Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

Fordham Law professor Howard Erichson (http://law.fordham.edu/faculty/1095.htm) has posted a new working paper that addresses the thorny issue of settlements in mass tort cases.  Titled Uncertainty and the Advantage of Collective Settlement, (forthcoming, DePaul Law Review) it posits six different types of uncertainty in mass torts, each of which he links to well-known cases. According to Erichson, there is uncertainty about

1. General causation (eg, Bendectin litigation)
2. Liability (tobacco/Agent Orange)
3. Exposure (ephedra/Wolburn leukemia clusters)
4. Product ID (asbestos)
5. Individual medical causation (Vioxx)
6. Damages

Erichson argues that, for cases 4, 5, and 6, aggregate settlement is a good idea, while litigation is probably better for cases 1, 2, and 3. What's his definition of "good idea"? He makes a few casual references to "justice," but what he really seems to mean is a settlement where the defendant pays compensation in proportion to the harm it (likely) caused. As Erichson puts it:

When parties face uncertainty about individual causation, a collective settlement may offer an excellent opportunity for an outcome that reflects proportional liability even in the absence of a proportional liability rule of tort law. However, collective settlement offers this advantage only when the uncertainty relates to the likelihood that each plaintiff will prevail on causation. If causation is uncertain but it is clear that each plaintiff can or cannot meet the preponderance standard, then collective settlement would reflect the same overliability or underliability that would result from individual or collective adjudication.

When liability and causation are clear but the amount of damages is uncertain, collective resolution – whether by adjudication or settlement – offers the benefit of reducing variability and possibly providing greater accuracy. Particularly with regard to punitive damages, collective resolution can serve the important function of reducing variable results among similarly situated claimants.

Erichson likes typologies, and views himself as providing starting points for further analysis by other researchers. So the fair question to ask is: is this a useful breakdown of types of uncertainty? And the answer is: somewhat.

One problem is that it seems Erichson stretched a little to get six categories. In particular, "individual medical causation" feels like a fudge. There's little to distinguish it from liability, except that--according to Erichson--in one case, the legal question is uncertain, and in the other, the factual question is. In either case, however, it would require individual trials to determine whether the substance caused the illness, and whether that meant that the manufacturer was liable. (For example, in some mass tobacco cases, it appears one of the larger problems with aggregate treatment was how to address the difficult issue of determining individual medical causation.)

And the second problem is that Erichson really doesn't consider the means by the settlement will be achieved, and the method of settlement can have a tremendous effect on its "justice."  There's no question that the parties would have difficulty pushing through a mass-tort settlement as a classwide settlement.   And while it is possible to settle a mass tort without invoking Rule 23, those settlements bring their own problems. Among other issues, settling many different cases on the same "take it or leave it" terms seems unfair, but engaging in a lengthy plaintiff-by-plaintiff claims may not save much time or money over the original trials. As Judge Eldon Fallon observed about the Vioxx settlement:

The potential harm to the public's perception of the judicial process is especially acute in the instant case because of the large number of claimants participating in the settlement. The approximately 50,000 plaintiffs and the $4.85 billion settlement fund have captured the public's attention, resulting in a heightened degree of public scrutiny on the settlement proceedings and the judicial process in general. Disproportionate results and inconsistent standards threaten to damage the public's faith in the judicial resolution of mass tort litigation by creating an impression of inherent unfairness.

That, right there, is the rub.  To make the settlement seem fair, it has to be fair, treating like cases similarly, and different cases differently.  Judge Fallon's solution was to assert the power to review individual plaintiffs' lawyers contingent-fee contracts (which would check the lawyers' understandable impulse to settle as many cases as possible on whatever terms).  That is an unwieldy solution, but better than nothing. How to resolve mass-tort claims like this--where individual causation is uncertain--remains a very difficult question. Erichson's proposed typology is useful on the easier questions, but unfortunately glosses over one of the most challenging issues in aggregate litigation today.

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 In the world of class actions, case brought under the Federal Labor Standards Act (FLSA) stand apart from other class actions. Unlike a standard Rule 23 class action, the plaintiff in an FLSA action has the option of filing a class action under Rule 23, a collective action under the FLSA, or both.

What is a collective action? Like a class action, a plaintiff in a collective action trades individual control over her lawsuit for the economies of scale and the bargaining leverage that come with group litigation. But FLSA collective actions follow different procedural rules than Rule 23 class actions, ones generally considered more permissive. FLSA certification usually occurs in two parts. First, in the "notice stage," the trial court decides whether it should notify other “similarly situated” employees who might wish to opt in to the litigation. If the court decides in favor of notice (and with it, conditional certification), it informs the putative class members with a court-ordered notice and gives them an opportunity to opt into (not out of) the class. After any other plaintiffs opt in, discovery commences. After discovery is complete, the defendant can move for decertification. If the court decertifies the proposed opt-in class action, it dismisses the opt-in plaintis without prejudice to reasserting their claims individually.

This more permissive procedure means that employment actions under the FLSA have become a growth industry for plaintiffs' lawyers. And the difference in procedure means that the strategies for opposing certification are different. So how does one oppose an FLSA action? Shook Hardy lawyers William C. Martucci and Jennifer Oldvader have published an article in the Kansas Journal of Law & Public Policy answering just that question. (The cite, for those interested, is 19 Kan. J.L. & Pub. Pol'y 433.) And they have several strong proposals for opposing the increasingly-common practice of filing concurrent Rule 23 class actions and FLSA collective actions:

• Attack the "common scheme or plan" allegation. "One way of gathering such evidence is to collect declarations from other employees, who can provide vital information on compensation and time-clock policies as well as how these policies are put into practice." If the declarations show that the "policy" was implemented in different ways at different times by different people, a court will have a harder time certifying a class.
• Argue that enough discovery has occurred to allow for heightened certification standard. "Generally, the rationale behind the "lenient" conditional certification standard is that a plaintiff has not had time to conduct any discovery at the conditional certification stage. However, where discovery has occurred, a defendant may be able to successfully argue that a heightened standard of review is more appropriate."
• Argue the conflict between collective action and class action. "When faced with the possibility of an opt-in FLSA collective action and an opt-out state law class action, a defendant may be able to successfully argue that a district court should decline to exercise supplemental jurisdiction because the state law class action predominates over the FLSA collective action."

Martucci and Oldvader focus their article on "off the clock" actions where plaintiffs are allegedly not paid for time they worked (as opposed to misclassification actions, where plaintiffs are denied overtime because their job does not qualify for it). But their tactical advice is sound. For attorneys looking to defend these kinds of cases, this is essential reading.

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 Obviously, securities fraud is bad for firms. But, once a fraud has been discovered (driving down the stock price), does a securities class action add injury to injury? A number of commentators have suggested so, using the following logic: a securities class action takes money from the firm, and pays it to the shareholders, minus costs and attorneys' fees. The hitch is that the firm is owned by the shareholders, which means that the attorneys have just taken money from the shareholders' property and handed it to them directly, while taking a one-third cut for themselves. (This is sometimes known as the "circularity" critique, because the money just moves in a circle--except for the part that moves into the lawyers' pockets.)

If securities class actions really just represent a 33% "lawyer tax," then why haven't firms challenged these lawsuits as being, on their face, evidence of inadequate counsel? One big reason is that doing so is dangerous from a rhetorical point of view. If a firm has been accused of defrauding its shareholders, it may lack the ethos to argue that the real fraud is the lawsuit itself.

And yet the circularity problem remains. However, a new article from the University of Pennsylvania Law Review, Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms, by Lynn Bai, James D. Cox, and Randall S. Thomas (158 U. Pa. L. Rev. 1877), suggests a possible legal argument for countering this kind of lawsuit.

The authors looked at a number of firms in different industries that had been accused of securities-related frauds (usually accounting frauds designed to artificially inflate the price of the stock), in order to determine whether the resulting class actions harmed the firms' performance in the long term. They examined a number of different measurements of performance, including stock price, sales, and liquidity.

The basic conclusion? Filing a securities class action has an immediate negative effect on stock price, but the firm gradually rebounds, even as the litigation progresses. However, both stock price and operational efficiency tend to remain low for a long time afterwards. Why? Because, in settling a class action, the firm winds up using most of its cash to pay the shareholders and lawyers, forcing a liquidity crisis that impairs its short-term performance. Once a firm lacks sufficient cash to operate day-to-day, it can't do what it needs to regain legitimate competitiveness, resulting in a continually depressed stock price.

Now, one possible reason for a continued low stock price is that the firm's performance was never that great to begin with. However, the authors also compared the firm's performance to the amount they paid in settlement, and found a strong relationship. In the authors' own words:

"defendants were more likely to experience lower liquidity levels than their peers in the post-settlement years than in the Pre-class Period. Moreover, this probability increased with the settlement amount ... These numbers are consistent with the theory that insurance provided less than full coverage of the settlement amounts and that the defendants paid the discrepancy out of their current assets. The settlement payment exacerbated liquidity constraints, making the defendants more vulnerable to liquidity crunches and prone to bankruptcy."

So, does this suggest that a securities defendant could accuse a plaintiff of being inadequate simply for filing the lawsuit in the first place? Not really. But it does suggest that in many cases, a securities class action may not be superior to other methods of resolving the lawsuit. If a class-action settlement (or by extension, damages award) harms the firm by reducing liquidity when the firm needs it most, then it is harming many of the same shareholders it is supposed to help. By contrast, SEC fines aimed at the officers who profited from a fraud, or SEC consent orders aimed at reforming the company's bad practices, can reform bad practices without crippling a firm's ability to rebound from actions of bad managers.

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 When a defendant is faced with a class action complaint, sometimes the best strategy appears to be to settle quickly, before having to engage in costly litigation or burdensome discovery. But, as readers of this blog know, that strategy is not always as straightforward as it first seems.  In today's case, we have another example, where what first appeared to be a quick-and-painless settlement wound up taking eight years and visiting the Seventh Circuit Court of Appeals three times.

In 2000, a group of class-action plaintiffs sued Fleet Mortgage claiming that it had sold their personal information to telemarketers, in violation of the Fair Credit Reporting Act (FCRA) and various state consumer-fraud acts. Mirfasihi originally brought suit on behalf of two classes, one of people whose information was shared, and one of people who actually bought something from the telemarketers.

Fleet Mortgage negotiated a settlement of the entire case, which the trial court approved. But, based on the appeal of some objectors, the Seventh Circuit reversed, because the settlement had released the claims of the "information sharing" class without giving them anything in return. After the case was remanded, the parties negotiated a second settlement, with a heavy cy pres component. (The court found cy pres appropriate because the information sharing class's claims were not worth much, if at all.) This settlement drew objections as well, and the Seventh Circuit again reversed and remanded, this time because the lower court had not "made an adequate effort to value the claims of the information-sharing class." On this second remand, the trial court found--after an extensive survey of the various state consumer-protection laws at issue--that the information-sharing claims had no value at all. The objectors appealed again, arguing that the information-sharing claims might be worth as much as a billion dollars, and that their lawyers deserved far more than the $18,750 fee they had received.

This time, the Seventh Circuit pulled no punches. Writing for the panel, Judge Posner first affirmed that the claims of the information-sharing class were worthless. Then, he proceeded to explain the primary dilemma that meritless class actions pose to all parties:

"We are disheartened that the litigation by the information-sharing class has been allowed to drag on for eight years, when it had no merit—and that as a matter of law, without need to take evidence. It is an example of the typical pathology of class action litigation, which is riven with conflicts of interest, as we discussed recently in Thorogood v. Sears, Roebuck & Co., supra, 547 F.3d at 744-46. The lawyers for the class could not concede the utter worthlessness of their claim because they wanted an award of attorneys' fees. The lawyers for Fleet were reluctant to argue the utter worthlessness of the claim because they were able to negotiate a settlement that cost their client virtually nothing—provided they did not take such a strong stand that it jeopardized the class lawyers' shot at a generous award of attorneys' fees, and hence the settlement. And the objectors were motivated to exaggerate the value of the claim of the information-sharing class so that they could get a generous award of attorneys' fees. At the very outset of the case, before certifying the class, the district court should have required the parties to present the belatedly presented survey of the consumer protection laws of the 50 states, plus argument concerning the scope of the Fair Credit Reporting Act, to demonstrate the existence of a colorable claim."

Class-action defense lawyers can learn several lessons from this opinion. First, early challenges to cases may be preferable to settlements, if for no other reason than they can test the merit of questionable claims. Second, certain classwide issues--like the feasibility of a nationwide class based on state law--do not have to wait until class discovery has been completed. And finally, if the plaintiffs don't watch out for the interests of the absent class members, then the defendant may have to; not doing so may cost the defendant years and tens of thousands of dollars in appeals. As I've said before, sometimes, settling on the cheap can be a very expensive strategy.
 

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 Brian Fitzpatrick (of "Objector Blackmail" fame) has published another article in the University of Pennsylvania Law Review asking the provocative question: are class-action lawyers paid too little? His provocative answer: yes they are. According to Fitzpatrick, in small-stakes class actions, lawyers should collect a 100% contingency fee. What's his justification? An argument he refers to as "insurance-deterrence theory." Fitzpatrick assumes that any money that goes to class-action lawyers serves a deterrence function, because not only does it cost the defendant money, it also funds further opposition to corporate wrongdoing. (Fitzpatrick is not the only person to make this kind of argument; many plaintiffs' lawyers and academics argue that class actions primarily serve as a public deterrent to corporate wrongdoing.) He also assumes that, if a harm is too small for a class member to reasonably buy insurance to prevent, then that money is better spent on the "deterrence" of paying the class lawyer than the "insurance" of compensating the class member.

Fitzpatrick dismisses most arguments to cap fees (for example, that class actions exist to compensate class members rather than enrich lawyers, or that giving plaintiffs' lawyers further incentives to file questionable cases might lead to further abuse) as "political." However, even leaving aside these arguments, Fitzpatrick's argument runs afoul of the basic structure of Rule 23.

• 100% fees make inadequate settlements. Rule 23(e) requires a settlement to be "fair, reasonable, and adequate."  One way the court measures these criteria is by determining whether a proposed settlement represents good value to the proposed class.  A class settlement that provided the members with nothing, and the lawyers with everything would be unlikely to pass this test. (It also would not pass the settlement-approval requirements of the Class Action Fairness Act. If courts are legally required to scrutinize settlements that give class members only coupons, then they certainly can't rubber-stamp settlements that give the lawyers everything and the class nothing.)
• 100% fees require inadequate class representatives. Fitzpatrick's proposal is also flawed because there is no reasonable class member that would willingly agree to forgo any possibility of recovery so that her counsel could be paid more. In essence, Fitzpatricks proposal relies on a class representative that would be willing to say "I understand I was defrauded for $100, but instead of getting that money back, I'd rather you just gave it all to my lawyer. And I'm confident everyone else like me will feel the same way." For many courts, that kind of statement would serve as evidence that the class representative was not sufficiently independent of her counsel. 
• 100% fees indicate inadequate class counsel. Under Rule 23(g), "Class counsel must fairly and adequately represent the interests of the class." That means that they must watch out for the class's best interest, not their own. From that standpoint, a 100% fee clearly does not look out for the best interests of the proposed class instead of the lawyers.

One has to admire Fitzpatrick's chutzpah; agree or not, he's made a bold proposal. But he's completely ignored the existing Rule 23 requirements to get there. As it turns out, Fitzpatrick's proposal is inadequate, in every sense of the word.

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The final "classic case" for now, Sprague v. General Motors Corp. involved an alleged violation of the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs had sued GM claiming that it had not provided them with the fully "paid up" lifetime healthcare benefits it had promised when it convinced them to take early retirement. The trial court certified a class of 50,000 early retirees, and declined to certify a class of 34,000 general retirees. GM appealed the certification of the early retiree class, and the plaintiffs appealed the denial of certification of the general retiree class. The Sixth Circuit reversed the certification, and affirmed the denial of certification--a complete victory for the defendant. In doing so, it made several important holdings about commonality and typicality:

Commonality. As the court pointed out, a common issue had to have some level of specificity. (An issue discussed here before.) Otherwise, every mass lawsuit would meet the commonality requirement, simply because the question "are class members residents of the Milky Way Galaxy?" would be a common issue.

It is not every common question that will suffice, however; at a sufficiently abstract level of generalization, almost any set of claims can be said to display commonality. What we are looking for is a common issue the resolution of which will advance the litigation.

In other words, a common issue must be a common material issue.

Reliance.  The court also held that, because GM made different statements to different retirees, their ERISA claims were not suitable for class treatment.

GM's statements to the early retirees were not uniform. Among other things, the statements varied (1) based on the person making the representation, (2) based on the particular special early retirement pro- gram that applied, (3) from facility to facility, and (4) from time to time. Given the wide variety of representations made, there must have been variations in the early retirees' subjective understandings of the representations and in their reliance on them. Some retirees might have interpreted GM's statements to mean that their benefits were vested. Others might have understood that their benefits were subject to change. Some early retirees might have relied on GM's statements about health care benefits, while for others the statements might have made no difference at all in the decision to retire early.

Like the Fifth Circuit in Castano, the court here came up with a succinct description of the largest problem with classes that require a finding of reliance.

Typicality.  The most quoted part of the Sprague opinion involved typicality. The court held that plaintiffs had not met the typicality requirement because proving their claims would not prove the claims of the other class members. As the court put it:

In pursuing their own claims, the named plaintiffs could not advance the interests of the entire early retiree class. Each claim, after all, depended on each individual's particular interactions with GM-and these, as we have said, varied from person to person. A named plaintiff who proved his own claim would not necessarily have proved anybody else's claim. The premise of the typicality requirement is simply stated: as goes the claim of the named plaintiff, so go the claims of the class. That premise is not valid here.

(Internal citations omitted.)

The primary lesson defendants can derive from Sprague is a simple one: when possible, frame issues to show the court how resolving them will not advance the litigation for the whole class. After all, the point of allowing a class action to proceed is that proving the plaintiff's case will prove the class's case as well. If that underlying premise is false, then a class action is not appropriate.

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If you'll pardon a brief bit of self promotion, The Class Action Playbook has a cover:

According to the Amazon page, the release date is October 11, 2010.  Rest assured, you'll get updates here.  

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Geoffrey Miller is one of the few law professors out there who consistently investigates real empirical questions about class actions. He's published on the role of objectors in class-action settlements, the use of non-pecuniary relief, and even the effect of judicial review on settlement rates. So when Miller comes out with a policy proposal--as he does in a recent article in the University of Illinois Law Review, it's worth paying attention to what he says.

Miller starts from the premise that "something is wrong with settlements." (If one were glib, one could say that his critique proves that something is right with settlements. Nobody's pleased with them.) His proposed solution? The preliminary judgment. As Miller proposes it, at any point, a party could move the court to declare whether it believed the plaintiff could establish her case by a preponderance of the evidence currently available.

A preliminary judgment is simply a tentative assessment of the merits of a case or any part of a case, based on the same sorts of information that the courts already consider on motions for summary judgment. The difference between a preliminary judgment and a summary judgment is that the court, in a preliminary judgment, would not be limited to deciding issues with which no reasonable jury could disagree. Instead, the court would provide its own provisional judgment on the merits of the case based on the information provided by the parties. A preliminary judgment, once given, would convert into a final judgment after the expiration of a reasonable period of time - say, thirty days. Any party against whom a preliminary judgment is issued, however, would have the right to object prior to the expiration of the period (with or without explanation), in which case the judgment would be vacated and the case would proceed according to ordinary rules of procedure. Like other threshold rulings, the preliminary judgment would then have no preclusive effect in the continuing litigation.

(Internal footnote omitted.)  According to Miller, this "preliminary judgment" would offer more information to the parties than a ruling on other preliminary motions--presumably because it would apply the same decision rule that applies at trial. He also believes it would reduce litigation costs.

In reality, while the motion for preliminary judgment would likely prove another useful tool, there is no reason to believe that it would be immune from the strategic behavior prompted by other versions of preliminary motions. Preparing a motion for preliminary judgment would not be costless. Defendants would have strong incentives to file early preliminary judgment motions, much as they already do with other preliminary motions. (This analysis would hold true whether one believes that defense counsel file early motions to rid themselves of frivolous cases, to frame the remainder of the litigation, or simply to run up their hourly bills.)

The lesson Miller's analysis suggests is a simple one, and one that this blog has advocated for some time now: Challenge both certification and merits as early as possible. While this isn't quite the same as getting a "preliminary judgment," the same advantages Miller touts operate. Each side gets an early look at the merits of the case. If the case lacks merit, the court should recognize the strength of the defendant's arguments and dismiss it (or at least strike the class allegations). If the case has some merit, better the defendant learn that as early as possible.

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Castano v. American Tobacco Co. (5th Cir. 1996)  involved a class of smokers, their estates, and their survivors arrayed against what was becoming a classic corporate villain: the tobacco companies.

Like in In re Rhone-Poulenc Rorer, the atmospherics favored the plaintiffs. Tobacco companies had already lost credibility in the court of public opinion. And the plaintiffs wisely took advantage of various embarrassing documents by asserting nine fraud-, warranty-, and tort-based causes of action, all based on the tobacco companies' allegedly inflicting the "injury of nicotine addiction" on a generation of smokers. Faced with a class that probably included friends and family on one side, and what appeared to be mustache-twirling villains on the other, the district court certified the class.

Of course, as lawyers might take for granted today, a nationwide personal-injury class asserting a number of fraud-based claims might be largely sympathetic, but it would not result in a workable trial. Since (like in Rhone-Poulenc Rorer) there was no Rule 23(f) that allowed for interlocutory appeals, the defendants sought appellate review under 28 U.S.C. § 1292(b).

In reversing the certification, the Fifth Circuit provided a number of observations that still carry great weight today:

Variations in state law matter. According to the Fifth Circuit,

The district court erred in its analysis in two distinct ways. First, it failed to consider how variations in state law affect predominance and superiority. Second, its predominance inquiry did not include consideration of how a trial on the merits would be conducted.

The Fifth Circuit provided a claim-by-claim analysis of material differences. It also held that differences in available affirmative defenses were material.

Fraud claims are extremely difficult to certify.  The Fifth Circuit also observed:

The court's treatment of the fraud claim also demonstrates the error inherent in its approach. According to both the advisory committee's notes to Rule 23(b)(3) and this court's decision in Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880 (5th Cir.1973), a fraud class action cannot be certified when individual reliance will be an issue. The district court avoided the reach of this court's decision in Simon by an erroneous reading of Eisen; the court refused to consider whether reliance would be an issue in individual trials.

(Footnote omitted.)  Defense lawyers continue to rely on that reasoning today when plaintiffs propose massive classes based on individual frauds.  

Large-value claims make for poor class actions.  The Fifth Circuit also noted that, as had been apparent for some time, there was real money in tobacco cases.

[I]ndividual damage claims are high, and punitive damages are available in most states.The expense of litigation does not necessarily turn this case into a negative value sut, in part because the prevailing party may recover attorneys' fees under many consumer protection statutes.

As a result, it would be very difficult to prove that the proposed class action was superior to an individual case for a plaintiff who had suffered actual harm.

So what's the takeaway for Castano? Many defense lawyers consider this one of their "go-to" cases for predominance and superiority analysis. And for a lucid explanation of why a rigorous analysis is necessary before certifying a class, few cases are better.

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