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 case.

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 settlement class.

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 682-683.

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 different.

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 Ninth Circuits.

This case should be of interest to all insurers.

Copyright 1998 Mayer, Brown & Platt. This Mayer, Brown & Platt publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.