The Colorado Supreme Court recently issued several new decisions on class certification, one of which was in an insurance class action – State Farm Mutual Automobile Insurance Company v. Reyher, Case No. 10SC77, 2011 Colo. LEXIS 844 (Colo. Oct. 31, 2011).  This was one of many putative class actions that have been filed involving the use of databases by insurers to evaluate the reasonableness of medical bills.  These cases have led to mixed results recently – the Illinois Appellate Court recently found certification improper, but in Oregon there was a class certified and a large verdict against an insurer that was upheld (and is now the subject of a petition for certiorari to the U.S. Supreme Court), and Farmers entered into a nationwide settlement.  (For some background on these recent developments in this area, see my prior posts on August 10, 2011, June 12, 2011 and April 22, 2011.)  What I found significant about this decision was that the Colorado Supreme Court explained how the trial judge correctly resolved a factual dispute presented by the evidence at the class certification hearing.  The court gave some guidance on how to draw the line between what issues are appropriate for the trial judge to decide at class certification and what issues should be left for a jury at trial.

Here, the relevant provision of the Colorado No-Fault Act required payment of “all reasonable and necessary” medical expenses.  State Farm, in evaluating claims, contracted with a third-party vendor to compare bills received with a database of charges for services in the same geographic area. The dispute here involved a classic type of issue that is often at the center of an insurance class action.  The plaintiffs claimed that they could prove the case on a classwide basis because State Farm purportedly relied solely on the vendor’s database and the pricing used in the database was allegedly flawed.  State Farm claimed that its adjusters would review the information from the vendor’s database and then make their own independent judgment on each claim, reviewing all relevant information in the file and not blindly adhering to the third-party recommendation.  The trial court was persuaded by State Farm’s evidence and found that individual issues predominated.  The court of appeals disagreed, finding that the plaintiff had adequately shown that they could “conceivably prove” liability on a class-wide basis, if their version of the facts were correct, and that the trial court improperly decided the “merits.”  The Colorado Supreme Court held that the trial court was correct (or at least it did not abuse its discretion), and reversed the court of appeals.

The Colorado Supreme Court explained that:

The court of appeals thus accepted at face value Plaintiffs’ allegations that State Farm had a practice of relying solely on the database to assess the reasonableness of claims and reprice them accordingly. As a result, the court of appeals concluded that Plaintiffs could “conceivably prove” State Farm’s liability on a class-wide basis. This constituted error.

In Jackson, we explained that a trial court may consider disputes “that overlap with the merits only to the extent necessary to satisfy itself that the requirements of C.R.C.P. 23 have been met.” Slip op. at 27. The U.S. Supreme Court has similarly permitted district courts to analyze issues that overlap with the merits for the purpose of determining whether the plaintiff has established the class certification requirements. See Wal-Mart Stores, Inc. v. Dukes, __ U.S. __, 131 S.Ct. 2541, 2552 n.6 (2011). A trial court may not, however, go a step further and prejudge the merits of the case or otherwise screen cases at the class certification stage. Jackson, slip op. at 26-27.

In the instant case, whether State Farm relied solely on the database was an issue relevant to Plaintiffs’ class-wide theories of proof and the merits of the case. The trial court only considered this issue to the extent necessary to satisfy itself that Plaintiffs had failed to establish State Farm’s sole reliance on the database with common proof. Moreover, because the trial court undertook this analysis for the purpose of determining whether common issues predominate over individual issues, it did not violate Jackson or otherwise impermissibly prejudge the merits of the case.

. . .

[A]fter rigorously analyzing Plaintiffs’ class-wide proof, namely the nature of State Farm’s claim review process, the trial court was satisfied that State Farm did not have a class-wide practice of relying solely on the database. The trial court then determined that proof at trial would be predominantly individual — a determination within the trial court’s discretion. We defer to this case management decision and recognize that Plaintiffs’ interpretation of the No-Fault Act and theories of proving liability can be tested in individual trials on the merits.

Id. at *18-19.

The court essentially said that the trial judge can decide factual disputes relevant to class certification issues, even where they overlap with the merits, but cannot prejudge which party ultimately would win on the merits (i.e., who would win regardless of whether the case is tried individually or on a classwide basis).  This is an important win for the insurance industry (and class action defendants generally), and I see it as an indication that most state supreme courts, even ones that are not particularly conservative, are likely to follow the U.S. Supreme Court decision in Wal-Mart on issues such as the consideration of the merits at class certification.  That portion of Wal-Mart, although it appears in the 5-4 portion of Justice Scalia’s opinion, is probably something the entire Court or nearly all of it would agree on.  But putting that aside, I think it’s the correct result as a matter of procedural law because it keeps the decision on class certification in the hands of the judge, where it is supposed to be.  If the Colorado Court of Appeals were correct, it would mean that where the plaintiff had some evidence that the case might, on their theory, be subject to resolution in a class-wide manner, the trial judge would have to throw up his or her hands and leave it to the jury to resolve.  The jury would essentially be deciding the issue of class certification – the plaintiffs would try to show that State Farm had a practice of blindly adhering to a purportedly inaccurate database, and State Farm would present its evidence that its claims were handled on a case-by-case manner.  Putting that issue to the jury takes away the trial judge’s role under the procedural rule to decide whether the case properly can be tried on a classwide basis or must be tried on an individual basis. 

One issue that seems to be missing from the Colorado Supreme Court’s analysis is that a full analysis on a motion for class certification should take into account not only how the plaintiffs intend to prove their case at trial but also how the defendant intends to defend the case at trial.  The mere fact that a plaintiff has a viable theory on which the plaintiff’s prima facie case could be presented on a class-wide basis at trial does not mean that common issues predominate if the defendant has the legal right to defend against the class claims by presenting evidence on an individual, claim-by-claim basis, and such individual evidence that the defendant has the right to present at trial will overwhelm the common issues.  That point was made by the U.S. Supreme Court unanimously in Wal-Mart when it found “Trial by Formula” improper (see my June 21, 2011 post), but the Colorado Supreme Court did not address this issue.