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CLASS ACTIONS
By James R. Copland, 05-21-2004

The class action device, in principle, is an expeditious way for people with similar grievances to join in a common suit and get compensated for injuries. As described by noted scholar Richard Epstein, class actions are important tools legal tools that allow tort claims to proceed in cases in which:

     a) The number of individuals similarly situated with respect to a common defendant becomes very large,

     b)The loss sustained by each party is relatively small, and

     c)The administrative costs of [each] individual suit turn out to be quite high.

Since individuals will not pursue claims unless their expected recovery from suing exceeds their cost of pursuing the suit-and the cost of pursuing suits is expensive, given lawyers' fees-the class action device is necessary for the tort system to deter large but dispersed wrongdoings.

Unfortunately, the class action device suffers from inherent difficulties. First, it is often not the case that claimants are, in actuality, "similarly situated." Often, various factual differences that might lead to disparate outcomes in individually litigated claims are glossed over were such claims joined into a class.

Secondly, there is a significant agency problem in class action litigation; since, by definition, individual claims are small for class litigation, no individual plaintiff typically has sufficient interest to monitor or control the class attorneys. At the most basic level, this problem is apparent: with a large, disparate class of plaintiffs, who negotiates with the attorneys over fees?

One leading class action securities lawyer famously quipped that his was the best legal practice in the world - he didn't have any clients! In the securities arena, Congress has tried to improve the agency problem through the Private Securities Litigation Reform Act of 1995, which gives extra control over securities class action litigation to large, institutional shareholders. In many other typical class actions, however, the problem of monitoring the class attorneys remains endemic.

Class action litigation also creates special problems in that it tends to involve plaintiffs from multiple jurisdictions, if not from all over the nation. Thus, instead of filing suit at the place of residence or injury-as is normally required in the typical single plaintiff lawsuit-plaintiffs' attorneys are able to "shop" class action suits in search of the most favorable forum. Quite predictably, the best forum winds up being a state "magnet court" well known for its hospitable treatment of class action lawsuits, what plaintiffs' attorney Dickie Scruggs has called "magic jurisdictions."

For instance, Madison County, Illinois - made famous last year by handing out a $10.1 billion verdict against Philip Morris for allegedly insinuating that its "light" cigarettes were "safer"-has seen a tremendous upsurge in class action filings in recent years. From 1998 to 2000, class action filings in Madison County increased over 1,800%. Over 80% of these suits were brought on behalf of proposed nationwide classes.

The costs associated with the proliferation of magnet courts go beyond the increased settlement values they generate for often tenuous claims. The fact that major national policy decisions are increasingly being made by county court judges, who are elected by and accountable to only the several thousand residents of their home communities, presents a serious threat to the democratic and federalist principles underlying our constitutional design.

For example, in November 1999, an Illinois judge in a county adjacent to Madison County awarded a national class of plaintiffs $1.2 billion in a lawsuit against State Farm Insurance. State Farm had allegedly been "fraudulent" in authorizing the use of generic parts in automobile repairs, even though using generic parts was not only allowed but actually required by some states to reduce insurance costs. The local Illinois judge thus unilaterally overrode the considered policy decisions of many other states' democratically elected officials.

Finally, because of the sheer size of many class action claims, they can enable plaintiffs' lawyers to attack businesses and large institutions are hard-pressed to defend themselves. Facing thousands or even millions of plaintiffs, and watching their share prices sink with bad publicity, companies settle rather than risk billions of dollars in punitive damages.

In effect, class actions can enable plaintiffs' attorneys to pursue claims on behalf of clients with little interest in the case and extract settlements from defendants whose cases look better on the merits. For example, in one recent case, defendant corporations settled a class action case for approximately $200 million, even though a litigation risk expert assessed the probability of the plaintiffs' case winning at trial at only 7 percent. The expense of litigating the claim-and the high verdict expected in the unlikely event of loss-gave the plaintiffs' attorneys a very strong hand despite their weak legal position. In such a context did a Florida judge reject a securities class action settlement last year by comparing the lawyers in that case to " 'squeegee boys' who . . . run up to a stopped car, splash soapy water on its perfectly clean windshield and expect payment for the uninvited service of wiping it off."

A system that permits the combination of many claims with little attorney oversight, to be litigated in the friendliest of jurisdictions in the nation, is obviously a system that needs some reform. Because class action litigation remains necessary for the reasons described at the outset, the project of responsible reform is to maintain some ability to aggregate and resolve multiple small claims while ameliorating the abuses inherent in the process.


 





 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.