Expert Testimony in Class Action Litigation

Speaker 11: Alan J. Cox of NERA Economic Consulting Page 1 Expert Testimony in Class Action Litigation Alan J. Cox, Ph.D. Senior Vice President LSI...
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Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 1

Expert Testimony in Class Action Litigation Alan J. Cox, Ph.D. Senior Vice President

LSI’s Innovative Strategies for Litigating Class Actions Conference Los Angeles, California November 12, 2007

Importance of Experts in Class Certification Matters

 Class certification more widely contested matter  Can force sides into establishing positions

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 2

Outline 1.

The Prototypical Plaintiff Argument

2.

The Economics of Common Impact

3.

The Myth of the Commodity Class

4.

A Formulaic Approach to Damages

5.

Section II Disputes

6.

Class Certification Applied to Claims of False Advertising

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Rule 23 For a class to be certified in a class action:  Action must meet: – Prerequisites in Rule 23(a) – One part of Rule 23(b)

 Rule 23(a) – – – –

Numerosity Commonality Typicality Adequacy of Representation

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 3

Rule 23(b)3

“The questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fair and efficient adjudication of the controversy.”

Economic testimony will focus on common impact and formulaic approaches to damages. 4

1. The Prototypical Plaintiff Argument

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 4

Prototypical Plaintiff Argument Horizontal Price Fixing Agreement

Commodity Homogeneity

Same Set of Suppliers

Barriers to Entry

No Substitute Products

Law of One Price

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Prototypical Plaintiff Argument Horizontal Price Fixing Agreement

Commodity Homogeneity

No Substitute Products

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 5

Effect of Elastic Demand

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Price Per Ton ($)

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Price for Resin During Alleged Conspiracy

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Competitive Price for Resin

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Tons Per Year Purchased by Company 1 8

Effect of Inelastic Demand

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Price Per Ton ($)

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Price for Resin During Alleged Conspiracy

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Competitive Price for Resin

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 6

Prototypical Plaintiff Argument Horizontal Price Fixing Agreement Same Set of Suppliers

Commodity Homogeneity

Barriers to Entry

No Substitute Products

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Price Per Ton ($)

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Pre-Conspiracy Marginal Supplier's Price

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60 Conspirators Pre-Conspiracy Price 40 Pre-Conspiracy Amount Bought from Conspirators

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Tons Per Year Purchased by Company 1 11

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 7

120

Price Per Ton ($)

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Price Per Ton ($)

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Pre-Conspiracy Marginal Supplier's Price If conspirators raise price above conspiratorial price…

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Tons Per Year Purchased by Company 1 13

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 8

Prototypical Plaintiff Argument Horizontal Price Fixing Agreement

Commodity Homogeneity

Same Set of Suppliers

Barriers to Entry

No Substitute Products

Law of One Price

Plaintiff would argue under these conditions that class-wide treatment is appropriate.

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Prototypical Plaintiff Argument Horizontal Price Fixing Agreement Commodity

Same Set of Suppliers

 Homogeneous  Each  Same elasticity customer faces same of supply for every customer choice of suppliers  Undifferentiated  No suppliers  No special outside the characteristics conspiracy  No customers could easily switch

Barriers to Entry

No Substitute Products

 Costly to enter  No alternatives to  Capital the product at intensive issue  No new entrants in time period

Law of One Price  All customers face the same supply and demand conditions  The prices of the products at issue all move together  Price lists

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 9

In Re Linerboard Antitrust Litigation  Bogosian Shortcut

“If a nationwide conspiracy is proven, the result of which was to increase prices to a class of plaintiffs beyond the prices which one would obtain in a competitive regime, an individual plaintiff could prove facts of damage simply by proving that the free market prices would be lower than the prices paid and that he made some purchases at the higher price.” 16

Simple Class Theory $/Ton Demand

Supply (Cartel) Supply (Competition)

$30 P = $25

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Quantity

Restrict Quantity 17

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 10

Argument in Linerboard

 Prices in the marketplace were controlled by the economic law of supply and demand  If a product is in short supply, its price will increase  Linerboard was in short supply because of restricted output of the co-conspirators  Therefore, prices increased

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2. Economics of Common Impact

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 11

Common Impact

 The world is rarely simple  Product differentiation  Price variation – Different prices for different customers at the same point in time – Individual pricing issues matter (negotiations, buying power, rebates, freight charges)

One cannot look at the average price. 20

Blades vs. Monsanto

 Class of purchasers of genetically modified corn and soybean seed  Genetically modified seeds are not homogeneous products  Seeds were not offered at a single uniform price  Defendants and their distributors often lowered the “overall” price of certain seeds, or gave discounts or rebates to certain farmers to offset any alleged premium

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 12

Blades vs. Monsanto

 Court rejected plaintiff testimony that argued same supply and demand conditions implied one price  Plaintiffs could not calculate but-for price formulaically

“The Court cannot ‘presume’ or ‘assume’ much less ‘conclude’ class-wide impact…when the evidence…demonstrates that such a presumption would be improper.” 22

3. The Myth of the Commodity Class Identifying Sets of Uninjured Customers

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 13

Counter-Examples

Customer Prices Over Time $20 $15

Price

 Demonstrate that a common price shock did not have a uniform impact on all customers

$10 $5 $0 1

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Time Customer 1

Customer 2

Customer 3

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Agricultural Chemicals

 Several factors had impact on the price of pesticides  Nature of rebates, discounts and other means of lowering prices,  Lack of market power by co-conspirators

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 14

In Re: IPO Securities Litigation

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In Re: IPO Securities Litigation

“…we also disavow the suggestion in Visa Check that an expert’s testimony may establish a component of a Rule 23 requirement simply by not being fatally flawed. A district judge is to assess all of the relevant evidence admitted at the class certification stage and determine whether each Rule 23 requirement has been met…”

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 15

4. A Formulaic Approach to Damages

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Myth of Price Structure

 Frequently see the concept of “price structure” introduced by Plaintiff experts  “Prices moving together” by “visual inspection” is alleged to be proof of common supply and demand factors  Run regressions to explain prices of a commodity such as electricity or natural gas. If price cannot be explained, assume conspiracy.

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 16

5. Section II Disputes

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Heerwagen vs. Clear Channel Communications  Plaintiff alleged that the defendant’s conduct monopolized the national ticket market for live rock concerts  The defendant’s expert successfully argued that the relevant market was local and not national

“A purchaser of a concert ticket is hardly likely to look outside of her own area, even if the price for tickets has increased inside her region and decreased for the same tour in other places… Such evidence accords with common sense in the calculus for the availability of substitutes.” 31

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 17

Heerwagen vs. Clear Channel Communications

“… whatever proof the plaintiff attempted to use to show defendant’s alleged monopoly power or attempted monopolization, a national class would not be the appropriate or preferable means to deal with plaintiff’s claim.”

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6. Class Certification Applied to Claims of False Advertising  Splenda is made with “sucralose,” a compound that is manufactured from sugar using a patented process.  Is not metabolized for energy by the human body, has a long shelf life and can be used in baking.  Was sold with the tag line “made from sugar so it tastes like sugar”

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 18

Class Certification Applied to Claims of False Advertising  Splenda is made with “sucralose,” a compound that is manufactured from sugar using a patented process.  Is not metabolized for energy by the human body, has a long shelf life and can be used in baking.  Was sold with the tag line “made from sugar so it tastes like sugar”  McNeil, the manufacturer, was sued in class actions in several states

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 Plaintiffs asserted: – a class of all “New Yorkers who purchased Splenda during the time period in question.” – that McNeil’s alleged misconduct “affected all members of the class in precisely the same manner – causing all members to purchase Splenda.” – that McNeil was able to charge a premium as a result of its false statements – that damages are directly proportional to the amount purchased

 Defense’s economist demonstrated that different customers people bought Splenda for different reasons: – Taste – Heat resistance (for baking) – Health concerns about other sweeteners – Grocery scanner data demonstrated that prices varied ( from $3.45 to $6.19 for 100 count package). 35

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 19

Price Differences Between Splenda and Equal at Various Internet Retailers

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Conclusions

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 20

Contact Us

Alan J. Cox

John Johnson, Ph.D.

Greg Leonard

Jesse David

Senior Vice President NERA—San Francisco +1 415 291 1009 [email protected]

Vice President Washington, DC +1 202 466 9239 [email protected]

Vice President NERA—San Francisco +1 415 291 1015 [email protected]

Vice President NERA—Los Angeles +1 213 346-3017 [email protected]

© Copyright 2007 National Economic Research Associates, Inc. All rights reserved.

Some Institutional Plaintiffs Will Gain, But Others Will Suffer a Net Economic Loss from a Successful Class Action Suit Alleged Damaged Shares

Shares Currently Held

5,000

100,000

Putnam

38,000

960,000

Chase

12,000

190,000

184,000

3,000

75,000

500

500,000

0

Vanguard

T. Rowe Price Fidelity Bank of America

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Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 21

How Does an Equity Plaintiff Fare with a Successful Class Action? Gains $6/share

Losses $6/share

All Shares Damaged, No Legal Costs: Equity Plaintiff Is Indifferent to Class Action 40

How Does an Equity Plaintiff Fare with a Successful Class Action? Gains $4

Losses $2

Only 1/4 of Shares Damaged, Legal Costs on Both Sides Are 1/3 of Settlement: Equity Plaintiff Is Better Off with Class Action 41

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA

Speaker 11: Alan J. Cox of NERA Economic Consulting

Page 22

How Does an Equity Plaintiff Fare with a Successful Class Action? Gains $4

Losses $8

All Shares Damaged, Legal Costs on Both Sides Are 1/3 of Settlement: Equity Plaintiff Is Worse Off with Class Action 42

Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA