EVENTS

Date:	Thursday, October 30, 2003
Time:	10:00 AM -- 1:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

October 2003
Class Action Reform: The Why and the Who

The debate over class action reform has long suffered from a lack of theoretical and institutional context. Much attention is lavished on the technical details of competing reform proposals with little recognition that those proposals often reflect widely divergent-though rarely articulated-assumptions about the general purposes of liability law (for example, deterrence of bad conduct and compensation of harmed individuals). At the same time, little sustained thought has been given to the institutional context of class action reform-that is, the specific risks and opportunities of pursuing reform through the federal courts, the judicial conference, the congress, or federal agencies.  On October 30, the AEI Liability Project hosted an exchange of views on the purposes and pathways of federal class action reform.

Michael Greve
AEI

Among the precursors of the modern class action, strangely enough, is British naval policy during the eighteenth century. Britain encouraged the more entrepreneurial members of its society to seize foreign ships on the open seas, and if you could bring these ships back to Britain, you could find yourself a court to divvy up the proceeds. That pattern is rather familiar to modern defense lawyers: plaintiffs seize some out-of-state corporation, drag it into a court-which, with distressing frequency, is situated in Morris County, Texas, or Jefferson County, Mississippi-and divvy up the proceeds. We now call these people trial lawyers instead of privateers, but the basic idea is the same, with one critical distinction. So far as we can tell, the privateer action worked because you actually had to be a privateer to participate. You couldn't say that you wanted to be a privateer or were once exposed to a privateer. You had to be one, and that bounded the plaintiff class. At the same time, the actions were limited to the actual ship and its cargo.

Privateering worked, in part, because these privateer actions resembled what we now call limited fund class actions, which by almost uniform consensus still work.  What doesn't work, by almost uniform consensus, is what are now called sprawling class actions-characterized by unbounded and frequently heterogeneous classes, always on the plaintiff side, sometimes on the defense side, and no limitations on the size of the fund, at least short of bankruptcy. You have exorbitant transaction costs, ruinous costs frequently for the defense side, and absurd compensation formulas on the plaintiff side. Everybody is clamoring for reform.

But, reform for what? And assuming that you know what you want to have done, who will do it? The potential or would-be class action reform confronts the dual task of finding somebody who will listen, and then fighting the institutional biases that might derail this train once it gets underway, if ever.

Panel I - Principles and Purposes of Class Action Reform

David Rosenberg
Harvard Law School

What people want is control and regulation of risk, and insurance. They also want the two in as optimal a combination as society can deliver. The necessary conclusion is that civil liability ought to contribute to the overall effort by the legal system to deliver what people want-to minimize the sum of accident cost through optimal risk regulation, optimal insurance, and, putting it strictly in terms of civil liability, optimal deterrence and optimal insurance. 

The necessary context of class actions is the management of mass production risks, because what class actions are addressing is mass production decision-making by so-called private enterprise and by government enterprise. That's where it's all coming from. It's mass production decisions, which don't have any individualizing characteristic to them at all. You can't break them apart with respect to any individual who might be affected. In fact, no individual would want them broken apart in that way because it would destroy the scale benefits of mass production. But in order to safeguard the collective goods, the regulatory system and the insurance system that the law operates have to be collective as well. So deterrence has to be a collectivized product, as does insurance.

Class action ought to be mandatory, automatic, and universal. There should be absolutely no question that class action should be certified. There should be no questions of predominance. There should be no questions of homogeneity versus heterogeneity in the claims. It's all hogwash if the objectives are deterrence and insurance. Insurance doesn't want to know anything about any individual claimant's causal relationship to the harm if that issue doesn't affect the level or severity of the loss that that individual has suffered.

Richard Epstein
University of Chicago Law School

Procedure must follow substance, not the other way around.  If we think that the substantive principles that underlie class action are wrong, we ought to go back to our representatives and argue for substantive changes, not fiddle around with the procedures of Rule 23. 

Contrary to Professor Rosenberg's beliefs, I start with the general principle that individual autonomy matters-if somebody invades your space by the use of force or fraud, or breaches a contract that they've made with you, you are a victim and the legal system is designed to vindicate your rights to the extent that they have been violated by other individuals.  But the greatest difficulty that every legal system has to face at every stage is friction.  Friction interferes with substantive operations, and can be dealt with for class actions in one of two ways: either you give up the compensatory goal, or you can aggregate the claims.  In the first case, you could say that if we have the deterrent effect, all individuals will benefit in their individual capacity by virtue of the reduction of the number of suits or of wrongs that we have, so there's a kind of indirect compensation.  In the second, aggregation can take place with a commitment to autonomy, based on voluntary joinder rather than mandatory participation.  In fact, this works quite well, or quite disastrously, depending on your point of view.

The problem is whether or not the underlying merits of the suit turn out to be sound once you aggregate the claim. I am sure that aggregation leads to effective magnification, but I am not sure that it leads to a social improvement. If you systematically miscalibrate certain kinds of injuries, you're going to get that wrong in any individual case. And if you get it wrong in an individual case, you're going to get it wrong in the aggregate, and the errors will never cancel themselves out. They're only going to accumulate in one form or another.  This holds true for all sorts of errors-including systematic overcompensation, which some would argue gets in the way of optimal deterrence.

The coercive model of class action works reasonably well in cases involving actual public goods.  But how do you pick the right jockey for the horse when you decide that you're not just riding a single horse, but you're riding a whole miserable herd of horses? Opting-out becomes extremely important as a disciplinary tool. The reason why these problems are so difficult is that everybody who wants to play these games is looking out for himself, and when you have a complicated system of coerced interaction, loaded by a heavy dose of powerful individual self-interest, the only thing that you can be sure of is mayhem.

Panel II - Class Action Reform-By Whom?

Michael Greve
AEI

We are here to discuss the institutional dynamics of class action reform, the pros and cons of pushing that particular agenda in one form or another, and the success or failure in this area of the various institutions: the Judicial Conference, the Supreme Court, the appellate system, the Congress, the Federal Trade Commission.

The Hon. Lee Rosenthal
U.S. District Court

In 1966, major reforms were made to the rule governing class actions, Rule 23 of the Federal Rules of Civil Procedure. One month from now, unless Congress acts affirmatively to prevent it, new amendments to this rule will become effective, and the difference between those two sets of amendments is worth examining.

The 1966 reformers were concerned with the idea of single-incident mass torts-such as the Ringling Brothers tent fire that had occurred not too long beforehand.  The problem was the possibility that, without an opt-out mechanism, a defendant could rig a patsy class, arrange to have itself sued, plan to settle for a small amount, and therefore be absolved of all liability at a very cheap price.  Rule 23(b)(3) was their attempt to solve that problem by excluding from the class any member who specifically protested within a certain time frame.  It was a radical change, and in the generation since then, there has been an explosion in substantive law on all sorts of fronts, state and federal, that with the class action device available made enormous changes to the American legal landscape.

Now, rulemaking itself has changed radically.  The difficulty of making rule changes anywhere but on the margins is exacerbated by the very great difficulty of distinguishing between substance and procedure. Because even though Rule 23(b)(3) was created within the Rules Enabling Act, it was the by-product of a procedural change. It is now widely viewed as having become so entrenched in access to and enforcement of substantive rights that any attempt to reduce, discipline, or impose greater procedural rigors on those rights is viewed as outside the Rules Enabling Act process. The very rules committee that created this mess can't do anything meaningful to clean it up.

The amendments that have passed up to Congressional approval this year are fair, balanced, and modest.  The advisory committee put to the drafting test the ability within the rules to address problems like certification shopping, settlement shopping, and overlapping and duplicative class actions pending simultaneously in state and federal courts.  We got nowhere.  We tried very hard, and there was a wonderful debate over the limits of the Rules Enabling Act, the Anti-Injunction Act, and the appropriate role of rulemaking, all of which led the committee itself to conclude that the rules enabling process would not permit us to get the result that many agreed would be optimal.

Mark Perry
Gibson, Dunn & Crutcher

What can the federal courts, and in particular the Supreme Court, do about class actions within the existing body of law?  I want to offer four proposals, arranged in increasing order of controversy, of things that could be presented fruitfully to the Supreme Court by the litigants in a proper case. 

The first is that the Supreme Court should say that the Rules Enabling Act means what it says.  If you look at the class action cases, 95 percent of our courts don't understand that proposition. They mouth the words of Rule 23, typicality and commonality and so forth, without asking the obvious question, which is: do the members of this class have a right that can be enforced through this device under the substantive law on which they are suing?  It is not enough to say that the class members have a common issue; they have to prove that they have a commonality.  That alone would preclude the maintenance of many class actions.

Secondly, with respect to state court actions, the Court should-and soon might-reaffirm, in no uncertain terms, that the Schutz decision means what it says.  In California, where I do a lot of my practice, the case is completely ignored.  The "logic" is that because California has a consumer protection statute and virtually all states have consumer protection statutes, California may maintain actions on behalf of all consumers in all states. This overlooks the fact that in the other forty-nine states, forty-eight of those do not allow private rights of action under their consumer statutes, so California is co-opting the decisions made by the people of all those other states as to who can sue and for what.  Schutz would preclude that, and it should be followed as precedent.

Third, in two cases-Snyder v. Harris (394 U.S. 332) and Zahn v. International Paper Co. (414 U.S. 291)-the Court held that claims of individual class members cannot be aggregated for purposes of meeting the amount in controversy requirement for getting the case into federal court.  Nothing in the statute would preclude a reversal of that ruling, because the reality of the situation is that a company is facing, one gazillion dollar claim, rather than a bunch of $75,000 claims.

Fourth, the Court could revisit the asbestos case Amchem v. Windsor (117 S.Ct. 2231), which turned on the interpretation of the Rule 23 requirements for class certification.  In that case, the class encompassed a wide range of "injuries," from established physical injuries to fear of future ones.  The Court found that grouping to be, among other things, contrary to the requirement of "common issue predominance," and in so doing neglected to consider the need of a defendant to buy peace through a settlement class.

John Beisner
O'Melveny & Myers

There are two class action questions that Congress can address.  The first is, who should hear class actions?  In the class action context, one of the major battles is over whether a federal court or a magnet state court should hear a case.  Class actions are very unusual in the sense that a lawyer who decides to file a class action can file that case in virtually any court in the United States. You have a lawyer asking, which venue will  be most favorable to me?  What has really spawned this debate is the question of whether certain local state courts should have what is essentially a monopoly over the multistate class actions.    It isn't easy to make laws in that kind of climate.  Lawmakers can't just think about what the statute says, they need to think about what the most creative lawyers on Earth could do with that statutory language to achieve exactly the opposite result of what Congress had in mind.

The other area where you might argue that Congress has a role is in regulating attorneys' fees.  When it has come to the award of attorneys' fees, no one has talked about the fact that efficiency is the reason for the existence of class actions. Particularly in the state courts, if you have an individual case that is litigated on a contingency fee basis, the typical award by agreement is that the attorneys will get between 25 and 40 percent of whatever is recovered for the plaintiff.  Now, if the efficiency logic is there, you would expect the fee to be two to five percent, at most, but that is seldom the result in a case. There is no efficiency discount. I think that is a major problem with the class action system and accounts for many of the problems that exist today.

In that regard, I would suggest that the approach to class actions that Professor Rosenberg suggests has been implicitly rejected in the context of the debate that's going on in Congress now regarding the Class Action Fairness Act. What has motivated that debate is the concern on both sides of the political aisle in Congress that class actions are not providing relief to consumers-they are providing money to attorneys.

John T. Delacourt
Federal Trade Commission

Class action settlements raise issues that are at the core of the FTC's consumer protection mission.  Charged with enforcing the Federal Trade Commission Act, the FTC has a broad mandate to intervene where the interests of consumers are being inadequately represented or, in some instances, not represented at all.  The class action mechanism has two principal objectives: to compensate injured consumers and to deter corporate wrongdoers.  The lack of a consistent, strong consumer voice at the table, however, frequently prevents the mechanism from doing either job well. There are simply too many ways for class counsel and the defendant working together to advance their interests at the expense of consumer class members.  At the settlement stage, there may be strong incentives for class action attorneys to collude with defendants to reach a mutually beneficial settlement that is not particularly protective of consumer class members. Ideally, FTC intervention at this stage, whether through amicus briefs or otherwise, provides consumers a seat at the table.

To date, there have been two principal focuses of the agency's class action reform efforts.  The first of these is the use of non-pecuniary or coupon compensation. Outside of very limited circumstances, use of coupon settlements raises serious conflict-of-interest concerns. Such deals typically entail a sizable fee request by client's counsel, which in turn is justified by an inflated valuation of the coupons. The defendant understands that the coupons offer consumers little real value and are, therefore, unlikely to be redeemed, at least in significant numbers.  The second focus is on excessive attorney fees. Excessive fee awards can and often do result in substantial consumer harm. Such fee awards do not represent costless windfall to lawyers but, rather, diminish the total compensation available to class members.  They may also create distorted incentives, promoting litigation that is not only contrary to the interests of the class but unnecessarily raises the cost of goods and services to consumers generally.

The FTC brings three major tools to the table:  consumer education, in the form of advice concerning topics such as opt-out notices and settlement terms; competition advocacy, in the form of comments on pending legislation or proposed rules; and the amicus brief, in which the FTC is able to provide courts with assistance on issues within the scope of the agency's expertise, including the potential consumer impact of class action settlements.  We believe, based on bipartisan support, broad-based criticism, and consumer feedback, that we are on the right track.

AEI Research Assistant Kate Rick prepared this summary.