Aggregate Litigation Generally

     Class Actions in Comparative Context

     Class actions are another exceptional aspect of American litigation. They allow numerous plaintiffs – sometimes as many as millions – to join together into a single action, represented by a plaintiff who asserts the rights of the entire class (defendant classes are also possible, but less common). The significance of class actions goes far beyond merely aggregating many claims into one lawsuit. They provide a vehicle for challenging governmental and private policy that violate the rights of a wide class of people. They also extend the regulatory reach of private litigation – and remember, that one theme of this course has been the American system of after-the-fact regulation through litigation – by collecting many small claims into one lawsuit that is so sizable it cannot be ignored.

     While the US remains an outlier in terms of aggregate litigation, other international jurisdictions increasingly have some form of procedures for aggregate claims. See generally, Deborah R. Hensler, The Future of Mass Litigation: Global Class Actions and Third-Party Litigation Funding, 79 Geo. Wash. L. Rev.  306 (2011) (Listing countries with some form of group or class litigation). See also  Ellen C. Campbell & Shanshan Zhao, The Mountains Are High and the Courts Are Far Away, Inaccessibility of Remedy for Small-Claim Chinese Plaintiffs in a Globalizing World, 30 N.Y. Int'l L. Rev. 1 (2017) (Discussing differences in aggregate process in US and China). Few, if any, other jurisdictions allow the scope of class actions that the US does. Some require governmental approval or involvement. Others limit the causes of actions that might be addressed on a class basis, or only allow certain kinds of remedies. Others require class members to affirmatively opt in, which greatly limits the practical utility of collective action, while others put limits on how class action attorneys can be paid. See generally, 2 Waller, Antitrust & American Bus. Abroad § 20:7 (4th ed.)

     Even within the US, class actions are controversial. Because the plaintiffs are not personally involved in the lawsuit, the attorneys have much more de facto control over the course of the litigation. This creates the risk of agency issues, where the attorneys put their interest ahead of the members of the class. Aside from that, plaintiffs might resent having no real control over litigation that intimately affects their lives. There is also the issue of whether the representative plaintiff really can represent the members of the class. In some cases, the named representative may not be a proper party to take on that responsibility. There also is the issue of whether the claims asserted in any given suit are of a type that can be efficiently and properly resolved through class litigation. The court must deal with whether the common issues really do predominate. Because absent parties can be bound by the result of the class litigation, the court also must deal with making sure those affected by the lawsuit have been given notice, and in cases where opting out of the result as possible, have been given a chance to opt out of the litigation and bring their own separate lawsuit.

     Class action procedures attempt to address some of the special problems that arise in class litigation. The court must test whether the representative plaintiff is well-suited to represent the class, and also determine whether the claims are such that class proceedings are appropriate. At the time of resolution of the lawsuit, the court must approve any settlement, in contrast to the normal practice of letting the parties reach any settlement that is mutually agreeable, and also must approve attorneys’ fees, again in contrast to the normal practice of letting the parties and the attorneys work it out for themselves.

     In class actions the certification of the class is often the determinative moment in the litigation. Because of this, a right to appeal exist after the determination of whether a class can be certified. In most cases, class action lawsuits do not go to trial, but settle if the class certification has been granted.

     Prerequisites

     The four prerequisites for a Rule 23 class action set forth in Rule 23 (a). The first requirement is numerosity. The class action only is proper when there are so many parties that normal joinder is impractical. There is no set number, and this depends on context. Second comes the requirement of commonality. This requires more than common issues, and seems to require that resolution of the issue for the representative will lead to the resolution for the other class members.

     The next two requirements deal with the class representative. The class representatives' claim must be typical. This means that the injury suffered in the relief sought by the class representative conforms with that of the class as a whole. A plaintiff who has not suffered financial injury, for example cannot represent a class seeking compensation for financial injury. Next comes the requirement of adequacy. The class representative must be able to fairly and adequately represent the class as a whole. This requirement is extended to the lawyers through rule 23(g), as the lawyer in practice drives the class litigation. Note that while lawyers will be retained by clients, the class counsel that drives the litigation will be appointed by the court. 

     These requirements seek to establish that the litigation is brought not on the half of some vague collective, but on the half of a class with identifiable common claims and remedies. It is essential that the court be able to order relief that addresses the claims of all, and this can only happen with a coherent class.

     In the opinion that follows, note closely how the court applies these prerequisites to the facts.

     Type of Class Actions

     There are three types of class actions set forth in Rule 23 (b). The first, set forth in Rule 23 (b)(1), looks to “inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for the party opposing the class." These kinds of class actions rarely arise and will not be part of our abbreviated examination of class actions. The second, set forth in Rule 23 (b)(2), looks to situations where resolution of an issue and the grant of relief would effectively determine the options of nonparties. You might wonder in what kind of situation this would occur. Consider a situation where a litigant is suing to require that a school district conform with the Constitution with regard to racial discrimination or seeking to have a state prison system alter inhumane practices to, again, avoid violating the Constitution. The remedy ordered by the court will have an impact on all students in the case of the school setting, and all prisoners in the case of the prison setting. Requiring these actions to be brought as class actions provides a level of procedural protection for those not directly involved in the lawsuit. This kind of litigation and class action is been important in the United States in areas such as civil rights and environmental litigation. The third type of class action, set forth in Rule 23 (b)(3), mainly arises when many small claims are being aggregated into one action, and requires that “questions of law or fact common to class members predominate over any questions affecting only individual members.” This is the kind of class action that was involved in the Chinese drywall cases. This type of class action has elements not found in the other two kinds, including a right of individual class members to opt out of the class action after receiving notice. We will discuss this a bit more below, and also read a case that involves this kind of class action.

     Certification and Process

     In most class actions, the most important decision the court makes is whether to certify the class at all. Class certification has significant importance for the name parties, the absent class members, the defendant(s), and the court itself. In many cases, the class certification leads to settlement of the litigation, as the risk of taking a certified class action to trial is substantial given the potential size of the damages.

     When an attorney files a lawsuit in class action form, the not-yet certified class is referred to as a 'putative' class. Even though the class is not yet certified, the court may nonetheless designate lead counsel if - as is often the case - there are competing candidates for the role, each representing a different individual plaintiff, and allow discovery to proceed on both jurisdictional and merits issues. The putative class only becomes binding on absent class members when it is certified and notice is given.

     To certify a class, the court first must determine that the suit meets the requirements as set out in Rule 23(a)(1) in order to maintain a class action. It also must determine which of the three categories of class action lawsuit the suit fits into. The court must also look to the adequacy of the class representative and counsel to make sure that they can carry forward the litigation appropriately. One thing the certification decision is not supposed to look to is whether or not the merits of the case are strong – that is, whether the plaintiffs are likely to prevail at trial.

     In some cases the court may certify what is called a partial class action for example, the court may grant class status as to a determination of liability, but leave assessment of damages to individual actions.

     The trial court has broad discretion with regard to whether to certify the class, and appeals are addressed on an abuse of discretion standard. Notwithstanding, any order with regard to class certification is, in an exception to the rule of finality, appealable after the certification decision is made. This exception recognizes the significance of the certification decision.

     If the class is certified, the members of the class must be given notice of the class certification. In a (b)(3) class action, they also are given a chance in response to the notice to “opt out” of the litigation. In some cases, if the opt outs are substantial, a new class of those who opted out might arise. The requirements of notice are complex, but in general must conform with the principles of Constitutional notice we studied in Q1.

     Rule 23(b)(3) Class Actions

     There are special aspects to (b)(3) class actions. For example, when notice is given, putative members of the class must be allowed a chance to “opt out” so that they can pursue their claims in another way – by themselves or in another class action.  Because this kind of class action is more fact-dependent, the court must also find that a class action is the best way to proceed and that the common issues 'predominate.’ To determine this, the court must also make additional inquiries, above and beyond those requires by (a)(1). The court must take into account the interest of class members in controlling the litigation themselves, the existence and nature of any other litigation addressing the same matters, the desirability of concentrating the claims in one forum, and the difficulties in managing a class action. Because this kind of class action is more fact-dependent, the court must also find that the common issues ‘predominate.’

     Subject Matter Jurisdiction

     For purposes of subject matter jurisdiction, only the domiciles of the named plaintiffs are taken into account. See Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 (1921). For example, if there is a nationwide class, and the representative plaintiffs are from New York and New Jersey, but the other 48 states are each represented by members in the class, for diversity purposes only New York and New Jersey matter.

     With regard to amount in controversy, section 1367 applies. So long as  one plaintiff meets the amount in controversy requirement, any additional plaintiffs can be joined under supplemental jurisdiction. See Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546 (2005)

     The Class Action Fairness Act provides a different way to establish subject matter jurisdiction. This statute provides federal subject matter jurisdiction for kinds of class actions a previously were relegated to state courts. If the aggregate damages of the class exceed $5 million, and if there is minimal diversity among the parties, subject matter jurisdiction exists under CAFA.

     Settlement and Attorneys’ Fees

     In an exception to normal practice, the court must approve any settlement or voluntary dismissal. This is to protect the members of the class against self-serving actions by the class counsel. In the case of settlement, the trend has been for courts to give increasingly searching inquiry into whether the class members receive any real benefit from the class settlement.

     The court also must approve any award of attorneys’ fees, which typically are awarded from either the defendant or the damages obtained. Again, this is to protect the class members against self-dealing by the attorneys. That said, the fees awarded often are substantial – for example, the attorneys who obtained a $250 million settlement in securities litigation against Alibaba and related defendants were awarded $62.5 million in fees. This fee award reflected both the work done and the result achieved for the class.

     Other Aggregate Litigation and Responses

     There are other forms of aggregrate litigation besides Class Actions and multidistrict proceedings. See generally, Alexandra D. Lahav, Essay, The Continuum of Aggregation, 53 Ga. L. Rev. 1393 (2019). For example, large bankruptcy proceedings often include an aggregate aspect as a large body of creditors contend for their share of a limited pool of assets. In a similar way, common fund litigation or disbursement can present similar aggregation issues as a pool of claimants seeks recovery.

     The general problem of Rule 23(b)(3) litigation - many small claimants whose claims cannot be litigated individually economically - is increasingly being addressed outside the formal judicial system. Since the rise of the internet, internet marketplaces have had to provide dispute resolution processes for small claims. Some of these have evolved into sophisticated online dispute resolution systems capable of handling many small claims at low cost. One such company, Modria, was spun off from eBay, and markets its platform to users including both corporations and governmental units. Other platforms have spun off or are being used by other large e-commerce vendors. More generally, there is a push to empower online dispute resolution as a way to drive down costs and complexity so that litigants can handle their own disputes directly. See, e.g., https://remotecourts.org/.  For a listing of companies involved in the online dispute resolution space see: http://techindex.law.stanford.edu/companies?category=6 

     Derivative Actions. Derivative actions, while not necessarily class actions, involve some commonalities with class actions. As you will have studied in business associations, a derivative action allows shareholders to sue the management of a corporation for breaches of fiduciary duties, with the proceeds to be paid to the corporation. Rule 23.1 sets forth special procedures for derivative actions, including that any complaint be verified by the party bringing the claim. Because the agency issues inherent in derivative actions are similar to those of class actions, Rule 23.1 also requires that any settlement, voluntary dismissal, or compromise received the approval of the court, and that notice be given to the shareholders who are members of the corporate entity.

     PSLRA Class Actions. You may recall that in the pleading chapter we briefly touched on the very enhanced pleading standards the Private Securities Litigation Reform Act of 1995 (“PSLRA”) imposes on plaintiffs in securities litigation. While it is beyond the scope of what we will study hear, the PSLRA also has provision that bear on class actions. In particular, the PSLRA creates a rebuttable presumption that the ‘lead plaintiff’ will be the party with the greatest economic stake in the outcome, and that their attorney will be the lead counsel. This has the intended effect of shifting lead control over the litigation from the first to file to the largest investor, generally a large institutional investor.

     Multidistrict Litigation. Multidistrict litigation panels fall somewhere between class actions and individual actions. In many mass torts, of which the Chinese drywall litigation would be an example, hundreds or thousands of lawsuits may be filed on behalf of the plaintiffs. Many of these lawsuits will involve common issues of law and fact, such as personal jurisdiction, the standard of law to be applied to the claim, and so on. To avoid repetition and to achieve efficiency and speed in the handling of these claims, a federal statute allows these claims to be joined together in a pretrial proceeding before one judge. This judge will determine the pretrial issues and supervise discovery, but will then return the lawsuits to the original forum for any trial. A key difference between multidistrict litigation and class actions is that each plaintiff remains in control of its claim. The multidistrict claims need not be joined into one action, either by Rule 20 or Rule 23, but instead can proceed as parallel but independent actions. Nonetheless, consolidating the cases in one location for pretrial matters can achieve substantial efficiencies with regard to both motion practice and discovery, and can also on occasion provide a more convenient platform for settlements.

     Once somewhat rare, today more than half of all federal cases are included in multidistrict litigation. As was true in the Chinese Drywall Litigation, a multidistrict proceeding can include both individual and class actions. We will not go into depth on the ins and outs of multidistrict practice, but you should be aware that this process has gained increasing prominence.