Complex Litigation

The ‘Class Actionization’ of America

By Michael Hoenig - New York Law Journal - May 10, 2019

Weeks ago, the U.S. Supreme Court decided Lamps Plus v. Varela, No. 17-988 (April 24, 2019), another in a series of decisions upholding, under the Federal Arbitration Act, agreements to arbitrate individual disputes and denying class arbitration unless the contract clearly and explicitly provides for class proceedings. In a case nearly a decade earlier, Stolt-Nielsen S.A. v. AnimalFeeds Int’l, 559 U.S. 662 (2010), the court held that arbitration may not be compelled on a class-wide basis when an agreement is “silent” on such availability.

In the new Lamps Plus ruling, the court holds that an arbitration agreement that is ambiguous on whether class arbitration is authorized likewise does not permit courts to infer that class-wide arbitration was agreed to. In the words of the court majority: “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’”

The court’s anti-class arbitration rationale—absent the parties’ clear agreement consenting to class-wide proceedings—was explained in the famous Concepcion decision (563 U.S. 333 (2016)), as well as Stolt-Nielsen (559 U.S. 662 (2010)). There is a “fundamental” difference between class arbitration and individualized arbitration. In the latter, the parties forego procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. Class arbitration, on the other hand, lacks these benefits. It sacrifices informality and “makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”

Class arbitration not only introduces “new risks and costs for both sides,” it also “raises serious due process concerns by adjudicating the rights of absent members of the plaintiff class—again, with only limited judicial review.” The details of the foregoing decisions need not detain us here. Lamps Plus is virtually hot off the press and the prior case law has been discussed in prior columns (e.g., “Arbitration Clause Class Action Waivers Upheld Again,” N.Y.L.J., Feb. 17, 2016, p. 3) and elsewhere (M. Hoenig and L. Brown, “Arbitration and Class Action Waivers Under Concepcion: Reason and Reasonableness Deflect Strident Attacks,” 68 Ark. L. Rev. 669 (Dec. 2015)).

Despite the consistent string of Supreme Court rulings, the new Lamps Plus decision has ignited a hailstorm of blog post criticism and commentary by class action proponents who, in effect, seem to urge that availability of class-wide proceedings is akin to some sort of holy writ—a “must-have” feature in order to achieve fundamental fairness. Without availability of class proceedings—oh my gosh—the justice system will collapse.

These reactions to the Lamps Plus ruling, along with similar outbursts seen in prior years, call to mind that there is a far broader issue than arbitration agreements. The question is whether the entire class action regime that explosively has come to dominate much of court litigation today has reached a tipping point. Has it become such an ever-expansive, negative behemoth that it needs to not only be reviewed but sharply modified and curtailed?

A recent yearly survey of some 400 companies revealed that the amount companies are spending to defend themselves against class actions increased for the fourth year in a row to $2.46 billion in 2018. That is likely to increase in 2019. Overall, 2018 saw more class actions involving more complex—and riskier—issues than ever before. D. N. Jones, “Companies’ Class Action Costs Hit 10-Year High, Survey says,” Law360 (April 16, 2019).

Another indication class-wide litigation is now a booming big business is the involvement of litigation financing firms, a phenomenon known as “third-party litigation funding.” Obviously, class litigation is proving to be highly lucrative, so financing firms want in on the action—a belief that their investments will be rewarded. This third-party involvement stampede has created additional tensions in a genre of litigation already filled with perversities. See A. Bronstad, “Mass Tort Attorneys: Judges Want to Know About Your Outside Financing,” Law.com (May 2, 2019).

Shaky Assumptions

Moreover, there seems to be an undercurrent assumption in consumer class litigation, that defendant manufacturers, sellers and providers of services normally and routinely are out to cheat or shortchange their customers. This underlying aura of suspicion seems successfully “sold” by advocates. Perhaps some claims against “rotten apple” corporate defendants may be well taken. But, just as a few rotten apples do not reflect the conduct of the population at large, so too, misbehavior by a company here and there ought not be the template by which all corporate conduct should be judged. The underlying assumption that all or most companies are cheats out to defraud or shortchange their customers is itself a perversity that should not influence class action practice.

The notion that most corporate defendants are cheats and frauds is unjustified for cogent and pragmatic reasons. Many manufacturers operate in government-regulated industries. There are penalties and consequences for falling below the mark regarding products that must conform to regulations and standards. Further, the adverse publicity that would follow is a potent deterrent against devious misconduct. Company executives answerable to their boards of directors and shareholders wish to avoid such derelictions, not invite them. They want to keep their jobs, not lose them. State regulation, state attorneys general actions and threats of real litigation augment an array of disincentives to cheat. Moreover, company executives, engineers, employees and service providers—and their families—are often users and consumers of the very products their company makes.

Perhaps the most important reason for repudiating the harsh, irrational assumption that corporations are out to harm the consuming public is that companies want to keep their customers! They want their customer base to grow, to be vibrant and viable for years to come. They want to succeed and be responsible actors in the marketplace. Yes, they want to make a profit. Yes, they may want to cut costs as part of that initiative. But the profit motive is healthy. Profitable companies provide jobs, a return on investments to their shareholders, research and development producing newer, better, safer and more efficient products. So, it is time to cleanse the legal system of tactically forged suspicions about companies at large.

The assumption of many courts that class actions are automatically apt for litigation of small claims because fixed litigation costs dissuade consumers from pursuing small claims and offer no incentive for lawyers to represent claimants seeking small recoveries can be questioned in many settings. For example, the institution known as the “small claims court” is provided in many jurisdictions with power to award relief up to thousands of dollars to an individual claimant. The plaintiff does not need a lawyer and formal proof requirements are much diminished. These are “peoples courts” in which real judges or specially-trained arbitrators hear suits on their merits and seek to “do justice” in their determinations.

Thus, the common notion that litigants with small claims have no outlet, incentive or recourse to pursue relief is untrue wherever small claims tribunals are available. While it is true that plaintiffs in such fora have to make an effort to present some facts supportive of the claim, that feature does not negate availability of this vast arena to litigate small claims.

Consumer Fraud

Further, consumer fraud acts or so-called deceptive trade practice acts were originally intended to allow individual consumers to sue where merchant fraud or deception was involved. Many of the statutory schemes provide for attorney fees and for recovery even of multiples of damages actually incurred. Thus, some statutes have treble or double damages provisions in addition to recovery of attorney fees. Therefore, to say across the board that “smaller” claims cannot be vindicated by individuals’ lawsuits is an oversimplification, if not a gross exaggeration.

While such individual claimants’ suits may not attract the Brahmans of the class action bar, there are plenty of competent lawyers who would handle such a case with the prospect of recovering attorney fees and multiple damages. Further, enterprising lawyers generally will be interested in such cases in any event because satisfied clients will be happy to refer such counsel to their relatives, friends or other claimants similarly situated. Building or expanding a law practice is harmonious with taking on such cases.

Consumer fraud act claims were not originally intended to be a predicate for class action litigation. Thus, the incorporation of consumer fraud act claims into the arsenal of weaponry available to class action lawyers represents a significant escalation that should magnify the concerns courts articulate about the class action mechanism. Consumer fraud act claims filed by one or two putative class representatives on behalf of hundreds of thousands or even millions of putative class members radically ups the ante on the roll of the dice in a given class action setting.

Ordinary breach of warranty claims, for example, can easily be converted by the stroke of the pleader’s pen into deceptive trade practices claims. The cost: the complaint filing fee. The sequelae: huge transaction costs, breathtakingly broad electronic discovery, hundreds of thousands of pages of document production; scores (perhaps more) of depositions, and expenditure of significant court resources, among others.

Class Harmed

Indeed, rather than any purported defect, often it is the filing of the class lawsuit and the attendant fanfare and publicity provided by eager, hungry and cooperative news media that spike up the number of claims and potentially diminish the market value of the product. Ironically, then, putative class lawyers become the engines for disparaging and impugning the integrity of the product and, thereby, driving down its value in the marketplace.

The putative class lawyers may do more damage to their own putative class members than the value of any eventual relief the individual class members may receive at the end of the road. If the class claim is lost as, for example, on a denial of class certification or after a dispositive motion or after a trial, the putative class members can become real victims, not because of a product defect, but because of the product disparagement and adverse publicity the class litigation had spawned.

The absent putative class members can be hurt tangibly in their pocket books (as for example via the product’s diminished resale value) by the actions of zealous and aggressive class lawyers whom they never retained, never consulted and, in fact, never dealt with. Who will assuage these victims?

Imagine, for example, hundreds of thousands of car owners of a particular model vehicle among whom, perhaps, one or two hundred have experienced enough of a particular vehicle problem to complain or to call the dealer for a warranty adjustment. The overwhelming majority of such car owners, however, may have no problem with their vehicles and are perfectly satisfied. Now along come aggressive class counsel who vigorously plead a consumer fraud scheme on behalf of two named plaintiffs who purport to represent all the putative class members. They call their media and publicity contacts, give out claim fact sheets, participate in or allow client interviews with the press or TV news shows and post on the internet allegations that a fraud was committed, that all the vehicles are dangerously defective and subject to failure, in effect, that the cars are “time bombs.”

The marketplace may respond to such loud, negative publicity allegations. Thus, during the pendency of the class lawsuit, the hundreds of thousands of satisfied consumers who have had no problem—the putative class members purportedly represented by class counsel they never retained—may actually be victimized by their vehicles’ resultant diminution in market standing or in value. It may be the supreme irony that the value of class members’ products may be damaged by the actions of their so-called class lawyers and representatives.

Class procedures also are distorting state law substantive rules. Normal sales law, as reflected in the Uniform Commercial Code, for example, regarding warranties, is structured upon a framework in which appropriate notice is first given to the seller about an alleged breach of warranty. The seller is given an opportunity to repair or replace the item or to make other amends within market custom that are satisfactory to the purchaser.

This rational approach is even reflected in consumerist automobile “Lemon Law” statutes where the seller is usually given a number of opportunities to first repair the car before litigation or arbitration ensues. But class action litigation, with its “race to the courthouse” by competing lawyers, with its pure fiction of class representatives purporting to “represent” numerous class members who actually may have had no damage or no bad experience as alleged by the named plaintiff, or who may not want to sue at all, upends the UCC’s reasoned approach.

Criticism Aplenty

There’s considerable scholarly criticism of what class action litigation has become, including the premise that class actions are unconstitutional. Professor Martin H. Redish’s book, Wholesale Justice: Constitutional Democracy and the Class Action Lawsuit (Stanford U. Press 2009), argues that class actions violate the Rules Enabling Act and separation of powers principles. Thus, the delegation by Congress to the Supreme Court to craft rules of procedure for federal courts does not permit the court to create rules that transform individual causes of action into monster litigation. See also A.D. Lahav, “Are Class Actions Unconstitutional?,” 109 Mich. L. Rev. 993 (2011) (reviewing Redish book and concluding that, if the class action is to be reformed, it will be on a policy basis, not a constitutional one).

Professor Linda S. Mullenix, in her law review article, “Ending Class Actions As We Know Them: Rethinking the American Class Action,” Emory Law Journal (2014), demonstrates that American class litigation has been nurtured by an “idealized” and “romantic” historical narrative. Experience over the last 25 years, however, “illuminates a very different chronicle about class litigation.” There are “legitimate questions concerning the fairness and utility of this procedural mechanism, and whether class litigation actually accomplishes its stated goals and rationales.” She calls the system an “evolving dysfunction” and proposes a return to “a more limited, cabined role for class litigation.” Thus, she envisions scrapping the damage class action, and limiting the class procedure to injunctive remedies.

Then, of course, there are numerous penetrating insights by appellate judges regarding serious, unfair shortcomings and huge perversities of class litigation. Unfortunately, we don’t have space here to review them. See e.g., In re Rhone-Poulenc Rorer, 51 F.3d 1293 (7th Cir. 1995); In re Bridgestone/Firestone Tire Prod. Liab. Litig., 288 F. 3d 1012 (7th Cir. 2002); Thorogood v. Sears, Roebuck & Co., 2010 U.S. App. LEXIS 22807 (7th Cir. Nov. 2, 2012), pet. for rehearing and rehearing en banc denied with statement, No. 10-2407 (7th Cir. Dec. 2, 2010) (statement responds sharply and lists decisions and law review commentary criticizing tactics employed by some class lawyers—a useful catalogue for litigators).

Conclusion

Class actions are not some angelic gift to most class members or the public. Gargantuan settlements, enormous attorney fees and huge transaction costs have to be paid by someone. Most often, the consumer pays in the form of higher prices for future products. The lawyer-driven frenzy to file endless class actions must abate.

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