Academic journal article The University of Memphis Law Review

Bad Bargains: The Mistake of Allowing Cost-Benefit Analyses in Class Action Certification Decisions

Academic journal article The University of Memphis Law Review

Bad Bargains: The Mistake of Allowing Cost-Benefit Analyses in Class Action Certification Decisions

Article excerpt

I. INTRODUCTION ........................................................................... 65

II. EXAMINING COST-BENEFIT ANALYSES UNDER COMPENSATION AND DETERRENCE ............................................ 71

A. Two Criteria for Examining Cost-Benefit Analyses ........... 71

1. Compensation ............................................................... 72

2. Deterrence ..................................................................... 74

B. Applying the Criteria to Cost-Benefit Analyses .................. 78

1. De Minimis Harms ........................................................ 78

2. Problems of Deterrence ................................................. 80

a. Overdeterrence ....................................................... 80

b. Underdeterrence ..................................................... 83

3. Increased Costs of Consumer Goods ............................ 85

III. The Harms of Cost-Benefit Analysis ............................... 87

A. The Difficulty of Determining Benefits and Costs .............. 87

1. Determining Benefits .................................................... 88

2. Determining Costs ........................................................ 89

B. A Premature Judgment on the Merits ................................. 92

IV. CONCLUSION ............................................................................ 93

I. INTRODUCTION

In Reiter v. Sonotone Corp.,1 the United States Court of Appeals for the Eighth Circuit elucidated some of the problems commonly associated with class actions:

Often, defendants who are unwilling or unable to defend [class action] suits are compelled for economic reasons to settle actions otherwise meritless. The result of such settlements will inevitably be counterproductive when the costs to the defendant of defense and settlement are passed on to present and future consumers. Moreover, big firms are better able than small or medium-sized businesses to defend or settle such claims under similar circumstances. The ultimate result might be to preserve an oligopolistic economic climate. The deterrent impact of such suits, in our view, does not outweigh their potentially ruinous effect on American business."

The Court of Appeals in Reiter unanimously concluded that a benefit of class actions - deterrence - did not justify their social costs, a potentially ruinous effect on businesses. As a result, the court refused to certify the class, instead placing the burden on state attorneys general to "protect the interests of consumers without imposing upon the courts and the economy the risk and burden of nonmeritorious class actions."3 The Supreme Court reversed, also in a unanimous opinion, advancing two arguments rebutting the social-cost argument that was so persuasive for the Eighth Circuit. First, the Court concluded that although private suits may impose heavy burdens on the federal courts, it is the responsibility of Congress to allocate the resources that allow the judiciary to carry out Congress's commands.5 Second, the Court noted that although the cost of defending class actions may have "a potentially ruinous effect on small businesses in particular and will ultimately be paid by the consumers in any event. . . . [These] are policy concerns more properly addressed to Congress than to [the Supreme Court]."6

The discussion in Reiter highlights a central problem with the class action device: its potential to achieve positive results is derived from the same features that allow what critics perceive to be negative results. The advantage of the class action device is its ability to aggregate small claims that could not be brought on an individual basis because doing so would be cost-prohibitive. This ensures that claimants with small injuries can have their day in court. By allowing small but legitimate claims to be heard, class actions can yield the institutional good of compensation. …

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