Messner v. Northshore University HealthSystem , 669 F.3d 802 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-2514
S TEVEN M ESSNER, et al.,
Plaintiffs-Appellants,
v.
N ORTHSHORE U NIVERSITY H EALTHS YSTEM,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07-cv-04446—Joan Humphrey Lefkow, Judge.
A RGUED F EBRUARY 8, 2011—D ECIDED JANUARY 13, 2012
Before SYKES, T INDER, and H AMILTON, Circuit Judges.
H AMILTON , Circuit Judge. Under Federal Rule of Civil
Procedure 23(b)(3), a class may be certified only if ques-
tions of law and fact common to members of the class
predominate over questions affecting only individual
members of the class. In this case, plaintiff-appellant
Steven Messner and other named plaintiffs alleged
that a merger between defendant-appellee Northshore
University HealthSystem and Highland Park Hospital
2 No. 10-2514
violated federal antitrust law. In fact, the Federal Trade
Commission found that the merger violated section 7 of
the Clayton Act, 15 U.S.C. § 18. Plaintiffs seek treble
damages and injunctive relief under section 4 of the
Clayton Act, 15 U.S.C. § 15, and they seek certification of
a class of individual patients and third-party payors
who allegedly paid higher prices for hospital care as
a result of the merger.
One key issue on the merits will be proof that the
merger had an antitrust impact on the plaintiff class,
primarily in the form of higher prices. To show the pre-
dominance of common questions regarding the merger’s
antitrust impact on class members, plaintiffs proposed
to rely on the same economic and statistical methods
used by the Federal Trade Commission staff and
Northshore’s own economic experts to analyze antitrust
impact in the merger litigation before the FTC. The basic
method, called “difference-in-differences,” is designed
to estimate the amount of Northshore’s price increases
that resulted from exercise of market power rather
than from other factors. This analysis, plaintiffs claimed,
will show that Northshore leveraged its newfound
market power to impose higher prices on insurers and
patients.
The district court denied plaintiffs’ motion for class
certification, concluding that their expert had not
shown that his proposed methodology could address
the antitrust impact issue on a class-wide basis. The
district court believed that plaintiffs’ proposed method-
ology required proof that defendant raised its prices
No. 10-2514 3
at uniform rates affecting all class members to the same
degree. Finding a lack of uniformity in price increases,
the district court concluded that plaintiffs could not
show predominance and that class certification should
be denied. The district court based this conclusion on
its belief that plaintiffs’ expert had conceded that the
common methodological framework by which he
proposed to demonstrate impact to members of the
class was invalid absent uniform price increases. Plain-
tiffs sought interlocutory appeal under Rule 23(f).
Because of the importance of the issue for this case and
for private antitrust enforcement, particularly with
respect to hospitals and health care providers with com-
plex pricing systems, we granted the petition for inter-
locutory appeal. We find that the district court’s conclu-
sion that a lack of uniform price increases required
denial of class certification was erroneous as a matter
of both fact and law, resulting in a denial that we must
find was an abuse of discretion. Although plaintiffs’
expert initially believed that Northshore did in fact in-
crease its prices uniformly across all services, he acknowl-
edged that it might not have done so, and he ex-
plained how his common methodology could show
impact to the class despite such complications. Apart
from the expert’s supposed concession, the degree of
uniformity the district court demanded simply is not
required for class certification under Rule 23(b)(3). In
essence, it is important not to let a quest for perfect evi-
dence become the enemy of good evidence. We vacate
the district court’s denial of class certification and
remand this matter for further proceedings.
4 No. 10-2514
We begin by reviewing Northshore’s merger and the
FTC proceedings that found it unlawful, and then turn
to the proceedings in the district court on class certifica-
tion. On the merits of the appeal, we consider first
the district court’s procedural handling of a challenge to
the testimony of Northshore’s expert witness, then the
central substantive issue of proving antitrust impact on
a class-wide basis. We conclude by considering some
additional objections to class certification raised by
Northshore.
I. The Merger and the FTC Proceedings
On January 1, 2000, defendant Northshore, then
doing business as Evanston Northwestern Healthcare
Corporation, merged with Highland Park Hospital,
located in Highland Park, Illinois. Prior to the merger,
Northshore owned Evanston Hospital in Evanston,
Illinois, as well as Glenbrook Hospital in nearby
Glenview, Illinois.
In February 2004, the Federal Trade Commission filed
an administrative complaint against Northshore alleging
that the merger violated section 7 of the Clayton Act,
15 U.S.C. § 18, by substantially lessening competition
for general acute care inpatient hospital services in the
“area directly proximate to the three [Northshore] hospi-
tals and contiguous geographic areas in northeast Cook
County and southeast Lake County, Illinois.” In re
Evanston Northwestern Healthcare Corp., 2007 WL 2286195,
at *3 (F.T.C. Aug. 6, 2007). Following an eight-week trial,
an administrative law judge concluded that the merger
No. 10-2514 5
violated the Clayton Act. The judge ordered Northshore
to divest Highland Park Hospital. Id. at *4.
On appeal in 2007, the Federal Trade Commission
agreed with the ALJ that the merger enabled Northshore
to exercise increased market power and that it used
that power to increase its prices by a substantial amount.
The FTC pointed out that Northshore’s own economic
expert found a price increase of nine to ten percent. Id. at
*66. The FTC concluded that the evidence as a whole
demonstrated that Northshore’s “substantially higher-
than-predicted merger-coincident price increases were
due to market power, rather than competitively-
benign factors.” Id. None of Northshore’s alternative
explanations for those price increases, the FTC concluded,
were supported by the record. Id. The FTC rejected
Northshore’s arguments that the merger made Highland
Park a meaningful competitor in the market, that the
merger’s anticompetitive effects were outweighed by
quality improvements at Highland Park resulting from
the merger, and that Northshore’s not-for-profit status
reduced the potential for anticompetitive harm. Id. at *67-
*73. The FTC affirmed the ALJ’s ruling that the
merger violated section 7 of the Clayton Act. Id. at *76.
When it came to the question of remedy, however, the
FTC concluded that divestiture of Highland Park was
not required. The FTC instead required Northshore
to use “separate and independent” teams — one for
Evanston and Glenbrook, and another for Highland
Park — to negotiate contracts going forward. Id. at *77-*79.
This remedy, the Commission concluded, would provide
6 No. 10-2514
for effective competition between the hospitals and
avoid the “complex, lengthy, and expensive process” of
divestiture. Id. at *79.
II. Proceedings in the District Court
In April 2008, plaintiff Messner filed this class action
suit against Northshore. (Dkt. 64, Ex. A.) Messner’s suit
was one of several similar actions challenging the
merger, all of which were consolidated under the title
In re Evanston Northwestern Healthcare Antitrust Litigation.
In their consolidated class action complaint, Messner
and the other named plaintiffs accuse Northshore of
monopolization and attempted monopolization of the
market for “general inpatient and hospital-based outpa-
tient services” in the “the geographic triangle created
by . . . Evanston Hospital, Glenbrook Hospital, and High-
land Park Hospital,” in violation of section 2 of the
Sherman Act, 15 U.S.C. § 2. (Dkt. 224.) They also allege
that the merger substantially lessened competition in
that market in violation of section 7 of the Clayton Act,
15 U.S.C. § 18. Plaintiffs bring their claims under
sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15 & 26,
requesting injunctive relief and treble damages for
injuries they suffered as a result of the alleged antitrust
violations.
Plaintiffs moved for class certification pursuant to
Rule 23(b)(3) on behalf of “All persons or entities . . . who
purchased or paid for inpatient hospital services
or hospital-based outpatient services directly from
Northshore . . . , its wholly-owned hospitals, predecessors,
No. 10-2514 7
subsidiaries, or affiliates . . . from at least as early as
January 1, 2000 to the present.” 1 In support of that
motion, plaintiffs offered the expert report of Dr. David
Dranove, an economist on the faculty of Northwestern
University who specializes in the health care industry.
He would use common economic and econometric meth-
ods to prove the antitrust impact of Northshore’s
actions on the class and to estimate damages. Dranove
would do so with the difference-in-differences method,
by comparing “the percentage change in [Northshore’s]
prices between the pre- and post-merger periods . . . to
the percent change in prices at a control group of local
hospitals during the same period.” App. 126. “If the
percentage change at [Northshore] is higher than the
change at the control group by a statistically significant
amount,” plaintiffs said, “impact can be demonstrated.”
App. 126-27. Plaintiffs said that this same method could
also provide an estimate of damages to individual
class members.
In light of the FTC’s findings that the merger had
violated the law and enabled Northshore to raise its
prices at least nine or ten percent above competitive
prices, it is understandable that Northshore put up a
1
Excluded from the proposed class were “those who solely
paid fixed amount co-pays, uninsureds who did not pay their
bill, Medicaid and Traditional Medicare patients, govern-
mental entities, [Northshore itself], other providers of
healthcare services, and the present and former parents,
predecessors, subsidiaries, and affiliates of [Northshore] and
other providers of healthcare services.”
8 No. 10-2514
determined opposition to class certification. The central
issue under Rule 23(b)(3) became whether plaintiffs
could show on a class-wide basis the antitrust impact of
Northshore’s actions on the proposed class. Northshore
argued that plaintiffs’ proposed class included a number
of members who, for a variety of reasons, were not
affected by the alleged price increases, and that plain-
tiffs had failed to propose “a common methodology
for identifying purported class members . . . included
within these ‘no impact’ categories.” In support of this
argument, Northshore relied primarily on the expert
testimony and report of Dr. Monica Noether, an expert on
whom it had also relied during the FTC proceedings.
After extensive briefing and an evidentiary hearing,
the district court denied plaintiffs’ motion for class certifi-
cation. In re Evanston Northwestern Healthcare Corp.
Antitrust Litig., 268 F.R.D. 56 (N.D. Ill. 2010). Although
the district court found that plaintiffs’ proposed class
satisfied the requirements of Rule 23(a), it concluded that
questions of law and fact individual to proposed class
members regarding the antitrust impact of the merger
predominated over questions common to the class as a
whole. Id. at 61-65, 87.2
2
The district court did not consider whether plaintiffs had
satisfied Rule 23(b)(3)’s additional requirement that “a class
action is superior to other available methods for fairly and
efficiently adjudicating the controversy.” Evanston North-
western Healthcare, 268 F.R.D. at 87 n.32.
No. 10-2514 9
III. Analysis
A. Requirements for Class Certification
To be certified, a proposed class must satisfy the require-
ments of Federal Rule of Civil Procedure 23(a), as well
as one of the three alternatives in Rule 23(b). Siegel v. Shell
Oil Co., 612 F.3d 932, 935 (7th Cir. 2010). As a threshold
matter, a proposed class must always meet the Rule 23(a)
requirements of numerosity, typicality, commonality,
and adequacy of representation. When certification is
sought under Rule 23(b)(3), as it is here, proponents of
the class must also show: (1) that the questions of law
or fact common to the members of the proposed class
predominate over questions affecting only individual
class members; and (2) that a class action is superior to
other available methods of resolving the controversy. Id.
In conducting this analysis, the court should not turn
the class certification proceedings into a dress rehearsal
for the trial on the merits. See, e.g., Schleicher v. Wendt,
618 F.3d 679, 685 (7th Cir. 2010); Kohen v. Pacific
Investment Management Co., 571 F.3d 672, 677 (7th Cir.
2009); Payton v. County of Kane, 308 F.3d 673, 677 (7th Cir.
2002). On issues affecting class certification, however, a
court may not simply assume the truth of the matters as
asserted by the plaintiff. If there are material factual
disputes, the court must “receive evidence . . . and resolve
the disputes before deciding whether to certify the
class.” Szabo v. Bridgeport Machines, Inc., 249 F.3d 672, 676
(7th Cir. 2001). Plaintiffs bear the burden of showing that
a proposed class satisfies the Rule 23 requirements, see,
10 No. 10-2514
e.g., Trotter v. Klincar, 748 F.2d 1177, 1184 (7th Cir. 1984),
but they need not make that showing to a degree of
absolute certainty. It is sufficient if each disputed re-
quirement has been proven by a preponderance of evi-
dence. Teamsters Local 445 Freight Div. Pension Fund v.
Bombardier Inc., 546 F.3d 196, 202 (2d Cir. 2008).
We review the denial of plaintiffs’ motion for class
certification for an abuse of discretion. See Arreola v.
Godinez, 546 F.3d 788, 794 (7th Cir. 2008). If, however, the
district court bases its discretionary decision on an er-
roneous view of the law or a clearly erroneous assess-
ment of the evidence, then it has necessarily abused
its discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384,
405 (1990); accord, Ervin v. OS Restaurant Services, Inc.,
632 F.3d 971, 976 (7th Cir. 2011) (reversing denial of class
certification).
Plaintiffs argue here that the district court made two
reversible errors, one procedural, the other substantive.
First, they contend that the district court failed to deter-
mine whether defense expert Noether’s report and opin-
ions were admissible under Federal Rule of Evidence 702
before ruling on the motion for class certification.
Second, they argue that the district court incorrectly
applied Rule 23(b)(3)’s predominance requirement. We
agree on both points, turning our attention first to the
procedural issue, then to the substantive issue, and
finally to additional arguments that Northshore makes
in support of the denial.
No. 10-2514 11
B. Daubert and Class Certification
Under Rule 702 and Daubert v. Merrell Dow Pharma-
ceuticals Inc., 509 U.S. 579 (1993), expert testimony is
admissible only if (1) the expert testifies to valid
technical, scientific, or other specialized knowledge; and
(2) that testimony will assist the trier of fact. NutraSweet
Co. v. X-L Eng’g Co., 227 F.3d 776, 787-88 (7th Cir. 2000).
Before the hearing on class certification, plaintiffs
moved to exclude the report of defendant’s expert,
Dr. Monica Noether, a private consulting economist.
Plaintiffs argued that Noether’s “economic analyses are
fundamentally defective” and that her opinion “should
be stricken as a whole.” 3
3
Northshore argues that plaintiffs moved to strike only
Noether’s initial report, not her later testimony and supplemen-
tal report, thereby waiving any argument to exclude those
materials. We disagree. Plaintiffs moved to strike Noether’s
expert report and also explicitly requested that “her opinion . . .
be stricken as a whole,” App. 1261, in part because Noether
lacked expertise regarding antitrust issues affecting “consumers
of healthcare plans.” App. 1264. Plaintiffs renewed that
objection at the start of the hearing on class certification, Dkt.
418 at 5, and objected when Noether offered new information
during that hearing in response to Dranove’ rebuttal report,
id. at 67-68, 94-95. The district court repeatedly put off
dealing with the substance of these objections. Id. at 5, 69, 95.
Plaintiffs’ objections gave the district court and defendant
ample opportunity to address the issues. Where the district
court repeatedly put off dealing with the issues, plaintiffs
did not need to renew their unsuccessful objection every
(continued...)
12 No. 10-2514
The district court denied plaintiffs’ motion. Although
it agreed that “Noether’s report . . . include[s] some
misleading information and analysis,” the court con-
cluded that plaintiffs’ “two opportunities — in their reply
brief and at oral argument — to respond to the conclu-
sions contained in Noether’s report” were sufficient to
address the report’s failings. Evanston Northwestern
Healthcare, 268 F.R.D. at 77. For this reason, the district
court declined to “undertake a Daubert analysis at this
procedural juncture,” explaining that it was giving
“Noether’s report the weight it believes it is due.” Id.
When an expert’s report or testimony is “critical to
class certification,” we have held that a district court
must make a conclusive ruling on any challenge to that
expert’s qualifications or submissions before it may rule
on a motion for class certification. American Honda
Motor Co. v. Allen, 600 F.3d 813, 815-16 (7th Cir. 2010);
see also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2553-
54 (2011) (expressing doubts regarding district court’s
conclusion that “Daubert did not apply to expert testi-
mony at the certification stage of class-action proceed-
ings”).4
3
(...continued)
time the same witness attempted to provide additional infor-
mation.
4
We issued American Honda one day after the district court here
issued its initial decision denying class certification. The
redacted version of the district court’s decision available to
(continued...)
No. 10-2514 13
In American Honda, we used the word “critical” broadly
to describe expert testimony important to an issue
decisive for the motion for class certification. If a district
court has doubts about whether an expert’s opinions
may be critical for a class certification decision, the court
should make an explicit Daubert ruling. An erroneous
Daubert ruling excluding non-critical expert testimony
would result, at worst, in the exclusion of expert
testimony that did not matter. Failure to conduct such
an analysis when necessary, however, would mean that
the unreliable testimony remains in the record, a result
that could easily lead to reversal on appeal.
The district court’s refusal to rule on plaintiffs’ Daubert
motion was an error under American Honda. Noether’s
opinions were undoubtedly “critical” to the district
court’s decision. Her report and testimony laid the founda-
tion for Northshore’s entire argument in opposition to
class certification, and the district court obviously relied
on Noether’s reasoning when making its decision,
quoting and discussing it many times. E.g., Evanston
Northwestern Healthcare, 268 F.R.D. at 86 (noting that
Noether’s “analysis . . . cast[s] doubt” on Dranove’s
contract analysis); id. (observing that Noether’s supple-
mental report “suggest[s]” errors in Dranove’s contract
analysis). Given the importance of Noether’s opinions,
the district court needed to rule conclusively on plain-
4
(...continued)
the public was released some time later, after our decision
in American Honda.
14 No. 10-2514
tiffs’ challenge to her opinions before it turned to the
merits of plaintiffs’ motion for class certification.
Instead of ruling on the admissibility of Noether’s
report, the court said it would give the report “the
weight . . . it is due.” Id. at 77. We recognize that this is a
time-honored and often acceptable approach toward
many difficult evidentiary issues when the judge is the
trier of fact. This approach does not suffice, however,
when expert testimony is in fact critical to class certifica-
tion. As we explained in American Honda, a district court
cannot merely “leave[ ] open the questions of what por-
tions of [the expert’s] testimony it may have decided
(or will decide) to exclude.” American Honda, 600 F.3d at
816. Those tough questions must be faced and squarely
decided. Id. at 817, citing West v. Prudential Securities,
Inc., 282 F.3d 935, 938 (7th Cir. 2002); see also Szabo,
249 F.3d at 676 (“Before deciding whether to allow a case
to proceed as a class action . . . a judge should make
whatever factual and legal inquiries are necessary
under Rule 23.”).
To avoid this conclusion, Northshore proposes that
we adopt the asymmetric rule that a definitive Daubert
ruling is necessary only when a district court grants
class certification, as in American Honda, but not when the
court denies certification, as here. In effect, Northshore
argues that a plaintiff should be allowed to rely on
an expert’s opinion in support of class certification
only if that opinion is backed by reliable methods and in-
formation, but that a defendant may rely on unqualified
or unhelpful “expert” opinions.
No. 10-2514 15
This result-oriented attempt to narrow American Honda
finds support in neither the irrelevant cases cited by
Northshore nor anything in American Honda itself. We
did not suggest in American Honda that denials of class
certification should be exempt from the strictures of
Daubert and Rule 702. We made clear that whenever
an expert’s report or testimony is critical to a class certif-
ication decision, a district court must rule conclusively
on a challenge to the expert’s qualifications or opinions
before ruling on class certification, without regard to
whether the district court ultimately grants or denies
that motion. See American Honda, 600 F.3d at 815-16. The
ruling is just as important to the plaintiffs as it is to
the defendants. Northshore’s proposed rule would also
create an unworkable logical conundrum, requiring a
court to determine first whether to certify a class before
considering the admissibility of the evidence it relied
upon in making that determination.
We also reject two secondary arguments Northshore
makes for its proposed limitation of American Honda.
First, Northshore emphasizes that such a limitation
must be read into American Honda because only plain-
tiffs bear the burden of satisfying Rule 23’s require-
ments while defendants may present no evidence if they
so choose. Northshore Br. 29, citing Carnegie v. Household
Int’l, Inc., 376 F.3d 656, 662 (7th Cir. 2004); In re
American Medical Systems, Inc., 75 F.3d 1069, 1086 (6th Cir.
1996). The general point about the burden of proof is
correct but has no bearing on Rule 702, which applies to
plaintiffs and defendants alike, regardless of which
side bears the burden of proof. The fact that a defendant
16 No. 10-2514
is not required to present evidence to defeat class certif-
ication does not give that defendant license to offer irrele-
vant and unreliable evidence. Second, Northshore
argues that we must have meant for American Honda
to apply only to decisions granting class certification
because a Daubert hearing is unnecessary when certifica-
tion is denied on grounds not addressed by the expert in
dispute. (Northshore Br. 30). But a Daubert hearing is
necessary under American Honda only if the witness’s
opinion is “critical” to class certification. That require-
ment is not met if the court decides the motion for class
certification on grounds not addressed by the witness.
To conclude on this procedural issue, we decline
Northshore’s invitation to cut the holding of American
Honda in half with a new exception for denials of class
certification. The district court should have ruled defini-
tively on plaintiffs’ Daubert motion and objections before
ruling on their motion for class certification. Northshore
also argues that any error under American Honda was
harmless. We disagree. As explained in the following
section, the district court frequently discussed Noether’s
opinions in reaching the substantive decision that we
find erroneous. We proceed to the primary substan-
tive dispute between the parties regarding the proper
application of Rule 23(b)(3) to the facts of this case.
C. Predominance and Antitrust Impact
Rule 23(b)(3) permits class certification only if the
questions of law or fact common to class members “pre-
No. 10-2514 17
dominate” over questions that are individual to members
of the class.5 There is no mathematical or mechanical test
for evaluating predominance. See 7AA Wright & Miller,
Federal Practice & Procedure § 1778 (3d ed. 2011). The
Supreme Court has discussed predominance in broad
terms, explaining that the Rule 23(b)(3) “inquiry trains
on the legal or factual questions that qualify each
5
Rule 23(b)(3) also conditions class certification on whether the
class action device is superior to other available methods for
fairly and efficiently resolving the dispute in question. We
need not consider whether plaintiffs have shown superiority
in this case, as this issue was neither considered by the
district court nor raised by either party on appeal. There are
so many common issues of law and fact relating to the issue
of Northshore’s liability, however, that the superiority require-
ment likely poses no serious obstacle to class certification
here. See Klay v. Humana, Inc., 382 F.3d 1241, 1269 (11th Cir.
2004) (finding superiority under Rule 23(b)(3) and noting that
“the more common issues predominate over individual
issues, the more desirable a class action lawsuit will be as a
vehicle for adjudicating the plaintiffs’ claims”). And this case,
at least on its face, implicates none of the specific concerns
that we have previously said will prevent a finding of superior-
ity. See, e.g., Harper v. Sheriff of Cook County, 581 F.3d 511, 516
(7th Cir. 2009) (finding no superiority where plaintiff’s chal-
lenge to defendant’s allegedly illegal jail management
practices “can be satisfied in an individual suit without the
management issues of a class action”); Andrews v. Chevy Chase
Bank, 545 F.3d 570, 577 (7th Cir. 2008) (finding no superi-
ority where class action seeking rescission of home mortgages
would require a “multitude” of “individual rescission pro-
cedures”).
18 No. 10-2514
class member’s case as a genuine controversy,” with the
purpose being to determine whether a proposed class
is “sufficiently cohesive to warrant adjudication by rep-
resentation.” Amchem Products, Inc. v. Windsor, 521 U.S.
591, 623 (1997). While similar to Rule 23(a)’s require-
ments for typicality and commonality, “the predominance
criterion is far more demanding.” Id. at 623-24. At the
same time, the Supreme Court also commented in
Amchem: “Predominance is a test readily met in certain
cases alleging consumer or securities fraud or violations
of the antitrust laws.” Id. at 625. We understand the
comment to mean that careful application of Rule 23 is
necessary in antitrust cases, as in all cases, and that in
antitrust cases, “Rule 23, when applied rigorously, will
frequently lead to certification.” Robert H. Klonoff, Anti-
trust Class Actions: Chaos in the Courts, 11 Stan. J.L. Bus. &
Fin. 1, 7 (2005) (discussing Amchem); accord, Behrend v.
Comcast Corp., 655 F.3d 182, 191 (3d Cir. 2011).
Rule 23(b)(3)’s predominance requirement is satisfied
when “common questions represent a significant aspect
of [a] case and . . . can be resolved for all members of [a]
class in a single adjudication.” Wright & Miller, supra,
§ 1778. Or, to put it another way, common questions
can predominate if a “common nucleus of operative
facts and issues” underlies the claims brought by the
proposed class. In re Nassau County Strip Search Cases,
461 F.3d 219, 228 (2d Cir. 2006), quoting Waste Mgmt.
Holdings, Inc. v. Mowbray, 208 F.3d 288, 299 (1st Cir. 2000).
“If, to make a prima facie showing on a given question,
the members of a proposed class will need to present
evidence that varies from member to member, then it is
No. 10-2514 19
an individual question. If the same evidence will suffice
for each member to make a prima facie showing, then
it becomes a common question.” Blades v. Monsanto Co.,
400 F.3d 562, 566 (8th Cir. 2005). Individual questions
need not be absent. The text of Rule 23(b)(3) itself con-
templates that such individual questions will be present.
The rule requires only that those questions not predomi-
nate over the common questions affecting the class as
a whole.
Analysis of predominance under Rule 23(b)(3) “begins,
of course, with the elements of the underlying cause
of action.” Erica P. John Fund, Inc. v. Halliburton Co., 131
S. Ct. 2179, 2184 (2011). Section 4 of the Clayton Act,
15 U.S.C. § 15, requires plaintiffs to prove: (1) that
Northshore violated federal antitrust law; and (2) that
the antitrust violation caused them some injury. In re
Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 311 (3d
Cir. 2008); Blades, 400 F.3d at 566; Bell Atlantic Corp. v.
AT&T Corp., 339 F.3d 294, 302 (5th Cir. 2003). The same
cases, and many others, also show that plaintiffs also
must show damages, but individual proof of this element
of a claim under the Clayton Act is not an obstacle to a
showing of predominance. It is well established that
the presence of individualized questions regarding dam-
ages does not prevent certification under Rule 23(b)(3).
See Wal-Mart v. Dukes, 131 S. Ct. at 2558 (deeming it
“clear that individualized monetary claims belong in
Rule 23(b)(3)”); Arreola, 546 F.3d at 801 (recognizing that
“the need for individual damages determinations does
not, in and of itself, require denial of [a] motion for certifi-
cation” under Rule 23(b)(3)); Hardy v. City Optical, Inc.,
20 No. 10-2514
39 F.3d 765, 771 (7th Cir. 1994) (“There have been many
antitrust class actions in which the relief sought was
damages, and the fact that the damages would generally
be different for each member of the class was not deemed
an insuperable obstacle.”); Allapattah Servs. v. Exxon
Corp., 333 F.3d 1248, 1261 (11th Cir. 2003) (“numerous
courts have recognized that the presence of individu-
alized damages issues does not prevent a finding that the
common issues in the case predominate”), aff’d, 545
U.S. 546 (2005); see also Klay v. Humana, Inc., 382 F.3d
1241, 1260 (11th Cir. 2004) (only in rare, extreme cases
would individual issues of damages be so complex as
to defeat class certification under Rule 23(b)(3)).
In this case, common questions clearly predominate in
regard to whether Northshore’s merger violated federal
antitrust law. The focus of the dispute here is on the
second element, referred to as “antitrust impact,”
Hydrogen Peroxide, 552 F.3d at 311, or “fact of damage,” Bell
Atlantic, 339 F.3d at 302 n.12. Under Rule 23(b)(3), plain-
tiffs had to show that it was possible to use common
evidence to prove that Northshore’s merger injured the
members of the proposed class. To do so, plaintiffs pre-
sented Dranove’s expert report and opinion. Dranove
claimed that “if [Northshore] overcharged an insurer
by a certain percentage, all or substantially all class mem-
bers covered by that insurer will be overcharged by
approximately the same percentage.” App. 1900. As a
result, he said, “Overcharges to an insurer result in
injury to that insurer as well as to all or substantially
all other class members who are covered by that in-
surer.” App. 1901. As the issue was developed further
No. 10-2514 21
in the district court, however, it became considerably
more complex.
If the market for health care services functioned like a
market for a generic, undifferentiated commodity (i.e.,
corn, wheat, or pork bellies) traded on an exchange
with standard contract terms and little opportunity for
individual bargaining, showing antitrust impact through
such overcharges would have been relatively simple.
In such a market, one can in theory, at least, estimate
simple supply and demand curves to show that an ac-
quisition of market power raised price and lowered
supply. That’s antitrust impact from monopolization.
Real markets are not as simple and elegant as the
classic economic model, and the market for hospital
services seems to be particularly complex. Insurers and
other third-party payors negotiate sophisticated con-
tracts with health care providers. Through multi-year
contracts for health care services, the parties may lock
those prices in place or negotiate for long-term price
changes significantly different than would have been
agreed if the prices were renegotiated each year. Factors
such as a hospital’s location, quality of services, and
reputation also can affect the price of a particular service.
Adding even more complexity is the fact that insurers
and health care providers negotiate contracts that cover
not a single service but complex bundles of many dif-
ferent services and products. See, e.g., John C. Render &
Neal A. Cooper, Survey of Recent Developments in Health
Care Law, 37 Ind. L. Rev. 1161, 1189 (2004). A hypothetical
bill for a Caesarian section, for example, might consist of
22 No. 10-2514
a variety of bundled items: anesthesia, operating room
use, surgeon’s fee, post-operative care for the mother,
newborn care for the baby, etc. A hospital could
unbundle and re-bundle those items in different ways,
adding some items in the overall charge and removing
others, so that a later bill for a service still called a Caesar-
ian section would charge for a different set of items
and have a very different overall price. The record here
reflects such complexity. For example, one contract re-
priced cardiology services after the physicians’ fees
were “unbundled” from the prices and were charged
separately. The nominal prices of the hospital’s charges
for cardiology services dropped, but after accounting
for the unbundling to ensure an apples-to-apples com-
parison, the overall prices increased significantly.
Even without such unbundling or re-bundling, the
prices of the individual component items are themselves
subject to a wide variety of market influences. For
example, an advance in anesthesia technology might
result in a sharp decrease in the cost of anesthesia at
the same time that a new and higher standard of care for
a related service requires expensive new machinery.
Without any exercise of market power, therefore, the
price for the bundled service (say, a Caesarian section or
a cardiac catheterization) might go up, go down, or stay
level, despite substantial changes in the prices of the
components.
As a result of these complexities, changes in the
nominal prices charged for particular services might
actually conceal rather than reveal a health care pro-
No. 10-2514 23
vider’s exercise of unlawful market power. The price for
a service may remain nominally the same or even
decrease, but only because changes in the prices of the
underlying components of that service have changed or
because the service has been restructured in a way
that conceals the anticompetitive price increase.
Dranove proposed to account for these complexities
by conducting what is known as a “difference-in-differ-
ences” or “DID” analysis. He would compare prices at
Northshore’s hospitals with prices at a control group of
comparable area hospitals not party to the merger but
otherwise presumably subject to the same market forces
affecting prices in hospitals. App. 1901, 1904. The differ-
ence between price changes for Northshore and the
control group, he explained, would estimate the average
overcharge imposed on Northshore’s patients due to
Northshore’s exercise of increased market power after
the merger. App. 1904. “For example,” he explained, if
Northshore’s hospitals “raise prices by 30% after the
merger and a control group of hospitals raises price
by 10%, . . . the ‘difference-in-differences’ is approxi-
mately 20%” and represents the approximate amount of
Northshore’s overcharges. App. 1921. If Northshore
overcharged an insurer by this percentage, he explained,
“all or substantially all class members covered by that
insurer will be overcharged by approximately the
same percentage.” App. 1926. Accordingly, Dranove
concluded, a contract’s “increase in average price will
have a common impact on all or substantially all
class members.” Id.
24 No. 10-2514
As things turned out, however, even that approach
does not deal sufficiently with all of the relevant varia-
tions that could confound the antitrust impact analysis.
In denying class certification, the district court concluded
that the viability of Dranove’s methodology turned on
“whether [Northshore] increased prices at a uniform
rate across services.” Evanston Northwestern Healthcare,
268 F.R.D. at 85. The court added: “Dranove’s method of
proving classwide impact . . . rests on an assumption
that [Northshore] increased prices at a uniform rate
across services.” Id. Such uniformity was absent, the
district court concluded, noting for example that “even
a cursory examination of the 2000 Payor A contract and
the September 22, 2002 Payor A contract makes clear
that the prices of some services changed at a variable
rate.” Id. at 86.6 To the extent that Dranove claimed that
the prices increased uniformly, the court believed that
he “focused primarily on price changes within con-
tracts — changes that are usually attributable to escalator
clauses.” Id. Price changes controlled by escalator clauses
“were not due to an exercise of market power,”
Northshore’s expert testified, because Northshore “had
the opportunity to exercise market power not within a
contract period, but only at the time of renegotiation.” Id.7
6
The published opinion refers to “Payor A” because much of
the relevant pricing and contractual evidence was subject to
a protective order.
7
The district court and Noether appear to have believed that
escalator clauses — increasing contract prices during a long-
(continued...)
No. 10-2514 25
Because plaintiffs’ proposed method for proving class-
wide impact “relies on an assumption that [Dranove
has] not been able to validate,” the district court con-
cluded, plaintiffs failed to establish predominance in
regard to antitrust impact, so class certification was
denied. Id. at 87.
On appeal, the parties raise two general arguments
regarding the district court’s denial of class certification.
For their part, plaintiffs contend that the district court
applied an incorrect standard of predominance under
Rule 23(b)(3) when it made uniformity of price increases
a condition for class certification. In response, North-
shore contends that the district court was correct to
7
(...continued)
term contract — can never reflect the exercise of market power
because they take effect long after contract negotiations have
concluded. This is not correct. The fact that an escalator clause
may be triggered months or even years after contract negotia-
tions occurred does not necessarily mean that the escalator
clause was immune from one contracting party’s exercise of
market power. Like the initial prices set in the contracts, the
terms of the escalator clauses — the services to which those
clauses would apply, the frequency of any price increases, and
the magnitude of those price increases — were the products of
the negotiations between the parties to those contracts. A
firm may use market power to ensure that those negotiations
result in an initial contract price higher than it might have
otherwise been able to obtain. We see no general reason such
a firm could not also use that market power to obtain escalator
clauses more generous than would have been possible other-
wise.
26 No. 10-2514
require uniformity of price increases because plaintiffs
conceded that such uniformity was necessary to Dranove’s
methodology for showing impact to members of the
class. We explain first that the district court applied too
stringent a standard in evaluating predominance. We
explain second that plaintiffs did not agree to or invite
the use of the wrong standard.
1. Predominance and Non-Uniform Price Increases
The district court misapplied Rule 23(b)(3)’s predomi-
nance standard when it made uniformity of nominal
price increases a condition for class certification. Under
the proper standard, plaintiffs’ “burden at the class
certification stage [was] not to prove the element of
antitrust impact,” but only to “demonstrate that the
element of antitrust impact is capable of proof at trial
through evidence that is common to the class rather
than individual to its members.” Behrend v. Comcast Corp.,
655 F.3d at 197, quoting with emphasis Hydrogen
Peroxide, 552 F.3d at 311-12; accord, Schleicher, 618 F.3d
at 686 (noting that Rule 23’s present structure is the
result of a “decision . . . to separate class certification
from the decision on the merits”); Blades, 400 F.3d at 566
(“To determine whether common questions pre-
dominate . . . the court must look only so far as to deter-
mine whether . . . common evidence could suffice to
make out a prima facie case for the class.”).
Through his proposed difference-in-differences or DID
analysis of the contracts between Northshore and its
insurers, Dranove claimed that he could show whether
No. 10-2514 27
and to what extent Northshore’s post-merger price in-
creases were the result of increased market power
resulting from the merger. In other words, Dranove
claimed that he could use common evidence — the post-
merger price increases Northshore negotiated with
insurers — to show that all or most of the insurers and
individuals who received coverage through those
insurers suffered some antitrust injury as a result of the
merger. App. 2541. That was all that was necessary to
show predominance for purposes of Rule 23(b)(3). See
Hydrogen Peroxide, 552 F.3d at 311-12.
Contrary to Northshore’s view, Dranove’s ability to use
common evidence to show impact on the class did not
ultimately depend on assuming the uniformity of the
nominal price increases imposed under any individual
contract. For reasons we explained above, such uni-
formity would certainly simplify matters. It would
allow Dranove to plug a single percentage — the uniform
price increase imposed on all patients covered under
an individual contract — into his DID analysis to cal-
culate the antitrust impact on those patients covered
by that contract. But as Dranove explained in his report,
a lack of uniformity would only require him to do more
DID analyses for each contract — one analysis for each
individual non-uniform price increase imposed in the
contract being analyzed. App. 2540. As a simple
example, if one post-merger contract raised the cost of
hypodermic needles by 30 percent but increased the cost
of saline solution by only 20 percent, DID comparison
to price changes for the control group for those indi-
vidual price increases could still be used to show any
28 No. 10-2514
antitrust impact those price increases had on all patients
who paid for hypodermic needles, saline solution, or both
under that contract. App. 2540-41. In a more complex
world, multiple analyses would be needed to show
more accurately a contract’s precise impact on class
members. That need does not change the fact that those
analyses all rely on common evidence — the contract
setting out the non-uniform price increases — and a
common methodology to show that impact. The ability to
use such common evidence and common methodology to
prove a class’s claims is sufficient to support a finding
of predominance on the issue of antitrust impact for
certification under Rule 23(b)(3). See Hydrogen Peroxide,
552 F.3d at 311-12.
By requiring uniformity of nominal price increases
within and across contracts, the district court misread
Rule 23(b)(3) to require a greater showing of common
evidence than is contemplated by that rule. Under the
district court’s approach, Rule 23(b)(3) would require not
only common evidence and methodology, but also com-
mon results for members of the class. That approach
would come very close to requiring common proof of
damages for class members, which is not required. To
put it another way, the district court asked not for a
showing of common questions, but for a showing of
common answers to those questions. Rule 23(b)(3)
does not impose such a heavy burden. See Blades, 400 F.3d
at 566 (“The nature of the evidence that will suffice to
resolve a question determines whether the question is
common or individual.”); see also Rule 23(b)(3) (requiring
that common “questions” predominate). Because the
No. 10-2514 29
district court applied the wrong legal standard when
analyzing plaintiffs’ motion for class certification, the
district court abused its discretion when it denied
the motion. See Ervin, 632 F.3d at 976; Hydrogen Peroxide,
552 F.3d at 312.
2. The Concession Issue
Northshore argues that these principles do not matter in
the end because, it says, plaintiffs conceded that their
case for common impact depended on uniform nominal
price increases. In support, Northshore relies primarily
on Dranove’s confirmation at the hearing on the motion
for class certification that “the viability of [his] method”
came down to whether Northshore “really [did] increase
prices at a uniform rate across services.” Dkt. 418 at 41.
On cross-examination, however, Dranove clarified that
his “DID analysis can be performed with or without
the uniformity.” Id. at. 57. These statements, seemingly
contradictory on their face, are easily reconciled once it
is remembered that Dranove proposed two alternative
methodologies: one in which the uniformity of merger-
related price increases was presumed, and another in
which such uniformity was absent. Which method to
use depended on the degree of uniformity.
If price increases were, as Dranove initially believed,
entirely or largely uniform, then he proposed to show the
merger’s impact on the individual class members by
simply plugging the average price increase imposed by
any given contract into his DID analysis. App. 1904-06,
1909, 1926, 1931, 2523-25, 2530, 2584. In those circum-
30 No. 10-2514
stances, the average price would accurately reflect the
individual price increases found in that contract. If the
average contract price went up an average of 20 percent,
and all of the services in that contract experienced
uniform price increases, each individual service also
went up 20 percent in price. App. 1909, 2523, 2571.
This specific methodology relied on uniform nominal
price increases, but the actual evidence was not that
simple. As Dranove implicitly acknowledged in his reply
report, if a contract’s individual service prices went up
at non-uniform rates due to Northshore’s unequal
exercise of market power, then DID analysis using that
contract’s overall average price increase would reveal
little about the merger’s antitrust impact on individual
class members covered by that contract. App. 2523 n.1.
According to Dranove, however, it would be most
unusual for a firm possessing market power in a geo-
graphic market to exercise that power selectively to
increase the prices of only some of its services. App. 1931-
33, 2539.
For this reason, Dranove believed that any non-uniform
price increases observed in Northshore’s contracts with
insurers could be explained by what he called “restructur-
ing,” or changes in price resulting from variations in
Northshore’s marginal costs or the re-bundling of compo-
nent services discussed above. App. 2530, 2543-45. Such
restructuring, he said, was unrelated to market power,
meaning that services exhibiting non-uniform price
increases could be treated as if they were subject to the
same percentage price increase imposed on all other
No. 10-2514 31
services covered in the same contract. App. 2543-44. If, for
example, the price for one service went up 30 percent
while all other services in that same contract went up
only 20 percent, that additional 10 percent increase
would not be treated as an exercise of market power for
purposes of his DID analysis. Only the 20 percent
increase shared by all other services in the same contract
would reflect the use of market power. App. 2544. As a
result, he explained, any non-uniform price increases
imposed in a single contract with an insurance provider
did not foreclose his use of that contract’s average
price increase to calculate accurately the impact to all
patients covered by that contract. App. 2545.
Even if non-uniform price increases in a contract
resulted not from restructuring but from Northshore’s
differential exercise of market power across different
services, Dranove explained that he could still use those
contracts to show impact on the class members. At his
deposition, Dranove explained that if his review of docu-
ments revealed a lack of uniformity unexplained by
restructuring, he would simply “adapt the methodology.”
Dkt. 284, Ex. I at 113, 157-58. In his initial report, Dranove
explained that he could adapt his analysis if needed
to accommodate “selective” price increases regarding
certain services. App. 1932. And his reply report showed
exactly how he would do that. The reply report empha-
sized that the DID analysis was fully capable of addressing
non-uniform price increases: “it is still possible to apply
a common methodological framework to measure
impact even [when Northshore] increased prices for
different services at different rates.” App. 2539. As noted
32 No. 10-2514
above, he would do so simply by conducting as many
DID analyses as there were non-uniform price increases
in a particular insurer’s contract with Northshore. App.
2540. In this way, Dranove explained, he would be
able to calculate “different overcharges across different
service categories” despite any non-uniform increase
in the prices charged for those services. App. 2540-41.
In other words, uniformity of nominal price increases
was not necessary to Dranove’s proposed methodology
for determining antitrust impact to the proposed
class. This explains why Dranove was willing (though
perhaps a little too reluctant for his own good) to concede
the non-uniformity of the price increases in Northshore’s
post-merger contracts. In fact, Dranove acknowledged
several times that Northshore’s prices did not always
increase uniformly, explaining that Northshore “almost
invariably increase[d] prices at the same rate,” App. 2523,
and that price increases “are applied across-the-board
for all or nearly all services,” App. 2524, in the “vast
majority of cases.” App. 2525 (emphases added). He
acknowledged that one contract called for “a dramatic
decrease in the price” for some services at the same time
it “impose[d] a significant increase in the price of
other service[s].” App. 2543.
The data in Appendix D of Dranove’s reply report
became the focus of attention during the hearing, in the
district court’s decision, and on appeal. The parties
make much of the evidence regarding “Payor A” con-
tained in Exhibits 161 and 162 admitted under seal in
the class certification hearing. Dranove had included
No. 10-2514 33
the price changes in Payor A’s contracts in his analysis
showing generally uniform rates of price changes.
Noether used Payor A’s contracts to show he was
wrong. The district judge focused on the issue, and
counsel for the plaintiffs told the judge: “I think you’re
just going to have to look at the numbers yourself.”
Dkt. 418 at 127-28. The judge did so, and in her opinion
denying class certification asserted that “of the 18 prices
listed in the renegotiated September 22, 2002 contract,
6 increased at a uniform rate, 9 increased at variable
rates, and 3 changed pricing methodologies from the
previous contract, making it difficult to draw a compari-
son.” 268 F.R.D. at 86.
We have also examined the contract, by comparing
the 2002 prices in Exhibit 162 to the 2000 prices in
Exhibit 161. The prices for eight categories of inpatient
services all increased by approximately 6.0 percent. In
other words, those price increases were uniform.8
For three categories of outpatient services, the pricing
methodology stayed the same for two (a discounted
percentage of billed charges), while the third changed
from a flat rate per case to a percentage of the billed
charges. 9 Where the superficial variation occurred was in
8
The categories of inpatient services were general inpatient
care, intensive care, vaginal delivery, C-section, boarder baby,
psychiatric/substance abuse care, telemetry/PCU, and skilled
nursing.
9
The two categories of outpatient services that stayed the same
were ambulatory surgery and “other outpatient services,” which
(continued...)
34 No. 10-2514
the pricing for specified cardiac services. There were nine
categories. Five showed decreases of 9.3 to 13.0 percent.
Two showed increases of 14.8 and 60 percent, respectively,
and two changed from flat rates to a percentage of billed
charges. The cardiac price changes, both in terms of
variations and the significant price reductions, appear to
be inconsistent with Dranove’s approach. When one
looks more closely, however, one sees that there was
a significant restructuring of these services and their
pricing. The baseline prices from 2000 all included the
professional services of physicians. App. 2725. In the
2002 contract, the professional services of physicians
have been removed from the prices. App. 2728. These
superficially non-uniform changes in prices therefore
merely pose the sort of manageable challenge that
Dranove’s methodology can handle. They do not under-
mine the methodology itself.
If Dranove believed that his entire methodology was
invalidated by non-uniform price increases, he expressed
that belief in a most unusual way. He admitted the exis-
tence of non-uniform increases in nominal prices. He
offered an economic explanation — restructuring — why
this apparent lack of uniformity was misleading. He
included data in Appendix D of his reply report showing
that some non-uniformity appeared even in contracts
that had not undergone any restructuring. And he ex-
9
(...continued)
included emergency room services. The third category was
cardiac catheterization.
No. 10-2514 35
plained in his reports how he would account for that
lack of uniformity. Dranove did not concede away (and
certainly not in a single statement at the class certifica-
tion hearing) the viability of the very methodology that
he had defended so vigorously over the course of two
lengthy expert reports. The district court’s conclusion
to the contrary was a clear error.1 0
D. Class Members Who Did Not, or Could Not, Suffer Injury
The district court based its denial of class certification
on two critical errors: (1) a misapplication of Rule 23(b)(3)’s
predominance standard; and (2) an erroneous belief
that Dranove’s DID methodology would be valid only if
Northshore’s contracts with insurers uniformly increased
prices across all services. On appeal, Northshore argues
that, even absent these errors, plaintiffs’ proposed class
cannot be certified because it contains many individuals
10
The district court expressed serious doubt that all nominally
non-uniform price increases were actually uniform price
increases that only appeared non-uniform because of behind-
the-scenes restructuring. Evanston Northwestern Healthcare,
268 F.R.D. at 86 n.31. Because such uniformity was as unneces-
sary under Rule 23(b)(3) as it was to Dranove’s DID analysis,
our analysis remains the same regardless of whether the
district court’s doubts were well-founded. It appears that the
difference of opinion on this point may have stemmed from
an ambiguity in how the experts and the parties were using
the term “restructure” to deal with some non-uniformity in
nominal prices.
36 No. 10-2514
who were not injured by Northshore’s alleged exercise
of market power. First, Northshore argues that the evi-
dence shows that Blue Cross Blue Shield of Illinois, plain-
tiffs’ “largest putative class member,” as well as a number
of other individuals, suffered no injury at all. Second,
Northshore argues that, for several reasons, a number
of class members could not have been harmed by its post-
merger price increases. We address each of these analyti-
cally distinct categories of individuals in turn.
1. Blue Cross and Other Allegedly Uninjured Parties
Northshore first contends that a number of members of
the putative class were not harmed by any post-merger
price increases. Northshore argues that Blue Cross was
not actually harmed by any post-merger price increases,
relying largely on Blue Cross’s affidavit stating, without
any real explanation, that it “did not pay artificially
inflated prices” and did not suffer “any injury or damage,”
App. 722-23, as well as the FTC’s conclusions that Blue
Cross experienced no merger-related price increases
between the merger in 2001 and the FTC proceedings in
2005.11 As a result, Northshore argues, none of the class
11
The ALJ observed during the FTC proceedings that this
was likely because Blue Cross “had a very strong bargaining
position against [Northshore]” and had “power to limit
[Northshore’s] price increases,” and did not “undermine the
conclusion that [Northshore] gained market power through
the merger. In re Evanston Northwestern Healthcare Corp. 2005
(continued...)
No. 10-2514 37
members who paid prices negotiated by Blue Cross were
harmed either. Northshore makes a similar argument
regarding individuals who it says were not injured
because “any price increases were passed on or borne
by someone other than the class member.” 1 2
All of this is at best an argument that some class mem-
bers’ claims will fail on the merits if and when damages
are decided, a fact generally irrelevant to the district
court’s decision on class certification. See, e.g., Schleicher,
618 F.3d at 687 (“The chance, even the certainty, that a
11
(...continued)
WL 2845790, at *138 (F.T.C. 2005). On review, the FTC declined
to address this “sticky and unsettled issue[ ]” because “the
record demonstrates that the merger likely gave [Northshore]
sufficient market power to increase the average price that it
charged to all [insurers].” 2007 WL 2286195, at *52. We express
no opinion on this matter, which, for the same reasons we
explain below, is an issue beyond the scope of class certification.
12
Northshore’s reasons for making this latter argument are
evident but misguided: the third parties to whom those costs
were passed on by members of plaintiffs’ proposed class lack
federal antitrust standing under the “indirect purchaser” rule.
See Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). But under
Illinois Brick, the ability of a direct purchaser to pass on
higher costs to others does not undermine its ability to sue
under the Clayton Act. BCS Services, Inc. v. Heartwood 88, LLC,
637 F.3d 750, 756 (7th Cir. 2011) (“antitrust violators are not
allowed to offset against their liability the amount of loss
that the direct purchasers . . . who are allowed to sue, were
able to pass on”).
38 No. 10-2514
class will lose on the merits does not prevent its certifica-
tion.”); Payton v. County of Kane, 308 F.3d 673, 677 (7th
Cir. 2002) (observing that “a determination on the propri-
ety of class certification should not turn on [the] likelihood
of success on the merits”). As we have previously ex-
plained:
a class will often include persons who have not been
injured by the defendant’s conduct; indeed this is
almost inevitable because at the outset of the case
many of the members of the class may be unknown,
or if they are known still the facts bearing on their
claims may be unknown. Such a possibility or indeed
inevitability does not preclude class certification . . . .
Kohen, 571 F.3d at 677.
The reasons a court may not decline to certify a class
merely because it believes the class’s claims will fail on
the merits should be clear. For one thing, it is unlikely
that discovery regarding the merits of a claim will be
complete by the time the court is called upon to
certify a class. See Fed. R. Civ. P. 23(c)(1) (requiring ruling
on class certification at “an early practicable time”).
Any consideration of the merits at the class certifica-
tion stage also runs the risk of supplanting the jury as the
finder of fact. See Behrend, 655 F.3d at 199. This risk
is particularly troubling because the procedural protec-
tions available for such early judicial evaluations of the
merits — such as the assumption under Rule 12(b)(6) that
allegations in the complaint are true and the Rule 56
requirement to give the non-moving party the benefit of
conflicting evidence — are not available under Rule 23.
No. 10-2514 39
See Szabo, 249 F.3d at 675 (“The proposition that a
district judge must accept all of the complaint’s allega-
tions when deciding whether to certify a class cannot
be found in Rule 23 and has nothing to recommend it.”).
Perhaps Northshore could have used its evidence
regarding Blue Cross to argue that Dranove’s methodolo-
gies were flawed. That would be an appropriate and
limited use of merits evidence at the certification stage.
See Schleicher, 618 F.3d at 685 (“a court may take a peek
at the merits before certifying a class,” but the peek must
be “limited to those aspects of the merits that affect the
decisions essential under Rule 23”). But Northshore
never developed such an argument in its briefs to this
court, thus waiving that argument on appeal. E.g., Awe
v. Ashcroft, 324 F.3d 509, 512-13 (7th Cir. 2003). The argu-
ment that Northshore has made, however, is one that
we have rejected time and again. See Schleicher, 618 F.3d
at 687; Kohen, 571 F.3d at 677; Payton, 308 F.3d at 677. We
now reject yet again. Also, even if we could reach the
merits of plaintiffs’ claims involving Blue Cross, the bare-
bones affidavit on which Northshore relies did not so
thoroughly disprove those claims as to render any further
presentation of evidence to the contrary pointless.1 3
13
This discussion may prove wholly academic. Blue Cross has
indicated that it does not wish to participate in any class
action against Northshore, App. 723, so if a class is certified,
it will opt out as is its right under Rule 23(b)(3). In light of
Dranove’s analysis indicating that Blue Cross and its policy-
holders suffered losses of $110 million as a result of the
(continued...)
40 No. 10-2514
2. Class Members “Immune” From Injury
Northshore next argues that class certification is inap-
propriate because the class contains a number of indi-
viduals who could not have been harmed by any post-
merger price increases. Among such individuals, North-
shore says, are those putative class members who
“met their annual plan out-of-pocket maximum or their
deductible regardless of any price increase,” as well as
those individuals whose contracts “protect[ ] against
any price increases.”
At first glance, it would seem that Northshore is
arguing, as it did in regard to Blue Cross, that certifica-
tion must be denied because plaintiffs’ proposed class
contains members whose claims will fail on the merits.
In actuality, however, Northshore is arguing that the
class for which certification is requested is fatally
overbroad because it contains members who could
not have been harmed by any post-merger price in-
creases — Blue Cross certainly could have been harmed,
but arguably might not have been for one reason or
another.14
This distinction is critical for class certification pur-
poses. As explained above, if a proposed class consists
13
(...continued)
merger, however, Blue Cross probably would be within its
rights if it chose to rethink its position.
14
Northshore failed to appreciate this distinction, which is
why it erroneously included all of these individuals in a
single argument concerning overbreadth.
No. 10-2514 41
largely (or entirely, for that matter) of members who
are ultimately shown to have suffered no harm, that
may not mean that the class was improperly certified
but only that the class failed to meet its burden of proof
on the merits. See Schleicher, 618 F.3d at 686 (“Rule 23
allows certification of classes that are fated to lose as
well as classes that are sure to win.”). If, however, a class
is defined so broadly as to include a great number of
members who for some reason could not have been
harmed by the defendant’s allegedly unlawful conduct, the
class is defined too broadly to permit certification. See
Kohen, 571 F.3d at 677 (explaining that “if the [class]
definition is so broad that it sweeps within it persons
who could not have been injured by the defendant’s
conduct, it is too broad” and the class should not be
certified). For example, if plaintiffs had sought certifica-
tion of a class shown to include an high percentage of
individuals who paid for medical services at Northshore’s
hospitals after the merger but under Northshore’s pre-
merger contracts with insurers (i.e., a multi-year con-
tract signed in 1999), that class obviously could not be
certified — it would contain a vast number of people
who could not have been harmed by the merger because
they purchased medical services in the absence of the
market power allegedly created by that merger. See,
e.g., Oshana v. Coca-Cola Co., 472 F.3d 506, 514 (7th Cir.
2006) (affirming, in class action alleging deceptive ad-
vertising, denial of certification of class defined so
broadly that it included “millions” of individuals who
were not deceived).
This distinction — between class members who
were not harmed and those who could not have been
42 No. 10-2514
harmed — stems in part from the “in terrorem character
of a class action.” Kohen, 571 F.3d at 678. Even if a class’s
claim is weak, the sheer number of class members and
the potential payout that could be required if all members
prove liability might force a defendant to settle a meritless
claim in order to avoid breaking the company. Id. While
that prospect is often feared with large classes, the
effect can be magnified unfairly if it results from a class
defined so broadly as to include many members who
could not bring a valid claim even under the best of
circumstances. E.g., Oshana, 472 F.3d at 514. For this
reason, “a class should not be certified if it is apparent
that it contains a great many persons who have suffered
no injury at the hands of the defendant.” Kohen, 571 F.3d
at 677. There is no precise measure for “a great many.”
Such determinations are a matter of degree, and will
turn on the facts as they appear from case to case.
The problem posed by class members whose claims
may fail on the merits for individual reasons is the
obverse of a different problem with class definition: the
problem of the “fail-safe” class: one that is defined so
that whether a person qualifies as a member depends
on whether the person has a valid claim. Such a class
definition is improper because a class member either
wins or, by virtue of losing, is defined out of the class
and is therefore not bound by the judgment. See Randle-
man v. Fidelity Nat’l Title Ins. Co., 646 F.3d 347, 352 (6th
Cir. 2011) (fail-safe class definition was one of two
grounds for decertifying class); Premier Electrical Const. Co.
v. National Elec. Contractors Ass’n, 814 F.2d 358, 361-63
(7th Cir. 1987) (explaining that Rule 23 was amended
No. 10-2514 43
in 1968 to prevent “one-way intervention”); Adashunas
v. Negley, 626 F.2d 600, 604 (7th Cir. 1980) (affirming
denial of class certification), quoting Dafforn v. Rousseau
Associates, Inc., 1976 WL 1358 (N.D. Ind. 1976) (Eschbach,
J.); Campbell v. First American Title Ins. Co., 269 F.R.D. 68, 73-
74 (D. Me. 2010); Roe v. Bridgestone Corp., 492 F. Supp. 2d
988, 992 n.1 (S.D. Ind. 2007); Genenbacher v. CenturyTel
Fiber Co. II, 244 F.R.D. 485, 488 (C.D. Ill. 2007); Indiana
State Employees Ass’n. v. Indiana State Highway Comm’n,
78 F.R.D. 724, 725 (S.D. Ind. 1978).
Defining a class so as to avoid, on one hand, being over-
inclusive and, on the other hand, the fail-safe problem is
more of an art than a science. Either problem can and often
should be solved by refining the class definition rather
than by flatly denying class certification on that basis.
See, e.g., Campbell, 269 F.R.D. at 73-74 (court revised class
definition to correct problem); Lewis v. First American
Title Ins. Co., 265 F.R.D. 536, 551 (D. Idaho 2010) (same);
Carson P. ex rel. Foreman v. Heineman, 240 F.R.D. 456, 492
(D. Neb. 2007) (same); Flanagan v. Allstate Ins. Co.,
228 F.R.D. 617, 618-19 (N.D. Ill. 2005) (same).
We are not persuaded that plaintiff’s proposed class is
so overly broad as to require denial of certification in
this case. As for the individuals whose contracts pur-
portedly protected them from price increases, Northshore
has given us no indication how many such individuals
actually exist. In fact, Northshore’s brief does not call
our attention to even a single contract actually con-
taining such a provision, let alone provide any basis to
believe that a “great many” putative class members
44 No. 10-2514
entered into such contracts. And Northshore admits
that only about 2.4 percent of the putative class members
paid only their out-of-pocket maximums or deductibles.
While this may prove, depending on the ultimate size
of the class at issue here, to be a significant number of
additional plaintiffs, a 2.4 percent decrease in the size
of the class is certainly not significant enough to justify
denial of certification. Cf. Oshana, 472 F.3d at 514 (affirming
denial of certification and noting that millions of people
were improperly included in the proposed class).1 5 Ac-
cordingly, we reject Northshore’s argument that plaintiffs’
proposed class is impermissibly overbroad. Of course,
the district court is free to revisit this issue at a later
time if discovery shows that the number of members
who could not have been harmed by the merger was
more significant than it appears at this time. See Kohen,
571 F.3d at 679 (noting that defendant was free to
depose a random sample of the class to determine
whether an impermissibly high portion of the class
could not have been harmed by the defendant’s
actions and, if so, request decertification of the class).
15
In circumstances such as these, involving minor overbreadth
problems that do not call into question the validity of the
class as a whole, the better course is not to deny class certifica-
tion entirely but to amend the class definition as needed to
correct for the overbreadth. Cf. Washington v. Walker, 734
F.2d 1237, 1240 (7th Cir. 1984) (noting that district court condi-
tioned grant of certification on plaintiff’s redefinition of
class). The district court is free to address this issue as it sees
fit after remand.
No. 10-2514 45
IV. Conclusion
As explained above, the district court’s denial of class
certification was based on a misinterpretation of the
factual record, namely, the court’s erroneous conclusion
that Dranove had conceded away the validity of the
common method by which he proposed to show
antitrust impact on members of the proposed class. Once
that erroneous conclusion is set aside, the evidence
shows that Dranove can use common evidence and his
difference-in-differences methodology to estimate the
antitrust impact, if any, of Northshore’s merger on the
members of that class. Together with the common ques-
tions and evidence on other liability issues, this was
sufficient to show predominance under Rule 23(b)(3).
Northshore’s remaining arguments against class certif-
ication are not persuasive. We V ACATE the district court’s
order denying plaintiffs’ motion for class certification
and R EMAND this matter for further proceedings con-
sistent with this opinion.
1-13-12