Reply Brief — Visa U. S. A. Inc. v. Wal-Mart Stores, Inc.

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IN THE

MAY @

Supreme Court of the United States

VISA U.S.A. INC. AND

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MASTERCARD INTERNATIONAL INCORPORATED,

Petitioners,

WALMART STORES, INC. ef al.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Second Circuit

REPLY IN SUPPORT OF

PETITION FOR CERTIORARI

M. LAURENCE POPOFSKY

STEPHEN V. BOMSE

THOMAS P. BROWN

HELLER EHRMAN WHITE &

MCAULIFFE, LLP

333 Bush Street

San Francisco, CA 94104

(415) 772-6000

PHILIP H. CURTIS

ROBERT C. MASON

ARNOLD & PORTER

399 Park Avenue ,

New York, NY 10022-4690

(212) 715-1000

Counsel for Visa U.S.A. Inc.

CARTER G. PHILLIPS*

VIRGINIA A. SEITZ

SIDLEY AUSTIN BROWN &

WoobD LLP

1501 K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

KENNETH A. GALLO

KEILA D. RAVELO

CLIFFORD CHANCE

ROGERS & WELLS LLP

200 Park Avenue

New York, NY 10166

(212) 878-8000

Counsel for MasterCard

International Incorporated

Counsel for Petitioners

May 7, 2002

* Counsel of Record

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WILSON-EPES PRINTING Co., INC. — (202) 789-0096 - WASHINGTON, D. C. 20001

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Supreme (-

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .......... | i

REPLY IN SUPPORT OF PETITION FOR

CERTIORARI... ray l

CONCLUSION 10

TABLE OF AUTHORITIES

CASES Page

In re Bridgestone/Firestone, Inc., Tires Prods.

Liab. Litig., No. 02-1437 et al, 2002 WL

831990 (7th Cir. May 2, 2002). ............. 10

Coopers & Lybrand v. Livesay, 437 U. 3. 463

SISTED 5c. nnne kere OB

Eisen v. Carlisle & ‘Jacquelin, 417, U s. 156

CEG TAD ioc iccnspcckcsccees eee ee ts 7

General Tele. Co. v. Falcon, 457 US. 147

(p<) Dern ment rmaiie OU dex’ in Suncare rer of 7,10

Szabo v. Bridgeport Machs., Inc., 249 F.3d 672

(7th Cir ), cert. denied, 122 S. Ct. aR: 6

West v. Prudential Sec., Inc., 282 F.3d 935 (7th

Cw. FOR) nossa ees 5

Windham v. American Brands, Inc., 565 F.2d 59

(Oils Cle. FDTD. « ccceincccce en ee eee 10

RULE

~ Fed. R. Civ. P. 23.......... Ginceeh ese ete aatan eleaeap 8

REPLY IN SUPPORT OF PETITION FOR

CERTIORARI

Virtually every argument in the opposition brief reduces to

two points: that petitioners had a full, rigorous review of the

merits of the class certification motion in this case and lost,

and that “[t]his case does not present any conflict among the

circuits” on the “proper standards for evaluating class

certification evidence.” Opposition (“Opp.”) at 2. As we

show infra, this argument treats as irrelevant the Second

Circuit’s articulation of its very lenient standard for assessing

class certification motions under Rule 23(b)(3) and pretends

that the courts below applied a standard different from the one

set forth in their opinions. In fact. the lower courts plainly

identified the legal rule that governed their assessment of the

record on class certification; that rule conflicts with the rule

adopted in other courts of appeals; and the petition properly

seeks review of that rule and resolution of that conflict.

Specifically, the Second Circuit held that a district court is

barred from resolving competing expert submissions on class

certification issues overlapping with the merits of a case and

may certify a class as long as the plaintiffs present merely

admissible evidence in support of the Rule 23(b)(3) prerequis-

ites. The court also authorized the postponement of the deter-

mination whether a class action is manageable despite identi-

fied problems with the management of individual class mem-

bers’ damage claims. Applying this relaxed standard, the

court found that plaintiffs’ expert’s submission in support of

class certification was not fatally flawed and certified a class

of four million plaintiffs seeking damages of $100 billion.’

' Respondents assert that petitioners “invented” the $100 billion

damages figure “for its apparent shock value.” Opp. 4 n.2._ That

contention is contradicted by the report of Respondents’ own expert

economist. Fisher Report at 123 (Apr. 4, 2000); Fisher Rebuttal Report at

51 (Apr. 26, 2000). Petitioners cannot quote Dr. Fisher’s precise numbers,

because Respondents have designated both Reports “Highly Confidential”

under the protective order entered by the district court.

Because respondents wish away the Second Circuit’s

holding, they do not confront the serious nature of the

conflicts raised by the Petition, nor do they even address

petitioners’ demonstration that the issue presented is both

recurring and vitally important to the fair and just

administration of civil litigation. Even respondents do not

dispute that class certification has a coercive effect on

defendants that is unrelated to the merits of their defense. See

Coopers & Lybrand v. Livesay, 437 U.S. 463, 476 (1978).

Indeed, certification in this case is “brutally coercive”

_ because of the size of the class and the damages asserted. See

Pet. App. 36a. Nor do respondents contest the importance of

the fair and uniform administration of Rule 23 to civii

litigation and to affected classes of plaintiffs and defendants.

It is no exaggeration to say that a class certification can result

in financial devastation for employers, industries, and entire

segments of the economy and alter policies and practices

whose legality has never been adjudicated. See Br. of the

American Bankers Ass’n; Br. of the Alliance of Auto. Mfrs.

This Court should grant review to ensure that Rule 23, which

it promulgated, is correctly and fairly interpreted and applied.

Petitioners address in turn each of respondents’ attempts to

divert attention from the class certification holding that

warrants this Court’s review.

1. In this case, the district court and the Second Circuit

clearly articulated the legal standard for assessing a motion

for class certification, and applied that lenient standard in

granting the motion for certification. Respondents now claim,

however, that although the courts below specified a standard

in which the resolution of evidentiary conflicts is prohibited

(or at least unnecessary), the courts nonetheless conducted the

“rigorous” or “exhaustive analysis” required by Rule 23(b),

rather than applying the deferential standard articulated in the

opinions. Not only is that improbable on its face, it is belied

by the language of the decisions below.

In support of the motion for class certification, respondents’

expert, Professor Carlton, submitted declarations stating his

belief that the facts necessary to establish a classwide

recovery could be proven. In response, petitioners’ expert,

Professor Schmalensee, submitted a declaration explaining

the numerous, improbable assumptions on which Professor

Carlton’s theory of classwide injury rested. Respondents

spend substantial time and energy attacking Professor

Schmalensee and discussing the relative merits of the two

experts’ positions. This effort entirely misses the point.

The legal issue presented by the petition is not which expert

is ultimately right about the merits of respondents’ antitrust

claims but, instead, the appropriate standard for deciding class

certification motions under Rule 23(b)(3).’ Here, despite the

fact that the expert declarations were addressed solely to Rule

23 issues, the district court and the court of appeals both

concluded that they were forbidden to decide which expert

was correct on the Rule 23 issues at this stage of the

proceedings. Instead, the courts below decided that Professor

Carlton’s submission that the Rule 23 prerequisites could be

met was not “fatally flawed” and, thus, the class had to be

certified. Pet. App. 1 la.

The district court first explained that “a ‘weighing of the

evidence is not appropriate at [the class] stage of the

litigation.” Pet. App. 87a. Indeed, the court stated that it was

not “the ‘trier of fact’” and that it was “expressly forbidden”

at the class certification stage to “delve into the merits of an

expert’s opinion, or indulge ‘dueling’ between opposing

experts.” /d. at 68a (citing Eisen v. Carlisle & Jacquelin, 417

U.S. 156, 177 (1974); Caridad v. Metro-North Commuter

? Respondents also irrelevantly assert that no other payment networks

impose requirements similar to the Honor All Cards rule. Opp. 5. This

assertion is fully refuted by the record evidence concerning, for example,

American Express and regional ATM networks. See J.A. at 784-85, 793-

96, 797-99, In re. Visa Check/Mastermoney Antitrust Litig., 280 F.3d 124

(2d Cir. 2001) (No. 00-7699) (“Visa Check”).

R.R., 191 F.3d 283, 292 (2d Cir. 1999)).* Thus, the district

court held that it had to certify the class if the “‘assertion of

class status is at least colorable,’” Pet. App. 87a, and even if

“factual or legal underpinnings of the [class certification] are

undermined once they are tested under a more rigorous

standard than Caridad allows,” id. at 97a.

The Second Circuit affirmed the legal standard for

assessing class certification evidence employed by the district

court. The court admonished that a motion for class certifi-

cation is “not an occasion for examination of the merits of the

case,” but rather is only to “ensure that the basis of the expert

opinion is not so flawed that it would be inadmissible as a

matter of law.” Pet. App. Ila. See also id. at 1la-12a

(authorizing class certification if plaintiffs have “‘a reason-

able probability’” or a “‘colorable method’” or a method that

is not “‘so insubstantial as to amount to no method at all’”).

There is no doubt that the district court addressed various

issues raised in the Schmalensee report. But, equally plainly,

the court viewed that “evidence” and the issues it raised

through the prism of the restrictive legal standard it

considered itself bound to apply. The Second Circuit held

that this was the correct approach. In the face of those clear

articulations, respondents’ suggestion thai the courts actually

applied some different standard or approach is untenable.

In sum, respondents cannot magically make the legal

standard articulated and applied by the courts below

disappear. The Second Circuit has established a lenient,

incorrect legal standard and applied it to this case. If, as we

show infra, that holding conflicts with the standard

established and applied in other circuits, then the petition

should be granted.

> See also Pet. App. 69a n.6 (a “lengthy, substantive critique of the

findings of the plaintiffs’ expert” is “not permitted in this circuit on a

motion for class certification”) (citing, inter alia, Caridad, 191 F.3d at

292).

2. Respondents’ second argument — that the decision below

does not conflict with the decisions of other circuits — also

rests on the erroneous premise that the Second Circuit did not

apply its articulated standard for assessing evidence of the

prerequisites for class certification. Any fair minded reading

of the opinion below compared to those issued by the

Seventh, Third and First Circuits plainly shows that

fundamentally different legal standards are applied in

different parts of the country in deciding class certification.

Respondents’ attempt to distinguish West v. Prudential

Sec., Inc., 282 F.3d 935 (7th Cir. 2002), is particularly

unavailing. In that case, far from resting on “an empty factual

record,” Opp. 17, the district court granted class certification

because “each side ha[d] the support of a reputable financial

economist .. . and [the court] thought the clash enough by

itself to support class certification and a trial on the merits.”

West, 282 F.3d at 938. The Seventh Circuit reversed that

decision, stating that “[a] district judge may not duck hard

questions by observing that each side has some support, or

that considerations relevant to class certification also may

affect the decision on the merits.” /d. It is irrelevant that the

district court in West wrote a short opinion, while the district

court here wrote 15 pages, Opp. 18, before declining to

decide whether plaintiffs’ expert had actually demonstrated

that common issues would predominate. The critical point is

that, in the Seventh Circuit, under Rule 23(b)(3), “[t]ough

questions must be faced and squarely decided, if necessary by

holding evidentiary - hearings and choosing between

competing perspectives,” West, 282 F.3d at 938. In contrast,

in the Second Circuit, the tough questions can be ducked, and

a class may nonetheless be certified.

Respondents also breezily dismiss other conflicting court of

appeals’ decisions as standing only for the proposition that a

court may go beyond the pleadings in deciding whether to

certify a class under Rule 23(b)(3). See Opp. 18-19 (citing

cases discussed in the Petition at 15-17).* These decisions are

all consistent with that proposition, but they also establish a

standard for assessing class certification evidence that simply

cannot be reconciled with the Second Circuit’s legal analysis.

In Szabo v. Bridgeport Machines, Inc., for example, the court

explained that “if some of the considerations under Rule

23(b)(3).. . overlap the merits... then the judge must make

a preliminary inquiry into the merits” and “resolve the dispute

before allowing the case to proceed.” 249 F.3d 672, 676-77

(7th Cir.), cert. denied, 122 S. Ct. 348 (2001). In each of the

other cited decisions, too, the court of appeals has mandated

““whatever legal and factual inquiries are necessary under

Rule 23.’” See Pet. 16-17. There is plainly a broad conflict

among the courts of appeals on the recurring and important

question of the appropriate standard for assessing class

certification evidence.

3. Respondents assert in passing, Opp. 21, that, in the

courts below, petitioners did not contend that a court deciding

a class certification motion had to resolve all factual and legal

questions necessary to determine whether the prerequisites of

class certification exist. This contention, which is based on

snippets in pleadings taken out of context, is flatly

contradicted by petitioners’ consistent arguments below that

* Respondents also argue that the Second Circuit’s decision could not

conflict with decisions of the Seventh and Third Circuits, because district

courts in the latter circuits have cited the district court decision in this case

with approval. See Opp. 20. The best way to determine whether courts of

appeals’ decisions are in conflict is to read the decisions themselves,

which, as we have shown, adopt wholly inconsistent standards.

Respondents’ further citation of district court decisions refusing to resolve

a “‘battle of the experts” at the class certification stage, id. at 20-21,

simply illustrates the breadth of the conflict and the vastly differing

approaches courts take to certification. See also Pet. 17 n.2. Particularly

given that class certification decisions take place at the district court level

and, even now (under amended Rule 23(f)) are not routinely reviewed, the

pervasiveness of the conflicts in approach underscores the need for this

Court’s review.

the judge must decide whether plaintiffs have proven the facts

essential to class certification. The question of the

appropriate standard for assessing class certification evidence

is plainly presented by the decision below.

4. Based on the faulty premise that there is no conflict

among the courts of appeals on the standard for assessing

class certification evidence, respondents also incorrectly

assert that petitioners’ unstated agenda must be to overturn

Eisen v. Carlisle & Jacquelin. That is untrue. What we urge

the Court to do is to eliminate confusion among lower courts

concerning the proper meaning of Eisen, and its relationship

to this Court’s other class action decisions requiring “rigorous

analysis.” See General Tele. Co. v. Falcon, 457 U.S. 147,

161 (1982); Coopers & Lybrand, 437 U.S. at 473.

On the one hand, Eisen holds that courts may not decide the

merits of a suit in order to determine whether to certify a

class. 417 U.S. 156, 177 (1974). Indeed, respondents implic-

itly concede that many district courts have misinterpreted

Eisen by holding that in the class certification context, it bars

decision of any factual or legal question that overlaps with a

merits determination. See Opp. 22; Pet. 18-20. On the other

hand, this Court’s decisions in Falcon and Coopers &

Lybrand require district courts to conduct a “rigorous

analysis” before certification. The language of Rule 23(b),

which requires a court to “find[]” that Rule 23(b)’s

> See, e.g., Pet. for Reh’g & Reh’g En Banc at i, Visa Check, 280 F.3d

124 (2d Cir. 2001) (No. 00-7399) (raising the following points for review:

“In Passing Upon A Motion For Class Certification, It Is Improper For

The Trial Court To Accept The Plaintiffs’ Expert Report So Long As It Is

Not ‘Fatally Flawed,’” and “A Class May Not Be Certified Unless The

Trial Court Is Able To Determine At The Time Of Certification That Each

Of The Requirements Of Rule 23 Can Be Met Without Sacnficing

Defendants’ Substantive Rights.”); Br. of Defs.-Appellants at 14-15, 17-

18, 22-27, id; Defs.” Mem. of Law in Opp’n to Pls.’ Mot. for Class

Certification at 20, Visa Check, 192 F.R.D. 68 (E.D.N_Y. 2000) (No. CV-

96-5238).

prerequisites have been met, Fed. R. Civ. P. 23(b), reinforces

the rigorous nature of the class certification inquiry.

This Court, however, has not explicitly determined the

nature of the rigorous judicial inquiry that is required or

permissible where the legal and factual questions raised by a

motion for class certification overlap with the merits of a

case. Specifically, the Court has not decided whether the

district court must, as a trier of fact for Rule 23 purposes,

actually resolve factual and legal disputes presented by the

Rule 23 criteria. Based on their differing readings of this

Court’s authority, the lower courts are confused and in

conflict about the standard for assessing class certification

evidence that overlaps with merits issues. See Pet. 18-20.

The need for resolution of this important question that rests at

the intersection of this Court’s Rule 23 case law is another

strong reason to grant the petition.

5. Finally, respondents have a_ single response to

petitioners’ demonstration that the Second Circuit’s decision

creates a conflict among the courts of appeals by its

simultaneous certification of the class and postponement of

serious and apparent manageability questions. They contend

that there were no “existing and identifiable manageability

problems” present in this case, Opp. 24 (emphases omitted),

and that this fact distinguishes the instant case from those

cited in the Petition at 20-22.

Unlike respondents, however, both courts below recognized

that the class certification motion presented significant

manageability questions. The district court recognized that

merchants might have an obligation to steer customers away

from using off-line debit cards in order to mitigate their

individual damages and therefore that the four million class

members’ damages might have to be individually tried. See

Pet. App. 91a-92a n.19 (“‘[e]ven the necessity of individual

trials on damages may be fatal if the class numbers in the

thousands or millions’) (quoting 2 Areeda & Turner,

Antitrust Law § 332c, at 157 (1978)). But, the district court

postponed determination of whether petitioners’ mitigation

defense would render the class action unmanageable and

certified the class, holding that:

It may well be appropriate to address before trial the

merits of some of defendants’ damages-related

arguments, and whether, upon resolution of those issues,

there remains a “practical means” to litigate the damage

claims of class members. [/d. at 92a n.19.]

The court of appeals affirmed this analysis and decision,

approving the postponement of decision on the manageability

question. In dissent, Judge Jacobs opined that “[t]he

manageability problem in this case has been ‘apparent’ from

the outset and is apparent right now.” Pet. App. 40a. See id.

at 4la (reciting record evidence that shows the mitigation

defense “may ‘have force’” and stating that “[i]t makes no

sense to provide individualized notice to millions of

merchants before the court has devised a ‘practical means’ for

trying the issues presented”).

The courts below did not hold that the manageability issue

raised by petitioners was unripe or speculative. Instead, they

held that under Rule 23(b), the district court may postpone

decision of serious manageability questions and still certify a

class.° Thus, the actual holding of the courts below (as

° Respondents also appear to contend that petitioners did not argue

below that the ability of merchants to steer gave rise to individualized

issues rendering the class action unmanageable. But petitioners

consistently argued that merchants’ ability to steer made individualized

determinations of injury necessary. See Pet. App. 89a-90a. And, while

the district court rejected the argument that steering could eliminate all of

a merchant’s damages, it acknowledged that the steering argument could

“have force” as an argument for mitigation of damages and the necessity

of individualized damages determinations. /d. at 90a-9la & n.19. This

argument was clearly presented to and decided by the court of appeals.

See, e.g., Reply Br. of Defs.-Appellants at 21, Visa Check, 280 F.3d 124

(2d Cir. 2000) (No. 00-7699) (“[t]he district court acknowledged that

individual damages issues might overwhelm common issues of liability

and thus defeat certification”); Pet. App. 21a-23a. The question whether

opposed to the strawman set up in the opposition brief)

conflicts with the language and structure of Rule 23(b), with

this Court’s decisions requiring a court to conduct a rigorous

analysis to determine whether the prerequisites of class

certification (including manageability) have been satisfied,

and with the decisions of other courts of appeals. Pet. 21-22.

As the latter decisions show, where, as here, there are

“serious problems [with class certification] now appearing,

[the court] should not certify the class merely on the

assurance of counsel that some solution will be found.”

Windham v. American Brands, Inc., 565 F.2d 59, 70 (4th Cir.

1977) (en banc). After the petition in this case was filed, the

Seventh Circuit reversed the certification of a nationwide

class seeking damages based on the abnormally high failure

rate of Firestone tires on Ford explorers, stating that, in light

of the variable facts for individual plaintiffs’ claims, “this

litigation is not manageable as a class action even on a

statewide basis.” Jn re Bridgestone/Firestone, Inc., Tires

Prods. Liab. Litig., No. 02-1437 et al., 2002 WL 831990, at

*4 (7th Cir. May 2, 2002).

Here, however, the district court impermissibly put the

manageability requirement of Rule 23(b) to the side, stating

that it would return to the question in the future. However,

with a certified class of four million, someday may never

come, notwithstanding petitioners’ defenses. It is precisely

for this reason that Rule 23(b) requires courts to enforce

“actual, not presumed, conformance” with its prerequisites.

Falcon, 457 US. at 160.

CONCLUSION

For the reasons set forth in the petition and in this reply, the

petition for certiorari should be granted.

Rule 23(b)(3) authorizes a district court to certify a class while postponing

a manageability determination is thus squarely presented by this case.

———

M. LAURENCE POPOFSK Y