Speaker 11: Alan J. Cox of NERA Economic Consulting
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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
120
Price Per Ton ($)
100
80
Price for Resin During Alleged Conspiracy
60
Competitive Price for Resin
40
20
0 0
100
200
300
400
500
600
700
800
900 1000 1100 1200 1300 1400 1500
Tons Per Year Purchased by Company 1 8
Effect of Inelastic Demand
120
Price Per Ton ($)
100
80
Price for Resin During Alleged Conspiracy
60
Competitive Price for Resin
40
20
0 0
100
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500
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800
900 1000 1100 1200 1300 1400 1500
Tons Per Year Purchased by Company 2 9
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
10
120
Price Per Ton ($)
100
Pre-Conspiracy Marginal Supplier's Price
80
60 Conspirators Pre-Conspiracy Price 40 Pre-Conspiracy Amount Bought from Conspirators
20
0 0
100
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900 1000 1100 1200 1300 1400 1500
Tons Per Year Purchased by Company 1 11
Law Seminars International | Litigating Class Actions | 11/13/07 in Los Angeles, CA
Speaker 11: Alan J. Cox of NERA Economic Consulting
Page 7
120
Price Per Ton ($)
100
Pre-Conspiracy Marginal Supplier's Price
80
60 Conspirators Pre-Conspiracy Price 40
20
0 0
100
200
300
400
500
600
700
800
900 1000 1100 1200 1300 1400 1500
Tons Per Year Purchased by Company 1 12
120
Price Per Ton ($)
100
Pre-Conspiracy Marginal Supplier's Price If conspirators raise price above conspiratorial price…
80
60
40
20
0 0
100
200
300
400
500
600
700
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900 1000 1100 1200 1300 1400 1500
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
60
70
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
2
3
4
5
6
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