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Optimal Class Size, Opt-Out Rights and 'Indivisible' Remedies
Abstract
Prepared for a Symposium on the ALI’s Aggregate Litigation Project, this paper examines the ALI’s proposal to permit opt-out rights when remedies and “divisible,” but not to permit them when remedies are “indivisible.” Starting from the ground up, the paper employs economic analysis to determine what the optimal size of a class action should be. We demonstrate that, in some circumstances, the optimal size of a class is a class composed of all victims, while in other cases, the optimal size is smaller. We further argue that courts should consider optimal class size in determining whether to certify a class, and that there should be no opt-out right when a class is optimally sized. The ALI’s approach does not always lead to the most efficiently sized class actions.
Over the past three decades, the Supreme Court has repeatedly insisted that due process requires that absent class members be given an opportunity to opt out of a class action seeking predominantly money damages. The Court’s asserted justification for linking opt-out rights and due process focuses on absent class members’ potential interest in seeking their own personal “day in court.” But this day-in-court rationale provides a problematic basis for viewing opt-out rights as a categorical requirement of procedural due process. Perhaps most obviously, the day-in-court justification makes virtually no sense in the context of class actions involving only small-value, individual damages claims, which cannot feasibly be litigated outside the context of a class proceeding. Recognizing the deficiencies of the standard day-in-court rationale, this Article approaches the connection between due process and class action opt-out rights from a different perspective. Rather than taking as its central case the condition of an individual class member wishing to pursue a separate, standalone litigation—the perspective implicit in the standard day-in-court account—this alternative perspective focuses instead upon the interests of those class members who prefer that their legal claims not be asserted at all. Outside the class action context, ownership of a legal claim typically entitles claimholders to decide for themselves whether or not their claims will be asserted in litigation. Class actions extinguish this control right by transferring control over absent class members’ claims to the class representatives and their attorneys. This transfer occurs without the claim owners’ explicit consent and allows their claims to be used for purposes with which the owners of those claims might not agree, such as to punish a particular defendant or to enrich class action lawyers that the owner views as undeserving. Opt-out rights provide an appropriate procedural safeguard that protects objecting class members from having their control rights erroneously extinguished, thereby allowing them to decide for themselves whether or not their claims will be asserted. Shifting the focus of due process analysis away from the interests of absent class members who wish to pursue individual litigation and toward the interests of class members who wish to avoid having their claims asserted at all sheds useful new light on a number of issues relating to the theory and practice of class action litigation, including: (1) the theoretical foundations for opt-out rights in cases involving so-called “negative value” claims, (2) the differential treatment of opt-out rights in equitable class actions as opposed to those seeking monetary relief, and (3) the relationship between opt-out rights and the underlying substantive law establishing the claimholder’s entitlement to sue.
The American class action is a procedural tool that advances substantive law values such as deterrence, compensation, and fairness. Opt-out class actions in particular achieve these goals by aggregating claims not only of active participants but also passive plaintiffs. Full faith and credit then extends the preclusive effect of class judgments to other U.S. courts. But there is no international full faith and credit obligation, and many foreign courts will not treat U.S. class judgments as binding on passive plaintiffs. Therefore, some plaintiffs may be able to wait until the U.S. class action is resolved before either joining the U.S. suit (and reaping its rewards) or relitigating the case abroad. Transnational class actions thus give some plaintiffs “litigation options.” The few courts and scholars that have recognized this phenomenon have proposed methods to identify litigation option holders and exclude them from opt-out treatment. Some U.S. judges, for example, have refused to certify classes that include citizens of foreign countries that may not recognize U.S. class judgments. This Article shows that this conventional wisdom is misdirected: citizenship is the wrong measure; courts are poorly positioned to identify relitigation risk; and the social costs of excluding option holders may well outweigh the benefits. Instead, courts should certify classes of foreign and domestic plaintiffs in service of policy goals such as deterrence and intraclass fairness regardless of foreign preclusion law. At the same time, this Article suggests innovative approaches to achieve some preclusion previously unremarked upon in transnational cases. Prior approaches are insufficient, in part, because they rely on courts without acknowledging the informational asymmetries between courts and parties or the limited tools available for judicial resolution. This Article explains how private incentives and private information may fill the gap in interjurisdictional preclusion law. Parties should be encouraged to negotiate private preclusion agreements in cases in which preclusion matters. In addition, courts can coordinate informally to curb costly relitigation. In summary, this Article uses values derived from lawmaking choices and a practical assessment of the litigation environment to respond to litigation options in transnational class actions not by excluding option holders but instead by permitting aggregation and seeking alternatives to preclusion law. This Article applies these lessons to transnational class actions filed in a single jurisdiction (e.g., a U.S. court), as well as to dueling class actions filed in two countries simultaneously and to U.S. recognition of foreign aggregate judgments whatever their form.
This Article, prepared for a symposium on class actions, examines the problem of cy pres relief through the lens of ensuring that class actions have an optimal claim structure and class membership. It finds that the present cy pres doctrine does little to advance the creation of optimal class actions, and may do some harm to achieving that goal. The Article then proposes an alternative “nudge” to induce putative class counsel to structure class actions in an optimal way: set attorneys’ fees so that counsel is compensated through a combination of an hourly market rate and a percentage of the net recovery to the class itself. The Article demonstrates that this approach to attorneys’ fees aligns the interests of the class in maximizing its recovery, class counsel in obtaining the most profitable (but reasonable) fee, and society in certifying the class action with the greatest expected net benefit. This approach also eliminates many of the agency-cost problems associated with class counsel failing to attend to the interests of the class. Finally, this approach eliminates most of the incentive for class counsel to seek cy pres relief, although in some cases cy pres relief may still be appropriate.
This Article claims that there may be a subset of cases in which private rights of action may work with public rights as an effective strategy for a firm to raise costs against rival dominant firms. A competitor firm may bring its own case (which is costly) and/or have government bring a case on its behalf (which is less costly). Alternatively, if the competitor firm has sufficient financial resources, it can pursue an approach that employs both strategies simultaneously. This situation of public and private misuse of antitrust may not happen often. As the Article will explore, it is not only a theoretical argument. This Article will provide examples of where this may have occurred both in antitrust's formative years and in its present.
Congress has created a mechanism through which victims of securities fraud may pursue remedies for their losses against the perpetrators. That mechanism includes the substantive prohibitions of the federal securities laws, as well as the procedural pathways established by the Private Securities Litigation Reform Act of 1995 and the Federal Rules of Civil Procedure and Evidence. In this Article, we delineate those access barriers and question both their constitutionality and wisdom. We begin by describing how some federal courts have rewritten the PSLRA and the Federal Rules of Civil Procedure and Evidence to erect merits barriers at three key pre-trial litigation stages that force plaintiffs to prove their case without the benefit of discovery to a judge before reaching a jury. In particular, some federal courts have redesigned the pleading standard under the PSLRA and the federal rules so as to steeply discount allegations of scienter based on circumstantial evidence. Other courts have doctored Rule 23 to require plaintiffs to prove the elements of reliance and loss causation by a preponderance of the evidence to pursue a class action. And some other courts have adjusted Rule 56 and the expert-witness regime to require plaintiffs to establish the weight and credibility of their expert witnesses to avoid summary judgment. At each of these pre-trial stages, the federal courts have effectively required plaintiffs to meet a burden of proof which is actually greater than or equal to the burden of proof which should be encountered only later at trial. The next part explains that these access barriers pose both constitutional and practical concerns. First by rewriting rules of procedure, rather than deferring to traditional rulemaking bodies like Congress and the Advisory Committee on Civil Rules of the Judicial Conference, the judiciary has usurped the rulemaking function of the legislature. Second, the pre-trial barriers erected require plaintiffs to meet, or at times even exceed, their burden of proof at trial and leave district courts with considerable fact-finding power, encroaching on the province of the jury. The constitutional implications of these merits-based access barriers alone should be sufficient to prevent federal courts from continuing to redesign the private securities litigation process. If it is not, this next part offers another reason cautions against mainstream acceptance of these judicial access barriers: they are unwise. The judicial access barriers rest on three premises that are incomplete, unsupported, or not true, including the incomplete and unsupported contention that defendants settle claims in terrorem, the myth that Congress is incapable of fashioning rules responsive to litigation concerns and that the jury is incapable of merited fact-finding, and the flawed assumption that merits-based screening precludes only “frivolous” litigation. We discover no legitimate support for any of these assumptions.
Almost all courts and scholars disfavor the use of class actions in mass tort litigation, since class actions infringe on each plaintiff's control, or autonomy, over the tort claim. The Supreme Court, in fact, has strongly suggested that protecting such litigant autonomy is a requirement of due process, and has done so in recent decisions concerning the class action, arbitration, preclusion law, and the Erie doctrine. In this article I argue that protecting litigant autonomy in the mass tort context is self-defeating, and, in the process, rethink basic tenets of procedural due process. Relying on recent property theory, I first show that protecting litigant autonomy in mass tort litigation causes collective action problems that undermine the deterrent effect of the litigation. Thus, protecting a plaintiff's autonomy over the claim leads to the very mass torts the claim seeks to prevent and remedy. Counterintuitively, this tragedy can be avoided by taking away each plaintiff's autonomy over the claim, such as through a mandatory class action. I then use the self-defeating nature of litigant autonomy in the mass tort context to reexamine the law of procedural due process. The result is a revision of what process is "due" that takes each plaintiff's individual interest in deterrence into account and impartially balances competing interests. I conclude that the law of procedural due process should end its preoccupation with the claim, and, in particular, a plaintiff's control over it. Instead, the law of procedural due process should take a context-dependent approach that takes into account the enforcement objectives of tort law and analogous liability rules.
Can eighteenth-century constitutional commitments that “courts shall be open” for private rights enforcement be coupled with twentieth-century aspirations that democratic orders provide “equal justice under law”? That question sits at the intersection of three cases, AT&T v. Concepcion, Wal-Mart v. Dukes, and Turner v. Rogers, decided in the 2010 Supreme Court Term. In each decision, Justices evaluated the fairness of particular procedures (class arbitrations, class actions, or civil contempt processes) when making choices about the meaning of governing legal regimes - the Federal Arbitration Act (FAA) and state unconscionability doctrine in AT&T; Rule 23 and Title VII in Wal-Mart; and the Due Process Clause and child support obligations in Turner.AT&T and Wal-Mart presented related questions about how the form of dispute resolution (individual or aggregate) and the place of dispute resolution (public or private, state or federal) affect the level of public regulation of consumer and employment transactions predicated on boilerplate, rather than negotiated, terms. The issue in Turner was whether state-funded lawyers were required before a person could, at the behest of the child’s custodian, be incarcerated for contempt for failure to pay child support. The specific case involved two individuals, but their circumstances illustrated the challenges faced by millions of other lawyer-less litigants in state and federal courts.Each case exemplifies the challenges that new rights, produced by twentieth-century social movements, pose for courts. When claimants such as consumers, employees, and household members presented themselves as entitled to equal treatment, jurists responded by interrogating their own procedural parameters. Relying on the Due Process Clause, courts developed distinct lines of analyses that - depending on the context - imposed criteria on decisionmaking procedures, mandated subsidies to address resource asymmetries between adversaries, shaped processes to reduce intra-litigant disparities, and facilitated access to courts. Requisite to those efforts was a practice that is intertwined with fairness - the public quality of adjudication that endows an audience with the authority to watch, critique, and respond through democratic channels to the legal norms announced. A “fair and public hearing” became a touchstone of what democratic orders required their courts to provide. But, as this trio of cases demonstrates, whether seeking to implement those egalitarian aspirations or simply to function, courts have to grapple with economically disparate claimants and a vast volume of eligible rights holders. If eighteenth-century constitutional entitlements to open courts are to remain relevant to ordinary litigants, the question is not whether to aggregate, subsidize, and reconfigure process but how to do so “fairly,” in terms of what groups, which claims, by means of which procedures, and offering what remedies. But without public disclosures and oversight of dispute resolution - in and out of court, single file and aggregated - one has no way to know whether fairness is either a goal or a result.
A half century ago, class actions were controversial. Aggregation was seen as permissible only under exceptional circumstances that could justify departures from the obligations of individual voice, participation, and control of the then-dominant procedural framework. The adoption in 2009 by the American Law Institute of Principles of the Law of Aggregate Litigation mark the normalization of group-based adjudication as well as the embrace of group-based settlements through which lawyers and judges shape binding and preclusive judgments. In those principles, the ALI offered two models of the “process due,” one focused on court-based obligations of public performance and the other imposing some regulation on out-of-court behavior yet relaxing relational constraints on lawyers by licensing them to enter into individual contracts pre-authorizing mass settlement negotiations. The ALI’s expansive attitudes contrast to another understanding of due process, exemplified by the 2008 Supreme Court decision of Taylor v. Sturgell. That ruling insisted that courts could not rely on the idea of “virtual” represenstation to use a judgment against one party to preclude another, even if the sequential plaintiffs shared the same lawyer. This essay explores the histories, differences, and benefits of these divergent approaches as they allocate authority among disputants, lawyers, judges, and give meaning to the phrase “due process of law.”
This Article addresses an increasingly important question: When, if ever, should foreign citizens be included as members of an American class action? The existing consensus holds that courts should exclude from class membership those foreign citizens whose country does not recognize an American class judgment. Our analysis begins by establishing that this consensus is flawed. Rather, to minimize the costs associated with relitigation in a foreign forum, we must distinguish between foreign claimants who are likely to commence a subsequent foreign proceeding from those who are unlikely to do so; distinguishing between those who come from recognizing and nonrecognizing countries creates needless inefficiency. Using standard tools of economic analysis, we examine the benefits and costs of the consensus rule and compare them to the costs and benefits of other possible rules. In this comparison, the consensus rule tends to perform poorly. As a matter of theory, the most efficient rule for deciding which foreign citizens to include and exclude is evident, but real-world informational constraints frustrate the application of this rule in practice. Because no rule regarding the inclusion and exclusion of foreign citizens is the most efficient in all situations, we propose that courts use rebuttable presumptions: include foreign citizens with claims that are not individually viable and exclude foreign citizens with claims that are viable.
An experiment was performed to determine the effects of the size of the plaintiff population, the presence or absence of an outlier, defined as a plaintiff whose injuries were significantly more severe than other plaintiffs, and whether plaintiffs were tried individually or were aggregated in a group. Sixty-six person juries were assigned to one of eleven experimental conditions, listened to a 4-h toxic tort trial, and, after deliberating, delivered verdicts on liability, and damage awards. The verdicts were increased significantly by the presence of an outlier and by an increase in the plaintiff population. While the punitive awards were higher in the outlier condition, there was also a tendency for juries to find the company not liable.
The meaning of the above findings, as well as the fact that juries exhibited great variability in their verdicts was discussed. Evidence as to the decision-making process of the juries was also gathered and discussed.
In recent decades, the class action has emerged as a system of law reform that rivals conventional legislation. Through class settlements, private attor-neys and courts seek to make binding deals that alter en masse the legal rights of class members. This transactional dimension of class settlements cries out for an account of the class action that situates that device in institu-tional terms within the conventional avenues of law reform. This Article provides an institutional theory of the class action. Draw-ing upon the economics of large-scale civil litigation, procedural doctrines of preclusion, and public-law literature on delegations, Professor Nagareda ar-ticulates the "preexistence principle" as a touchstone with which to under-stand the modern class action. The preexistence principle holds that attor-neys and courts enjoy no general power to alter legal rights unilaterally. A class settlement thus must stop short of what Congress might do by way of civil justice reform legislation, such as that enacted in the aftermath of Sep-tember 11, 2001. The preexistence principle illuminates the fundamental structural dis-tinction drawn between mandatory and opt-out classes, and thus enables courts to answer important questions circulating in class action litigation today: questions, for instance, about whether the right to opt out is personal or transactional, and about how a class settlement may legitimately deter opt-outs.
Plaintiffs' attorneys in class action and derivative suits occupy an uneasy place in the American legal system. The traditional image of the lawyer is of an independent professional providing advice and advocacy on behalf of a client. The attorney, in this view, is an agent of the client and subject to the client's control in all important matters. Plaintiffs' class action and derivative attorneys do not fit this mold. They are subject to only minimal monitoring by their ostensible "clients," who are either dispersed and disorganized (in the case of class action litigation) or under the control of hostile forces (in the case of derivative litigation). Accordingly, plaintiffs' class and derivative attorneys function essentially as entrepreneurs who bear a substantial amount of the litigation risk and exercise nearly plenary control over all important decisions in the lawsuit.
When multiple class action suits are filed on behalf of the same class members, numerous problems ensue. Dueling class actions are confusing to class members, wasteful of judicial resources, conducive to unfair settlements, and laden with complex preclusion problems. The article creates a typology of different kinds of dueling class actions; explores the problems that plague each type; considers the effect the Supreme Court's decision in Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367 (1996), has had on these problems; evaluates the efficacy of existing judicial tools to curb them; and proposes an array of possible solutions. The more modest quick fixes include: (1) creation of a registry of all class actions filed; (2) amendment of Rule 23 and state class action rules to bar the certification of dueling class actions and to require the appointment of a class action advocate; (3) amendment of the Anti-Injunction Act to enlarge the authority of federal courts to enjoin dueling class actions; (4) amendment of the multidistrict litigation statute to permit transferee courts entertaining consolidated dueling class actions to retain the cases for trial; and (5) enactment of legislation requiring better notice to absent class members in dueling class actions. The article also explores more dramatic legislative solutions to permit the consolidation of all dueling class actions in a single forum.
In this study, 135 jury-eligible adults were randomly assigned to 1 of 5 aggregations of plaintiffs involving 1, 2, 4, 6, and 10 claimants. Jurors were shown a 5- to 6-hr trial involving claims of differential repetitive stress injuries by each plaintiff. Measures concerning liability, damages, and various cognitive and attributional factors were collected. The defendant was more likely to be judged as liable as the number of plaintiffs increased. Awards reached a zenith at 4 plaintiffs and then began to decrease. Increases in the number of plaintiffs who were aggregated degraded information processing. Limits of juror competence in complex trials and juror aids were discussed.
While the rules governing the formation of groups engaging in collective action may have significant impact on group size and behavior of members, most experiments on public goods have been conducted with the subjects in exogenously fixed groups or of fixed sizes. We study endogenous formation of groups in a public-goods provision game by allowing subjects to change groups under three sets of rules: free entry/exit, restricted entry with free exit, and free entry with restricted exit. We find that the rules governing entry and exit do have a significant impact on individual behavior and group-level outcomes. Copyright 2008 Blackwell Publishing, Inc..