Zombie class actions

Zombies, which currently enjoy enormous popularity in books and movies, are worse than dead.  They are undead.  They lack most of the faculties live humans possess, but they can move and they are driven to kill.  Now that Wal-Mart v. Dukes and AT&T v. Concepcion have been added to the jurisprudence, the class action may become a zombie too.  Prior decisions of many courts had enfeebled it.  The new decisions could kill it outright, but they may instead transform it into a creature, the zombie settlement class, whose mission will be to feed on and suck the life from live claims.  Its arrival should be feared.  Although existing settlement classes sometimes obtain fair value for claims, zombie classes will not.  They will help defendants by consuming claims that could be litigated or arbitrated and stripping them of value.

Even before the decisions in Dukes and Concepcion, the class action was in poor health.  A raft of decisions had restricted the Rule 23(b)(3) opt-out class action’s utility as a means of litigating personal injury claims and tightened the certification requirements for these class actions more generally by making the “predominance” requirement harder to meet.  Other decisions, including Ortiz v Fibreboard Corp., In re Katrina Canal Breaches Litigation, and In re Rhone-Poulenc Rorer, cut back at the viability of classes certified under Rule 23(b)(1) or 23(c).

The class action had also been enfeebled in areas where it was more commonly employed: securities, employment, and statutory torts (Truth In Lending Act, Fair Debt Collection Practices Act, etc.).  The Private Securities Reform Act of 1995 made securities class actions less viable by enabling defendants to dismiss cases more easily on the pleadings.  Much of the vitality that remained was sapped by corporate law scholarship casting doubt on the value of securities fraud class litigation.  The Civil Rights Act of 1991 made it harder for plaintiffs to certify employment class actions.  It extended new remedies that undermined the predominance of common questions because they required individualized proof of wrongdoing.  Certification also became difficult in cases involving statutory torts, which seemed ideal for class treatment because both the wrongdoing and the damages were highly if not completely uniform.  Many judges felt that, when a statute called for a specified damage award for every infringing act, aggregation created too large an imbalance between the punishment and the offense.  “Junk faxes” are nuisances, but should the price of using them to advertise one’s restaurant, insurance agency, or other small businesses be that one must close one’s doors?

Agency problems and partisan propaganda took a toll on the class action too.  Although some lawyers possessed the financial resources, talent, and risk tolerance needed to try class actions and to bargain for fair value in settlement, many did not.  In the latter lawyers’ hands, class actions became vehicles for cheap settlements that disserved class members while compensating class counsel at handsome hourly rates.  Just ask customers of BAR/BRI’s and Kaplan’s bar review programs, who were offered coupons for future preparatory courses for a test most had already passed (or for other tests that an attorney would likely never take, like the MCAT) as part of a settlement agreement reached by BAR/BRI, Kaplan, and class counsel.

Seeing the desirability of settling for pennies on the dollar, defendants learned to use reverse auctions to end-run good lawyers or undermine them.  The resulting bad settlements gave the class action an unsavory reputation as a form of litigation whose only real purpose was to make lawyers rich.  Political partisans exploited the widespread antipathy for plaintiffs’ attorneys and cast the small claim class action in a bad light.  “Millions for lawyers; Happy Meals for class members” was their battle cry.

Plainly, even before Dukes and Concepcion the class action was a strange creature.  It had the potential to be a mighty champion of plaintiffs’ rights, but could also be a paper tiger or a means of cheating claimants out of relief.  The class action was Superman, Caspar Milquetoast and Lucy-pulling-the-football-away-from-Charlie-Brown rolled into one.

The class action’s zombie potential was known before Dukes and Concepcion too.  It could be seen in settlement classes that were incapable of being tried on the merits.  Being unable to threaten defendants with class-wide judgments at trial, the lawyers handling these cases could not bargain for reasonable settlement recoveries.  Their bargaining leverage stemmed only from their ability to force defendants to incur litigation costs, to interfere with defendants’ merger plans, or to tarnish defendants’ reputations.  Not surprisingly, these cases threatened plaintiffs more than defendants.  Although these cases had no life of their own, they could suck the life out of claims by settling them cheaply.

The Court’s decision in Amchem Products, Inc. v. Windsor supposedly put the kibosh on zombie class actions by requiring settlement classes to satisfy all the Rule 23 certification requirements, except manageability.  Concepcion and Dukes may revivify them.  Zombie classes may even come to dominate the field.

Consider employment cases, a common type of class action.  Concepcion creates the strong possibility that employers will use arbitration agreements to prevent workers from suing on behalf of plaintiff classes.  As a result, the number of employment class actions may sharply decline.  Employers may not drive it down to zero, however.  They will predictably waive anti-class action arbitration provisions when opportunities arise to obtain irresistible settlement terms.  For example, an employer worried about facing a raft of individual discrimination lawsuits or arbitrations may decide to beat workers to the punch by settling an early-filed individual lawsuit as a class action on favorable terms.  If and when employees later discover the true extent of the employers’ wrongdoing, the class settlement will prevent them from suing.

Things may be just as bad for consumers.  Companies whose relationships with consumers are governed by contracts – credit card companies, telecommunications companies, and mortgage lending companies, just to name a few – have been given a green light to insert arbitration provisions and class action prohibitions into those contracts.   A great number of companies had already included such provisions prior to Concepcion.  Any remaining holdouts, and any companies who dropped these provisions when litigation over them got heated prior to the Court’s decision in Concepcion, may insert (or re-insert) them.  Consequently, and as with employment claims, the number of consumer class actions will plummet, but again possibly not to zero.  Prior to Concepcion, companies worried that courts would invalidate arbitration clause/class action waiver combinations, so they updated their contracts to include “third generation” arbitration clauses.  Through “third generation” clauses, drafters made claiming more economically feasible bv including provisions to pay claimants’ arbitration fees and to award thousands of dollars to claimants who obtained arbitral awards higher than the companies’ final pre-arbitration settlement offers.  If these “third generation” clauses enable large numbers of individual consumers to arbitrate, the more attractive option for defendants post-Concepcion may be to waive the anti-class action provision and settle a zombie class on the cheap.

Why would an attorney representing a lone worker or consumer agree to settle the case on behalf of a class?  The prospect of an enormous payday, for one thing, and the knowledge that some other lawyer may do the deal, for another.  But, obviously, no attorney in this position will be able to bargain for reasonable compensation.  Press too hard, and the drafter will kill the deal and invoke the anti-class action arbitration provision.  And should drafters exercise that option, the future for claimants looks bleak.  Indeed, potential defendants may be just as likely to enter into zombie class settlements as they are to return to the not-so-bygone days of second-generation or even harsher first-generation arbitration clauses, which courts may well find enforceable post-Concepcion.   These earlier clauses provide drafters with little incentive to make good faith settlement offers or to assist claimants in paying for arbitration.  Suddenly, then, the claim-sucking zombie class action starts looking like the better of plaintiffs’ options.  Either way, as a practical matter, the drafter will be able to dictate terms.

Such strategies will be available to potential defendants in all contexts where victims and wrongdoers participate in relationships governed by agreements.  The effect on class actions will be far-reaching: Most class actions today occur between parties who are in contractual relationships with one another.  For example, public companies can position themselves to create zombie shareholder class actions by putting anti-class arbitration agreements in securities issuing documents.  Stock brokers, financial advisors and fund managers can include anti-class provisions in client agreements.  Expect a resurgence in these provisions in credit card terms of service.  Manufacturers, sellers, and service providers can include suitable provisions in warranties, bills of sale, and service agreements.

The Court’s decision in Dukes also provides potential defendants with greater leverage to secure zombie settlement class actions.  For starters, although the majority opinion purports only to set out the conditions under which a court can correctly find that a common question exists, it actually transfers work previously done by Rule 23(b)(3) to Rule 23(a)(2).  As a practical matter, Dukes may thus have created a predominance requirement for all class actions, including those brought for injunctive or declaratory relief.  (This was, in essence, the dissent’s concern in Dukes.)

Unless carefully read by lower court judges, Dukes may also require plaintiffs to prove their cases in court at the certification stage.  This possibility is suggested by the majority’s observation that the plaintiffs had provided “no convincing proof” of a company-wide discriminatory policy and had produced evidence “insufficient to establish that their theory can be proved on a classwide basis.”   This is excellent news for defendants, who may now have an evidentiary point on which to oppose certification and to appeal pro-certification trial court rulings.  Faced with the threat of no compensation whatever, plaintiffs’ attorneys may be all too willing to enter into zombie class settlements.

The attractiveness of zombie classes will likely vary across contexts.  Employers may find them especially attractive because workers will be unable to opt out of zombie classes certified under Rule 23(b)(2).  Merchants might view them as a simple way to avoid paying out scores of individual claims in arbitration.  But in all contexts, potential defendants are likely to gain something and lose little, because arbitration provisions can always be waived.  One must therefore expect them to include anti-class arbitration clauses in more and more agreements, and to maximize the potential for zombie settlement classes to consume live claims.

Judicial review of settlements pursuant to Rule 23(e) is the only source of protection claimants have from zombie classes.  There is reason to fear it will not suffice.  Untriable settlement classes posed difficulties before Amchem, despite the existence of Rule 23(e).  Is there reason to expect judicial review to work better now than it did then?  Perhaps.  Now that judges have more experience dealing with sell-outs, they may be better at spotting them.  In fact, Judge Real recently rejected the BAR/BRI-Kaplan settlement (but partly because the members of a uniquely composed putative class – licensed attorneys – objected in droves).  But most class settlements are approved, including those that generate objections and have questionable features.  Spotting sell-outs is also intrinsically difficult.  Claims do not come with price tags stating their value, and it is often hard for judges (or anyone, really) to know what claims are worth.  In ordinary litigation, good incentives can create appropriate settlements naturally. One would be more confident of having good outcomes in class actions if the incentives were better.

Arthur Miller once called the class action a “Frankenstein Monster.”  In the decades thereafter, courts shackled the monster and tamed it. Now, the U.S. Supreme Court seems to have cast it into the legion of the undead.  Only time will tell whether the class action continues to be a viable and valuable form of litigation.