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A recent opinion from the United States Court of Appeals for the Fifth Circuit illustrates the importance of carefully scrutinizing classwide liability theories, even where district courts have flexibility assessing classwide damages theories. See Sampson v. United Servs. Auto. Ass’n, No. 22-30351, --- F.4th ---, 2023 WL 6533181 (5th Cir. Oct. 6, 2023).

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According to the plaintiffs in Sampson, the defendant-insurer breached their insurance contracts and underpaid the “actual cash value” of total-loss automobile insurance claims by using a third-party valuation company instead of the National Automobile Dealers Association Guidebook (NADA) to value the totaled vehicles. The two named plaintiffs would have been paid more if their insurer had used NADA, but that was not the case for all insureds. So, the district court certified a class of insureds whose valuations from the insurer were less than NADA’s “clean retail” value.

On appeal under Fed. R. Civ. P. 23(f), the Fifth Circuit reversed the district court’s class certification order, finding that Rule 23(b)(3)’s predominance requirement was not satisfied. The court began by analyzing NADA values “in the damages context,” noting that the plaintiffs’ damages model compared the insurer’s valuations to NADA valuations without accounting for other valuation methods that were indisputably permissible. The plaintiffs argued that NADA was an acceptable source for calculating damages because the state’s total-loss statute specifically blessed total-loss valuations from “a generally recognized motor vehicle industry source” (La. R.S. § 22:1892B(5)(b)). According to the plaintiffs, NADA provided a permissible comparator for damages because “as a matter of law, NADA values&nbsp;are&nbsp;proof of actual cash value.”

But the Fifth Circuit recognized that even if NADA values could be treated as proof of actual cash value under the statute, it would follow that Kelley Blue Book (KBB) values, Edmunds values or values from any other “generally recognized used motor vehicle industry source” could also be treated as proof of actual cash value. This “creates an explosion of predominance issues because [defendant] has the due process right to argue, for each individual plaintiff, that damages should be determined by a different legally permissible method that would produce lower damages than NADA (or no damages at all).” For example, the Fifth Circuit noted that almost 10 percent of insureds from a claim file sample were (1) paid less than NADA value (meaning that they were included in the district court’s class) but (2) still paid more than Kelley Blue Book value (meaning that the insured was paid more than actual cash value as a matter of law under the plaintiffs’ theory).

The plaintiffs also argued that the district court had broad discretion to choose among imperfect damages models and that such models “need not be exact at the class certification stage.” The Fifth Circuit recognized this general principle, but it held that there was a more fundamental problem with this class: “[E]ven granting that the district court had wide discretion to choose among&nbsp;damages&nbsp;models at the class certification stage, [defendant] is correct to argue that its discretion is more limited in the context of determining&nbsp;liability.”

The plaintiffs’ breach of contract claims required proof of actual damages or injury. So, the plaintiffs’ choice of NADA (as opposed to other permissible “used motor vehicle industry sources”) was “not simply a choice among imperfect&nbsp;damages&nbsp;models.” Instead, it “is an arbitrary choice of a&nbsp;liability&nbsp;model.” And as the Fifth Circuit explained,&nbsp;“a district court’s wide discretion to choose an imperfect estimative-damages model at the certification stage does not carry over from the context of damages to the context of liability.”

Nor could the district court avoid these fundamental predominance problems by asserting that they involved “merits questions.” As the Fifth Circuit recognized, “Rule 23 is not a context where courts must assiduously separate certification from merits issues; they will often be deeply intertwined.” The plaintiffs were thus required to put forward evidence to show that NADA was “the” singular measure of actual cash value – as their liability model required. The court explained, “whether the district court can certify this class and put off [defendant’s] arguments for consideration at the merits stage is the&nbsp;question; it is not itself an answer to [defendant’s] arguments.”

The Fifth Circuit’s Sampson opinion shows the importance of carefully critiquing a plaintiffs’ liability theory. What may first appear to be individualized damages issues can really be individualized liability issues if the underlying causes of action require proof of injury to establish liability. And in federal court, individualized injury issues can also raise individualized questions about each class member’s Article III standing if some class members have no injury or zero damages. That too can implicate predominance. See Cordoba v. DIRECTV, LLC, 942 F.3d 1259, 1264, 1273-7 (11th Cir. 2019) (recognizing the “powerful problem under Rule 23(b)(3)’s predominance factor” if “the court will have to sort out those plaintiffs who were actually injured from those who were not.”).

The Fifth Circuit’s opinion also provides a reminder that things are not always as they appear on the surface. The plaintiffs repeatedly asserted that their class was permissible because the Fifth Circuit had previously considered and accepted the same damages model in Slade v. Progressive Sec. Ins. Co., 856 F.3d 408 (5th Cir. 2017). The Fifth Circuit in Sampson recognized that “Slade did bless a damages model much like this one” – and, in fact, the author of Sampson was also the author of Slade. But the Fifth Circuit had “scoured the record in Slade” and found “no indication that that court ever considered whether it was appropriate to determine damages by arbitrarily choosing NADA (or arbitrarily choosing KBB) over objections like the ones [defendant] raises here.” The insurer in Slade “simply did not raise this set of objections,” so Slade did not control.

Fifth Circuit Parses Crucial Distinction Between Class Liability Theories and Class Damages Theories