Baycol and Strategic Behavior

As I mentioned in my previous posts, I planned to blog this month on each of the four class action cases the Supreme Court decided this term:  (1) AT&T Mobility LLC v. Concepcion; (2) Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403; (3) Smith v. Bayer, 09-1205; (4) Wal-Mart Stores, Inc. v. Dukes, No. 10-277.    I have already discussed AT&T, Halliburton, and Wal-Mart (ad nauseum), so I want to conclude my blogging stint by discussing Smith v. Bayer, the Baycol case. 

Baycol turned out to be an easy, 9-0 decision (with one caveat), but it shows the collective action problems that can arise in the absence of mandatory collective procedures in the mass tort context.  In discussing Wal-Mart, I alluded to these collective action problems in discussing the problem of asymmetric stakes, so here I want to build on my discussion by outlining the legal issue and laying out the real, strategic problem the Justices missed.

Baycol concerned two competing class actions in West Virginia against the manufacturer of Baycol, Bayer, for personal injuries caused by the drug.   The first class action, filed in West Virginia state court, was removed by Bayer to federal court, where it was then promptly transferred to the district court for the district of Minnesota to be included in ongoing multidistrict litigation ("MDL") concerning Baycol.  The second class action was also filed in West Virginia state court, but the plaintiff included defendants that destroyed diversity among the parties, preventing Bayer from removing the case to federal court and transferring the action to the Minnesota MDL.  Both actions were filed prior to the Class Action Fairness Act of 2005, which, among other things, relaxed diversity requirements to permit defendants to remove class actions to federal court.  Now keep that in mind, because I will test you on it later.

The MDL court denied the first class action's motion for class certification.  Bayer then asked the MDL court to enjoin the second class action from being certified.  Under the Anti-Injunction Act ("AIA"), a federal court cannot enjoin a state court proceeding except in a few narrow circumstances, primarily out of comity, or respect, for state court proceedings.  But Bayer sought to invoke the "relitigation" exception to the AIA, which permits a court to enjoin a second action if the parties are precluded from bringing it according to a federal judgment.  Specifically, Bayer argued that the MDL court's rejection of the first class action precluded the second class action, since the issue of class certification had already been decided by the MDL court in the negative.  The MDL agreed, and enjoined the second class action.

Two problems arose for Bayer.  First, under the law of issue preclusion, the issue in the first action must be the same as the issue in the second action.  Here the first class action was denied under federal law, Rule 23, while the second class action sought certification under state law, which is similar (though not identical) to Rule 23.   Second, under the law of issue preclusion, the parties have to be the same in both actions or at least be in privity, a fancy word for cahoots.  Here there was no dispute that the parties to the second class action were not the same as, or in privity with, the parties to the first class action.  One exception to the "same parties" requirement is the class action itself, which permits a court to issue a judgment that binds nonparty members of the class, but here the court denied class certification, so there was no class action to speak of.

The Supremes used both grounds to reverse the MDL's injunction as violating the AIA.   The first ground, which all Justices joined, was easy enough.  West Virginia's class action law, which was very similar to Rule 23, was not the same.  The second ground, which Justice Thomas did NOT join, was interesting.  The Court reiterated the general presumption that a judgment cannot bind a nonparty, (except for class actions, of course), so the lack of sameness also was a reason to reverse.  To do otherwise would recognize a "de facto" class action where one was explicitly denied.  I am unsure about the validity of this second ground, which is why we shouldn't underestimate Justice Thomas's point of view.

So far so good.  But what I find interesting are the policy reasons that underlie the need for an injunction in these cases, and that lead to legislation such as CAFA (see what I did there?).  One primary concern, recognized by the Court, is opportunistic behavior.  Class attorneys can effectively shop around for a court to certify a class, changing the representatives to avoid issue preclusion.  Framed in this way, the inability to enjoin copycat class actions sounds like a advantage for the plaintiffs.  

But consider the defendant's perspective.  Suppose that a defendant can choose among different, competing class actions.  The class attorneys could compete with each other on price, telling the defendant "allow us to certify and we can ensure a low-cost, global settlement," with a kickback provided by generous attorneys fees.  Such "reverse auctions," which were first identified by John Coffee, require greater use of antisuit injunctions to enjoin competing class actions.  Indeed, Tobias Wolff has argued in favor of permitting the use of such injunctions to prevent "reverse auctions."   Thus, it is easy to see why the MDL court (which is also a great way to avoid "reverse auctions") would want to put the kibosh on the second class action in Baycol. 

But the same strategic behavior which causes "reverse auctions" is not limited to competing class actions.  A single plaintiff may want to defect from the class since he may be better off going alone.  But as I mentioned in my post on asymmetric stakes, and as I argue in more detail in my paper, allowing the plaintiffs to strategically defect reduces the economies of scale any plaintiff can use to invest in common issues.  Thus, it perpetuates the problem of asymmetric stakes - no one plaintiff or group of plaintiffs will have the same amount at stake as the defendant, and thus the defendant will have greater incentive to invest in the case.  Accordingly, just as an injunction is needed to prevent strategic behavior in the "reverse auction" context, individual plaintiffs must also be enjoined from defecting from a class action to prevent the problem of asymmetric stakes.  In other words, you need a mandatory class action - all the way down.

With that, I want to thank Prawfsblawg for allowing me to post this month, and thank you all for reading.  If you are interested in my thoughts on other mass tort cases or complex litigation generally, I will be expressing myself on the Mass Tort Litigation blog, and invite you all to check the blog out!