February 01, 2016

Class Actions 101: We All Still Need Class Actions

Jocelyn D. Larkin

With class actions much in the news, and the Supreme Court deciding a couple of pro-employer blockbuster cases last term, a new practitioner might well wonder: Have class actions hit their “sell by” date? Has Federal Rule of Civil Procedure 23’s half-century procedural experiment run its course? Should our merry band of Class Actions & Derivative Suit Committee members pack up our instruments and head to intellectual property or bankruptcy law? Not quite yet. Let’s pause to remember why this whole thing started in the first place.

What did the Federal Civil Rules Advisory Committee have in mind back in 1966 when it drafted the modern Rule 23?

The drafters were quite clear that at least one purpose of the rule was to facilitate civil rights class actions. Recall that the Civil Rights Act of 1964 had just passed; the class action was seen as an effective tool to dismantle institutional discrimination on a broad scale.

Why were class actions necessary?

Discrimination is, by definition, based on a class-wide bias. In the workplace, victims of discrimination would rightly fear retaliation if they challenged their employer in litigation. Low-wage workers would be loath to risk their jobs in individual litigation, assuming they could even find a lawyer to take their case. In addition, it would not be possible in individual cases for plaintiffs to afford the complex expert statistical evidence often necessary to prove liability. Finally, a class-action injunctive remedy gives a federal court broad power to change practices and monitor implementation over a number of years.

Maybe that made sense in the past, but are class actions still necessary since the most pernicious forms of explicit discrimination have been overcome?

Unfortunately, there remain in our society victims of illegal conduct who lack the resources or capacity to obtain justice without a class action. For example, courts have in the past year certified class actions in two states on behalf of children who are suffering abuse and neglect in foster-care systems lacking effective screening and oversight. There is also a series of class actions around the country, challenging the unnecessary institutionalization of persons with developmental disabilities. An individual case could not accomplish the systemic change that is needed to ensure that such illegal practices are stopped.

Corporate fraud, unfortunately, also remains alive and well. The smartest guys in the room at Enron left a trail of swindled investors and pensioners in their wake. And how about that Madoff chap?

Can’t victims of fraud just file individual cases in federal court with the help of plaintiffs’ lawyers on contingency contracts?

The drafters of Rule 23 also understood that damage claims, and particularly small-value claims, could not be litigated in a cost-effective way in federal court, even where statutory attorney fees were available. Those claims would consequently not be brought.

If the per capita loss is very small, and a consumer receives only a $20 check at the end, is it really worth all the time and money of the federal courts to litigate consumer or securities cases?

That question assumes that the only purpose of the case is compensation to the victims. Congress has created many federal statutes that permit private enforcement actions because it understands that federal agencies will not have the resources to track down and prosecute every wrongdoer. Private class actions also serve to enforce important federal laws and deter fraud and other illegal conduct.

But aren’t class actions just making lawyers rich?

That’s what people think, but the data don’t support it. Vanderbilt Law Professor Brian Fitzgerald conducted an empirical study of class-action settlements and found that the mean rate of fees awarded was about 25 percent of the settlement funds. That percentage is, of course, far lower than the typical contingency fee (33–40 percent) in an individual lawsuit. So, while some plaintiffs’ lawyers may be making money in class-action practice, the amount needs to be considered in light of the risk they take on (many class actions are dismissed or not certified), the length of the case (years!), and—most importantly—the results that they obtain for the class.

So maybe class actions make sense for plaintiffs. But what about defendants?

Sometimes, corporate or government defendants have a big legal problem on their hands—perhaps they sold a defective drug or lost billions because of the risky investments of a rogue trader. They may be facing hundreds of lawsuits in dozens of jurisdictions, and the costs can rapidly mount. Class actions provide a mechanism to resolve the claims with a coherent compensation scheme and ensure global peace for the settling defendant. If claims are extinguished in the class action after proper notice, the defendant need not worry about new claims popping up in the future.

That sounds right in theory, but does it really happen?

The recent Third Circuit en banc decision in Sullivan v. DB Investments, Inc., 667 F.3d 273 (3d Cir. 2011), provides a good example. The case involved a class-action settlement resolving a series of federal and state antitrust actions against De Beers for its alleged manipulation of world diamond prices for the past half century. The classes included over 184 million direct and indirect purchasers. That’s a lot of claims. The settlement was ultimately affirmed over a range of objections. Chief Judge Scirica wrote an interesting concurrence emphasizing how class actions ensure something for everybody: “redress of injuries, procedural due process, efficiency, horizontal equity among injured claimants, and finality.”

But haven’t there been abuses of class actions?

Certainly. But Rule 23 provides district courts with broad supervisory power over class actions, and judges have not been reluctant to step in when they see such abuses. Congress has responded as well. The Class Action Fairness Act targeted the use of coupon settlements and imposed some limitations on their use.

What about class-action objectors? Aren’t they mucking up the system and increasing costs?

As in everything else, there are legitimate objectors, and there are those with more self-interested motives. In the ideal situation, objectors can serve as an extra set of eyes, assisting the busy district court judge by pointing out weaknesses in the settlement that the settling parties may not be eager to highlight or simply did not recognize in the course of their negotiations. In those circumstances, a bad agreement isn’t approved, and a pretty good agreement can be modified and strengthened.

In the worst case, the objector is interested in holding up the settlement with the threat of an appeal in order to be bought off, or the objector may simply be ideologically opposed to class actions. Those objectors present serious challenges for a judge and settling parties.

What can lawyers do to make class actions work better?

On the plaintiff side, focus on cases with real victims and be sure that you have the resources to see a case all the way to the end. On the defense side, avoid the reverse auction temptation—shopping for plaintiffs’ lawyers willing to accept a low-ball settlement when class cases with legitimate plaintiff firms are already pending. Everybody needs to avoid unnecessarily cumbersome claims procedures and to write class notices that are in plain English. The Federal Judicial Center has some excellent model notices.

©2012. Published in the Section of Litigation Class Actions & Derivative Suits E-Newsletter, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Jocelyn D. Larkin

Jocelyn D. Larkin is with the Impact Fund in Berkeley, California.