Class Action Imbroglios Revisited - Herzfeld & Rubin, P.C.

New York Law Journal

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 tried.”¹

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

Courts’ Concerns

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 of problems….”⁴

In 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 colluding counsel.”⁸

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, factual scenarios.

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 trial.¹⁰

The foregoing problems were advanced years earlier in the famous Rhone-Poulenc case¹¹ 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 such cases.

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.¹³Thus, 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.

Class Damaged

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 publicity.

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 li litigation.¹⁵ Perhaps more about this in a future article.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes

39 FRD 69, 103 (1966).
Hoenig, “Class Actions to Be Decided by the Supreme Court,” New York Law Journal, Oct. 18, 2010, p. 3.
In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability, 1995 WL 223209 (3d Cir. 1995).
Id. (quoting from Mars Steel v. Continental Illinois National Bank & Trust, 834 F2d 677, 678 [7th Cir. 1987]).
547 F3d 742, 2008 U.S. App. LEXIS 23535 (7th Cir. 2008).
Id., LEXIS at 3—4.
Id., LEXIS at 4.
Id., LEXIS at 5
Id., LEXIS at 5—6.
Id., LEXIS at 6—7.
In re Rhone-Poulenc Rorer Inc., 51 F3d 1293, 1298—99 (7th Cir. 1995).
606 F3d 391 (7th Cir. 2010), 2010 U.S. App. LEXIS 10259.
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, 2010).
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).