Beyond "It Just Ain't Worth It": Alternative Strategies for Damage Class Action Reform

Abstract

DEBORAH R. HENSLER [*] THOMAS D. ROWE JR. [**] I INTRODUCTION We begin with the premise that private class actions for money damages can yield significant social benefits. Class actions for damages can provide compensation for modest but non-trivial losses suffered by widely dispersed but similarly positioned persons as a result of the negligence or illegal behavior of others, allowing recovery for losses that cannot practically be achieved through individual litigation. In this way, damage class actions can deter such injurious behavior and thereby supplement regulatory enforcement by administrative agencies that are under-funded, susceptible to capture by the subjects of their regulation, or politically constrained. Damage class actions also may provide efficient management and resolution of large numbers of similar claims when individual litigation is feasible, but its costs would be extraordinarily high. [1] Despite these benefits, however, the financial incentives that fuel private class action litigation have the potential to undermine these goals. Private litigation that duplicates effective regulatory enforcement may impose additional costs without commensurate benefits. Non-meritorious class actions filed by lawyers who expect defendants to be willing to pay something simply to ensure that the class counsel will go away, as well as class action settlements that bear little relation to the merits of the claims, dilute the deterrent effect of class action litigation. Settlements designed in ways that make it unlikely that the defendants will deliver all of the benefits they have pledged to pay class members will not achieve their asserted compensation objectives. The efficiency gains flowing from global resolutions of claims may be outweighed by settlements that invite vast numbers of product users with weak or questionable claims to apply for benefits. During the 1990s, as damage class actions grew in numbe r and scope, both scholarly and public policy discourse on this subject focused on such negative outcomes. The theoretical bases for the concern that the goals of representative litigation may be thwarted have been well developed. To avoid litigation costs and small risks of large judgments, some defendants are willing to settle even very weak claims for their nuisance value. The incentive to settle nuisance claims--always present in litigation--is particularly great in large-scale representative litigation, with its higher-than-average risks. Recognizing this, some plaintiffs' attorneys search out defendants who can be easily persuaded to settle such claims, often earning attorneys' fees that are disproportionate to the modest effort and expense required to achieve these settlements. Conversely, some defendants who face stronger claims may seek out plaintiffs' attorneys who are willing to settle such claims at less than their true value in exchange for fees that arguably are more generous than they deserve, given what they have obtained for their class clients. In both instances, the defendants buy res judicata at an inappropriate price: In the first instance, they pay too much (and the plaintiffs' attorneys pocket the premium); in the second, they pay too little (and class members suffer the loss). In both instances, because clients in representative litigation usually cannot effectively control their attorneys, unfaithful plaintiff attorney-agents are free to pursue their own interests. In addition, the deterrent signals of litigation are distorted because the costs of the harms that are imposed on the class are not properly reflected by settlement outcomes. [2] The empirical evidence that supports the theoretical concerns is not as fully developed. No comprehensive assessment of the costs and benefits of damage class actions has been compiled, and no such assessment is in progress. [3] Empirical investigation of a small number of cases suggests, however, that the merits of some class actions are questionable and that some class action settlements provide more benefits for class counsel and defendants than for class members. …