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Sunday, June 26, 2011

Asymmetric Stakes and Wal-Mart

I want to continue blogging about Wal-Mart, and explain why I disagree with the Court's interpretation of "commonality" under Rule 23(b)(2).  Although there has been significant criticism of this part of the Court's opinion, it is actually consistent with a recent trend by courts to look at the merits before awarding class certification.  In essence, by requiring a merits determination for purposes of satisfying "commonality," the Supreme Court is requiring a review of the merits of all proposed class actions, not just class actions seeking certification under Rule 23(b)(3).

So what's the big deal?  The problem with requiring a merits determination before granting class certification is that the plaintiffs need class certification in order to develop the merits.  Thus, the plaintiffs need class certification before a merits determination, not after.  As I argue in my recent paper Mass Torts and Due Process, this is because cases like Wal-Mart suffer from a problem of asymmetric stakes.

 Take the classic example for why class actions are needed - small claims litigation.  In small claims litigation, the potential recovery is too small to give a plaintiff an incentive to bring suit.  After all, "only a lunatic or a fanatic sues for $30."  But why is that a problem?  There are many examples of people who may have technical causes of action who chose not to sue.   Would you sue someone for battery if they gave you a wedgie (well, maybe for a four-story atomic wedgie)?    

The real problem in small claims litigation is that the stakes are asymmetric.  The defendant is subjected to the whole, collective liability at issue, but the recovery (the flip side of liability) is divided up among the plaintiffs.   So while the plaintiffs each decide not to bring suit, the defendant can avoid liability altogether.  

As I argue in my paper, the problem of asymmetric stakes does not go away simply because the plaintiffs may have enough incentive to bring suit, because there are other investments that the plaintiffs can make in the litigation, like hiring an attorney or, as in Wal-Mart, hiring an expert on social framework methods.   But if the problem of asymmetric stakes persists, then the defendant will always have greater incentive to invest in the litigation than the plaintiffs.  The defendant simply has more at stake.   This is doubly true given the greater financing options that defendants have in litigation.

The class action solves the problem because, as I argue in my paper, it is functionally a trust device.  It assigns control of the claims to a third party, class counsel, for the benefit of the plaintiffs, plus a percentage cut of the recovery, so that class counsel will invest in the litigation as if she owned the total amount at stake.  In this way the class action equalizes the stakes, giving the plaintiffs (via class counsel) and the defendant equal incentives to invest in the case.  Without the class action, collective action problems would prevent the plaintiffs from ever having the same stakes as the defendant.  It may be too expensive to join together and bring suit, or some plaintiffs may defect to bring suit individually.

Because the class action equalizes the stakes to prevent disparities in litigation investment, having the plaintiffs effectively prove their claims before class certification is a bad idea.  It would be like having the plaintiffs put out a fire before giving them a fire extinguisher.  But the impulse to require a merits determination before class certification is strong, as evidenced by the Fifth Circuit's position (later reversed) in Halliburton and the Court's decision in Wal-Mart.  Nevertheless, that impulse has to be resisted as much as possible if we care about the objectives of Title VII and similar liability rules.  

Posted by Sergio Campos on June 26, 2011 at 05:22 PM | Permalink

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To be honest, this argument sounds a little spurious. I agree that there is asymmetry between the potential plaintiffs' and the defendant's situations in these cases, but I'm not at all clear that this - by itself - justifies the class action approach. It's not the goal of civil litigation to achieve some abstract kind of fairness between groups, nor is it to punish the defendant for misdeeds.

If I feel as though I've been cheated of $30 by a large company, I would, as you say, probably decide not to sue. But why should that consideration change just because there are 10,000 others out there in the same position? If the company has committed fraud or theft it will be (or should be) puninished using the criminal law. My main options are to demand my money back, or to accept the loss and vow never to do business with that company again. From the company's perspective, even if it sincerely believes that it's in the right, it may want to pay my demand rather than lose future business far in excess of $30 (note that the asymmetry is now working in my favor, because the $30 is of even less significance to the company than it is to me). Given the amount involved, I'm unclear as to why you would consider this an unsatisfactory outcome and why anyone (apart from class action lawyers) would be any better off if a class action approach was adopted.

Posted by: Andrew | Jun 27, 2011 12:57:05 PM

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