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Earlier this week, the Securities and Exchange Commission's conflict minerals rule went back to court as the rule's challengers asked for a stay. The SEC adopted the rule under a Dodd-Frank provision intended to mitigate the violence in the Democratic Republic of the Congo. The Court of Appeals for the DC Circuit held last month that "to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have 'not been found to be 'DRC conflict free,''" they violate the First Amendment. The court remanded the case to the district court, but the actual mandate for the district court to act will not be issued until early June--after the conflict mineral rule's impending reporting deadline of June 2. It would have made sense for the SEC to stay the enforcement of the rule until the district court clarifies the degree to which the First Amendment violation impairs the rule. SEC Commissioners Daniel Gallagher and Michael Piwowar argued for a full stay on the grounds that the whole rule carries the First Amendment taint. Instead, the SEC issued only a partial stay of the elements of the rule that the court clearly identified as unconstitutional. Companies were directed to comply with the remainder of the rule on the existing timeline. Even if the SEC has technical legal grounds to proceed without waiting to hear from the district court, doing so displays a troubling lack of sensitivity to practical realities. Such indifference to the rule's costs, complexities, and unintended consequences is typical of the SEC's approach to implementing the conflict minerals provision. The SEC has failed to take steps within its discretion to identify and minimize these effects. For example, the SEC decided to require companies to file reports under the rule, rather than furnish them--a wording change with serious implications for legal liability. Once again, in refusing to tweak the rule's compliance timeline, the SEC is acting with unnecessary inflexibility.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

The purpose of allowing the people to petition their government for a redress of grievances is to ensure that those who have been wronged have the means to obtain compensation for the harm caused. Within this context, the debate over what constitutes "fair" compensation generally turns on two general considerations; namely, 1) whether the plaintiffs who seek a redress have legitimate claims and 2) if so, whether their accrued compensation is justified on the facts and circumstances of the case. Increasingly, the legislative and judicial systems have experienced burgeoning problems in dealing with the legitimacy of both factors.

To this end, Mark Behrens, Cary Silverman, and Christopher Appel of the legal firm Shook, Hardy, & Bacon L.L.P. have authored two important pieces. In terms of whether plaintiffs have legitimate claims, Behrens and Appel write in an op-ed for the National Law Journal that medical monitoring claims have increasingly been utilized by plaintiffs to try and obtain redress without the requisite injury-in-fact necessary to have standing. They laud courts that have attempted to restrict payments for injuries that may or may not occur, often at the expense of those truly harmed:

Suppose you have been exposed to a product that may increase your risk of a disease. You presently have no injury, but you are concerned that you could develop a disease in the future. Should the person who created the situation or made the product associated with the risk pay for you to obtain periodic medical testing?

Courts have come to different conclusions. Most courts over the past 20 years have said no to medical monitoring claims. Since 2000, these include the Supreme Courts of Alabama, Kentucky, Michigan, Mississippi, Nevada and Oregon. A few courts, however, recently have allowed medical monitoring claims in some situations, including the highest courts of Missouri in 2007, Massachusetts in 2009 and Maryland last year.

To the surprise of many in the plaintiffs' bar, a majority of New York's highest court recently joined the list of courts that have said no to medical monitoring for asymptomatic claimants. The New York Court of Appeals said that awarding medical monitoring to those individuals can threaten recoveries for the truly sick and lead to administrative nightmares and public policy judgments that are better left to the legislature.

The New York Court of Appeals reached the right conclusion. For over 200 years, one of the fundamental principles of tort law has been that a plaintiff cannot recover without proof of a physical injury. This bright-line rule may seem harsh in some cases, but it is the best filter courts have developed to prevent a flood of claims, provide faster access to courts for those with reliable and serious claims, and ensure that the sick will not have to compete with the nonsick for compensation.

As to the legitimacy of accrued compensation, Behrens, Silverman, and Appel write in the Wake Forest Law Review that courts are misrepresenting the ratio of actual or potential damage to punitive damages by including extra-compensatory damages that skew the ratio downwards, ostensibly making it seem valid:

Whether extracompensatory damages are considered in the ratio calculation has constitutional and practical significance. For example, if a jury awards a modest $50,000 in actual damages but $1 million in punitive damages, the resulting 20:1 ratio would far exceed the presumptive single-digit ratio limit expressed by the U.S. Supreme Court. But, if the court adds an additional $200,000 in attorney fees to the compensatory damages denominator, the double-digit ratio drops to 4:1 and is less constitutionally suspicious. Inclusion of prejudgment interest, which is set at statutory rates in some states that far exceed inflation, can have an even more significant effect on the constitutional calculus. For example, an Oklahoma appellate court upheld a $53.6 million punitive damage award where actual damages were $750,000; the award included $12.5 million in prejudgment interest to reach a 4:1 ratio. Without prejudgment interest, the 70:1 ratio between the punitive and actual harm damages should have led to a different result.

They theorize that the true ratios (minus the extra-compensatory damages) may be a presumptive violation of due process. If we accept these issues as inherently dangerous to the health of the judicial system, then there needs to be action taken in terms of mitigating the potential damage to defendants. If no action is taken, the chances of truly-deserving plaintiffs receiving compensation goes down and the administrative costs on the court and defendants go up. If defendants are then unable to cover the cost of legitimate claims, the result is no redress for the plaintiff and significant financial harm or bankruptcy for the defendant. It becomes self-evident, then, that if the scales of justice tip increasingly in favor of one party, both parties ultimately suffer.

As I discussed in yesterday's Washington Examiner, at tomorrow's conference, the Supreme Court will decide whether to grant certiorari on a pair of companion cases -- Sears v. Butler and Whirlpool v. Glazer, which Ted has previously discussed (here, here, and here).

Both cases involve 21 varieties of energy- and water-efficient "front-load" washing machines manufactured by Whirlpool.

In 2001, Whirlpool released the first of this diverse group of washers that reduced water and energy use by more than two-thirds (cutting $120 from the average family's annual water and power bills).

Whirlpool's washers have been ranked among the best in their class by Consumer Reports and helped the company win multiple "sustainable excellence" awards from the federal Environmental Protection Agency.

Class-action attorneys have pounced on the fact that a small percentage of these washers, like all washing machines, can (if improperly maintained) emit "musty odors" from leftover laundry residues.

Such odors may be marginally more likely in these newer machines than in traditional, less water- and energy-efficient washers.

A decade of call center data from Whirlpool and Sears place the percentage of consumers facing such odors at two to three percent, and a more recent February 2010 examination by the Consumers Union estimates the problem rate at less than one percent.

I agree with Ted and others (e.g., ATRA's Tiger Joyce, Tim Bishop & Joshua Yount, the bulk of the business community filing amicus briefs asking for cert) that these cases have broad-ranging potential implications and that the Supreme Court should take them up to clarify the reach of Wal-Mart v. Dukes and Comcast v. Behrend:

The Supreme Court has taken significant interest of late in limiting the use of class-action remedies. In its 2011 decision in Walmart v. Dukes (involving a gender discrimination claim) and last year's decision in Comcast v. Behrend (involving an antitrust claim), the court has emphasized that for a class of plaintiffs to be approved, the facts have to show a common and specific cause of harm that "predominates."

The washing machine cases certainly fail the Supreme Court's predominance test for class-action litigation.

Let's hope that the Supreme Court decides to step in yet again, because the legal theory underlying these cases is worse than musty -- it stinks.

Update: The Supreme Court neither granted nor denied the cert petitions here -- we'll watch for it at the next conference.

Mark A. Behrens and Virginia Knapp Dorell of the international law firm Shook, Hardy & Bacon, L.L.P., in an article originally published on Corporate LiveWire, outline proposed amendments to the Federal Rules of Civil Procedure released by the Advisory Committee on Civil Rules. These suggested fixes are aimed at curbing litigation costs, especially those related to discovery.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

Following on the heels of its passage of the FACT Act last week, the House took up the issue of lawsuit abuse more broadly:

On Thursday, November 14, the Lawsuit Abuse Reduction Act (LARA), H.R. 2655, was passed by the U.S. House of Representatives on a 228-195 vote. LARA is designed to curb the filing of frivolous lawsuits by restoring mandatory sanctions (e.g. payment of attorney fees) where a court determines a claim to be frivolous. It would amend Rule 11 of the Federal Rules of Civil Procedure to provide for mandatory sanctions and also eliminate the "safe harbor" provision which currently allows parties to withdraw a frivolous claim within 21 days without consequences.

From a procedural standpoint, this bill would streamline the Rule 11 process by delineating a bright-line rule for remedies if a claim is deemed frivolous. This would allow for increased judicial economy in the decision-making process, because judges would not have to spend additional time determining whether sanctions are appropriate for a given case. Instead, the focus would shift strictly towards determining the appropriate size and scope of the sanctions.

From a substantive standpoint, the Rule 11 reform would create greater certainty of consequences for the claimant. Because the claimant knows that an initial ruling that a claim is frivolous leads to mandated sanctions, the subjectivity of the judge's view on whether sanctions should be applied becomes irrelevant.

At the same time, because the judge retains subjectivity as to the breadth of the sanctions, the claimant does not have the variables necessary to measure whether it still might be worth it to bring a claim or group of claims. As a result, the claimant would naturally be reluctant to bring a substandard claim in the first place, especially because the removal of the safe harbor provision would make it even riskier to do so.

Today, the Supreme Court decided American Express v. Italian Colors (PDF) (holding, 5-3, that the fact that necessary expert-witness costs exceed the expected return on low-value individual claims, premised on federal law, does not, under the judicially created "effective vindication" doctrine, mean that arbitration clause class-action waivers are unenforceable). (The justices here lined up in the "usual" way -- with Justice Scalia writing for the majority and Justice Kagan for the dissent; Justice Sotomayor, who considered the case below on the Second Circuit, recused.)

See Ted's earlier posts on the case here (at cert stage) and here (after filings of merits briefs). We also hosted a featured discussion on the case between Ted and Cardozo law professor Myriam Gilles here. And see Ted's Manhattan Institute paper on arbitration-clause waivers of class-action remedies here, and reaction here (Greve) and here (Wood).

Because, as Ted has noted, "the litigation lobby has already beat the bushes to create unfair animus against arbitration clauses," it's important to emphasize what the decision says and what it doesn't. Justice Kagan's very well-written dissent to the contrary, the majority opinion does not suggest that companies can invoke any and every arbitration provision to preclude the vindication of federal rights.

Plaintiffs in asymmetrical litigation can often force settlement by threatening to impose large discovery expenses on the defendant. Even in a meritless case, if a judge is willing to approve a low-cost settlement that pays the class counsel, both sides can find it profitable to settle rather than litigate. (Moreover, in a meritorious case, conducting unreasonably broad discovery can be a means to boost lodestar to rationalize larger fees when a court is evaluating a settlement agreement: the discovery is reviewed by low-paid associate attorneys with a highly profitable lodestar billing rate, and the class counsel then uses that figure to rationalize a disproportionate fee at the tail end of the case.)

In Boeynaems v. LA Fitness International, LLC, 2012 WL 3536306 (E.D. Pa. Aug. 16, 2012), the defendant faced onerous supplemental discovery requests after already producing substantial information. As Sean Wajert reports:

Judge Michael Baylson ruled that when class action plaintiffs request "very extensive discovery, compliance with which will be very expensive," plaintiffs typically should share defendant's discovery costs - at least until plaintiffs' certification motion has been filed and decided. ... "If the plaintiffs have confidence in their contention that the Court should certify the class, then the plaintiffs should have no objection to making an investment."

Read the whole thing.

The burdens of e-discovery
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Marc Herrmann notes that judges have unrealistic expectations regarding e-discovery. Of course, they're encouraged to have such unrealistic expectations by plaintiffs' lawyers in asymmetric discovery cases. Acting as if a mere snap of the fingers can result in the full production of electronic documents means that judges can treat the normal frictions of failure as evidence of bad-faith that could lead to sanctions precluding a defendant from defending itself at trial. And if those consequences are a possibility, then that means that defendants can't risk spending less than top dollar on discovery, meaning that plaintiffs' lawyers have additional leverage to extract rents in nuisance settlements. Add the incentives of insurers indifferent between paying defense lawyers and paying plaintiffs' lawyers, and now any case that can get past the motion to dismiss stage is worth millions, no matter how meritless, and more if the court exercises its discretion to let discovery proceed while to motion to dismiss is pending. So it's of mild concern when a law professor argues (via Steinman) that whether to stay discovery while a motion to dismiss is pending should be adjudicated on a multi-factor-test case-by-case basis, pooh-poohing the costs of discovery, or the incentives of plaintiffs to increase the costs of discovery. Under such a regime, even bringing a case that can't survive a motion to dismiss would be profitable. Among the factors missing from Kevin Lynch's analysis: the incentive of judges to permit discovery to go forward and refuse to rule on a motion to dismiss, hoping that this creates an incentive to settle that gets cases off the docket.

§ 1920 and e-discovery costs

We had noted a trend of courts being willing to use 28 U.S.C. §1920, which permits cost-shifting of the expenses of "making copies," to the much greater costs of e-discovery by broadly construing the meaning of "making copies." In the first appellate decision on the topic, Race Tires America v. Hoosier Racing Tire Corp., the Third Circuit has rejected that broad interpretation, and held that only $30,000 of a $365,000 e-discovery expense fell within the parameters of §1920. The opinion has interesting language on the expense of e-discovery in the first footnote. More at WSJ Law Blog.

Relatedly: Professor William Hubbard testifies about the costs of discovery, with particular attention paid to the long tail.

Also relatedly: Steve Susman argues for "mutual disarmament" in the discovery game. Of course, that sort of voluntary agreement is only possible in the scenario where anticipated discovery costs are not asymmetric.

The problem of the special master

Fed. R. Civ. Proc. 53 permits a judge to appoint a "special master" to resolve complicated pretrial matters that the judge does not have time to do; most state courts have similar procedures. Such special masters are typically experienced attorneys who charge the full billing rate of experienced attorneys; rather than being put out for competitive bid, judges often pick a friend for the lucrative assignment. The existence of a rule as a safety valve allows courts to handle heavier dockets, but that in itself has its own distorting effects. A judge has reduced incentive to narrow the scope of discovery; heck, the privilege log disputes alone can generate hundreds of thousands of dollars, and create unreasonable standards that add tremendous expense to litigation beyond what is paid to the special master.

A recent scandal in New York reported by the Daily News suggests other possible problems: in 1999, Manhattan Supreme Court Justice Sherry Klein Heitler appointed Laraine Pacheco special master in a series of asbestos cases, and in 2005, Pacheco was making $368,000 a year overseeing settlement discussions. Pacheco lost her lucrative position last week when it was learned that she had overbilled parties—including city and state taxpayers—$400,000. Pacheco had previously come under fire for wanting to hold these settlement discussions near her vacation home in Tucson, Arizona, inviting lawyers to do so as a junket (and suggesting they shop at her daughter's jewelry store).

This is an area that merits much more study by the legal reform community.





Accidental Justice: The Dilemmas of Tort Law

Judging Science: Scientific Knowledge and the Federal Courts

Galileo's Revenge: Junk Science in the Courtroom

The Litigation Explosion: What Happened When America Unleashed the Lawsuit


The Path to the T.J. Hooper: Of Custom and Due Care

Courts of Convenience

The Selection of Disputes for Litigation


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.