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Creating A Class Action System&#8211What A Country Should Consider

An Introduction To Issues That Must Be Addressed By Any Country Considering Enacting Or Modifying Class Action Legislation

Several countries are considering the use of class action lawsuits. This article’s purpose is to identify the important issues one should consider in evaluating the fairness and efficacy of class action litigation.

A class action lawsuit can be devastating. The staggering costs of merely defending against one – let alone the cost of actually losing – have forced many American corporations into bankruptcy or caused their management teams to be replaced. The U.S. Supreme Court has recognized that class action discovery can be a form of extortion; it can force a company to surrender and settle a lawsuit, because it cannot afford to properly defend itself.

When it devised the class action lawsuit as a procedure to streamline civil litigation, Congress did not anticipate it would be used as a weapon to injure companies which may have technically violated that law, but not caused any harm. In California, alone, up to 100 class action lawsuits are filed every week – thousands every year. Most are not properly class actions in the true sense; they are not legal proceedings in which persons represent interests common to a large group of persons who have been actually injured. Instead, most are premised on the technical violation of some statute, where the supposed violation has not actually harmed anyone. Frequently, an attorney files a class action so he can compel defendants to settle it, and he can demand attorney fees as a direct result. Essentially, most class action lawsuits are “attorney fee motions” disguised as “legitimate” lawsuits.

A country considering implementing a class action system should learn from our flawed system. The author cannot address all of the factors a country should consider in determining whether to implement a class action procedure, or what limits to impose to prevent lawsuits from being filed for the sake of generating attorney fees rather than helping injured people. But the author hopes it will give legislative bodies pause to consider consequences that follow class action litigation.

Some background is instructive. A class action is a procedural device that allows one or more plaintiffs to prosecute a lawsuit on behalf of a larger group (the class members) who have suffered the same wrong at the hands of the defendant, but who are so numerous that a court could not adequately manage the lawsuit if each member of the class were required to be joined as a named plaintiff. This simple description provides a reference point for a deeper analysis.

Class actions, as we know them today, are a relatively recent invention.

“Representative actions” have existed since the earliest days of English common law. English courts sitting in equity created them as an exception to the general rule that litigation must be conducted by and on behalf of the individually named parties only.

In the United States, we refer to this “general rule” as the “necessary parties rule.” It requires all persons interested in the lawsuit’s subject matter (as plaintiff or defendant) be made parties to the lawsuit – regardless of how many there are. As one United States judge explained: “The reason is that the court may be enabled to make a complete decree between the parties, may prevent future litigation by taking away the necessity of a multiplicity of suits, and may make it perfectly certain, that no injustice shall be done, either to the parties before the court, or to others, who are interested by a decree, that may be grounded upon a partial view only of the real merits.”

When strictly enforced, the “necessary parties rule” may deny recovery to a party before the court. As a result, courts sitting in equity developed exceptions, including one to cover situations where (1) the number of parties is substantial and the court believes it would be impractical (or impossible) to bring them all into the court, or (2) where the legal issue presented is a question of general interest. Under those circumstances, courts sitting in equity allowed a small number of persons to prosecute lawsuits for the benefit of many others, provided that the party bringing the lawsuit was a fair, adequate representative of the class’s absent members.

But as society evolved, the common law was ill-equipped to resolve claims that followed. Common law developed with the expectation that one plaintiff would file suit against one defendant, and so the procedures that developed to fit that paradigm were well-suited to handle large numbers of people with common complaints spread over a wide region.

As a former British colony, our nation’s law derived from British law. American courts followed the example of the British and recognized the power in equity to avoid multiplicity of actions where numerous individuals sued a common defendant for the same legal wrong.

In 1842, the U.S. Supreme Court promulgated Equity Rule 48. It recognized the use of representative lawsuits where the parties were too numerous to be conveniently brought before the court. But this rule did not bind absent class members to the judgment that resulted from the litigation. It was not until 70 years later, in 1912, that Equity Rule 48 was rewritten and became Rule 38. The new rule maintained representative actions, but also allowed judgments to bind absent parties.

Finally, in 1938, Congress promulgated the Federal Rules of Civil Procedure, finally giving life to the class action device, pursuant to the original version of Rule 23. But it was not until 1966 – only 45 years ago – that the class action mechanism assumed its current form.

Its origins lie in equity, but the United States class action is an accepted procedural litigation device that permits a small number of plaintiffs to represent and bind an entire class through one lawsuit.

A class action does much more than merely manage the situation of “too many plaintiffs.” It also protects defendants from the risks associated with multiple lawsuits and inconsistent results. This is particularly important where inconsistent rulings would place the defendant in the untenable position of having to act one way to comply with one court order, but in another way comply with another order.

When used properly and not as a means of extortion, a class action can provide a cost-efficient way to resolve similar claims – benefiting plaintiffs (who can distribute the cost of their individual lawsuits among all class members) and benefitting defendants (who need only litigate a particular issue once).

Under Rule 23, to allow a case to proceed as a class action, the district court must make the following findings: (1) the number of class members renders it impracticable to join them in the action, (2) the class members’ claims share common questions of law or fact, (3) the claims or defenses of the proposed class representatives are typical of those for the rest of the class, and (4) the proposed class representatives will adequately protect the interests of the entire class.

Also, in addition to the requirements of numerosity, commonality, typicality, and the adequacy of class representation, the district court must make at least one of the following findings: (1) requiring separate actions by or against the class members would create the risk of inconsistent rulings, or that a ruling with respect to individual class members may be dispositive of other class member claims thereby substantially impairing or impeding their ability to protect their interests; (2) the party against whom the class seeks relief has acted or refused to act on grounds generally applicable to the class, so that injunctive or declaratory relief as to the entire class would be appropriate; or (3) common questions of law or fact “predominate” over class member specific questions, and that proceeding by way of class action would be “superior to other available methods” for resolving the dispute.

In many ways, these federal guidelines governing class actions are appropriate, but there is a problem concerning their scope. For example, in an effort to protect consumers from theft, Congress enacted a law that required merchants to block out, on credit card or debit card receipts given to consumers, all but the last 4 digits of the card number and expiration date. But many merchants inadvertently failed to block out the expiration date. This technical violation gave rise to a slew of class actions, all across the United States, despite the fact that courts, and even the plaintiffs’ lawyers, admitted that no consumer had been injured by merely including the expiration date on the receipt.

This is a good example of what is wrong with the American system. Often American courts join in the game of “gotcha” and enforce a technical violation that has not caused any harm.

The credit/debit card truncation statute no doubt was well-intended. Frequently, consumers drove away from pay-at-the-pump gas stations, leaving behind their receipts. Unless one has knowledge of the entire card number, knowledge of the expiration date is meaningless. The thief must still discover the numerous missing numbers on the card. Moreover, any thief clever enough to discover 12-15 missing card numbers is likely to try the small number of “month/year” expiration date variables (a total of 60 choices: 12 months over 5 years). Despite the fact that this omission never caused any consumer harm, parties spent tens of millions of dollars in legal fees and settlements and consumed hundreds of hours of court time to “redress” this “violation.”

The most important question for a country to address is this: What is our goal? Certainly, the answer is not, “We want to increase the number of lawsuits filed in our country.” Certainly, the answer is not, “We want to devote judicial resources to lawsuits where no one has been injured, and increase the income of those plaintiff lawyers who are clever enough to pick up on insignificant but technical violations of law.” Encouraging lawsuits for the sake of promoting litigation is not laudable. There may be merit to considering class actions as a procedural device for redressing corporate wrongs. But the circumstances under which such a device may be utilized must be carefully considered and circumscribed.

Again, we do not here address the many variables that should be considered. It would not be possible to do so, because the priorities of each country vary, necessitating a case-by-case analysis of the goals sought to be achieved by any particular country. The author hopes, however, that countries considering the use of a class action procedural device will thoughtfully consider the risks inherent with such a system, and carefully craft rules that will take into account not only the ends, but also the means. Because, bringing Machiavelli into the courtroom, in class action litigation, the ends do not always justify the means.