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CAFA Law Blog Information, cases and insights regarding the Class Action Fairness Act of 2005

Guest Post: CAFA, You Are A Bad, Bad Boy!

Posted in Legal Publications and Articles

Class, we are delighted to bring you another guest post.  Professor Elizabeth Chamblee Burch of the Cumberland School of Law at Samford University in Birmingham, Alabama is here to enlighten you on CAFA’s impact on litigation as a public good.  I know many of you are wondering if there is anything good in CAFA at all.  Well, Professor Burch posits the position that the effects of CAFA are bad.

Please give Professor Burch your attention.  Excuse me, I see we have a question.  Yes, Mr. Seymour?  I know that football season is starting, but you cannot ask her if she is an Alabama or an Auburn fan.  However, before agreeing to allow her to appear as one of our guest columnists, we did verify that she is not a supporter of Nick Saban’s view on the Class Action Fairness Act. Mr. Wilbourn, you can put your hand down.  I am not going to even call on you.

Now, please give your attention to Professor Burch.

My thanks to the editors of CAFA law blog for the chance to guest blog! I’ve recently written an article titled CAFA’s Impact on Litigation as a Public Good – this is the Reader’s Digest version, but the full article is available for download here: http://ssrn.com/abstract=1005021. 

In it, I contend that class actions get all the attention; indeed, not even other aggregation devices incite the debates over ideology and politics that Rule 23 has lately. Perhaps this fervor and rhetoric emanates from the class action’s principal function: enabling private mechanisms for ex post remedies where ex ante regulation fails. Implicit in these debates is the abstract idea that rights do not protect themselves. Rather, the government either acts to regulate a field or, as has increasingly become the case, permits private actors to fill the void. “Regulation” in the United States is unique in its low entry market costs and stringent back-end regulation through litigation. Litigation-heavy ex post regulation across-the-board makes government funding difficult. A lack of governmental resources, political pressures, and federal information gaps about local occurrences on the one hand plus public vigilance and entrepreneurial attorneys on the other makes decentralized enforcement through private litigation a viable alternative to costly monitoring of ex ante regulation. Thus enters the class action.

In truth, the class action does more than aggregate; it augments government policing and generates external societal benefits. These societal benefits – “externalities” – are the spillover effects from facilitating small claims litigation. In federalizing class actions through the Class Action Fairness Act (CAFA), Congress, in some ways, impeded class action practice, thereby negating its positive externalities and inhibiting backdoor regulation. My full article, CAFA’s Impact on Litigation as a Public Good, critically considers those effects on the common good. It also develops an implicit but overlooked theme within the CAFA debate – the notion that litigation itself is a public good.

A “public good” is typically defined as one that the government must provide because there are insufficient market incentives for private participants to do so. Embedded in this concept is the collective action problem: there is no market incentive to provide a good that benefits everyone equally. This disincentive has been labeled the problem of “jointness of supply and impossibility of exclusion.” Optimally deterring wrongdoing through litigation is one example of a public good. Deterrence benefits the public in general and excludes no one. And there is also a collective action problem: would be litigants with insubstantial damages may do nothing in hopes of free riding on a similar previous action’s preclusive effects or benefiting from an across-the-board policy change.

The class action overcomes this collective action conundrum by pooling claims and allowing plaintiffs’ attorneys to collect a fee based on the entire recovery. The class action thus produces a public good: litigation. Class litigation is both a public good provider – by deterring wrongdoing – and a good itself. In fact, pursuing class litigation produces a laundry list of positive externalities. To start, class litigation engenders a private cadre of supplemental regulators and shapes acceptable procedures for processing aggregate claims. It establishes rules of conduct that both delineate boundaries for acceptable social behavior and decrease the need for future lawsuits. Moreover, class litigation creates a viable litigation threat to corporate actors engaging in a cost-benefit analysis, makes information about corporate products and practices publicly available, and prompts policy changes that extend beyond the litigants and to the public.

Still, I realize that class actions also cause negative spillovers. It is true that they are not perfect regulators. What is more, there are legitimate and compelling arguments that certain class actions have caused more harm than good. I opt here, however, to leave those questions for another day. Thus, as a starting point, I take for granted the following: class actions perform a regulatory function; this function can have a public benefit; and, to the extent that this function creates more good than harm, CAFA affects that good.

I begin the Article by explaining how the private class action performs this supplemental regulatory function and highlight the controversial “private attorney general” concept. Despite divergent views, private attorney involvement can produce a public good regardless of self-interested or altruistic motivations. Still, much of the class action criticism dwells on attorney motivations and miscreant state-court judges. It goes like this: plaintiffs’ attorneys bring class actions affecting the nation as a whole in state courts with judges elected by a few thousand constituents who are willing to certify class actions with questionable merit. Thus, that section canvasses a few of the arguments that convinced Congress to alter ex post regulation’s dynamic by changing class actions’ venue from state to federal court.

The Article then considers the question of whether CAFA changes more than venue. It does. Examining CAFA’s impact on the longstanding substance versus procedure morass and the choice-of-law problem produces a simple and intuitive result: CAFA results in fewer class certifications. In short, combining choice-of-law problems, Rule 23(b)(3)’s manageability requirement, and CAFA’s prerequisite that putative class actions be national in scope leads to less certified classes. This increases the likelihood that claims will proceed as collective groups or not at all – inhibiting the class’s regulatory function. Some might find this disturbing from a compensation standpoint since smaller groups, and thus smaller recoveries and attorneys’ fees, handicap plaintiffs’ attorneys in presenting their strongest case. But, from a deterrence-centric position, I am less troubled about this phenomenon producing lower individual compensation and more concerned that it will lead to cloudy legal boundaries, less judicial supervision, and less procedural fairness.

Put differently, because federal courts are less willing to certify class actions, there are four principal effects – all negative. First, noncertified actions are either dropped – prompting concern that certain areas may escape ex post regulation altogether – or they proceed collectively. The latter creates concerns that the collective process – a process without judicial quality control – is less procedurally fair. Post-CAFA process creates a procedural justice dilemma: it disproportionately favors defendants, but this may be justified by pragmatic considerations of cost and access for litigants. Second, when noncertified actions settle, the settlements are closed, private, and often confidential. This decreases transparency, thus inhibiting the law’s behavior-guiding function, and withholds public educational opportunities. Third, noncertification theoretically thwarts deterrence by allowing defendants to avoid internalizing the full costs of their conduct and by making some collective actions too costly to bring. Finally, noncertification disaggregates plaintiffs’ attorneys, making information-sharing more difficult.

The full article is available on SSRN: http://ssrn.com/abstract=1005021