Unger v. Amedisys Inc.

• Decision Date: 17 February 2005
• Docket Number: No. 03-30965.,03-30965.
• Citation: 401 F.3d 316
• Parties: Frances UNGER, et al., Plaintiffs, William Patterson, lead plaintiff; Gordon Ellis, lead plaintiff, Plaintiffs-Appellees, v. AMEDISYS INC.; et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

401 F.3d 316

Frances UNGER, et al., Plaintiffs William Patterson, lead plaintiff; Gordon Ellis, lead plaintiff, Plaintiffs-Appellees, v. AMEDISYS INC.; et al., Defendants-Appellants.

No. 03-30965.

United States Court of Appeals, Fifth Circuit.

February 17, 2005.

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Marjorie Ann McKeithen (argued), Martin Stewart Bohman, McKeithen, McKeithen & Bohman, Baton Rouge, LA, Mark Levine, Stull, Stull & Brody, New York City, Lynn Lincoln Sarko, Juli Farris Desper (argued), Elizabeth A. Leland, Keller Rohrback, Seattle, WA, for Plaintiffs-Appellees.

James Richard Swanson (argued), Loretta Gallaher Mince, Correro, Fishman, Haygood, Phelps, Walmsley & Casteix, New Orleans, LA, for Amedisys Inc., Borne, Graham and Joffrion.

James A. Brown, Jon Charles Anjier (argued), Liskow & Lewis, New Orleans, LA, for United Nat. Ins. Co.

Appeals from the United States District Court for the Middle District of Louisiana.

Before REAVLEY, JONES and DENNIS, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This case, on review pursuant to Fed. Rule Civ. Proc. 23(f), implicates the standards and procedures used by district courts when considering certification of securities class actions dependent on the "fraud on the market" theory. See Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Like our brethren in the Third, Fourth, Seventh and Ninth Circuits, we hold that a careful certification inquiry is required and findings must be made based on adequate admissible evidence to justify class certification. Because the district court erroneously applied too lax a standard of proof to the plaintiffs' fraud-on-the-market allegations, we must vacate the class certification and remand.

BACKGROUND

Amedisys provides home health care, nursing, home infusion therapy, and ambulatory surgery services. The company's stock is traded on the NASDAQ Over The Counter Bulletin Board ("OTCBB"). Approximately ninety percent of Amedisys's revenue comes from Medicare. This case stems from the conduct of Amedisys and its directors in reporting profits based on new Medicare procedures.

Beginning October 1, 2000, Medicare implemented the Prospective Payment System ("PPS"), which altered the way Medicare compensated home health care companies. Under PPS, Medicare paid health care companies like Amedisys a portion of their fees in advance, based on forward-looking estimates of the cost of services. After the company provided the service, the remainder of the fee was paid; alternatively, if the initial payment proved too high, the company had to reimburse Medicare the difference. To comply with the new PPS procedures, Amedisys purchased and implemented new computer software.

Plaintiffs allege that Amedisys willfully manipulated the PPS program to inflate the estimated costs for certain health services; that it thereby artificially fueled company earnings; and, ultimately, that Amedisys's actions wrongfully enhanced its stock price. On June 13, 2001, Amedisys issued a curative statement, conceding that it had overstated revenues, but maintaining that the overstatements were inadvertently caused by the new software used with the PPS program. The stock price fell.

On August 21, 2001, Frances Unger filed suit against Amedisys, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. As is often the case, plaintiffs' lawyers solicited potential class members over the Internet and through newspaper advertisements. Several other suits were consolidated with Unger's and five individuals were chosen as lead plaintiffs. Class certification was requested for "all persons and entities who purchased the common stock of Amedisys, Inc. between November 15, 2000 through [sic] June 13, 2001." Discovery occurred to ascertain the qualifications of the proposed class representatives. At a hearing, the district court evaluated this evidence and the plaintiffs' sketchy evidence in support of the fraud-on-the-market basis for their presumed reliance on Amedisys's misrepresentations. The district court certified the class under Rule 23(b)(3).

The Amedisys defendants timely sought, and this court granted, an interlocutory appeal raising two issues embodied in the class certification: the adequacy of the lead plaintiffs' qualifications and the sufficiency of plaintiffs' evidence to support the fraud on the market presumption.

DISCUSSION

The class certification determination rests within the sound discretion of the trial court. Gulf Oil Co. v. Bernard, 452 U.S. 89, 100, 101 S.Ct. 2193, 2200, 68 L.Ed.2d 693 (1981). That discretion, however, must be exercised within the constraints of Rule 23. Id. A district court that premises its legal analysis on an erroneous understanding of the governing law has abused its discretion. U.S. v. Insaulgarat, 378 F.3d 456, 464 (5th Cir.2004); U.S. v. Mann, 161 F.3d 840, 860 (5th Cir.1998).

Rule 23 requires the claims of a proposed class to meet several requirements before the class can be certified. The party seeking certification bears the burden of establishing that all requirements of Rule 23 have been satisfied. Berger v. Compaq Computer Corp., 257 F.3d 475, 479-80 (5th Cir.2001). First, the district court must find what has been termed numerosity, commonality, typicality, and representativeness.¹ For class actions seeking money damages, like this one, the district court must make additional findings of predominance and superiority. Rule 23(b)(3). The predominance element requires a finding that common issues of law or fact "predominate over any questions affecting only individual members." Id. This requirement, although reminiscent of the commonality requirement of Rule 23(a), is "far more demanding" because it "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623-24, 117 S.Ct. 2231, 2249-50, 138 L.Ed.2d 689 (1997). Finally, a class action must afford the superior means to achieve "fair and efficient adjudication of the controversy." Rule 23(b)(3).

Recognizing the important due process concerns of both plaintiffs and defendants inherent in the certification decision, the Supreme Court requires district courts to conduct a rigorous analysis of Rule 23 prerequisites. Falcon, 457 U.S. 147, 161, 102 S.Ct. 2364, 2372, 72 L.Ed.2d 740 (1982). District courts are required to take a "close look" at the parties' claims and evidence in making its Rule 23 decision. Amchem, 521 U.S. at 615, 117 S.Ct. at 2246. Class certification hearings should not be mini-trials on the merits of the class or individual claims. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78, 94 S.Ct. 2140, 2152-53, 40 L.Ed.2d 732 (1974). At the same time, however, "[g]oing beyond the pleadings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues." Castano v. Am. Tobacco Co., 84 F.3d 734, 744 (5th Cir.1996). To assist the court in this process it may sanction controlled discovery at the certification stage. See FED.R.CIV.P. 23 Advisory Committee's Note to 2003 amendments. The plain text of Rule 23 requires the court to "find," not merely assume, the facts favoring class certification. Rule 23(b)(3).

Appellants first challenge the qualifications of the class representatives under Rule 23(a)(4). To meet Rule 23 requirements, the court must find that class representatives, their counsel, and the relationship between the two are adequate to protect the interests of absent class members. Stirman v. Exxon Corp., 280 F.3d 554, 562 (5th Cir.2002). Class representatives must satisfy the court that they, and not counsel, are directing the litigation. To do this, class representatives must show themselves sufficiently informed about the litigation to manage the litigation effort. Berger, 257 F.3d at 479.

Nothing in the record indicates that the district court abused its discretion with regard to the Rule 23(a)(4) requirement. The district court fully evaluated the evidence, which included depositions and testimony of the class representatives. The court was neither clearly erroneous in its factfindings nor in error legally. To address this argument further would pointlessly require us to recount the case-specific evidence.

The crux of this appeal lies in the legal basis for and sufficiency of evidence supporting the district court's finding of predominance under Rule 23(b)(3). The district court here expressed skepticism that Castano, which discussed fraud and other claims raised by a putative nationwide class of tobacco smokers, should govern securities fraud class actions. Its skepticism was unfounded. Castano is not logically so limited, and its reasoning has been approved in the securities fraud context by other circuit courts as well as by district courts in this circuit. Gariety v. Grant Thornton LLP, 368 F.3d 356, 362-64 (4th Cir.2004); Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 168 (3d Cir.2001); see also Johnston v. HBO Film Management., Inc., 265 F.3d 178, 186-88 (3d Cir.2001); Szabo v. Bridgeport Mach., Inc., 249 F.3d 672, 676-77 (7th Cir.2001); Lehocky v. Tidel Techs., Inc., 220 F.R.D. 491, 504 (S.D.Tex.2004); Krogman v. Sterritt, 202 F.R.D. 467, 473 (N.D.Tex.2001); Griffin v. G K Intelligent Sys., Inc., 196 F.R.D. 298, 303-04 (S.D.Tex.2000).

One of the lessons emphasized by Castano and related cases is that a district court must perform sufficient analysis to determine that class members' fraud claims are not predicated on proving individual reliance. If the circumstances surrounding each plaintiff's alleged reliance on fraudulent representations differ, then reliance is an issue that will have to be proven by each plaintiff, and the proposed class fails Rule 23(b)(3)'s predominance...