Beyond "It Just Ain't Worth It": Alternative Strategies for Damage Class Action Reform
Hensler, Deborah R., Rowe, Thomas D., Jr., Law and Contemporary Problems
DEBORAH R. HENSLER [*]
THOMAS D. ROWE JR. [**]
We begin with the premise that private class actions for money damages can yield significant social benefits. Class actions for damages can provide compensation for modest but non-trivial losses suffered by widely dispersed but similarly positioned persons as a result of the negligence or illegal behavior of others, allowing recovery for losses that cannot practically be achieved through individual litigation. In this way, damage class actions can deter such injurious behavior and thereby supplement regulatory enforcement by administrative agencies that are under-funded, susceptible to capture by the subjects of their regulation, or politically constrained. Damage class actions also may provide efficient management and resolution of large numbers of similar claims when individual litigation is feasible, but its costs would be extraordinarily high. 
Despite these benefits, however, the financial incentives that fuel private class action litigation have the potential to undermine these goals. Private litigation that duplicates effective regulatory enforcement may impose additional costs without commensurate benefits. Non-meritorious class actions filed by lawyers who expect defendants to be willing to pay something simply to ensure that the class counsel will "go away," as well as class action settlements that bear little relation to the merits of the claims, dilute the deterrent effect of class action litigation. Settlements designed in ways that make it unlikely that the defendants will deliver all of the benefits they have pledged to pay class members will not achieve their asserted compensation objectives. The efficiency gains flowing from global resolutions of claims may be outweighed by settlements that invite vast numbers of product users with weak or questionable claims to apply for benefits. During the 1990s, as damage class actions grew in numbe r and scope, both scholarly and public policy discourse on this subject focused on such negative outcomes.
The theoretical bases for the concern that the goals of representative litigation may be thwarted have been well developed. To avoid litigation costs and small risks of large judgments, some defendants are willing to settle even very weak claims for their nuisance value. The incentive to settle nuisance claims--always present in litigation--is particularly great in large-scale representative litigation, with its higher-than-average risks. Recognizing this, some plaintiffs' attorneys search out defendants who can be easily persuaded to settle such claims, often earning attorneys' fees that are disproportionate to the modest effort and expense required to achieve these settlements. Conversely, some defendants who face stronger claims may seek out plaintiffs' attorneys who are willing to settle such claims at less than their true value in exchange for fees that arguably are more generous than they deserve, given what they have obtained for their class clients. In both instances, the defendants buy res judicata at an inappropriate price: In the first instance, they pay too much (and the plaintiffs' attorneys pocket the premium); in the second, they pay too little (and class members suffer the loss). In both instances, because clients in representative litigation usually cannot effectively control their attorneys, unfaithful plaintiff attorney-agents are free to pursue their own interests. In addition, the deterrent signals of litigation are distorted because the costs of the harms that are imposed on the class are not properly reflected by settlement outcomes. 
The empirical evidence that supports the theoretical concerns is not as fully developed. No comprehensive assessment of the costs and benefits of damage class actions has been compiled, and no such assessment is in progress.  Empirical investigation of a small number of cases suggests, however, that the merits of some class actions are questionable and that some class action settlements provide more benefits for class counsel and defendants than for class members. Moreover, concerns about filing and settlement practices gain credence because they are expressed by lawyers and interest-group advocates on both the plaintiffs' and defense sides of the litigation, persons who do not routinely agree with one another.
The controversy over whether it is possible to craft a damage class action regime that is, on balance, socially beneficial dates back (at least) to the 1966 revision of Federal Rule of Civil Procedure 23. As concern about class action abuses has grown, some critics have called for eliminating consumer and other class actions in which the losses claimed for individual class members are modest.  Other critics have urged the exclusion from class certification of those tort actions in which there is a credible opportunity for individual litigation. Some of these critics oppose the principle of using collective litigation to achieve regulatory enforcement or tort compensation objectives.  Still other critics support the goals of collective litigation but believe that the financial incentives that fuel damage class actions are so strong that, in practice, these goals are subverted more often than not. 
To date, no political consensus has emerged about the appropriate use of damage class actions. A long effort by the Civil Rules Advisory Committee in the 1990s to reform Rule 23 largely foundered, mostly as a result of this lack of consensus.  But calls for reform persist, and both Congress  and the federal judiciary  have taken up the matter yet again. The persistent chorus of criticism--supported by anecdotes about absurd claims and outrageous settlements--has the potential to erode societal support for damage class actions. This possibility should challenge supporters of procedures to remedy collective harms through private litigation to propose policies to calibrate better the aggregate benefits and costs of damage class actions.
To this end, 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. Part II briefly describes these strategies. 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, which we discuss in Part IIIA.
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, in Part IIIB 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 ha ve 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.
If too many non-meritorious damage class actions are coming through the courthouse doors, then it might seem attractive to adopt strategies that would raise the bar for certification or participation. Two such strategies have attracted attention in recent years: (1) imposing a cost-benefit test for certification and (2) requiring those who want to be part of the class to come forward at the inception of the litigation (that is, "opt in"), rather than relying on their passive consent to legitimize the suit. After carefully considering both strategies, we think it is questionable whether they would consistently and fairly screen out non-meritorious lawsuits, while ensuring access for meritorious cases. Imposing a cost-benefit test for certification would encourage judges to make merits-based decisions without adequate grounds for these decisions. Requiring class members to opt in would deny access to those who have suffered losses too small to permit them to secure legal representation, without regard to the s ubstantive merits of their claims against those whose actions led to the losses.
A. Imposing a Cost-Benefit Test for Certification
If, as some critics claim, judges too often certify damage class actions when class members have little to gain--while defendants and the court system face large costs--it would be logical to stiffen the criteria for certification. The Federal Civil Rules Advisory Committee proposed to do just that in 1996, when it published proposed amendments to Rule 23(b)(3) that included a new factor (F) for judges to consider when deciding on certification: "whether the probable relief to individual class members justifies the costs and burdens of class litigation."  The proposed amendment was ultimately tabled and seems unlikely to be revived any time soon.  By reviewing the issues raised by the proposal, however, we can better understand the problems that would be encountered by efforts to reform the damage class action regime by incorporating cost-benefit or merits-based assessments into the certification decision. 
The Committee's proposal--soon dubbed the "it just ain't worth it" rule--incited a storm of opposition from legal scholars and consumer advocates, who argued that it would gravely threaten the use of class actions for regulatory enforcement.  In addition, how the provision would be implemented remained unclear. What evidence would a judge have before her at the time of certification--supposed, under the rule, to take place early in the litigation process--to ascertain what class members would likely receive, and what the likely costs would be? Ultimately the many difficulties with the proposal led the Advisory Committee to abandon consideration of factor (F). 
The debate over the consequences of factor (F) for regulatory enforcement quickly overshadowed concerns about the practical application of the new provision, but the concerns were valid. RAND's recent case studies of damage class actions found that arguments about what is at issue in these lawsuits--the legal merits of the claims and how to assess damages at both the aggregate and individual levels--may persist until late in the litigation.  In some instances, there is extensive discovery on these points. Determining the "probable relief" to class members at the inception of such litigation would pose a considerable challenge. Indeed, if the terms of a settlement call for a pro rata division of the aggregate recovery among all eligible claimants, and the number of claimants who will come forward is unknown--as is often the case--the size of individual shares may not be known until after a class action is settled. 
The cost side of the cost-benefit test is even less susceptible to judicial determination. Whereas courts often (although not always) know what benefits claimants are likely to collect once a class action has been settled or adjudicated, they virtually never know the costs of class litigation. Because judges award class counsel fees, they determine a portion of these costs themselves. But fees are most frequently awarded on a percentage-of-fund ("POF") basis; therefore, a judge who does not know the size of a potential aggregate recovery at the time of certification will also not know the likely amount of class counsel fees. Moreover, the judge will virtually never know how much defendants pay their lawyers in fees and expenses. Because this information is not a matter of public record, judges have no evidence from prior cases on which to base estimates of the total costs of class litigation. Relying on defendants' estimates of projected costs at the start of the litigation when certification is contested wo uld raise serious fairness questions.
If judges faced the dilemma of having to decide whether the probable relief to class members outweighed the costs without adequate information for such an assessment, it is uncertain what they would do. We may speculate that some would base their decisions on their general views regarding the costs and benefits of different types of class actions. Others might rely on their assessment of the merits of the case before them. During its deliberations on amendments to Rule 23(b)(3), the Advisory Committee considered including a provision for judges to take a preliminary "peek at the merits" among the certification factors.  At first, some representatives of corporate defendants supported this idea; but the Committee later put it aside, in part in reaction to concerns that emerged as corporate representatives considered the potential consequences of asking judges to rule, even in provisional fashion, on the merits of a case before the facts or legal issues had been reasonably well developed. 
RAND's case study analyses suggest that taking preliminary assessments of the merits of class actions into account in certification rulings would likely yield inconsistent outcomes. After reviewing information about the claims underlying ten recent damage class actions, RAND's analysts wrote: "We felt like members of the audience at a production of the Japanese drama 'Rashomon.' Viewed from one perspective, the claims appear meritorious and the behavior of the defendants blameworthy, but viewed from another, the claims appear trivial or even trumped up, and the defendant's behavior seems proper.
Efforts to incorporate cost-benefit or merit-based tests among the certification factors are appealing because they hold out the possibility of diverting "bad" cases from the legal system before significant costs have been incurred. Eliminating such cases early would also diminish the oft-mentioned in terrorem effect of class actions, which defendants explain as the threat posed by even a modest potential for huge class-wide damages that class counsel can threaten once a case has been certified.  The empirical evidence suggests, however, that the search for a cost-benefit or merit-based standard that can be incorporated into the certification process (in addition to the present criteria relating to the form of the litigation  and functional concerns,  and the possibilities of dismissal and summary judgment) may be quixotic. It is difficult to design a fair and adequate procedure for a preliminary determination of the merits, and it is similarly difficult to imagine a cost-benefit test that does n ot at least implicitly, if not explicitly, incorporate a preliminary merits determination.
B. Requiring Class Members to Opt In
For corporate defendants, the most significant provision of the 1966 revisions to Rule 23 was the substitution of an opt-out provision for the de facto opt-in requirement of the "spurious" class action that before 1966 most resembled Rule 23(b)(3) actions for money damages.  As a result, the scope of money damage lawsuits--and hence the financial exposure of the corporations against whom they usually were brought--multiplied many times over. Previously, the class would have included only those similarly situated persons and entities that were aware of the action and wished to join it. Now, all those who met the class definition and did not come forward--potentially hundreds of thousands or even millions of people--were included in the litigation, and if it succeeded, all might be eligible to receive damage awards. 
Over the past several years, some critics of damage class action practice have proposed a return to an opt-in requirement for Rule 23(b)(3) suits.  They argue that requiring those who want to be bound by a class action outcome to opt in would enhance the system's ability to screen out trivial and non-meritorious lawsuits. Large numbers of class members would come forward, these critics assert, when there was a widely shared perception that the alleged wrongdoing was significant and that the potential remedies were worth pursuing.  Hence the value of damage class actions in these circumstances would be preserved. But when the wrongdoing was insignificant or the remedies trivial, few people would come forward. This response would reduce the in terrorem effect of filing a class action in such circumstances, encouraging defendants to contest non-meritorious suits. In addition, judges might decline to certify a class if only a small fraction of eligible class members opted in. Faced with a higher risk of not covering their costs to pursue a class action, plaintiffs' attorneys would be less likely to file non-meritorious suits and suits in which the likely remedies were trivial.
We agree that class size very likely would be smaller if class members were required to opt in and that the rate of opting in would be especially low when individual losses were small. As a result, we would expect the rate of filing class actions for small losses to consumers to decline under an opt-in regime. But we suspect that the lawsuits that would effectively be denied access to the legal system would include substantively meritorious as well as substantively non-meritorious claims. Conditioning the prosecution of a class action on class members having suffered substantial individual losses would thus subvert what many believe to be one of the key purposes of collective action,  namely facilitating litigation precisely when many persons have suffered, as a result of another's wrongdoing, losses that are too modest to allow them to obtain individual counsel.
Returning to an opt-in requirement for damage class actions would leave in place a vehicle for collective litigation, but the vehicle would be substantially under-powered in comparison to the current model.  The deterrence capacity of the legal system would be limited to those instances in which defendants visited substantial harm upon individuals, leaving actions that cause small harms to large numbers of persons--and may secure large benefits to the wrongdoers--unrestricted by private law. Whatever their opinion on the proper role of private class actions in regulatory enforcement, it seems that all would have