Discuss the impact of ‘class action’ in the society and economy.
My interest in ‘class action’ has grown long before the enrolment of undergraduate law. The issue was introduced to me under a laymen’s term in the movie Erin Brockovich. What it attracts me is the idea of bringing a legal action on behalf of a group of people against a large entrepreneurial company for the compensation of the loss and doing justice for so many people at once. There are some major differences between the ordinary claims and class action. Class action is unique of its special characteristics. Therefore, it becomes essential to examine the characteristics of class action and its operation due to the fact that such lawsuit is only widely available in America, and not under the jurisdiction of English law. Despite that there have been similar actions brought under this heading; the English law still remains largely unclear.
In this essay, I will first start to clarify the definition of class action. Second, I will describe the operation of class action and its characteristics. Third, I will start to analyze what are the effects of these characteristics in society and economy, and balancing the pros and cons. Finally, I hope to construe the conclusion that the disadvantaged impact of class action outweighs the benefits. In addition, I would also like to clarify that since most of the articles I have found are published by American scholars, this essay will be focusing on class actions brought under the United States jurisdiction.
In the United States, the class action is mainly brought under five headings: consumer rights, securities and antitrust, environmental, mass tort and civil rights. The first type of claim is brought due to the fraudulent business practices and other reasons result in individual economic losses (the amount is generally small on each individual). Second type of the claim is brought by small number of members and entitled to the most of the recovery; this area of law is often very specialized. Similarly, the claims brought under environmental issue, is a form of class action brought under consumer rights but the major difference is that the remedy is injunctive rather monetary compensation. Mass tort is another type of claim which is similar to claims under consumer rights. The major difference between the two is that mass tort claims are large claims by individuals for personal injuries. Despite that the claims are large enough for pursuing individual litigation; it is more effective when claims are brought jointly. The final type of claims is associated with i.e. prisoners’ rights. It is also aiming to seek injunctive rather than monetary relief.
Definition of class action
Before laying out the definition of class action, it is important to draw the attention on what law govern the operation of class action lawsuit in the United States. Rule 23 of the Federal Rules of Civil Procedure governs the class actions. It sets out four prerequisites of numerosity, commonality, typicality and adequacy of representation to apply to the class actions of both plaintiff and defendant. Rule 23 will be addressed in relation to its procedural rules in later part of this essay.
It is essential to lay down a definition for class action now. For class action, there are many synonyms. For example, multi-party action, group action and mass tort claims etc. Since they all refer to the same lawsuit, in this essay only ‘class action’ will be referred to and all the synonyms will be incorporated into. The basic definition of class action ‘is a legal procedure which enables the claims (or part of the claims) of a number of persons against the same defendant to be determined in the one suit’. (Mulheron, p. ) The fact that class action often comprises of a group of claimants which become impossible to have all the plaintiffs present themselves in front of the court, it then becomes the best alternative that the court will appoint the representatives to represent on behalf of the plaintiffs. The representative is self-nominated, as long as the representative must have the claims which are typical of the class and can adequately represent other members. The next issue is to explore requirements which are to be satisfied in order to become a member of the class action. In order to become one of the members, there must be existence of ‘common issue’. For example, a group of people who want to claim damages for the same product they have used and prove that it caused them injuries. But merely purchasing the same product doesn’t constitute common issue. The defendants will probably be the person who is the manufacturer of the product. The members will all be bound by the outcome of the case despite their opinions and none or relatively small contribution towards the litigation process.
Characteristics of class action
With the definition of the class action, we can now extend to the characteristics of the class action. As I have mentioned in the previous paragraph, part of the characteristics are underlined in the definition. Here I will address the characteristics of those which are not mentioned in the definition. In order to make the claims of class action persuaded smoothly, the representatives appointed by the court become essential and significant. The representatives are often comprised of selected class members and representative attorneys. The lawyer will be responsible for running of the lawsuit, making important legal decisions and provide the class members with majority of the information. It seems that the attorney in this kind of cases is expected to perform more jobs and carry out more duties and thus the attorneys charge a different fee, what is termed ‘contingency fee’. Instead of charging the class members with the normal hourly rate of attorney’s work, the attorney charges for a share in the monetary compensation from the defendant. Second, during the period of litigation, all the class members who are not representatives will be issued with the notice to update them with the progress. (Rule 23(b) (3)) Third, the outcome of the common issue of the case, despite members is favoured or not, will bind every member. Unless the members of the class choose to opt-out before the outcome of the litigation is set, they cannot bring separate action under the same issue.
Class Action Procedure
I need to outline the procedures of class actions prior to see the impacts of the action. The legal system in the United State is said to be complex where there are two systems, national court system and federal court system. Fortunately, most of the states have enacted Rule 23 for the procedures on class actions. I will first start to address the four prerequisites in Rule 23 (a) which mentioned previously. The Rule 23 states that the class must be ‘so numerous that joinder of all members is impracticable.’ Rule 23(1)(a) The minimum number of class members is 35. Within the class, there must be ‘questions of laws or fact common to the class’. The typicality is another requirement that if the claims or defences are ‘typical of the claims or defences of the class’, the class members can may sue or be sued as representatives. The final requirement is that the representatives ‘will fairly and adequately protect the interests of the class’.
Once the prerequisites in 23(a) are met, we will then need to move on for the action to be fit into the three requirements in 23(b). In 23(b) (1) states that questions which are common to the class must predominate over any questions that affect only individual level. This also assures the class will be ‘sufficiently cohesive to warrant adjudication by representation’. (Amchem Products, Inc. v. Winsor, 117 S. Ct. 2231 (1997) The issue of predominance is judged on how trial time and focus will be spent. Second, class treatment has to be ‘superior to other available methods for fair and efficient adjudication of the controversy’. In order to decide the superiority, the court would take various factors into account. The most important factor is to examine ‘the difficulties likely to be encountered in the management of class action’ or ‘manageability’. Other factors stated in Rule 23(b) (3) such as controlling individual class member actions, the extent and nature of any individual lawsuits that are already pending, the extent and nature of any individual lawsuits that are already pending, and the desirability of concentrating all claims in the chosen court.
Where all the requirements are fulfilled, Rule 23 (c) directs the court to determine ‘as soon as practicable’ after the case is filed and be tried as a class action. This is the class certification and it is consider as one of the most important stages of the case. In order for the judge to decide the issue of the certification, the lawyers of both sides will have to provide the judge with the intensive information in order to establish that such as commonality issue exists, and the requirements mentioned before are met. In the case where the representative is chosen, there is a rise of fiduciary or quasi-fiduciary obligation between representative and other members. It is a special relationship of trust and confidence where person relies on the fiduciary to protect his interests. Representative will have to produce notices (the plaintiff have to pay for the cost of the notice) to members once the case is certified and inform them with the right to opt-out. Another thing to be mentioned in relation to notice, it is fundamental to the class action for the notification of essential procedure. Thus, Rule 23(c) (2) requires the class receive ‘the best notice practicable under the circumstances’. In the case where individual notices become infeasible, the practical alternative would be through newspaper or other form of mass media communication routes.
We also have to mention the extra protection layer inserted by Rule 23 (e). Prior to the approval of the court and communication of the notice to the members, the class action can neither be dismissed nor settled. The preliminary settlement can be communicated by both parties, however, without the ‘fairness hearing’ of the court, the settlement cannot be approved. All the class members will have the right to attend the hearing and their opinions in relation to the settlement will be heard.
In the last part of the essay, I have briefly outlined the definition, characteristics and the procedures in class action litigation. In this part of the essay I will start to explore what are the impacts of specialities of class actions, and to further evaluate the advantages and disadvantages of these impacts in the society and economy as a whole. In order to construe the arguments in this essay, I have done a lot of researches in the areas of legal studies and society, economics etc. I have come up with various good articles, however, part of them contend very complicated econometrics and mathematical formula and theories. Therefore, I will try to keep the use of these complicated formulas to a minimum level. I will first start with the advantages of the class action and in later part of the essay I will focus on the criticisms made in relation to these advantages.
Advantages of class action
Class action is “the ‘most powerful legal tool’ available in the United States”. (J. Alexander) The class action brought a different aspect in the legal system which is predominated by individual litigations. One of the advantages of the class action can be illustrated by the example, where a manufacturer of a company produces faulty goods which cause small damage to each individual. Despite the small scale on the individual level, the aggregate monetary losses would be great. If the action is not brought against the manufacturer, the manufacturer will thus be profited in large scale. “The enterprise will have an incentive to commit the harm, and the result will be an inefficient utilization of scarce resources.” (A. Rosenfield, an empirical test of class-action settlement) Therefore, class action allows the claims can be brought jointly in order to overcome the economic obstacle to support the cost of litigation where each individual claim is small. The action also aggregates the individuals who are economically less powerful since the litigation of the commercial case is often associated with high price which is affordable to the corporate companies but not the individuals. The class action can serve the goal to obtain compensation for the individuals and law enforcement. Class actions also assist the legal system to work more efficiently by avoiding common issue to be viewed repeatedly in individual cases. The action is said to create a system of incentives in order to avoid the inefficient distribution of economic resources. (A. Rosenfield)
The second advantage is that in order to maximise the profit that the plaintiff representative lawyer can obtain, the lawyer will try their best to work the most efficiently. For example, to minimize the duration of the litigation, if the litigation starts to drag, the attorney would have to be paid for higher price for the longer aggregated working hours. The representative lawyer will want to work with the maximum efficiency for the greatest outcome. The lawyer would also want the action to be successful so that he can be guaranteed with the share of the monetary recovery. This creates an incentive for the lawyer to work hard for the class members or for more class members. It also creates incentives for the lawyers for private law enforcement actions.
The third advantage is related to the effects when the action is brought. When a class action is brought against the defendant, generally would attract the attention of the defendant company to look into the issue which is brought against them. For example, to research on the quality of the product, or other improvements can be made in related. The self-regulation in the industry is normally not sufficient to monitor the products. To a greater extent, the action may promote the level of self-regulation to a higher standard. This also applies to the government agencies, i.e. consumer protection agency, since they are generally lack of resources to follow up such issue for the consumers to seek for their damages. The action can also attract the attention of these agencies in the future for the supervision of the company and related issues in the future. The defendant company may also prevent to have the similar damages happen in the future to ensure the health and safety of their users and benefit for more people in the society. Furthermore, the government incorporate further legislation to regulate the industry and protect the rights of the users in the future. For the products which cannot be improved or it has already caused serious harm, this is also a good opportunity to attract the attention of the mass media. The media can pass the related information down to the individual in the society, i.e. to stop using the products, and assert the pressure on the defendant company for solution or compensation. The government may then in relation to the victims in the case to allocate them with resources to improve their conditions.
The final advantage is that the class action may increase the competitiveness of industrial market. This is due to the fact that the consumers are more aware of the products they use, the related corporate companies would have to work harder in order to avoid the damages happen again in the future, and they would have to maximise their profit in order to compensate for the monetary compensation that is paid out for the class action members. For other companies which the claim is not brought against but related, they would also be aware of the issue and try to avoid the same situation happen in the future. The market would be become more competitive because every company would try to produce the best products out of the manufacturing process, or the better quality products. The consumers may be aware of the changes and purchase better quality products. In relation to the class action claims which seek for the enforcement in law. This will provide higher protection for the users when using certain product and better quality in life as well. In addition, the true costs of the products are paid by the corporate companies instead of passing on to the consumers. The resources in the society are better distributed and used. The economy also operates more efficiently as a whole.
I have briefly outlined the advantages of class action lawsuits, in the next part of the essay; I will start to analyze these advantages critically.
Disadvantages of class action
Due to the fact that class actions are one claim brought on behalf of collective cases based on commonality, it is difficult and expensive to research and litigate all the cases. As mentioned earlier in this essay, Rule 23 sets out a list of procedures to be complied with in order for a class action to be certified, this together with the court approved settlement draws a great additional expenditures on the costs of the litigation. The plaintiff lawyer will have to gather all the information of each individual case and try to find out the most powerful common issue will the court will approve and be certified for the action. In addition to support the class action to be successful, various pieces of evidence have also to be gathered. The process of gathering evidence may be very costly and complicated since the relevant evidence may exist over a long period of time and larger geographical area. This often involves getting the information from the defendant companies and many obstacles need to be overcome. After the gathering of the evidence has come to a completing end, the plaintiff lawyer needs to prove the general policies through the evidence gathered, rather than question a single incidence which caused the action. For lawyers of both parties, they are usually specialised for class actions and are highly aware of the reward once success. Therefore, they often put into more time and effort on filing works and intensive research which result in higher costs of litigation than individual claims. This leads us to argue the second advantages of class actions. I have mentioned previously that in order to gain the maximum outcome for plaintiff lawyer’s work, they will try to work more efficiently. However, the reality is that since the filing and research procedures are long, the lawyer’s fee still based on the hourly basis. (J. Alexander, p.14)
The US courts follow the adversary system where parties and their lawyers have large control as to how the proceedings are to be brought against and to what extent. For example, how much the researches should be done, what issues to be brought against and how many witnesses to be called for etc. In contrast, the judge is playing a passive role when viewing the case. Therefore, the trial judges in the class actions are expected to take up a more aggressive role to supervise the enforcement and settlements to be done actively. Even though generally the judges in class actions have a more active role, the experienced judges in related field feel that it is appropriate to give the judges a more active role under various reasons. The judges in class actions have to pay more amount of time in viewing the cases and administrative procedures required, i.e. the content and form of notices, set the schedules for the evidence to be heard and processing the claims etc.
Because the long procedural time required for the class action to be heard in the court and have a judgement, the majority of the case is settled prior to the actual trial in the court. Therefore, to discuss the effect of the settlement becomes essential here. For class settlements one type is to set out the total class recovery and it is up to the plaintiff party to divide between the members depending on the number of claims filed. The other type of settlement will specify out the amount that each member will receive. In addition to these types of general classification, the recovery can also be divided according to the loss suffered by the individuals and the remaining fund will result back to the defendant. This case often happens where only small number of claims is filed.
In relation to the settlements been made, forms of recovery are varied. The most common form is cash recovery. In the consumer class actions, the members may want to stop the company from its certain business practices or adopt extra safeguard protection for consumers. By doing this, the company is actually paying for the true costs of the products; however, it might not be the case. Coupon settlements have appeared more often in the consumer related cases. The members will get the coupons for free purchase in company’s products or the discount in future purchases. This is because the defendant company like the idea that the consumers will have to pay for the extra services or safeguards employed by the company. This not only boosts the sale of the company, in a way it compensate part of the loss through the litigation of class action, or even turn into actual profits for the defendant. In addition, members who brought the action against the company may be devastated for the loss caused by the company’s product, they may not regain their confidence again in the products and thus do not have actual benefits incurred on them and the company still benefits indirectly from the faulty products. We then need to question what about the attorney’s fee in the case of coupon settlements? In this type of settlement, the attorney’s fee will be set for cash value separate to the coupons received by the class members in the settlement agreement and results in higher contingency fee. Because of these two major characteristics of coupon settlements have attracted huge concerns and criticisms on the possibility of collusion and abuse between the plaintiff lawyer and the defendant.
One of the advantages of class action is to bring the justice to the class members and the defendant pays for the damages being caused. However, this may not be the case. The class members have to file their claims prior the certification and then be bound by the judgement or settlements. It is only a small number of members file their claims, the vast majority remained not to be filed. It is thus impossible for the defendant to pay their actual price for the fault it has caused. Furthermore, the justice cannot be done for those who do not have their claims filed. Even where the case is successful, the delivery of the settlement can be dragging off the time for the members on their actual receipts of the recovery. The administrative cost of the delivery is also another additional cost for the class members. This leads us to discuss about the conflict of interests. Furthermore, the research suggests that the court do decide class action cases with the same factor under individual cases. As suggested in The Court and Market: Economic Analysis of contingent fees, the analysis supports the judicial efficiency hypothesis that when the courts set the attorney fees in class action case, they respond the same economic factor reflected in a well-informed private market.
The economic interests of both parties are different, and the difference even exists between the class members and the plaintiff attorney. We will first look at the major conflict of interest between the class members and plaintiff attorney. For the class members, their major goal is to maximise net recovery from the settlement or judgement. In order to maximise the net interest, all other additional costs will need to be reduced. For example to minimize administrative costs, litigation expenses, maximise the recovery from the defendant and most of all, to minimize the attorney’s fee. Often, when financing the claim, the attorney’s fee comes out from the class recovery. In contrast, the plaintiff lawyer’s main economic interest is to maximise their fee, the effective hourly fee. In other words, the lawyer wishes to obtain the fee according to the number of hours worked on the case as soon as possible.
“Economic theory suggest that, in the private market, a plaintiff with a bigger case will be able to attract lawyers with a smaller contingent percentage than will one with an otherwise identical small claim and, similarly, that the more quickly the lawsuit can be concluded, the smaller the contingent fee percentage that will be needed to attract attorney’s interest. “ (The courts and market, economic analysis)
Because once the lag between the receipts of the fee gets longer, the true value of the fee is said to be decreased. Therefore, settlement becomes the most effective way for the plaintiff attorney to maximise the interest.
In relation to the opponent side of the defendant attorney, the major interest for them is to settle the case instead of going through trail process. Once the case decides to go under trail, the workload for the defendant lawyer will increase dramatically. There is also a possibility that the defendant lawyer may suffer loss of no payment once the case is lost. The work of the defendant lawyer cannot be paid for and not even other expenses related to the case. Even though if the case is won by the defendant lawyer, higher fee can be received, there is still higher risk that the lawyer has to bear. The increase in the fee is not proportionate to the increased amount of the work and the risk to bear. Therefore, settlement becomes the best solution for the defendant lawyer. One thing to be mention is that, the amount of recovery varies according to the willingness of the plaintiff to settle the case or not. If the plaintiff has a strong preference for the settlement, the defendant lawyer will offer a smaller recovery. This may also reduce the public value class action and the class can only rely on fiduciary with the lawyer to protect their interests.
Class actions usually attract the public attention on the issue, and of course, the mass media. Nowadays, mass media possess greater influential power than ever before to influence people’s judgement and thinking. There have been concerns that the judgment of the case may be influenced by the preferred position or view presented by the mass media, what is sometimes termed as social justice.
In this part of the essay, I have argued against the advantages which are said to be associated with class actions with critical analysis from the individuals to the greater extent of the public. I have also tried to make the comparison of the conflict of interests between different parties.
We do not discount the great advantages which are brought by the class actions however, because it is effective and powerful, we have to be careful about how it is used. One of the major reasons to disqualify class action is the worry of floodgate argument. There are occasions where the certain type of damage is not caused through short period of time but over a period of accumulation. It is hard to separate those who are truly required for the compensation of the loss from those who simply want to have a share in the compensation. It is hoped that through class action the social justice of the society can be done by the judicial system for the economically vulnerable individuals against the economically powerful corporate companies. However, the situation may not be changed for much as the economically powerful ones still do benefit from their positions. Despite that only part of the justice is said to be done through the settlement and monetary recovery, I believe that most of the cases are still under-presented. In order to achieve the social justice in the society, first is to extend the enforcement power of the judge or court to supervise the defendant company to actually put the action into practice. The conflict of interests should also be minimized by adopting new and improved legislation. As suggested in Amchem v. Winsor, if there is a conflict of interest within the class itself, the court should allow the division into sub-classes. We also should be aware of the fact that most of the class members are unable to speak for themselves in the court and thus they should receive the best help from the judicial system and this can be done via the circulation of notices. Therefore, the costs of the notices should be balanced by the court between the plaintiff and defendant, not just plaintiff who is solely responsible for it. In addition, there should be more related remedies available for class actions in order to serve the actual purpose of the litigation.
It is hard at the beginning to fit class action into the individually based legal system. The difficulties and the extra administrative work place several obstacles for the claim to be successful and even to be brought up in the first place. However, we do see the benefits of when the claim is successful against the corporate company and draws the attention of the public for the issue. By looking at the history of class action development in the US
, it is not surprising to see that many changes have been adapted in order for the class action claim can be better viewed. For English legal system, there is no clearly set of procedural rules in governing such cases and no adaptation for such legal action. In order for the future class action works in the English system, we have to carefully examine the characteristics of the class action in different jurisdictions and evaluate whether they are fit for the purpose or not. We also have to take into the account of the social difference between the US and England and Wales. Legal system is construed and shaped by the values and opinions of the society not just rules set down regardless.
- Google Scholar search: Class action
- – Class action Dilemmas: Pursuing Public Goals for Private Gain by Deborah R. Hensler
- -Class-action privileges and contingent legal fees: Investor and lawyer incentives to litigate and the effect on audit quality by DeJong Douglas V (Download with restriction for ScienceDIrect Subscribers only)
- – The Courts and the Market: An Economic Analysis of Contigent Fees in Class-Action Litigation by William J. Lynk, The Journal of Legal Studies, Vol.19, No.1. (Jan 1990), pp. 247-260
- – The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform by Jonathan R. Macey; Geoffrey P. Miller, They University of Chicago Law Review, Vol. 58, No.1. (winter, 1991), pp. 1-118
- – Journal of empirical legal studies, vol. 1, issue 1 p.27-78, Mar 2004
- Attorney fees in class action settlement (Download with restriction) by Theodore Eisenberg, Geoffrey P. Miller (2004 ) USD 29
- – Incentives for class action lawyers by Alon Klement and Zvika Neeman, The Journal of Law, Economic and Organization vol 20, No.1
- – Estimating economic damages in class action securities fraud litigation by Edward A. Dyl (Restricted access for only Questia subscription), Journal of Forensic Economics, Vol. 12, 1999
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