Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—3d Cir.: Law grads alleging fraud from school’s employment rates properly denied class status, (Aug 17, 2016)

By E. Darius Sturmer, J.D.

A group of Widener University School of Law graduates who alleged that the school had defrauded them by charging them tuition rates that were inflated on the basis of misleading employment statistics were not entitled to certification as a class, the U.S. Court of Appeals in Philadelphia has held. Because the graduates’ theory of the case was insufficiently supported by class-wide evidence, they could not establish that common questions would predominate over individual issues. Therefore, a denial of class certification by the federal district court in Newark was affirmed (Harnish v. Widener University School of Law, August 16, 2016, Chagares, M.).

The named plaintiffs, six former students who had graduated from one of Widener’s campuses in Pennsylvania and Delaware between 2008 and 2011 but had trouble obtaining employment afterward, asserted that the school’s publication of graduate placement rates that included part-time and non-legal positions but excluded alumni not looking for work violated the New Jersey Consumer Fraud Act (NJCFA) and Delaware Consumer Fraud Act (DCFA). The federal district court in Newark agreed, denying the school’s motion to dismiss the claims in March 2013.

The graduates’ further allegations that they suffered monetary damages from tuition overcharges based on those employment rates, however, marked the undoing of their class action, in the lower court’s view. The graduates could not satisfy one of the requirements for class certification required by Federal Rule of Civil Procedure 23(b)(3)—that common questions predominated over individual questions—because their damages expert’s proposed method of proving damages pointed to the variation in class members’ employment outcomes rather than establishing a class-wide theory of damages. Because some graduates did obtain full-time legal jobs, their damages would be different from those of graduates who did not, the court stated.

Class-wide damages evidence. The trial court did not apply an improperly burdensome legal standard by "scrutinizing [the graduates’] class-wide evidence prior to full merits discovery and demanding that they ‘conclusively prove class-wide damages,’ " the appellate court said. Its analysis of the proposed class-wide evidence "was not a merits determination," the appellate court explained, but was necessary to determine preliminarily whether the element of the claim would necessitate individual or common proof. The graduates’ criticism of the lower court’s focus on damages "gloss[ed] over" the distinction between "fact of damage" and "the measure/amount of damages." The general rule that individual damages calculations did not preclude class certification under Rule 23(b)(3) was not invoked in the instant case, according to the appellate court, because the trial judge’s finding had been concerned not merely with the graduates’ ability to calculate the precise measure of damages, but rather with their ability to demonstrate the fact of damage class-wide—core elements of liability under the NJCFA and DCFA.

Class members’ employment outcomes. The trial court’s assessment of class members’ own individual employment outcomes in its analysis of damages amounted only to harmless error, the appellate court decided, because the inflated-tuition theory of damages that was at issue in the case had not been adequately supported by class-wide evidence. Thus, class certification under Rule 23(b)(3) would have been precluded either way. Eliminating any focus on members’ employment outcomes would have removed only one individualized inquiry, the appellate court stated.

Inflated-tuition theory. The graduates’ argument that the trial court erroneously equated their non-reliance-based inflated-tuition theory of damages with a non-cognizable, reliance-based "fraud-on-the-market" theory was rejected. Regardless of the precise terminology applied to the case, the appellate court determined, the plaintiffs failed to satisfy Rule 23(b)(3)’s predominance requirement because the only class-wide evidence of damages that they offered supported a non-cognizable theory. If the lower court believed that the graduates were attempting to prove reliance class-wide by way of a "fraud on the market" presumption, it was only because they had placed market efficiency at issue by citing expert analysis suggesting that tuition at Widener and elsewhere responded to public information, including employment statistics.

Given their "out-of-pocket damages" claim, the graduates had to prove that Widener’s publication of misleading employment statistics worsened all class members by causing them by pay more for something than it was worth. Thus, they were proposing to prove that the misrepresentations empowered the school to charge more across the entire market. However, state courts had held that the ascertainable-loss and causal-relationship elements of the NJCFA and DCFA were not met by this kind of price-inflation theory. Recognizing price inflation as a cause of ascertainable loss was essentially the same as extending the fraud-on-the-market presumption to all consumer fraud cases. The distinction between a fraud-on-the-market theory and the asserted price inflation theory "[was] immaterial because the state courts have refused to recognize either theory outside the federal securities fraud context," the appellate court concluded.

The case is No. 15-3888.

Attorneys: Danielle F. Moriber, Rachel E. Simon, and David S. Stone (Stone & Magnanini LLP) for John Harnish, Justin Schluth, Robert Klein, Gregory Emond, Ayla O’Brien Kravitz, and Christina Marinakis. Suna Lee and Thomas F. Quinn (Wilson, Elser, Moskowitz, Edelman & Dicker) and Dennis J. Drasco (Lum Drasco & Positan LLC) for Widener University School of Law.

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