Over the years, large corporations and the defense bar, through their lobbies, have launched a broadside attack against class actions, accusing them of being shakedown schemes perpetrated by class action attorneys. The attacks have, at times, migrated to the judicial bench, leading to conceptual confusion in class action jurisprudence. This post clarifies the simple role class actions play as an efficient device to aggregate claims of individuals who have suffered similar harms and refutes the idea that class actions encourage corporations to settle unmeritorious claims.
What Class Actions Are
A class action is a procedural device to aggregate individuals’ claims, which are entitlements to relief under the law after suffering harm. When a case is certified as a class action it merely means that an individual or small group of individuals will act as representatives for others who have allegedly suffered injuries similar to theirs at the hands of the same culprit. The class certification determination does not rule on the merits of an action, but rather, expands the scope of who is bound by a later decision on the merits. That is, if the plaintiff class, through their representatives, prevails on the merits of an action, then all class members will receive compensation for the harm they have suffered. If the defendant prevails, no member of the class will receive compensation for the alleged injury and cannot bring a new suit concerning the same subject matter against the same defendant.
The primary justification for class actions is efficiency. Specifically, if a large group of individuals have allegedly suffered a similar injury, then it makes sense to determine whether they are entitled to relief in one fell swoop, rather than on a piecemeal basis. For example, in a recent case of ours, a national builder constructed homes in a residential subdivision without including a weather-resistant barrier, such as Tyvek, behind the exterior siding. This failure, we allege, has led to, and will continue to lead to, significant water damage to the homes. Because the construction defect is identical for all of the homes, it would make no sense for individuals to bring claims separately, which is why the court has appropriately ordered that the case proceed as a class action.
What Class Actions Are Not
Large corporations have, typically through their lobbies, waged massive campaigns against class actions. A principal line of attack has been that class actions place undue pressure on defendants to settle because of the exposure to high dollar amounts in liability. A class action is, in their eyes, a “tool for extortion.” Unfortunately, some in the legal community, including judges, have swallowed the rhetoric hook, line, and sinker. Some judges have gone so far as to say that pressure on defendants to settle “is a factor [the court] weigh[s] in [the] class certification analysis.”
Class actions are not tools for extortion. Luckily, this view has its own proponents, including Justice Sonia Sotomayor who, in a majority opinion authored when she was a circuit court judge, wrote that such concerns have no basis in the law and “underestimate the powerful policy considerations that favor class certification….” In re Visa Check / Mastermoney Antitrust Litig., 280 F.3d 124, 145-46 (2d Cir. 2001). Further, there is no empirical evidence to substantiate the assertion that businesses routinely settle class actions simply out of fear, rather than because individuals have suffered a real injury and are entitled to relief under the law. Following class certification, if corporations believe they have done no wrong, they should be confident they will prevail on the merits of the suit through a motion for summary judgment or at trial, clearing them of all liability in one stroke. As scholars have written, “Meritless filings are not met with payoff money; they are met with motion practice, and sometimes sanctions.” Myriam Gilles & Gary B. Friedman, Exploding the Class Action Agency Costs Myth: The Social Utility of Entrepreneurial Lawyers, 155 U. Pa. L. Rev. 103, 159 (2006).
Finally, the respective fee structure for plaintiffs’ firms and defense firms makes it more likely that corporations and their counsel are the ones susceptible to engaging in abusive tactics to coerce settlement. Plaintiffs’ firms operate on a contingency basis. That is, payment for their services is contingent on a positive outcome. Hence, their incentive is to file meritorious lawsuits and resolve them as quickly as possible, so that they are paid and can commit greater resources to providing redress to aggrieved individuals by filing new suits. Defense attorneys, however, “who usually are compensated by the hour at rather handsome levels and paid contemporaneously – frequently protract pretrial processes for various reasons, including to enhance their fees, to avoid reaching trial (particularly jury trial), and to coerce contingent-fee lawyers … into settlement.” Arthur R. Miller, From Conley to Twombly to Iqbal: A Double Play on the Federal Rules of Civil Procedure, 60 Duke L.J. 1, 66. The different incentive structures imbedded within plaintiffs’ and defense firms, and the natural consequences that follow, supply further evidence that corporations are not somehow the victims of frivolous lawsuit shakedowns.