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Class Action Countermeasures

Discussions of the Strategic Considerations Involved In Class Action Defense

The Rules Advisory Committee Study Agenda – Rule 23(e)

Posted in Settlement

Amending Rule 23 would add clarity to the settlement process and teeth to the protection of absent class members.  But to solve the real class settlement process, the Advisory Committee will have to look at why so many weak claims advance so far into litigation.

For the next few months, excepting my usual year-end posts, I am going to be taking a longer look at the various items on the Advisory Committee’s Study Agenda. And, in contrast to my usual stance in this blog, which tends to be “comment on the strategies, not the wisdom of the case,” I am going to editorialize.  (Why?  Because Rule 23 has not been amended yet, and if it is, I’d like it to be in a way that makes class action litigation better and more effective when it’s appropriate.)

The first item on the Study Agenda is possible amendment of Rule 23(e).  (I’ll take longer looks specifically at cy pres and objectors, both of which have been singled out for review.)

Rule 23(e) governs the settlement of class actions.  And, to be sure, Rule 23(e) generally could use some clarity.  As a standard for settlement approval, “fair, reasonable, & adequate” is nice but vague, kind of like Bill Pullman.  So courts have stepped in to fill the doctrinal gaps left by the standard, leaving us with an extensive and conflicting common law littered with disparate, redundant, complicated multi-factor tests.  As the ALI put it in its Principles of the Law of Aggregate Litigation:

The current case law on the critera for evaluating settlements is in disarray. Courts articulate a wide range of factors to consider, but rarely discuss the significance to be given to each factor, let alone why a given factor is probative.

(Emphasis added.)  (The First Circuit has made the same criticism.

So, for example, the Second Circuit requires a court to consider:

(1) the complexity, expense and likely duration of the litigation;
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings and the amount of discovery completed;
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining the class action through the trial;
(7) the ability of the defendants to withstand a greater judgment;
(8) the range of reasonableness of the settlement fund in light of the best possible recovery;
(9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.

(Internal citations omitted; line breaks added.)  The Ninth Circuit‘s standard is subtly different, requiring consideration of

among others, some or all of the following:
the strength of plaintiffs’ case;
the risk, expense, complexity, and likely duration of further litigation;
the risk of maintaining class action status throughout the trial;
the amount offered in settlement;
the extent of discovery completed, and the stage of the proceedings;
the experience and views of counsel;
the presence of a governmental participant; and
the reaction of the class members to the proposed settlement.

(Line breaks added.)  (And, to digress, one must ask why the “views of counsel” are relevant.  Is class counsel really going to admit they disagree with some settlement terms?)

In addition, there are a number of practices that have evolved in class action settlements that are not addressed by Rule 23(e), including the use of incentive awards for class representatives and the use of cy pres relief.

But while Rule 23(e) could benefit from some clarity, the real issue at stake here has very little to do with settlement approval.  The underlying issue is the skewed incentives that lead to poor settlements.

What do I mean by a poor settlement?  Let’s look at some of the more prominent settlement reversals in the last few years:

  • Mirfasihi v. Fleet Mortgage reversed a FCRA class action settlement that contained a large cy pres component.  Before its final disposition, the settlement bounced up and down to the Seventh Circuit a remarkable three times.  As Judge Posner wrote, the real problem was that neither side had an incentive to concede the “utter worthlessness of the claim.”
  • Klier v. Elf Atochem, Inc. reversed a toxic-spill class action in which an $830,000 claims surplus was donated to charity rather than distributed to class members.
  • Feder v. Frank reversed a settlement with a large coupon component.  The plaintiffs had alleged problems with their printer toner, but the trial court had called their evidence of liability and causation “weak.”
  • Dewey v. Volkswagen Aktiengesellschaft reversed a settlement involving leaky sunroofs.  The named plaintiffs had divided the class up into those who were entitled to monetary relief (which included them) and those who were not.  (The distinction had to do with the claims rates for various Volkswagen models.)  The Third Circuit found this to be an irreconcilable conflict of interest.

Similarly, there have been a number of case in which courts have rejected preliminary approval of settlements because of their obvious deficiencies.  To name just a few:

  • In Tijero v. Aaron Bros. Inc., the Northern District of California rejected a wage-and-hours settlement in which the class members received only minimal relief in exchange for an overly broad release.
  • In Better v. YRC Worldwide, the District of Kansas refused preliminary approval to a securities settlement that released claims for no compensation, and offered no information about the distribution of a substantial cy pres payment.
  • In Figueroa v. Sharper Image, the Southern District of Florida refused to approve a consumer-fraud settlement that included a large coupon component, and injunctive relief of questionable value to the class.

In each of these cases, the primary problem was the gap between what the defendant thought the claims were worth, and what the plaintiffs’ counsel would accept in fees to go away.  Bad settlements spring from weak cases.  In weak cases, defendants don’t value the case at much, but plaintiffs’ counsel want (or need) a certain amount of fees.  So we wind up with little actual benefit to class members.  (We can assume both sides are working in good faith.  If the plaintiffs just screw up at the beginning, then they will have sunk costs into a loser, and the defendant won’t want to pay.  Or in some cases, like Figueroa, the defendant may not be able to afford more.)

Rule 23(e) is valuable, and it serves as an important check on class action settlements that do not benefit absent class members.  If there should be one guiding principle for Rule 23(e), it should be to watch out for the interests of the absent class members.  (Can I say this as a defense lawyer?  Yes.  Defendants and absent class members often have oddly converging interests.)

But Rule 23(e) is only addressing a symptom (questionable settlements), not the cause of the problem.  And the cause of the problem is that gap in valuation of class claims.  The fact is that the vast majority of bad class action settlements come from cases that should not have been brought in the first place.  Cases where it is clear from the time of the complaint that large numbers of class members have not been harmed (like in Mirfasihi or Dewey) or cannot be found (like in Klier) or where evidence of causation will be weak (like in Feder) are not cases that should survive preliminary scrutiny.  Once they do, the threat of (1) exorbitant discovery costs and (2) even a slim chance of a bet-the-company loss will usually compel some cost-of-litigation settlement.  When that is not enough to justify fees that would allow plaintiffs to break even, we see the kinds of “innovations” that eventually get reversed.

Politically, effective reform here will be extremely difficult.  Defendants are agnostic overall about bad settlements.  (The option is nice in individual cases, but conscientious defense counsel will advise their clients that cheap settlements often cost more in the long run.)  Objectors lack the political power to influence much reform.  Judges have a compelling (and admirable) interest in clearing their dockets that lead them to favor settlements of class actions where possible.  And any real reform directly threatens plaintiffs’ business model.  But bad settlements start with bad cases.  And no matter how unpleasant it may be in the short term, reducing the number of bad cases brought benefits everyone.

What Will Be in the Coming Class Action Amendments?

Posted in Certification, Uncategorized

            I’ve written a little so far about the fact that Rule 23 is likely to undergo revision in the next few years.  Last week Judge Robert Michael Dow, who is a member of the Advisory Committee on the Rules of Civil Procedure’s Rule 23 subcommittee, spoke at the annual meeting of Lawyers for Civil Justice.  He offered an update on what the Rules 23 subcommittee is looking at reforming (what he referred to as their “study agenda”). 

As Judge Dow pointed out, the subcommittee is at the beginning of its review, which he called “stage one of a multi-year process.”  In other words, there will be no amendment to Rule 23 until January 2017, at the earliest.  The study agenda currently contains six items, although, as you’ll see, at least one of them encompasses a number of hot topics in Rule 23 practice. (And that’s not to say the subcommittee may not add more if suggested by enough parties.)

So enough throat-clearing.  What is the subcommittee looking at?

  1. Settlement class issuesThis is the single largest topic that the subcommittee is addressing.  As Judge Dow put it, at this point, somewhere between 96% and 99% of certified class actions settle rather than proceeding to trial, so the Rule should really reflect the fact that settlement is the primary endgame in a class action.  In addition, most federal judges have made it clear that they would like more guidance about how to conduct settlements.  (This makes a great deal of sense.  As I’ve observed in the Class Action Playbook, Rule 23(e) provides only three vague factors to consider when evaluating a settlement: is it “fair, reasonable, and adequate”?  As a result, different federal circuits have adopted different, cumbersome, multi-factor tests, making settlement a difficult and opaque process.  The Rule 23 subcommittee is considering a number of potential reforms.  In addition to clearer guidance within the Rule, it is also considering whether it should formally address the controversial issue of cy pres relief, as well as the role the objector  should play in class settlements.  (For this latter issue, the Rule 23 subcommittee is coordinating with the Appellate Rules subcommittee, since one of the proposed reforms involves appeals bonds.)
  2. Issues classesSince the certification of issues classes has come into vogue post-Dukes, a fresh issue has arisen.  May a court certify an issues class even if the larger proposed class would not meet Rule 23’s requirements, or is that just an unconstitutional end-run around Rule 23(b)(3)’s predominance requirement?  (Professor Laura Hines, who also presented at the meeting, has a great analysis here.)  The Rule 23 subcommittee is looking at this issue as well.
  3. Notice issuesMost parties don’t pay much attention to notice until a class has been certified, and then the primary concern is cost.  The Rule 23 subcommittee will consider, among other things, whether advances in technology may make effective notice cheaper, and whether this may require a change in Rule 23’s language.
  4. Rule 68 and mootnessJudge Dow sits in the Northern District of Illinois, so he referred to this issue as the “Damasco problem.”  There’s no question the Seventh Circuit’s particular ruling has created some peculiar practices in its district courts.  It appears the Rule 23 subcommittee is primed to consider how to address these issues.  (Judge Dow did not say whether the Rule 23 subcommittee will consider how the cost-limiting provisions of Rule 68 interact with Rule 23.)
  5. Ascertainability.  Many, many courts have referred to Rule 23’s “implicit” ascertainability requirement.  It may be time to make it explicit.  The Third Circuit has asked the Rule 23 subcommittee to consider whether there should be a formal ascertainability requirement in the Rule.  Assuming there should be (and it’s hard to come up with arguments against), the biggest question is what the contours of the requirement will look like.  For example, will the recent recognitions of “administrative burden” make it in?
  6. Merits inquiriesThe Supreme Court may have thought that it had finally resolved the question of whether a “rigorous analysis” requires an inquiry into the merits where appropriate when it decided DukesIt didn’t.  Courts still apply varying standards for certification.  And it remains an open question whether a given court will allow an early challenge to facially deficient class pleadings.  So the Rule 23 subcommittee is also keeping an eye on these issues under the umbrella of the role of the merits in class actions.

What does this all mean for the average practitioner?  I’ll be pushing into more depth on some of these issues in the coming weeks to discover just that.  But, in the meantime, it certainly means that (a) the class action is far from dead, and (b) for class action practitioners, the next few years are going to be interesting ones.

Strategic Ambiguity in Complex Litigation

Posted in Uncategorized

Defense lawyers, especially class-action defense lawyers, live in a world ruled by ambiguity.  While they’re often more predictable than they like to believe, judges work to keep their intentions in a given case ambiguous.  (We’ll see why in moment.)  “Adventuresome” plaintiffs’ counsel work hard to push the boundaries of existing caselaw, which can leave the state of even settled law more ambiguous than one might like.  And, of course, because plaintiffs’ lawyers tend to play offense, they’re often more tactical than strategic, which gives them an incentive to remain ambiguous about their intentions.  Wouldn’t it be great if there were just some kind of math we could apply in situations like this?

It turns out there is.  It’s pretty darned advanced, but it does exist.  And, in their 2011 working paper The Strategic Use of Ambiguity, Bielefeld University’s Frank Riedel and Linda Sass apply it to reach some interesting conclusions about when and how to use ambiguity in strategic games.  (For our purposes, that means “litigation.”)

Skipping the formula, what Riedel & Sass do is to define ambiguity (roughly, creating a condition where others cannot make an informed guess about your intentions), create a way to model it mathematically (using “Ellsberg urns”).  Apply a little game theory et voila!, instant strategic insight.  And what are those insights?

  • Judges have a game-theoretic incentive to stay ambiguous.  One of the games Riedel & Sass model involves a superpower mediating between two skirmishing regional states.  The superpower cares mostly about peace, and discerning who started a conflict may be impossible.  (Sound familiar?)  If the superpower opts to remain opaque about its intentions and sympathies, then under a normal range of payoffs, both states will avoid starting anything.  (Usually these games are structured to show that, with a normal range of payoffs, conflict is likely.  So this is an unusual result.  In game-theoretic terms, these ambiguities create non-Nash equilibria.)  What’s particularly interesting about the analysis is that it assumes that all players prefer no ambiguity.  If I’m correct that plaintiffs’ lawyers are more ambiguity-accepting, then judge/superpower ambiguity may appear to create a slight strategic advantage for them.
  • If your opponent plays ambiguous strategies, you should not.  This is the conclusion that should prove most interesting to defense lawyers.  It was to me (and, as it turns out, to the authors.)  Riedel & Sass model a game called “Matching Pennies”.  This is because, as it turns out, in a probability game like Matching Pennies, it is possible to immunize oneself against strategic ambiguity by focusing on the probability of outcomes.  TV attorney Harvey Spector has become famous for his very quotable “I play the man, not the odds.” But, as it turns out, if you’re up against an opponent who employs strategic ambiguity—particularly if there are other uncertainties, like an ambiguous judge—playing the odds is more often the winning strategy.  And it’s not really playing the odds, it’s playing the terrain.

In other words, keep focused on what the law actually says.  And don’t be afraid to be very clear with both the judge and your adversary what you’re doing.  If you’re right about the law, it’s not going to matter nearly as much as people think.


Size Matters: The Psychology of the Class Action

Posted in Scholarship

Back when the Dukes class action was before the Supreme Court, journalists and academics wrote a number of pieces—some longer, some shorter—about whether a class action could be too large. (After the fact, University of Chicago professor William Hubbard published an illuminating article on the same topic.) For the most part, the conclusions tended to be the same: it was not the size of the class action that mattered, but the cohesiveness.

Now Rotterdam PhD candidate Alexandre Biard has weighed in on the topic from a new perspective: behavioral psychology, and the conclusions he reaches are both fascinating and practical. While he performs no independent studies himself, his review of the literature offers up some interesting ideas, some of which confirm and some of which contradict my own intuitions about the subject.

According to Biard, the key concept to understand is “entitativity,” which could be roughly defined as cohesiveness, or the degree to which a collection of individuals can be perceived as an entity. Generally speaking, the more a group looks like an entity, the more likely it is that the judge will treat it like one.

Among the qualities that can confer “entitativity” are the number of intimate connections within a group (families, for example, are good examples of entities), and the degree to which the group shares tasks and goals (like sports teams do). As one might expect, these findings have some interesting implications for class certification briefing. Among others, it really is worthwhile to fight over the commonality requirement, because, rhetorically at least, that is where the real heavy lifting is getting done. If the plaintiffs can paint a picture of a class bound by common goals and common connections, then they have a better shot at getting a class certified. Similarly, if the defendant can show that the proposed class is really just a loose connection of people who happened to stumble into similar circumstances, it can defeat certification.

(As a side note, this view of “entativity” may also explain why securities and antitrust classes are often considered easier to certify: it’s easier to see how stock investors or direct purchasers in an industry might be bound by common goals. It is harder to see how used-car purchasers or competitors for work promotions are.)

Biard also finds that the outlier effect tends to affect these groups. The outlier effect describes how individuals will impute characteristics to a group based on what they perceive in its most extreme (or most memorable) members. This suggests a psychological reason for the typicality and adequacy requirements: if the class representative is too far off from the group in one aspect or another (she faces unique defenses for example, or she has an unusually compelling story, then she will skew perception of the merits for the entire group. That’s not good in either direction: either the defendant is being treated unfairly, or the putative class is.

But most importantly, Biard argues that, when confronted with an extremely large group like a prospective class, judges (like any human beings) tend to rely more on emotional reactions than on pure logic. The reason for this is that it is easier to process judgments about large groups of people by using the cognitive shortcuts our emotions afford us. Unfortunately, this also means that judges will rely on stereotypes and intuitive judgments about right and wrong, rather than strict logic or legal text.

So what are the practical implications of this work? It suggests a number of rhetorical focuses for the defendant:

Keep focused on the diversity within the proposed class. To the degree one can show a proposed class is not a single entity with common objectives, it will be easier to defeat certification. To that end,

Keep focused on the named plaintiffs. Most named plaintiffs are outliers, if only because they have taken the unusual step of heading up a class action. As a result, keeping the litigation focused on their stories is likely to show how the proposed class is not a cohesive whole.

Emphasize law and facts. Particularly in class actions, the more a defendant can stick to the existing law and facts as opposed to naked emotional appeals, the more likely it is that it can circumvent any bias that may result from the judge’s employment of the affect heuristic.


Adequacy & Class Action Governance

Posted in Certification

For a long time, I have had a very specific law review article I’ve wanted to write, but with my many other commitments, it has never come to fruition. And, given my schedule coming up, it’s unlikely it ever will. But I do have this blog, so why not just outline the idea here?

Scholars have worked for a long time to establish a governance mechanism for class actions that would prove both effective and legitimate. It’s a difficult balance to strike: most policymakers want class actions that can operate effectively as litigation devices, but that don’t just hijack the choses in action of numerous unnamed class members. As a result, we’ve seen radical proposals to reform the class action, including making it into a trust device, and just eliminating class plaintiffs altogether.

In fact, there’s an even more radical solution, that would at the same time require no change to the existing Rule 23. Enforce Rule 23(a)(4)’s adequacy requirement. As written, and as originally interpreted, the adequacy requirement exists to ensure due process is met. It is the constitutional guarantee that a representative action like a class action is legitimate.

The problem, then, is that most modern class plaintiffs are not adequate to the task. That’s not to speak ill of class plaintiffs. They’re recruited, and then “trained” to defer to their lawyers’ judgment of what is best for the class. And that makes sense from the lawyers’ standpoint, too. There is nothing that can disrupt a carefully planned legal theory in a complex case more than a wilful client.

This is why Rule 23(a)(4) is honored mostly in the breach. The other reason, as I’ve alluded to elsewhere, is a line of cases that read too much into a old motion to dismiss ruling upheld by the Supreme Court. The end result of that misreading is similar to the end result of the misreading of Eisen for several decades: courts inclined to certify class actions simply quote, without further analysis, the proposition that a named plaintiff does not have to be Arthur Miller [] in order to represent a class.

So what would this kind of adequacy enforcement look like? Several courts this year have actually offered an idea.

  • There would have to be affirmative evidence of the plaintiff’s adequacy. Boilerplate assurances of “zealous advocacy” would not be enough.
  • Named plaintiffs would have to have actual working knowledge of their case. They still wouldn’t need to be legal experts themselves, but courts would not allow them to simply say they defer to their lawyers.
  • Class lawyers would not be allowed to replace named plaintiffs without consequence.

Of course, this proposal is likely to receive criticism as well. The largest criticism is probably that reinforcing the adequacy requirement may make class actions as a device less effective. And, to the extent “less effective” means “requires some up-front work to file and maintain,” that may very well be true. But that does not make the criticism valid. The Supreme Court has recently reminded us that Rule 23’s requirements are “stringent” and “in practice exclude most claims.” And (and you’ll see here that I am a defense lawyer) that’s OK. Class actions should be rare, and they should be more expensive than the average lawsuit. They are far more lucrative, after all. If tracking down an adequate plaintiff—that is, one who has suffered an actual harm and is willing to represent the class and stand up to her lawyers when necessary—is that difficult, it may be that the lawsuit doesn’t have much merit to begin with.

What’s interesting is that we’ve tried this experiment at least once, and with good results. The Private Securities Litigation Reform Act added some prohibitions that made it extremely difficult to pull anyone who had bought a single share of stock into a securities lawsuit. The result was that institutional investors became class plaintiffs. There were fewer (though not no) meritless securities lawsuits, and the quality of the securities class action bar improved as well.

Properly enforced, adequacy makes a great asset to class action practice on both sides: it screens out truly frivolous suits, and it gives meritorious suits an edge by giving them a plaintiff who will do more than sign interrogatories and testify for three hours.

Amending Rule 23: Lessons from the PSLRA

Posted in Strategy

Earlier this year, it became clear that the Advisory Committee on Civil Rules is considering possible amendments to Rule 23. As Tony Lathrop’s post summarizes, the “front burner” issues at the moment largely concern class action settlements, focusing in on possible limits to cy pres relief and greater clarity on what Rule 23(e)’s “fair, reasonable, and adequate” criteria mean.

I think these are great ideas for possible amendments.  I’m certainly on record about the possible problems that arise from cy pres relief, and I’ve also written about the proliferation of settlement standards that arise from Rule 23(e)’s vague language.

But, if we’re thinking about amending Rule 23 again, I have to ask, why be cautious?  Why not really think about the ways in which class action litigation could be improved?  The Advisory Committee is already grappling with several weighty issues, including the runaway cost of discovery, that have large class-action components.  So why not look at ways to reform Rule 23 to help ensure the “just, speedy, and inexpensive” determination of proceedings?

What we would be looking for, then, are reforms that would reduce the expense of class actions and increase the odds that meritorious class actions got a fair hearing.  A tall order, but one, as it turns out that was filled almost two decades ago.  So here is my simple but radical proposal for class action reform: amend Rule 23 to make all class actions look like securities class actions.

Nineteen years ago, Congress passed the Private Securities Litigation Reform Act (“PSLRA”) to address the perceived scourge of runaway securities class actions.  Strike suits were common: class action lawyers would wait for any drop in stock price, and then file a lawsuit.  Courts would often rubber-stamp certification, leaving defendants with the choice of settling or risking bet-the-company liability.

The PSLRA enacted a number of reforms.  Among them:

  • it imposed an automatic discovery stay as soon as any dispositive motion was filed (15 U.S.C. § 78u–4(b)(3)(B));
  • it required the court to conduct an independent inquiry into whether the pleadings meet the requirements of Rule 11 and, if they do not, it requires the imposition of sanctions (15 U.S. Code § 78u–4(c)); and
  • it tied attorneys’ fees to relied actually obtained for class members.  (15 U.S. Code § 78u–4(a)(6).)

There was, of course, a huge outcry.  Opponents of the PSLRA argued it would would kill the securities class action.  (Securities plaintiffs’ lawyers still maintain the statute is problematic.)  But with the benefit of nineteen years of experience, we can say that those arguments were wrong.  As NERA Consulting has continued to document in its yearly reviews of trends in securities class actions, complaint filings have remained largely stable at between 200 and 270 new cases per year since the PSLRA’s enactment.  (See pages 2-3 of the linked report.)

So the PSLRA did not kill the securities class action.  But, at the same time, we hear less about truly abusive securities class actions.  Lazy, sloppy, or vague pleadings are weeded out at the motion to dismiss stage, without embarking on expensive discovery.  (And the discovery stay ensures that costs don’t mount while the dismissal motion is pending.)  The mandatory sanctions review acts as an effective deterrent against fishing expeditions.  And while the fee provisions may not have reduced fees, they have increased awards to class members.

So why not take advantage of our findings from this two-decade experiment?  Amend Rule 23 to add a discovery stay, sanctions review, and value-for-fees provision.  The worst that happens is that plaintiffs’ lawyers will up their game.

Vulnerability Theory & Class Actions

Posted in Uncategorized

SUNY-Buffalo professor Christine Bartholomew has an article out with the intriguing title “Redefining Predator and Prey in Class Actions.”  Unfortunately, it does not use zoology or mathematical predator-prey equations to explain class litigation—the kind of loopy academic mashups that can be both fun to read and insightful.  Instead, she uses a new “vulnerability theory” to critique the “current impotency” of Rule 23.

So what is “vulnerability theory”?  It appears to be a critique of current policies, arguing that they tend to favor the interests of entrenched institutions over truly disadvantaged groups when determining what is a public good.  In terms class action lawyers on both sides would likely understand better, that would mean placing the interests of the absent class members first.

According to Professor Bartholomew’s vulnerability-based critique, traditional class action scholarship and recent class action caselaw has focused too much on pro-corporation rhetoric, resulting in a superficially neutral, but de facto pro-defense interpretation of the Rule.  Or, as she puts it:

[B]y prioritizing efficiency over public good, rhetoric has redefined the “victim” in class actions. Individual consumers, or putative class members, are no longer seen as the victims of corporate defendants’ malfeasance. Instead, building on dicta from one Seventh Circuit decision, defendants are advancing arguments that class action procedures harm corporate defendants by forcing them into extortionist settlements. Successful class action attorneys have been redefined as the predators with corporations their prey.

It’s probably an overstatement to argue that corporate defendants are perceived as “victims” in a given class action lawsuit.  And Professor Bartholomew is hardly the first academic to believe that class counsel are unfairly maligned, or that legal policy should do more to favor plaintiffs. Indeed, the general progress of her argument will seem very familiar to many consumers of class action scholarship.  She argues that

  • Class actions have been rendered impotent by decisions that have advantaged corporations over consumers.  Specifically, courts began accepting two arguments from defendants: (1) certification had the potential to coerce settlements in meritless cases, and (2) class actions were designed to serve judicial efficiency.
  • Absent class members are the “vulnerable” group in class action litigation; not corporate defendants, because: (1) they are at a financial disadvantage compared to corporations; (2) they are at an informational disadvantage; and (3) courts favor corporations over consumers.
  • As a result, reforming Rule 23 should focus on enhancing deterrence of corporate misconduct, on increasing participation from class members, and on allowing easier cy pres distributions to charities.

Some of these arguments are hardly controversial.  I know of no one who would argue that absent class members are the most vulnerable group in class litigation.  Many of these arguments are well-trod ground.  And a few of the phrasings that Professor Bartholomew employs betray either her bias towards automatically believing the merits of any plaintiff’s claim (“the dominant judicial attitude towards class actions is knee-jerk skepticism”), or a misunderstanding of how class actions work (such as her characterization of cy pres relief: “Class actions have allowed consumers to fund public benefits …”) (Emphasis added.)

Nonetheless, this article is important for two reasons.  First, it provides a relatively new justification for some of the same results-oriented arguments defendants tend to hear from plaintiffs.  “Vulnerability theory” may be novel, but in a political system that seems increasingly polarized between haves and have-nots, or between the 1% and the 99%, knowing the nuances of arguments for skewing the rules in a particular direction is always good.  Second, and more importantly, it reinforces from both a rhetorical and theoretical standpoint one of the central truths defendants must learn when litigating class actions: the best arguments are framed in terms of what is best for absent class members.  Absent class members are the beneficiaries of Rule 23.  Caselaw has consistently held that named plaintiffs, class counsel, and even judges owe absent class members a fiduciary duty.  And, as I have argued before, the interests of absent class members and defendants in a fair procedure for certifying a class often coincide in surprising ways.

The Guardianship Model of the Class Action

Posted in Scholarship

Northwestern Law professor Martin Redish should be very familiar to readers of this blog. I’ve covered his work before, from his constitutional challenges to the class action through his critique of the cy pres remedy to his surprising turn to what looked like a “trust model” of the class action last year. Professor Redish’s work is—unlike many modern class action scholars—not easily classified. I’ve said before, and I’ll likely say again (I’m certainly saying it now): you ignore Professor Redish at your peril.

So, when I saw he had a new article coming out in the Emory Law Journal, “Rethinking the Theory of the Class Action: The Risks and Rewards of Capitalistic Socialism in the Litigation Process,” I sat down with great anticipation to read it.

The thesis of the article is, while hardly surprising, certain to be controversial. Professor Redish reaffirms his recent argument that the class action should be treated as a form of trust or guardianship (what he calls the “Guardianship Model”).

As background, he points out that there have traditionally been three competing models of the class action:

 To this point, it would be accurate to assert that practitioners, scholars, and jurists have either proposed or implicitly assumed one of three underlying theories of the modern class action:

(1) the Aggregation model;

(2) the Entity model; or

(3) the Private Attorney General model.

The latter two models—at least in the ways in which scholars have employed them—must be categorically rejected. While the Private Attorney General Model implements legitimate purposes served by the modern class action, it is grossly incomplete and therefore leads to a skewed perspective on the class action, which effectively alters the underlying substantive law being enforced in democratically and constitutionally impermissible ways. The Entity Model, on the other hand, has absolutely nothing to recommend it. On the contrary, the model represents an alchemy-like transformation of the nature of underlying substantive rights in a manner that violates core notions of American democratic theory.

(Emphases added, internal footnotes omitted.) This is not to say, however, that Professor Redish approves of the Aggregation Model, either. Professor Redish believes that the Aggregation Model does not account for the unique nature of the attorney-client relationship in a class action, where the attorney is the driving force behind the litigation, and may experience serious conflicts of interest with various class members.

His solution is to propose a series of modifications to Rule 23, based on what he cals the “Guardianship Model” of the class action. As he explains that model:

in order to prevent the harms caused by the departures from the traditional attorney–client relationship the class attorneys must be deemed to function as guardians of the interests of the absent class members. By imposing on class attorneys the fiduciary obligations which guardians have to their wards, our procedural system should be able to obtain the benefits of the modern class action while simultaneously avoiding at least most of the pathologies to which the current practice gives rise. I should emphasize that the analogy to a legal guardian is by no means perfect. In some ways, class attorneys function as traditional attorneys, qualitatively different from the traditional guardian model. Thus the Guardianship Model of the modern class action represents a synthesis of traditional procedural aggregation and a form of guardianship, reminiscent of the fiduciary manner in which guardians legally function under long established principles of equity.

(Emphases added, internal footnotes omitted.)  To formalize this new way of looking at the class action, Professor Redish proposes four reforms:

  • inserting a “significant likelihood of meaningful relief for the bulk of the absent class members” requirement into Rule 23(a), the section of Rule 23 that applies to all class actions;
  • changing attorney compensation so that it relates only to the amount actual class members receive;
  • abolishing cy pres relief; and
  • treating the class attorney as the real party in interest for the purposes of preclusion.

These are all interesting ideas. And while I’m usually the first to point out when something is not likely to actually be adopted, I’m aware that the Rule 23 subcommittee is currently entertaining proposals on at least one of these reforms. So these are also worth taking seriously.

I have two other brief reactions to this article.

First, I’m surprised that Professor Redish doesn’t mention the work of University of Miami law professor Sergio Campos, who has also written extensively on looking at class actions as trusts instead of aggregation devices.  Indeed, despite their conflicting views on the usefulness of the class action in general, they converge remarkably on the proposed reform.  That alone is extremely interesting.

Second, I think that Professor Redish may be overcomplicating the issue somewhat. Granted, his proposals are colored in part by his belief that Rule 23 as it currently stands likely violates the Rules Enabling Act. However, reining in the “pathologies” with which he is most concerned could also be accomplished by strengthening enforcement of Rule 23(a)’s adequacy requirement and Rule 23(g)’s adequacy of counsel requirement. While the text of both of these requirements counsels courts to keep a close eye on named plaintiffs and class attorneys as fiduciaries of the proposed class, the reality is that many courts provide only a cursory examination of adequacy.

Regardless of whether I personally agree with all of Professor Redish’s conclusions, this is easily one of the most important class-action articles of the year, and Professor Redish’s proposals are worth a serious look. Scholars sympathetic to class action plaintiffs frequently propose new ways of looking at the class action, which can often be interpreted as ways of getting around the restrictions imposed by Rule 23.  This is the first defense-side argument for a new way of looking at class aggregation, and that alone makes it worthy of study.  But, just as important, Professor Redish’s proposals can have important practical effects.  Courts should study them to see how they might better fulfill their own fiduciary duties. And defense lawyers should study them because—like much of Professor Redish’s work—these provide the seeds for some excellent oppositions to class certification.

A Theory of Novel Injury Theories

Posted in Uncategorized

Back in 2010, noted legal scholar Marc Galanter wrote an article on “The Dialectic of Injury and Remedy.” It contains only one explicit mention of class actions, but, in general, touches on some points that recur frequently for class action lawyers.

Professor Galanter’s primary argument is that both injuries and remedies are socially constructed. That’s a point that should come as no great shock to lawyers: we spend our careers engaging with a very specific and well-known social construct. But Professor Galanter zeros in on the fact that, like many social constructs, ideas about injury and remedy change over time. Things that the ordinary citizen would have accepted as just plain bad luck a generation ago now—because of advancing technology, changed social attitudes, or an increase in litigiousness, take your pick—are considered injuries that require legal remedies.

Or, as he puts it:

 So injury and remedy are not fixed and determinate, but moving and changing. Is this change random, or is there a pattern? Is there some force driving the moving frontier? These questions take us back to naming and blaming—to changing perceptions of injury and changing attributions of responsibility for causing injury and providing remedy. In the long run, new ways of envisioning and understanding troubles and remedies are the hidden fount and engine of our expanding sense of injustice.

Crudely, our sense of legal injury and remedy reflects the changing capabilities of human society. Human inventiveness, accumulated in science, technology, and social organization, has enlarged our capacity to prevent and address many kinds of harm. Think of inoculations, electrical insulation, and safer aircraft. As more things are capable of being done by human institutions, the line between unavoidable misfortune and remediable injury shifts. The realm of injury is enlarged.

(Emphasis added, footnote omitted.)

Why is this sociological observation important to class action lawyers? Because the evolution of the class action, which we often attribute to “adventuresome” plaintiffs is just as attributable to changes in the understanding of injury and remedy. And frequently, certification opinions hinge on whether the judge believes that there is an injury that requires a class action to remedy it. The classic cases Castano v. American Tobacco Co. and In re Rhone-Poulenc Rorer grappled with the concept of the “immature tort”; really just a question of whether a novel injury theory (“addiction” for Castano, “serendipity” for Rhone-Poulenc Rorer) could justify aggregating a series of personal-injury lawsuits into bet-the-industry litigation. And it’s not hard to read the Dukes opinions, both majority and dissent, as arguing over whether being subjected to a corporate culture that was “vulnerable” to gender discrimination could support a class action.

Novel theories of injury are, in short, one of the chief engines of the class action. And so it is vitally important that class action lawyers learn to question the injury theories that show up in complaints.

Professor Galanter’s argument is largely neutral on whether the expansion of our understanding of injury is a good thing; he treats it more as a historical inevitability. But he does offer three observations about “the future of injury,” all of which are worth some attention.

  • First, he points out that, because we tend to construct injuries by analogy, the more injuries we recognize, the more we are likely to find, even if we are remedying the many we already know about. This counsels against recognizing too many inventive injuries today.
  • Second, he points out that the more injuries we find, the more we will be forced to ration out remedies. Society’s resources are finite, after all. This is a powerful point for defense lawyers; providing a legal remedy for a largely theoretical or unrecognized injury takes up resources that could be used to better effect somewhere else.
  • Third, because our understandings of injury and remedy shift over time, some seemingly frivolous claims may become mainstream in the future. But, by the same logic, other claims that seem to make sense now will seem foolish in a few years’ time. The trick is to recognize the trajectory various injuries and remedies are on, and, where appropriate, to call that to the court’s attention.

As its title suggests, “The Dialectic of Injury and Remedy” is not completely free of academic jargon. But, for the most part, it’s written in deceptively simple prose. It’s well worth the look for any class action lawyer who needs to wrap her head around arguing cutting-edge theories of injury or damages.


The State of the Merger Class Action

Posted in Scholarship

Merger-challenge class actions have become very popular in the last decade. (For a great source of data, check Cornerstone Research’s surveys on the subject.) They operate similar to traditional securities class actions, but have found a way of resurrecting the sense of urgency that the Private Securities Litigation Reform Act (PSLRA) removed; they do it by litigating deals that are already in progress. Because the litigation threatens to disrupt an otherwise-lucrative deal, it is likely that the parties will pay to settle it quickly.

In general, merger class actions have gained a reputation as “low-hanging fruit” for class action firms looking for a quick buck. One recent paper, by “Deal Professor” Steven M. Davidoff, Penn Law’s Jill Fisch, and Fordham Law’s Sean J. Griffith, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform, argues that merger litigation that results in just disclosures tends to offer no benefit whatsoever to shareholders (making them the proverbial “peppercorn” settlement). (By contrast, merger litigation that results in some amendment to the deal offers at least minimal value, but “amendment settlements” tend to be rarer beasts.)

Washington University’s Adam B. Badawi published an interesting strategic look at the merger class action last year in the Washington University Law Review. In Merger Class Actions in Delaware and the Symptoms of Multi-Jurisdictional Litigation, he examines two seemingly contradictory trends involving the Delaware Chancery Court’s role in merger class actions: from 2005-2011, plaintiffs were turning to other courts as venues for merger challenges. But starting in 2011, cases began to return to Delaware. The exodus from Delaware is largely understood to have occurred after the Chancery Court grew more critical of merger class actions.  Badawi theorizes that the return may be driven by strategic concerns:

It appears that filing a case in Delaware may provide a number of strategic benefits to out-of- state counsel who have lost the race to the courthouse in a non-Delaware jurisdiction. Given that foreign jurisdictions often select lead counsel on the basis of the first to file the case, out-of-state counsel who lose the race to the courthouse have little to gain by filing in that foreign jurisdiction. If, however, these counsel have a plausible chance at being named as lead counsel in Delaware—where the selection of lead counsel largely depends on the size of a plaintiffs’ shareholdings and the perceived quality of its law firm—they can file in Delaware.

(Emphasis added, internal footnote omitted.)

Most interesting, though, is the recent study by Case Western’s C.N.V. Krishnan, Steven Davidoff, and Vanderbilt’s Randall S. Thomas, Zealous Advocates or Self-Interested Actors? Assessing the Value of Plaintiffs’ Law Firms in Merger Litigation. This paper surveys a large number of merger lawsuits over the last decade, and concludes that they can be broken into two tiers. The top tier are brought by the top five to ten plaintiffs’ firms at any given time, involve more contentious deal terms, more frequent docket activity, and result in greater benefit to shareholders. The bottom tier are brought by the remaining three hundred or so firms that have filed merger class actions, and look a lot more like the stereotypical merger lawsuit.

For most corporate defendants, merger class actions do not occur with the same frequency as other litigation. So it is well worth the time to collect information on the landscape should you be considering a large deal. These three studies are an excellent place to start.