Settlement, ADR, and Class Action Superiority

Abstract

When a defendant sets up a private voluntary compensation scheme or includes an arbitration clause in its form contracts, the resulting alternative dispute resolution (ADR) system bears striking resemblance to the typical endpoint of class action litigation — a settlement setting up an administrative claims resolution scheme as an alternative to litigation on a mass basis. This article addresses the question of when the existence of one of these ADR systems — offering a shortcut to the same endpoint — should block future class action litigation. It examines important differences in timing, bargaining dynamics, and agency costs in these three contexts. And it argues that a court asked to certify a class in the face of an existing private resolution scheme should undertake a functional and essentially comparative inquiry, considering not only the potential savings in transaction and agency costs, but also the underlying bargaining dynamics that may make these ADR shortcuts more vulnerable to unilateral manipulation by defendants than class action settlements.

Keywords: class action, settlement, alternative dispute resolution, ADR, Aqua Dots, GCCF, superiority, arbitration, complex litigation, class arbitration, Concepcion, Italian Colors, voluntary refund

JEL Classification: K40, K41