to properly consider the ability and motivation of the plaintiffs to proceed as joined, as opposed to individual, parties. We therefore remand for the District Court to conduct a rigorous numerosity analysis for this class of twenty-two (or twenty-five) members. In conducting this rigorous analysis, factors that the District Court may consider include the financial resources of the class members, the geographic dispersion of the class members, the ability to identify future claimants, together with the fact that these claims are for damages, and not injunctive relief.

In re Modafinil, 837 F.3d at 259.

In Judge Rendell’s view, Judge Goldberg had simply pointed to the heavy burdens that would arise if class members joined the case as plaintiffs and focused on the practical problems of having plaintiffs from all over the country, some with claims worth far less than $1 million, try to work together.

Fallout

The court remanded the case to Judge Goldberg, and he conducted a conference with counsel on December 7, 2016. The docket does not reflect any next steps the court contemplates before addressing the numerosity issue anew in light of the Third Circuit’s guidance.

The district court will likely find less judicial economy from proceeding on a class basis and will probably rule that most class members have enough incentive and resources to join as plaintiffs. Will the new balance still tip in favor of class treatment? If it does, will the court of appeals sustain that assessment?

If the decision goes the defendants’ way, it will transform litigation of price-fixing claims against pharmaceutical makers. No longer will wholesalers have the ability to benefit from class settlements as passive class members. (AmerisourceBergen, for example, reported that it received more than $250 million from “antitrust settlements” since 2014.) The wholesalers must either forego recoupment of billions of dollars in overcharges or bring claims against their suppliers.

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I will look at the risks and rewards of drug wholesalers’ pursuing antitrust claims directly in future posts.