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Australian Law Reform Commission - Reform Journal |
Reform Issue 77 Spring 2000
This article appeared on pages 67 – 71 & 93 of the original journal.
Large-scale litigation: A US perspective
By Deborah R. Hensler*
Public policy discourse about civil litigation in the United States has been dominated in recent years by the ideas of ‘hyper-lexis’ and ‘litigation explosion’. Civil justice researchers have shown that the litigation explosion is largely mythological. But there has been a significant increase in large-scale litigation in the US during the past several decades. This litigation comprises three distinct classes of suits:
• Mass personal injury and property damage litigation (mass torts);
• Class actions for money damages, mainly arising out of consumer transactions; and
• ‘Social policy’ class actions.
Mass torts
Mass torts arise out of widespread use of or exposure to products or substances. Typically, US plaintiffs claim medical and work losses, non-economic damages and, often, punitive (exemplary) damages. Until recently, these cases were the bailiwick of individual tort attorneys who were retained by individual clients on a contingency basis. For economic reasons, they bundled cases together and pursued strategies that resulted in aggregative (group) settlements. Some 50 mass torts have been large enough and expensive enough to attract national attention in the US over the past 30 years; many of these comprise more than 10,000 claims and some involve hundreds of thousands of claims. Settlements range up into the billions of dollars. Many other locally concentrated suits – such as litigation arising out of exposure to toxic chemicals – involve several thousand claims and millions of dollars, but are not widely reported.
Money damage class actions
These actions, arising out of consumer transactions, claim violations of securities, anti-trust or consumer protection laws or business practice regulations. Typically, class members claim small individual damages but the aggregate amounts sought can be substantial and may include punitive damages. These cases are the bailiwick of private class action attorneys – rather than government or legal services attorneys – who are compensated by court-awarded fees and expenses. Attorney fees may be awarded based on a formula that takes into account the hours invested in the case, the market-rate for their time, and risk. But most often the fees are awarded on a ‘percentage of fund’ basis, which mirrors the contingency rate charged in individual litigation.
Class action litigation for money (as contrasted with litigation aimed at social reform) was enabled by the adoption of the modern class action rule (Rule 23, Federal Rules of Civil Procedure) in 1966 and was immediately mired in controversy. An initial burst of litigation was soon constrained by judicial decisions and it was not until the 1990s that securities litigation and other consumer financial litigation again became the subject of controversy in the US. In the wake of curbs on securities litigation, other types of consumer class actions appear to have increased dramatically in the past few years. No one knows exactly how many of these suits are filed annually, but there are probably no more than a few thousand. Like mass tort cases, however, they comprise thousands or hundreds of thousands of claims and millions of dollars in damages.
Class action suits may be brought in most state courts, as well as the federal court system. An anomaly of the US system is that an attorney can bring a nationwide class action, alleging violations of many states’ laws, in a single state court, meaning that a state judge and state jury in one place can decide the rights of and remedies for citizens of 49 other states.
About 10 years ago, class action practitioners who had previously devoted themselves to securities and other financial litigation began to move into the mass tort field. Today mass tort litigation in the US is an amalgam of large bundles of individual claims and class actions, and individual attorneys and class action attorneys compete as well as collaborate in the field. The use of class actions for resolving mass torts has been highly contested. Critics argue that individuals’ rights are sacrificed in class actions, which frequently yield formulaic allocations of damages. Whether claims for future injury can be included in a class action settlement has been particularly controversial. But the argument about the use of class actions for mass torts in the US is not just an argument about these issues, but also reflects a struggle for control over this litigation by individual tort lawyers and class action attorneys, who have different litigation perspectives and strategies and different approaches to funding litigation.
Social policy class actions
Social policy class actions are suits brought by public officials and private attorneys who have come together to seek damages and changes in practice from entities such as tobacco companies, gun manufacturers and health maintenance organisations (HMOs). Fees won in mass torts and other class action litigation have provided the wherewithal for private attorneys to invest in these suits, which – if successful – promise to yield enormous fees. Elected state attorneys-general may also see the litigation as a springboard for campaigning for higher office. The litigation has variously sought individual tort damages, reimbursement to government agencies for costs incurred allegedly as a result of injurious products, and changes in product design, marketing, advertising, and business practices.
Legal culture
Each of these classes of litigation can be seen as a response to particular issues in contemporary US society. Each also reflects changes in the organisation of the plaintiff attorney bar and in judicial culture in the US. The litigation is facilitated by key features of the American legal system, including contingency fee practice, lawyer advertising, the American fee rule (each side responsible for its own costs), the availability of punitive damages and jury trials. It has also been facilitated by and has contributed to the creation of a new plaintiffs’ bar, which is highly specialised, well capitalised, and has a sophisticated understanding of science and technology and a readiness to enter into partnerships with other law firms to pursue a collaborative litigation strategy against defendants. This new bar has been able to overcome to a considerable degree the traditional resource advantages of corporate defendants.
Explaining the rise of mass litigation
The rise of mass torts reflects the success of mass marketing and the increasing ability of scientists to detect even small increases in health risks associated with product use or exposure. The prominent role that asbestos, pharmaceutical products, medical devices and toxic chemicals have played in this litigation also reflects earlier years of lax regulation; many of the most prominent mass torts are a result of latent injuries incurred before regulations were adopted or strictly enforced. The absence of a comprehensive health scheme and the inadequacy of wage income replacement systems in the US create personal and family needs that fuel this litigation.
The rise of consumer class actions in the US is a response to the creation of statutory rights at the federal and state levels that can best be mobilised in collective actions. Although securities class actions have been curbed in the past few years by the US Congress, the use of private litigation to deter statutory violations has been championed by the chair of the Securities Exchange Commission, the public entity that regulates securities in the US. Other public officials also support the use of private litigation to complement public enforcement efforts, which are often hobbled by resource and political constraints. The recent surge in consumer class actions outside the securities arena may reflect the trend towards de-regulation and de-funding of government regulatory agencies in the 1980s. The new information technology has also facilitated the litigation by increasing the availability of information on business practices, for example, resulting from regulatory investigations. Public attorneys-general and consumer advocates have helped to fuel this litigation, but it is mainly the creature of entrepreneurial private lawyers.
The new social policy class actions – against tobacco companies, gun manufacturers, and HMOs – have their historical roots in social impact litigation brought in the US under the class action rule to end abuses of civil rights. That litigation was generally brought by public interest lawyers, who under civil rights statutes were promised fees if they prevailed. The fees would be paid by defendants, as ordered by the court. The new suits have been brought by public attorneys-general and by private lawyers whose share of any fees awarded by the court may be negotiated privately with the public officials. The partial success of the tobacco suits appears to have encouraged the filing of the more recent gun manufacturer suits and litigation against HMOs. Anti-smoking, gun control and consumer health care advocates have seized on the new litigation as a tool for contending with powerful lobbying groups that have forestalled previous legislative and regulatory efforts at the federal and state levels.
Management of large-scale litigation
Large-scale litigation poses considerable management burdens for US trial courts, which are still organised mainly to deal with smaller, less complex civil litigation and criminal cases. Courts have experimented with various management approaches. In some courts, all the cases of a particular type – for example, all asbestos suits – are assigned to a single judge. That judge may then issue pre-trial orders that apply to all cases of this type, and may attempt to facilitate settlement of large blocks of suits at a time. One court had so many mass tort cases of different types that it created a special ‘mass torts division’ within the court. When many similar cases arise in multiple venues, the state court administrative body may collect all the cases and assign them to a single jurisdiction and judge for pre-trial management. In the US federal courts, the Judicial Panel on Multi-Districting can collect all similar cases filed in the federal court system and assign them to a single judge. But the panel has no jurisdiction over state court cases, so state litigation may proceed in parallel with the federal litigation. No state has jurisdiction over cases in another state, so although any one state can collect all the cases that arise within that state and assign them to a single venue, there is the potential for on-going litigation in 50 different states, plus the federal courts. Typically, the rules that allow for collecting cases across venues apply only to pre-trial processes (motions and discovery). Once cases are ripe for trial, they must be sent back to the individual venues in which they were filed.
The goal of these various management strategies is to streamline pre-trial processes and settle cases, preferably in large batches or in a single ‘global’ settlement. The formal rules that permit collecting cases from multiple jurisdictions do not provide for such global settlements, although smaller group settlements are common. The only formal structure for global settlements is the class action (or bankruptcy court). This is what led lawyers, parties and judges to seek certification of mass torts in the US even though the drafters of the class action rule had noted that it would not be appropriate to handle mass torts as a class.
The federal class action rule, which most states in the US have adopted in some form, permits a small number of individuals to come forward and file a suit on behalf of large numbers of similarly situated individuals who may not (at least, initially) know of the litigation. The rule has its historical roots in the English joinder rules. As it has evolved in the US, the class action rule applies to situations in which there are large numbers of similar claims, which arguably can be managed more efficiently collectively than individually. The individuals who seek to represent the class must have claims that are typical of those of class members and they must have adequate resources to litigate effectively. At some point, class members must be given notice that the suit is being prosecuted on their behalf and, generally, must be given an opportunity to ‘opt out’ of the litigation. Class members who do not opt out will be bound by the outcome of the collective litigation and will not be able to prosecute an individual claim in the future. If the class action lawsuit is not settled, it will proceed to a class-wide trial and a jury will decide the outcomes for the entire class.
The class action is well suited for litigating large numbers of small value claims, such as those that arise out of consumer transactions. As a practical matter, the plaintiffs could not afford to litigate these claims individually, so the class action device gives them access to a legal remedy where none would be available otherwise. This in turn means that defendants can be held accountable for wrongful actions that impose small costs on individuals, but reap large benefits for the wrongdoers. The controversy over such class actions in the US is not about the appropriateness of the collective litigation vehicle for small claims. Rather, the controversy is about whether the fees that class counsel can earn in this litigation are so great as to encourage frivolous claims, whether the courts or administrative agencies are best positioned to decide such cases, and whether the settlements that result properly reflect the merits of the cases.
Certifying mass torts as class actions raises a number of other issues. First, it is generally thought that plaintiffs in these cases will have vastly different injuries, and that the legal merits of their claims may also differ dramatically, because of differences in exposure to a product. Some critics argue that these claims do not have enough in common to justify class certification. Other critics argue that many, if not all, of the class members could pursue their claims individually and would fare better in court if they did so. But collecting the cases has the potential to significantly reduce the costs of the litigation for plaintiffs, defendants and for the courts.
Trials & settlements
Because of the differences among mass tort claims, when mass torts have been certified as class actions, the jury is typically asked to decide only the common issues of causation and liability and, perhaps, punitive damages. If the class prevails on these issues, then damages issues will be tried individually. In some instances mass torts that have not been certified as class actions are also tried collectively, under rules that provide for consolidating similar individual claims for trial. Typically, however, mass torts do not go to trial at all; in the few instances, in which there has been a class-wide or group trial of liability or causation, group settlements followed.
The availability of jury trials for civil cases in the US – with the possibility of large compensatory and punitive damage awards – powers large-scale litigation. But only a tiny fraction of these cases are tried. Most are settled. Mass torts that are settled outside the class action (or bankruptcy) context may receive little judicial oversight. It is said that many of these settlements are formulaic in nature. In contrast, because of concerns about conflicts of interest between class counsel and their clients in representative litigation, the American class action rule requires judges to review and approve any settlement that is reached in a class action. Judges also award fees to class counsel, rather than leaving payment arrangements to individual class members. Judges hold hearings at which proposed settlements, and sometimes the fees to be awarded, may be debated.
Managing class actions and other large-scale litigation is resource- intensive and time-consuming. The available evidence suggests that the value of large-scale litigation to plaintiffs, in relation to its costs, varies with the degree of judicial oversight. But there are no institutionalised arrangements in US state or federal courts for providing additional resources to the judges to whom these cases are assigned. Judges are continually admonished to move cases rapidly and to promote settlement whenever possible. Judges receive little guidance on how to assess settlements for fairness and adequacy and may prefer not to invite into the process those who might challenge a proposed settlement or the fees that attach to it.
As courts’ willingness to aggregate cases, informally or formally, has increased, the potential for and magnitude of mass litigation appears to have increased as well. Plaintiff attorneys bringing tort claims for mass injuries expect that cases will, at some point, be aggregated. When that occurs, it is widely perceived that the attorney with the most claims will have a strategic advantage. Hence, plaintiff attorneys advertise for clients and more clients come forward. The increased number of claims increases the risk exposure of the defendants. But this is perceived also as an advantage by plaintiff attorneys, who expect that defendants will pay a premium to cap their exposure. Risk averse defendants encourage risk seeking plaintiff attorneys, and the scope of the litigation widens accordingly.
This is not to say that plaintiff attorneys always succeed in mass tort litigation, or that the price of success is small. Large judgments are the product of persistence, willingness to assume risk, and willingness to invest huge sums of capital. The point, rather, is that efforts to manage the litigation efficiently have the potential to fuel it as well.
Problems & prospects
Private collective litigation poses significant challenges for the US civil justice system.
The cost of the litigation to the courts often receives the lion’s share of attention in judicial discussion. But the central policy question about this litigation is not its transaction costs, but rather whether the benefits are worth the costs. The answer to that question is inevitably political because it implicates not only assessment of the litigation itself, but also assessment of the alternatives to it. But the focus of controversy in the US has been on the conflicts of interest that are inherent in large-scale group litigation.
The enormous fees that provide the incentive for entrepreneurial lawyers to invest in meritorious cases also create incentives for lawyers to collude with defendants to resolve cases in ways that better serve the lawyers than the plaintiffs. Collusive practices diminish the deterrent potential of meritorious litigation, because rather than the settlement price being the cost of the harm done (adjusted for uncertainty about the merits), the price of settlement is simply whatever the market will bear. The huge exposure attendant on large-scale lawsuits also leads defendants to pay out huge sums of money in cases in which their liability is dubious.
In financial injury class actions, class members receive reimbursements for losses that are dwarfed, individually and sometimes even in the aggregate, by their lawyers’ fees. Tales of these settlements contribute to citizens’ cynicism about the legal system and lawyers in particular. Corporate defendants come to regard the system as fundamentally corrupt, even as they choose to negotiate with class counsel who are willing to bargain away class members’ reimbursement in exchange for higher fees for themselves.
When mass tort claims are aggregated informally, individual mass tort plaintiffs often receive rough group justice but they pay the price of an individualised justice system in the form of the contingency fee that they negotiated with their attorney. When mass tort claims are resolved as class actions, the available evidence (which is scanty) suggests that transaction costs are considerably lower. Under both regimes, some claimants may suffer as a result of efforts to please others. Global settlements of mass tort litigation usually require payments to everyone who has been exposed to the injurious product, whatever their degree of injury. The large numbers of claimants who come forward in these cases dilute the pool of money available for the most seriously injured.
Conclusion
Mass litigation in the US provides important opportunities to secure compensation for losses that would otherwise be fully imposed on individuals and their families, to enforce regulations that might otherwise not be enforced, and to deter practices that harm society. It may also offer a pragmatic strategy for exerting countervailing pressures on US legislatures that are dominated by powerful interest groups. But these benefits come at a significant price. Adversarial litigation is not the best means of achieving all personal and social aims; nor are the courts the best institutions for administering all social policies. But private litigation may be the means of achieving important social goals that is most consistent with the highly individualised nature of US society.
* Dr Deborah Hensler is the Judge John W. Ford Professor of Dispute Resolution at Stanford Law School and Senior Fellow, RAND Institute for Civil Justice. This is an edited version of her speech to the ALRC’s conference, Managing Justice ... the way ahead for civil disputes, Sydney, May 2000.
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