Beware Intended Consequences of Class Action Reform, Too

Dave and I wrote this article for Law360, which was published today. Here it is in its entirety.

On March 8th, Law360 published an article from two class action defense lawyers who argue that the anti-class action bill currently working through Congress (known as H.R. 985) doesn’t go far enough in its quest to “stem[] class action litigation.”  They call in particular for legislation designed to mitigate the “in terrorem effect” that they insist causes corporations to “settle truly meritless claims.”

This in terrorem boogeyman has been trotted out for decades, every time that a pretext is needed to close the courthouse doors to victims of corporate abuse.  Let’s shoo away the boogeyman this time around, rather than again allowing dramatic changes to the law.  There are many good reasons to do so.

For one, studies of class actions and class settlements—including by the Federal Judicial Center—do not support the intensely negative view of litigation as blackmail.[1]  “[T]he class action is more nearly a shield than a sword.  It has protected companies from bankruptcy, but it appears to have rendered few companies insolvent, if any.”[2]

The blackmail analogy has no empirical backing. Again and again, scholars have debunked the myth that class actions foster extortionate claims. The analogy also defies common sense. The likelihood of prevailing at trial is what gives class litigants leverage; pressure largely comes from the merits and value of claims.[3] Despite all this, the blackmail myth has garnered far more legislative and judicial attention than the needs of plaintiffs pursuing meritorious class claims.[4]

The in terrorem boogeyman has already been used to justify at least a half dozen colossal changes to the class action practice.   Let’s consider just the most obvious of examples:

  • The PSLRA – When Congress passed the Private Securities Litigation Reform Act in 1995, supporters pointed to the “many … lawsuits [that] are filed as class actions [and have] had an in terrorem effect on Corporate America.”[5]  Afterward, the Supreme Court acknowledged the PSLRA “addressed the settlement pressures associated with securities-fraud class actions.”  Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1200 (2013).
  • CAFA – When Congress passed the Class Action Fairness Act in 2005, its supports similarly “argued that magnet–state court certifications [were having an] in terrorem effects on defendants.”[6] It was widely acknowledged “the goal of CAFA was to deal with problems … including but not limited to … in terrorem blackmail pressure.”[7]
  • Twombly – The Supreme Court has likewise based major holdings on the fear of “in terrorem” class actions. When it rewrote Rule 8, effectively changing it from a notice pleading standard to one requiring factually-detailed allegations preceding discovery,[8] the Twombly majority noted the risk that “a plaintiff with a largely groundless claim be allowed to take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007).
  • Concepcion – Again, in 2011, the Supreme Court invoked the in terrorem threat in its Concepcion decision, using the threat to justify providing corporate America carte blanche to bind many customers and employees to forced arbitration clauses—entirely precluding a wide variety of meritorious lawsuits on their behalf. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 350 (2011).

And now H.R. 985. Let’s be clear about what H.R. 985 does. It proposes to stack a heap of bricks directly in front of the courthouse doors. These bricks are procedural rules corporations have long sought but failed to obtain through court rulings or the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States.

The bricks have been stacked high enough. At what point do we recognize that erecting additional procedural obstacles will only serve to deny true victims of corporate fraud their constitutional rights to a day in court? At what point do we stop making policy based on a “class action as blackmail” charge that is unproven and unpersuasive?

The campaign in support of the bill fails to acknowledge the need for balance. That has resulted in widespread opposition to the bill. Environmental, disability, consumer, and civil rights groups stand united against it. The American Bar Association has spoken out against it. Chairs of the Advisory Committee on Civil Rules and the Committee on Rules of Practice and Procedure—two esteemed federal judges appointed by Chief Justice John G. Roberts—have urged Congress not to amend class action procedures through this bill. Even the House Liberty Caucus, conservative Republican members of the U.S. House of Representatives,[9] has opposed H.R. 985. Though the bill has passed in the House, the House Liberty Caucus’s letter was spot-on: “Class action lawsuits,” the caucus explained, “are a market-based solution for addressing widespread breaches of contract, violations of property rights, and infringements of other legal rights.”[10] H.R. 985 “adds immense procedural hurdles for class action plaintiffs” and “allows bad actors to avoid massive liability just because their victims cannot be sorted into a perfect group in which every person has the same injury.”[11]

We often say that it is better that ten guilty persons escape than that one innocent suffer.  What ratio should we aim for when it comes to corporate fraud remediable through class actions?  Should we err on the side of protecting corporate wrongdoers or victims of fraud?  Haven’t we already tilted the playing field enough against the injured?

[1] Brian T. Fitzpatrick, An Empirical Study of Class Action Settlements and Their Fee Awards, 7 J. Empirical

Legal Stud. 811 (2010); Thomas E. Willging & Shannon R. Wheatman, Attorney Choice of Forum in Class Action Litigation: What Difference Does it Make?, 81 Notre Dame L. Rev. 591 (2006); Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, Federal Judicial Center, Empirical Study of Class Actions in Four Federal District Courts: Final Report to the Advisory Committee on Civil Rules (1996).

[2] Charles Silver, “We’re Scared to Death”: Class Certification and Blackmail, 78 N.Y.U. L. Rev. 1357, 1405 (2003).

[3] E.g., Michael Selmi & Sylvia Tsakos, Employment Discrimination Class Actions After Wal-Mart v. Dukes, 48 Akron L. Rev. 803, 809-814 (2015); Bruce Hay & David Rosenberg, “Sweetheart” and “Blackmail” Settlements in Class Actions: Reality and Remedy, 75 Notre Dame L. Rev. 1377 (2000); Silver, supra note 2, at 1357.

[4] Selmi & Tsakos, supra note 3, at 813.

[5] Report of the U.S. Senate Committee on Banking, Housing, and Urban Affairs to accompany S. 240, 104th Cong. 21 (1995) (testimony of George H. Sollman on behalf of the American Electronics Association), available at https://www.gpo.gov/fdsys/pkg/CRPT-104srpt98/html/CRPT-104srpt98.htm.

[6] Genevieve G. York-Erwin, The Choice-of-Law Problem(s) in the Class Action Context, 84 N.Y.U. L. Rev. 1793, 1803-04 (2009).

[7] Linda S. Mullenix, Gaming Removal Under the Class Action Fairness Act: Can a Plaintiff Stipulate to Less than the Requisite Amount-in-Controversy to Evade Removal?, ABA (2013), available at https://law.utexas.edu/wp-content/uploads/sites/5/Mullenix-StandardFire.pdf.

[8] Gregory P. Joseph, Supreme Court Rewrites Pleading Requirements, SCOTUSblog (2007), available at http://www.scotusblog.com/archives/Sup%20Ct%20Rewrites%20Pleading%20Rules.pdf.

[9] Liberty Caucus, Wikipedia, https://en.wikipedia.org/wiki/Liberty_Caucus (last visited Mar. 10, 2017).

[10] House Liberty Caucus Statement on H.R. 985, Fairness in Class Action Litigation Act of 2017 (Mar. 9, 2017).

[11] Id.