Did you ever write a check for more money than was in your account? Such a check

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Did you ever write a check for more money than was in your account? Such a check usually “bounces,” and your bank charges you a fee called an “NSF charge” (not-sufficientfunds charge). In California in 1975, Mr. Perdue was charged $6 by Crocker Bank for writing an NSF check. He sued the bank in a case that eventually went to the California Supreme Court. It costs a lot more than $6 to pursue a case that far. Mr. Perdue and his lawyers pursued this case because the stakes far exceeded $6. In fact, Mr. Perdue brought this action not merely on his own behalf but also on behalf of all those account holders at Crocker Bank who paid NSF charges. If successful, Mr. Perdue would recover his $6 and all the other alleged overcharges made by Crocker Bank against its customers. When a plaintiff attempts to bring an action on behalf of a class of plaintiffs, the court must decide whether to “certify” a “class” and permit someone like Mr. Perdue to sue on behalf of himself and everyone else in the alleged class. This is a delicate problem because a successful suit by Mr. Perdue will extinguish everyone else’s claims. Once a class action succeeds, the members of the class, most of whom were not even consulted about the case, will have lost their right to sue. When should a class be certified? Economics suggests that class actions are appropriate when the stakes are large in aggregate and small for any individual plaintiff. In our example, the sum of NSF charges to all account holders at Crocker Bank roughly measured the stakes in dispute, and the stakes for each individual account holder roughly equaled $6. So, the certification of a class seems appropriate. Once a class is certified, if the plaintiff who represents the class agrees to a settlement, or if that plaintiff succeeds at trial, damages will be paid by the defendant. These damages must be distributed in such a way that the whole class of plaintiffs benefits, rather than merely the active plaintiff and his or her lawyers, who are naturally inclined to grab a large share for themselves. The courts must decide whether a proposed distribution in a class action is fair. For example, should the active plaintiff’s lawyers, who are often responsible for organizing and initiating the suit, be compensated at their standard billing rate? Or should they receive more than their usual fee in order to compensate them for taking the high risk of losing the suit? Distributing small sums of money to everyone in the class is usually prohibitively expensive. Sometimes the court approves a distribution to some members of the class and the donation of the remaining recovery to a charity that benefits people similar to the members of the class. In technical terms, class actions ideally consolidate litigation to achieve economies of scale and provide a legal remedy for small injuries that are large in aggregate. (Additionally, class actions are sometimes used to reduce total litigation costs in mass torts, as with asbestos victims or, as we saw in a Web Note in Chapter 9, those harmed by tobacco consumption.)

The potential economic benefits of class actions are clear. But recently, some have raised the possibility that there are economic costs as well. The thrust of the concern is that there are some circumstances in which the court certifies a class of plaintiffs to proceed against a defendant even though the merits of each individual claim are very small (so that the objective likelihood of each individual’s prevailing is small). But the risk to the defendant if the class should prevail is so catastrophic that the defendant is, in essence, blackmailed into settling a class action, even though it might have won each individual contest with members of the class. These are precisely the arguments made by Judge Richard A. Posner in In the Matter of Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir. 1995). The litigation in that case involved a group of about 300 hemophiliacs who alleged that they had become HIV-positive as a result of taking AHF, a clotting agent made by Rhone-Poulenc Rorer, Inc. in the early 1980s. The 300 plaintiffs all had similar enough claims that they sought and received certification as a class from the federal district court. Judge Posner, on appeal, was reluctant to certify the class. Of the 13 individual cases that had been brought at the time of this appeal, 12 had been won by the defendant, and Judge Posner speculated that the defendant would have probably won the vast majority of the remaining individual cases. Nonetheless, he suggested that if the class were to be certified, many more plaintiffs would present themselves, perhaps in the thousands. And in that circumstance Rhone-Poulenc Rorer might be facing $25 billion in potential liability and, as a result, bankruptcy. “They may not wish to roll these dice. That is putting it mildly. They will be under intense pressure to settle.” Judge Posner quoted Judge Henry Friendly as saying, “settlements induced by a small probability of an immense judgment in a class action [are] ‘blackmail settlements.’” That is, there are circumstances in which the mere act of certifying a class may be enough to convert low-merit claims into such a high risk of catastrophic failure that the defendant will be impelled to settle. These concerns about class actions creating settlement pressure may be overblown. See Charles M. Silver, “We’re Scared to Death”: Class Certification and Blackmail, 78 N.Y.U. L. REV. 1357 (2003). But Congress found the concerns compelling enough to pass the Class Action Fairness Act of 2005, which expanded federal jurisdiction in class certifications and imposed restrictions on attorneys’ fees in class actions. Most other countries, including those of the European Union, have not allowed class action litigation. That may be changing; the EU appears to be poised to allow class action litigation.

QUESTION: Explain the effects of class actions on the number of suits, using our distinction of causes, into (1) injuries, (2) filing costs, and (3) expected value of the legal claim.

Explanation / Answer

The most usual effect of class on such claims is that the defendant, considering the large amount of claim, usually agrees for settlement. However, otherwise the class actions, if the plaintiff wins, leads to economic and compensatory damages- these include medical bills and lost wages (economic damages) and damages for pain and suffering and emotional distress (compensatory damages). Sometimes, punitive damages may be tacked on too, which are actually awarded for the purpose of punishing the defendant.

Filing costs are usually settled by contingent fees, which is a contract by which the lawyer agrees to advance litigation expenses. At the end of the case, lawyer receives an agreed percent of the recovery, which is usually done by means of common fund doctrine. It says that if a person (the representative plaintiff) through his efforts creates a recovery benefitting many people, then in all fairness, all beneficiaries to share the cost of recovery. Expected value of the claim is settled as per the number of people the lawsuit affects and to the monetary extent.

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