An all-star team of defense counsel led by Sidley Austin’s Carter Phillips derailed one of the largest pending antitrust class actions in the country on Friday when the U.S. Court of Appeals for the D.C. Circuit denied class certification in a case alleging that the largest freight railroads in the U.S. conspired to fix prices.

The case raises a thorny class action question: When can a class action include uninjured members? How many is too many?

The panel’s answer is understandable but unsatisfying. Despite what the lower court judge described as “strong evidence of conspiracy and classwide injury,” the railroads are likely to chug off unscathed—though at least one large customer, William Koch’s Oxbow Carbon & Minerals, is pursuing an individual lawsuit.

Going into the appeal, the railroads had cause to worry. Potential damages with trebling could have been stratospheric—billions of dollars. And the plaintiffs are represented by top tier lawyers including Quinn Emanuel Urquhart & Sullivan’s Kathleen Sullivan and Stephen Neuwirth and Hausfeld name partner Michael Hausfeld.

They built a compelling case that from 2003 to 2008, BNSF Railway Co., CSX Transportation Inc., Norfolk Southern Railway Co. and Union Pacific Railway Corp. conspired to increase revenue by imposing a fuel surcharge. 

Faced with decades of declining freight rates, railroad executives allegedly got together and agreed to impose the charge across their entire customer bases, “without the discounts, waivers, and offsets that were the hallmarks of earlier competition,” the plaintiffs said.

It worked. The lockstep fees significantly boosted revenue, reversing the historic downward trend in rail freight rates. 

U.S. District Court Judge Paul Friedman of the District of Columbia certified the class in 2012 but was reversed on appeal.

On remand, he nixed class cert. A key part of his reasoning? The class included too many uninjured members.

There are about 16,605 shippers in the proposed class, but an expert determined that 2,037 of them weren’t injured—or 12.7% of the class members.

The First and Ninth circuits have held that it’s acceptable to have a de minimis number of class members who weren’t harmed—but where to draw the line?

“There are only a few reported decisions in which courts have discussed this issue in concrete terms, but the ones that have suggest that 5% to 6% constitutes the outer limits of a de minimis number of uninjured class members,” Friedman wrote. “Absent some further way to reduce this number and segregate the uninjured from the truly injured, the court cannot find that ‘all or virtually all’ class members were injured under the predominance prong of Rule 23 (b)(3).”

On appeal, Sullivan (who declined comment) and Hausfeld argued that this was no reason to deny class cert.

For one thing, those uninjured 12%? Almost all of them are tiny customers, many with just a single shipment. Collectively, they account for less than one-tenth of one percent of the shipments and revenue at issue in the case, the plaintiffs said. 

“Any dispute over this tiny fraction of shipments cannot predominate over the common issue of injury for virtually all of the shipments and revenue,” they argued.

Nor did they concede the little customers were uninjured. “[T]here was substantial classwide proof that all of the shippers, including those with negative damages in the model, were in fact harmed,” they wrote. 

Besides, Sullivan and Hausfeld argued, “the supposedly uninjured class members can easily be excluded from recovery if they do not prove injury because they (and the amounts of their shipments) are already identified. There is no legal basis for preventing certification of a class simply because some small, known subset of class members might ultimately not succeed at trial.”

The railroads went all-out in hiring lawyers to shut down the case. 

Sidley’s Carter Phillips handled oral argument, joined on the briefs by partner Joseph Guerra and counsel Kathleen Moriarty Mueller.

Norfolk Southern tapped John Nannes and Tara Reinhart of Skadden, Arps, Slate, Meagher & Flom and Saul Morgenstern and Jennifer Patterson of Arnold & Porter.

Union Pacific was represented by Daniel Wall, Timothy O’Mara, Christopher Campbell and J. Scott Ballenger of Latham & Watkins and Thomas Isaacson of Covington & Burling.

BNSF hired Gibson, Dunn & Crutcher partners Randy Mastro, Theodore Boutrous Jr., Andrew Tulumello, Lucas Townsend, Veronica Lewis and Andrew LeGrand along with Joshua Soven of Wilson Sonsini Goodrich & Rosati and Samuel Sipe, Jr. and Linda Stein of Steptoe & Johnson LLP.

CSX went with Kent A. Gardiner, Shari Ross Lahlou and Luke van Houwelingen of Crowell & Moring.

If that wasn’t firepower enough, the U.S. Chamber of Commerce, represented by Anton Metlitsky of O’Melveny & Myers, weighed in on their side as an amicus.

“This is not a proper class action,” the defense counsel wrote. “Class certification is never appropriate in antitrust cases when there are individualized injury and damages issues of the magnitude presented here and where the plaintiffs’ purported common proof is so obviously flawed.”

The D.C. Circuit agreed.

“In assessing how many individual adjudications are too many, both the district court and the parties invoke cases addressing the question of when, if ever, a class may include concededly uninjured members,” wrote Judge Gregory Katsas for the panel, which also included Chief Judge Merrick Garland and Judge Judith Rogers.

“Strictly speaking,” they continued, “this case does not present that question, for the plaintiffs here insist that each member of the proposed class was injured. Nonetheless, the cited cases bear some similarity to this one: Uninjured class members cannot prevail on the merits, so their claims must be winnowed away as part of the liability determination. And that prospect raises the same kind of question at issue here—when does the need for individualized proof of injury and causation destroy predominance?”

The plaintiffs’ best case was a class action over the acid reflux medication Nexium, where a small percentage of the class, due to brand loyalty (It’s “the Purple Pill”!), would have bought the drug even if a cheaper generic alternative had been available. The First Circuit held that uninjured class members could be weeded out by having everyone fill out an affidavit stating whether they would have purchased the branded drug or a generic alternative.

Here, it’s much more complicated. “[T]he defendants intend to contest whether any of the 2,037 shippers suffered injury as a result of any conspiracy. And the question presented in these individual challenges—regarding impacts on shippers of different sizes, shipping different products in different geographic markets, with different transportation options and different degrees of leverage—would be far more complex than the single unitary question (branded or generic?) at issue in Nexium,” the D.C. Circuit held.

Their conclusion: “Given the need in this case for at least 2,037 individual determinations of injury and causation, the district court did not abuse its discretion in denying class certification on the ground that common issues do not predominate.”