Sacred Heart Health Systems, Inc. v. Humana Military Healthcare Services, Inc.

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
MARCH 30, 2010
No. 08-16430
JOHN LEY
________________________
CLERK

D. C. Docket No. 07-00062-CV-3-MCR-EMT

SACRED HEART HEALTH SYSTEMS, INC.,
ST. VINCENTS HEALTH SYSTEM, INC., et al.,

Plaintiffs-Counter
Defendants-Appellees,

versus

HUMANA MILITARY HEALTHCARE SERVICES, INC.,

Defendant-Counter
Claimant-Appellant.

________________________

Appeal from the United States District Court
for the Northern District of Florida
_________________________

(March 30, 2010)

Before BLACK, MARCUS and HIGGINBOTHAM,* Circuit Judges.

*
Honorable Patrick E. Higginbotham, United States Circuit Judge for the Fifth Circuit,
sitting by designation.
MARCUS, Circuit Judge:

Defendant Humana Military Healthcare Services, Inc., a health maintenance

organization, appeals the district court’s order certifying a class of approximately

260 hospitals in six states, which claim that Humana systematically underpaid

them for medical services they rendered to veterans under a federal program, and

thereby breached their individual network provider agreements. Humana

challenges the district court’s determination pursuant to Fed. R. Civ. P. 23(b)(3)

that common questions -- in particular the question of whether the federal

government forced Humana to pay the hospitals lower rates -- would predominate

over individual ones, and that a class action would be a superior method of

resolving the instant dispute. After careful review, we agree with Humana that

many important uncommon questions raised by this litigation overwhelm the one

common issue and render the case unsuitable for class treatment, and that the

district court’s contrary conclusion was an abuse of discretion. We, therefore,

reverse the district court’s certification order and remand for further proceedings

consistent with this opinion.

I.

Humana is a managed care organization that contracts with hospitals and

other care providers to offer health care services to its members. In 1995, Humana

2
won a Managed Care Support (“MCS”) contract with the federal government

pursuant to its CHAMPUS/TRICARE (“TRICARE”) program, which offers

healthcare services for military retirees and their dependents.1 Pursuant to the

contract, Humana entered into individual network agreements with numerous

healthcare providers located in TRICARE Regions 3 and 4 to provide outpatient

non-surgical services to TRICARE beneficiaries. At the time, Regions 3 and 4

included the states of Alabama, Florida, Georgia, Mississippi, South Carolina,

Tennessee, and parts of Louisiana and Arkansas. Under each network agreement,

the hospital would render services to TRICARE beneficiaries and Humana would

reimburse the hospital in accordance with the terms of the agreement. The

government would then pay Humana at fixed rates for healthcare costs, subject to

periodic redetermination using a risk-sharing formula by which Humana and the

government would share increased costs or savings.

The reimbursement dispute at the heart of this case is permeated by two

central and related terms, one or both of which appear in many of the payment

provisions of the hospitals’ network agreements. The first is the term “CHAMPUS

1
CHAMPUS, the “Civilian Health and Medical Program for the Uniformed Services,” was
effectively superseded by TRICARE. See Defendant’s Statement of Facts, Doc. No. 180, ¶ 3; see
also Bd. of Trs. of Bay Medical Ctr. v. Humana Military Healthcare Servs., Inc., 447 F.3d 1370,
1372 (Fed. Cir. 2006). The agreements at issue in this case make varying reference to TRICARE
and CHAMPUS, but there is no distinction for purposes of this appeal, and the terms are used here
interchangeably.

3
allowable”; the parties agree that the term refers generally to any allowable

maximum payment or payment formula set by TRICARE, and it appears to have

meant billed charges or a flat rate prior to 1999. The second term is “CMAC,”

which is short for “CHAMPUS Maximum Allowable Charges,” and which

designates a specific schedule of fees patterned after the so-called “resource-based

relative value scale” (“RBRVS”) used by Medicare and other private payers. See

Report of Dr. Zachary Dyckman, at 2.2 The parties agree that “CMAC” -- or

“CMAC rates” -- is one form of a “CHAMPUS allowable.”

Prior to October 1, 1999, Humana paid each of the network providers for

hospital outpatient radiology and laboratory services either at a percentage of the

charges the hospitals billed or at a flat rate. Humana appears to have done so either

because that is what the particular network agreement required, or because the

network agreement limited payments to the “CHAMPUS allowable,” which at the

time was understood to mean billed charges or a flat rate. See, e.g., 1 Hr’g Tr. 26.

By a written communication dated November 18, 1999, however, Humana

informed the network providers that payment for outpatient laboratory and

radiology services rendered after October 1, 1999, would be made on the basis of

CHAMPUS Maximum Allowable Charges -- i.e., CMAC rates. See, e.g., Letter

2
CMAC is referred to interchangeably here as TMAC, which is short for “TRICARE
Maximum Allowable Charges.”

4
from Richard J. Mancini, Director, Humana Network Development, to CFO,

Baptist Medical Center of Nassau, dated Nov. 18, 1999, Def. Ex. 163.3 The change

in payment policy almost uniformly resulted in lower payments to the providers

than under the billed charges/flat fee structure.

Humana justified the change on the ground that the TRICARE Management

Activity (“TMA”), a unit of the Defense Department that administers TRICARE

for the government, had imposed CMAC as the new “CHAMPUS allowable.”

Whether or not that was true -- a question that goes solely to the merits of this case

-- Humana announced the change in a one-page letter that it claims was sent to all

of the hospitals, and which a large majority of the hospitals acknowledge receiving.

The letter read in relevant part as follows:

In accordance with TRICARE/CHAMPUS policy, payment of all
outpatient technical and professional laboratory and radiology claims
will be made on the basis of CHAMPUS Maximum Allowable
Charges (CMAC). Beginning October 1st, 1999, CMAC rates will
apply to claims payment for these services performed in the hospital
outpatient setting.

See, e.g., Letter from Richard J. Mancini, Director, Humana Network

Development, to CFO, Baptist Medical Center of Nassau, dated Nov. 18, 1999,

Def. Ex. 163.

3
Humana continued to implement the change to CMAC rates through 2003; it applied
CMAC to outpatient therapy on March 1, 2001, to medicine and ambulance services on January 1,
2002, and to other miscellaneous services on April 2, 2003. See 1 Hr’g Tr. 27, June 16, 2008.

5
 A small number of hospitals -- approximately nine -- initially objected to the

change in payment methodology, but apparently agreed to accept CMAC payments

when reminded again of the federal policy-based explanation offered in the

November 1999 letter. No hospital appears to have terminated its contract with

Humana as a result of the change in payment policy, even though many of the

provider agreements contained a termination clause that either party could invoke

after a defined notice period. See 2 Hr’g Tr. 238, June 17, 2008.

In August 2002, however, the Baptist Hospital of Florida and the Healthcare

Authority of the City of Huntsville, Alabama, sued Humana in the United States

District Court for the Northern District of Florida, asserting that the 1999 change in

payment methodology constituted a breach of their network agreements. The

plaintiffs sought to represent a class of similarly situated hospitals in former

Regions 3 and 4. See Baptist Hospital, Inc. v. Humana Military Healthcare Servs.,

Inc., Case No. 3:02cv317 (N.D. Fla.) (Collier, J.) (“the Baptist Action”). Class

counsel in that case, who represent the hospitals in this case as well, voluntarily

dismissed the Baptist Action without prejudice in January 2003. See Baptist

Action, Docs. 54, 55. In June 2003, the same two plaintiffs, joined this time by the

Bay Medical Center of Florida, sued Humana in the same district court, alleging

essentially the same claims. Bd. of Trs. of Bay Med. Ctr. v. Humana Military

6
Healthcare Servs., Inc., Case No. 5:03cv144 (N.D. Fla.) (Rodgers, J.) (“the Bay

Medical Action”). That case was dismissed pursuant to settlement prior to a ruling

on class certification.

Finally, on February 5, 2007, seven plaintiffs -- Florida providers Sacred

Heart Health Systems, St. Vincent’s Health System, Southern Baptist Hospital,

Baptist Medical Center of the Beaches, Baptist Medical Center of Nassau, together

with Our Lady of the Lake Hospital of Louisiana and Phoebe Putney Memorial

Hospital of Georgia -- filed the action underlying this appeal, once again in the

Northern District of Florida. Seven months later, they moved for class certification

in order to answer the question of whether TRICARE had in fact “mandated”

Humana’s use of CMAC rates.

To help it determine whether certification was appropriate, the district court

held a three-day evidentiary hearing at which the parties offered considerable

testimony and documentary evidence. This included copies of the more than 300

contracts that fell within the class definition; evidence of TMA policy before and

after November 1999, when Humana announced the change in reimbursement

methodology; evidence of Humana’s and the hospitals’ understanding of the term

“CHAMPUS allowable” in the contracts where that term appeared; and the parties’

understanding of other contractual provisions, including those governing

7
termination, the timeliness of claims for improper reimbursement, and waiver of

defenses to breach.

At the Rule 23 hearing, Humana focused its effort to defeat certification on

the terms of the payment clauses themselves, which, although far from the only

portions of the contracts relevant to the determination of liability, obviously are

central to resolution of the merits of this case. There can be no dispute that those

clauses contain a wide variety of language. We discuss that language at length

below, but for present purposes, it is enough to observe that some of the contracts

contain unqualified reference to billed charges or a flat rate, others limit payment

to “any CHAMPUS allowable” and are accompanied by a parenthetical phrase

containing one or more such “allowables,” still others make partial or exclusive

reference to CMAC, and a number of others contain language unique to

themselves.

Humana also pointed to a variety of terms other than the payment clauses

that might affect whether a breach of the reimbursement provisions is enforceable.

These include termination clauses allowing one or both parties to end their

contractual relationship after a specified time -- the relevant question being

whether a failure to invoke the provision could indicate a forfeiture of the right to

object later on -- and waiver clauses specifying whether and when a party’s

8
forbearance may be construed as a relinquishment of contractual rights.

Finally, Humana emphasized -- and there is no dispute -- that the laws of

each of the six states where the class member hospitals are located would apply to

the construction of the network agreements, and to the interpretation of any

extrinsic evidence.4 Humana argued that examination of the varied individual

contracts and the extrinsic evidence relevant to the affirmative defenses of

ratification and waiver would overwhelm the common question of whether the use

of CMAC was mandated by federal policy.

The hospitals responded by introducing testimony of Humana officials

indicating, essentially, that the terms of the individual agreements had played no

role in Humana’s decision to use CMAC rates (and therefore should play no role in

determining whether the use of CMAC was legal under the agreements). In this

vein, Humana’s Medical Director, Dr. John Crum, testified that although he “fe[lt]

it[] [was] very important to comply with the terms of the contracts, . . . [he] really

had nothing to do with that,” 1 Hr’g Tr. 29, and “did not give consideration to the

language in th[e] contract[s]” before suggesting the policy change, id. at 30.5

4
None of the hospitals identified as falling within the certified class are located in South
Carolina or Arkansas, both of which fell at least partly within former TRICARE Regions 3 and
4.
5
Dr. Crum in fact stated that, had he known Humana was required to pay the negotiated rates
set forth in the hospital contracts, he still would have recommended the application of CMAC rates,
but before doing so he would have had someone check the terms of each hospital’s contract to “see

9
Crum said he relied for this on Humana’s Director of Network Development,

Richard J. Mancini. Id. Mancini, however, also disclaimed consideration of the

contracts, stating that his role was merely “to send the letters of notice to providers

and do what I needed to do with our folks in the field so they could understand th[e

change] . . . [in the event] somebody came back and wanted to renegotiate.” Id. at

31.

Finally, Mr. Robert Shields, who was the CEO of Humana Military at the

time of the reimbursement change, stated that he had not “review[ed] [any]

network[] provider contracts” to see if they “would have ostensibly required the

network providers to accept the CMAC fee schedule.” Id. Nor did he recall any

discussion of the contracts “taking place in the decision to apply CMAC fee

schedules to hospital radiology and laboratory services.” Id.

Separately, the hospitals urged that even if the varying contractual terms

were relevant, they still could be grouped into six categories that might be useful in

creating subclasses. One category, for example, contained only contracts with

unqualified reference to billed charges or flat rates, while others included contracts

that limited payment to some form of the “CHAMPUS allowable,” or that referred

expressly to CMAC rates. Notably, however, one of the six categories was a

if there was a problem with it.” Crum Dep. 60:7-9, Dec. 20, 2007.

10
“miscellaneous” one containing over twenty contracts.

To all of this, Humana responded that its reasons for making the payment

change did not conclusively, or even marginally, answer the question of whether

some or all of the varied network agreements nonetheless authorized payment at

CMAC rates. Further, Humana drew attention to individualized liability issues

flowing from the parties’ course of dealings. Thus, for example, it presented

evidence that approximately thirty hospitals, all claiming that their 1999 contracts

did not authorize payment of CMAC absent a federal directive, subsequently

entered into new contracts with Humana containing the same payment language,

notwithstanding their awareness that Humana had implemented its CMAC

payment policy. Humana argued that this acceptance of the new status quo was an

affirmative ratification of its policy -- and, notably, would require examination of

individualized extrinsic evidence. Similarly, Humana highlighted the

aforementioned evidence that, among all the hospitals in the certified class, only

about nine of them objected to the use of CMAC, suggesting that the rest of the

hospitals waived their rights to challenge the CMAC payments.

Humana ultimately made the following broad claims in the district court, all

of which it renews on appeal: first, that the significant variation in the material

terms of the network agreements -- which appear to support Humana’s contractual

11
defenses to varying degrees and in different ways -- alone defeated predominance

and superiority; second, that certain of the contracts contained ambiguities, which,

under the laws of each of the six relevant states, would require recourse to extrinsic

evidence of the parties’ pre- and post-contract negotiations and dealings; third, that

even as to contracts whose material terms were unambiguous, the evidence would

show that many of the hospitals either ratified the change to reimbursement at

CMAC rates, or waived any claim of breach by knowingly accepting CMAC

payments for over ten years (both defenses raising a host of issues requiring

examination of individualized extrinsic evidence); and, finally, that the laws of the

six relevant states differed materially in their treatment of the extrinsic evidence.

The district court rejected each of these claims and certified a single class

comprised of:

All institutional healthcare service providers in TRICARE former
Regions 3 and 4 which had contracts with Humana to provide
outpatient non-surgical services to CHAMPUS/TRICA RE
beneficiaries as of November 18, 1999, excluding those network
providers who contractually agreed with Humana to submit any such
disputes with Humana to arbitration.

Order Granting Motion for Class Certification (“Certification Order”) at 20, Sacred

Heart Health Sys. v. Humana Military Healthcare Servs., Inc., Case No. 3:07cv62

MCR (N.D. Fla. Sept. 25, 2008) (Rogers, J.). The district court declined to create

subclasses based on either the variations in contract language or differences in

12
applicable state law, although it noted that if division proved necessary, the use of

either or both sets of subclasses -- six subclasses in each category -- likely would

suffice. See id. at 18 & n.22. Humana timely petitioned for interlocutory review

pursuant to Rule 23(f), and we granted the petition. See Fed. R. Civ. P. 23(f).

II.

“The decision to certify is within the broad discretion of the district court,”

and we review for an abuse of that discretion. Klay v. Humana, Inc., 382 F.3d

1241, 1251 (11th Cir. 2004) (citation omitted).

A district court abuses its discretion if it applies an incorrect legal
standard, follows improper procedures in making the determination,
or makes findings of fact that are clearly erroneous. A district court
may also abuse its discretion by applying the law in an unreasonable
or incorrect manner. Finally, an abuse of discretion occurs if the
district court imposes some harm, disadvantage, or restriction upon
someone that is unnecessarily broad or does not result in any
offsetting gain to anyone else or society at large. In making these
assessments, we review the district court’s factual determinations for
clear error, and its purely legal determinations de novo.

Id. (citation omitted). Recognizing the “awesome power of a district court” in

controlling the availability of the class action mechanism, id., we require that

decisions to certify a class rest on a “rigorous analysis” of the requirements of Rule

23, Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1266 (11th Cir. 2009) (“A district

court must conduct a rigorous analysis of the rule 23 prerequisites before certifying

a class.” (citation omitted)).

13
 Humana does not dispute that the requirements of Rule 23(a), which apply to

all class actions, have been satisfied in this case.6 Rather, the sole issue in this

appeal is whether the district court abused its discretion in determining that the

prerequisites of Rule 23(b)(3) had been met. A class may be maintained pursuant

to Rule 23(b)(3) if “the court finds that the questions of law or fact common to

class members predominate over any questions affecting only individual members,

and that a class action is superior to other available methods for fairly and

efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3). In this appeal,

the parties raise the same arguments concerning predominance and superiority as

they did in the district court. We address them in turn.

A.

“Whether an issue predominates can only be determined after considering

what value the resolution of the class-wide issue will have in each class member’s

underlying cause of action.” Rutstein v. Avis Rent-A-Car Sys., Inc., 211 F.3d

1228, 1234 (11th Cir. 2000). Common issues of fact and law predominate if they

“‘ha[ve] a direct impact on every class member’s effort to establish liability’ that is

6
Pursuant to Rule 23(a), every class action must have the following four characteristics:
“(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions
of law or fact common to the class; (3) the claims or defenses of the representative parties are
typical of the claims or defenses of the class; and (4) the representative parties will fairly and
adequately protect the interests of the class.” Fed. R. Civ. P. 23(a).

14
more substantial than the impact of individualized issues in resolving the claim or

claims of each class member.” Vega, 564 F.3d at 1270 (emphasis added) (quoting

Klay, 382 F.3d at 1255). If “after adjudication of the classwide issues, plaintiffs

must still introduce a great deal of individualized proof or argue a number of

individualized legal points to establish most or all of the elements of their

individual claims, [their] claims are not suitable for class certification under Rule

23(b)(3).” Klay, 382 F.3d at 1255. In practical terms, while “[i]t is not necessary

that all questions of fact or law be common,” id. at 1254 (citation omitted), “the

addition or subtraction of any of the plaintiffs to or from the class [should not]

have a substantial effect on the substance or quantity of evidence offered.” Id. at

1255 (quoting Alabama v. Blue Bird Body Co., 573 F.2d 309, 322 (5th Cir. 1978)).

To assess the impact of a common question on the class members’ claims, a

district court obviously must examine not only the defendant’s course of conduct

towards the class members, but also the class members’ legal rights and duties. A

plaintiff may claim that every putative class member was harmed by the

defendant’s conduct, but if fewer than all of the class members enjoyed the legal

right that the defendant allegedly infringed, or if the defendant has non-frivolous

defenses to liability that are unique to individual class members, any common

questions may well be submerged by individual ones. This principle emerges

15
clearly from our case law and that of other circuits. See, e.g., Vega, 564 F.3d at

1272 (“Without the existence of a common contract, of course, there can also be no

commonality with respect to whether T-Mobile’s conduct . . . , even if undertaken

pursuant to a uniform policy, constituted a breach of every class member’s

particular employment contract.”); Gene & Gene LLC v. Biopay LLC, 541 F.3d

318, 326-29 (5th Cir. 2008) (reversing class certification predicated on defendant’s

“common course of conduct, fax blasting,” where the district court “did not explain

how th[is] common course of conduct . . . would affect a trial on the merits,” and

where a trial in fact would require individualized proof as to whether each class

member had consented to receipt of faxes); Broussard v. Meineke Disc. Muffler

Shops, Inc., 155 F.3d 331, 340 (4th Cir. 1998) (reversing certification based on

defendant’s alleged breach of franchising agreements, where the agreements

variously supported or undermined the plaintiffs’ theory of liability); Sprague v.

Gen. Motors Corp., 133 F.3d 388, 398 (6th Cir. 1998) (en banc) (reversing

certification of claim by General Motors retirees that company breached their

contracts by reducing their benefits at the same time and in the same manner,

where each “contract” arose from an individual “side deal” with the company).

While acknowledging that it provided every hospital with the same

justification for changing its payment formula -- namely, a new mandate from the

16
federal TRICARE authority -- Humana argues that any questions arising from this

common course will be overwhelmed by individualized issues flowing from

variations in the contractual terms and the parties’ course of dealings. For a

number of reasons that we discuss in turn, we agree.

1.

In the first place, claims for breach of contract are peculiarly driven by the

terms of the parties’ agreement, and common questions rarely will predominate if

the relevant terms vary in substance among the contracts. It is the form contract,

executed under like conditions by all class members, that best facilitates class

treatment. See, e.g., Klay, 382 F.3d at 1263 (reversing certification of breach of

contract action involving numerous different contracts, and observing that “this is

not a situation in which all plaintiffs signed the same form contract”); Kleiner v.

First Nat’l Bank of Atlanta, 97 F.R.D. 683, 692 (N.D. Ga. 1983) (noting that

“claims arising from interpretations of a form contract appear to present the classic

case for treatment as a class action,” and collecting numerous cases in which such

claims were certified). Absent such ideal conditions, and particularly in cases

involving numerous or different contracts, we have “hesita[ted] to conclude that

common issues of fact predominate,” Klay, 382 F.3d at 1263, and we have

required at the threshold that all of the subject contracts be “materially similar.”

17
See Allapattah Servs. v. Exxon Corp., 333 F.3d 1248, 1261 (11th Cir. 2003). See

also Sharkus v. Blue Cross of Greater Phila., 431 A.2d 883, 886-87 (Pa. 1981)

(“[A] class action may be maintained even when the claims of members of the

class are based on different contracts where the relevant contractual provisions

raise common questions of law and fact and do not differ materially.”).

We discerned such material similarity in Allapattah Services v. Exxon Corp.,

where we upheld the certification of a class of 10,000 Exxon gas station owners

who claimed that Exxon had breached their individual sales agreements.

Specifically, the owners claimed that Exxon had secretly begun overcharging them

by failing to implement the terms of its “Discount for Cash” program, which

required that the company offset a surcharge on credit card gasoline sales with a

corresponding reduction in the wholesale price of gasoline. 333 F.3d at 1252.

While each dealer had a different contract, each contract “included express

language to the effect that any breach of a provision by either party of a failure to

carry out the contract provisions ‘in good faith’ was conclusively deemed to be

substantial.” Allapattah Servs., Inc. v. Exxon Corp., 61 F. Supp. 2d 1308, 1311

(S.D. Fla. 1999), aff’d, 333 F.3d 1248 (11th Cir. 2003). Exxon thus owed to all

dealers “[t]he duty to set the wholesale price in good faith, which incorporate[d]

the duty not to charge its dealers twice for the cost of credit card processing.” Id.

18
at 1314 n.7. “Because all of the dealer agreements were materially similar[,] . . .

[w]hether [Exxon] breached [its] obligation[s] was a question common to the class

and the issue of liability was appropriately determined on a class-wide basis.” 333

F.3d at 1261.

We can discern no such similarity here, either as to the payment provisions,

or as to other terms like the termination and waiver clauses that bear on Humana’s

potential liability. We begin with the payment clauses, which appear throughout

the more than 300 contracts that fall within the ambit of the class definition.

Humana argues, and we agree, that the differences in these provisions are reducible

linguistically to a minimum of around 33 variants. In the district court, the

plaintiffs attempted to organize these variants into six categories -- Groups A

through F -- and their effort provides a useful starting point in assessing the

similarity of the agreements’ terms. After examining the contracts, however, we

conclude that, notwithstanding the possibility of some further grouping, the

diversity of the material terms is overwhelming.

The plaintiffs’ Group A consists of contracts that require reimbursement for

outpatient services at a percentage of billed charges, or at the particular hospital’s

“usual and customary charges less a [XX]% discount or the applicable inpatient per

19
diem, whichever is less.”7 Group A represents a total of approximately 127

contracts whose payment clauses, at least, are materially similar in referring only to

some form of the hospitals’ billed charges.8 So far, so good.

Group B is also numerous, with approximately 99 contracts, but is

considerably less uniform (and differs sharply in substance from Group A). Each

contract in Group B provides for reimbursement based in some manner on hospital

charges or flat rates, but each contract also limits reimbursement as follows:

Notwithstanding the above, Hospital agrees that in no event shall
payments made for medical services provided to Beneficiaries exceed
[XX] percent ([XX]%) of any CHAMPUS allowable . . . . ”

See, e.g., Def. Ex. 144, at 10 (Attachment B). Directly after this clause is a

parenthetical phrase beginning with “e.g.,” and specifying two or more

reimbursement formulas. Approximately 84 of the contracts read “(e.g., DRG,

CMAC, or billed charges)”; 3 read “(e.g., DRG, CMAC)”; 5 read “(e.g., DRG,

CMAC, or billed charges),” where “CMAC” is stricken through by hand; 1 reads

“(e.g., DRG, CMAC or outpatient charges)”; and 6 read “(e.g., DRG or billed

7
The district court entered a protective order to prevent disclosure of, inter alia, the
actual percentage rates in the network agreements, which Humana says are proprietary business
information. Because of that determination, and recognizing that the actual percentage rates are
not relevant to this appeal, we adopt Humana’s practice of replacing such numbers with “XX.”
8
In referring to the number of contracts here, we mean each contractual relationship
between one of hospitals and Humana, even if in some cases the same agreement governs the
relationships of multiple hospitals within a particular health system.

20
charges).”

Humana and the hospitals dispute the meaning of the “e.g.” clauses. The

hospitals argue that while “[s]ome of the ‘notwithstanding clauses’ contain

different examples of various CHAMPUS allowables within the parenthetical, . . .

the phrase itself is the same for each,” and the payment clauses therefore are

materially similar. Plaintiffs’ Statement of Facts, ¶ 47. At the Rule 23 hearing, the

district court essentially agreed, observing that its “interpretation of the language,

the plain language, [was] that[] [it is] an example of CHAMPUS allowable, and

[that] . . . [f]or example, DRG or CMAC could be billed charges, could be ASC,

whatever is provided for in the [Code of Federal Regulations].” 2 Hr’g Tr. 156.

Humana argued that the “e.g. clauses” may affect the hospitals’ rights to receive a

particular reimbursement formula.

We agree with Humana that the conclusion reached by the hospitals and the

district court is not readily apparent -- at least not sufficiently so to homogenize the

variant contracts for purposes of class certification. At a minimum, the conclusion

is undermined by the parties’ decision, after “extensive discussions,” id. at 12, to

strike the word “CMAC” from the “e.g. clause” in all five of the contracts for the

Baptist Medical Center group in Jacksonville, Florida. If the allowables in

parentheses were understood as mere examples, there would have been no legal or

21
practical purpose in striking them. The testimony of Phillip Boyce, who in 1999

was Senior Vice President of Managed Care at Baptist Jacksonville-St. Vincent

Hospitals, and who was responsible for managing the TRICARE contracts, id. at 6,

illustrates the point:

Counsel: You eliminated the CMAC so that the limitation in what you
might be reimbursed would not be capped at CMAC but would be
the billed charges, and that Humana could not use CMAC to cap
your charges for outpatient services; is that correct?

Mr. Boyce: That’s correct.

Id. at 75.

Whether or not striking of the word “CMAC” supports the hospitals’ or

Humana’s position, the very act -- coupled with the substantial variety in the “e.g.

clauses” themselves -- suggests that the clauses may not have the same legal

meaning. Consistent with this suggestion, the Baptist-Jacksonville hospitals

reacted to the change in payment methodology by stating: “Since we will be

receiving 100% of CMAC for the lab and radiology, we are inclined to accept it

and not open up the contract.” Def. Ex. 164; 2 Hr’g Tr. 50.

Group C comprises approximately 65 hospital contracts with payment

clauses that limit reimbursement to the “CHAMPUS allowable” or some portion

thereof. Yet, whereas approximately 51 of these contracts merely provide for some

discount off of the “CHAMPUS allowable,” 13 -- those for the IASIS Healthcare

22
Corporation hospitals and the Tenet Health Systems hospitals -- also contain the

familiar “notwithstanding clause” characteristic of Group B, with the notable

declaration that “[t]he CHAMPUS allowable for hospital outpatient services is the

HOSPITAL’s billed charges,” see, e.g., Def. Ex. 54, Amend. 2, ¶ D (emphasis

added). The existence of this latter provision raises a peculiar possibility: namely,

that even the “CHAMPUS allowable” was not necessarily understood before 1999

to be the hospitals’ billed charges. Needless to say, this possibility creates a

measure of tension among the various members of the plaintiffs’ Group C.9

Group C also contains one contract -- that of Egleston Children’s Hospital in

Atlanta, Georgia -- which provides that “[o]utpatient rates are discounted off the

current C[HAMPUS] allowable fees,” and which sets forth a list of such discounts.

Def. Ex. 84. Even ignoring the dubious relationship between the structure of this

contract and that of the other members of Group C, it is facially unclear whether

the phrase “C[HAMPUS] allowable fees” refers to the “CHAMPUS allowable,” or

to CHAMPUS Maximum Allowable Charges, i.e., CMAC rates. In short, Group C

9
The special definitional clause is not the only evidence of a distinction in pre-1999
contracts between the CHAMPUS allowable and billed charges. For example, in a document titled
“Interim Agreement” between Humana and Baptist Memorial Health Care Corporation of
Mississippi, executed on May 13, 1996, the typed text reads: “For the Hospitals listed on Exhibit
C, Hospital agrees to accept XX% of the CHAMPUS DRG allowable for the inpatient services and
a XX% Discount from the Hospital charges for outpatient Hospital services.” Ex. 109. A
handwritten correction, however, initialed by the signatory parties, replaces the phrase “Discount
from the Hospital charges” with “of the CHAMPUS allowable charges,” indicating a perceived
distinction between the two. Id.

23
also is not internally uniform.

Contract Groups D and E are unified principally by the presence in both of

language that, as the plaintiffs concede, absolves Humana of liability. Group E,

with 31 contracts, consists entirely of post-1999 agreements that expressly provide

for reimbursement at CMAC rates. These contracts fall squarely within the class

definition, but the hospitals concede that their language precludes a theory of

breach based on Humana’s payment of CMAC rates. See Answering Br. at 50

(“[T]he plaintiffs are not claiming a breach of contract for any subsequent contract

where the parties have agreed specifically to be paid CMAC rates.”).

Group D, for its part, contains 19 variously pre- or post-November 1999

contracts that refer to both CMAC and the “CHAMPUS allowable,” and in some

cases to billed charges. These contracts provide that laboratory and radiology

services are to be reimbursed at either a percentage “of CMAC” or a percentage

“of CMAC or 60% of Billed Charges,” and that “[a]ll other outpatient” is to be

reimbursed at a percentage of billed charges. In a variation on the Group B

contracts, each of these provisions is accompanied by a “notwithstanding clause”

and an “e.g. clause” listing various CHAMPUS allowables. We have difficulty

seeing what glue holds Group D together at all.

Finally, we come to Group F, which the plaintiffs have appropriately labeled

24
“miscellaneous.” As that label suggests, the provisions of these contracts have

little in common with each other or with those of the preceding groups. We

highlight only a few examples.

The network agreement of AMI Brookwood Hospital in Alabama (and

apparently only that agreement) qualifies its specific payment formulas with the

following phrase: “Notwithstanding the above, Hospital agrees to accept as

payment in full, for all outpatient services and/or procedures not specifically listed

above to Members, the Hospital’s usual and customary charges less a [XX]%

discount from the Standard C[HAMPUS] payment when provided to C[HAMPUS]

participants.” Def. Ex. 6 (emphasis added). The phrase “Standard CHAMPUS

payment” is reminiscent of the phrase “CHAMPUS allowable fees,” but bears an

even more ambiguous relationship to the core vocabulary of this case, i.e., to the

phrases “CHAMPUS allowable,” CMAC rates, or any other commonly understood

denomination.10

Two other contracts -- those of Dale Medical Center and Riverview

Regional Medical Center in Alabama -- similarly provide for reimbursement of

outpatient services, including “Emergency Room/CT/MRI/Outpatient,” at “[XX]%

of present [or “established”] C[HAMPUS] Rates.” Def. Exs. 13 & 22. Different

10
The AMI Brookwood agreement was executed on June 29, 1998, and was in force at the
time Humana began reimbursing at CMAC rates. Def. Ex. 6.

25
still -- and apparently no less ambiguous -- is the formula of the Woodland

Community Hospital in Alabama, which went into effect on October 11, 1996, and

which was in effect at the time of the switch to CMAC rates: it provides for

reimbursement of outpatient services at a “[XX]% discount from the standard

CHAMPUS allowable charges.” Def. Ex. 28. It is quite unclear from the record in

this case whether the quoted language refers to the “CHAMPUS allowable” or,

with its conspicuous definite article, to “the . . . CHAMPUS [maximum] allowable

charges,” i.e., CMAC.

The language of some contracts provides greater guidance: one, for example

-- that of the Houston Medical Center, Def. Ex. 86 -- provides for payment “at

[XX]% of prevailing CHAMPUS maximum allowable rates (as defined in 10/1/93

Federal Register).” The cited section of the Federal Register, however, contains

not a table of rates, but an array of provisions generally prescribing a method of

calculating appropriate CMAC rates. See 58 Fed. Reg. 51227-01, 1993 WL

384025 (Oct. 1, 1993). And another contract within the same hospital group -- the

agreement of Perry Hospital, effective at the time of the CMAC switch -- clouds

this relative clarity. It contains essentially the same reference to the 1993 Federal

Register entry, but provides further that

[n]otwithstanding the above, Hospital [agrees] that in no event shall
payments made for medical services provided to Beneficiaries exceed

26
 [XX] percent ([XX]%) of any CHAMPUS allowable (e.g., DRG,
[ASC], CMAC or billed charges).

Def. Ex. 86, at Attachment A. How these provisions interact is highly unclear.

On balance, we think the substantial variation found in the material terms of

the many contracts makes this case a close relative of Broussard v. Meineke

Discount Muffler Shops, 155 F.3d 331 (4th Cir. 1998), in which the Fourth Circuit

vacated a $390 million jury verdict that was tainted by the district court’s improper

certification of numerous and disparate breach of contract claims. The plaintiffs in

Broussard were franchisees who claimed that the franchisor, Meineke, had violated

provisions in their franchise agreements governing the use of funds in an

advertising account. In holding that variation in the agreements’ material terms

precluded a finding of commonality, id. at 340-44 -- much less a finding under the

“far more demanding” predominance standard, Amchem Prods., Inc. v. Windsor,

521 U.S. 591, 624 (1997) -- the court stated unequivocally that “plaintiffs simply

cannot advance a single collective breach of contract action on the basis of

multiple different contracts” where those contracts “contain[] materially different .

. . language,” Broussard, 155 F.3d at 340.

In illuminating the material differences in the franchise agreements, the

Fourth Circuit explained that

[a]pproximately half of the contracts signed by class members . . . .

27
 contain[] . . . language [that is] more favorable to Meineke[,]
[whereas] . . . . about a quarter of the contracts, including some with
the [more favorable language], contain language . . . [that] makes
plaintiffs’ case stronger . . . . [Y]et another variation among [the
contracts] . . . rais[es] a wholly distinct set of interpretive issues.

Id. It was therefore “[e]vident[] . . . [that] the breach of contract action that [was]

the cornerstone of plaintiffs’ case raise[d] numerous uncommon questions.” Id.

Yet, the plaintiffs had been allowed to proceed to trial, and “to stitch together the

strongest contract case based on language from various [contracts], with no

necessary connection to their own contract rights.” Id. at 344.

Like the contracts in Broussard, the hospitals’ agreements contain a variety

of payment terms that variously bolster or detract from Humana’s non-frivolous

argument that CMAC rates are contractually valid. Also within this spectrum are

terms that are not readily classifiable; these singular and enigmatic provisions

further erode what marginal textual similarity exists here. They also open the door,

under the law of the six relevant states, to consideration of extrinsic evidence11 -- a

topic that we take up below in the context of Humana’s affirmative defenses.

While it acknowledged “some differences among the contracts’ terms,” the

11
See, e.g., Higgins v. Tenn. Coal, Iron, & R.R. Co., 62 So. 774, 774 (Ala. 1913); Ace Elec.
Supply Co. v. Terra Nova Elec., Inc., 288 So. 2d 544, 547 (Fla. Dist. Ct. App. 1973); Ga. Code Ann.
§ 24-6-3(b); Derbes v. GBS Props., LLC, 902 So. 2d 1109, 1112 (La. Ct. App. 2005); IP
Timberlands Operating Co. v. Denmiss Corp., 726 So. 2d 96, 110 (Miss. 1998); Coble Sys., Inc. v.
Gifford Co., 627 S.W.2d 359, 362 (Tenn. Ct. App. 1981).

28
district court declined to address those differences and the potentially disparate

contractual rights they create, holding that the contracts were “materially similar

with respect to the determination of the liability issues raised by [the hospitals’]

breach of contract claims.” Certification Order, at 17. By its own explanation, the

district court so held because Humana “allegedly applied the same lower fee

schedules to all of its providers at the same time for the same reason.”

Certification Order, at 17. But by focusing solely on the defendant’s course of

conduct, the district court overlooked the substantial variation in the contracts and

the corresponding rights and duties they provide the plaintiffs. Vega, 564 F.3d at

1272. Those rights and duties are in fact very disparate.

Finally, we cannot accept the district court’s proposal to use subclasses

corresponding to the hospitals’ six categories of payment clauses. Certification

Order, at 8 n.12, 18 n.22. We recognize the long and venerated practice of creating

subclasses as a device to manage complex class actions, but the six subclasses

proposed here mask a staggering contractual variety. The sixth proposed subclass -

- a miscellaneous residue of numerous payment clauses that are insusceptible of

ready classification -- alone is fatal to predominance. When this “potpourri”

subclass, as Humana has termed it, is broken down into its disparate component

parts, the illusion of uniformity gives way to nearly thirty subclasses.

29
 Common sense tells us that “[t]he necessity of a large number of subclasses

may indicate that common questions do not predominate,” Manual for Complex

Litigation, § 21.23 (4th ed. 2004); see also Harding v. Tambrands Inc., 165 F.R.D.

623, 630 (D. Kan. 1996) (“The potential for numerous different subclasses weighs

against a finding of predominance of common issues.”). Here, the necessary

recourse to a “miscellaneous” subclass readily indicates the lack of a predominant

question.

Ultimately, after examining the many individualized payment clauses

contained in the network agreements, we perceive a “distinct possibility that there

was a breach of contract with some class members, but not with other class

members.” Broussard, 155 F.3d at 340. Subclasses are no answer to this problem,

meaning that the efficiency of a class action will be lost entirely unless the

hospitals are allowed “to stitch together the strongest contract case based on

language from various [contracts], with no necessary connection to their own

contract rights.” Broussard, 155 F.3d at 344. The hospitals, however, may not

lawfully “amalgamate” their disparate claims in the name of convenience. Id. at

340. The Rules Enabling Act, 28 U.S.C. § 2072 -- and due process -- prevents the

use of class actions from abridging the substantive rights of any party. Yet, from

the record before us, an abridgment of the defendant’s rights seems the most likely

30
result of class treatment. By glossing over the striking differences in the material

terms of the agreements, the district court created an “unnecessarily high risk,”

Vega, 564 F.3d at 1279, of such unlawful results, and thereby abused its discretion.

2.

While the powerful variations in the contractual terms alone are fatal to the

certified class, we also consider Humana’s argument that extrinsic evidence

relevant to the determination of liability is likely to overwhelm the common

question. The problem of extrinsic evidence is best illustrated by reference to

Humana’s affirmative defenses to breach, which by definition will arise even if the

question of breach is resolved in the hospitals’ favor.

Even the most common of contractual questions -- those arising, for

example, from the alleged breach of a form contract -- do not guarantee

predominance if individualized extrinsic evidence bears heavily on the

interpretation of the class members’ agreements. The risk of voluminous and

individualized extrinsic proof runs particularly high where a defendant raises

substantial affirmative defenses to breach. In Coca-Cola Bottling Co. of

Elizabethtown, Inc. v. Coca-Cola Co. (“Elizabethtown”), 95 F.R.D. 168 (D. Del.

1982), for example, an independent bottler claimed that Coca-Cola had breached

contractual provisions concerning the pricing of soft-drink syrup, and moved for

31
certification of a class of similarly situated companies. Even though the “contracts

to be construed [were] identical in their material parts,” the court refused to certify

a class because “myriad . . . contract issues lurk[ed] in th[e] lawsuit, . . . [i]n

particular, [the fact that] each unamended bottler’s course of dealing with [Coca-

Cola] would be relevant to construing the contract language, inasmuch as it could

indicate knowledge of or acquiescence in [Coca-Cola’s] pricing policies.” Id. at

178 (emphasis added).

A related difficulty inheres in the application of multiple states’ laws to the

extrinsic evidence. See, e.g., Bowers v. Jefferson Pilot Financial Ins. Co., 219

F.R.D. 578, 583-84 (E.D. Mich. 2004) (holding that class certification was not

appropriate in breach of contract action against insurer, where law of the state

where insured was domiciled would govern, and there was significant variation in

the laws of the relevant states with respect to the use of extrinsic evidence). Faced

with this very problem, the court in Elizabethtown held that any common issues

would be “submerged by the facts surrounding the course of dealing under each

individual contract, and the application of different states’ laws to each set of

facts.” 95 F.R.D. at 178.

In this case, Humana advances two principal affirmative defenses, each of

which assumes for purposes of argument that the TMA did not mandate the use of

32
CMAC rates as the CHAMPUS allowable, and each of which is, at the very least,

non-frivolous. In the first place, Humana argues that many hospitals ratified the

use of CMAC rates either by renegotiating their contracts under the same terms

after accepting CMAC payments, or by making statements indicating acceptance of

an oral modification to their agreements. Thus, for example, named plaintiff

Phoebe Putney Hospital amended its network agreement in July 2000, around

seven months after Humana informed it of the switch to CMAC rates, but the

amended agreement included precisely the same reimbursement language as its

predecessor, under which Phoebe Putney alleges a breach. Def. Ex. 94.

St. Tammany Hospital of Louisiana also signed a revised agreement several

months after the change in reimbursement policy, but despite the change, the

agreement contained the same familiar cap on payments at a percentage “of any

CHAMPUS allowable (e.g., DRG or CMAC).” Def. Ex. 105. And, on two

subsequent occasions, Humana and St. Tammany modified their agreement to refer

expressly to CMAC or TMAC, at least arguably suggesting that CMAC was

understood ab initio as an acceptable payment method. Def. Ex. 105. On balance,

it appears that as many as thirty other hospitals in the certified class similarly

amended their agreements after the change in payment policy without altering the

reimbursement language, and without protesting the CMAC payments.

33
 Humana also cites its dealings with St. Vincent’s and Baptist Jacksonville

hospitals in support of a similar argument, namely, that some hospitals orally

modified their agreements to provide for CMAC reimbursements. On September

7, 1999, the parties concluded an agreement, referenced above, that contained a

“notwithstanding clause” in which the term “CMAC” was stricken through. When

Humana announced the change to CMAC reimbursements in November 1999,

however, the hospitals’ negotiator told Humana that “[s]ince we will be receiving

[a percentage] of CMAC for the lab and radiology [outpatient services], we are

inclined to accept it and not open up the contract.” Def. Ex. 164, at 2. Humana

claims that, assuming the contract did not already incorporate CMAC, this

statement is evidence that the parties’ subsequent dealings did so.

Second, Humana contends that a majority of the hospitals -- apparently all

but around nine of them -- waived their rights to assert a breach by accepting

CMAC payments without protest, in many cases for many years. As noted, many

of the hospitals also accepted the new payment formula despite having the right to

terminate their network agreements upon 60 or 90 days’ notice. See 1 Hr’g Tr.

152-53, 167; Def. Ex. 94 (contracts of named plaintiff Phoebe Putney Hospital);

Def. Ex. 93 (contracts of Northside Hospital).

The district court minimized the impact of Humana’s defenses on the

34
outcome of the predominance inquiry, stating that the defenses “largely involve

individualized damages issues, not liability issues.” Certification Order, at 17. We

disagree. As an initial matter, we note that under the laws of each of the six

relevant states, the defenses of ratification and waiver can operate to preclude

liability itself.12 More generally, we have recognized that where the defendant

“proffer[s] individualized and varying evidence to defend against claims of

individual class members by showing what they knew or should have known

about” an allegedly illegal course of conduct of which they complain, “significant

questions concerning ultimate liability [may] remain for many class members[,] . . .

such . . . [that] the common questions [will] not predominate.” Vega, 564 F.3d at

1274; see also Elizabethtown, 95 F.R.D. at 178 (explaining that the determination

of whether class members acquiesced in defendant’s allegedly illegal pricing

scheme raised individualized questions of liability that defeated predominance).

In any event, we find no support in the text of Rule 23 or interpretive case

12
Concerning the defense of ratification, see, for example, Meadow River Lumber Co. v.
Univ. of Ga. Research Found., Inc., 503 S.E.2d 655, 661-62 (Ga. Ct. App. 1998); Frazier v. Harper,
600 So. 2d 59, 62 (La. 1992); Valley Fid. Bank & Trust Co. v. Cain P’ship, Ltd., 738 S.W.2d 638,
639-40 (Tenn. Ct. App. 1987); Dusenberry v. First Nat’l Bank of Birmingham, 122 So. 2d 716,
721-22 (Ala. 1959); Toffel v. Baugher, 111 So. 2d 290, 291 (Fla. Dist. Ct. App. 1959); and Wood
Naval Stores Export Ass’n v. Latimer, 71 So. 2d 425, 430 (Miss. 1954). With respect to waiver, see,
for example, Retail Developers of Ala., LLC v. E. Gadsden Golf Club, Inc., 985 So. 2d 924, 930
(Ala. 2007); Arbogast v. Bryan, 393 So. 2d 606, 608-09 (Fla. Dist. Ct. App. 1981); Ga. Farm Bureau
Mut. Ins. Co. v. Bishop, 464 S.E.2d 9, 11 (Ga. Ct. App. 1995); Rogers v. Horseshoe Entm’t, 766 So.
2d 595, 602 (La. Ct. App. 2000); Canizaro v. Mobile Commc’ns Corp. of Am., 655 So. 2d 25, 29
(Miss. 1995); and Gold Kist, Inc. v. Pillow, 582 S.W.2d 77, 79-80 (Tenn. Ct. App. 1979).

35
law for the district court’s rigid distinction between liability and damages. While

we have recognized that “the presence of individualized damages issues does not

prevent a finding that the common issues . . . predominate,” Klay, 382 F.3d at 1259

(emphasis added) (quoting Allapattah, 333 F.3d at 1261), it is never the plaintiff’s

burden to show that “all questions of fact or law [are] common, [only that] some

questions are common and that they predominate over individual questions.” Id. at

1254 (emphasis added).

Individualized damages issues are of course least likely to defeat

predominance “where damages can be computed according to some formula,

statistical analysis, or other easy or essentially mechanical methods.” Id. at 1259-

60. The relevant inquiry, however, is still whether questions of “liability to the

class . . . predominate[] over . . . individual issues relating to damages,” Allapattah,

333 F.3d at 1261 -- which is merely a more focused way of asking whether

common issues predominate over individual ones. Plainly, the issues of

ratification and waiver raised in this case cannot be “computed according to [a]

formula, statistical analysis, or other . . . mechanical method[].” Klay, 382 F.3d at

1259-60. It was a clear error of judgment to brush them aside as mere “damages”

issues.

The hospitals’ final attempt to salvage the district court’s predominance

36
finding also falls flat. They claim, on the merits, that because Humana’s

justification for the switch to CMAC payments was a sham, any ratification,

acquiescence, or waiver cannot have been voluntary, knowing, or intelligent, and

therefore must have been ineffective. In their answering brief on appeal, the

hospitals translate this claim into an argument for class certification; specifically,

they point out that the validity of their theory turns on whether Humana’s

justification was knowingly false, which of course requires answering the common

question and presumably causes that question to predominate further. The

hospitals’ claim of a fraud or misrepresentation, however, raises yet more

uncommon questions, as is best illustrated in the context of waiver.

The hospitals are correct that if waiver were obtained by fraud, it would

negate any intentionality on their part, and therefore negate the waiver itself. But

fraud is a peculiar species of falsity; it is the “intentional misrepresentation of a

material fact made for the purpose of inducing another to rely, and on which the

other reasonably relies to his or her detriment.” Charles v. Fla. Foreclosure

Placement Ctr., LLC, 988 So. 2d 1157, 1160 (Fla. Dist. Ct. App. 2008) (emphasis

added) (citing Lopez-Infante v. Union Cent. Life Ins. Co., 809 So. 2d 13, 15 (Fla.

Dist. Ct. App. 2002)); cf. Ga. Farm Bureau Mut. Ins. Co. v. Bishop, 464 S.E. 2d 9,

11 (Ga. Ct. App. 1995) (reversing finding of waiver as a matter of law with respect

37
to claim for recovery of unpaid wages, where there was “evidence that plaintiff did

not know and could not reasonably have discovered the shortfall in his

compensation”). In defending its waiver theory against the hospitals’ theory of a

misrepresentation, Humana would seek to discover not only whether the hospitals

examined for themselves if the payment change was justified by federal policy,

but, in case they did not, whether their blind reliance on Humana was reasonable.13

Humana presumably would do so by recourse to individualized material such as

email communications, meeting minutes, and the recollections of past and present

officials -- as it already has with respect to several hospitals.

Beyond these formidable barriers to certification, there may be considerable

variation in the state law under which any extrinsic evidence would have to be

scrutinized. Although there is no categorical bar to class treatment where the law

of multiple states will apply, courts have expressed some skepticism of such

treatment, particularly in substantive areas where the content of state law tends to

differ. See Elizabethtown, 95 F.R.D. at 177 (collecting cases for the proposition

13
Some of the hospitals may not be able to claim at all that they were “tricked” into
accepting CMAC. For example, Our Lady of the Lake representative Rene Ragas testified at the
certification hearing that he had never heard of any “mandate[]” requiring Humana to reimburse the
hospital based on CMAC rates at the relevant time. 1 Hr’g Tr. 199-200. Our Lady of the Lake
began accepting CMAC rates without protest after the change in payment policy, id. at 131, 193, and
absent such a representation by Humana, the hospital would be hard-pressed to argue that it was
induced to do so on the basis of a misrepresentation. In any event, Humana would be entitled to
probe the facts surrounding each network agreement to ascertain whether the inducement theory
holds water.

38
that “[c]ourts have often refused to certify class actions when they involve the law

of more than one state”). Undeniably, it falls to the plaintiff to demonstrate the

homogeneity of different states’ laws, or at least to show that any variation they

contain is manageable. Klay, 382 F.3d at 1262.

Notably, in cases implicating the law of all fifty states, “[t]he party seeking

certification . . . must . . . provide an extensive analysis of state law variations to

reveal whether these pose insuperable obstacles.” Cole v. Gen. Motors Corp., 484

F.3d 717, 724 (5th Cir. 2007) (emphasis added) (quotation marks and citations

omitted); see also Klay, 382 F.3d at 1262. Without deciding what level of analysis

is appropriate in a case such as this one where the laws of fewer than all fifty states

are at issue, it is clear that more than a perfunctory analysis is required. “The issue

can only be resolved by first specifically identifying the applicable state law

variations and then determining whether such variations can be effectively

managed through creation of a small number of subclasses grouping the states that

have similar legal doctrines.” Walsh v. Ford Motor Co., 807 F.2d 1000, 1017

(D.C. Cir. 1986) (citation omitted). It is “the court’s duty to determine whether the

plaintiffs have borne their burden where a class will involve multiple jurisdictions

and variations in state law.” Spence v. Glock, Ges.m.b.H., 227 F.3d 308, 313 (5th

Cir. 2000).

39
 The district court acknowledged that there might be “some variations in state

law,” but, because the law of “only six states would be involved,” it thought the

common issues “should not be overwhelmed by distinctions in individual state

law.” Certification Order, at 18. The district court further thought that if

distinctions began to overwhelm the common issues, the use of six subclasses

corresponding to the six applicable bodies of state law would be an expedient

solution. As with the variations in contractual language, however, we can find no

serious analysis of the variations in applicable state law relative to Humana’s

affirmative defenses. See Spence, 227 F.3d at 313. That procedural error “ha[s]

resulted in a critical legal deficiency -- insufficient evidence of predominant

common legal issues,” id., and is further evidence of an abuse of discretion.

Moreover, a brief survey of the relevant states’ laws reveals the importance

of a “rigorous analysis” of each aspect of class certification, including the question

of whether variations in state law will destroy predominance. We again refer to the

law of waiver to illustrate the point. All six of the relevant states define waiver as

the voluntary or intentional relinquishment of a known right.14 This uniformity,

however, unravels beyond the definition. Of particular relevance to Humana’s

14
See, e.g., Mullis v. Bibb County, 669 S.E.2d 716, 720 (Ga. Ct. App. 2008); Channel v.
Loyacono, 954 So. 2d 415, 425 (Miss. 2007); Bell v. Birmingham Broad. Co., 82 So. 2d 345, 347
(Ala. 1955); Arbogast v. Bryan, 393 So. 2d 606, 607-08 (Fla. Dist. Ct. App. 1981); Gold Kist, Inc.
v. Pillow, 582 S.W.2d 77, 79 (Tenn. Ct. App. 1979); Breaux v. Laird, 88 So. 2d 33, 38 (La. 1956).

40
waiver defense is the extent to which conduct alone may be deemed a waiver of

known rights. Among the six relevant states, there are varying degrees of

solicitude or hostility towards this method of proof.

Under Florida law, “[i]t is axiomatic that . . . . [a] party may waive any rights

to which he or she is legally entitled, by actions or conduct warranting an inference

that a known right has been relinquished.” Hammond v. DSY Developers, LLC,

951 So. 2d 985, 988 (Fla. Dist. Ct. App. 2007) (quotation marks and citations

omitted); see also Torres v. K-Site 500 Assocs., 632 So. 2d 110, 112 (Fla. Dist. Ct.

App. 1994) (seller waived notice provision in contract by failing to promptly

invoke it, and by allowing buyers to proceed with performance under contract).

“Although waiver does not arise from forbearance for a reasonable time, it may be

inferred from conduct or acts putting one off his guard and leading him to believe

that a right has been waived.” Arbogast v. Bryan, 393 So. 2d 606, 608 (Fla. Dist.

Ct. App. 1981) (party’s failure to timely speak out and enforce a claim to

commissions due from a transaction constituted waiver). In other words, “[w]here

a party fails to declare a breach of contract, and continues to perform under the

contract after learning of the breach, it may be deemed to have acquiesced in an

alteration of the terms of the contract, thereby barring its enforcement.” Acosta v.

Dist. Bd. of Trs. of Miami-Dade Cmty. Coll., 905 So. 2d 226, 229 (Fla. Dist. Ct.

41
App. 2005) (citation omitted) (holding that medical students claiming breach of

contract by university for tuition increases acquiesced, “through their conduct . . .

[of] commencing the program, satisfying all their course requirements, and

eventually graduating, . . . [in paying] the higher tuition”).

By contrast, Louisiana heartily discourages its courts from finding waiver.

While its quantum of proof is not uncommon -- conduct indicating waiver must be

“so inconsistent with the intent to enforce the right as to induce a reasonable belief

that it has been relinquished,” Tate v. Charles Aguillard Ins. & Real Estate, Inc.,

508 So. 2d 1371, 1374 (La. 1987) -- the Louisiana courts recognize that “[t]he

doctrine of waiver or estoppel contravenes the legal rights of the person sought to

be estopped,” Breaux v. Laird, 88 So. 2d 33, 38 (La. 1956), and therefore “should

be applied only in exceptional cases where its application is necessary to effectuate

justice or prevent injustice.” Aetna Fin. Co. v. Antoine, 343 So. 2d 1195, 1198

(La. Ct. App. 1977) (quoting Breaux, 88 So. 2d at 38); Pittman Constr. Co. v.

Housing Auth. of New Orleans, 179 So. 2d 900, 905 (La. 1965) (citation omitted).

Indeed, the Louisiana courts could hardly be more explicit in pronouncing that

“[w]aiver . . . is not favored in Louisiana law[,] . . . such [that] claims [of waiver]

must be examined carefully and strictly,” Alexander v. Cornett, 961 So. 2d 622,

632 (La. Ct. App. 2007) (emphasis added); see also Howard Trucking Co., Inc. v.

42
Stassi, 485 So. 2d 915, 918 (La. 1986) (“‘Estoppel’ in its various forms seems to

be a doctrine of last resort. In Louisiana, no statutory material and no body of

jurisprudence justifies its use. In this court we have discussed it, in modern times,

only to disallow a claim that the opponent ought not to be able to make a certain

claim or defense.”).15

To complicate matters still further, the common law rule of waiver can be

modified by contract, and it appears to have been in many of the contracts at issue

here. Specifically, many of the class members’ contracts contain the following

provision relating to waiver:

Waiver, whether express of implied, of any breach of any provision of
this Agreement shall not be deemed to be a Waiver of any other
provision or a waiver of any subsequent breach of the same provision.

See, e.g., Ex. 9 (Baptist Health Contract). Assuming, as one reasonably might, that

each instance of reimbursement for a service at CMAC rates constituted a separate

alleged breach of a particular hospital’s contractual right to be reimbursed at a

different rate, the quoted provision could be read to foreclose a waiver argument

altogether. But state law appears to vary with respect to whether this non-waiver

15
Because the record discloses no serious analysis of the applicable state law and its
potential variations, we need not undertake an exhaustive survey -- or indeed any survey at all --
of the relevant law to determine whether its content is sufficiently uniform. We provide a brief
discussion, however, to underscore the importance of this type of analysis whenever a putative
class action implicates the law of multiple jurisdictions.

43
provision would be enforceable.

Under Georgia law, it is well-established that even “a provision against

waiver of contractual rights may itself be waived.” J.W. Truck Sales, Inc. v.

Hartrampf Outdoor, L.L.L.P., 631 S.E.2d 750, 752 (Ga. Ct. App. 2006) (quoting

J.E.M. Enters. v. Taco Pronto, Inc., 244 S.E.2d 253, 255 (Ga. Ct. App. 1978)).

See also Smith v. Gen. Fin. Corp. of Ga., 255 S.E.2d 14, 15 (Ga. 1979)

(“[E]vidence of the buyer’s repeated, late, irregular payments, which are accepted

by the seller. . . raise[s] [a jury question] as to whether the anti-waiver provision in

the loan contract was itself waived.”); Fulton v. Anchor Sav. Bank, FSB, 452

S.E.2d 208, 216 (Ga. Ct. App. 1994) (holding that doctrine of waiver was available

to plaintiff-debtor against defendant-creditor bank in an action for wrongful

repossession of automobile, despite provision in the loan contract allowing lender

to “waive or delay enforcing any of [its] rights without losing them,” since,

although plaintiff had violated provision requiring notice before moving loan

collateral from address of record, there was evidence she had informed bank of

new address, and that bank had sent notices to new address under agreement); see

also Integrated Micro Sys., Inc. v. NEC Home Elecs. (USA), Inc., 329 S.E.2d 554,

558-59 (Ga. Ct. App. 1985) (reversing summary judgment for defendant relying on

particular contractual provision where fact questions remained as to whether

44
defendant’s conduct amounted to waiver of subject provision, and whether anti-

waiver provision providing that no part of the agreement “may . . . be modified,

waived, or changed except in writing signed by both parties hereto” itself had been

waived).

By contrast, “Florida courts have consistently enforced [anti-waiver]

clauses,” Nat’l Home Communities, L.L.C. v. Friends of Sunshine Key, Inc., 874

So. 2d 631, 634 (Fla. Dist. Ct. App. 2004), including of the kind found in many of

the hospitals’ network agreements, id. (interpreting anti-waiver provision stating

that “[n]o waiver by either party of any provision of this Agreement shall be

deemed a waiver of such provision with respect to any subsequent matter relating

to such provision”). In Rybovich Boat Works, Inc. v. Atkins, 587 So. 2d 519 (Fla.

Dist. Ct. App. 1991), for example, the court strictly enforced an anti-waiver clause

providing that “no waiver of any rights or obligations hereunder shall be deemed to

have occurred unless in writing signed by the party against whom such waiver is

asserted and no waiver shall be deemed a waiver of any other or subsequent right

or obligation”; the court held that the “buyer’s affirmative defenses of waiver and

estoppel were defeated as a matter of law by the provisions of the contract itself.”

Id. at 522. See also Eskridge v. Macklevy, Inc., 468 So. 2d 337, 339 (Fla. Dist. Ct.

App. 1985) (holding that lessor who continued to accept benefits under lease could

45
terminate option clause where lease contained anti-waiver provision); Philpot v.

Bouchelle, 411 So. 2d 1341, 1344-45 (Fla. Dist. Ct. App. 1982) (holding that anti-

waiver clause precluded waiver defense, and explaining that while acceptance of

benefits ordinarily can constitute a waiver of the right to assert a breach, “the

parties contractually modified the common law rules of waiver” by including an

anti-waiver provision).

We also cannot say that the district court’s proposed use of subclasses

corresponding to the six bodies of applicable state law would be an adequate

response to the apparent differences in those laws. We again recognize the practice

of creating subclasses in class actions, but we again find impediments to their

beneficial use in this case. Principally, while the proposed state-law subclasses

might suffice if the underlying contracts were uniform, the material provisions of

the contracts are anything but uniform. For that reason, a necessary (but not

sufficient) step towards managing the variety would be to create subclasses

corresponding to different variants of the payment clauses. That division,

however, does not remotely correspond to the division of states’ laws as they apply

to the interpretation of the material contract terms, or to evidence of subsequent

conduct modifying the rights flowing from those terms. The point is evident even

if we consider only those contracts in force at the time of the payment switch. The

46
putative Alabama subclass, as just one example, would comprise 19 contracts in

Group A, 9 in Group B, 10 in Group C, 1 in Group D, and 8 in Group F.16 In other

words, when the two sets of six subclasses are overlaid upon one another, “the

proliferation of disparate factual and legal issues is compounded exponentially.”

Georgine v. Amchem Prods., Inc., 83 F.3d 610, 627 (3d Cir. 1996).

3.

In sum, beyond the difficulty of managing the variation among the payment

provisions and other material terms, the trial court would be required to evaluate

significant quantities of individualized extrinsic evidence associated with

Humana’s affirmative defenses, and the hospitals’ response to those defenses

would implicate even more such individualized evidence. Furthermore, the

evaluation of all of this evidence would appear to be complicated by substantial

variations among the six bodies of state law that apply. Under these

circumstances, we have little difficulty concluding that the district court’s

certification of this class was an abuse of discretion.

16
Because our example considers only those contracts in force at the time of the payment
change, it excludes all of Group E, which comprises only post-November 1999 contracts that create
no liability for Humana. For the sake of completeness, we note that the Florida subclass would
comprise 34 contracts in Group A, 20 in Group B, 14 in Group C, and 5 in Group F. The Georgia
subclass would comprise 13 contracts in Group A, 9 in Group B, 21 in Group C, and 3 in Group F.
The Louisiana subclass would comprise 4 contracts in Group A, 10 in Group B, and 2 in Group C.
The Mississippi subclass would comprise 5 contracts in Group A, 9 in Group B, 2 in Group C, and
2 in Group F. And, the Tennessee subclass would comprise 20 contracts in Group A, 35 in Group
B, 13 in Group C, and 1 in Group D.

47
 B.

The second prong of Rule 23(b)(3) requires a court to determine whether “a

class action is superior to other available methods for fairly and efficiently

adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3). The focus of this analysis

is on “the relative advantages of a class action suit over whatever other forms of

litigation might be realistically available to the plaintiffs.” Klay, 382 F.3d at 1269.

As a result, the predominance analysis has a “tremendous impact on the superiority

analysis . . . for the simple reason that, the more common issues predominate over

individual issues, the more desirable a class action lawsuit will be as a vehicle for

adjudicating the plaintiffs’ claims,” id., both relative to other forms of litigation

such as joinder or consolidation, and in absolute terms of manageability, see Fed.

R. Civ. P. 23(b)(3)(D). The converse is also true: the less common the issues, the

less desirable a class action will be as a vehicle for resolving them. In particular,

“[t]he creation of a number of subclasses . . . in a Rule 23(b)(3) suit . . . may defeat

the superiority requirement” by splintering the proposed class and thereby

diminishing the relative value of a class action over other forms of litigation. See

Manual for Complex Litigation, § 21.23 (4th ed. 2004). And of course, a class

action containing numerous uncommon issues may quickly become unmanageable.

We have little to add on the subject of superiority in this case. Principally,

48
the lack of predominance belies any suggestion that a fair administration of the

class claims could “save[] the resources of both the court[] and the parties.” Gen.

Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 155 (1982) (citation omitted).

Furthermore, given the lack of uniformity within several of the proposed contract

subclasses, the existence of more than 20 contracts that do not belong to any

meaningful category, and the likely need for at least some subdivision according to

applicable state law, there may be little value left in a class action once the

proposed class is adequately partitioned, which in turn may make class action

alternatives such as joinder particularly appropriate. Finally, it need hardly be said

that class treatment in this case runs the risk of being severely unmanageable.

We make only one additional observation. The Supreme Court has

reminded us that

[w]hile the text of Rule 23(b)(3) does not exclude from certification
cases in which individual damages run high, the Advisory Committee
had dominantly in mind vindication of the rights of groups of people
who individually would be without effective strength to bring their
opponents into court at all. . . . The policy at the very core of the class
action mechanism is to overcome the problem that small recoveries do
not provide the incentive for any individual to bring a solo action
prosecuting his or her rights. A class action solves this problem by
aggregating the relatively paltry potential recoveries into something
worth someone’s (usually an attorney’s) labor.

Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (citations and

quotation marks omitted). While we are not blind to the disparity in power

49
between Humana and even the largest of the class members here, the class

members are neither powerless to act nor ignorant of their legal rights. To the

contrary, they have a substantial stake in the dispute and assuredly do not lack the

means of obtaining representation. Even in a borderline case, that fact might well

counsel against class treatment. In this case, however, the fact is that a series of

disparate questions overwhelms what may be common, such that use of the class

action methodology would be “either singularly inefficient . . . or unjust,” Klay,

382 F.3d at 1269 (citation omitted) (amendment in original), as a vehicle for

litigating the claims of 260 putative hospital plaintiffs in this contract action.

III.

We reverse the district court’s order certifying this action for class treatment

and remand for further proceedings consistent with this opinion. We leave it to the

district court and the parties to determine whether any subset of the claims or class

members might be susceptible of fair and efficient class treatment in accordance

with the principles we have set forth at some length.

REVERSED AND REMANDED.

50