Catholic Healthcare West v. US Foodservice Inc. , 729 F.3d 108 ( 2013 )

12-1311-cv
In re US Foodservice Inc. Pricing Litig.
United States Court of Appeals
FOR THE SECOND CIRCUIT
August Term 2013
(Argued: May 29, 2013 Decided: August 30, 2013)
No. 12-1311-cv
_____________________________________
IN RE: US FOODSERVICE INC. PRICING LITIGATION
_____________________________________
CATHOLIC HEALTHCARE WEST, TOMAS & KING, INC., WATERBURY HOSPITAL
o/b/o themselves & others similarly situated, CASON INC., o/b/o themselves &
others similarly situated, FRANKIE’S FRANCHISE SYS INC., o/b/o themselves &
others similarly situated,
Plaintiffs-Appellees,
-v.-
US FOODSERVICE INC.,
Defendant-Appellant,
KONINKLIJKE AHOLD N.V., GORDON REDGATE, BRADY SCHOEFIELD,
Defendants.
_____________________________________
Before: STRAUB, LIVINGSTON, and LYNCH, Circuit Judges.
Appeal from a decision of the United States District Court for the District
of Connecticut (Droney, J.) certifying a nationwide class of 75,000 cost-plus
customers of U.S. Foodservice, Inc. on claims pursuant to the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68, and state
contract law. Because the district court conducted a rigorous analysis of the
Rule 23 requirements, see Fed. R. Civ. Pro. 23, and did not abuse its discretion
in determining that common issues of fact and law would predominate over
individualized issues and that a class action is a superior mechanism for
litigating these claims, we AFFIRM.
RYAN PHAIR, Hunton & Williams LLP,
Washington, D.C. (James E. Hartley, JR.,
Drubner, Hartley & Hellman; Richard
Laurence Macon, Akin Gump Strauss Hauer &
Feld LLP; Joe R. Whatley, Jr., Whatley Drake
& Kallas, LLC; Richard Leslie Wyatt, Jr.,
Hunton & Williams LLP, on the brief) , for
Plaintiffs-Appellees.
GLENN M. KURTZ (Douglas P. Baumstein, on the
brief), White & Case LLP, New York, New
York, for Defendant-Appellant.
DEBRA ANN LIVINGSTON, Circuit Judge:
This case concerns allegations of fraudulent overbilling by U.S.
Foodservice, Inc. (“USF”), the country’s second largest food distributor whose
customers have included the United States government, as well as hospitals,
schools, restaurant chains, and small businesses across the United States. This
interlocutory appeal requires us to determine whether the district court abused
its discretion in certifying a nationwide class consisting of about 75,000 USF
2
“cost-plus” customers. The gravamen of plaintiffs’ complaint is that USF devised
and executed a fraud to overbill these customers in violation of the Racketeer
Influenced and Corrupt Organization Act (“RICO”), 18 U.S.C. §§ 1961-68, and
state and tribal contract law. Despite the size of the class and the fact that it
implicates the laws of multiple jurisdictions, the district court correctly
concluded that both the RICO and contract claims are susceptible to generalized
proof such that common issues will predominate over individual issues and a
class action is superior to other methods of adjudication. Accordingly, we affirm
the district court’s certification of this class pursuant to Federal Rule of Civil
Procedure 23(b)(3).
BACKGROUND
A. USF and Cost-Plus Pricing
Defendant-Appellant USF was a relatively small player in the food
distribution industry in the early 1990s, but by 2000 had tripled in size and
become the country’s second largest food distributor with over 250,000
customers, 75,000 of whom comprise the class here. USF purchases food
products, including meats, seafood, produce, and condiments, from suppliers and
in turn sells the items to its customers. USF distributes national brands, such
as Heinz and Sara Lee, under their own label; non-branded goods, usually meats
and produce; and its own private label brands, which are designed to compete
3
with national brands and require USF to invest in marketing, branding, and
similar services.
USF sells many of its food products on a cost-plus basis that is common in
the industry. Under this pricing model, the final cost to the customer is
computed based on the “cost” (also “landed cost” or “delivered cost”), meaning the
price at which USF purchases the goods from its supplier, and the “plus,” or
additional surcharge that USF charges on top of the cost, often expressed as a
percentage increase over this cost. Thus, when a customer enters into a contract
with USF, its contract does not guarantee it a set price such as $1 per pound of
coleslaw, but rather a set increase over the cost at which USF will purchase the
coleslaw (i.e., a 5% mark-up). If a supplier increases the price of goods to USF,
that cost is passed on to the customer. USF’s contracts with its cost-plus
customers provide various methods for calculating cost: some contracts base cost
on nationally-published price lists, for instance, while others dictate that cost is
set by USF’s distribution centers based on the local market. This class action
centers on contracts that set cost based on the “invoice cost,” which refers to the
price on the invoice from the supplier to USF.
Finally, promotional allowances – discounts provided to distributors from
suppliers generally in exchange for fulfilling certain conditions, such as order
minimums – are central to cost-plus pricing in the food service distribution
4
industry. Such allowances are more readily available to large distributors and
are offered by many (but not all) suppliers to promote their products. USF’s
customer contracts typically permit USF to keep the benefit of any promotional
allowances for itself and do not require that it pass these savings on to the
customer. According to USF, without the right to retain these promotional
allowances, it would not be able to realize a profit in an extremely competitive
market with razor thin margins.
B. The Alleged Fraud and Its Discovery
Plaintiffs allege that USF, beginning at least as early as 1998, engaged in
a fraudulent scheme by which it artificially inflated the cost component of its
cost-plus billing and then disguised the proceeds of its own inflated billing
through the use of purported promotional allowances. The scheme centered on
six Value Added Service Providers (“VASPs”), which plaintiffs allege were shell
companies established and controlled by USF for the purpose of fraudulently
inflating USF’s cost to its customers.1 According to plaintiffs, USF executives
Mark Kaiser (who was convicted of securities fraud stemming from a separate
fraudulent scheme orchestrated while at USF, see United States v. Kaiser, 609
F.3d 556 (2d Cir. 2010)) and Tim Lee created the VASPs and installed two
1
The six VASPs in questions are: (1) Seafood Marketing Specialists, Inc.; (2)
Frozen Farms, Inc.; (3) Produce Solutions, Inc.; (4) Private Label Distribution, Inc.; (5)
Speciality Supply and Marketing, Inc.; and (6) Commodity Management Systems, Inc.
5
confederates, Gordon Redgate and Brady Schofield, in leadership positions at the
VASPs in order to hide USF’s involvement and control. Though Redgate and
Schofield ostensibly owned the VASPs, USF funded the VASPs with multi-
million dollar, interest-free loans. As noted by the district court, USF retained
irrevocable assignment of the VASP shares, controlled “to whom and when the
VASPs made payments,” and guaranteed their payments to suppliers.
According to plaintiffs, the purpose of the VASPs was not to provide
legitimate services, but to permit USF to overcharge its customers via the
generation of fraudulent marked-up invoices that misrepresented USF’s cost for
the goods provided to its customers. USF allegedly negotiated the purchase of
goods from suppliers without input from the VASPs. USF then directed
suppliers to bill goods to the VASPs, but often to deliver them directly to USF.2
The VASPs then generated a second invoice, ostensibly to “sell” the goods to
USF, using a higher price dictated by Kaiser or Lee. USF purported to pay the
VASPs and then used the higher VASP prices in setting the landed cost for its
cost-plus pricing. USF customers unwittingly paid the inflated amounts and the
VASPs then completed the scheme by kicking back the fraudulent mark-ups to
USF disguised as legitimate promotional allowances. The VASPs retained
2
Title for the purchased goods often passed directly from suppliers to USF
without being transferred to the VASPs.
6
nominal transaction fees sufficient to cover operating expenses, including
handsome salaries for Redgate and Schofield.
Plaintiffs contend that the operation of the VASP fraud was known only
to a small cadre of USF employees. According to plaintiffs, the VASP kickbacks,
unlike legitimate promotional allowances, were deposited into a single account
that Kaiser and Lee controlled. As for USF customers, they were also kept in
the dark. Although some of these customers had the right to audit USF’s
invoices, the invoices generated by the VASPs revealed nothing about the
kickbacks to USF or USF’s funding and control of the shell companies. The
district court cited evidence, moreover, “that USF actually took steps to conceal
the VASP system from its customers.” The court’s opinion refers, among other
things, to a contemporaneous email in which Rob Soule, USF’s Chief Accounting
Officer, noted that the company’s auditors were raising concerns about funds
advanced to one of the VASPs: “They do not understand why USF would advance
funds to any vendor.” Soule further observed that the VASP in question “is not
just any ‘vendor,’ but we do not want to publicize this fact.” J.A. at 623.
In 2000, The Royal Ahold Group (“Ahold”) presented USF with a proposal
to acquire the rapidly growing company. In the course of conducting due
diligence for the purchase, Paul Ekelschot, head of Ahold’s audit committee, sent
a memo to members of Ahold’s executive board in which he noted that USF used
7
brokers for its private label products in order to earn promotional allowance
rebates on these products and “shelter” these rebates from its clients’ auditors.3
The memo concluded that “[t]his technique needs to be researched to assess
the tax and legal implications and associated business risks.” J.A. at 795. One
recipient of the memo, reacting to this information, wrote in the margin “AVISO!
MOLTO PELIGROSA,” meaning “Warning! Very Dangerous” in Italian. Ahold
nonetheless went forward with the acquisition, and the fraud, according to
plaintiffs, thereafter continued.
In January 2003, Ahold management and its auditors, Deloitte & Touche,
received an anonymous letter warning that: “US Foodservice . . . ha[s] been
requiring some of [its] suppliers to ship product to Ahold companies, but send
the invoices to companies[] which are not owned by Ahold.” J.A. at 902. The
letter identified three of the VASPs at issue here as companies to which the
suppliers were directed to send invoices. Deloitte subsequently conducted an
inquiry and produced a memo regarding USF’s VASP transactions in which it
observed that the “primary beneficiary of the VASP transactions appears to be
3
Earlier in the year, when USF’s finance department became concerned about
large payments between USF and the VASPs, David Eberhardt, USF’s Deputy General
Counsel, drafted agreements to formalize the relationship between USF and the
entities created by Kaiser and Lee. Notably, a provision in each of the agreements
prohibited the VASPs from publicly indicating any affiliation with USF and required
them, if asked, to disavow any suggestion that they acted on USF’s behalf.
8
USF,” but that USF has no legal ownership interest in the VASPs. J.A. at 901.
The memo queried whether the VASPs should be consolidated into USF’s
financial statements and whether “the practice of using the VASP’s invoice cost
to USF as USF’s invoice cost for billing customers under cost plus contracts
create[s] any legal exposure.” Id.Ahold thereafter procured a letter from its outside counsel, White & Case,
concluding that USF faced no “serious exposure to damages from any potential
claims arising from USF’s use of VASPs.” J.A. at 927. The opinion, however,
was based on assurances from USF, inter alia: that USF had no affiliation with
the VASPs and none of its officers, directors, or employees had any ties, directly
or indirectly, with them; that “[t]itle to products procured for USF by a VASP
pass[ed] through the VASP”; that USF’s cost-plus customers were “aware that
USF is utilizing the VASPs to service their account”; and, finally, that the
VASPs provided valuable services, that USF had “legitimate business reasons
for outsourcing certain functions to independent VASPs,” and that there was “no
improper motive” behind the arrangement. Id. White & Case withdrew the
letter in March 2003, citing “reason to doubt whether the assumptions on which
we based our conclusions are valid.” J.A. at 939.
Also in 2003, following the discovery of other accounting irregularities at
USF, Ahold’s audit committee retained the law firm of Morvillo, Abramowitz,
9
Grand, Iason & Silberberg, which in turn engaged PricewaterhouseCoopers LLP
(“PwC”) to conduct an independent forensic accounting investigation of USF to
address, among other things, whether consolidation of the VASPs was required
and “whether legal issues exist relative to cost-plus contracts vis a vis VASP
passback earnings.” PwC’s subsequent report concluded that USF effectively
controlled the VASPs, which raised “significant questions” concerning USF’s
potential liability to its cost-plus customers; PwC concluded that USF’s control
of the VASPs “clearly required” consolidation. J.A. at 1258, 1295.
On October 17, 2003, Ahold publicly disclosed the VASP system and
consolidated the VASPs into restated financial statements for the relevant years.
Its filings outlined the financial relationship between USF and the VASPs,
asserted that the “VASPs provide varying degrees of support to USF,” and
concluded that Generally Accepted Accounting Principles “require the
recognition . . . of the VASPs within [Ahold’s] consolidated financial statements.”
J.A. at 2684. Shortly thereafter, Ahold ordered USF to phase out its use of
VASPs. It subsequently sold the company for $7.1 billion, agreeing to indemnify
USF for any liability to cost-plus customers over $40 million arising from the
VASP scheme.
C. The Class Action
The first lawsuit against USF in the wake of Ahold’s disclosures was filed
10
by Waterbury Hospital, a community and teaching hospital in Connecticut.
Other plaintiffs followed suit, including Thomas & King, the owner and operator
of 88 Applebee’s franchises, and Catholic Healthcare West, the largest not-for-
profit hospital system in California.4 The pending cases were found to involve
“common factual questions concerning the propriety of USF’s performance of
cost-plus contracts” and were consolidated for pretrial proceedings in the District
of Connecticut, see In re U.S. Foodservice, Inc. Pricing Litig., 528 F. Supp. 2d
1370 (J.P.M.L. 2007), after which a consolidated amended class action complaint
was filed. The district court subsequently denied USF’s motion to dismiss the
RICO and breach-of-contract claims. See In re U.S. Foodservice Inc. Pricing
Litig., Nos. 3:07-md-1894, 3:06-cv-1657, 3:08-cv-4, 3:08-cv-5, 2009 WL 5064468(D. Conn. Dec. 15, 2009).
Following class discovery, plaintiffs moved to certify the class on these
claims on July 31, 2009. Both sides submitted considerable evidence at the class
certification stage, including representative samples of the contracts at issue,
evidence as to the structure, operation, and concealment of the VASPs, and
4
The United States also brought suit, alleging that USF “falsely and
fraudulently inflated the prices it charged the United States under its cost-based
contracts to supply agencies of the United States with food products.” Complaint,
United States v. U.S. Foodservice, Inc., 1:10-cv-06782 (S.D.N.Y. Sept. 13, 2010). These
claims were brought pursuant to the False Claims Act, 31 U.S.C. § 3729, and the
common law of fraud and unjust enrichment. See id. The parties settled upon USF’s
agreement to pay approximately $30 million. Appellee’s Br. at 2.
11
competing expert testimony on industry standards and damages calculations.
USF argued, in particular, that the VASPs provided legitimate services; that
because VASPs are common in the industry, customers were aware that USF
could set cost in the manner it did; and that its customers based their
purchasing decisions on the total prices USF charged – which were competitive
with the prices available from competitors – and not on a belief that the “cost”
component of USF’s invoice price reflected the price at which the supplier
provided the goods.
After hearing oral arguments, the district court granted the motion for
class certification in full and certified a Rule 23(b)(3) class as:
Any person in the United States who purchased products from USF
pursuant to an arrangement that defined a sale price in terms of a
cost component plus a markup (“cost-plus contract”), and for which
USF used a VASP transaction to calculate the cost component.
In re U.S. Foodservice Inc. Pricing Litig., Nos. 3:07-md-1894, 3:06-cv-1657, 3:08-
cv-4, 3:08-cv-5, 2011 WL 6013551, at *1 (D. Conn. Nov. 29, 2011). The district
court found that plaintiffs had presented evidence that supported their fraud
allegations, including: (1) that USF placed orders directly with the suppliers for
“delivery” to the VASPs; (2) that USF “intentionally concealed the VASPs from
its cost-plus customers”; and (3) that USF controlled the VASPs’ finances,
guaranteeing their obligations, dictating to whom and when they made
12
payments, and funding many of the VASPs through short-term, interest-free
loans. Id. at *2-3. The court noted that the magnitude of the VASP operation
was “substantial,” with one VASP alone passing back over $58 million to USF
in a single year based on about $500 million in sales. PwC, the district court
observed, “found that the ‘[t]otal VASP pass-back receipts over the period from
April 2000 to December 2002 were $388 million.’” Id. at *3.
The court did not reach the merits whether the VASPs were shell
companies created to perpetrate a fraud or whether, as USF contends, they were
employed to provide legitimate services to USF in keeping with industry
practice. The court noted that the legitimacy of USF’s use of the VASPs is
contested and that evidence in the record indicates that some VASPs performed
legitimate business functions, including: “(1) quality control services; (2)
purchasing; (3) brand and product development; (4) merchandising services; (5)
marketing support; and (6) customer service.” Id. Regardless, the court
determined that certification was appropriate because plaintiffs had
demonstrated, and USF had failed to rebut, that the relevant issues were
susceptible to generalized proof such that individualized questions would not
predominate and render the class unmanageable.
USF moved this court for leave to file an interlocutory appeal challenging
class certification, and that motion was granted on April 3, 2012.
13
DISCUSSION
We review a district court’s decision to certify a class under Rule 23 for
abuse of discretion, the legal conclusions that informed its decision de novo, and
any findings of fact for clear error. Parker v. Time Warner Entm't Co., L.P., 331
F.3d 13, 18 (2d Cir. 2003); In re Initial Pub. Offerings Sec. Litig., 471 F.3d 24, 40-
41 (2d Cir. 2006). A district court abuses its discretion when “(1) its decision
rests on an error of law . . . or a clearly erroneous factual finding, or (2) its
decision – though not necessarily the product of a legal error or a clearly
erroneous factual finding – cannot be located within the range of permissible
decisions.” Parker, 331 F.3d at 18 (alteration in original) (quoting Zervos v.
Verizon N.Y., Inc., 252 F.3d 163, 168-69 (2d Cir. 2001)).
“The class action is an exception to the usual rule that litigation is
conducted by and on behalf of the individual named parties only.” Comcast
Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013) (internal quotation marks and
citation omitted). Federal law permits individual claims to be litigated as a class
action provided that the party seeking certification “affirmatively demonstrate[s]
his compliance with Rule 23.” Id. (internal quotation marks omitted). The party
must establish that the four threshold requirements of Rule 23(a) – numerosity,
commonality, typicality, and adequacy of representation – are satisfied and
demonstrate “through evidentiary proof” that the class satisfies at least one of
14
the three provisions for certification found in Rule 23(b). Id. USF does not
dispute that the Rule 23(a) factors are met, but protests that the district court
erred in finding Rule 23(b)(3)’s requirements satisfied.
To certify a class pursuant to Rule 23(b)(3), a plaintiff must establish: (1)
predominance – “that the questions of law or fact common to class members
predominate over any questions affecting only individual members”; and (2)
superiority – “that a class action is superior to other available methods for fairly
and efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3). To certify
a class, a district court must “make a ‘definitive assessment of Rule 23
requirements, notwithstanding their overlap with merits issues,’ . . . must
resolve material factual disputes relevant to each Rule 23 requirement,” and
must find that each requirement is “established by at least a preponderance of
the evidence.” Brown v. Kelly, 609 F.3d 467, 476 (2d Cir. 2010); Myers v. Hertz
Corp., 624 F.3d 537, 548 (2d Cir. 2010) (plaintiffs bear the burden of
“establish[ing] by a preponderance that common questions [will] predominate
over individual ones”); see also, In re IPO, 471 F.3d at 33 (“[T]he important point
is that the requirements of Rule 23 must be met, not just supported by some
evidence.”).
15
Upon a complete review of the record, we conclude that the district court
conducted a rigorous analysis based on the relevant evidence, properly resolved
factual disputes, and did not abuse its discretion in concluding that common
issues predominate as to plaintiffs’ RICO and breach of contract claims and that
a class action is a superior method of litigating these claims.
* * *
We first briefly outline the substance of plaintiffs’ claims against USF. To
prevail on their civil RICO claim, plaintiffs must show “(1) a substantive RICO
violation under § 1962; (2) injury to the plaintiff’s business or property, and (3)
that such injury was by reason of the substantive RICO violation.” UFCW Local
1776 v. Eli Lilly & Co., 620 F.3d 121, 131 (2d Cir. 2010) (citation omitted). Here,
plaintiffs allege that USF and its VASPs constituted an enterprise as defined in
18 U.S.C. § 1961(4) that engaged in a pattern of racketeering activity, namely
mail and wire fraud, see 18 U.S.C. §§ 1341, 1344, in violation of 18 U.S.C.
§ 1962(c).5 Specifically, they assert that USF devised a scheme to defraud its
customers in which it mailed to customers phony invoices generated by the
5
Section 1962(c) makes it “unlawful for any person employed by or associated
with” an enterprise engaged in or affecting interstate or foreign commerce “to conduct
or participate, directly or indirectly, in the conduct of such enterprise’s affairs through
a pattern of racketeering activity.” 18 U.S.C. § 1962(c). “Racketeering activity” is in
turn defined to include a litany of so-called predicate acts, including “any act which is
indictable” under the mail and wire fraud statutes. 18 U.S.C. § 1961(1)(B).
16
VASPs to inflate prices above what the customers were contractually obligated
to pay. Similarly, the plaintiffs assert that USF breached the terms of its cost-
plus contracts by using the VASP invoices to calculate the cost component of the
amounts billed to customers, thereby causing these customers to pay prices
higher than they should have paid under the contracts.
A. Predominance
i) The RICO Claim
The predominance requirement is satisfied “if resolution of some of the
legal or factual questions that qualify each class member’s case as a genuine
controversy can be achieved through generalized proof, and if these particular
issues are more substantial than the issues subject only to individualized proof.”
Eli Lilly & Co., 620 F.3d at 131 (quoting Moore v. PaineWebber, Inc., 306 F.3d
1247, 1252 (2d Cir. 2002)); see also Amgen Inc. v. Conn. Ret. Plans & Trust
Funds, 133 S. Ct. 1184, 1196 (2013) (in securities fraud class action, explaining
that “Rule 23(b)(3) . . . does not require a plaintiff seeking class certification to
prove that each element of her claim is susceptible to classwide proof[,]” but
rather, requires “that common questions predominate over any questions
affecting only individual class members” (internal quotation marks and
alterations omitted)). USF argues that this has not been shown as to the RICO
claim because: (1) a misrepresentation necessary to prove mail or wire fraud
17
cannot be established through common evidence; (2) plaintiffs’ reliance on any
purported misrepresentation by USF, necessary here to prove causation, cannot
be shown using common evidence; and (3) plaintiffs suffered no injury to their
business or property that can be shown with common evidence. We disagree
with each of these contentions.
a) Misrepresentation
We have previously observed that fraud claims based on uniform
misrepresentations to all members of a class “are appropriate subjects for class
certification” because, unlike fraud claims in which there are material variations
in the misrepresentations made to each class member, uniform
misrepresentations create “no need for a series of mini-trials.” Moore, 306 F.3d
at 1253. Here, the district court did not abuse its discretion in determining that
USF’s alleged misrepresentation was uniform and susceptible to generalized
proof. Specifically, plaintiffs allege that the VASP-related invoices mailed from
USF to its cost-plus customers included the same fraudulent misrepresentation:
namely, that the cost component of USF’s billing was based on the invoice cost
from a legitimate supplier and not from a shell VASP controlled by USF and
established for the purpose of inflating the cost component. While each invoice
obviously concerned different bills of goods with different mark-ups, the material
misrepresentation – concealment of the fact of a mark-up inserted by the VASP
– was the same in each.
18
The allegations here are most akin to those in Klay v. Humana, Inc.,
where plaintiffs alleged that defendant HMOs systemically underpaid doctors
by uniformly misrepresenting to them that the HMOs were “honestly pay[ing]
physicians the amounts to which they were entitled.” 382 F.3d 1241, 1258 (11th
Cir. 2004), abrogated on other grounds by Bridge v. Phx. Bond & Indem. Co., 553
U.S. 639 (2008). There, the Eleventh Circuit upheld certification of the
physician class on the basis that the doctors’ RICO claims were “not simply
individual allegations of underpayments lumped together,” but rather focused
on a centralized corporate conspiracy to defraud, which could be proven through
generalized evidence – and which, absent certification, would have to be re-
proven in each case. Id. at 1257-58. Similarly here, the thrust of the RICO
claim is USF’s scheme to create and employ the VASPs to inflate the invoices so
as to overbill each class member in the exact same manner.
USF contends that the customer invoices cannot be deemed to
misrepresent cost without reference to the parties’ underlying contractual
arrangement, defeating any resort to generalized proof. But even assuming
arguendo that this is correct, the district court specifically found after reviewing
the evidence that USF’s cost-plus contracts are substantially similar in all
material respects. In re U.S. Foodservice, 2011 WL 6013551, at *14. This
finding is supported, moreover, by Deloitte, Ahold’s auditor, which reviewed the
contracts to determine USF’s potential legal exposure and concluded that the
19
key term of “invoice cost” is “consistently defined.” J.A. at 900-01. In short,
because the question whether the invoices materially misrepresented the
amounts due USF is common to all plaintiffs, the class will “prevail or fail in
unison” on this point – rendering certification appropriate. Amgen, 133 S. Ct.
at 1191.
b) Causation
USF next contends that reliance is “a necessary part of the causation
theory advanced by the plaintiffs,” Eli Lilly, 620 F.3d at 133, and that
individualized issues will predominate as to reliance because “the key issue in
this case is customer knowledge of the alleged pricing practice at issue,”
Appellant’s Br. at 25. USF argues that the district court simply “assumed” that
USF’s customers were “ignorant of USF’s influence or control over the landed
cost and [promotional allowances]” and that it failed to analyze or even
acknowledge evidence to the contrary. Customer reliance on its supposedly
inflated invoices, USF maintains, “can be determined only by adducing evidence
from the 75,000 customers,” and not by generalized proof. Appellant’s Br. at 26-
27. We disagree.
As we have noted, “proof of misrepresentation – even widespread and
uniform misrepresentation – only satisfies half of the equation” in cases such as
this because plaintiffs must also demonstrate reliance on a defendant’s common
20
misrepresentation to establish causation under RICO.6 McLaughlin v. Am.
Tobacco Co., 522 F.3d 215, 223 (2d Cir. 2008), abrogated on other grounds by
Bridge v. Phx. Bond & Indem. Co., 553 U.S. 639 (2008). Certification is
inappropriate where “reliance is too individualized to admit of common proof.”
Id. at 224-25 (concluding that certification was improper where many factors
other than defendants’ alleged misrepresentations about health consequences
of light cigarettes may have led individuals to purchase them). The fact that
class members will show causation by establishing reliance on a defendant’s
misrepresentations, however, does not place fraud-based claims entirely beyond
the reach of Rule 23, provided that individualized issues will not predominate.
See id.
Such is the case here. First, payment, as we have said, “may constitute
circumstantial proof of reliance upon a financial representation.” Id. at 225 n.7.
As in Klay, the defendant here is alleged to have sent the plaintiffs false billing
information (albeit in this case misrepresenting the amount of money due rather
than, as in Klay, that the proper amount had been paid). Klay, 382 F.3d at 1259.
In cases involving fraudulent overbilling, payment may constitute circumstantial
proof of reliance based on the reasonable inference that customers who pay the
6
While the Supreme Court has clarified that first-party reliance is not an
element of a RICO claim predicated on mail fraud, see Bridge, 553 U.S. at 649, it may
be, as it is here, “a necessary part of the causation theory advanced by the plaintiffs.”
Eli Lilly, 620 F.3d at 133.
21
amount specified in an inflated invoice would not have done so absent reliance
upon the invoice’s implicit representation that the invoiced amount was honestly
owed. Fraud claims of this type may thus be appropriate candidates for class
certification because “while each plaintiff must prove reliance, he or she may do
so through common evidence (that is, through legitimate inferences based on the
nature of the alleged misrepresentations at issue).” Id.USF therefore errs in suggesting that “there is no common evidence of
individual customer knowledge” as to its allegedly fraudulent billing scheme.
Provided the plaintiffs are successful in proving that USF inflated their invoices
and misrepresented the amount due, proof of payment constitutes circumstantial
evidence that the plaintiffs lacked knowledge of the scheme. Moreover, and as
found by the district court, the record also contains generalized proof of USF’s
concealment of its billing practices, including the Ekelschot memo in which the
head of Ahold’s audit committee observed that USF used the VASPs to earn
promotional allowance rebates on private label products and “to hide [these
rebates] from clients’ auditors.” J.A. at 795 (emphasis added). As the district
court found, “there is evidence that USF actually took steps to conceal the VASP
system from its customers” and “the record lacks evidence that any of USF’s
customers had knowledge of USF fraudulently inflating the cost component of
its products through the operation of the VASPs.” In re U.S. Foodservice, 2011
22
WL 6013551, at *9, 11. Upon a review of the record, we conclude that these
findings are not in error.
USF claims that this case is not like Klay, but like Sandwich Chef of
Texas, Inc. v. Reliance National Indemnity Insurance Co., 319 F.3d 205 (5th Cir.
2003), in which the Fifth Circuit held that a class action premised on the
fraudulent overcharge of insurance premiums, supposedly in excess of regulatory
rates, had been improperly certified. In Sandwich Chef, however, as the Fifth
Circuit concluded, the district court “did not adequately account for individual
issues of reliance that will be components of defendants’ defense against RICO
fraud.” Id. at 220 (emphasis added). There, the defendants had produced
evidence that class members had individually negotiated premiums,
demonstrating awareness that “the amounts being charged varied from rates
filed with regulators,” and that policyholders had nonetheless “agreed to pay
such premiums.” Id. Such evidence, reflecting individualized arrangements on
the part of putative class members wholly aware of the truth regarding the
alleged misrepresentations on which the class was said to have relied,
“preclude[d] a finding of predominance of common issues of law or fact.” Id. at
221. Critically, however, the record here contains no such individualized proof
indicating knowledge or awareness of the fraud by any plaintiffs.
USF contends, to the contrary, that the district court “failed to rigorously
analyze or resolve [an] overwhelming evidentiary record” demonstrating that
23
many class members were not deceived as to the nature of its billing practices.
Appellant’s Br. at 27. We are not persuaded. Much of the evidence contained
in the “ten tranches of evidence” on which USF relies is of marginal relevance,
at best, to the question whether USF’s customers had knowledge of the disputed
billing practices. For example, USF relies heavily on a 2006 email from an
employee at Premier, Inc. (“Premier”), a purchasing agent for some of USF’s
cost-plus customers, alerting clients that USF had been sued “for pricing
practices” and noting the employee’s belief that USF had been “transparent and
ethical” in its relationship with Premier. As the district court noted, Premier
was not a cost-plus customer, but a “Group Purchasing Organization” that
helped members like Catholic Healthcare West manage and reduce supply costs.
And suffice it to say that this single-paragraph email sheds little light on the
question whether any USF customer was aware of USF’s billing practices during
the relevant period.
Upon a review of the record, we conclude that the district court did not err
in finding that “there is no evidence that the plaintiffs were aware of the VASP
system or its purpose.” In re U.S. Foodservice, 2011 WL 6013551, at *9. But
even if this were not the case, most of the remaining proof to which USF points
hardly draws into question plaintiffs’ Rule 23 showing, and for a simple reason:
such proof, far from demonstrating that factual questions regarding the
knowledge of individual class members will predominate over questions common
24
to the class, is in fact generalized proof concerning common arrangements in the
food distribution industry. Thus, USF cites the testimony of its expert, Frank
Dell, that pursuant to “well-known and common industry practice,” USF’s
customers would have understood that USF had influence over the invoice cost
used in the cost-plus formula and that it received promotional allowances. USF
relies on survey evidence suggesting, inter alia, that USF customers purchasing
on a cost-plus basis understand both “that foodservice distributors, such as USF,
ha[ve] an internal profit or inside margin in the cost component of their private
label sold on a cost plus basis” and that such distributors use middleman
vendors.7
We agree with the district court that such evidence “does not raise the
concern of issues of individual knowledge predominating.” See In re U.S.
Foodservice, 2011 WL 6013551, at *11. As the district court recognized, the
parties “dispute the legitimacy and purpose of the VASPs,” with USF contending
that the VASPs provided service to USF, particularly regarding its private label
products; that USF, as is common in the food service industry, legitimately
influenced and even set the “cost” component in its cost-plus pricing based on the
service provided; and that the monies supposedly funneled back to USF were in
7
USF additionally points to the testimony of plaintiffs’ expert, Thomas
Maronick, to the effect that pursuant to industry practice, USF would have a “say” in
determining the price of their private label products.
25
fact proper promotional allowances. Id. at *2. USF points to generalized proof
supporting this defense – proof wholly consistent with class action treatment –
but the record does not contain a single piece of evidence suggesting “actual
individual knowledge” on the part of a specific customer “of the VASPs’ existence
and USF’s pricing practices.” Id. at *11; see Katz v. China Century Dragon
Media, Inc., 287 F.R.D. 575, 588-89 (C.D. Cal. 2012) (finding predominance
requirement satisfied in securities fraud class action where there was no
evidence indicating “the likely need for individualized assessments of class
members with respect to the[ir] knowledge” of alleged misrepresentations); Pub.
Emps.’ Ret. Sys. of Miss. v. Merrill Lynch & Co., 277 F.R.D. 97, 118-19 (S.D.N.Y.
2011) (“Sheer conjecture that class members ‘must have’ discovered [the
misrepresentations] is insufficient to defeat Plaintiff’s showing of predominance
when there is no admissible evidence to support Defendants’ assertions.”). In
such circumstances, conjectural “individualized questions of reliance,” which are
“far more imaginative than real[,] . . . do not undermine class cohesion and thus
cannot be said to predominate for purposes of Rule 23(b)(3).” Amgen, 133 S. Ct.
at 1197 (internal quotation marks omitted). For if bald speculation that some
class members might have knowledge of a misrepresentation were enough to
forestall certification, then no fraud allegations of this sort (no matter how
uniform the misrepresentation, purposeful the concealment, or evident plaintiffs’
common reliance) could proceed on a class basis – a conclusion that this Court
has already declined to reach. See McLaughlin, 522 F.3d at 224-25.
26
Whether, as plaintiffs claim, the VASPs were created for the purpose of
misrepresenting cost and were then kept secret so as to deceive customers about
overbilling or whether, instead, they provided legitimate service to USF for
which it appropriately billed its customers, is a question subject to generalized
proof – and a question that, barring class action treatment, will have to be
endlessly re-litigated in individual actions. We conclude that the class will
“prevail or fail in unison” on this point – so that, in either case, questions of fact
common to class members will predominate over questions regarding individual
customers’ reliance. The district court acted well within its discretion in
rejecting USF’s claim to the contrary. See Amgen, 133 S. Ct. at 1191.
c) Injury
USF next contends that the district court abused its discretion in
certifying a RICO class because RICO damages cannot be reliably ascertained
on a class-wide basis. According to USF, the proper measure of RICO damages
here is the difference between the price paid by each plaintiff for the goods it
purchased and the market price available when the goods were bought, so that
regardless whether USF deceived customers in purporting to carry out its
obligations under its cost-plus contracts, plaintiffs were harmed by USF’s fraud
only if they purchased goods from USF that they could have obtained more
cheaply elsewhere. Because such a calculation “would require the consideration
of the prices for thousands of products, on a daily, weekly and monthly basis,
over a period of years, in hundreds of different markets, for tens of thousands of
27
customers,” class-wide issues as to damages, USF contends, do not predominate,
and certification was inappropriate. Appellant’s Br. at 45.
USF again misses the mark. Our case law is clear that “damages as
compensation under RICO § 1964(c) for injury to property must, under the
familiar rule of law, place [the injured parties] in the same position they would
have been in but for the illegal conduct.” Commercial Union Assurance Co., PLC
v. Milken, 17 F.3d 608, 612 (2d Cir. 1994). Granted, we have said that because
RICO “compensates only for injury to ‘business or property,’” a victim who is
induced to part with his property by the misrepresentations of a fraudster is
generally not entitled to “benefit of the bargain” damages – meaning recovery of
what the fraudster promised, as opposed to the property the victim lost.
McLaughlin, 522 F.3d at 228 (quoting 18 U.S.C. § 1964(c)); see also Fleischhauer
v. Feltner, 879 F.2d 1290, 1300 (6th Cir. 1989); Heinold v. Perlstein, 651 F. Supp.
1410, 1412 (E.D. Pa. 1987) (“Where, as here, the only property to which a
plaintiff alleges injury is an expectation interest that would not have existed but
for the alleged RICO violation, it would defy logic to conclude that the requisite
causation exists.”). This case, however, is not about such inducement, but
concerns a fraud that occurred after plaintiffs already had a protectable interest
in their cost-plus contracts with USF. See Heinold, 651 F. Supp. at 1411(distinguishing between RICO violations that induce the formation of a contract
and RICO violations that “interfere[] with a contract extant at the time of that
conduct”); see also Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1310 (7th Cir.
28
1987) (holding RICO victim entitled to recover benefits due under contract where
defendants engaged in fraud after the formation of contract in order to deprive
victim of benefits of its bargain).
USF, having entered into contracts that entitled its customers to “cost-
plus” pricing, is alleged to have systematically deceived them into believing they
were being afforded such pricing when, in fact, they were being overcharged.
The key inquiry in such a circumstance is not what price customers could have
procured elsewhere at the point of purchase, but rather the amount of
overcharge – the amount customers paid USF as a result of its deception. The
measure of damages as compensation for this injury is straightforward:
customers are entitled to the difference between the amount they paid on
fraudulently inflated cost-plus invoices and the amount they should have been
billed (or, stated differently, the price increase due to the use of VASPs).8 We
accordingly conclude that USF’s contention that the district court abused its
8
Plaintiffs’ proposed measure for damages is thus directly linked with their
underlying theory of classwide liability (that the misrepresentations on the invoices
caused overpayments) and is therefore in accord with the Supreme Court’s recent
decision in Comcast v. Behrend, 133 S. Ct. 1426 (2013), which reversed a Rule 23(b)(3)
class certification on the ground that plaintiffs’ theory of damages was flawed. Id. at
1432-33. In Comcast, the Supreme Court held that courts should examine the
proposed damages methodology at the certification stage to ensure that it is consistent
with the classwide theory of liability and capable of measurement on a classwide basis.
Id. at 1433-35 (finding that plaintiffs’ damages “model failed to measure damages from
the particular antitrust injury on which petitioners’ liability in this action is
premised”). As discussed in Part B, infra, the district court carefully examined
plaintiffs’ damages model, finding it appropriate and feasible to redress the common
harms alleged, and therefore did not abuse its discretion in determining that common
issues predominate.
29
discretion in certifying the RICO class because RICO damages cannot be shown
on a class-wide basis is without merit.
ii) The Contract Claims
Certifying plaintiffs’ breach of contract claims raises additional concerns
because the contracts here are not uniform and they implicate the laws of many
jurisdictions. USF argues common questions will not predominate as to these
claims for three reasons: (1) the contracts vary materially from each other and
individualized extrinsic evidence will predominate in the interpretation of key
terms; (2) some of the contracts require customers to satisfy minimum purchase
requirements before they are entitled to cost-plus pricing, a matter that is not
subject to common proof; and, finally, (3) the contracts are governed by the laws
of 48 states, as well as tribal law. For the following reasons, we disagree.
a) Contract Variations and Extrinsic Evidence
USF argues, first, that the contracts here have materially different terms
and that the variations among them defeat plaintiffs’ attempt to establish
predominance as to the contract claims. Moreover, determining the issue of
breach pursuant to the “numerous different definitions of the terms ‘vendor’ and
[promotional allowance] in the numerous and varying contracts,” USF
maintains, will require “reference to individualized extrinsic evidence.”
Appellant’s Br. at 49. USF asserts that resolution of the issue of breach can
therefore not be attained through generalized proof and that the district court
30
abused its discretion in ruling that Rule 23(b)(3)’s predominance requirement is
satisfied as to the contract claims. We are not persuaded.
To be clear, courts properly refuse to certify breach of contract class
actions where the claims require examination of individual contract language.
See, e.g., Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 340
(4th Cir. 1998); Spencer v. Hartford Fin. Servs. Grp., Inc., 256 F.R.D. 284, 304
(D. Conn. 2009) (declining to certify class for breach of contract claims where
contracts defined cost and value differently such that the language of each
contract “would need to be carefully considered to determine whether defendants
breached each contract at issue”); cf. Sprague v. Gen. Motors Corp., 133 F.3d
388, 398 (6th Cir. 1998) (decertifying class of early retirees in ERISA case where
“side deals” contained myriad variations as to what each retiree was promised).
In such cases, however, courts have determined that the language variations
were material to the issue of breach. Here, USF’s own expert testified that the
contracts “essentially all [say] the same thing” and that in the food service
industry, “[i]t [is] well understood . . . what a cost plus contract is,” J.A. at 2938.
Similarly, USF’s own auditor found that USF’s contracts are consistent in how
they define invoice cost, J.A. at 900-01. The district court’s conclusion that
USF’s cost-plus contracts are substantially similar in all material respects, see
In re U.S. Foodservice, 2011 WL 6013551, at *14, is amply supported by the
record.
31
USF contends that resolving the contract claims will require introduction
of evidence of contract negotiations and course of performance evidence to
determine whether individual customers knew about USF’s use of VASPs and
“acquiesce[d] in it without objection.” U.C.C. § 1-303(a)(2). To be sure, extrinsic
evidence can illuminate the meaning of ambiguous contract terms, and the terms
of the contracts here, each of which is governed by the Uniform Commercial
Code (“UCC”), may in theory “be explained or supplemented” by extrinsic
evidence of the parties’ “course of performance, course of dealing, or usage of
trade.” Id. § 2-202; see also id. § 1-303(d)-(e) (noting that course of performance,
course of dealing, and trade usage are “relevant in ascertaining the meaning of
the parties’ agreement, . . . and may supplement or qualify the terms of the
agreement”); accord Allapattah Servs., Inc. v. Exxon Corp., 333 F.3d 1248 (11th
Cir. 2003), aff’d on other grounds by 545 U.S. 546 (2005).9 USF’s argument as
to the importance of individualized extrinsic evidence as to the contract claims,
however, simply mimics its claim that the issue of individual customer
9
The UCC defines “course of performance” as the parties’ conduct in the
transaction in question provided that “(1) the agreement of the parties with respect to
the transaction involves repeated occasions for performance by a party; and (2) the
other party, with knowledge of the nature of the performance and opportunity for
objection to it, accepts the performance or acquiesces in it without objection.” U.C.C.
§ 1-303(a). In contrast, “course of dealing” focuses on the parties’ conduct in previous
transactions that can “fairly be regarded as establishing a common basis of conduct for
interpreting their expressions and other conduct” in the transaction in question. Id.
§ 1-303(b). Finally, “usage of trade” does not involve any inquiry into the conduct of the
individual parties, but rather covers “any practice or method of dealing having such
regularity of observance in a place, vocation, or trade as to justify an expectation that
it will be observed with respect to the transaction in question.” Id. § 1-303(c).
32
knowledge defeats certification of the RICO class, and it fails for the same
reason. Just as the record contains no evidence regarding individualized
customer knowledge, it likewise includes no evidence of any USF customer’s
contract negotiations or individualized conduct in performing pursuant to the
contract that tends to show either that the customer understood his contract to
authorize the VASP arrangements or that he otherwise acquiesced in them.
USF proffers expert testimony regarding accepted industry practice (namely,
that it is common knowledge that food distributors employ VASP-like
arrangements), but this is generalized trade usage evidence appropriately
considered on a class-wide basis.
The fact that each of these contracts is governed by the UCC, moreover,
further supports the district court’s conclusion that common issues will
predominate in the adjudication of these contract claims. Plaintiffs allege, inter
alia, that USF breached its cost-plus contracts because the use of VASPs to
inflate costs was dishonest, commercially unreasonable, and a breach of USF’s
implied duty of good faith. See Cmplt. ¶¶ 152-53; see also U.C.C. §1-203 (“Every
contract or duty within this Act imposes an obligation of good faith in its
performance or enforcement.”). The UCC’s implied duty of good faith, in turn,
requires not only “honesty in fact” between contracting parties but also “the
observance of reasonable commercial standards of fair dealing in the trade.”
U.C.C. § 2-103(1)(b) (defining “good faith” for merchants); see id. § 1-201(b)(20)
(defining “good faith” for non-merchants). See also U.C.C. § 1-203 cmt.
33
(explaining that the duty of good faith is implemented by the provisions on
course of dealing and trade usage, and “directs a court toward interpreting
contracts within the commercial context in which they are created, performed,
and enforced.”); 1B Larry Lawrence, Lawrence’s Anderson on the Uniform
Commercial Code § 1-304:42 (3d ed. 2012) (“U.C.C. § 1-201(b)(20) establishes an
objective test for good faith: whether the party acted in observance of reasonable
commercial standards of fair dealing. The commercial reasonableness of the
party’s behavior relates solely to the fairness of the behavior.”).
We agree with the district court that the question of breach with regard
to plaintiffs’ contract claims will focus predominantly on common evidence to
determine whether, in fact, USF used controlled middlemen to inflate invoice
prices and whether such a practice departs from prevailing commercial
standards of fair dealing so as to constitute a breach. See U.C.C. § 2-103(1)(b).
In this regard, we find the Eleventh Circuit’s decision in Allapattah Services,
Inc. v. Exxon Corp., 333 F.3d 1248, instructive. There, plaintiffs alleged that
Exxon breached its contracts with its dealers by overcharging them on fuel
purchases. Id. at 1252. Though the contracts were not identical, the Eleventh
Circuit affirmed the class certification because the dealer agreements were
materially uniform insofar as they imposed the same duty of good faith on
Exxon. Thus, the question of whether Exxon had violated its duty was common
to all class members. Id. at 1261. The same holds true here.
34
Like the district court, we anticipate that adjudication of the breach of
contract claims will largely parallel adjudication of the RICO claims. The
common issues will include USF’s creation and control of the VASPs, the actual
services, if any, the VASPs provided, USF’s efforts to hide the true nature of the
VASPs from its customers (which in the breach of contract setting is
circumstantial proof that customers did not know of and never acquiesced in
USF’s course of performance), and trade usage concerning controlled middlemen
like the VASPs. Since the record does not indicate the existence of material
differences in contract language or other significant individualized evidence, we
conclude that the district court did not abuse its discretion in concluding that
common issues will predominate over any individual issues, and that USF’s
claim to the contrary should be rejected.
b) Minimum Purchase Requirements
USF next contends that many of the contracts impose minimum purchase
requirements on customers as a precondition to their entitlement to cost-plus
pricing. Compliance with this “condition precedent” to USF’s obligation to
provide cost-plus pricing, USF contends, raises individualized issues not subject
to generalized proof, defeating predominance as to the contract claims. The
district court concluded, to the contrary, that these minimum purchase
obligations are not material, and do not draw into question the predominance of
common issues as to the contract claims. We agree with the district court.
35
The minimum purchase requirements at issue here stipulate that to be
entitled to the benefits of the contract, including cost-plus pricing, customers
must purchase a minimum percentage of their food supplies from USF. For
instance, the Thomas & King contract provides that the specified margins are
contingent on Thomas & King “purchasing 85% of [its] total purchases in each
specified product category from [USF],” J.A. at 1544. We agree with USF that
if the minimum purchase requirements in many of its contracts had ever been
enforced, individualized questions could potentially predominate regarding these
contracts, as each plaintiff might be required to introduce evidence showing that
it had complied with the requirements set forth in its contract to establish USF’s
breach.
But that is not this case. Here, the district court found that the minimum
purchase requirements in the contracts were not enforced by USF and thus are
not material to the question whether USF breached its agreements. The factual
finding of non-enforcement is entitled to deference unless clearly erroneous. See
Parker, 331 F.3d at 18. Given the absence of any evidence showing that USF
ever enforced these requirements, as well as testimony from USF’s own expert
describing such requirements as “dream figure[s]” that food distributors do not
even monitor for customer compliance, we cannot say that the district court’s
determination was clearly erroneous. In light of this factual finding, the district
court did not abuse its discretion in determining that the provisions are not
36
material to the question of breach, and thus that they create no need for
individualized evidence of compliance.
c) Variations in State Contract Law
USF next argues that certification was improper because this multi-state
class action implicates the laws of many jurisdictions. We agree that putative
class actions involving the laws of multiple states are often not properly certified
pursuant to Rule 23(b)(3) because variation in the legal issues to be addressed
overwhelms the issues common to the class. See, e.g., Castano v. Am. Tobacco
Co., 84 F.3d 734, 741 (5th Cir. 1996) (“In a multi-state class action, variations
in state law may swamp any common issues and defeat predominance.”); Sacred
Heart Health Sys., Inc. v. Humana Military Healthcare Servs., Inc., 601 F.3d
1159, 1183 (11th Cir. 2010). However, these concerns are lessened where the
states’ laws do not vary materially. See Klay, 382 F.3d at 1262 (“[I]f the
applicable state laws can be sorted into a small number of groups, each
containing materially identical legal standards, then certification of subclasses
embracing each of the dominant legal standards can be appropriate.”). Thus, the
crucial inquiry is not whether the laws of multiple jurisdictions are implicated,
but whether those laws differ in a material manner that precludes the
predominance of common issues. See Walsh v. Ford Motor Co., 807 F.2d 1000,
1017 (D.C. Cir. 1986) (“[N]ationwide class action movants must creditably
demonstrate, through an ‘extensive analysis’ of state law variances, ‘that class
37
certification does not present insuperable obstacles.’” (quoting In re Sch. Asbestos
Litig., 789 F.2d 996, 1010 (3d Cir. 1986))).
Here, they do not. As courts have noted, state contract law defines breach
consistently such that the question will usually be the same in all jurisdictions.
See Klay, 382 F.3d at 1263 (“A breach is a breach is a breach, whether you are
on the sunny shores of California or enjoying a sweet autumn breeze in New
Jersey.”); see also Am. Airlines, Inc. v. Wolens, 513 U.S. 219, 233 n.8 (1995)
(“[C]ontract law is not at its core diverse, nonuniform, and confusing” (internal
quotation marks omitted)). The uniformity is even more pronounced in this
matter, moreover, as all the jurisdictions implicated have adopted the UCC.
USF’s principal contention to the contrary is that despite such adoption, state
and tribal laws differ as to the admissibility of extrinsic evidence. But plaintiffs’
papers in support of their motion for class certification demonstrate that all the
relevant jurisdictions have adopted U.C.C. § 1-303, governing the introduction
of such evidence. See J.A. at 2648-50. In the absence of any showing by USF
disputing this, we conclude that the district court did not abuse its discretion in
determining that variations in state contract law do not preclude certification.
iii) Fraudulent Concealment and Tolling
In yet another effort to refute the district court’s conclusion that plaintiffs
have established predominance for the purpose of Rule 23(b)(3), USF argues: (1)
that plaintiffs must rely on USF’s alleged fraudulent concealment to toll the
various statutes of limitations implicated in this action, in order to render timely
38
their RICO and contract claims; (2) that different jurisdictions employ various
legal standards for tolling statutes of limitations; and (3) that, as a result,
common issues of law or fact do not predominate, and the district court abused
its discretion in concluding otherwise. For the following reasons, we disagree.10
At the start, we agree with the district court that fraudulent concealment
can be demonstrated via class-wide, generalized evidence. Granted, some
jurisdictions whose law may apply to plaintiffs’ contract claims require that a
“plaintiff asserting fraudulent concealment prove it exercised some degree of
diligence” to discover the claims. See In re U.S. Foodservice, 2011 WL 6013551,
at *19. Similarly, a plaintiff seeking to toll the statute of limitations for a civil
RICO claim must demonstrate that he was “reasonably diligent in trying to
discover his cause of action.” Klehr v. A.O. Smith Corp., 521 U.S. 179, 182
(1997). The district court found, however, that plaintiffs “produced common
evidence showing that USF intended to conceal the VASPs and, therefore, it
cannot reasonably be expected that the plaintiffs could have discovered the
10
Both parties presented the district court with an analysis of the relevant
statute of limitations principles in all 50 states, though plaintiffs argue, inter alia, that
upon proper application of choice of law principles, the law of only one to three states
will be germane. Like the district court, we do not reach this choice of law issue in
light of our conclusion that even assuming the laws of multiple jurisdictions apply,
common issues predominate.
With regard to variations in the statutes of limitations themselves, the district
court found that such variations did not pose an insuperable obstacle to class
certification because only one state imposes a statute of limitations less than four years
and subclasses may be created as needed to manage statute of limitations issues. See
In re U.S. Foodservice, 2011 WL 6013551, at *17. USF does not dispute the
propriety of this ruling on appeal.
39
injury until they became more fully aware of VASPs[’] existence and purpose.”
In re U.S. Foodservice, 2011 WL 6013551, at *17. And while some contracts
provided customers audit rights, common evidence indicates that USF
purposefully designed the VASP system to be invisible to customer audits, and
USF’s own expert testified that an audit could not have uncovered the VASP
arrangements. In the absence of any individualized evidence that plaintiffs were
not deceived by USF’s attempts to conceal the truth about the VASPs or that
plaintiffs had the necessary tools to uncover the fraud prior to public disclosure
of the VASP system in 2003, the district court did not abuse its discretion in
determining that common evidence of this concealment will predominate in
resolving whether the relevant statutes of limitations were tolled. Cf.
McLaughlin, 522 F.3d at 233-34 (decertifying class in part because defendants
introduced evidence indicating that plaintiffs knew truth about light cigarettes
and were not deceived by false advertising).
The other variations among potentially applicable tolling standards
identified by USF do not change this analysis. First, surveys of state law
conducted by both parties reveal that all but three states apply the doctrine of
fraudulent concealment or the related doctrine of equitable estoppel to toll the
statute of limitations for contract claims. USF points out that 14 of these states
provide that a statute of limitations is tolled for fraudulent concealment only if
the plaintiff relied on a misrepresentation by the defendant, and that five states
require that plaintiffs demonstrate fraudulent concealment by clear and
40
convincing evidence.11 See J.A. at 3201-33. But just as payment of inflated
invoices constitutes circumstantial evidence that can be used to establish, for
RICO purposes, that plaintiffs relied on the invoices’ misrepresentation as to the
cost component of USF’s pricing, so too may such evidence be used to establish
reliance for fraudulent concealment purposes. And the mere fact that five states
impose a heightened standard of proof for fraudulent concealment does not draw
into question the district court’s conclusion as to predominance, but instead
suggests simply the possibility that the district court, in a case in which
generalized proof will resolve many issues, may choose to handle other less
numerous and less substantial issues through the creation of a limited number
of homogeneous subclasses. See Fed. R. Civ. P. 23(c)(5) (authorizing creation of
subclasses); Marisol A. v. Giuliani, 126 F.3d 372, 379 (2d Cir. 1997) (“Rule 23
gives the district court flexibility to certify subclasses as the case progresses and
as the nature of the proof to be developed at trial becomes clear.”). In sum,
11
USF also highlights variations in state law as to (1) whether an affirmative
act of concealment by defendants is required as opposed to simple silence; (2) whether
intent / knowledge on behalf of the defendant is required; and (3) whether the statute
of limitations begins to run on actual discovery or constructive discovery. We find no
error, however, in the district court’s conclusion that these differences are immaterial.
Plaintiffs allege an affirmative act by defendants who acted with an intent to deceive,
and “the point at which plaintiffs should have discovered the breach is the same point
at which they did discover the breach.” In re U.S. Foodservice, 2011 WL 6013551, at
*19.
41
fraudulent concealment issues may sometimes preclude certification under Rule
23(b)(3), but they do not do so here.
B. Expert Testimony
USF also challenges the district court’s reliance on the plaintiffs’ damages
expert John Damico, who testified that individual damages could be calculated
on a class-wide basis with a simple formula using data extracted from USF’s
databases, and plaintiff’s industry expert Stacy Moore, who testified that the
VASP system “was not common industry practice and [USF’s] customers would
not – and by USF’s design, could not – have known that USF was engaging in
such conduct,” J.A. at 2986. USF argues that the district court erred by
considering this testimony without first conducting a Daubert hearing to
determine the evidence’s admissibility.12 The record establishes, however, that
the district court performed its gatekeeping function and that it resolved the
disputes regarding expert testimony in plaintiffs’ favor.
The Supreme Court has not definitively ruled on the extent to which a
district court must undertake a Daubert analysis at the class certification
12
Under Daubert v. Merrell Dow Pharmaceuticals Inc., expert testimony is
admissible if the expert is proposing to testify to (1) scientific knowledge that (2) will
assist the trier of fact to understand or determine a fact or issue. 509 U.S. 579, 592
(1993). “This entails a preliminary assessment of whether the reasoning or
methodology underlying the testimony is scientifically valid and of whether that
reasoning or methodology properly can be applied to the facts in issue.” Id. at 592-93;
see also Fed. R. Evid. 702; Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999)
(extending Daubert to non-scientific testimony).
42
stage.13 In Wal-Mart, the Court offered limited dicta suggesting that a Daubert
analysis may be required at least in some circumstances. See 131 S. Ct. at 2553-
54 (“The District Court concluded that Daubert did not apply to expert testimony
at the certification stage of class-action proceedings. We doubt that is so . . . .”
(internal citation omitted)). In In re IPO, we disavowed our earlier statement
that “an expert’s testimony may establish a component of a Rule 23 requirement
simply by not being fatally flawed,” 471 F.3d at 41, without deciding whether or
when a Daubert analysis forms a necessary component of a district court’s
rigorous analysis. But see id. at 41 (noting that a district judge must be afforded
“considerable discretion to limit both discovery and the extent of the hearing on
Rule 23 requirements”).
We need not reach that question here either, as the record indicates that
even though the district court did not conduct a Daubert hearing, it considered
the admissibility of the expert testimony on the papers after USF had indicated
that it was “happy to rely on the papers.” S.A. at 608, 719; see United States v.
Williams, 506 F.3d 151, 161 (2d Cir. 2007) (noting that the “formality of a
13
The Supreme Court certified this precise question in Comcast Corp., see 133
S. Ct. 24 (mem.) (certifying question “[w]hether a district court may certify a class
action without resolving whether the plaintiff class has introduced admissible
evidence, including expert testimony, to show that the case is susceptible to awarding
damages on a class-wide basis”), but did not reach it because the defendant had not
objected to consideration of the expert testimony below, see 133 S. Ct. at 1435-36
(Ginsburg, J., dissenting).
43
separate hearing” is not always required for a district court to “effectively fulfill[]
its gatekeeping function under Daubert”). As its opinion makes clear, the
district court did make the requisite findings, concluding with respect to
Damico’s proposed damages model that it is appropriately “based on USF’s
alleged fraudulent pricing,” “provides for a universal calculation of damages”
because USF “almost always used an invoice to calculate prices,” and that “the
only feasibility-related issue is the potential need for manual input of certain
customers.” In re U.S. Foodservice, 2011 WL 6013551, at *15-16. Similarly the
court concluded that industry practice can be used to establish whether “USF
customer[s] had any reason to know of” USF’s VASP pricing. Id. at *11.14 We
therefore see no reason to disturb the district court’s considered conclusions on
the issue of expert testimony. See United States v. Farhane, 634 F.3d 127, 158
(2d Cir. 2011) (noting that Daubert inquiry is flexible, that “district courts enjoy
considerable discretion in deciding on the admissibility of expert testimony,” and
that “[w]e will not disturb a ruling respecting expert testimony absent a showing
of manifest error”).
14
USF’s argument that the district court erred in relying on Moore’s testimony
is actually a red herring. The district court cited Moore only once in its opinion –
referring to her only as a “purported expert” – and its analysis regarding the
predominance of industry standards over questions of individual customer knowledge
was not dependent on her declaration. See In re U.S. Foodservice, 2011 WL 6013551,
at *11.
44
C. Superiority
USF asserts, finally, that even if common issues predominate in this class
action, so that the district court did not err in reaching this conclusion,
certification was still improper because a class action is not a superior method
of adjudicating these claims. USF does not address any of the Rule 23(b)(3)
factors,15 however, and argues only that no economies would be achieved over
individual litigation because absent this action individual customers would not
bring suit. We do not find this reasoning persuasive.
As the Supreme Court has said, Rule 23(b)(3) class actions can be superior
precisely because they facilitate the redress of claims where the costs of bringing
individual actions outweigh the expected recovery. See Amchem Prods., Inc., 521
U.S. at 617. Here, substituting a single class action for numerous trials in a
matter involving substantial common legal issues and factual issues susceptible
to generalized proof will achieve significant economies of “time, effort and
15
Rule 23 instructs that matters pertinent to a finding of superiority include:
(A) the class members’ interests in individually controlling the
prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the
controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation
of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.
Fed. R. Civ. P. 23(b)(3).
45
expense, and promote uniformity of decision.” Fed. R. Civ. P. 23 advisory
committee’s notes. USF raises no significant argument to the contrary.
Conclusion
Despite the size and geographic scope of this class, close inspection of this
case reveals that any class heterogeneity is minimal and is dwarfed by common
considerations susceptible to generalized proof. The claims of each class member
will be governed by the same substantive law, either RICO or the UCC.
Moreover, the uniform nature of USF’s alleged fraud and USF’s concerted effort
to shield its scheme from scrutiny place each customer in the same position as
to these issues and ensure the cohesiveness of the class. USF itself, moreover,
relies heavily on common proof – namely, trade usage evidence – in articulating
its defense and has identified no individualized evidence or legal issues drawing
into question the district court’s conclusion that common issues will
predominate. We discern no abuse of discretion in the district court’s
determination that certification was appropriate. Accordingly, for the foregoing
reasons, we affirm the district court’s order certifying the class.
46