Abstract
The consolidation of similar claims for compensation into a single large class of plaintiffs is referred to as “class action litigation.” This practice can have both social costs and social benefits. For an example of the social benefits of consolidating separate claims, if the facts giving rise to the claims are substantially similar, then there may be significant savings in litigation and court administrative costs from presenting those facts once rather a multitude of times. There may, however, be significant social costs to creating a class of litigants and consolidating their claims. For example, this practice may empower those with frivolous negative expected-value claims to wring an unwarranted settlement from the defendant or defendants. The article surveys other sources of social cost and benefit from class-action litigation, reviews the empirical literature on these actions, and examines recent U.S. policy debates about reforming class-action litigation. The article concludes that class-action litigation can have substantial net social benefits but only if courts assiduously oversee the class certification process so as to identify and forestall the social-cost-generating aspects of class-action litigation.
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Notes
I shall not here discuss the phenomenon of “mass torts,” in which a single event gives rise to injuries to a large number of claimants and whose claims might be consolidated into a single action. The claims against Union Carbide for the chemical leak at its Bhopal, India, plant in 1984 and those against asbestos manufacturers are interesting examples of these special kinds of torts.
Of course, this is a stylized version of the litigation. There may be, as we shall see, a bifurcated trial in the first phase of which the common facts of liability are brought out and separate later proceedings in which individual losses are calculated. Even in the instance of bifurcation, there still may be significant cost savings from consolidating the liability phase of the proceedings. In point of fact, it is more common—and more productive of problems, as we shall see—to dispense with the separate proceedings on individual damages and, instead, to award the class a lump-sum with each plaintiff getting a pro rata share.
There is another stylization to the example: I have assumed that one large trial replaces 10,000 individual trials. That is extremely unlikely. Even if class actions were illegal, there would almost certainly not be 10,000 individual trials. Rather, there would probably be a series of enough individual trials for the other plaintiffs and the defendant to form a strong belief about how the future trials would be likely to go—that is, whether plaintiffs or the defendant would be likely to win. In light of those beliefs, settlements or dropped complaints will account for the largest percentage of the 10,000 possible trials.
If a litigant has a “positive expected value of litigation,” then the amount that he anticipates recovering if his case is successful, multiplied by the probability of success, exceeds the anticipated cost of litigation. For someone who has a “negative expected value of litigation,” the amount that she anticipates recovering times the probability of success is less than her anticipated costs of litigation. I shall make a further distinction within the class of negative expected value litigants shortly.
See Bone, supra n. 2, at 261–65.
See Hay and Rosenberg (2000).
Bone, supra n. 2, at 263-64.
In this regard, the class certification procedures avoid the same problems that might arise in a bankruptcy proceeding in which the total claims of the creditors exceeded the assets of the debtor.
The negative expected value can arise from the fact that the plaintiff’s case is weak (it makes a novel claim for recovery that is unlikely to succeed or the evidence to establish a more conventional claim is weak) or the costs of litigation (of establishing the novel claim for recovery or of surmounting the weakness of the evidence in a more conventional claim) are very high or both. I consider some further aspects of negative-expected-value claims in the next paragraphs of the text.
Bone, supra n. 2, at 266.
Bone notes, id. at 267–68, that there are alternatives to the class action for deterring defendants from inflicting small injuries on a large-number of individuals. For example, treble damages for successful plaintiffs, as are allowed in the U.S. federal antitrust statute, may create a strong incentive to litigate and a strong deterrent on wrongful action. Note, however, that in the example given above treble damages would not have converted any individual’s negative-expected-value claim into a positive-expected-value claim. There may be other public enforcement mechanisms beside individual causes of action. In securities fraud, for instance, the U.S. Securities Exchange Commission can bring actions against firms for violations of the securities regulations, including seeking criminal penalties. Nonetheless, it is almost certainly the case that the appropriate policy is one of both private causes of action (including class actions) and public enforcement (through ex ante regulation and ex post public enforcement). See Kolstad et al. (1990).
See Sacconi (2011) for a critical perspective in this special issue.
Professor Bone cites Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir. 1996), as an example. “In [that case], a class of 715,000 mortgagees, whose mortgages were serviced by BankBoston Mortgage Corp., sued for damages in an Alabama state court, alleging that the bank improperly calculated the surplus that the mortgagees had to maintain in their escrow accounts. The parties settled, with the class attorneys receiving somewhere between $8.5 and $14 million in fees and class members receiving one-time interest payments between $0 and $8.76. The settlement provided that BankBoston could deduct the attorney’s fees from each mortgagee’s escrow account, and in most cases this deduction exceeded the interest payment, with the result that most class members suffered a net loss from the litigation.” Bone, supra n. 2, at 277 n. 86.
Two recent empirical studies of attorney’s fees in class action litigation throw light on the actual practices in recent litigation. Ted Eisenberg and Geoff Miller examined two extensive data bases of class action data spanning the period 1993–2002. Their findings are that the size of the class’s recovery is the principal determinant of the attorney’s fees. Even in cases in which the court performed the lodestar calculation, the size of the recovery (whether in money or in coupons or other forms of soft relief) was the principal determinant of the attorney’s fees. “The mean fee award in common fund cases is well below the widely quoted one-third figure, constituting 21.9 percent of the recovery across all cases [].” Eisenberg and Miller also found a positive correlation between the degree of risk in the litigation and the attorney’s fees. See Eisenberg and Miller (2004). Eric Helland and Jon Klick also studied factors affecting the size of attorney’s fees in class actions. They find that judges who face crowded dockets are more likely to approve higher attorney’s fees, all other case characteristics held constant. See Helland and Klick (2007).
There have not been, to my knowledge, empirical studies of these lead-counsel auctions to reveal whether they are, in fact, superior compensation methods.
Bone, supra n. 2, at 282-85.
Id. at 291.
The case also involved some complicated procedural issues. For the purposes of focusing on the class-action-litigation aspects of the controversy, I shall ignore those issues.
Rhone-Poulenc Rorer, at 1298, citing Friendly (1973).
But see Schwartz (2002). Professor Schwartz seeks to articulate why it is thought to be normatively undesirable for a class action to result in a settlement if the underlying individual claims had little chance of success. “I speculate that what really moved Judge Posner was a belief that too much power has been conferred on juries and that juries are using that power systematically to discriminate against defendants.” Id. at 309. “The opinion is an unhappy mixture of expediency (do anything to reduce the harm inflicted by irresponsible juries), obfuscation (what, exactly, is the theory of the case?), and disingenuousness (tears for defendants settling to avoid bankruptcy but apparent indifference to victims settling to avoid destitution).” Id. at 310.
For the case in favor of aggregating some NEV claims and for worrying less about blackmail settlements, see Silver (2003). Silver notes that “[a] year and a half after Posner decertified the Rhone-Poulenc class and seemingly in deliberate defiance of his opinion, the parties negotiated a class-based settlement that paid $100,000 per ‘case’ of HIV infection, exclusive of attorneys’ fees and costs, which were provided for separately.” Id. at 1376.
See Bone and Evans (2002).
For an excellent summary of the fraud-on-the-market theory, including criticisms of the theory, see Macey (1998).
Basic v. Levinson, at 241-42.
Some of the professional literature on the include Alexander (1991) (arguing that almost all securities fraud class actions are without merit); Bohn and Choi (1996) (a large number, but not all, are meritless); and Seligman (1994) (arguing that the literature on the merits of securities fraud class action litigation is far from conclusive). A marvelous study and summary of the literature on class actions is Hensler, Pace, Dombey-Moore, Giddens, Gross and Muller (2000).
The Act was passed by Congress over President Clinton’s veto. One of the principal House sponsors of the bill was Chris Cox, Republican of California, who has since become the head of the Securities and Exchange Commission.
This has proved a tough hurdle for plaintiffs to get over; they cannot simply cite a misleading or false statement and say that the defendant “must have known” that it was false or misleading, as they could have before passage of the PSLRA.
See Helland (2006). The focus of Professor Helland’s article is whether directors at a company that has been the subject of a successful securities fraud action pay a reputational price. He finds very little evidence of a decline in reputation and wonders, therefore, whether private class action litigation for securities fraud has desirable effects.
The “diversity jurisdiction” refers to the fact that any party can remove a case to a federal court if the other side is domiciled in a different state.
This provision reflects the widespread revulsion that greeted the facts in Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir. 1996), discussed in n. 11 supra.
Grundfest (2007). Professor Grundfest, now at Stanford Law School, previously served as a commissioner of the Securities and Exchange Commission.
Id.
Id.
Willging and Lee (2006).
Id.
See Creswell (2006).
See www.milbergweiss.com. See also www.milbergweissjustice.com. The last statement on the indictment on that website is dated July 17, 2006.
Creswell (2007). As part of the plea agreement, Mr. Bershad agreed to give back $7.75 million, to pay a $250,000 fine, and to cooperate with the prosecution in further matters having to do with the conspiracy.
Meier (2007).
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Acknowledgments
I owe great thanks to Amber Evans, University of Illinois College of Law, Class of 2008, for her excellent assistance, and to Theodore L. Ulen, Esq., and Timothy B. Ulen, Esq., for comments on an earlier draft. I also want to thank Professor Giovanni B. Ramello of the Department of Public Policy and Collective Choices, University of Eastern Piedmont, Italy, for organizing the conference and symposium of which this essays a part.
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Ulen, T.S. An introduction to the law and economics of class action litigation. Eur J Law Econ 32, 185–203 (2011). https://doi.org/10.1007/s10657-011-9252-9
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DOI: https://doi.org/10.1007/s10657-011-9252-9