Replacing Class Actions with Private ADR: A Comment on “Settlement, ADR, and Class Action Superiority”

A major reason for judicial review of a class action settlement is the impracticality, if not impossibility, of obtaining the consent of all class members. To be sure, class members often have an opportunity to opt out, but failure to opt out is a far cry from affirmative consent to the settlement itself. See, e.g., Robert G. Bone, The Puzzling Idea of Adjudicative Representation: Lessons for Aggregate Litigation and Class Actions, 79 Geo. Wash. L. Rev. 577, 592–93 (2011).

See American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013) (holding that enforcement of a class action waiver clause is not barred by the effective vindication doctrine on the facts of the case); AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (holding that a class action waiver clause in a consumer arbitration agreement is enforceable even when claims are for small amounts).

Consumer arbitration is the key area of current controversy in the arbitration setting, but courts also enforce arbitration clauses in employment and other contracts. Outside of the arbitration setting, many of the decided cases involve consumer product recall and refund programs with subsequent class actions seeking economic recovery. See, e.g., In Re Aqua Dots Prods. Liab. Litig., 654 F. 3d 748 (7th Cir. 2011) (recall program offering to replace a defective toy or refund the purchase price); In Re Conagra Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689 (N.D. Ga. 2008) (recall and refund program involving contaminated peanut butter); In Re Phenylpropanolamine Prods. Liab. Litig., 214 F.R.D. 614, 621–23 (W.D. Wash. 2003) (refund and product replacement programs for defective medication); Chin v. Chrysler Corp., 182 F.R.D. 448, 463–64 (D. N. J. 1998) (recall program for cars with defective brakes). But there are other situations, not involving consumer recall programs, in which firms have voluntarily created compensation schemes to redress widespread harm. See Webb v. Carter’s Inc., 272 F.R.D. 489, 504–05 (C.D. Cal. 2011) (certification of a personal injury class action denied when the defendant implemented a voluntary refund policy that included reimbursement for out-of-pocket medical expenses); Berley v. Dreyfus & Co., 43 F.R.D. 397, 398–99 (S.D.N.Y. 1967)((b)(3) certification of a securities class action denied when the defendant offered to refund the purchase price of the stock). And there is no reason why a voluntary compensation scheme might not extend, as in GCCF, to other types of personal injury or property damage claims. See generally Eric P. Voigt, A Company’s Voluntary Refund Program for Consumers Can Be a Fair and Efficient Alternative to a Class Action, 31 Rev. Litig. 617, 621 n. 13, 642–46 (2012) (describing different types of cases).

I have argued elsewhere that rulemakers and judges should always worry about the quality of settlements as much as they do the quality of trial judgments, because both implicate proper enforcement of the substantive law. See, e.g. Robert G. Bone, Who Decides?: A Critical Look at Procedural Discretion, 28 Cardozo L. Rev. 1961, 1981–84 (2007). This does not mean, of course, that all settlements must be reviewed; what it means is that settlements should not command deference just because they purport to be the result of private agreement.

In fact, many of Rave’s examples involve small claim class actions. For instance, when Rave criticizes consent as a justification for deferring to a private scheme like the one in Aqua Dots, he focuses on mass wrongs involving small claims, for which individual litigation is nonviable and therefore choice is not meaningful.

The critical passage is in Concepcion:

The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.

AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011); accord American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2312 (2013). Note that this passage makes no mention of deterrence; it refers instead to how the class action procedure is inconsistent with the FAA.

It is possible, of course, that the Court majority really means to scuttle small claim class actions serving a deterrent function and chose to pursue that end by arguing the incompatibility of class arbitration with the FAA. But that is not what it said.

And the Court holds only that pursuing a class action in the face of a perfectly adequate private compensation scheme is not adequate representation under 23(a)(4).

In Re Aqua Dots Prods. Liab. Litig., 654 F. 3d 748 (7th Cir. 2011). This case involved recovery for the inflated price of the product and not for any personal injuries.

See In Re Aqua Dots Prods. Liab. Litig., 270 F.R.D. 377, 379 (N.D. Ill. 2010).

See Aqua Dots, 654 F. 3d at 750–51; Aqua Dots, 270 F.R.D. at 379–80. Apparently, however, the public notice of the recall program did not mention refunds. See Voigt, supra note 3, at 639 n. 96.

Also, those consumers whose children suffered physical injury from ingesting the Aqua Dots adhesive, see Aqua Dots, 654 F. 3d at 749 (noting that some children became sick and at least two fell into a coma), can still sue for damages, a prospect that should enhance deterrence. See, e.g., In Re Phenylpropanolamine Prods. Liab. Litig., 214 F.R.D. 614, 621 (W.D. Wash. 2003) (noting that the personal injury actions might serve deterrence and punishment goals).

The firm’s incentives depend on many factors, including the probability that a court will find the ADR scheme inadequate and the cost of creating and administering it. These incentives also depend on the anticipated effectiveness of the scheme in reducing the size of an eventual class action (assuming that plaintiffs who take advantage of the scheme are excluded from the class). A smaller class might not have much effect on the defendant’s litigation costs, but it should produce a smaller class recovery and thus a smaller attorney’s fee and weaker incentives to file a class action in the first place.

In fact, Professor Rave’s fee proposal has more radical implications. Since an attorney would not file a class action unless she believed it provided superior compensation—and thus a fee—adopting this proposal might make it possible to rely exclusively on the attorney’s superiority determination and avoid the need for any judicial analysis at all. This result, however, assumes compensation is the exclusive goal; if factors other than compensation are important, a judicial determination might still be necessary to assure that these additional factors are properly considered.

See also In Re Conagra Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689, 691 (N.D. Ga. 2008) (noting the extensive involvement of the FDA); Chin v. Chrysler Corp., 182 F.R.D. 448, 451–52 (D. N. J. 1998) (noting that National Highway Traffic Safety Administration investigated the brake problem and instigated the recall).

There are limits to reputation mechanisms, however. Reputation constrains only if negative information is widely distributed, and many consumers might not bother even to search the Internet before making small value purchases.

Since the comparison is to the class action, the public notice does not have to be any better than the 23(c)(2) notice class members receive in a (b)(3) class action. See Voigt, supra note 3, at 647–53.

See Fed R. Civ. P. 23(b)(3) (requiring that “a class action is superior to other available methods for fairly and efficiently adjudicating the controversy”).

See generally Voigt, supra note 3, at 625–36 (noting that many courts have read (b)(3) superiority to include comparisons with non-litigation alternatives).

Thus, I disagree with Professor Rave’s stated premise that “claimants are entitled to as much relief as they can bargain or litigate for under [the applicable substantive law].” Claimants are entitled to only as much as the substantive law guarantees them.