Monday, February 16, 2004

Thinking About Class Actions Differently

Ok everyone, I must admit I’ve been a little slow posting lately, due to computer disasters, weekend distractions (good distractions, mind you), and scholastic duties. But as Congress once again considers changing how we handle class actions, this is a good time for me to drop everything and offer my unqualified opinion (pun intended) on what the new bill does, and what it doesn't do.

Basically, the new bill attempts to solve venue-shopping. Congress no longer believes the trial lawyers when they say that rural Illinois state courts are a good spot for class actions because of the need to support bridge-related tourism (especially since the bridges are in Iowa). Nor do they buy the line that rural Mississippi courthouses are the ideal place to cool-off and have a massive lawsuit over the summer. Politicians are so cynical.

The new FRCP 23 would permit removal for diversity if any named plaintiff is diverse with any defendant. Why not carefully select your named plaintiffs to avoid this rule? Because in many cases the typicality of claims requirement of FRCP 23(a) will require a large sampling of plaintiffs in order to represent different state laws.

The new Rule 23 also calculates the monetary requirement for federal subject-matter jurisdiction in a more intelligent fashion - instead of mapping the normal $75,000 requirement on to class actions (see Zahn v International Paper Co, 414 US 291 (1973)), the monetary requirement is evaluated in the aggregate - $5,000,000 total will suffice. This ensures that only relatively high-stakes (b)(3) cases reach the feds, though I'm not sure how this will work for (b)(2) cases (aka injunctive relief is sole/dominant request).

The district judges maintain some discretion over removal, answering concerns about cases in which the legal questions largely involve one state's law. Basically, if more than 1/3 of the class members are in the same state, the district judge can remand to that state court, and if more than 2/3 of the members are from the same state and one of the defendants is a citizen of the state as well, the district judge must remand.

There are other provisions besides these, and all of these potential rules are being tinkered with. But the final product should look something like what I've described.

More interesting to me is what the new Rule 23 doesn't do. First of all, the federal courts are still left with the common problem of conflicts of law between class members. See, for example, Philips Petroleum Co. v. Shutts, 472 US 797 (1985), Castano v American Tobacco Co., 84 F 3d 734 (5th Cir 1996). These cases essentially say that district courts can’t get creative in handling conflicts of law – it’s unacceptable to have the class consent to the law of a single state if they don’t have any real contacts with the chosen state or their law is materially different, and you can’t solve large-scale differences in law by subclassing under Rule 23(c)(4) either. Thus, these cases often end up back in various state courts.

This problem has the potential of defeat the new Rule 23’s purpose while helping no one – defendants don’t get the favorable forum of the federal system or the finality of a single suit, plaintiffs don’t get strength in numbers and top-level representation, and the court system loses the efficiency benefits of aggregation and consistency (though some feel class actions may not provide these benefits; see, for example, Bridgestone/Firestone, Inc., 288 F 3d 1012, 1020 (7th Cir 2002) (Easterbrook) (comparing aggregated class actions to central-planning models of governance)).

My personal view is that the problem ultimately lies with Erie. Allowing plaintiffs to consent to a single-system of law is like ad hoc federal common law. So long as we still believe that there’s value in having Nebraska plaintiffs governed by Nebraska agency concepts regardless of the forum, we can’t with a straight face say that these values aren’t implicated in the class action context and allow Louisiana law to apply to our Nebraskan.

But maybe we should just renounce Erie in the class action context. I think you could make a good argument that Erie is great when you’re dealing with one rule of decision, but when you’re dealing with a dozen, it might be better to let the parties chose one. After all, allowing the parties to chose answers Brandeis constitutional concern that federal courts do not have the power to make up law – the parties would be making the choice, not a district judge.

Of course, the parties will surely fight over which law is “most fair,” but as long as this adversarial setting leads to some law “in the middle,” I think the results will be reasonable, and plaintiffs won’t have an incentive to conspire to create federal jurisdiction – they won’t know what rule they’ll get. Plus, this system will also be consistent with the logic of Erie - the conspiracy problem of Black and White Taxicab v Brown and Yellow Taxicab, 276 US 518 (1928) that Brandeis worried about in Erie is avoided on both fronts: the new Rule 23 keeps diversity issues from allowing plaintiffs to gerrymander a state forum, while the uncertainty of law in the federal forum (combined with the less-favorable procedural rules and juries) will keep unworthy plaintiffs from the district courts.

I’ll keep my analysis short on the second problem the new Rule 23 doesn’t address. Suffice it to say, the whole class action system is premised on a big lie: the class representatives are like real clients, making decisions on behalf of the class, taking an active role in the litigation, and looking to enforce their rights. In reality, many class representatives are props for the trial lawyers, often are the most sympathetic cases (and thus provide a misleading view of the class), and many are even repeat players used over and over again by the same firms (this is a favorite technique of top class action firm Milberg Weiss, according to this Forbes piece). Given these realities, why have class representatives at all?

Abolishing the class representative isn’t as radical as it seems. After all, corporations fight for consumer interests in the unfair competition arena under the Lanham Act. This is ok because the corporations’ and the public’s incentives are aligned – corporations want their rivals to pay, and the public wants truthful advertising. In the class action context, attorneys and class members have similar interests too – both want to maximize the judgment in their favor. To the extent we’re worried that lawyers will abuse this system by taking all the money for themselves, we must remember that a district judge acts as a fiduciary for the unnamed class members in a class action, and that the current system of class representatives hasn’t exactly reigned-in lawyers' fees. Thus, allowing the district judge to act as a fiduciary for the entire class would allow a more-informed individual to assess the distribution of fees, while freeing trial lawyers from the class representative farce. As a side benefit, this would destroy the class representative diversity jurisdiction game.

Still think me crazy? Well, Judge Posner agrees with me. This will either calm your fears or bolster your argument, depending on whether you’re from the University of Chicago or not. Quote:

“For purposes of determining whether the class representative is an adequate representative of the members of the class, the performance of the class lawyer is inseparable from that of the class representative. This is so because even when the class representative has some stake (unlike Culver), it is usually very small in relation to the stakes of the class as a whole, magnifying the role of the class lawyer and making him (or in this case her) realistically a principal. Indeed the principal. When we said earlier in this opinion that ‘Culver has done nothing to move the case forward except to file a flurry of frivolous motions’ and remarked ‘the lack of energy with which he [Culver] has performed his function of class representative’ and that the courts and Congress had refused as yet to rule that ‘the requirement that a class action, like any other suit, have a plaintiff is to be dropped and the class lawyer recognized as the true plaintiff,’ realists reading this opinion no doubt sniggered. All Culver's moves in this suit were almost certainly the lawyer's. Realistically, functionally, practically, she is the class representative, not he. ‘Experience teaches that it is counsel for the class representative and not the named parties, who direct and manage these actions. Every experienced federal judge knows that any statements to the contrary is [sic] sheer sophistry.’”

Culver v City of Milwaukee, 277 F 3d 908, 913 (7th Cir 2002).

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