By Michael Hoenig - New York Law Journal -
November 12, 2010
Creative judging has
its merits but can also exact a huge price. One of the mechanisms courts
have used, sometimes with bludgeon-like effect, first to "consolidate"
and then rid themselves of so-called "mass tort" litigation is the class
action. In federal courts the class action device is governed by Rule 23
of the Federal Rules of Civil Procedure, which also has various
analogues in state law practice. Usually, several named plaintiffs file
a lawsuit on behalf of themselves and other purported but unnamed
members of a class seeking money damages or other relief based on
traditional legal theories.
Attorneys filing class
actions, for the most part specialists in this genre of litigation,
frequently are involved in a "race to the courthouse." The predominant
reason for this race is that attorneys for litigants who successfully
persuade a court to certify the broadest possible class effectively will
control the litigation and thereby call the shots with respect to the nature
and extent of recoveries, if any, including settlements.
The pot of gold at the end
of the successful class action rainbow usually includes hefty legal fees. If
the defendants cave in early in the game when class actions are
certified—and many do because they do not relish litigating one mega case
involving millions or even billions of dollars to be decided by one lay
jury—the lawyers for the class may be rewarded with gigantic legal fees for
their litigation travails. It does not always turn out that way. Every once
in a while battle is truly joined in tortuously expensive proceedings, but
the ritual dance of suit-followed-by-early-settlement occurs frequently
enough to make the class action gambit one of handsome legal business if the
lawyers know what they are doing. The advent of electronic discovery with
its huge transaction costs can be a further source of pressure to settle.
A common syndrome is for
several specialized law firms, at first competitively, to file separate
class action complaints in diverse jurisdictions on behalf of different name
plaintiffs seeking certification of a national class. If one of these gets
national certification first, the others in effect may have lost the race.
On the other hand, because
individual courts may have difficulties of one kind or another in allowing
or administering a national class, the race to the courthouse may pay off
nonetheless because courts may be more amenable to certifying smaller suits
such as state-wide classes. Then there are several rainbows to follow and,
at their end, several smaller but still lucrative pots of gold. Competitor
attorneys can become allies working together informally or, in some
situations, occasionally being formally associated as attorneys of record
into their respective litigations. When different putative class actions in
federal courts are consolidated in a multidistrict litigation proceeding for
pretrial purposes, alliances between the attorneys are struck, especially in
attempts to be a member of the lead counsel or liaison counsel committees.
As applied to consumer
fraud, mass tort or products liability litigation alleging a claimed
deficiency in a product's design or condition, class actions present
enormous and complex problems. Rule 23's Advisory Committee Note in 1966
even expressed doubt about using class actions in the single "mass accident"
case, i.e., one incident involving numerous claimants, let alone mass tort
settings involving multiple claimants affected in numerous individual
occurrences over time.
Thus, the Advisory
Committee stated: "A 'mass accident' resulting in injuries to numerous
persons is ordinarily not appropriate for a class action because of the
likelihood that significant questions not only of damages but of liability
and defenses to liability, would be present, affecting the individuals in
different ways. In these circumstances an action conducted nominally as a
class action would degenerate in practice into multiple lawsuits separately
In the 1980s, however,
creative judging shoehorned mass tort litigation involving Agent Orange,
DES, asbestos and Dalkon Shield claims, among others, into the class action
rule's originally narrow ambit. Settlements flowed and some courts now
viewed the class action mechanism as a viable means for expeditiously,
efficiently and relatively inexpensively disposing of lots of cases. This
newly-fashioned, case-ridding darling, however, soon became a tool for
filing lawsuits en masse for every conceivable, alleged misstep by
corporations or deep-pocket defendants.
Further, lawyers adroitly
reasoned that the states' broadly worded consumer fraud acts offered
enormous avenues to plead the slightest perceived dereliction as a deep,
conspiratorial, anti-consumer fraud. As a result, consumer fraud act or
deceptive trade practices act claims have mushroomed. In many respects, we
are witnessing a soaring "class actionization" of America, much of it aided
by some judicial thinking that putative class actions are angelic missions—a
topic discussed in last month's column.2
Not surprisingly, this turn
of events has caused some courts to more critically re-evaluate major
disadvantages of ubiquitous class action treatment. For example, in 1995 the
use of "settlement classes" was rigorously examined when the U.S. Court of
Appeals for the Third Circuit set aside a class action settlement in pick-up
truck litigation involving General Motors.3 The appellate court,
in a massive opinion, discussed major systemic problems and articulated
tight standards to be applied in according "settlement class" treatment.
The court vacated the
orders certifying the provisional class and approving the settlement and
remanded the matter to the trial court for further proceedings. In the
course of its opinion, the appellate court noted that class actions
potentially "create the opportunity for a kind of legalized blackmail: a
greedy and unscrupulous plaintiff might use the threat of a large class
action, which can be costly to the defendant, to extract a settlement far in
excess of the individual claims' actual worth." The "fundamental departure
from the traditional pattern in Anglo-American litigation generates a host
Thorogood v. Sears, Roebuck & Co.,5 the U.S.
Court of Appeals for the Seventh Circuit observed that, while the class
action is an "ingenious device for economizing on the expense of litigation
and enabling small claims to be litigated," the class action mechanism "has
its…downsides." There is "a much greater conflict of interest between the
members of the class and the class lawyers than there is between an
individual client and his lawyer. The class members are interested in relief
for the class but the lawyers are interested in their fees, and the class
members' stakes in the litigation are too small to motivate them to
supervise the lawyers in an effort to make sure that the lawyers will act in
their best interests."6
Defendants, on the other
hand, are interested in minimizing the sum of damages they pay the class and
the fees they pay the class counsel; and so "they are willing to trade small
damages for high attorneys' fees."7 The result of these
incentives is to forge a community of interest between class counsel, who
control the plaintiff's side of the case, and the defendants. The judge
presiding over the class action is charged with responsibility for
"preventing the class lawyers from selling out the class," but it is a
responsibility "difficult to discharge when the judge confronts a phalanx of
A further problem observed
by the Seventh Circuit in Thorogood
is the "enhanced risk of costly error." By placing a central issue in a case
under class treatment, it is resolved by a single trier of fact and, so, "a
trial becomes a roll of the dice; a single throw will determine the outcome
of a large number of separate claims." This contrasts with the normal method
of letting a litigation "consensus" emerge from several trials by different
juries in different lawsuits filed in the context of varying, but specific,
Thus, if a company is sued
in a number of different cases for a defective product and wins some and
loses some, "the aggregate outcome is a fair reflection of the uncertainty
of the plaintiffs' claims." But when the central issue in a case is given
class treatment, "there is no averaging of divergent responses from a number
of triers of fact having different abilities, priors, and biases."9
The risk becomes "asymmetric" when the number of claims aggregated in the
class action is so great that an adverse verdict would push the defendant
into bankruptcy, for then the defendant will be under great pressure to
settle even if the merits of the case are slight." In such settings,
corporate managers are unwilling to bet their company on the outcome of a
The foregoing problems were
advanced years earlier in the famous
and also years later in
Pella Corp. v. Saltzman,12 a consumer fraud act
claim involving aluminum-clad windows installed nationwide that allegedly
allowed water to seep in and rot the wood. In upholding certification of two
classes limited to the defect and warranty amendment issues, the Seventh
Circuit nevertheless once again warned of its concerns regarding the risk of
error by one trier of fact rather than letting a consensus emerge from
multiple trials. The issue of proximate causation in consumer fraud cases is
another major concern. It is necessarily "an individual issue" and class
members in the Pella
case, as the district court's plan contemplated, "still must prove
individual issues of causation and damages."
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.
Further, consumer fraud
acts or so-called deceptive trade practice acts were originally intended to
allow consumers to sue where merchant fraud or deception was involved. Many
of the statutory schemes provide for attorneys 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 attorneys 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 attorneys 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
Consumer fraud act claims
were not originally intended to be a predicate for class action litigation.
Indeed, some state deceptive trade practices acts do not provide for or, by
court decision, disallow class actions to be filed.13 Thus, where
courts permit, 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 sequellae: 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.
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, putative class lawyers then 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 who
they never retained, never consulted and, in fact, never dealt with. Who
will assuage these victims?
Courts confronted with
so-called consumer fraud act claims that are little more than the subjective
pleader's attempts to transmogrify relatively small numbers of routine
breach of warranty claims into consumer frauds should factor into the
equation whether such class lawyer exaggerations will harm the absent mass
of consumers who have no say regarding tactics or the creation of adverse
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 harp on the allegation 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, and such adverse 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.
Courts should be wary about the negative forces they may unleash when they
unwittingly consider the class action device as an automatic benefit to the
putative class members' welfare.
And, what about consumer
class action defendants who have acted responsibly towards their customers,
when a slip-up occurred? What if the class defendant took reasonable steps
to remediate the problem or to refund or repair customer loss or damage or
to satisfy warranty obligations? Should such "good company" behavior be
penalized with continued maintenance of a class action? Or should "good
company conduct" be grounds for denying class certification when remediation
efforts in the marketplace have been or are a "superior" method of handling
the controversy? A number of discerning, courageous court rulings—such as
the Aqua Dots
decision issued on Oct. 4 by U.S. District Judge David H. Coar of the
Northern District of Illinois14—seem to signal an emergent, at
least nascent, trend to allow "good conduct" and practical, market-based
remedial solutions to substitute for and eclipse wasteful class litigation.15
Perhaps more about this in a future article.
Michael Hoenig is a
member of Herzfeld & Rubin.
1. 39 FRD 69, 103 (1966).
2. Hoenig, "Class
Actions to Be Decided by the Supreme Court," New York Law Journal, Oct.
18, 2010, p. 3.
re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability,
1995 WL 223209 (3d Cir. 1995).
4. Id. (quoting from
Mars Steel v. Continental Illinois National Bank & Trust,
834 F2d 677, 678 [7th Cir. 1987]).
5. 547 F3d 742, 2008 U.S.
App. LEXIS 23535 (7th Cir. 2008).
6. Id., LEXIS at 3-4.
7. Id., LEXIS at 4.
8. Id., LEXIS at 5
9. Id., LEXIS at 5-6.
10. Id., LEXIS at 6-7.
re Rhone-Poulenc Rorer Inc., 51 F3d 1293, 1298-99 (7th
12. 606 F3d 391 (7th Cir.
2010), 2010 U.S. App. LEXIS 10259.
13. See e.g., discussion of
Tennessee's Consumer Protection Act as precluding class action in
Thorogood v. Sears, Roebuck & Co.,
547 F3d at 746, 2008 U.S. App. LEXIS, at 8-9.
In re Aqua Dots Products Liability
Litigation, 2010 U.S. Dist. LEXIS 105788 (N.D. Ill. Oct. 4,
15. See also
Chin v. Chrysler Corp., 182
F.R.D. 448 (D.N.J. 1998); In re
Phenylpropanolamine (PPA) Prods. Liab. Litig., 214 F.R.D. 614
(W.D. Wash. 2003); In re ConAgra
Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689, 699-701
(N.D. Ga. 2008).
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