By a resounding bipartisan margin of 72-26, the Senate passed on Thursday the Class Action Fairness Act. The legislation would transfer class actions out of state courts into federal courts if a significant number of class members are from states other than the defendant’s. Endorsed by President Bush, the act is expected to pass quickly through the House, and it will constitute the president’s first major legislative victory of his new term.
Tort-reform opponents have attacked the legislation as unnecessary. Senator Russ Feingold has called the class-action reform “a solution in search of a problem.”
To make this case, Feingold and others have pointed to a study published last March by two law professors, Theodore Eisenberg and Geoffrey P. Miller. Eisenberg and Miller’s study, which primarily examined the relationship between attorneys’ fees and class-action recoveries, also made the subsidiary finding that the magnitude of the average class-action recovery had remained largely constant over the ten-year period they examined, 1993-2002.
On the basis of this finding, the New York Times ran a story on the front of its business section entitled, “Study Disputes View of Costly Surge in Class-Action Suits.” The president of the Association of Trial Lawyers of America proclaimed, “This empirical study comes out and says the system is working correctly.”
But this interpretation of the Eisenberg-Miller study is deeply flawed. As I describe in more detail in a paper just released by the Manhattan Institute, rather than undermining arguments for class-action reform, Eisenberg and Miller’s data strongly support the need for reform.
The Eisenberg-Miller data show that the average class-action recovery over the ten-year period they examined was $138.6 million. This figure is huge for any single case, not to mention as an average of all cases in a large sample. Moreover, the study shows that the average recovery of the top 20 percent of cases was $613 million, and the average for the top 10 percent equaled $1.08 billion. Again, these extraordinary numbers represent averages.
The principal concern about the class-action mechanism is that mere certification of a class–prior to the introduction of any evidence addressing the merits of the claim–will bludgeon a defendant into a settlement rather than risking the survival of the company on a verdict rendered by six lay jurors. A good example is the silicone-breast-implant litigation–one of the cases in the Eisenberg-Miller sample–that settled for $4.2 billion despite predominant scientific evidence showing no relationship between implants and the ailments claimed by the plaintiffs.
The numbers revealed by the study–an average $138.6 million recovery–show the operation of the bludgeon. The authors imply, though the study is not clear on the subject, that most, if not all, of these recoveries represent settlements prior to trial. Many of them may well be meritorious, but we will never know because the cases settled prior to any judge or jury evaluation of the claim.
The Eisenberg-Miller numbers also show that class-action litigation is big business, worthy of resolution in the federal courts. Looking only at cases in their sample, class-action recoveries averaged over $5 billion per year over the ten-year period–again, a huge number.
And it is undeniable that the Eisenberg-Miller figures, huge though they are, are significant underestimates of the magnitude of class-action litigation overall. Eisenberg and Miller only report data taken from published opinions that discussed attorneys’ fees, and their data are highly skewed toward securities class-action litigation, which constitutes over half their sample.
Various other categories of cases appear in the data in such small numbers that one can only conclude that their sample is highly partial, seriously underestimating the magnitude of class-action litigation. For example, their data include only nine civil-rights class actions, 23 employment class actions, 22 ERISA class actions and a miniscule seven mass tort-class actions. It is simply implausible that, over the ten-year period of study, these low numbers represent the full volume of class-action litigation in state and federal courts together.
The claim that the system is working “correctly” is based on the finding that the average class-action recovery did not increase dramatically over the ten-year period. But an average $138.6 million recovery stable over ten years shows that the problem with class actions is deeply engrained and that reform is long overdue. If, as I suspect, the magnitude of total class-action recoveries is five, ten, or 20 times the Eisenberg-Miller study’s showing of $5 billion per year, class-action litigation is imposing extraordinary costs on American society.
Class-action litigation has proven a problem in this country because of the conflation of three separate changes in our civil-justice system: the adoption of very loose procedural requirements for class certification; the acceptance of vastly more lenient substantive standards for allowing claims to reach juries; and the expansion of liability standards since the mid-1970s based on vague and unproven ideas about how liability judgments can improve societal welfare.
Shifting some number of class actions from state to federal courts may tighten up in modest ways the requirements imposed for class certification. It would also prevent plaintiffs’ attorneys from shopping their cases to local judges in backwater jurisdictions, and permit clear and immediate avenues of appeal after classes of plaintiffs are certified. These are modest changes, but important ones and in the right direction.
Real tort reform, however, requires a fundamental rethinking and redesign of both our substantive and procedural rules of law. Until that happens, America’s problem with excessive litigation will persist.
–George L. Priest is the John M. Olin Professor of Law and Economics at Yale Law School and blogger for PointOfLaw.com.