Today the Court granted certiorari in three cases of interest
to the business community. Amicus briefs in support of the petitioners are due
on August 6, 1998, and amicus briefs in support of the respondents are due on
September 8 (because September 5 is a Saturday and September 7 is Labor Day).
Any questions about these cases should be directed to Evan Tager (202-778-0618)
or Alan Untereiner (202-778-0656) in our Washington office.
1. Expert Engineering Testimony Concerning
Product Defect — Admissibility. Five years ago, the Supreme Court
substantially altered the standards governing the admissibility of expert
testimony in federal trials. In Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993), the Court held that under Rule
702 of the Federal Rules of Evidence district judges must act as "gatekeepers"
to ensure that expert testimony is based on a reliable methodology. The Court
also set forth a nonexclusive list of factors - including whether the expert's
methodology can be tested, has been the subject of peer review, and is generally
accepted in the relevant scientific community - that courts should consider in
determining whether expert testimony is based on a reliable methodology (and
thus is admissible). In Kumho Tire Co. v. Carmichael, No. 97-1709,
the Court granted review to decide whether the Daubert factors apply to
the testimony of an expert engineer concerning an alleged product defect.
The case arises out of an accident that occurred when the rear
tire of a minivan blew out. The injured occupants brought suit against the
manufacturer of the tire, claiming that the five-year-old tire had been
defectively designed and manufactured. Plaintiffs engaged a "tire failure
expert" who examined the remnants of the failed tire and concluded that the
failure resulted not from any abuse by the plaintiffs but from a defect in
either the tire's design or its manufacture. When that expert became ill, he
transferred the case to a colleague at his consulting firm who also claimed to
be a "tire failure expert" and who reached the same conclusion without first
examining the tire. The tire manufacturer moved to exclude this testimony on the
ground that it did not satisfy the minimum standards of evidentiary reliability
set forth in Daubert. Applying the Daubert factors, the district
court granted the motion and entered summary judgment in defendants' favor. 923
F. Supp. 1514 (S.D. Ala. 1996).
The Eleventh Circuit reversed. 131 F.3d 1433 (1997). The court
of appeals held that Daubert does not apply to "non-scientific" expert
testimony. Although acknowledging that "the laws of physics and chemistry are
implicated in the failure of [the] tire," the court stated that the testimony of
plaintiffs' engineering expert was non-scientific because it was based on the
witness's "experience" in "looking at the mangled carcasses of blown-out tires."
Id. at 1436; ibid. (noting that the expert "claims that he can
identify telltale markings revealing whether a tire failed because of abuse or
defect"). For that reason, the court explained, the admissibility of the expert
testimony should not be evaluated under the Daubert factors.
The Court granted review to resolve a deep conflict in the
circuits over how Daubert should be applied to expert engineering
testimony concerning product defect. The outcome of this case will have a
significant impact on product liability litigation in the federal courts.
Manufacturers of all types of products may wish to be heard in this important
2. Class Actions — Settlements — Limited Fund
— Right to Notice and Opportunity to Opt Out. In Amchem Products,
Inc. v. Windsor, 117 S. Ct. 2231 (1997), the Supreme Court struck
down the certification of an asbestos settlement class, concluding that common
issues did not predominate over individual ones and that, due to potentially
conflicting interests, the named plaintiffs did not fairly represent the class.
Today the Court granted certiorari in Ortiz v. Fibreboard Corp.,
No. 97-1704, to evaluate the propriety of the certification of another asbestos
Prior to Amchem, the Fifth Circuit had upheld the
certification of a mandatory, non-opt-out settlement class. 90 F.3d 963 (1996).
The Supreme Court vacated the Fifth Circuit's judgment and remanded for further
consideration in light of Amchem. On remand, the Fifth Circuit again
upheld the class certification. 134 F.3d 668 (5th Cir. 1998). The court
distinguished this case from Amchem in two ways. First, Amchem was
certified under Rule 23(b)(3), which requires that questions of law or fact
common to the class members predominate over questions regarding individual
class members and that a class action be superior to other methods of
adjudication. By contrast, the Fifth Circuit held, this case was certified under
Rule 23(b)(1)(B), which does not require predominance but instead requires a
finding that adjudications by individual class members would be dispositive of
the interests of non-parties or would substantially impair the ability of
non-parties to protect their interests. Because the district court had found
that there was a "limited fund" from which damage awards could be paid, the
Fifth Circuit concluded that class certification would prevent current class
members from obtaining earlier and larger awards to the detriment of future
claimants. Second, unlike in Amchem, there was no conflict of interest
among class members because the settlement provided that both present and future
claimants would receive awards based upon their individual damages.
Judge Jerry Smith dissented. Id. at 670. Noting that the
defendant Fibreboard, its insurers, and Owens-Corning, which had recently
purchased Fibreboard, all continued to be solvent, he maintained that a fund
"established by the settlement itself" is not the kind of "limited fund" that
would justify invocation of Rule 23(b)(1)(B). Id. at 671-674. Judge Smith
further argued that the due process requirement that individuals be afforded
notice of any proceeding affecting their rights can never be satisfied with
respect to future claimants who as yet may be unaware that they have been
injured. Id. at 674-675. Judge Smith also contended that there was a
conflict of interest that should have prevented certification because present
claimants would receive more than future claimants and that plaintiffs exposed
prior to 1959 would receive the same compensation despite the fact that their
claims had higher values. Id. at 677-678. Finally, Judge Smith argued
that Rule 23(a)'s commonality requirement was not satisfied by "the class
members' interest in the settlement itself," but rather "must derive from a
substantial legal or factual question that is necessary to the class members'
theories of recovery," a standard that he believed was not met. Id. at
The Court granted certiorari to consider whether a nationwide,
settlement class may be certified based upon a "limited fund" where the
defendant had not entered bankruptcy and assets may still be available to pay
for outstanding claims. The Court will also consider whether a non-opt out class
can properly be certified under Rule 23(b)(1)(B) to bind absent class members
based upon a limited fund theory. It may also refine its teachings in
Amchem regarding conflicts among class members and Rule 23(a)'s
requirement of commonality and typicality. Finally, it may shed additional light
on the requirement that class members receive adequate notice.
This case is important to the business community because it
will further clarify the requirements of Rule 23, and especially the
circumstances in which a class may be certified for settlement purposes.
3. Insurance — McCarran-Ferguson Act —
Applicability to RICO Actions. The Supreme Court granted certiorari today in
Humana, Inc. v. Forsyth, No. 97-303, to consider whether the
application of the Racketeer Influenced and Corrupt Practices Act (RICO), 18
U.S.C. § 1961, et seq., to the business of insurance invalidates, impairs
or supersedes state law regulating the same conduct, in contravention of the
McCarran-Ferguson Act, 15 U.S.C. § 1012(b), when the state and federal statutory
prohibitions are parallel, but the remedies provided are materially
This action arose out of a dispute regarding the administration
and interpretation of employee group health insurance policies sold by Humana
Health Insurance of Nevada (HHI). The policies contain a "co-payment" provision,
pursuant to which patients covered by the policies were obligated to pay all
charges up to a specified deductible and 20% of charges above the deductible, up
to a specified annual maximum. HHI was responsible for the remaining 80%.
The policies covered treatment at certain Nevada hospitals,
including the Humana Hospital-Sunrise (Sunrise Hospital), which is owned and
operated by Humana, Inc. (Humana). HHI negotiated substantial discounts with
Sunrise Hospital for services provided to its policy beneficiaries, which Humana
applied to its 80% obligation. Policy beneficiaries continued to be billed for
20% of the undiscounted hospital charges.
Plaintiffs filed suit on behalf of two classes of employees:
(1) those who bought the policies (the "Premium Payor Class") and (2) those who
made co-payments under the policies (the "Co-Payor Class"), alleging that HHI's
practice violated the Employee Retirement Income Security Act (ERISA), 29 U.S.C.
§ 1001, et seq., the Sherman Act, 15 U.S.C. § 1, et seq., and
RICO. Only the viability of the RICO claim is before the Supreme Court.
The RICO claim is predicated upon the allegation that HHI
concealed or misrepresented its discount arrangements with Sunrise Hospital with
the intent to defraud the Premium Payor Class into purchasing policies and the
Co-Payor Class into making excessive co-payments. The district court held that
this claim was barred by the McCarran-Ferguson Act, which provides that no
federal law of general applicability "shall be construed to invalidate, impair
or supersede any law enacted by any State for the purpose of regulating the
business of insurance" (15 U.S.C. § 1012(b)). 827 F. Supp. 1498 (D. Nev. 1993).
The district court noted that Nevada law vests the state Insurance Commissioner
with "exclusive jurisdiction" to regulate trade practices in the business of
insurance. Id. at 1521. In particular, Nevada law "specifically prohibits
the dissemination of false or misleading information relating to the sale of
policies or the benefits obtained thereto," but imposes only administrative
punishment, such as fines and withholding approval of insurance plans, for such
violations. Ibid. The legislature's judgment that such conduct was worthy
of only administrative sanctions, the district court reasoned, would be
invalidated, impaired or superseded if, for that same conduct, plaintiffs could
pursue RICO claims, and their attendant harsher penalties, which include treble
damages and attorney's fees. See ibid.
The Ninth Circuit reversed. 114 F.3d 1467 (1996). The court
agreed with the district court that the McCarran-Ferguson Act was enacted, in
part, to allow states to regulate the business of insurance free from
inadvertent preemption by federal statutes of general applicability, that the
conduct upon which the RICO count charge was predicated was the business of
insurance, and that such conduct was regulated by Nevada. Id. at
1479-1480. The court, however, disagreed with the district court's conclusion
that the application of RICO to these facts would invalidate, impair, or
supersede the Nevada law. Id. at 1479. Although the court recognized
"some symmetry" between RICO's private right of action and Nevada's
administrative scheme, it ruled that that symmetry did not create a conflict
between federal and state law, as here federal law merely provides an additional
remedy for conduct already prohibited by the state. Id. at 1480.
The Ninth Circuit's decision is consistent with those in the
First and Seventh Circuits (see Villafane-Neriz v. FDIC, 75 F.3d
727 (1st Cir. 1996); NAACP v. American Family Mut. Ins. Co., 978
F.2d 287 (1992)), but conflicts with those of the Sixth and Eighth Circuits,
both of which have held that the application of the harsh treble damages remedy
allowed by RICO would impair a state regulatory scheme that imposes a
substantially less severe penalty for the same conduct (see Kenty v.
BankOne, Columbus N.A., 92 F.3d 384 (6th Cir. 1996); Doe v.
Norwest Bank Minnesota, 107 F.3d 1297 (8th Cir. 1997)). The Solicitor
General, pursuant to the Court's invitation, filed an amicus brief
recommending that the Court grant certiorari to resolve the conflict. On the
merits, the Solicitor General weighed in on the side of the First, Seventh, and
This case should be of interest to all insurers.
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