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

Property-rights class actions are difficult to bring, because property tends to be unique, and class actions do not work well with unique claims. But that doesn't stop plaintiffs from trying to certify classes asserting property based claims.

This week's case--Onyx Props. LLC v. Bd. Cty. Comm'ners of Elbert Cty., 2013 U.S. Dist. LEXIS 7151 (D. Colo. Jan. 17, 2013).--arises out of one such effort. The specific details are convoluted, but basically amount to the following: two developments in Elbert County, Colorado were, for various reasons, rezoned from an "A-Agriculture" designation to an "A-1" designation. This was apparently important to at least one set of property owners who ran a composting business--acceptable under one designation but not the other. When Elbert County told them to cease composting, they challenged its ruling in state court, and won; the court found that the rezoning was fatally flawed because it was based on the wrong map.

Not content with their victory in state court, the plaintiffs filed a §1983 class action, alleging that the defendant had violated their constitutional rights (and other property owners') by enacting and then enforcing invalid zoning regulations against them.  

The trial court in the District of Colorado denied their request for class certification on a number of grounds, but the most significant was that 

the property rights at issue differ appreciably between the proposed class members and, as such, the analysis as to whether the alleged illegal activities of the [Elbert County] BOCC violated the property owners' substantive due process rights requires individualized inquiry.

As a result, the plaintiffs could not establish commonality.  But the court went further, pointing out that the unique nature of the plaintiffs' property rights also precluded certification of either a damages class under Rule 23(b)(3) or an injunctive-relief class under 23(b)(2).  

Among other problems, any damages class would have trouble showing superiority, since in a property-based case

each class member has an interest in controlling his or her claim given the individualized nature of that claim.

Similarly, the plaintiffs' request for injunctive relief was not appropriate for class treatment because 

the BOCC's reliance on the regulations/map at issue to consider past determinations would require an individualized assessment of the applicability and the appropriate relief, as opposed to future injunctive relief to Elbert County citizens and members of the public

In short, the more the plaintiffs relied on their due process rights to their real property, the harder it was to fit their lawsuit into any classwide relief.  

For defense lawyers, the takeaway here is simple: the unique nature of property rights means that property-based class actions are almost always a bad idea.  The key is showing the court the specific ways in which real property differs in a given area.

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 Ten Cases to Educate You

• In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748 (7th Cir. 2011). 
• Pipefitters Local 636 Ins. Fund v. Blue Cross Blue Shield of Mich., 654 F.3d 618 (6th Cir. 2011).
• Madison v. Chalmette Refining, L.L.C., 637 F.3d 551 (5th Cir. 2011).
• In re Bridgestone/Firestone, Inc. Tires Prods. Liab. Litig., 288 F.3d 1012 (7th Cir. 2002). 
• Gregory v. Finova Capital Corp., 442 F.3d 188 (4th Cir. 2006). 
• Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 259 F.3d 154 (3d Cir. 2001).
• Kamm v. California City Development Co., 509 F.2d 205 (9th Cir. 1975). []
• Katz v. Carte Blanche Corp., 496 F.2d 747 (3d Cir. 1974). []
• Bevrotte v. Caesars Ent. Corp, 2011 U.S. Dist. LEXIS 114463 (E.D. La. Oct. 4, 2011). []
• Pablo v. Servicemaster Global Holdings, Inc., 2011 U.S. Dist. LEXIS 87918 (N.D. Cal. Aug. 9, 2011).

Further Reading:

• Edward F. Sherman, "Abandoned Claims" in Class Actions: Implications for Preclusion and Adequacy of Counsel, 79 Geo. Wash. L. Rev. 483, 503 (2011). 
• Andrea Joy Parker, Dare to Compare: Determining What "Other Available Methods" Can Be Considered Under Federal Rule 23(b)(3)'s Superiority Requirement, 44 Ga. L. Rev. 581 (2010).
• D. Bruce Hofferman, To Certify or Not: A Model Proposal for Evaluating the "Superiority" of a Class Action in the Presence of Government Enforcement, 18 Geo. J. Legal Ethics 1383 (2005).

Questions to Consider:

• Judge Easterbrook authored both In re Aqua Dots and In re Bridgestone/Firestone, Inc.: is it possible to reconcile the two opinions?
• What forms of adjudication are superior to class actions? Are there consistent principles for finding them so?
• How do the four factors under Rule 23(b)(3) play into the typical superiority analysis?
• Several judges and scholars have begun making arguments that imply that there may be a larger overlap between superiority and adequacy than previously thought. What can defense counsel make of these analyses?

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 Last week, there were two appellate opinions, one from the Seventh Circuit and one from the Tenth, that are worth some attention. They're worth discussing together as well, because while only one is really helpful for defendants, both discuss different conceptions of how to argue comity in class actions.

The first is Smentek v. Dart (7th Cir. 2012). Smentek was a class action filed on behalf of Illinois prisoners who had been denied dental care in violation of the due process clause. It was the third of its kind. How did that happen? In the first two class actions, various trial judges of the Northern District of Illinois had denied certification. Not so the third, who granted it. As Judge Posner noted in the Seventh Circuit's opinion:

We don't understand why all three cases were not assigned to the same judge. Besides the usual advantages of consolidation, it would have avoided the problem that has precipitated the appeal in this case, because a single judge would not be of different minds about three identical lawsuits.

Given the Supreme Court's opinion last year in Smith v. Bayer Corp., the defendant could not ask for an injunction preventing any further class actions from being filed, nor could it argue that a new class action was barred by collateral estoppel. But it could, as the Court had directed, ask the new court to, in the interest of judicial comity, deny certification. Foolproof strategy, right?

As it turns out, not in the Seventh Circuit. The trial court did not take comity into account. Nor, according to Judge Posner, should it have.

The version of comity announced in dictum in Smith v. Bayer Corp. is novel. It does not involve the mutual respect of sovereigns or quasi-sovereigns and it does not appear to be limited to cases in which parallel suits are pending in different courts (or before different judges) of the same sovereign. … The Supreme Court's opinion cites no authority for the extension of the doctrine of comity to mere disagreement between federal judges, and despite the reference to expecting "federal courts to apply principles of comity to each other's class certification decisions" (emphasis added), the Court seems really to have been thinking about cases involving federal-state comity, of which Smith v. Bayer Corp. was one.

(Emphasis added.)  The primary problem Judge Posner saw was that, to provide the doctrine with any preclusive effect would simply render it collateral estoppel by another name, an avenue that the Supreme Court had already closed off.

True, the effect of the doctrine of comity, when it is successfully invoked, is preclusive. But unlike res judicata, it is a doctrine that does not require but merely permits preclusion, except (as we're about to see) when it governs choice of forum. The mandatory comity for which the defendants in our case contend is just another name for collateral estoppel.

Judge Posner, no fan of repetitive class actions (remember, he authored several opinions disapproving of it in Thorogood v. Sears, Roebuck & Co.), conceded that this left open a distinct issue of judge-shopping, one that his colleague Judge Easterbrook had identified long ago in In re Bridgestone/Firestone. In Posner's words:

Not that there isn't a serious problem of judge shopping in the disordered realm of class action litigation, a problem well illustrated by this case and its two predecessors taken all together. Without a rule of preclusion, class action lawyers can do what the lawyer here (and the lawyer in Thorogood) did: keep bringing identical class actions with new class representatives until they draw a judge who is willing to certify the class.

So, at this point, it appears that the Supreme Court's admonition to respect previous denials of certification is of persuasive value only, which means that it is helpful only so long as the court is not inclined to certify a class in the first place, which is to say not helpful at all. At least Judge Posner's opinion spells out the problem in stark terms, of which one might hope other courts will take notice.  

The second case is Winzler v. Toyota Motor Sales U.S.A., Inc. (10th Cir. 2012). In this case, the plaintiff sued for an injunction requiring essentially requiring a recall of Toyota Corollas that allegedly stalled without warning. After she filed the complaint, Toyota moved to dismiss because the plaintiff had not suffered a stalling incident herself, and therefore had not incurred any injury. ("No-injury" class actions are common in products liability.) The trial court granted the motion.  Toyota also noted that a NHTSA investigation was underway. By the time the plaintiff filed her appeal, Toyota had announced a recall, and it had argued to the Tenth Circuit that the recall mooted the plaintiff's claims.  (This particular formulation of mootness is referred to as "prudential mootness.")

The Tenth Circuit found merit in Toyota's position. Like Judge Easterbrook did in Aqua Dots, the Tenth Circuit expressed concern about the fact that suing on top of a recall would add transaction costs that would benefit only the plaintiffs' lawyers.

Our intervention would, as well, surely add new transaction costs for Toyota and perhaps reduce the incentive manufacturers have to initiate recalls (as Toyota did here), all while offering not even a sliver of additional relief for Ms. Winzler and members of the class she seeks to represent. Perhaps the lawyers would benefit if this would-be class action labored on through certification, summary judgment, and beyond. But it's hard to see how anyone else could.

But the Tenth Circuit was not just concerned that suing when an administrative recall was available would add transaction costs. It also worried that initiating a redundant action through the courts would undermine the comity between branches of government:

To hold otherwise -- to allow a case to proceed simply because there happen to be differences between the remedial process a coordinate branch has selected and those we might choose - would not only require us to ignore the reality that there's often no one single right way to go about providing equitable relief to an injured party. It would also require us to ignore the reality that there are nearly always (if not always) some differences between Executive, Legislative and Judicial remedial procedures given how differently the three branches operate: by regulation, legislation, and decree. To presume deficiency from difference would no doubt go a long way, as well, toward spelling the end of prudential mootness doctrine and the comity it is supposed to afford our coordinate branches.

At that point, it affirmed the lower court's dismissal of the case.

So, what can we draw from these two different treatments of the concept of "comity"? Comity as a standalone concept is not a particularly helpful one: as Judge Posner points out, the doctrine of comity really only applies to separate sovereigns. However, comity also has a looser meaning, one that asks courts to respect other governmental bodies, even if they stem from the same sovereign power. And here, comity is at the very least a useful rhetorical device. It reminds the court that it is not the only available means of relief; and that some litigation is simply a waste of time and money. Of course, since comity is not mandatory, what a court chooses to do with that information remains entirely up to it.

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The nice folks at E-Commerce Law Reports have just published an article by yours truly on using settlements with state attorneys general or other government agencies to reduce one's class action liability.  You can find it here.  

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 I hope everyone had a good Memorial Day weekend. This week, we take a brief look at a number of opinions that were decided last week, none of which are revolutionary, but all of which are useful to defendants at some stage of the class action. Think of it like a Memorial Day barbecue, a little something for each course.

Discovery. Both plaintiffs and defendants like to serve contention interrogatories, and both also like to give vague answers. It's part of the chess game that is pretrial discovery, and it can be frustrating to both observers and participants. In Fulghum v. Embarq Corp., 2012 U.S. Dist. LEXIS 72643 (D. Kan. May 24, 2012), the court decided it had had enough of the squabbling over identifying which documents could identify the class:

The interrogatory asked Plaintiffs--not Defendants--to identify the group of retirees who fell within the applicable plan documents. Plaintiffs, therefore, would have that information. Furthermore, if the process is as simple and mechanical as Plaintiffs contend, the Court questions why Plaintiff did not perform the analysis. Plaintiffs do not offer any reasons why Judge O'Hara's ruling is clearly erroneous, but instead assert that their answer was appropriate. Plaintiffs have spent more time arguing over the appropriateness of their interrogatory response than necessary to respond to the request.

(Emphasis added.)  Moral: while a little fencing is OK, you must answer your interrogatories with substance at some point.

Offer of judgment. A plaintiff files a FCRA class action. The defendant files an offer of judgment for $25,000, a comfortable amount more than the maximum statutory damages plus an attorneys' fee. Does that moot the class action? According to Sanchez v. Verified Person, Inc., 2012 U.S. Dist. LEXIS 70128 (W.D. Tenn. May 21, 2012), yes it does.

[I]f a named plaintiff's claim is mooted by an offer of judgment made before certification of the class or the filing of a class certification motion, dismissal of the action is required.

(Internal quotation marks omitted, emphasis added.)  The court found the rule unnecessarily harsh, but still applied it to dismiss the action. (The opinion includes an discussion of how the timing of an offer of judgment may affect its validity; the discussion is interesting because it gets so convoluted. This level of complication may be the beginning of a tip towards the Seventh Circuit's rule in Damasco v. Clearwire Corp.)

Certification. Consider this the entree in our little picnic of class-action rulings. Johnson v. Harley Davidson Motor Company Group, LLC, 2012 U.S. Dist. LEXIS 72048 (E.D. Cal. May 23, 2012) concerned an alleged defect that caused surfaces on certain motorcycles to heat to a temperature that might burn skin. The court found three problems with certifying a class: (1) There was no uniform design to the motorcycles, (2) There were

literally zero complaints about the allegedly excessive heat. Literally zero complaints suggest this is a public-policy-driven lawsuit instead of a client-driven lawsuit.

(Emphasis added, internal citation omitted.) The third problem was that (3) regulation by the National Highway Traffic Safety Administration was a superior remedy to a class action.

Notice. Everyone knows that Rule 23(b)(3) requires the "best notice practicable," and that that usually means individually-mailed notice. But what if the defendant sends the notice by bulk mail to nursing homes for distribution to residents there? Not good enough, says the Northern District of Oklahoma:

The mailing of Notice Packets in bulk to these 49 care facilities does not comport with due process because there is no evidence that the potential Class Members ever actually received their packets.

Childs v. United Life Ins. Co., 2012 U.S. Dist. LEXIS 70113 (N.D. Okla. May 21, 2012) (emphasis added).  The court took special care to explain its concerns, which primarily had to do with the structure of the proposed settlement. Because the plaintiffs were guaranteed a particular fee, their incentives were "decoupled" from maximizing the number of class members to respond; and because the defendants had a reversion clause, their incentive was to minimize the number of respondents.

Moral: the simpler the settlement, the better the odds of it getting through. If you can't make a simple settlement, it may be that it's not really a case worth settling.

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 So, unless you live under a rock, you've probably heard that JP Morgan lost some money last week. And, as one might expect, with a $2 billion loss, lots of people have opinions. One of those is Yale Law Professor Jonathan Macey, who wrote an op-ed in the Wall Street Journal (behind a paywall) worrying that, since both the SEC and the Department of Justice has launched an investigation into the loss, the Obama administration was turning losing money into a federal crime. (WSJ Law Blog summary here.) Professor Macey is a very smart man. But he also has never spent time as a litigator. (Go ahead, check; I'll wait.) And I think, in this case, that shows.

See, here's the thing. While Professor Macey is very worried, I'm not sure that JP Morgan's executives are complaining about either the SEC's or DOJ's investigations. I'm sure they're not celebrating them, but there's have good reason to welcome the investigations at this point.

Let's leave aside for a moment the fact that JP Morgan CEO Jamie Dimon already said he was expecting regulators to sniff around (because that was, in fact, their job). That might just be diplomacy.

But it's also a great way to reduce JP Morgan's eventual legal exposure from any lawsuits. JP Morgan's stock went down once the loss was announced. (To be expected.) And that meant securities lawsuits would soon follow.  In fact, Thompson/Reuters legal reporter Alison Frankel immediately asked what the over-under would be for filing the first class action. 

It wasn't long. As of this post, Robbins Geller Rudman & Dowd LLP and Bernstein Liebhard have both announced class actions against JP Morgan. (This once again calls into question the deterrence justification for these lawsuits; to say that JP Morgan needs more deterrence than a $2 billion loss to tighten its practices stretches credulity. If deterrence is the name of the game, these firms should be looking for the next JP Morgan, not suing this one.)

One of the best ways to inoculate against those class actions is to let the regulators in to give the firm a clean bill of health. If a clean bill of health is not possible (and it may not be, see Dealbook's analysis here), better to negotiate a settlement with the government than with lawyers who will take a 33% cut for themselves. If JP Morgan works with the government, it has an excellent rhetorical argument against fast-tracking a class action (why duplicate government effort?) and a good doctrinal argument against certifying the class (the class action would not be superior to the government investigations). That's not making it a crime to lose money, that's using the legitimacy of the DOJ to buttress the legitimacy of JP Morgan when it needs to defend civil lawsuits. If the DOJ and JPM's C-suite both contain smart people (and they clearly do), then they'll take advantage of this situation--the DOJ (and perhaps the SEC) to show that they're on the case when something is rotten on Wall Street, and JP Morgan to show that government action is enough.

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For years, class-action scholars have tried to import lessons from administrative law into Rule 23, on the theory that mass torts, like administrative actions, deal with large, generalized issues. Sometimes these imports provide new insights, but often they stress why it is that Rule 23 is not equipped to handle issues in the same way that administrative agencies are. Now, Professors Adam Zimmerman and Michael Sant' Ambrogio seek to "turn the tables" and ask what overworked  administrative agencies can learn from Rule 23. Their argument, in a nutshell:

[T]here is no reason why ALJs should have any less power to aggregate claims than a civil court. For some time, administrative law scholars have described the significant impact agency adjudications have on parties who never directly participate in a proceeding. Moreover, the modern administrative state, like the class action, originally developed in response to intractable disputes involving large groups of people. In part for that reason, the Supreme Court has long characterized class actions themselves as a “quasi-administrative” proceeding.
This article argues that agencies should adopt aggregation procedures, like a civil class action, to resolve common claims raised by large groups of people in administrative courts.

(Footnotes omitted, emphasis added.)

It's an interesting proposal, which the authors argue would result in more consistent outcomes for agency litigants, speed up rulings, and increase access to justice. It also addresses a persistent problem with private class actions:

reforming agency procedures through the federal court class action deprives agencies of the opportunity to take the first crack at reasoned decisionmaking with the same focused attention and information available to a federal court in a class action. It is inconsistent with the values underlying the doctrines of exhaustion and ripeness, which seek to give agencies the first opportunity to address issues within their purview. Indeed, one of the criticisms of judicial reform of administrative programs is that it is anti-democratic and the political branches, not the courts, should correct agency errors. Providing agencies with the opportunity to address systemic problems through aggregation mechanisms is respectful of the responsibilities allocated to the agency by Congress.

And for two of the types of cases the authors address ("public rights" cases where many individuals are suing the government, and "distribution" cases, where the government is looking to compensate victims after it has fined a defendant) any kind of agency class action would operate much like a classwide settlement. Since the global peace would be bought by an institution that already has sovereign immunity, and is consenting to aggregation, it looks like a very attractive solution to what they describe as a widespread administrative problem.

For "private right" cases however (which the authors describe as cases brought by plaintiffs against private defendants in front of agencies), agency class actions would run into the same problems as Rule 23 class actions--the defendant is entitled to put on its full range of defenses. And that means that the authors have overstated the reach of their proposal. These are often the situations--alleged safety problems, alleged consumer fraud--where administrative rulemaking is superior to individual litigation.

In the meantime, however, I'd recommend class-action defense lawyers read their proposal, if only because their analysis of the overall problem shows why some class actions belong in front of administrative agencies instead of in the federal courts. 

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Last month, I received a flurry of email from various people who wanted to point me towards Mark Herrrman's column on Above the Law, "Torpedoing Class Actions." In that column, Herrmann reviewed Martin Redish's 2009 book Wholesale Justice, which argues that class actions are an unconstitutional delegation of state power to private lawyers. He also called class-action defense lawyers "derelict" and asked "Where is the practicing bar?" when it comes to advocating Redish's arguments.

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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.

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 This was a busy year for class-action jurisprudence. Clearly, most of the Supreme Court cases had some effect on class action practice. But the district and appellate courts also rendered a host of rulings this year that significantly affect class-action practice. Despite what a number of academics and plaintiffs' lawyers have claimed, the class action is not dead.  That said, it's probably true, to quote plaintiff's lawyer Daniel Girard, that while the "death of the class action" is overstated, the "Golden Age of the private attorney-general" is over. There were so many interesting opinions in the past year, with so many implications, that it was hard to identify just ten. Consequently, I've cheated a little. The final two entries actually comprise four cases which, taken as pairs, indicate a couple of new trends to watch out for.

1. Wal-Mart Stores Inc. v. Dukes (S. Ct.) - Whether you think it killed the class action or not, Wal-Mart Stores, Inc. v. Dukes (called "Wal-Mart" by some, "Dukes" by others) was the runaway most important case of the year for class-action practitioners. It clarified an ongoing debate about whether Rule 23(b)(2) could be used for money damages (it can't), it finally provided a standard for Rule 23(a)(2) (a common question must have a common answer), and it finally put to bed a common misreading of Eisen that had justified ignoring inconvenient facts when certifying class actions. Those all make it the most significant decision of the year, even before you get to the press hype.
2. AT&T Mobility v. Concepcion (S. Ct.) - Concepcion is the other case that has been accused of killing the class action (sometimes on its own, sometimes in conjunction with Dukes.) It hasn't managed that feat, but it has sent what one plaintiffs' attorney called "a seismic change" through class-action practice. While we're still feeling the aftershocks it's clear that it is now more difficult to bring "creative" consumer claims that are governed by clear purchase contracts; and certain individualized employment disputes are also finding their way into arbitration rather than class actions. And that's before we get into the Supreme Court's discussion of exactly what due process requires from aggregated litigation.
3. Pilgrim v. Universal Health Card, LLC (6th Cir.) - This case, the first appellate opinion to address the motion to strike class allegations at the pleading stage, has made the tactic truly viable. For years, class-action defendants have faced down multi-state classes that they knew from prior experience could not get certified. And yet, because courts were reluctant to rule on the viability of these class actions before discovery, defendants faced long and expensive discovery just to get to a legal issue that required no additional facts. Pilgrim marks the first time that an appellate court has recognized that determining whether variations in state law predominate over other issues does not require discovery, it just requires an analysis of the laws in question.
4. Klier v. Elf Atochem Inc. (5th Cir.) - Thought that cy pres relief was a no-brainer in your class action settlement? Think again. Joined later in the year by the Ninth Circuit's opinion in Nachsin v. AOL, LLC, Klier finally bridles the runaway use of cy pres relief to dress up less valuable class actions. The fact that it also provided a stark critique of the always-problematic medical-monitoring class action was just a bonus.
5. Smith v. Bayer Corp (S. Ct.) - Significant" does not have to mean "pro-defendant." In Smith, the Supreme Court held (abrogating the Seventh Circuit's Thorogood opinion last year) that a defeat at class certification does not preclude another class member from bringing the same class action somewhere else. It based this decision on the eminently logical reason that, until a case has been certified as a class action, it is just an individual plaintiff's case. (That same logic underlies the Seventh Circuit's recent re-affirmation that one can moot a class action before certification.)
6. Erica John Fund v. Halliburton (S. Ct.) - Similarly, securities defendants were perfectly happy with the Fifth Circuit's requirement that a plaintiff demonstrate loss causation when certifying a securities class under a "fraud on the market" theory, even if that requirement could not be found in the text of Rule 23. The Supreme Court, in a short, well-reasoned, and unanimous opinion, definitively closed off that particular line of argument.
7. In re Bluetooth Headsets Products Liability Litigation (9th Cir.) - The Ninth Circuit's rejection of a problematic class-action settlement (the class got nothing, the attorneys got $850,000) imposed a common-sense "proportionality" requirement on class counsel fees, recognized that segregation of the fee request from the rest of the settlement does not eliminate perverse incentives for class counsel, and required a cross-check for lodestar-based fees.
8. Judge Alsup's Class Settlement Checklist - Judge Alsup has handled a number of class actions in his few years on the bench. And this was the year that he developed a standing order that lays out what he expects from any classwide settlement, before negotiations may even have begun. It's an outstanding idea, and it provides excellent guidance to plaintiffs and defendants about what they can and can't accomplish in a settlement in his court. While I may not agree with all of his analysis, I can't fault his attempt to create certainty in the negotiation process.
9. In re Aqua Dots Products Liability Litigation (7th Cir.) & Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan (6th Cir.) - The Sixth and Seventh Circuits both faced the question of how to handle class actions that, while they might benefit the plaintiff and the plaintiffs' lawyers, would do no one else any good. Judge Easterbrook of the Seventh Circuit pointed out that while it is logical to say that a class action duplicating a voluntary recall is not a good idea, it doesn't exactly fall under the text of superiority. So instead, he held that a plaintiff who brings a redundant class action is inadequate. The Sixth Circuit, faced with a class action that might benefit the class but would in the process hurt other citizens of Michigan, simply held it not superior to other methods of resolving the controversy (including individual lawsuits).
10. CE Design v. King Architectural Metals (7th Cir.) & Creative Montessori Learning Centers v. Ashford Gear LLC (7th Cir.) - In a pair of opinions this year, Judge Posner seemed single-handedly determined to restore integrity to the class action. In CE Design, he held that a named plaintiff who has credibility problems cannot serve as an adequate class representative. In Creative Montessori, he held that class counsel who have engaged in deceptive methods to prosecute their class action are not adequate class counsel. The message behind these two cases seems clear: everyone in a class action is expected to be on the up-and-up, not just the defendants.

In making this list, I had to leave off a number of significant developments in class action practice. Taco Bell tried a risky but successful PR strategy this year. The Second Circuit held that subclasses might require their own counsel. The federal appellate courts have split--even after Dukes--on how to treat expert testimony. 2011 was an interesting time for class actions. Perhaps uniquely so. It will be interesting to see how each of these developments shakes out in 2012.

[Note - edited after publication to fix a formatting error and an unfinished sentence.]

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This month's piece of classic scholarship comes from the sociology of law. Thirty years ago, William L.F. Felstiner, Richard L. Abel, and Austin Sarat published a piece in the Law & Society Review titled "The Emergence and Transformation of Disputes: Naming, Blaming, Claiming …" 

The authors wanted to trace how experiences transform into legal disputes. And they identified three key steps along the way:

• Naming -- the party recognizes that she's been injured, or, as the authors put it, recognizes an experience as injurious;
• blaming -- she figures out that someone else is responsible for her injury; and
• claiming -- she communicates that conclusion to the faulty party. If the faulty party does nothing about her claim, then it evolves into a dispute.

As the authors point out, one of the interesting things about this process is that not all grievances evolve into lawsuits. They refer to this phenomenon as "grievance apathy."

We know that only a small fraction of injurious experiences ever mature into disputes. Furthermore, we know that most of the attrition occurs at the early stages: experiences are not perceived as injurious; perceptions do not ripen into grievances; grievances are voiced to intimates but not to the person deemed responsible.

In other words, grievance apathy makes the world go 'round. Not every "injurious experience" needs to wind up in a court of law.  And we would not want them all to.  In fact, the authors identified, even at the time, the problem that that lawyers often "'create' at least some of the needs they satisfy."

But they did not predict the extent to which, today, entrepreneurial class action attorneys have turned that social process on its head. In the course of looking for claims on which they can make money, they will identify entities with deep pockets (blaming), and then come up with a reason why they've done some injury (naming). They'll then look for someone who has suffered the pre-identified "injury." And, if that person's resolve wavers (that is, they begin to succumb to "grievance apathy"), they'll do their utmost to keep the plaintiff angry.

The problem is that manufactured conflicts rarely lead to good lawsuits. Those lawsuits tend to be a waste of time and money, for all concerned. They may very well focus on harms that are not really harms.  And they can lead to inordinately complicated "solutions," or duplication of previous solutions (with the added cost of judicial administration and attorneys fees), or cases that--if won--would harm innocent third parties.

Now, despite what some might argue, this does not mean that there is no such thing as a good class action. There are some instances where there will be clear-cut harms that are too small to bring as individual lawsuits, and where the defendant chooses not to offer a remedy. Those instances are why we have Rule 23. But, and this is a large but, Felstiner, et al.'s analysis does suggest that courts have good reason to be suspicious of manufactured lawsuits--in which a lawyer comes up with his case first and his plaintiff as an afterthought. Because, in those cases, there very well might be a reason that "grievance apathy" took hold.

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 Superiority (which requires a court to find "a class action is superior to other available methods for fairly and efficiently adjudicating the controversy") is an often-overlooked area of Rule 23, perhaps because these days, it comes with a nice long, non-exhaustive list of factors to consider, including:

(A) the class members' interests in individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.

After all, what litigant (or court) doesn't love slogging through a nice long list?

But, nice long list aside, superiority is an extremely valuable tool in a class-action defense lawyer's kit. Why? Because, when you get down to it, superiority encodes an important policy choice into Rule 23: when a plaintiff is suing for money damages, a class action should not be the court's first choice for resolving the dispute. The court should look to see whether other ways of solving the problem (individual cases, government action) work first.  And it should also look to see whether the class action will do more harm than good.

One recent case, Pipefitters Local 636 Insurance Fund v Blue Cross Blue Shield of Michigan (6th Cir. 2011), illustrates just how useful the superiority requirement can be when wielded properly.

The plaintiffs in Pipefitters sued Blue Cross because, for three years, it had imposed a fee (called the "other-than group" subsidy, or OTG subsidy) on group health customers. The fee helped subsidize the care of out-of-group insureds, such as retired people living on fixed incomes. One of the key merits questions was whether Blue Cross had been acting as an ERISA fiduciary at the time it imposed the fee. Despite the fact that determining whether Blue Cross's fiduciary status required looking at its individual Administrative Service Contracts with each client, the trial court certified a class under Rule 23(b)(3).

Blue Cross appealed. And, in an unusual twist, it was joined by the Michigan Commissioner of the Office of Financial and Insurance Regulation, which filed an amicus brief explaining that certifying a class against Blue Cross could result in "significant, negative financial ramifications to Michigan's senior citizens" because a victory might result in the inability to subsidize older non-group insureds.

The Sixth Circuit reversed the certification on two grounds. Procedurally, it pointed out that the trial court had not based its opinion on sufficient facts. Substantively, it held that a class action was not superior in this case. Specifically, it offered three reasons why the proposed class action would not be superior. First, the proposed class was simply unmanageable.

[T]he district court here would be required to conduct individualized inquiries into the ASC terms and funding arrangements of each ASC customer. That means looking at the contract terms and funding arrangements of 550 to 875 class members. Given the necessary number of individual inquiries, a class action cannot be a superior form of adjudication.

Second, the potential damage awards were large enough to justify individual litigation.

[T]he potential damage awards do not support a finding of superiority. The Fund alone claimed damages in excess of $280,000, and the record indicates that the possible awards of other class members exceed this amount. These are not the types of awards that would preclude individual class members from seeking relief through litigation.

But most important (and most interesting),

The Commissioner contends that, as a result, if the case were to proceed as a class action, BCBSM would potentially be forced to stop collecting more than $100 million dollars annually, which could result in higher premium rates for insured customers or in a reduction in Medigap coverage and a dramatic increase in premium rates for Michigan's senior citizens. The serious financial repercussions to Michigan's elderly population further support a conclusion that a class action is not a superior method of resolving the Fund's allegation.

The Sixth Circuit justified this view by citing an old Third Circuit case, Katz v. Carte Blanche Corp., 496 F.2d 747, 760 (3d Cir. 1974), that had held that a court could consider whether the class action was good for the "public at large." There is a certain logic to this argument. After all, if class action plaintiffs' lawyers want to hold themselves out as quasi-public servants who supplement publicly-accountable attorneys-general, then it would make sense to look at the effect their actions have on the public at large.

So what can defense lawyers learn from this case? Never assume that a class action is the best way of resolving a dispute. Class-action critics have often complained that plaintiffs' lawyers file big cases without considering the bigger picture of how they will affect policy. Pipefitters indicates that courts may actually listen to those arguments.

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I don't often rush to post news of a new opinion, but when I open my inbox to find multiple emails telling me something new and big has happened, that's a different story. And yesterday, I had a number of people telling me about a new opinion out of the Seventh Circuit: In re Aqua Dots Products Liability Litigation.

Russell Jackson wrote about this case last year, when the district court issued its opinion. The case concerned a child's toy called Aqua Dots, which was basically colored beads that, when you added water, would fuse together into whatever design you had arranged. The problem was, Aqua Dots looked a lot like candy. So much so that some kids swallowed them, and were put into brief comas. As soon as Aqua Dots found out, they recalled the product. But, sure as Thanksgiving is followed by Christmas shopping, the recall was followed by a class action.

The District Court had a hard time understanding how a class action would be superior to the recall, so it declined to certify the proposed class on superiority grounds. The plaintiffs appealed. The Seventh Circuit affirmed the result in an opinion by Judge Easterbrook. As he put it:

It is hard to quarrel with the district court’s objective. The lower the transactions costs of dealing with a defective product, the better. The transactions costs of a class action include not only lawyers’ fees but also giving notice under Rule 23(c)(2)(B). Notice may well cost more, per kit, than the kits’ retail price—and could be ineffectual at any price, since most purchases were anonymous. The court can’t send each buyer a letter. Notice would be by publication, yet the recall was widely publicized. Why bear these costs a second time? The Consumer Products Safety Commission has not expressed dissatisfaction with the recall campaign or its results, and the record does not contain any evidence of injury to children after the recall was announced. Spin Master believes that most of the 400,000 kits not returned in the recall were used before the recall began and that few, if any, defective kits remain in consumers’ hands. Consumers whose children used their kits are not members of the proposed class, so a public notice of a class action could be expensive yet pointless.

(Emphasis added.) Despite Judge Easterbrook's initial sympathy, he took issue with the fact that the trial court had departed from the text of Rule 23. (While the judge had held that the class action was not superior, he had not identified what kind of adjudication it would be superior to. Judge Easterbrook held that the voluntary recall of Aqua Dots was a resolution, but not an adjudication.) And, as Judge Easterbrook pointed out, the Supreme Court has made it clear that the text of Rule 23 controls over any individual policy preferences:

A district court is no more entitled to depart from Rule 23 than it would be to depart from one of the Supreme Court’s decisions after deeming the Court’s doctrine counterproductive. Rule 23 establishes a national policy for the Judicial Branch; individual district judges are not free to prefer their own policies. The Court made this point twice in its most recent Term. See Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011); Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011).

(Emphasis added.)  Here's where the opinion gets really interesting. Because while Judge Easterbrook held that the trial court could not depart from the text of Rule 23, he found another textual source for the court's holding.

Instead of departing from the text of Rule 23(b)(3), the district court should have relied on the text of Rule 23(a)(4), which says that a court may certify a class action only if “the representative parties will fairly and adequately protect the interests of the class.” Plaintiffs want relief that duplicates a remedy that most buyers already have received, and that remains available to all members of the putative class. A representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests.

(Emphases added.)  In other words, when a plaintiff files a class action that basically duplicates a voluntary action that the defendant has already taken, she may not have come up with an inferior method, but she is an inadequate representative of the class, in part because she appears to be prizing her attorneys' best interests over those of the class.

I'd usually close up by asking how a defendant can use an opinion like this, but in this case I don't think I really need to add anything.

(Hat tip to Ted Frank and David Appelbaum.)

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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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It's a situation familiar to many class-action defendants: a plaintiff files a complaint with, say, ten causes of action. But, by the time the case reaches the certification stage, she's voluntarily dismissed nine of them--including the ones that actually address the alleged harm--in favor of an attenuated theory that she thinks stands the best chance of getting certified. (For example, a case that's clearly about fraud somehow morphs into a breach-of-contract case; or a tort case about an alleged safety defect becomes a breach-of-express-warranty case specifically disclaiming any future physical injuries.) No individual plaintiff in her right mind would assert this claim in an individual lawsuit; among other things, doing so would preclude her from later asserting her stronger claim. But this is, of course, not an individual lawsuit, it is a proposed class action.

Usually, defendants sigh and begin researching the caselaw on adequacy, preparing to argue that any plaintiff who would abandon perfectly logical (but not certifiable) claims in favor of a riskier streamlined claim is not doing her absent class members any favors. In fact, she is selling the potentially valid claims of her fiduciaries (the absent class members) in exchange for a chance at certification.

Now, Professor Edward F. Sherman of the Tulane Law School has proposed an alternative argument in his article in the George Washington Law Review, "Abandoned Claims” in Class Actions: Implications for Preclusion and Adequacy of Counsel.

Like many academic articles, this one isn't afraid of taking the long way around to get to its point. So it provides brief discussions of the Supreme Court's ruling in Cooper v. Federal Reserve Bank of Richmond, the Fifth Circuit's recent ruling in McClain v. Lufkin Industries, Inc., and a line of Texas state-law cases on preclusion. But, toward the end of the article, Professor Sherman begins to make some interesting points about preclusion and abandoned claims. Most notably, he recommends:

a court should make a determination as to whether the omitted claims are likely to be of importance to the class and whether the risk of preclusion is high enough to refuse certification. The practice of some plaintiffs' attorneys of shotgunning all possible claims into a complaint should not establish that none of those claims can ever be omitted or else there would be inadequate representation. Multiple causes of action can be repetitious and overlapping, and class counsel should have some leeway in structuring a class action to be the most efficient and effective vehicle to serve the interests of the class. In the cases that find that abandoning claims is inadequate representation, there are hints that courts are particularly concerned with strategic abandonment no matter how important those claims might be to some class members. Paring down a class action so that it can be certified should not in itself be considered inadequate representation. It is often in the interests of the class members to do just that, particularly where there is little likelihood, in the absence of a class action, that class members can and will pursue the claims in individual suits. In (b)(3) class actions, a certifying court is required to find that "a class action is superior to other available methods for the fair and efficient adjudication of the controversy," which includes whether the class members are interested "in individually controlling the prosecution or defense of separate actions." A similar determination that there is little likelihood that class members will want to sue individually on omitted claims might be required should class certification be opposed on the basis of abandoning claims.

(Emphasis added, internal footnotes omitted.) This reasoning suggests that perhaps defendants should try opposing plaintiffs who abandon claims on superiority, as well as adequacy, grounds. After all, if class members can do better by asserting individual lawsuits, then that's what they should be doing, rather than waiting for a class representative without an actual theory to recover on their behalf.
 

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Enron.  The Toyota sudden acceleration MDL.  The Microsoft antitrust class actions.  There are no shortage of class actions that have arisen from government investigations of various kinds.  But while seeing a class action complaint arrive on top of a government subpoena can be stressful, it's not necessarily the end of the world.  In fact, the defenses of each can harmonize in surprising ways.

On Tuesday, my colleague John Adams and I presented a CLE session on how to defend class actions that arise from government investigations of various kinds.  In it, we explained:

• best practices for handling government investigations, and how they contribute to an effective class action defense;
• why class action plaintiffs' attorneys find government investigations so attractive; and 
• strategies for coordinating discovery; and
• the best class certification opposition arguments.  

You can download the slides from the presentation here.  

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2011 has produced a number of class actions that have caught the attention of the news media. The class action against Taco Bell, for example, made headlines for the innovation involved in the defendant's PR strategy. The class action against former President Carter capitalized on a novel theory and a famous defendant. Now, a plaintiffs' firm has brought a lawsuit against the Dallas Cowboys on behalf of those ticketholders who didn't get the seats they thought they would at the Superbowl. This appears to be a PR-based class action, much like the ones against Taco Bell and Jimmy Carter. What does I mean by that? Much of the value of each of these lawsuits comes from the threat of adverse publicity rather than the risk of certification. And this case is no exception.
To bring this lawsuit, the plaintiffs had to argue that the NFL's apology offer (triple the ticket price) wasn't enough to make them legally whole. And that creates a number of problems for certifying that class. Based on the Amended Complaint [UPLOAD here are a few:

• Plaintiffs who overpaid for their tickets are suing the wrong people. One of the plaintiffs' complaints is that they paid far more than the ticket price for their tickets. That means they bought from scalpers. So a court will likely find the NFL's refund of triple the ticket price to be more than fair. If the class member paid more than that, he needs to talk to his hookup. (This hurts their two breach-of-contract claims, it also hurts their fraud claims.)
• The plaintiffs are seeking the wrong damages for a class action. They claim in the complaint that this includes travel costs to the Superbowl, and "disappointment and frustration." But the law does not usually award these kinds of damages for breach of contract claims. (The technical term for these kinds of damages is "consequential damages.") And, if it did, it would require the kind of individualized proof (how disappointed was each person) that makes a class action very hard to try. If they just want the ticket price, well, the NFL has already offered three times that.
• Courts don't like fraud class actions. Class actions need common proof. Most fraud cases can't provide that. Instead, to prove fraud, you have to prove that you personally relied on a false statement. Proving that reliance is next to impossible on a classwide basis, which is why most courts do not certify fraud claims.
• Rich ticketholders don't make great class-action plaintiffs. Class actions exist to protect the little guy. They're supposed to aggregate a lot of small claims that people could not bring on their own. But here, plaintiffs like Mr. Dolabi may be out as much as $100,000 (the price he paid for his seat license). If he stayed at a hotel, it likely wasn't a Motel 8. These guys aren't the little guys, these are the guys who spend literally tens of thousands of dollars on football tickets. They can afford to bring their own lawsuits, may compromise their ability to demonstrate superiority.

Based on several news items, it seems clear that plaintiffs' counsel is looking for a quick settlement. But a quick settlement tends to favor the lawyers rather than the class. If there is a settlement in this case, it will be interesting to see how much it improves on the original offer that the NFL made.

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 When the Supreme Court granted certioriari in Dukes v. Wal-Mart Inc., the Vanderbilt Law Review grabbed a number of law professors who study mass torts and asked them to contribute essays to its En Banc feature. One of these--Richard Nagareda's Common Answers for Class Certification--was one of the most interesting articles published in 2010. Several of the other contributions also posed some interesting questions, among them Alexandra Lahav's The Curse of Bigness: The Optimal Size of Class Actions. 

Lahav doesn't really address the question she asks in the title; she offers no verdict on the optimal size of a class action (unless the answer is "as big as you can make them"). For the most part, she focuses on how courts could use the promise of probabilistic evidence to justify certifying classes for litigation. But the introduction to her essay poses an interesting rhetorical issue: when arguing about class actions, does the size of the lawsuit matter?

There's no question that many press outlets, when covering Dukes, focused on the fact that it was the largest civil-rights lawsuit to be certified.  After all, the size of the lawsuit is something the average reader understands immediately. And there is no question that courts often call attention to the size of class actions, both when granting certification and when denying it.

As Lahav correctly points out, there is no doctrinal limit on how large a class action may grow. (Rule 23(a)(1)--the numerosity requirement--does establish on how small one may shrink.) Instead, most lawyers use size as a proxy for one of the other Rule 23 requirements. Plaintiffs use the size of the class to bolster their arguments that a class action is superior to other forms of resolving a given dispute. For example, as the the Fifth Circuit put it in Jenkins v. Raymark Industries, when a class is large enough, it may be

superior to the alternative of repeating, hundreds of times over, the litigation of the state of the art issues with, as that experienced judge says, ‘days of the same witnesses, exhibits and issues from trial to trial.’

Defendants, on the other hand, often use size as a shorthand for heterogeneity (as they did in Dukes). As Lahav puts it:

The statements about the size of this class action appeal to an intuition that the court’s ability to provide individualized justice is inversely proportional to the size of the class action.

And, to the extent that a larger class is more likely to encompass various different kinds of claimants, that rhetoric can be useful. Defendants also may point out that the larger a class is, the more likely that it may pressure defendants into settling claims that have no merit, just to avoid the possibility of ruinous liability.

So does the size of a class matter? It depends on why the party is invoking it.

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Just a few miscellaneous notes that can't--by themselves--justify their own posts.  I leave it to the reader to determine if there are any predominating common issues.

• The WLF webinar on "Legal PR, Trial Lawyers’ Style: How They Seek Advantage Outside of Court and Proactive Countermeasures for Defendants," featuring yours truly and Cato Institute Fellow Walter Olson has been archived here.  
• I just received my author's copy of the Class Action Playbook over the weekend, which means that it will be released very shortly (October 1!).  The back cover contains blurbs from, among others, law professor Robert Klonoff and plaintiffs' lawyer Garrett Wotkyns.  If you are a blogger or legal reporter who would like a copy for review purposes, please feel free to contact me.
• Fellow class-action blogger J. Russell Jackson (of Jackson on Consumer Class Actions and Mass Torts) has a great writeup of the recent Weiner v. Snapple case (which should be especially useful for those briefing superiority) at the WLF website.
• Also, since they've said everything I could have: here's a sampling of blog entries on the Second Circuit's recent Zyprexia decision.  Bottom line: it is always worth challenging plaintiffs' use of aggregate proof in non-securities class actions.  

Come back tomorrow for the regular Tuesday entry.  

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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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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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Noted plaintiffs’ lawyer Elizabeth Cabreser has an article in a recent issue of the Denver University Law Review, Apportioning Due Process: Preserving the Right to Affordable Justice. The article is notable for several reasons, but mostly because Cabreser uses it to tell a story that supports the rhetoric plaintiffs' lawyers invoke when moving to certify a class. To wit:

• Due process is expensive.
• Primarily because corporate defendants use procedure as an attrition weapon. (Also, hourly billing encourages defendants to work a "thousand plodding hours" instead of "one brilliant one.")
• The Class Action Fairness Act (CAFA) just makes the problem worse. The passage of CAFA has sent class actions to a bottlenecked federal judiciary, further delaying relief to people who desperately need it.

It's a well-written article that strives to accomplish two goals at once. First, Cabreser tells a story about due process, and one likely to have intuitive appeal to judges.

At the same time, she's building a case for the superiority of class actions over other ways of resolving disputes. If litigation is so expensive, and the claims are so small, then the only solution must be a class action. Right?

Maybe not. In her discussion of how to make justice more affordable for individuals, Cabreser ignores a number of other methods individuals have of challenging large corporations over smaller claims. Those include:

• Small claims court.
• Arbitration. Corporations often have arbitration clauses in their contracts with individuals. And, often, those clauses state that the corporation will cover the costs of the arbitration. Sometimes, they even provide a premium for the consumer if the corporation fights the arbitration and loses. It's small wonder that class-action plaintiffs' firms don't like arbitration, because it often precludes large-fee class actions.  But the fact that arbitration won't pay a Lieff Cabreser's fees hardly makes it an unattractive option for most consumers.
• Statues that authorize attorneys' fees.

What can we take away from this? First, this is an excellent example of plaintiffs’ rhetoric supporting class actions. Second, when plaintiffs start talking about how a class action is the only possible alternative, it’s time for defendants to get suspicious. Class actions may sometimes be the best solution to a widespread problem, but they are rarely the only one.

(One final note: careful readers will observe that the entries this week are a little briefer than usual. That’s because I’m on vacation. Expect more “classic cases” and quick summaries of interesting articles throughout August.)

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 I'm going to try a new semi-regular feature, which is to provide summaries of some of the seminal cases on which class-action defendants frequently rely. Instead of focusing on the tactics that led to these rulings, I'll be highlighting the most commonly-used passages, as well as some that may be wrongly overlooked.

We'll start this out with In re Rhone-Poulenc Rorer (7th Cir. 1995). In re Rhone-Poulenc Rorer involved a particularly difficult set of facts: a proposed class of HIV-positive hemophiliacs sued a group of drug companies that manufactured blood solids. Because the companies did not know enough about how HIV was spread, they had not screened properly for the disease, and had inadvertently infected the members of the class. (The hemophiliacs needed blood solids to provide the clotting factor that their blood lacked.) The plaintiffs sought certification of a class asserting two theories, a conventional negligence theory (the drug companies should have had better screening procedures for HIV), and a more inventive "serendipity" negligence theory (had the drug companies done a better job of screening against Hepatitis B, they would also have caught the HIV-infected blood).

The trial court certified the proposed class. Since Rule 23(f) (allowing for interlocutory appeals of class certification orders) did not yet exist, the defendants sought a writ of mandamus from the Seventh Circuit. A panel of the Seventh Circuit led by then-Chief Judge Richard Posner granted mandamus and reversed the certification order. In doing so, it made the following observations that have proven useful to defendants:

Certified classes create intense pressure to settle.

Suppose that 5,000 of the potential class members are not yet barred by the statute of limitations. And suppose the named plaintiffs in Wadleigh win the class portion of this case to the extent of establishing the defendants' liability under either of the two negligence theories. It is true that this would only be prima facie liability, that the defendants would have various defenses. But they could not be confident that the defenses would prevail. They might, therefore, easily be facing $25 billion in potential liability (conceivably more), and with it bankruptcy. They may not wish to roll these dice. That is putting it mildly. They will be under intense pressure to settle.

The law of negligence varies from state to state.

The law of negligence, including subsidiary concepts such as duty of care, foreseeability, and proximate cause, may as the plaintiffs have argued forcefully to us differ among the states only in nuance, though we think not, for a reason discussed later. But nuance can be important, and its significance is suggested by a comparison of differing state pattern instructions on negligence and differing judicial formulations of the meaning of negligence and the subordinate concepts.

Or, as Posner put it, quoting Oliver Wendell Holmes,

"The common law is not a brooding omnipresence in the sky, but the articulate voice of some sovereign or quasi sovereign that can be identified." The voices of the quasi-sovereigns that are the states of the United States sing negligence with a different pitch.

(Internal citations omitted.)

Courts must be careful when bifurcating a class action.

Bifurcation and even finer divisions of lawsuits into separate trials are authorized in federal district courts. And a decision to employ the procedure is reviewed deferentially. However, as we have been at pains to stress recently, the district judge must carve at the joint.

(Internal citations omitted.)  How does one tell an improper bifurcation?

The first jury will not determine liability. It will determine merely whether one or more of the defendants was negligent under one of the two theories. The first jury may go on to decide the additional issues with regard to the named plaintiffs. But it will not decide them with regard to the other class members. Unless the defendants settle, a second (and third, and fourth, and hundredth, and conceivably thousandth) jury will have to decide, in individual follow-on litigation by class members not named as plaintiffs in the Wadleigh case, such issues as comparative negligence -- did any class members knowingly continue to use unsafe blood solids after they learned or should have learned of the risk of contamination with HIV? -- and proximate causation. Both issues overlap the issue of the defendants' negligence.

So what are the primary takeaways from In re Rhone-Poulenc Rorer? Defendants should make sure they put the plaintiff to their burden. Rushed state law analyses and underdeveloped trial plans are not enough.

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With this post, I’ll be kicking off a new, semi-regular examination of the rhetoric that gets used frequently in class actions. What does rhetoric have to do with defending class actions? Like much of the rest of the law, everything. The rhetoric a party adopts helps to frame the issues for the remainder of the case.

One rhetorical tool is the allusion. An allusion can help to crystallize a legal point, making it more clearly and more persuasively than merely stating the rule would, by comparing it to a story that’s already deeply embedded in the judge’s mind.

Class-action defense employs a number of specialized allusions, such as comparing an ill-formed class action to Frankenstein’s Monster. But one of the most prevalent allusions in class-action practice is the plaintiff’s invocation of David and Goliath. The plaintiff will most often invoke this allusion in support of her superiority argument. The central premise is that a class action allows a powerless consumer (the David) to oppose a large, well-funded corporate entity (the Goliath). Or, as Judge Aldisert put it when he dissented in Katz v. Carte Blanche Corp.,

While there is biblical if not historical support for the motion that one David did slay a Goliath, the social desirability of consumer class actions was to insure that a David plaintiff has a Goliath capability against the Goliath propensities of his adversary . . .

So, how does one counter the David versus Goliath trope? The most powerful way to do so is to switch the analogy the plaintiff is trying to set up.

• Suggest that David is not powerless in this case. If the plaintiff is capable of bringing a real lawsuit for substantial damages, he may already have a Goliath capability. And, in many states, legislatures have enacted consumer-protection statutes that are specifically designed to level the playing field. 
• Point out that this David is not fighting alone. Part of the power of the David versus Goliath story is the image of a lone boy facing down a giant warrior. In class-action litigation, there is often another Goliath (like a government agency) standing by specifically to keep the corporate giant in check.

In either case, the key to opposing David-versus-Goliath rhetoric is to bring the judge back to the fact that, in class-action litigation, the David is not stuck with only a rock and a sling. There are a number of other tools he can use, and those are usually superior to the class action.

(Image in public domain, obtained from Wikimedia Commons.)

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Judge Jack Weinstein is no stranger to class actions; he has decided a number of them over the years. And while no one can deny his inventiveness, he has at times drawn criticism for his predisposition for finding judicial solutions to widespread social problems. Judge Weinstein's reputation is part of what makes the case of Ramirez v. Dollar Phone Corp so interesting.

The case itself deals with prepaid calling cards -- which are most often used by low-income immigrants (because they can use the cards for international calls at relatively low rates).

Plaintiffs' central allegation was that: "Law enforcement agencies and researchers investigating the industry have discovered widespread discrepancies between the amount of calling time claimed in advertising and marketing materials, and the calling time actually available to card users."

So the plaintiffs sued for violation of various states' consumer fraud acts, and the defendant moved to dismiss.

It appears from the opinion that--at this point--Judge Weinstein took an unusual step. While the defendants only moved for dismissal, Judge Weinstein converted their motion into a limited summary judgment motion, and then sua sponte denied certification of the class. Once he denied certification, he dismissed the case for lack of subject-matter jurisdiction. (This opinion was issued before the Seventh and Eleventh Circuit ruled that a federal court retains jurisdiction over CAFA cases even after it denies class certification.)

Judge Weinstein held that the patchwork of state laws addressing issue meant that, in this case, individual issues would predominate over common issues. Judge Weinstein tried very hard to limit the case to its specific facts, but he still laid out clear circumstances that would be useful to defense lawyers.

While variations in state laws are ordinarily a predominance problem, Judge Weinstein treated the complications with the proposed class as a superiority problem. Since there is no uniformity among state regulations of calling cards, he reasoned federal government regulation would be superior. What is significant is that, in this particular case, the federal government was not actively regulating the issue in the same way as in some other cases involving findings of no superiority.   Judge Weinstein, recognized this issue, but decided that it was not enough to overcome the problems with the proposed class:

In general it is inappropriate to deny those wronged civilly a fallback court-supervised remedy when the administrative law segment of our justice system has neglected to provide an available superior form of protection. There are, however, instances where the litigation remedy is relatively so inferior as to warrant denying it altogether in the hope that administrative justice will prevail. This is such an instance.

So what can defendants take from this? Sometimes, a "private attorney general" is not enough to overcome a problem facing a vulnerable section of society.  Sometimes, a problem requires government intervention. And sometimes--when the need is clear enough--that argument can convince even the unlikeliest of judges that a class action is not appropriate

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Securities class actions have often drawn criticisms from both defense counsel and their ideological allies. One of the more interesting criticisms has been that securities class actions may be nothing more than shell games moving money around in such a way that the only parties to benefit are the lawyers. The theory goes like this: when a plaintiff files a securities class action, she seeks compensation for a drop in the value of her shares. The firm, faced with a bet-the-company lawsuit, settles (with a payout to the plaintiffs’ lawyers). The settlement, on a prorated basis, goes to the plaintiff. And then the value of her stock in the company drops because the company has paid her a settlement and her (and its) attorneys a large fee.
It’s a tidy story, presenting a logic that’s difficult to argue against. But is it true? Law professors Lynn Bai, James Cox, and Randall Thomas set out to test this story. Their study, “Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms” reached a number of conclusions, two of which are important to this discussion.

• Defendant firms tend to perform worse than their counterparts after they’re sued. Or, as the authors put it, their regression analysis “confirm[s] the deterioration in sample defendants’ operational efficiency in the early years following the commencement of the lawsuit. For the post-settlement periods, defendant firms with high settlement amounts had a higher probability of under-performing their peer groups than companies facing lower settlement amounts.”
• Class-action settlements often come out of a firm’s operating capital. “These numbers are consistent with the theory that insurance provided less than a full coverage of the settlement amounts and the discrepancy was paid out of the defendants’ current assets. The settlement payment exacerbated liquidity constraints on the part of the defendants, making them more vulnerable to liquidity crunches and prone to bankruptcy.”

In this case, the bottom line for defendants is that securities class actions affect the bottom line of defendants. One hardly needs an academic study to prove that. But this is one of the first studies to outline the ways in which a securities class action can directly affect the financial health of a firm. Ironically, the securities class action winds up sapping the very assets that a firm needs to stay healthy, and provide an adequate return on investment for the same shareholders the lawsuit is supposed to protect. From a strictly doctrinal standpoint, this study suggests that a securities class action may not be superior to other methods of resolving any controversy arising out of a stock drop. It’s an argument that defense counsel will surely pursue further.
 

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Antitrust class actions can be tough cases for defendants. By their nature, cases against alleged monopolists lend themselves well to David-versus-Goliath rhetoric. But, just as difficult, a number of the fundamental questions in antitrust class actions can only be decided after a “battle of the experts” that costs a great deal of money and may alienate judges who – like many lawyers – went to law school because they didn’t like math. So how can defendants rein in meritless antitrust class actions?

Kelly Bozanic, a fellow at Penn State’s Dickinson School of Law, has written a working paper that offers one solution. Her main argument, which is not of much help to practitioners, is that the court should “rigorously consider” antitrust standing at the class-certification stage. Of course, a court already must rigorously consider all Rule 23(a) requirements before certifying a class. And it would seem clear that a plaintiff who lacks antitrust standing would be either an atypical or inadequate class representative. At minimum, she will be subject to the “unique defense” of lack of antitrust standing. (In fact, one would expect to see a number of pre-certification summary judgment motions on the issue of antitrust standing.)

But Bozanic’s argument suggests a more interesting point: a wrongful certification of an antitrust class (or even just certification of an overbroad class) could lead to overenforcement, which would chill otherwise competitive conduct. To the extent that is true (and demonstrable), a defendant may argue that the class action against it is not superior because it would chill legitimately competitive conduct. (There’s a related argument also worth making – where a government agency like the Department of Justice Antitrust Division or Federal Trade Commission has investigated possible antitrust violations, certifying a class on top of that enforcement may also be considered overdeterrence.) Of course, to make that argument clearly to the court, the defendant may need the help of one of those high-priced experts.
 

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University of Pittsburgh Law Professor Rhonda Wasserman has posted a working paper to the Social Science Research Network (SSRN) with the weighty title “Transnational Class Actions and Interjurisdictional Preclusion.”  While it spends a great deal of time reviewing the current state of the literature on preclusion in class actions and class-action regimes in other countries (both useful surveys to have), the paper asks a simple but important question for class-action defendants: If a defendant settles a class action involving more than one country’s citizens, can it enforce the agreement against all of the class members?

This is not an abstract question. Multi-national class actions are becoming more common.  And for many defendants, the one benefit of class-action litigation is that it offers a degree of finality that one cannot find in individual litigation, and only rarely in mass torts.

To answer that question, Wasserman reviews a report of the British Institute of International and Comparative Law, which surveyed the preclusion doctrines of various European countries, including (among others) the United Kingdom (England and Wales), Germany, France, and Romania. As Wasserman reports, the Institute comes to three conclusions:

• Claim preclusion in Europe is “quite a bit narrower than the transactional test that is applied widely in the United States.” In particular, European courts are less likely to give preclusive effect to classwide settlements.
• “[A]bout half of the participating European countries do not accord their judgments issue preclusive effect.”
• “[A] review of the European class action and collective action vehicles reveals a deep reluctance to bind those who neither commence litigation in their own name nor affirmatively choose to opt in.”

What does this mean for class-action defendants? It actually has two implications, both equally important:

First, a defendant looking to settle a multi-national class action should be very sure of the preclusion doctrines in the countries where it may seek to enforce any settlement agreements.

But second, a multi-national class action may not be superior to other forms of litigation, because it may not resolve the dispute for various members of the class.
 

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For practitioners, clauses in consumer contracts that require consumers to arbitrate smaller claims rather than bring large-scale class actions have been a hot issue for several years. Defendants (and their counsel) like these clauses because, when they work, they can reduce a bet-your-company class action back to a manageable individual claim. Class-action plaintiffs (and their counsel) tend to dislike the clauses for the same reason.

In general, the debate surrounding class-action arbitration clauses centers on whether a given clause – which is usually part of a take-it-or-leave-it consumer contract – is unconscionable because the consumer had no chance to negotiate it. And while defendants can win this debate, they can lose it just as easily.

However, one federal district court case from 2007 shows how a defendant can craft an arbitration clause that may allow it to take advantage of this low-cost alternative to class actions, even in a generally pro-plaintiff jurisdiction like the Ninth Circuit, applying consumer-friendly law like Washington state’s. In Carideo v. Dell, Inc., the plaintiffs sued Dell alleging that it sold them defective laptops. Dell invoked its arbitration clause, which the trial court upheld.

The plaintiffs moved for reconsideration. In denying that motion, the trial court found that plaintiffs could still vindicate their claims in arbitration because:

• the individual amount in controversy was $1,300 to $1,700, large enough to justify a day in front of an arbitrator;
• the arbitration forum (the NAF) did not provide for confidential awards, which meant that later plaintiffs would benefit from these first arbitrations;
• there was enough freely-available evidence (including internet complaints) for the plaintiffs to make a persuasive factual case without expending lots of costs; and, most importantly
• Dell agreed to pay all of plaintiffs’ arbitration costs in excess of the initial $25 filing fee.

Since the end result was that arbitration would be less expensive (and less time-consuming) than bringing a suit in court, the court refused to find the arbitration clause substantively unconscionable. Nor, since the arbitration clause provided a genuine means of redress, did the court find the clause procedurally unconscionable, even though it noted the take-it-or-leave-it nature of the contract.

So what does this mean for defendants? For those that might consider arbitration clauses to reduce the risk from class actions, it may make sense to reduce the barriers to arbitrating the claims. There is at least some evidence that people prefer informal dispute resolution to litigation.  Assuming in general the products are sound, the potential liability from a handful of arbitrations – even including costs – is far less than the cost of litigating a class-action suit brought by an entrepreneurial plaintiff’s lawyer, or an extremely disgruntled consumer, even if the suit is dismissed early in. And, even if the case were to proceed as a class action, the presence of a realistic arbitration program available at the outset would be a strong argument that class litigation was not superior to individual litigation.
 

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