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Class Action Countermeasures Discussions of the Strategic Considerations Involved In Class Action Defense

Insight from Other Strategists – Ronald Coase on Blackmail

Posted in Strategy

For those unfamiliar with Ronald Coase, he is the 101-year-old Nobel Laureate who laid a number of the foundations for law and economics when he published his Nature of the Firm (which explained why people would use corporate forms instead of just contracts) and Problem of Social Cost (which explained why law should seek to minimize transaction costs).

In 1988, Professor Coase turned his formidable intellect to another question that had vexed legal scholars for some time: why is blackmail illegal? As Professor Coase pointed out, the central paradox of blackmail is that it makes it illegal to threaten to do something (reveal facts that would embarrass or harm someone) that is perfectly legal to actually go out and do. In other words, if I know something embarrassing about, say Russell Jackson, it is perfectly OK for me to reveal those facts on this blog. But it is not OK for me to ask Russell to buy me an expensive dinner in exchange for not revealing those facts. Why is that?

Professor Coase’s solution–no surprise–draws on his previous work about minimizing transaction costs. He starts from the principle that:

It is obviously undesirable that resources should be devoted to bargaining which produces a situation no better than it was previously.

Based on that principle, Professor Coase argued that blackmail transactions do not provide any benefit to the victim (since he is in the same state as before), but do impose a cost.

It is not difficult to understand why people feel this way. A blackmailer threatens to do something which will harm his victim unless he is paid a sum of money or receives some other benefit,and by emphasizing the unpleasant consequences for the victim of not meeting his demands (or even inventing them, as in the "Mr. A. Case"), he endeavours to extract as much as he can from him. It may be objected that this is exactly what happens in business negotiations. And this is correct. But the situations are not identical. The demands made by a businessman are constrained by the competition of other businessmen, by the fact that the party threatened is likely to have a good idea of whether the threat has to be taken seriously and by the adverse effects on future business of being difficult in negotiating. …

Business negotiations (which may also cause anxiety) either lead to a breakdown of the negotiations or they lead to a contract. There is,at any rate, an end. But in the ordinary blackmail case there is no end. The victim, once he succumbs to the blackmailer, remains in his grip for an indefinite period.

(Emphasis added.) In other words, the real problem here is not the threat, it is the fact that there is no way for the blackmail victim to put an end to the threat. Paying once does not guarantee that

The logic of Coase’s blackmail argument extends to class action defense. Let’s leave aside for the moment the common argument that some class actions are no more than legalized extortion. Here are two other ways in which the argument might apply, both of which will be familiar to readers of this blog.

The Aqua Dots case: A manufacturer comes across a consumer issue. It attempts to solve that issue through voluntary action (sometimes while cooperating with government agencies). Despite its voluntary action, an entrepreneurial plaintiffs’ lawyer demands to be cut in for some nominal "improvement" to the relief, plus an attorneys’ fee. So the manufacturer faces the choice of paying the counsel a fee to go away, or adding the cost of litigation to the cost of remedying the problem in the first place. (Judge Easterbrook solved this by deciding that a plaintiff who would simply piggyback on a voluntary recall is not an adequate representative of the class.)

The Thorogood case: Plaintiff files a class-action lawsuit on questionable grounds. Defendant defeats it. Plaintiff files again in a new jurisdiction. Plaintiff writes a letter pointing out to the defendant that there are many jurisdictions left to file in, and defending lawsuits is costly. So the defendant faces the choice of paying plaintiff or facing multiple lawsuits until one wins. (The Supreme Court has decided this issue by encouraging courts to follow the practice of judicial comity, respecting other denials of class certification for the same subject matter. It’s an open question still how successful this solution will be.)

This is why "blackmail" is a problem. It’s a bargain for a promise not to do something. And that’s what makes it analytically useful for class actions, because class actions can be viewed as an attempt to extract concessions in exchange for a promise not to sue, or at least a promise not to sue again.

From the defendant’s standpoint, that’s part of what makes them a bad deal. Signaling a willingness to bargain in that fashion just opens one up to more and more attempts to make similar deals.

Using the rhetoric of blackmail, while attractive, is unlikely to persuade some judges that there is a real problem.  But using the logic behind prohibiting blackmail makes a great deal of sense: most courts can sympathize with the fact that some litigation does not actually promote any public benefit. And, if that is the case, there are real questions as to whether the lawsuit is really worth the court’s resources.

  • http://consumerclassactionsmasstorts.com Russell Jackson

    Is it “blackmail” if I — knowing that you know something embarrassing about me — offer to buy you an expensive dinner if you’ll refrain from disclosing it? Better yet, when are we going to go out for cocktails where we each can embarrass ourselves?