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

The caper was a simple one: the money was just sitting there unclaimed, so Kevin Waltzer would claim it.

In this case, the unclaimed money was sitting in common funds for three securities class-action settlements--In re Nasdaq Market-Makers Antitrust Litigation, In re Cendant Corporation Litigation, and In re BankAmerica Corporation Securities Litigation. To claim it, Waltzer posed as a financier who had traded the stocks at issue in each case. With the help of several accomplices (including one at the accounting firm that made the disbursements for the settlement) Waltzer cleared more than $40 million before he was caught by the IRS, and turned on the rest of his crew.

Today's case, United States v. Negroni, details the fallout from the scheme. The legal issue revolves around whether the trial court had justifiably departed downwards from the Federal Sentencing Guidelines when sentencing several of the defendants. The Third Circuit said it did not, and remanded the case for resentencing. Its primary reason for doing so was oddly similar to some class action appeals -- the trial court had not adequately explained its reasons for the downward departure.

But what's more relevant to class-action practice is the nature of the scheme. The defendants here were fraudulently claiming proceeds from securities class-action settlements. And, like with most criminal activity, it's hard to imagine that the crooks who got caught were the only ones committing the crime.  

Negroni shows that there is good reason to build verification mechanisms into a class settlement. Plaintiffs' lawyers often argue that these mechanisms serve only to depress claims. But Negroni shows exactly how individuals can make false claims; and the richer the proposed settlement, the more likely it is that it will attract con men like the defendants here.

Less important from a practical perspective, but more interesting from a theoretical one, this decision undermines the more extreme versions of deterrence that some academics use to justify increasing attorneys' fees in class actions. If class actions were only about deterring bad conduct and it didn't matter where the money went, there'd be no reason to punish these defendants. In class actions, there is rarely a high claims rate against the common fund.  So, from a "pure deterrence" perspective, the fact that this money went to con men instead of deserving shareholders should not matter. But, of course, it does matter. And why is that? Because courts recognize that class actions--like other civil lawsuits--are devices for making wronged victims whole, as opposed to simply deterring alleged bad actors. Even if current practice occasionally renders that goal a legal fiction, it's an essential legal fiction. Shattering our suspension of disbelief by allowing con men to walk away with the proceeds, whether they be posing as class members, lawyers, or experts, does extraordinary damage to a delicately balanced system.

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 As a class action lawyer (and one who defends class actions, no less), I often face the problem of explaining to friends and family exactly what I do all day. The cases themselves are often interesting, but the way we lawyers go about defending them--by mastering the arcana of one of the Federal Rules of Civil Procedure--can seem hopelessly dry. And that is why, at times, I have comforted myself with the (hollow, I admit) consolation that at least I'm not an ERISA lawyer.

Except, of course, that ERISA can spawn class-action lawsuits as well. Some simply challenge a plan administrator's decisions in administering employees' retirement benefits. But, more and more frequently, plaintiffs' lawyers are filing ERISA "stock-drop" cases, which go after the same alleged frauds challenged in securities class actions, but use ERISA plan beneficiaries as plaintiffs instead of individual or institutional investors.

The combination of Rule 23 and ERISA is enough to send many experienced lawyers into fits of anxiety or ennui, but Vanderbilt law student Lauren Fromme has bravely stepped in to explain the workings of the ERISA stock-drop suit in her comment "Unreliable Securities for Retirement Income Security: Certifying the ERISA Stock-Drop Class."

Let me say first, Fromme has written an outstanding student note, not so much for its final prescription (which I'll admit is intriguing), but for its careful exploration of a burgeoning trend in securities class actions. Fromme begins by identifying the key differences between a securities case and an ERISA stock-drop suit, namely:

First, most 10b-5 lawsuits are governed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which provides for an automatic discovery stay and heightened pleading requirements. Mirroring Federal Rule of Civil Procedure 9(b), the PSLRA requires that 10b-5 claimants plead "loss causation" and "state with particularity" facts creating a "cogent and compelling inference" that the defendants acted with intent to deceive. ERISA claims, however, are not covered by PSLRA, and Federal Rule of Civil Procedure 26 is the sole guidance for discovery. Without the additional requirements of PLSRA and Rule 9(b), ERISA plaintiffs need only plead facts creating a "plausible" inference of causal connection under Federal Rule of Civil Procedure Rule 8(a), making it easier to survive a motion to dismiss. Second, Rule 10b-5 plaintiffs must show that the defendants acted with scienter, which is a wrongful state of mind requiring at least a showing of recklessness, while ERISA requires only a showing of negligence. Third, Rule 10b-5 only allows for the recovery of damages as defined by the loss resulting from the defendant's misstatements. Remedies under ERISA, however, may exceed the plaintiffs' damages, including lost profits and other equitable relief restoring the benefit plan for losses. Finally, Rule 10b-5 defendants are defined broadly by their relationship to any fraudulent misstatements, while ERISA defendants must be plan fiduciaries.

(Emphases added, internal footnotes omitted)

As Fromme points out, the largest obstacle to certifying an ERISA stock-drop class is the treatment of the investors' reliance on the alleged misrepresentations. Reliance matters in ERISA suits (which seek restitution to a firm's retirement plan) because most plans are defined-contribution plans, rather than defined benefit plans. As a result, participants choose their own investments, and bear the risk of those investments working out or not. (Courts certify ERISA suits under all three subsections of Rule 23(b), but Fromme argues causation matters even in Rule 23(b)(1) or (b)(2) suits to the extent defendants can demonstrate that a representative plaintiff is atypical of the class because she relied on a misrepresentation no one else did.) ERISA suits are not suits under 10b-5, so it is unclear that the Basic rule that allows plaintiffs to presume reliance is in effect.

Fromme's proposal to fix this apparent contradiction is to require "some reliance":

the plan participants collectively in an ERISA section 502(a)(2) claim can be likened to a single plaintiff asserting a claim under Rule 10b-5. All of the plan participants might not rely on the fiduciary's misstatements, but as long as some participants rely there will be actual causation. This is similar to a single 10b-5 plaintiff, for example, who detrimentally relies in part on the corporate officer's misstatements, in part on her own intuition, and in part on the recommendations of a friend. As long as the plaintiff in this 10b-5 case can demonstrate the detrimental reliance on the material misstatements, her reliance on the other aspects of the security should not matter. Therefore, to establish liability in an ERISA section 502(a)(2) claim, all that the plaintiffs must show is that some of the plan participants relied on the material misstatements. Only some reliance will be enough to cause harm to the plan as a whole.

Fromme's proposal is interesting, although it raises some questions about how it would play out in practice. Does a plan participant who did not rely on a misstatement have standing to offer evidence of others' reliance? Will this create a greater focus on cherry-picking class representatives, which may raise adequacy problems? Nonetheless, this is an outstanding piece of student scholarship, and well worth a read by anyone who defends securities class actions.

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 In July 1969, General Telephone Company of the Southwest hired Mariano Falcon, a Mexican-American, as part of minority recruitment effort. Falcon maintained a good employment record until, "[i]n October 1972 he applied for the job of field inspector; his application was denied even though the promotion was granted several white employees with less seniority." Dissatisfied with being passed over, Falcon filed a charge with the Equal Employment Opportunity Commission, which promptly granted him a right-to-sue letter.

Falcon filed his lawsuit as a class action, alleging discrimination not just in General Telephone's promotion practices (sensible, since he had been passed over for promotion), but also in its hiring practices. After General Telephone responded to his interrogatories, Falcon moved to certify a class of all employees or potential employees. (This was an "across the board" challenge to Falcon's employment practices, a tactic that the Fifth Circuit allowed at the time.)

The trial court certified the class without conducting a hearing. It then conducted a trial of the liability issues, which resulted in a finding of that General Telephone had discriminated against Mexican-Americans in its hiring--but not its promotion--decisions. Both sides appealed the ruling; General Telephone because the hiring claim had been certified, and Falcon because his hadn't been.

The Supreme Court granted certiorari "to decide whether the class action was properly maintained on behalf of both employees who were denied promotion and applicants who were denied employment." In an 8-1 opinion , (Chief Justice Burger concurred in part and dissented in part), it held that the answer was "no."

Justice Stevens began his opinion by noting that

The class-action device was designed as an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only. Class relief is peculiarly appropriate when the issues involved are common to the class as a whole and when they turn on questions of law applicable in the same manner to each member of the class. For in such cases, the class-action device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [class member] to be litigated in an economical fashion under Rule 23.

(Internal quotations omitted.)

Justice Stevens's opinion primarily addressed the problem that Falcon's claim was not the cause of action certified for class treatment. As a result, he was an atypical class representative.

We have repeatedly held that a class representative must be part of the class and possess the same interest and suffer the same injury as the class members.

(Internal quotations omitted.)  In fact, Justice Stevens held

Conceptually, there is a wide gap between (a) an individual's claim that he has been denied a promotion on discriminatory grounds, and his otherwise unsupported allegation that the company has a policy of discrimination, and (b) the existence of a class of persons who have suffered the same injury as that individual, such that the individual's claim and the class claims will share common questions of law or fact and that the individual's claim will be typical of the class claims.

The Court also found that the trial itself showed class treatment wasn't appropriate.

Instead of raising common questions of law or fact, respondent's evidentiary approaches to the individual and class claims were entirely different. He attempted to sustain his individual claim by proving intentional discrimination. He tried to prove the class claims through statistical evidence of disparate impact. Ironically, the District Court rejected the class claim of promotion discrimination, which conceptually might have borne a closer typicality and commonality relationship with respondent's individual claim, but sustained the class claim of hiring discrimination. As the District Court's bifurcated findings on liability demonstrate, the individual and class claims might as well have been tried separately.

Falcon is particularly important right now given that the Supreme Court is deciding Wal-Mart v. Dukes. The composition of the Court has changed, so this case does not provide a guide to how the current Court will rule on Dukes. But both parties relied on Falcon in their briefing, so it is particularly important to remind ourselves how the Court has ruled in previous employment class actions. Just because the plaintiff has alleged discrimination does not mean that he has alleged a claim that can be established with classwide proof.

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As I've discussed before, there are few areas of law as polarized as class actions. The plaintiff and defense bars in class-action law rarely agree on anything, from the proper scope of Rule 23 to what a class action is in the first place. And I'm not the only one to have noticed this divide. Connecticut law professor Alexandra Lahav recently published an essay in the Fordham Law Review on "Two Views of the Class Action."

Lahav's essay could improve from more focus.  She winds up talking about two different pairs of competing views--one of class actions, and one of class-action lawyers lawyers--that don't line up perfectly themselves.

The first set of competing views she discusses are often called the "entity" and the "joinder" views of class actions. The entity view (often espoused by plaintiffs in briefing) argues that a class is a single entity that exists independently of the class representative. This label is often helpful for courts trying to certify a class, or lawyers seeking greater control over their case. (If a class is an entity, then there is little need to listen to a rebellious class representative, or even objectors.) By contrast, defense lawyers often invoke the joinder analogy to remind the court that a mere joinder device cannot and should not change the substantive rights of the parties.

The second set of competing views involve how to look at class-action lawyers. One school of thought looks at these lawyers as entrepreneurs, businessmen who conjure cases and then find plaintiffs to staff them; the others as private attorneys general who serve the public good for a profit.

Lahav's account of these two sets of competing views gets confused in a few places. For example, she describes both the entity and the entrepreneur tropes as defendants' views of class actions, even though defendants traditionally do not argue (or believe) that litigation classes are cohesive entities. Instead, they often see--and point out to the court--a loose collection of people with different problems and different claims, not all of equal merit. Similarly, while plaintiffs may on occasion argue that a class action is just a joinder device, they are far more likely to describe a class as a coherent entity that exists independently of the class representative.

Moreover, rather than really explore how these conflicting views have informed class-action doctrine, Lahav then embarks on a completely different discussion. Relying heavily on references to poets Wallace Stevens and Percy Shelley, and novelist Nikolai Gogol, she asks whether plaintiffs' lawyers are rogues harnessed for a useful purpose, or a redemptive force that deserves more respect. (Personally, If we're going to make poetry out of something as prosaic as lawyering, I'd prefer Anna Barbauld's approach myself.)

The point that Lahav is leading up to (after invoking Gogol's novel Dead Souls) is that the law often treats class-action lawyers as greedy men whose greed is harnessed for the public good. In Lahav's view, this is a problem, not because class-action lawyers may in fact step over the line, but because seeking to limit their wrongdoing apparently causes the problem in the first place.  As she puts it:

The lawyer is sometimes a rogue, but the more our system accepts this as true and seeks to harness the rogue, the more our system creates roguish behavior.

There are two problems with this final argument. First, literary references or no, Lahav doesn't explain how treating class actions as susceptible to abuse winds up creating those abuses, and that failure to identify how the process works undermines her credibility. It also means her logic could apply to anyone, including defendant corporations. By Lahav's logic, treating corporations like criminals by regulating them just encourages them to commit illegal acts--a conclusion I doubt she would agree with. And that's the second problem with Lahav's article: it provides a one-way ratchet that gives plaintiffs' lawyers the benefit of the doubt, but no one else. Courts, she argues, should view the class-action lawyer as "capable of redemption," but not the defendant (who should be deterred from exploiting others).

As I've explained before, law (not to mention legal strategy) works best when it recognizes that everyone has a little rogue in them. Corporations are capable of good and bad things, and so are the self-appointed cops who police them. Assuming that one side can do no right and the other can do no wrong very rarely leads to accurate descriptions or good policy outcomes; while it may encourage the side that can do no right to clean up its act, it usually results in the side that can do no wrong testing exactly how far it can go.

I'm not saying Lahav's essay is useless. The first half contains an interesting (if somewhat muddled) description of several rhetorical tropes used in class-action practice. I just wish that the second half had stuck with analyzing the rhetoric instead of indulging in it.

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Greg Mortenson turned a passion for mountain-climbing and an interest in helping the women of Central Asia into a multimillion dollar charitable foundation and a bestselling book. The book, Three Cups of Tea, tells the story of how his failed attempt to scale K2 (considered one of the hardest peaks in the world) led to his founding a charity to build schools in Central Asia.

But since the time that Mortenson's book hit the bestseller list, a number of people (including former supporter John Krakauer) have raised serious questions about whether Mortenson was telling the truth in Three Cups of Tea, and whether he has conducted his charity work properly. Last month, the CBS newsmagazine 60 Minutes aired a less-than-flattering segment on the controversy. Soon after that, a pair of Montana state lawmakers filed a class action against Mortenson and his charity, the Central Asia Institute. 

The complaint asserts claims for fraud, deceit, RICO violations, breach of contract, and unjust enrichment. Many of these claims are hard to certify. In particular, fraud-based claims (here, fraud, deceit, and RICO) will require individual proof of reliance for each class member.

What do I mean by "individual proof of reliance"? In this case, all one needs to do is look at the comments to the 60 Minutes article:

"I just started reading Three Cups of Tea a few weeks ago. None of what 60 Minutes is saying seems particularly shocking or surprising to me. For example, it probably does cost that much more to promote a book in the U.S. than it does to build 100 schools in Pakistan. I found the story to be engaging and inspiring, but also suspected all along that some of the facts were distorted to make the story flow better."

"After reading the book I was impressed that someone would have the courage and faith to do what he claims to have accomplished, even if only some of it is true, it was a remarkable acheivement. "

"While I had some caveats while reading Mr. Mortenson's book (3 Cups), I nevertheless am essentially disgusted by the assumptions and arrogance of outside entities (going in well after the fact) that expect all transactions and processes in places like mountainous Pakistan and Afghanistan to have proceeded along idealistic and unreal American "standards" - which don't exist, anyway. Who do they think they're kidding?"

"I'll reserve judgment on Greg Mortensen, at least for now. Success isn't permanent. Failure is not fatal. I'll continue to recommend his books for the lessons learned, and I'll wait to see how Greg Mortensen's legacy plays out."

Assuming each of these commenters bought the book they read, each one is a member of the proposed class. And none of these class members believe they were deceived. There are many reasons to buy a non-fiction book; some may be looking for the most truthful account possible of a story, but some may in fact buy a book knowing it's likely to contain bias or even outright falsehood. Whoever Mortenson's attorney is, she could spend some quality time harvesting comments like these to show that proving liability will require different evidence for each putative class member.

Moreover, the fact that this lawsuit was filed by a pair of Montana lawmakers implies that this lawsuit may be more about scoring political points than about repairing any particular damage. (Legislators have many, varied reasons for filing lawsuits, not all of which will line up with consumers' interests.)

It may be that the plaintiffs' lawyers here are not looking to certify a full class. Given the severity of the negative publicity that has attached to Mortenson, they're likely banking on turning the lawsuit into a quick settlement. Authors and publishing houses rely heavily on publicity for their marketing, which means that they're unlikely to want to risk too much bad publicity.

No matter how this lawsuit turns out, however, it forms the latest example of the literary class action--and we can certainly expect to see more of these in the future.

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I've talked before about the problem of circularity in securities class actions. Briefly put:

[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.

At the time, I pointed out that while the circularity critique may suggest that securities class-acton plaintiffs are inadequate the moment they bring a lawsuit, courts were unlikely to give that argument much credit. Villanova professor Richard Booth, however, has authored a working paper that refines the argument, and shows why securities class actions may actually cause adequacy problems in language most courts will understand. Booth notes that there are two kinds of investors: diversified investors that actively manage their portfolios in some way, and more passive "buy-and-hold" investors. diversified investors are far less likely to buy and hold investments. Instead, they tend to be "actively managed," trading investments based on a number of factors in an attempt to beat the returns the market offers. Most importantly, even a diversified investor with a stable strategy will buy and sell individual stocks as it rebalances its portfolio. As a result, a diversified investor--and many, if not most, investors are diversified--is just as likely to gain from a securities fraud (selling the stock when its value is still inflated) as it is to lose. Under those circumstances, as Booth describes it, securities class actions operate as a redundant insurance policy.

Moreover, because the diversified investor has shielded itself from any large individual loss that comes from a buy-and-hold strategy, they are more likely to prefer derivative lawsuits to class actions. Why? Because in a derivative class action, the vast majority of the money recovered goes back into the corporation, rather than out to the original buyers of the stock. Booth also points out that attorney fees tend to be lower in derivative actions, effectively reducing the "lawyer tax" on any recovery. Or, as Booth himself puts it:

Undiversified investors are likely to favor class actions. Diversified investors are likely to oppose class actions and favor derivative actions. Although undiversified investors would not object to a derivative action in principle, they might object because the derivative recovery would reduce the class recovery. In other words, each group opposes what the other favors. Investors who stand to gain more from a class action will want their representative plaintiff (and lawyer) to maximize their claim by downplaying or indeed ignoring any evidence of derivative claims. The remainder of investors will want a zealous derivative plaintiff (and lawyer) to maximize derivative claims.

(Emphasis added)  Booth's working paper suggests three strategies for the lawyer defending a securities class action:

• Aim discovery at the plaintiff's investment strategy. If the plaintiff in a securities class action actively manages its assets, then it is far less likely to have suffered a significant loss. If it pursued a buy-and-hold strategy for the stock, it may not be an adequate or typical representative of those investors who more actively manage their assets. (Many defense lawyers already ask about investment strategy as a matter of course, but a reminder never hurts.)
• Argue derivative actions are superior to class actions. I've discussed superiority in securities class actions before, but Booth's analysis reinforces the point: a securities class action may not be the best way of recovering investment losses. In fact, a derivative lawsuit--because it generates less in fees and puts the money back into the corporation itself--offers natural advantages over a class action.
• Argue adequacy. One of the strongest strands of adequacy doctrine is the discussion of intra-class conflict. If the defendant can generate evidence that shows that the named plaintiff does not actually represent the investment strategies of a significant percentage of the class--and in fact may be actively undermining others' investment strategies--that is strong evidence that an irreconcilable class conflict exists.

These tactics are hardly radical; in fact, they're based on common sense about how people actually invest. Unfortunately, as the circularity critique highlights, common sense is not always so common in the realm of securities class actions.

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A few weeks ago, I mentioned that the Supreme Court had begun to hand down its class-action cases for the term. I was wrong. It actually delivered another opinion a month ago that, despite sitting on my desktop, I had forgotten. And that's something I ought to correct.

The case, Matrixx Initiatives, Inc. v. Siracusano, arose out of an alleged securities fraud. According to the plaintiffs, Matrixx Initiatives, Inc. (in the person of three of its executives) withheld reports of a possible link between its cold remedy Zicam and a condition known as anosmia, or loss of the sense of smell. Specifically, the plaintiffs alleged that, starting in 1999, Matrixx had received calls from doctors who had reported "clusters" of patients who used Zicam and suffered anosmia. (Even under more rigorous conditions than self-reporting, cluster samples tend to lack the precision required for statistical significance.)

Matrixx convinced the district court to dismiss the complaint by arguing that clusters are not significant enough to reach the standard of materiality under § 10 of the Securities Exchange Act, and that the plaintiffs had not pled that the defendants had scienter under the PSLRA. The Second Circuit reversed, and Matrixx appealed to the Supreme Court.

The Court faced two questions, both of which arise primarily in securities class actions. First, does an omission of data that is not statistically significant count as material? Second, is recklessness enough to fulfill the PSLRA's scienter requirement?

It didn't struggle with either question. Justice Sotomayor wrote for a unanimous court. First, the Court held that data does not have to be statistically significant to be material.

As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation. We note that courts frequently permit expert testimony on causation based on evidence other than statistical significance. We need not consider whether the expert testimony was properly admitted in those cases, and we do not attempt to define here what constitutes reliable evidence of causation. It suffices to note that, as these courts have recognized, "medical professionals and researchers do not limit the data they consider to the results of randomized clinical trials or to statistically significant evidence."

(Internal citations omitted.) Justice Sotomayor concluded that since

medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.

The Court did try to set some limit on the materiality of any adverse events. It noted that adverse event reports are "daily events" for pharmaceutical manufacturers. So the real question was not whether there had been an adverse event report, but how a reasonable investor would treat the "total mix" of information at that time.

The Court also briefly discussed scienter. Given plaintiffs' allegations that Matrixx had hired a consultant and convened a "panel of physicians and scientists" to help it respond to the reports of anosmia,

[t]he inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions.

So what does this ruling mean for defense lawyers? First, it should guarantee continued business. Efforts to limit its reach aside, the Court's ruling provides an opening for enterprising plaintiffs' counsel to file securities-fraud cases based on isolated events, so long as they argue that the events changed the total mix of information available to an investor. The ruling also means that lawyers will have to pay extra attention to how their clients conduct investor relations. The more aggressive the investor-relations strategies, the more likely plaintiffs will be able to paint a picture that the company thought a given event indicated something meaningful, leading to an inference of scienter.

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 Last year, I discussed Northwestern professor Martin Redish's argument that class actions are unconstitutional. Redish had predicted--and I largely agreed--that the argument would fall on deaf ears. It turns out we were both wrong. Leaving aside those defense lawyers who adopted his arguments about the Rules Enabling Act, Alexandra Lahav of the University of Connecticut has now reviewed his book Wholesale Justice.

Lahav praises the book, but largely disagrees with its conclusions. Specifically, she takes issue with Redish's argument that class actions violate separation of powers, and that they lack democratic accountability.

In arguing against Redish's separation-of-powers critique, Lahav observes that this separation is most often enforced through the use of "checks and balances"; and those, she says, are sufficient in their current form. As she points out, when abuses of class actions have grown especially prevalent, the legislature has stepped in to address the problem. In particular, it has done so when it enacted the PSLRA and CAFA. Lahav also claims that class actions are constitutional in a larger sense because they are--contrary to Redish's argument--subject to democratic accountability. As she puts it:

Not only are class actions salient on a national level, but individuals also have access to class actions, in the sense that many of us have been members of class actions. We have received notices in the mail and gathered that while we will only obtain a very small recovery, the lawyers managing these cases will get millions. Class members are entitled to call the lawyers in charge of the case and there is often a toll free number available for that purpose. Class members are also entitled to write to the court as well as to appear at a fairness hearing about the settlement.
The problem is that the class actions to which citizens have access— class actions of which they are actually a member—lack salience. This is either because class action notices are indeed mind numbing or because the amounts at stake are simply too small to bother over. Most people do not call that toll free number, protest the settlement in person or in writing, or even respond to the notice. Opt-out rates are low.

(Internal footnote omitted)

However, aside from a throwaway mention, Lahav's discussion of accountability leaves out perhaps the most important group to questions about class actions: class-action lawyers. Courts that regularly hear class actions have noted that, in most cases, the plaintiffs have little to no influence. Instead, they are "cats paws" for lawyers that even she points out stand to get millions for a case. (The cats-paw relationship has gone so far, in some cases experienced lawyers name plaintiffs without consulting them first.)

It's unfortunate that Lahav largely avoids this discussion, because it's where the real meat of the debate over the legitimacy of class actions lies. Those who worry about litigation-enforced "blackmail" are not worried about the plaintiffs looking to enforce their two-dollar claims. They're worried about more interested parties--the lawyers with the skewed incentives and the actual control over the lawsuit.

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 For those who are not yet suffering Concepcion fatigue from the many many many blog posts on the topic, I have a brief post up at the OUPblog on its effect on consumers.  

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Many defense lawyers get particularly impassioned about adequacy in class actions; and I'm no exception. After all, adequacy ensures (or at least it is supposed to ensure) that a real plaintiff with a real injury--as opposed to lawyer with a LEXIS/NEXIS account and a hunger for fees--is bringing the case. In a recent article for the George Washington Law Review Texas Law Professor Patrick Woolley takes a look at adequacy from a different angle. He argues that when a court examines adequacy in a proposed class action, it should be looking at whether it has personal jurisdiction over the absent class members.

[W]hile considerations of efficiency and efficacy may play a role at the margins, personal jurisdiction is not about the efficiency and efficacy of litigation. Rather, as I discuss below, the law of personal jurisdiction imposes serious external constraints on the law of class actions to safeguard important legal values quite apart from the efficiency and efficacy of class litigation.

(Internal footnotes omitted) Professor Woolley's proposed reform is a stark one:

Absent class members should be deemed to waive their adequacy objections by failing to raise them in the class proceeding only if the class court (1) has authority to require absent class members to appear for the purpose of litigating their adequacy objections and (2) exercises that authority. Critics of collateral attack have often assumed that a class court with jurisdiction to hear the class claims has jurisdiction to bind absent class members on the adequacy of class representation. But as I explain in detail below, the class court has authority to require an absent class member to raise adequacy objections in the class proceeding on pain of waiver only if the class member has minimum contacts with the forum sovereign and has received process-like notice requiring an appearance. In the absence of these standard jurisdictional requisites, a class court has only "limited and conditional" jurisdiction over absent class members. In other words, "the court has power to enter a judgment against an absent class member on the basis of adequate representation, but no power to compel an absent class member to appear in the forum to contest adequate representation or anything else."

(Emphasis added, internal quotations and footnotes omitted.) Professor Woolley argues that a close reading of the Supreme Court's opinion in Phillips Petroleum Co. v. Shutts--the opinion that established that courts may exert jurisdiction over out-of-state class members if it affords them the right to opt out of a class--"makes clear that the Court never suggested that a failure to opt out is sufficient to establish jurisdiction."

This is not an abstract debate; if a class member was not adequately represented, she may bring a new lawsuit based on the same allegations. In effect, Professor Woolley is arguing for making class actions opt-in instead of opt-out. And adequacy plays a very important role in determining the preclusive effect of a class action. (In fact, when you get down to it, this is what many preclusion debates are about: was the opt-out procedure good enough in a given case?)

But while, in general, Professor Woolley's argument makes some intuitive sense, it leaves open too many questions about specifics. For example, what is "process-like notice"? And does Rule 23 really require "persuasive evidence" of consent to each class action? If class actions required consensus, they'd be next to useless for resolving large-scale judicial debates.

As a defense lawyer, I'm obviously sympathetic to the idea that absent class members should have a real role in class-action litigation: allowing for a more active role helps prevent the filing of class actions that exist only for lawyers to extract settlements from defendants. But if a court certifies a class, it specifically considers the adequacy of the class representatives, and it does so in its role as a fiduciary to the class. Beefing up the adequacy requirement at certification makes a great deal of sense. Doing so only on the back end means compromising the finality that that provides defendants with some benefit from the device.

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