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Monday, November 08, 2010

Governance v. Property

So in my previous post I paid tribute to Richard Nagareda and, in particular, his contribution to the ALI's Principles of the Law of Aggregate Litigation.  I tried to show that the Principles reflect two major themes of Nagareda's scholarship: (1) mass torts and similar complex litigation all share a common problem of "governance," and (2) correcting this problem requires primarily corrections to the "design" of existing procedures.    

In my current draft, entitled "Mass Torts and Due Process," I argue that "governance" does not fully capture the difficulty of mass torts.  Instead, I argue that mass torts present a "property" problem.  So why do I think "property," not "governance," tells a better story?  To answer that question, I have to take a detour and discuss the work of one of Nagareda's foils, David Rosenberg.

To recap, Nagareda understood mass torts as providing a "governance" problem because they involved parties with interests that were both divergent and interdependent.  Take asbestos litigation.  Due to the mass production of asbestos containing products and long latency periods for asbestos-related injuries (think decades), asbestos manufacturers injured a large number of individuals whose injuries were temporally dispersed.  Some manifested injury relatively quickly (call these the "presents"), while others were exposed to asbestos but took some time to manifest injury, if at all (call these the "futures").  

What if the manufacturer wanted to settle all of its asbestos liability at a given point in time?  It could settle with each of the presents, but cannot do so with the futures, at least not easily.  Suppose, however, that a class action was brought on behalf of a class of all individuals exposed, including the presents and futures?  The manufacturer could reach a global settlement with the class and "quiet title" as to its asbestos liability, so to speak.  Well, the global settlement class action approach was rejected by the Supreme Court in Amchem, and it is easy to see why.  What's to stop the presents from biasing any settlement in their favor?  In fact, what's to stop the class attorneys from selling out the class for pennies on the dollar, a problem that the Court will highlight in a later decision, Ortiz v. Fibreboard.  These conflicts reflect a "governance" problem - how do you set up governing structures to adequately take into account the interests of everyone in the litigation?  Class actions seem only to exacerbate the "governance" problem, not solve it.

David Rosenberg, who is primarily a tort scholar, viewed mass torts differently.  He focused less on the differences among the plaintiffs and more on what they had in common.  In particular, and despite their differences, the plaintiffs all shared a number of fact and legal issues as to liability, such as whether the manufacturer had knowledge of the dangers of asbestos, or whether asbestos caused certain diseases.  A plaintiff going alone will invest in those issues to increase their likelihood of recovery, but only to a point. To take a simple example, if the total recovery runs around $500K, the plaintiff is not going to hire a $1M expert.  The defendant, in contrast, will invest much more on common issues.  The defendant has to account for more than the plaintiff before it.  So if the liability associated with a common issue is $100M, the defendant will not hesitate to hire a $1M expert, or $2M expert, or whoever is the best out there.  Because of these asymmetric stakes, to borrow a phrase by Robert Bonedefendants have an inherent advantage in mass tort litigation.  Rosenberg has discussed this problem of asymmetric stakes in a number of articles, perhaps most forcefully in a response to a piece by Richard Nagareda in the Harvard Law Review.

As I argue in my draft, the problem of asymmetric stakes is best understood as a "property" problem.  The reason the defendant has greater incentive to invest in common issues is because it effectively owns all of the liability associated with those issues.  By contrast, each plaintiff only owns a partial amount of the recovery associated with a common issue.  Thus, the defendant can exploit economies of scale to invest in common issues that the plaintiff cannot, at least alone.  Of course, plaintiffs can aggregate to match the scale of the defendant's ownership, but that is rarely possible.  The futures do not have a "claim" to aggregate until they manifest injury, there are high transaction costs to aggregating, and, most importantly, there is strategic behavior.  Some plaintiffs, frankly, would rather go alone then aggregate with the others, making everyone worse off.  This mismatch in scale between the ownership unit of the resource (the claim for damages) and the scale at which the resource is most efficiently used (collectively, at least for common issues) is a common feature of commons/anticommons situations.  Thus, mass torts present a "property" problem, one caused by the individual ownership of each plaintiff's tort claim.

So why does this matter?  Conceived as a "governance" problem, class actions are disfavored.  But as a "property" problem, class actions can correct the problem of individual ownership of the claims by, in effect, judicially assigning legal title to all of the claims to a third party, class counsel.  In this way class counsel can invest in common issues at the same scale as the defendant.  In fact, to avoid an "anticommons" problem where a plaintiff threatens defection by opting out, the class action ideally would be mandatory.

Of course, reconceiving "mass torts" as a "property" problem does not completely do away with the problems identified by the "governance" lens.  In fact, a mandatory class action will require some plaintiffs to recover less than they otherwise would going alone, and prohibit any escape from the potential inadequate representation of class counsel.  How do I account for these deficiencies?  I will address these points in the next post.

Posted by Sergio Campos on November 8, 2010 at 11:21 PM | Permalink

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Comments

Your point about asymmetry is well-taken. But why is this a "property" problem rather than a "collective action" problem? You use the word "ownership" to describe a tort plaintiff or defendant's relationship to a potential lawsuit. I'm wondering what additional leverage that frame adds, over and above the well-developed literature on collective action. (Indeed, because so much of the property/commons literature is about governance institutions, you can get at that literature by starting from a governance frame, as well.)

Also, plaintiff defections from a class don't really present an anticommons problem in the usual sense. A's decision to opt out of a class doesn't prevent a settlement from being effective as to B, C, D, etc. If A is leaving because she thinks she can get a better outcome suing A individually, this is a problem for B, C, and D only because it depletes the defendant's assets . . . which makes the situation into a commons problem.

Posted by: James Grimmelmann | Nov 9, 2010 7:17:32 AM

Hi James! Thank you so much for reading the post and commenting! It is wonderful to have such an engaged and knowledgeable audience!

In an earlier draft of the post, I made a joke that the difference between a "governance" problem and a "property" problem appears semantic. After all, Elinor Ostrom titled one of her books "Governing the Commons." So you are right that the problem can be understood as a "collective action" problem, and David Rosenberg himself identified it as one.

I use the "property" story not so much to exclude the "governance" story, but to identify the root cause of the collective action or governance problem. As in other commons situations, the collective action problem arises from a mismatch in scale between the individual ownership of the claim and the need to invest in common issues collectively. The "property" story not only suggests a different solution than the traditional "governance" story (more class actions, not less!), but will have added salience when I shift to the "due process" part of the draft, where the law self-consciously identifies the claim for damages as the relevant "property" interest. There is more to come on this front!

As for plaintiff defections, I should I have explained what I meant by avoiding an "anticommons" problem more clearly. Under current law, class actions may be permitted for mass torts, but only if, among other things, the plaintiffs have an opportunity to opt out of the class post certification. This conclusion is reflected in the Principles. See Section 1.05(c)(7) & cmt. j. But the ability to opt out gives some plaintiffs the opportunity to hold out and try to bias any recovery in his or her favor, particularly when a plaintiff can litigate alone and free-ride off of previous work on common issues. But if some plaintiffs defect and free-ride, then the plaintiffs are less well off as a whole because they can't match the scale economies of the defendant. In other words, the concern is not the depletion of the "limited" pot, but the many veto points to collective action that would diminish, even destroy, the plaintiff's economies of scale. Thus, the problem of hold outs in nonmandatory class actions resembles the "chicken" games that exemplify anticommons problems - problems that arise when all would benefit from collective action, but individual efforts to extract as much of the surplus as possible may blow up the deal. I hope this helps!

Posted by: Sergio J. Campos | Nov 9, 2010 8:50:55 AM

"Because of these asymmetric stakes, to borrow a phrase by Robert Bone, defendants have an inherent advantage in mass tort litigation."

Surely this isn't true. If it were, those aligned with defendants wouldn't go to great lengths to discourage and limit class action limitation and the sides on issues like class action arbitration would be reversed.

Two things give plaintiffs an advantage in mass tort litigation.

1. There are economies of scale inherent in litigation that they can only secure through some form of collective action.

2. When plaintiff's cases are weak, the principle expessed in the seminal article "How to Gamble If You Must" applies. It turns out to be a statistical fact that if the odds are not in your favor, that you are more likely to get a good result if you make one high stakes bet than you are if you make lots of low stakes bets where the law of averages catches up with you. When the odds are in your favor, in contrast, you are better off making lots of low stakes bets.

If a court has a 20% chance of ruling for the plaintiffs in a matter where there a 1,000 plaintiffs, they have a 20% chance of getting everything they've asked for (and are unlikely to be held responsible for costs or fees if they lose), but if they try one at a time, 800 of them +/- about 30, will lose, and the poor success rates in the early cases will discourage others from even trying and wasted attorneys fees and cost awards against the losers may turn those cases into actual losers to a significant degree.

Posted by: ohwilleke | Nov 15, 2010 3:17:14 PM

Can you say more about why a mismatch in scale suffices to make this a "property" story? I usually associate the scale-mismatch story with Henry Smith's semicommons work, in which the problem is that there are two actual uses that are efficient at different scales. Here, there's really only a single use for the rights parties bring to the litigation: to litigate. It happens that this is more efficient at larger scales (both to avoid duplication and to control sequencing), but this just means that some parties are better positioned to take advantage of the situation than others. The language of collective action does just as well as the language of commons or anticommons, no?

Posted by: James Grimmelmann | Nov 15, 2010 10:05:23 PM

Agreed that this can be understood as a collective action problem, but I like the commons literature because, like in Smith's piece, the concern is with scale. The use I am focusing on is not simply "litigate" but investing in common issues. That is better done collectively, but only the defendant can do it right off the bat given its monopoly ownership as to the liability associated with any common issues. The plaintiffs, on the other hand, are too dispersed to match the scale of the defendant, at least in the absence of a class action. To better fit the Smith situation, you could posit two uses, investing in common issues versus a "day in court," that are better done at different scales (collectively, individually). The real problem is how to accommodate the "day in court" use, which implicates procedural due process law, and which I will discuss in my subsequent posts.

Posted by: Sergio Campos | Nov 15, 2010 11:00:49 PM

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