Beyond 'it Just Ain't Worth it': Alternative Strategies for Damage Class Action Reform

Abstract

In this article we explore alternative strategies for class action reform aimed at improving the cost-benefit ratio of a damage class action regime. Our analysis draws on RAND's recently completed study of contemporary damage class action practice and on the extensive theoretical literature on entrepreneurial litigation. Our goal is to identify mechanisms for enhancing the system's capacity to screen out non-meritorious suits, while preserving access for meritorious actions. While recognizing other concerns related to class actions (such as agency problems between class counsel and class members, and ethical issues), we do not address these problems except as they pertain to the question of screening. Similarly, we do not attempt to discuss the full range of proposals that have been put forward to address the various perceived problems relating to damage class actions, but instead focus on those proposals that are most relevant to the question of screening.

The first two strategies we consider would attempt to enhance the system's screening capacity directly, at the front end of the litigation process, by applying a cost-benefit test at the time of certification, or by requiring class members to decide whether to participate at the inception of litigation. We conclude that it is unlikely that judges could apply a cost-benefit test fairly and consistently, and that an opt-in requirement might screen out as many meritorious suits as non-meritorious actions (if not more).

The next two strategies would attempt to enhance the system's screening capacity indirectly, at the back end rather than the front end. The first and relatively non-controversial back-end strategy relies on judges to use more vigorously their authority to scrutinize class action settlements and fee award requests. By better calibrating the benefits to class members and financial rewards to class counsel, more rigorous judicial management would drive out "bad" class actions while maintaining access for meritorious lawsuits. The theoretical literature on entrepreneurial litigation and RAND's case study investigations provide the grounding for this strategy.

While we believe that increased judicial scrutiny could substantially improve the system's screening capacity, relying solely on judicial discretion for regulatory purposes has some obvious weaknesses?particularly in our federal system, in which parties who cannot satisfy one judge may simply depart that jurisdiction for another whose judges are more congenial. Hence we consider a different and more controversial approach to re-calibrating incentives to file and settle non-meritorious suits: adopting loser-pays attorney fee-shifting for certified damage class actions, with liability on the plaintiffs' side borne by class counsel. Although critics of class actions have proposed other manipulations of financial incentives, such as auctions, to improve the cost-benefit ratio of damage class actions, those who support the use of representative litigation in at least some circumstances have generally rejected fee-shifting out of hand. Our analysis suggests that such a version of loser-pays might have some positive effects on the damage class-action regime by increasing the costs of bringing non-meritorious suits, while at the same time somewhat increasing the benefits of pursuing meritorious cases. The many practical problems associated with integrating this approach into American class action practice, however, raise questions about its practicability, and it is unclear whether the posited improvements in the cost-benefit ratio would be large enough to merit seeking solutions to these knotty problems. Hence we conclude by urging further attention to judicial regulation, while inviting more serious scholarly consideration of fee-shifting strategies.