Class Action Countermeasures

When Government Investigations Are Good Defense

Andrew Trask — Thu, 17 May 2012 04:54:54 -0500

So, unless you live under a rock, you've probably heard that JP Morgan lost some money last week. And, as one might expect, with a $2 billion loss, lots of people have opinions. One of those is Yale Law Professor Jonathan Macey, who wrote an op-ed in the Wall Street Journal (behind a paywall) worrying that, since both the SEC and the Department of Justice has launched an investigation into the loss, the Obama administration was turning losing money into a federal crime. (WSJ Law Blog summary here.) Professor Macey is a very smart man. But he also has never spent time as a litigator. (Go ahead, check; I'll wait.) And I think, in this case, that shows.

See, here's the thing. While Professor Macey is very worried, I'm not sure that JP Morgan's executives are complaining about either the SEC's or DOJ's investigations. I'm sure they're not celebrating them, but there's have good reason to welcome the investigations at this point.

Let's leave aside for a moment the fact that JP Morgan CEO Jamie Dimon already said he was expecting regulators to sniff around (because that was, in fact, their job). That might just be diplomacy.

But it's also a great way to reduce JP Morgan's eventual legal exposure from any lawsuits. JP Morgan's stock went down once the loss was announced. (To be expected.) And that meant securities lawsuits would soon follow. In fact, Thompson/Reuters legal reporter Alison Frankel immediately asked what the over-under would be for filing the first class action.

It wasn't long. As of this post, Robbins Geller Rudman & Dowd LLP and Bernstein Liebhard have both announced class actions against JP Morgan. (This once again calls into question the deterrence justification for these lawsuits; to say that JP Morgan needs more deterrence than a $2 billion loss to tighten its practices stretches credulity. If deterrence is the name of the game, these firms should be looking for the next JP Morgan, not suing this one.)

One of the best ways to inoculate against those class actions is to let the regulators in to give the firm a clean bill of health. If a clean bill of health is not possible (and it may not be, see Dealbook's analysis here), better to negotiate a settlement with the government than with lawyers who will take a 33% cut for themselves. If JP Morgan works with the government, it has an excellent rhetorical argument against fast-tracking a class action (why duplicate government effort?) and a good doctrinal argument against certifying the class (the class action would not be superior to the government investigations). That's not making it a crime to lose money, that's using the legitimacy of the DOJ to buttress the legitimacy of JP Morgan when it needs to defend civil lawsuits. If the DOJ and JPM's C-suite both contain smart people (and they clearly do), then they'll take advantage of this situation--the DOJ (and perhaps the SEC) to show that they're on the case when something is rotten on Wall Street, and JP Morgan to show that government action is enough.

Negotiation Studies - The Anchoring Problem

Andrew Trask — Wed, 16 May 2012 04:40:59 -0500

I've written before about priming, the tendency of us humans to adopt emotional states if we are exposed to words with emotional content. But there are other psychogical effects that can influence negotiating in unseen, and unwelcome, ways. One of the most common of these is the problem of anchoring.

What is anchoring? As Dan Orr and Chris Guthrie write in their 2006 article Anchoring, Information, Expertise, and Negotiation: New Insights from Meta-Analysis, it's the tendency of any negotiation of numbers (like the price of a home) to cluster around the first number thrown out. Experiments have shown that this actually happens. And it can happen in odd ways. For example, social scientists have been able to influence a person's estimate of the value of a home in Des Moines, Iowa by showing them the median home price in the far more expensive Honolulu; or, better yet, they have influenced people's estimates of the African membership in the UN by spinning a wheel of fortune and reporting the number the arrow pointed at.

In essence, anchoring is a subset of priming, just one that focuses on numbers. Much as we can be primed by words to act in certain ways, we can also be "primed" by numbers that we see.

Like all heuristics, anchoring is often adaptive. For example, when estimating how much we will have to pay to purchase a house, it is usually reasonable for us to rely on the initial list price because it often conveys meaningful information about the actual market value of the home. Problems can arise, however, in two circumstances. First, we can get into trouble when we over-rely on an anchor. In the home purchase example, for instance, we are at risk of over-paying for the house if we are unable to adjust sufficiently away from its list price. Second, we can get into trouble if we rely on an irrelevant or uninformative anchor. If, for example, a newspaper article recounting the median home price in Honolulu influences the amount we are willing to pay for a small house in Des Moines, we are also at risk of over-paying for that home. (Likewise, if our estimate of African membership in the United Nations is influenced by the spin of a wheel of fortune, anchoring is obviously influencing our judgment in untoward ways.)

To test whether anchoring really wound up influencing actual negotiations, Guthrie and Orr performed a statistical meta-analysis on previous studies. (A meta-analysis is a method of statistical analysis that aggregates studies in the same field; performed properly, it can offer results that are more statistically sound than any individual study.) Their conclusion:

Our meta-analysis demonstrates that anchoring has a powerful influence on negotiation outcomes.

From this, they drew a few tactical recommendations. First, they leapt to the same conclusion as most do when they first hear of anchoring: bid high (or low) to start out, in order to sway your counterparty into moving their price closer to yours. Of course, most negotiators already do this, and there is only so far one can move out of a general range before it becomes obvious what one is doing, which may actually cause certain agreements to fall through.

Guthrie and Orr do identify another tactic, however, which is to use anchoring on oneself to counteract any external anchors. In other words, to the extent that one can set high explicit goals before sitting down at the table, one can counteract the anchoring effect of any opening offers at the table. (One might consider this the "I'm not going to pay a lot for this muffler" strategy.)

Guthrie and Orr also talk about the importance of using a good "outside" strategy as a way of defending against anchoring effects. What is an "outside" strategy? Basically, it's any strategy that gets the negotiator out of her own head, since that is where the anchoring effect is happening.

This outside, 'policy' approach improves decision-making by changing the dimensions of the choice-set. A good example of an outside strategy is the prevention of 'independent' auditors from working with a bank or brokerage firm for more than, say, five consecutive years. Rather than simply advising auditors to be impartial, or expecting them to be professional and direct in delivering bad news to the company responsible for their employer's financial growth, the outside strategy removes the threat to integrity by eliminating its source.

(Emphasis added.) Simple bans are an outside strategy, as are bright-line rules. (The controversial Federal Sentencing Guidelines were an effort by Congress to either keep judges from anchoring too low, or an attempt to impose an alternative anchor.) But so is consulting an impartial third party, such as a consultant or a local expert. And it's possible that having a client back at home with high expectations also constitutes a good defense against anchoring; it's certainly something that works for a number of defense counsel.

The New Normal in Class Action Defense - Khalif L. v. City of Union City

Andrew Trask — Tue, 15 May 2012 04:07:54 -0500

Today's case is interesting in no small part because it shows just how far class-action arguments have come in the last 18 months. In the latter half of 2010, most defendants faced with a class action would look primarily at adequacy (are the named plaintiffs good representatives?), typicality (do the named plaintiffs have the same injury and proof as the class?), and predominance (are there more individual issues than common issues?). Now, however, given recent trends in case law--particularly the increased focus on a "rigorous analysis"--more defendants are looking at numerosity [] (can the plaintiffs show that there are enough class members?) and commonality (will the class action yield common answers?) as well.

Take, for example, the recent case of Khalif L. v. City of Union City, 2012 U.S. Dist. LEXIS 64567 (N.D. Cal. 2012). In this case, the named plaintiff sued the Union City Police Department, alleging that it had unlawfully discriminated against its African-American population by denying young blacks who had been victimized by Latino gangs any police assistance.

Under the best of circumstances, this would be a difficult case to prove on a classwide basis. (How, for example, does one really prove non-responsiveness on a common basis? Unless the police systematically never responded to calls from African-Americans, there would always be individualized issues.) When the plaintiffs moved for class certification, the defendants opposed them on both numerosity and commonality grounds, and did so successfully.

For numerosity, the plaintiffs had alleged that, based on 2000 census data, coupled with several affidavits alleging non-responsiveness by the police department, the court could conclude that there were enough African-American high school students in the area to constitute a class.

Defendant, however, asserts that plaintiffs' reliance on the 2000 census data is unduly speculative, and furthermore, that plaintiffs' supporting declarations are insufficient to satisfy numerosity requirements, since the testimony therein exposes a paucity of contact between certain putative class members and the UCPD (and thus, lack of membership in the class).

Defendant's objections are well taken. Plaintiffs have failed to connect the census information they primarily rely upon -- and that establishes the presence of 301 Black or African-American students enrolled in grades 9 through 12 in Union City in 2000 -- to their own class definition or claims.

(Emphasis added.) Similarly, to establish commonality, the plaintiffs asserted that the common issue was whether the Union City Police Department had violated the civil rights of the class members. The defendants responded with an argument that is becoming more common after Dukes: anyone can pose a "common" question, but will it yield common answers?

What plaintiffs here must posit are not questions that within them presuppose a finite legal conclusion that will apply to all class members (e.g., whether the UCPD acts to violate plaintiffs equal protection rights), but instead questions of law or fact that will generate a common answer among members of the class that will aid in determining questions of liability (e.g, allegations that all plaintiffs were subjected to the same particularized UCPD response, or conduct by the same UCPD officer, as a result of similar underlying incidents/reports). This plaintiffs fail to do.

The takeaway from this case is pretty simple. In the wake of cases like Dukes, courts are beginning to recognize that certifying a class means certifying it for a classwide trial. Under those circumstances, even issues like numerosity and commonality are not foregone conclusions for the plaintiff. This is the new normal in class action defense.

Time and Complex Litigation - Why Do Plaintiffs Hate Delays So Much?

Andrew Trask — Thu, 10 May 2012 05:03:43 -0500

There is a common perception in complex litigation (not to mention litigation generally) that time favors the defendant. Defendants often counsel clients not to react too quickly: situations that may provoke a fight-or-flight response in the moment often present more strategic opportunities as they unfold. And plaintiffs tend to agree; they often complain that defendants' primary strategy is just to delay litigation for as long as possible.

But is there any basis for this assumption? After all, there are definite cases--like the motion to strike class allegations, or when plaintiffs try to change their theory late in the litigation--where defendants prefer to move faster than plaintiffs to resolve outstanding issues. So why is it that we all assume that plaintiffs want to rush while defendants want to wait?

One of the largest reasons that we assume that plaintiffs want to proceed faster than defendants is because of what economists call the time discount factor. All other things being equal, people value a gain now more than an equal gain in the future. This works in reverse, too. Most people would prefer a loss in the future more than the same loss today. (So you can see why, from the beginning, plaintiffs push for quick trials--they want their payments now, while defendants don't mind putting off losses from litigation.)

In 2007, Rutgers political science professor Jack S. Levy and PhD candidate Phillip Streich looked over the economic literature on time discounting. And what they found was that the classic account of time discounting actually understates how people treat decisions over time. As they wrote in their article Time Horizons, Discounting, and Intertemporal Choice:

The accumulation of experimental research on intertemporal choice has made it increasingly clear that the exponential discounting model that Samuelson (1937) pioneered nearly seventy years ago, which has subsequently dominated economics and economic applications in political science, does not provide a descriptively accurate model of how most people actually behave in making choices over time. Instead of discounting by a constant rate from one period to the next, people tend to discount relatively more heavily the near-term future and to discount relatively less heavily the more distant future, compared to constant-rate exponential discounting. In addition, discounting is not independent of the value of future out- comes. People have greater discount rates for less valuable outcomes than they do more valuable outcomes, and they have greater discount rates for gains than for losses. This asymmetry of losses and gains, so familiar to students of prospect theory, carries over into other manifestations of reference dependence and framing: the anticipated loss of utility of having to wait longer than expected for a future reward is greater than the anticipated gain in utility from receiving a future reward sooner than expected.

(Emphases aded.) All of these phenomena together contribute to what economists call hyperbolic discounting. These two phenomena (sometimes called the gain-loss asymmetry and the delay-speedup asymmetry) add to the explanation of why defendants appear to prefer delay: plaintiffs value the gains they might receive less the further away they appear, and the mere fact of delay feels like a loss to them. By contrast, the defendant still anticipates that any anticipated loss will close to the amount it hurts today, and it experiences comparatively less gain from the day.

So what does this mean in complex litigation? It means that plaintiffs are in fact likelier to push hard to resolve matters quickly, even when there are sound reasons for proceeding deliberately. And that means that any attempts to slow the litigation to a manageable pace will lead to vigorous protest and strong rhetoric about "delay tactics." This may not be mere rhetoric on the part of cynical counsel; it may represent genuine frustration.

It also means that defendants have some leverage in negotiating how the litigation will proceed. Remember, all else being equal, delays are more immediately painful to plaintiffs than they are immediately helpful to defendants. So, when defendants need important concessions in other areas of the litigation (perhaps in the scope of discovery), they may be able to trade less-valuable (to them) scheduling concessions.

Negotiation Studies - Can Lawyers Use Underhanded Tactics in Negotiating?

Andrew Trask — Wed, 09 May 2012 04:46:02 -0500

We've been talking about negotiations on Wednesdays here for several months now. And while most of that discussion has focused on how to reach principled agreements, even with parties you may not like, there is no denying the fact that sometimes, people lie when negotiating. Or, at the very least, they shade the truth.

This tendency makes sense. To the extent that negotiations are an exchange of information about what agreements will provide the most value to both sides, and to the extent that we all leak information without knowing it, it is just sound strategy to try to keep some information private. There are several ways one can do this. One is to outright lie; another is simply to use accurate information to mislead.

And there are other tactics that can, under certain circumstances, succeed at reaching an agreement even if they're not commonly accepted or liked. One can use the ruse of an agreement to gain valuable information from the other side. Similarly, one can use threats or intimidation to force an agreement where one might not otherwise exist. (For example, corporate defendants--and courts--often worry that plaintiffs' lawyers use class actions to leverage small, easily resolved individual complaints into large cases that will justify large attorneys' fees by threatening bet-the-company litigation.)

So what is to keep lawyers from doing all of this? Is there any law that regulates negotiations? Well, sort of.

First of all, lawyers are not above the law itself. So laws that prohibit outright fraud or other forms of deceptive conduct that might arise in negotiation will apply equally to lawyers. But, in addition, the law governing lawyers' professional duties has evolved to regulate some of this conduct as well. The best-known of these rules is probably the ABA Guidelines on Settlement Negotiations. And while these are not the last word on lawyers in negotiations, they do provide a good starting point.

First and foremost, the ABA Guidelines say that a lawyer cannot outright lie about a material fact.

"In the course of representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person; or
(b) fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6."

(ABA Guideline 4.1.) Unlike fraud, these prohibitions against misstatements do not require the other side to actually rely on the misstatement. (In other words, it is the misrepresentation itself that is a problem, not the harm it does to the other side. This makes sense; lawyers have enough PR problems without being known to condone lying.) That said, the ABA is quick to clarify that by misstatements, it does not mean all misstatements. Just the ones about provable facts.

The prohibition against making false statements of material fact or law is intended to cover only representations of fact, and not statements of opinion or those that merely reflect the speaker’s state of mind.

The Guidelines point out that this allows a certain amount of "puffing," or strategic misinformation. (As one colleague once pointed out, they allow him to react to settlement offers by talking about how angry he is, even if the offer is well within what his client has told him is acceptable.)

Moreover, a lawyer sometimes has a duty to disclose certain information, at least to correct misrepresentations by his client.

The duty to disclose may arise in at least three situations: (1) a lawyer has previously made a false statement of material fact or a partially true statement that is misleading by reason of omission; (2) a lawyer learns of a client’s prior misrepresentation of a material fact; and (3) a lawyer learns that his or her services have been used in the commission of a criminal or fraudulent act by the client, “unless such disclosure is prohibited by the ethical duty of confidentiality.”

Nor may lawyers use the settlement process "in bad faith." (ABA Guideline 4.3.1.) What does that mean?

It is not bad faith for a party to refuse to engage in settlement discussions or to refuse to settle. Settlement is not an obligation, but an alternative to litigation. The choice to pursue it to fruition should be that of the client. However, it may be impermissibly deceptive, and thus an act of bad faith, for a lawyer to obtain participation in settlement discussions or mediation or other alternative dispute resolution processes by representing that the client is genuinely interested in pursuing a settlement, when the client actually has no interest in settling the case and is interested in employing settlement discussions or alternative dispute resolution processes solely as a means of delaying proceedings or securing discovery.

Finally,

A lawyer may not attempt to obtain a settlement by extortionate means, such as by making extortionate or otherwise unlawful threats.

(ABA Guideline 4.3.2.) The ABA is quick to add that, of course, that threatening a party with a valid civil claim is permissible, as is "reminding" the party of the costs of fighting a civil claim in court. So there is some leeway for lawyers to use the threat of a lawsuit to

Now, as with any subject matter involving lawyers--who have, as a profession, never met a rule they couldn't argue around--these ethics rules are not the last word on what lawyers may (or may not) do in the service of negotiating for their clients. Like the Pirate Code, they turn out to be more of a guideline. That is one reason why the ABA Guidelines alone are 71 pages of rules and commentary, instead of a quick, bullet-point list of commandments. And, of course, the barriers to making a complaint to the appropriate licensing body can create some more space for underhanded tactics. But the ABA Guidelines do mark an important starting point. And I will be revisiting exactly what kinds of tactics have been upheld as legitimate and what have not.

Meanwhile, however, it is worth remembering that while underhanded tactics may occasionally work, they carry a heavy cost. A party that believes that it has been treated unfairly will not trust the trickster a second time. And reputations spread. Negotiators known to be dishonest or to employ underhanded tactics will find it harder to reach agreements with other parties as well; also, no one likes to be branded as untrustworthy. And it is these threats, as much as any worry about ethical sanctions, that keep many lawyers in line.

Judge Says "Pfau" to Literary Class Action

Andrew Trask — Tue, 08 May 2012 04:39:48 -0500

Last week, the District of Montana ruled on the defendants' motion to dismiss in Pfau v. Mortenson (the infamous "Three Cups of Tea" class action). The lawsuit alleged that author Greg Mortenson had made up aspects of his biography in writing and marketing his bestselling memoir Three Cups of Tea. The plaintiffs--a pair of Montana lawmakers--specifically claimed that Mortenson and his publisher had engaged in a criminal enterprise (a term of art for RICO claims) to market his book as nonfiction despite the falsehoods it allegedly contained.

When the complaint was filed, I wrote about how the lawsuit had a slim chance of getting certified as a class action. That chance has now gone from "slim" to "none": the trial court dismissed the complaint without leave to amend. And its opinion is instructive reading for class-action defense lawyers.

I'm going to presume that most of my readers are familiar with motions to dismiss, and so will not dwell on the court's discussion of Iqbal (which discusses the "plausibility" requirement in federal pleading) or Rule 9(b) (which requires a heightened pleading standard for fraud-based claims). Instead, I'll just note that the opinion largely turns on the fact that the plaintiffs did not meet their pleading burden in either case. As the court put it when dismissing plaintiffs' RICO claims:

The RICO claims are fraught with shortcomings, including failure to satisfy causal elements, failure to specify the roles of the Defendants, not adequately pleading enterprise theories, and failure to specify an actionable, identifiable racketeering activity. Failure to adequately address the causal elements is the ultimate and fatal flaw. The Complaint does not state, nor is it possible to ascertain, whether Plaintiffs would have purchased the Books if: (1) the Books were labeled or marketed as fiction; or (2) the readers knew portions of the Books, as claimed, were fabricated. Plaintiffs' overly broad statements that they paid approximately $15 for the Books because they were represented as true does not suffice. Additionally, Plaintiffs fail to allege when they purchased the Books, which is crucial in analyzing this case. In fact, Plaintiffs never allege they visited CAI's website or saw or heard any statements made by it before purchasing the Books.

(Emphases added; internal footnote omitted.) The opinion also points out that the plaintiffs did not differentiate among the defendants in making their allegations. (Courts generally frown on "group pleading" of fraud or RICO claims.)

Nor was the court impressed by plaintiffs' fraud-related claims. In particular, it pointed out that the plaintiffs could not point to any specific misrepresentation on which they relied. (The plaintiffs had alleged that they were misled by the book's characterization as "nonfiction." They did not specify who made that representation, or how they relied on it.)

The fraud pleadings in point of fact are weakened by incorporation of the flawed RICO allegations. Moreover, the Complaint fails to specify what representation the Plaintiffs relied upon or the materiality of that representation. Plaintiffs are not entitled to rely on general allegations of purported lies within the Books' content. At a minimum, Plaintiffs must show that they relied on some particular statement by the Defendants made outside the text of the Books.

(Internal footnote omitted.) The plaintiffs had also asserted breach-of-contract and unjust enrichment claims. The court denied these for lack of privity. (Since the plaintiffs bought the book from retailers, there was no privity of contract between them and the publisher, or them and the author.)

What's the takeaway here? Don't forget about the merits arguments. While I talk a lot about how plaintiffs often don't consider whether classes are actually certifiable, they often stretch legal theories far beyond what they're intended as well. In particular, plaintiffs asserting class actions based on public outrage often find themselves in a precarious position: if they are too specific in their allegations, it becomes clear that they do not have a certifiable class. If they rely on vague allegations to mask the obvious certification problems, then they can not prevail on the merits. Plaintiffs (and scholars sympathetic to them) will likely say this is evidence that Rule 23 is not working properly. I'd say the opposite. The class action is not a one-size-fits all device, and its primary purpose is not to leverage quick settlements. The class action is designed to allow a trial of aggregated claims; it works for some kinds of cases, and not others. Recognizing where it will not does not diminish its usefulness.

The Problem with Trial by Formula

Andrew Trask — Thu, 03 May 2012 04:38:02 -0500

In Wal-Mart Stores, Inc. v. Dukes, Justice Scalia registered his disapproval of using statistics to litigate liability in a class action, writing

The Court of Appeals believed that it was possible to replace such proceedings with Trial by Formula. A sample set of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised by a master. The percentage of claims determined to be valid would then be applied to the entire remaining class, and the number of (presumptively) valid claims thus derived would be multiplied by the average backpay award in the sample set to arrive at the entire class recovery -- without further individualized proceedings. We disapprove that novel project.

(Emphases added, internal citation omitted.) Several months later, Connecticut Law Professor Alexndra Lahav wrote a spirited defense of the practice of "Trial by Formula," in the Texas Law Review, titled, aptly enough, "The Case for Trial by Formula."

I would love to say that Professor Lahav's argument is sound as far as it goes, but it goes a little too far. What do I mean by that?

For the most part, Professor Lahav argues that "Trial by Formula" (which she takes to mean statistical sampling in litigation) is an excellent way of ensuring equality of outcome in mass tort litigation. As she writes:

The problem with this understanding of injury valuation is that the tort system does not approximate the actual damages suffered by the plaintiff. The tort system is an institution that is supposed to monetize injuries, yet injuries are not readily monetizable. What the tort system does is assign a value to the damages suffered by the plaintiff. The amount of money damages the system assigns to injuries is contextual and cultural. This means that tort values are comparative; the value assigned to a given injury is dependent on values assigned to other injuries. The cultural contingency of tort damages is the reason that the amounts awarded in tort cases are sometimes controversial. This is also the reason that critics of the tort system are able to say that the system is unpredictable. The problem of valuing injury is not limited to the trial context. In settlement, even if one is able to accurately discount the amount of damages by the probability of the defendant being found liable, the damages assigned to a plaintiff (the amount that is to be discounted) will still be contested.

(Emphasis in original.) To ensure an accurate valuation of damages, Professor Lahav argues that courts should be more rigorous in their statistical methods, an argument that I (and most lawyers) would have no problem with.

To the extent that Professor Lahav argues that statistical sampling may help to smooth out the variations in damages awards, I think she has a strong case. And while I can certainly see where there are sound strategic arguments on the other side (who chooses the sample? for example), she has at least helped to frame an issue that both plaintiffs and defendants might agree on. (And, in many cases, they do. This is why matrix settlements have become popular in mass torts.)

The problem with her argument is that--at least implicitly--she does not confine herself to using statistical sampling to measure damages. Instead, she appears to also want to use it to determine liability. She tips her hand in two places. The first is in her discussion of several class actions that used statistical techniques, not just to determine the amount of damages, but also to determine the fact of injury for different plaintiffs:

In the late 1990’s, a few trial courts experimented with binding statistical adjudication procedures. In Hilao v. Marcos, a federal court used statistical methods to adjudicate a class action brought on behalf of persons who suffered human rights abuses under the regime of Ferdinand Marcos in the Philippines. A special master conducted on-site depositions in the Philippines, and based on these he recommended a recovery schedule to a jury, which then adopted his recommendations (for the most part). The Ninth Circuit upheld this procedure. Around the same time, a U.S. District Court judge in Texas tried 160 asbestos cases and was prepared to use these verdicts to extrapolate to the remainder of asbestos cases consolidated before him. The Fifth Circuit quashed his efforts, holding that the extrapolation of the results of the sample verdicts violated the defendant’s due process right and the Seventh Amendment. No trial court has followed in the footsteps of these innovators and the appellate courts continue to express hostility to mandatory statistical adjudication of this type.

(Emphasis added, footnotes omitted.) The second place is more explicit, when she discusses how one might use statistical sampling to root out fraudulent claims:

Trial by Formula has the potential to resolve many other problems that plague modern litigation. For example, commentators have repeatedly lamented patterns of baseless claiming in mass tort litigation. Sampling offers a way of addressing the phenomenon of fraudulent claims and creating incentives to curb them.

(Emphasis added, footnotes omitted.) In both of these cases, the problem that the courts (and the plaintiffs) have worried about is not the statistical determination of damages once liability has been established, it is the statistical determination of liability itself. This is the same issue that Justice Scalia had in the Dukes case. To repeat his specific issue (as opposed to the summation):

A sample set of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised by a master. The percentage of claims determined to be valid would then be applied to the entire remaining class ...

It isn't the use of statistical sampling to determine damages that defendants (or the Court) worries about. It's the use of sampling to determine liability that causes problems, because statistical sampling cannot tell which plaintiffs are actually entitled to relief and which are not. Professor Lahav argues that "Trial by Formula" works because we want equality of outcome--treating like cases alike. But no defendant--or anyone else concerned with due process--wants unlike cases treated alike, particularly when the difference between the cases is that in one the defendant is actually liable and in the other it is not. That's the bridge too far, and that is the one that Professor Lahav and others either don't notice--or won't admit--they are crossing.

Negotiation Studies - 3 Tips for Bargaining with the Devil

Andrew Trask — Wed, 02 May 2012 04:53:13 -0500

Harvard Law Professor Robert Mnookin has written a lot about negotiation. Seriously, a lot. His most recent book, Bargaining with the Devil, is about how to negotiate long-standing conflicts with lots of bad blood. Or, as he puts it:

By "bargain" I mean attempt to make a deal--try to resolve the conflict through negotiation--rather than fighting it out. By "Devil," I mean an enemy who has intentionally harmed you in the past or appears willing to harm you in the future. Someone you don't trust. An adversary whose behavior you may even see as evil.

(Emphasis added.) Mnookin's primary concern with "bargaining with the Devil" is that negotiating with an enemy carries with it a number of "negative traps," patterns of thought and behavior that leave the parties mired in conflict instead of actually resolving issues. He examines this issue through the lens of three primary examples: (1) Nelson Mandela's discussions with the Afrikaner government; (2) the resolution of a long-standing legal dispute between IBM and Fujitsu; and (3) a bitter labor dispute at the San Francisco Symphony Orchestra.

Among the most useful lessons Mnookin offers:

Beware of preconditions. As Mnookin points out, preconditions are often designed to deprive the other side of any leverage (by, for example, taking the only issues one side cares about off the table). As a result, they send an unequivocal signal that one side is not actually interested in negotiating through the issues. So the next time plaintiffs' counsel tells you that they're happy to talk settlement, but only on a classwide basis, save yourself the time. She's just told you she's not ready to talk yet.

Personal connections can be important. Often the mere act of dealing with a rival feels like too much of a compromise. I have certainly, in my time, dealt with clients who believed that even dignifying a class action complaint with negotiation was doing nothing more than encouraging bottom-feeding behavior. (In some cases, they were right. But in some cases, the refusal to negotiate more knee-jerk than considered.) How does one make it past this initial reluctance to negotiate? Mnookin offers the example of Nelson Mandela, who was able to secure compromises from the all-white South African government by making (and then maintaining) personal connections with individual Afrikaner leaders. Once they had a personal connection to Mandela (as well as a sense of mutual respect), they could "make concessions and yet maintain one's self-respect."

Reinforce the value of cooperation to your own side. Mnookin draws on Robert Putnam's work on two level games. He points out that in resolving a dispute, both parties usually must deal with disgruntled (and possibly polarized) constituents back home. And, as Mnookin points out, no matter how skilled the negotiator is, if her constituents do not understand the importance of compromise, then there will not be an agreement. His suggestion? Continually reinforce the benefits of any compromise with your constituents.

I have a much deeper understanding of how difficult it is to change the negotiation culture of an organization. It requires not simply initial "buy-in" but constant reinforcement. … Without this reinforcement, their natural fears--the negative traps--may reappear.

Mnookin's work is useful for class-action defendants on two levels. First, since there does tend to be some polarization and demonization between plaintiffs and defense counsel, it is useful to see what he recommends for negotiating with parties one might find deeply distasteful. Second, and every bit as important, Mnookin provides a detailed look at three extremely difficult negotiations. That alone is worth the price of the book.

More on Cy Pres - Rohn v. TAP Pharamceuticals Products, Inc.

Andrew Trask — Tue, 01 May 2012 04:17:35 -0500

Much has been written in the last few years about cy pres relief (relief that goes, not to class members, but to ) in class action settlements. While plaintiffs and defendants still find cy pres to be a valuable for increasing settlement amounts, the practice has come under increasing fire from some scholars and courts who view it more as a way of inflating settlement amounts to justify attorneys fees.

Last week, the First Circuit weighed in on the debate in Rohn v. TAP Pharmaceutical Products, Inc. Its take: while cy pres relief is a valid tool for providing relief to absent class members, courts should not have the discretion to decide where the funds actually go.

The procedural posture of the case is a little complicated. Rohn is one of the constituent cases of the In re Lupron Marketing & Sales Practice Litigation. The appellants are one subclass of plaintiffs, who challenged a cy pres distribution of $11.4 million to the Dana Farber/Harvard Cancer Center and the Prostate Cancer Foundation. (They argued that the money should have gone to them, as consumers.)

The First Circuit took the opportunity to state some of the principles it follows when reviewing cy pres relief. It elected not to follow Judge Jones's suggestion in her concurrence to Klier v. Elf Atochem (5th Cir. 2011) that courts prefer reversion settlements to cy pres. Instead, it adopted the "reasonable approximation" standard.

Both case law and the ALI Principles support our adoption of the "reasonable approximation" test. As to whether distributions reasonably approximate the interests of the class members, we consider a number of factors, which are not exclusive. These include the purposes of the underlying statutes claimed to have been violated, the nature of the injury to the class members, the characteristics and interests of the class members, the geographical scope of the class, the reasons why the settlement funds have gone unclaimed, and the closeness of the fit between the class and the cy pres recipient.

The First Circuit was also not sympathetic to the plaintiffs' claim that they deserved the money, since they had already received full relief, and

It is well accepted that protesting class members are not entitled to windfalls in preference to cy pres distributions

However, the First Circuit also expressed one concern about cy pres relief, namely that the court itself should not be the entity deciding where cy pres funds should go.

Distribution of funds at the discretion of the court is not a traditional Article III function, as many courts have recognized …

What's the takeaway for defense lawyers? Cy pres is still OK, but make sure that the third party receiving the relief is closely related to the gravamen of the lawsuit.

Coming Soon: The Stanford Journal of Complex Litigation

Andrew Trask — Mon, 30 Apr 2012 04:45:41 -0500

Back in December, I bemoaned the fact that there wasn't more good class action scholarship, and I offered a number of topics that I thought class-action scholars could look into. In January, I offered some more suggestions about ways to improve class action scholarship. It appears I wasn't the only one thinking along the lines of improving academic coverage of issues in complex litigation, because I just received the following email:

Re: Announcing the Stanford Journal of Complex Litigation!

Dear Authors:

We are proud to announce the founding of the Stanford Journal of Complex Litigation (SJCL). Beginning in the 2012-2013 academic year, SJCL will publish articles and essays that are timely and make a significant, original contribution to the field of complex litigation. We are currently seeking article and essay manuscripts on a range of topics including the rules of civil procedure, aggregate litigation, mass torts, jurisdictional disputes, complex litigation reform, actions by private attorneys general, and transnational litigation.
We hope you will consider publishing with SJCL for a few reasons:
· Specialization: SJCL is the first student-edited journal devoted exclusively to topics relating to complex litigation. Publishing with SJCL will ensure your important contribution will be read within the broader field it is engaging. SJCL will serve as a forum for dialogue on complex litigation issues. We also expect that because SJCL is devoted exclusively to complex litigation, it will quickly become a source of guidance for courts and practitioners.
· Expedited publishing: Because we are currently accepting submissions for the first volume of SJCL, we will be able to publish many of the submissions we accept in our fall issue. That means you can expect your article with SJCL to be in print faster than almost any other journal. There will be no need to update through a lengthy editing process.
· Modified peer review: SJCL will follow a modified peer-review system. Meaning, after a first-level review by SJCL’s editorial staff, any submission that is a candidate for publication will be submitted to at least one scholar in the field of complex litigation or civil procedure who will review the piece. We will take any unanimous decision from our peer reviewers as a binding decision on publication. This will ensure that SJCL is publishing significant contributions to this field.
· “Light edit”: Our editorial policy is to afford substantial deference to authors, in both tone and substance. As a result, all articles must be well written, well cited, and completely argued at the time of submissions. SJCL will only edit to ensure readability and Bluebook compliance, which means that the editing process will be faster but also requires that authors vouch for the accuracy of their citations.
· Outreach: We are committed to generating interest in the articles published with SJCL. That is why we will actively promote all scholarship we publish at symposia and on the blogosphere. We are also committing to distributing hundreds of copies of our first issue to grow our readership base.
· Volume 1: There is something to be said for publishing in the very first volume of a journal. We hope you appreciate this significance and decide to submit your manuscript to SJCL.

We review and accept articles year-round on a rolling basis. SJCL strongly prefers electronic submissions through the ExpressO submission system, which can be found online at http://www.law.bepress.com/expresso. You may also e-mail your manuscript tosjcl_submissions@lists.stanford.edu. We do not accept submissions in hard copy.
SJCL is also seeking faculty with expertise in areas such as civil procedure or complex litigation to serve as reviewers. If you are interested, please contact sjcl_editors@lists.stanford.edu.

A website with more information is forthcoming. For the time being please refer to our Stanford Law School site:http://www.law.stanford.edu/publications/journals/sjcl/.

Please contact us with any questions. We look forward to working with you.

Regards,

Nick Landsman-Roos & Matt Woleske
Editors-in-Chief, Stanford Journal of Complex Litigation
sjcl_editors@lists.stanford.edu

I'd say that there are enough good research topics in complex litigation to support a devoted journal. Now we have one. So if you've been mulling over some issue specific to complex litigation, this is the ideal time to write it up and submit it.

And I'd like to wish Nick and Matt the best of luck in launching their new journal.

The Agency Class Action

Andrew Trask — Thu, 26 Apr 2012 05:37:56 -0500

For years, class-action scholars have tried to import lessons from administrative law into Rule 23, on the theory that mass torts, like administrative actions, deal with large, generalized issues. Sometimes these imports provide new insights, but often they stress why it is that Rule 23 is not equipped to handle issues in the same way that administrative agencies are. Now, Professors Adam Zimmerman and Michael Sant' Ambrogio seek to "turn the tables" and ask what overworked administrative agencies can learn from Rule 23. Their argument, in a nutshell:

[T]here is no reason why ALJs should have any less power to aggregate claims than a civil court. For some time, administrative law scholars have described the significant impact agency adjudications have on parties who never directly participate in a proceeding. Moreover, the modern administrative state, like the class action, originally developed in response to intractable disputes involving large groups of people. In part for that reason, the Supreme Court has long characterized class actions themselves as a “quasi-administrative” proceeding.
This article argues that agencies should adopt aggregation procedures, like a civil class action, to resolve common claims raised by large groups of people in administrative courts.

(Footnotes omitted, emphasis added.)

It's an interesting proposal, which the authors argue would result in more consistent outcomes for agency litigants, speed up rulings, and increase access to justice. It also addresses a persistent problem with private class actions:

reforming agency procedures through the federal court class action deprives agencies of the opportunity to take the first crack at reasoned decisionmaking with the same focused attention and information available to a federal court in a class action. It is inconsistent with the values underlying the doctrines of exhaustion and ripeness, which seek to give agencies the first opportunity to address issues within their purview. Indeed, one of the criticisms of judicial reform of administrative programs is that it is anti-democratic and the political branches, not the courts, should correct agency errors. Providing agencies with the opportunity to address systemic problems through aggregation mechanisms is respectful of the responsibilities allocated to the agency by Congress.

And for two of the types of cases the authors address ("public rights" cases where many individuals are suing the government, and "distribution" cases, where the government is looking to compensate victims after it has fined a defendant) any kind of agency class action would operate much like a classwide settlement. Since the global peace would be bought by an institution that already has sovereign immunity, and is consenting to aggregation, it looks like a very attractive solution to what they describe as a widespread administrative problem.

For "private right" cases however (which the authors describe as cases brought by plaintiffs against private defendants in front of agencies), agency class actions would run into the same problems as Rule 23 class actions--the defendant is entitled to put on its full range of defenses. And that means that the authors have overstated the reach of their proposal. These are often the situations--alleged safety problems, alleged consumer fraud--where administrative rulemaking is superior to individual litigation.

In the meantime, however, I'd recommend class-action defense lawyers read their proposal, if only because their analysis of the overall problem shows why some class actions belong in front of administrative agencies instead of in the federal courts.

Negotiation Studies - The Dark Side of Having Options

Andrew Trask — Wed, 25 Apr 2012 04:36:30 -0500

Last week, I talked about some of the limitations of using Getting to Yes when negotiating class actions. But Getting to Yes has other limitations as well, ones well worth lawyers' consideration. For example, in his 2003 article: Panacea or Pandora's Box?: The Costs of Options in Negotiation, Vanderbilt Professor Chris Guthrie takes on the question of just how useful generating new options (or "creating value") can be in negotiation. His answer is that it's less useful than one might think.

Relying on existing experimental research, new experimental research, and "real-world" empirical evidence, the Article identifies four potential costs associated with option generation: option devaluation, context dependence (both contrast and compromise), non-compensatory decision making, and decision regret. Taken together, these "option costs" stand for the ironic proposition that negotiators who heed the option-generation prescription may be more likely than those who ignore it to enter into inferior agreements with which they may be less satisfied. In short, option generation may not be the panacea its proponents imagine, but rather a Pandora's box that can lead negotiators astray.

(Emphasis added.) So how exactly do these four "option costs" work?

1. Option devaluation. Basically, the more options one offers, the less attractive any option will seem.

Because the process of comparison brings to mind the relative advantages and disadvantages of the options under consideration, and because each option's disadvantages are likely to loom larger than its advantages, loss aversion implies that comparisons will decrease the attractiveness of every option under consideration.

2. Context dependence. A more generalized form of his first cost, context dependence means that negotiators do not evaluate options in a vacuum; instead, they compare them against the other options they face. (See how that includes the first "option cost"?)

Psychologists have discovered, however, that people's assessments of initially considered options are often systematically influenced by the emergence of an additional, irrelevant option. People "make context-based inferences about the worth of alternatives whether or not the context provides a valid basis for such inferences."

This effect means that once there are multiple options on the table, it becomes easier to manipulate your counterpart's decisions by introducing options that--while not strictly relevant--will sway them towards options more favorable to you, either by making them seem more attractive by contrast, or by making them seem like a reasonable compromise.

3. Non-compensatory decision making. This is a way of saying that, confronted with lots of options, people do not act like rational maximizers.

When several options are available, negotiators may make decisions based not on an evaluation of all available information (compensatory decision making), but rather on the basis of a simplified decision-making process (non-compensatory decision making).

I've discussed some of these forms of decision making before. It's worth noting that Guthrie may be underestimating their effects. Non-compensatory decision making occurs frequently, not just when one is confronted with multiple options.

4. Decision regret. What is decision regret?

For every yes there must be a no. To decide one thing always means to relinquish something else. As one therapist commented to an indecisive patient, "Decisions are very expensive, they cost you everything else." Renunciation invariably accompanies decision. One must relinquish options, often options that will never come again.

In other words, decision regret is an extreme form of buyer's remorse. The more options there are in a negotiation, the more likely the negotiator will be dissatisfied with her decision, because she will be looking back at those options she decided against with rose-colored glasses.

Guthrie's takeaway from this--and remember, he's a law professor--is that you should always involve a lawyer in negotiations that might involve multiple options.

Lawyers are more likely than others to use compensatory rules when assessing negotiation options because lawyers are among the more rational and analytical members of society. Researchers have used psychological tests like the Myers-Briggs Type Indicator (MBTI) [http://www.myersbriggs.org/my-mbti-personality-type/mbti-basics/], as well as brain-dominance testing [http://www.ipn.at/ipn.asp?BHX] instruments, to demonstrate this analytical orientation. Indeed, neuroscientists have "selected lawyers when they wished to test an occupational group that is characteristically analytical in its preferred mode of thought." This is not to say, of course, that lawyers are pure "rational actors" who are impervious to the effects of psychological "biases" in decision making; in fact, lawyers, like other novice and expert decision makers, are susceptible to such biases. However, experimental evidence suggests that lawyers are more likely than others to be able to resist these biases and make decisions rationally.

Personally, I think this may be overestimating the rationality of lawyers. However, Guthrie's point may work better if it's made simpler--when confronted with multiple options in a negotiation, it is worth consulting a neutral, relatively objective third party. They may not be more "rational" than other human beings, but they won't be as invested in the specific decision, and that should provide the detached double-check the negotiator needs.

E-book Price Fixing - The Benefit of State AG Actions

Andrew Trask — Tue, 24 Apr 2012 04:14:25 -0500

Last Friday, Thomson/Reuters reporter Alison Frankel (who should be on every class-action lawyer's RSS feed) wrote about an example of a new strategy class-action defendants have developed over the past few years. That strategy? Work with the government. In this case, publishers Harper Collins and Hachette--two of the defendants in both the Justice Department's recent price-fixing complaint and a class action making the same allegations--have settled with 16 state attorneys general. Harper Collins has announced that it plans to settle with the other 34 state AGs as well if possible. Leaving aside the fact that settling with a government agency often the right thing to do when accused of wrongdoing, it also provides several immediate benefits to defending subsequent class actions.

From Frankel's piece:

For the defendants, there are obvious benefits to reaching quick settlement with state regulators rather than slogging through litigation with class action lawyers who've already sunk millions into working up the case. The AG parens patriae cases aren't subject to the same requirements as federal court class actions (although they do have to be approved by Cote, who is overseeing all of the e-books litigation). There are also no attorneys' fees for the state AGs, which means cheaper settlements for defendants. In the muni bond derivatives litigation, class counsel repeatedly argued that defendants preferred to make deals with the AGs because the private lawyers would demand bigger settlements.

Settling with state AGs (or the Justice Department, for that matter), offers two other benefits for class action defendants as well.

First, it provides an excellent superiority argument should the class action proceed. Action by government agencies is often superior to a class action, in no small part because the government can tailor the remedy as it sees fit. (More support for the fact that state AG settlements are superior: CAFA requires parties to report class-action settlements to state AGs, not the reverse.)

Second, and related, negotiating with the government undermines one of the plaintiffs' most common rhetorical justifications, that class actions are necessary for deterrence because the government cannot effectively regulate corporate misconduct. After all, if the government has already effectively regulated the conduct in question, then there is no need for a class action to "fill in the gaps." At that point, if plaintiffs' counsel is still pushing the case, it becomes clearer to the court that it's really about the fees, not the public good.

It's interesting, because this likely means that class actions as a device do have some general benefit. They encourage negotiations with appropriate government authorities. The irony is that this benefit does little, if anything, for plaintiffs' counsel.

Good News: Inside Counsel Must Do More With Less on Class Actions

Andrew Trask — Fri, 20 Apr 2012 05:33:33 -0500

Last week, Carlton Fields published the results of a survey it commissioned, in which an independent consulting firm interviewed 322 corporate counsel about what class action practice would look like to them in 2012. The survey has gotten a fair amount of press, and rightfully so. Any time someone takes the time to collect actual data about how lawyers do their jobs, it's worth paying attention.

The headline for the survey has been that corporate counsel are expected to do more with less. Specifically:

In 2012, corporate legal departments expect to handle slightly more of them—on average, 5.4 matters per company, up from 4.4 in 2011. At the same time, they plan to decrease their per suit costs, which average $776,500, by 17 percent this year.

(Emphases added.) The survey has a number of other important findings, from the three most prevalent practice areas for class actions (labor/employment, consumer fraud, and securities), to the importance of consolidating class actions with a single in-house lawyer (which yields average savings of more than $300,000 per case).

But I want to focus on the headline--more with less is the new normal for class-action counsel. That may sound like bad news in an embattled legal market. It's not. In fact, I'm glad to see it, because it means that there is real opportunity out there for up-and-coming class-action firms. There are more matters out there, they're being centralized within corporate law departments, and counsel who can show deep knowledge of Rule 23 and cost-saving strategies will be at a competitive advantage.

What does that mean specifically?

Settlements will likely be be fewer and smaller. While Carlton Fields reports that inside counsel are split on whether to settle cases early, it's hard to dispute one central truth: if there's less money available to spend on class actions, then there is less money for settlement. And that makes good litigators, as opposed to quick settlers, that much more valuable.
Aggressive defense--including early challenges to certification--becomes more important. If defendants can't afford settlement, then they're gong to fight harder. Motions to dismiss and to compel individual arbitration remain favored tactics, although those victories may not be as decisive as once thought. But there are other tactics as well. Regular readers are probably bored to death of my beating the drum for the motion to strike class allegations. But at a time when budget pressures are high, it's a great way to force a debate on certification on the defendant's--rather than the plaintiff's--timetable. (Smart defense counsel will also consider tactics that may not be related to motions practice.)
Rule 23 nerds are more attractive. If corporations are consolidating class actions with a single in-house lawyer, we're going to be facing clients with a deeper knowledge of Rule 23 across various practice areas. It stands to reason that firms that can offer individuals with a deep, broad-based knowledge of Rule 23--lawyers fluent in the language and familiar with the terrain--are going to be able to offer tangible benefits to their clients. (Which means it's a good time to be a class-action blogger.) Not every member of a team has to be an expert in Rule 23, but smart in-house counsel will want to make sure at least one of their outside lawyers is.
Case management is critical. Look, I'll be the first to admit it. Case management is not sexy. It will never get the clicks a good SCOTUS opinion will. And lawyers who geek out over things like knowledge management or Getting Things Done tend to get funny looks from others in the office. But mastering case management yields real benefits in greater productivity [] and adaptability to unforeseen circumstances. That may be anathema to lawyers who bill by the hour, but it's a big deal to inside counsel who pay by it.

The takeaway here is a simple one. The market is getting tougher. In-house counsel need lawyers who can work faster and cheaper, and are willing to try unconventional things to win quick and reduce costs--whether those are alternative fee arrangements or unusual arguments. It's a bad time for business as usual in class-action defense. And that makes it a great time to be a class-action defense lawyer.

Klonoff on Class Action Decline - The Good, the Bad, and the Ugly

Andrew Trask — Thu, 19 Apr 2012 04:32:47 -0500

Robert Klonoff, Dean of the Lewis & Clark Law School, has produced a new article, The Decline of Class Actions (forthcoming from the Washington University Law Review), that provides a much-appreciated overview of recent developments in class action law from a plaintiff's perspective. (Disclosure: Dean Klonoff provided a very nice blurb for the Class Action Playbook.) Regular readers of this blog know that I am actually a big fan of plaintiffs' perspectives: I think understanding them is crucial to a conscientious and seals defense of class action litigation. And while there is much to like in Dean Klonoff's analysis, there is also a fair amount that is lost to the same old pro-plaintiff analysis that many courts have begun to reject.

Unlike a number of his scholarly colleagues, Dean Klonoff doesn't say that the class action is dead, just that courts have made it a lot harder to get a class certified, and that he considers that a problem. He traces that problem to a number of the "new" requirements that courts have imposed on class-action plaintiffs in the last decade. What are those new requirements? Well, they'll look familiar to readers of Rule 23.

Rigorous analysis. Dean Klonoff worries that courts now require too much evidence from plaintiffs at the certification stage. Some of his concerns have some actual foundation (a number of practitioners, both plaintiff and defense, have noted that the increased focus on rigorous analysis has shifted costs toward the beginning of the case for both sides, a result necessarily in tension with the efficiency arguments for class certification). But others betray an ignorance of how lawyers actually litigate cases. For example, he expresses concern that:

While courts have imposed strict new evidentiary burdens on plaintiffs, they have increasingly permitted defendants to seek denial of class certification without submitting to discovery. For instance, in Pilgrim v. Universal Health Card, LLC, the Sixth Circuit upheld the district court’s dismissal of class allegations in a nationwide class action, reasoning that “we cannot see how discovery or for that matter more time would have helped [plaintiffs].” Other courts have taken this approach as well. Case law requiring plaintiffs to put forward exacting evidentiary proof in support of class certification is difficult to square with case law permitting defendants to move to strike class allegations without allowing plaintiffs even minimal discovery.

In fact, it is easy to square these two requirements. The plaintiff bears the burden of providing the court with an adequate basis for certifying a class. LIke with any burden, that means that ties go to the other party (in this case, the defendant). If the plaintiff has pled a class action that can't be certified because of an insurmountable legal defect, there is no reason to engage in discovery that cannot cure that defect. This is the exact same reason that we require a plaintiff both to prove her case by a preponderance of the evidence, but also allow the defendant to file a motion to dismiss.

More importantly, Dean Klonoff does not address the actual new requirement imposed by Rule 23(c)(1)(B), which requires a detailed order from courts certifying a class. Without actual evidence from plaintiffs, courts will find it hard to meet this new requirement.

Interestingly, Dean Klonoff does think that courts should resolve Daubert questions before certification, because they are about the admissibility of evidence, rather than proof of the merits.

Ascertainability. Dean Klonoff also worries about courts' increased focus on the viability of class definitions.

Indeed, the trend of more exacting scrutiny of class definitions has been recognized by one of the nation’s leading class action defense attorneys, John Beisner. In a recent article, Beisner noted that “more and more decisions are turning on the requirement of an ascertainable class definition.” He thus urged class action defense counsel to look for ways to challenge the class definition.

(Internal footnotes omitted.) According to Klonoff, a "more measured" approach would be to allow the plaintiffs to amend their class definition whenever it is challenged. And, in many cases, that is exactly what a court will do. But sometimes amending a class definition is simply futile: if there is no common issue uniting the class, then any definition will be either overbroad or impermissibly merits-based.

Numerosity. Dean Klonoff has identified an important trend here. Prompted by a need for a more rigorous analysis, courts have expanded their analysis of numerosity. In particular, they have begun to question the assumptions plaintiffs make, and to look at the effect that geographic dispersion may have.

Although the case law is conflicting, plaintiffs are nonetheless at risk of losing on class certification if their numerosity argument is based on inference or on appeal to common sense. The strict approach adopted by some courts represents yet another troublesome trend. Indeed, the large number of successful challenges to numerosity—which was once the least demanding requirement of Rule 23(a)—is one of the most dramatic recent developments.

(Emphasis added.) Both plaintiffs and defense can benefit from a greater understanding of this development.

Commonality. Not surprisingly, given his overall thesis, Dean Klonoff believes that the Supreme Court erred in its holding in Dukes. As he puts it:

The majority decision in Dukes cannot be squared with the text, structure, or history of Rule 23(a)(2). Nothing in the text of Rule 23(a)(2), or in the Advisory Committee Notes thereto, requires that the common question be central to the outcome. Instead of looking at the traditional methods of interpreting Rule 23(a)(2), the majority relied heavily on a law review article by Professor Nagareda.

Dean Klonoff also questions whether Nagareda was really writing about commonality, even though Nagareda makes makes it clear that he is referring to common questions in Rule 23 a number of times (both Rule 23(a)(2) and 23(b)(3) use the same term; it makes sense they would mean the same thing). This begs the question: Why would you want to certify a class where the common question was not central to the outcome of the case? This, unfortunately, is not a question he answers. (Dean Klonoff does raise another interesting question, which is whether the use of the term "common question" in Rule 23 is the same as in Rules 20 and 42.)

Adequacy. After pointing out that he actually supports a more stringent adequacy requirement in general, Dean Klonoff argues that adequacy should not encompass claim-splitting.

There is, however, a disturbing trend in “adequacy” jurisprudence. That case law focuses not on the ability of class representatives and counsel to vigorously represent the class, but on counsel’s selection of the causes of action to assert. The argument is that, by not bringing all potentially viable claims, the representatives and counsel have (1) impermissibly “split” claims, thereby prohibiting class members (pursuant to res judicata) from later bringing those omitted claims, or (2) subjected class members to the risk that collateral estoppel could essentially nullify their remaining (unfiled) claims.

(Internal footnote omitted.) Dean Klonoff's solution is simply to have courts state that collateral estoppel shall not apply to claims that could have been raised, but were not for strategic reasons. This is a disturbing suggestion on several levels, not least of which is that it undermines the balance that justifies class aggregation, that of the right to individual trials on the one hand, and the need for global resolution--for plaintiff or defendant--on the other.

Other Issues. Dean Klonoff also worries that plaintiffs cannot use Rule 23(b)(2) strategically to certify money damages classes that would not qualify under Rule 23(b)(3), and that courts have clamped down on fraud and multi-state class actions (the former because reliance is very difficult to prove on a classwide basis, the latter because plaintiffs have not offered any viable methods of certifying a nationwide class). He believes that these constitute "per se" rules against certification.

Klonoff doesn't have much practical advice for lawyers, instead he advocates forum-shopping to find more receptive circuits. (He recommends the Second, Third, and Ninth.) Instead, he largely critiques the holdings, and asks courts to hold differently going forward.

So the good news is that Dean Klonoff has published an actual work of doctrinal scholarship that can help lawyers, something we desperately need more of. The bad news is, it's clearly plaintiff-biased; but that's not really bad news. Dean Klonoff is a smart man who knows class-action law well; reading his analysis of the latest class certification cases will help any conscientious defense lawyer hone his arguments. The real bad news (call it the "ugly") is that these are apparently the best pro-certifictaion arguments. Rather than basing them on the case law as it stands, Klonoff instead questions the legitimacy of recent holdings:

They suggest a suspicion about class actions generally, premised on the assumption that the class action is a blunt instrument to coerce settlement and secure large attorneys’ fee awards.

In fact, as several class-action plaintiffs made clear at the DePaul Law Review Symposium, these are not the only arguments available to plaintiffs. Plaintiffs who actually meet the requirements of Rule 23--by avoiding individualized issues, providing evidence that each of the requirements are met, and engaging in comprehensive legal analysis where appropriate in multistate class actions--are on exceptionally strong footing at certification. When one's arguments all start out by assuming a premise like "courts should not be suspicious," then the battle is won or lost before any argument gets made. Either the judge is suspicious or she isn't, either she agrees that the text of Rule 23 is secondary to deterrence and efficiency, or she does not. At that point, all the arguments of this kind that exist are unlikely to change her mind from where she started.

(Hat tip to Professor Lahav at the Mass Tort Litigation Blog for finding the article.)

TAGS -

Negotiation Studies - The Limits of Getting to Yes

Andrew Trask — Wed, 18 Apr 2012 04:20:24 -0500

Anyone who writes or talks about negotiation strategy eventually has to address Getting to Yes. It's the 800 pound gorilla in the negotiation field, and it has produced a vocabulary that, while occasionally jargony and unwieldy, is in constant use. Far more importantly, it contains some outstanding advice on how to negotiate in almost any context, even with difficult counterparties.

So, assuming that you've never read the book, what's it about? Getting to Yes advocates a method known as "principled negotiation." As the authors describe it, principled negotiation:

suggests that you look for mutual gains wherever possible, and that where your interests conflict, you should insist that the result be based on some fair standards independent of the will of either side. The method of principled negotiation is hard on the merits, soft on the people. It employs no tricks and no posturing.

In general, principled negotiation is an outstanding overall strategy, in no small part because it tends to work whether or not the other side uses it too. (And, for lawyers in particular, it has an added benefit. If you are continually referring to some fair, objective standard, then if the negotiation breaks down you are very well placed to defend your position in front of a mediator, arbitrator, or judge.)

In explaining this principle, Fisher & Ury present two primary insights that can help negotiators. Unfortunately, each also presents some specific problems in the class-action context:

BATNA - the "Best Alternative To Negotiated Agreement."

The reason you negotiate is to produce something better than the results you can obtain without negotiating. What are those results? What is the alternative? What is your BATNA--your Best Alternative To a Negotiated Agreement? That is the standard against which any proposed agreement should be measured. That is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your interest to accept.

(Second emphasis added) In business deals, the best alternative is often some agreement with someone else. In litigation, the best alternative to a negotiated agreement is litigation. And, more importantly, the best alternative for a defendant is the money it pays to the class and counsel, while plaintiff counsels' best alternative is the fees they will collect. (This is what class-action scholars call the agency problem with class actions.) The calculus is a little different than what Fisher & Ury have in mind.

"Creating value." - This is Fisher & Ury's other big insight. Their big example of it involves two children fighting over an orange:

[A]ll too often negotiators end up like the proverbial children who quarreled over an orange. After they finally agreed to divide the orange in half, the first child took one half, ate the fruit, and threw away the peel, while the other threw away the fruit and used the peel from the second half in baking a cake.

Leaving aside the fact that the authors' kids bake a heck of a lot more than I did in my youth, this kind of creating value can work extremely well in business negotiations. By taking a step back, the two sides can often agree on a division that allows each to get more value out of an agreement than they might out of just splitting the pot in two. And there are no shortage of attempts to "create value" in class action settlements as well. The difficulty is that Rule 23 constrains some of the creativity lawyers might exercise. This is not a bad thing. The "orange" problem that class-action lawyers are trying to solve is that the defendant does not want to pay much, but class counsel want large fees. So "creating value" in the class action context often means giving the class members something that doesn't cost much, but can be claimed as valuable enough to justify large attorneys' fees. And those are the exact agreements most likely to draw objections.

Despite these issues, Getting to Yes is still the definitive book on negotiations, and much of the advice in it (from how to evaluate your best alternatives, to how to deal with more coercive tactics from the other side) is extremely valuable. Class-action lawyers just have to make sure that in following the book's advice, they're not running up against the specific strategic problems posed by complex litigation.

Does Virtual Gold Count Towards CAFA's Amount in Controversy? Abreu v Slide Inc (ND Cal 2012)

Andrew Trask — Tue, 17 Apr 2012 05:00:50 -0500

For the tech savvy, virtual money is all the rage. It's been the subject of a few science fiction/crime mashups by bestselling authors like Neal Stephenson and Charlie Stross. It even provides a thriving trade in various online games, one that has proved to be worth a fair amount of of real-world money. And now, it's entered the world of class action practice.

The case, Abreu v Slide Inc (ND Cal 2012), involved an internet game (which Google eventually bought) called SuperPoke! Pets. The game allowed users to adopt and care for a virtual pet. By playing with the pets, users earned virtual currency that could be used to buy virtual goods for the pets. But, if the users were willing to spend actual money, they could also buy "gold," which could be used to buy premium goods; they could also buy and sell certain goods on a "robust secondary market." And boy did players spend; in fact, the named plaintiff alleged that she spent more than $1,000 on her virtual pets during the time she played.

So, how does virtual gold translate into a real lawsuit? In June 2011, SuperPoke! Pets announced it was discontinuing its gold, and then in September 2011, it announced it would take the game offline in 2012. So the plaintiff sued in California State Court, alleging that SuperPoke! Pets had violated California's consumer fraud act, and seeking

to recover the full value of users’ in-game purchases of both money and virtual goods, as well as “other investments” allegedly lost as a result of the game’s termination.

SuperPoke! Pets removed the case to the Northern District of California, where it landed on the docket of blog-favorite Judge William Alsup. As part of its notice of removal, it appended an affidavit showing that users had spent more than $6,116,000 buying gold between October 2010 and June 2011.

The plaintiff moved to remand, arguing that SuperPoke! Pets had not met its burden of showing the amount in controversy because they had not provided business records, and had not covered the entire class period. (The plaintiff also, contrary to the allegations in her complaint, argued that SuperPoke! Pets had not considered any refunds they might have offered.) Judge Alsup was having none of it.

Defendants’ submissions, coupled with the allegations in the complaint, plainly show the amount in controversy exceeds five million dollars. Plaintiff’s complaint seeks to recover the actual value of SPP users’ “investments and property” in “gold” and virtual goods as well as money spent on VIP status subscriptions. The complaint alleges users spent “hundreds or even thousands of dollars on the game." Thus plaintiff has put at issue the full amount of user spending on SPP. The Michalek declaration shows user spending exceeded the jurisdictional amount on just one portion of the game (“gold” purchases), and in just the nine months preceding the game’s termination. According to the complaint, user purchases of “gold” and premium virtual goods began well before October 2010.

Plaintiff faults defendants for failing to produce actual business records to show the amount of damages. Defendants are not required, however, to prove plaintiff’s damages allegations. They need only show that the amount put at issue by plaintiff exceeds the jurisdictional amount.

(Emphasis added, internal citations omitted.)

Virtual gold, but real jurisdiction.

Spherical Cows, Can Openers, and Classwide Injury

Andrew Trask — Thu, 12 Apr 2012 05:38:48 -0500

There's an old joke about a physicist asked to help increase milk production at a dairy farm. He begins by assuming a spherical cow.

There's another old joke about a group of academics stranded on a desert island with a can of food. As they try to figure out how to get the food out of the can and into their mouths, the economist argues they should assume a can opener.

Why open a blog post with two lame jokes? It's not to demonstrate that academics shouldn't do comedy; some physicists and economists make good comedians. It's to point out that many academics, in their attempts to come up with accessible explanations of the world around them, wind up assuming away too much.

And that's the problem plaguing Professor Sergio Campos's latest paper on developing proof of classwide injury in class action litigation. Instead of grappling with the realities of the law as it stands, and therefore offering practical advice on what constitutes classwide proof, Professor Campos tries to assume into existence a world that doesn't exist.

Professor Campos's argument is that the requirement that a class-action plaintiff demonstrate a common injury that can be proven with classwide evidence stems from three "fallacies" about class actions.

The first fallacy is that class actions are "all at once" procedures which require a court to resolve all issues in one fell swoop. ...

The second fallacy is that the class action is an "extraordinary remedy" that, like a preliminary injunction, requires the plaintiffs to show a likelihood of success on the merits before a court can certify a class. ...

The third fallacy is that, in the absence of proof of classwide injury, individual trials as to each plaintiff's injury are required to accurately determine individual injury and prevent uninjured plaintiffs from recovering.

How is it that, in Campos's view, so many courts could have bought into these fallacies? Well, first of all, he's assuming fallacies where none exist. Almost no courts require that a class action resolve all issues in a single swoop. What they do--in the wake of Dukes--is define a common issue as:

of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

(Emphasis added.) Similarly, no court requires that plaintiffs show a likelihood of success on the merits before certifying a class. (In fact, despite the emphasis on rigorous inquiry, that part of the ruling in Eisen is still valid.) And--despite the Third Circuit's ruling in Sullivan v. DB Investments--the Supreme Court's ruling in Amchem Products v. Windsor (as well as numerous rulings rejecting overbroad classes) made clear that that if some class members were injured and others were not, a class action is not appropriate.

And how did Professor Campos get these fallacies so wrong? That comes from the fact that he is trying to explain why courts--in contravention to his own theory--treat the class action like a representation device rather than a trust device. According to Professor Campos:

However, the class action is neither a "joinder" device nor a "representational" device. As I have argued elsewhere, the class action is a "trust" device, which becomes apparent once one examines why class actions are preferable in small claims litigation like the antitrust, securities fraud, civil RICO, and employment discrimination cases I have discussed so far."

Campos's take on the class action as trust is an interesting one, and it would go some way to explaining a few quirks of class action doctrine, like why Rule 23 is so ready to hand control of a case over to the class attorney rather than the representative plaintiff. (There are alternative explanations, such as that some courts have misinterpreted the adequacy requirement.) But to deny that the class action is a representative device ignores--among other things--the text of Rule 23(a):

(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.

(Emphases added.) And this is Professor Campos's problem. He's bought into the "trust" and "deterrence" arguments so far that he doesn't just ignore the remainder of class action doctrine, he's convinced courts must be wrong when they employ it. Deterrence and trusts are Professor Campos's spherical cow and can opener. They explain class actions to him, but they only do so by ignoring the text of the rule and the weight of precedent.

So, why should a defense lawyer bother reading this article? Because, like it or not, these arguments do come up. Professor Campos is not stupid; and it's worth it to see where smart people go wrong in these arguments.

Negotiation Studies - Collective Decisionmaking & Organization Size

Andrew Trask — Wed, 11 Apr 2012 05:20:30 -0500

In class actions, we have negotiations between two organizations. On one side is a corporation or firm, an organization in the truest sense. On the other is an "organization" of class members represented by one or more plaintiffs. Does this affect the way that negotiations are handled?

Almost certainly. As Professors Mark Gradstein, Shmuel Nitzan, and Jacob Paroush wrote twenty years ago in their Public Choice article, Collective Decision Making and the Limits on the Organization's Size, one reason organizations cannot grow beyond a certain size is that making decisions becomes too difficult. Or, as they put it:

Expansion confers both benefits and costs. Benefits include improvement in the organization's decisions from inclusion of another mind involved with the resolution of the problems the organization faces. The costs include a lengthening of the decision-making process which may result in an increase in the direct payment for managerial time as well as an increase in the likelihood of failure to make decisions on time.

(Emphasis added.) In other words, the larger the organization, the harder it is to make quickly when necessary.

The authors also consider how the "technology" of decision making affects how large the organization can grow. By "technology," the authors mean the rule for making decisions (say, majority rule, or representation under Rule 23). But it also makes sense that communications technology (like conference call capability, email, or some kind of social media) may influence the size of an organization.

The application to class-action negotiations should be fairly obvious. The larger the defendant, the more defense counsel will have to make sure it knows exactly who to consult at the client when working out a deal, particularly if counsel is under time pressure. But, equally important, the more diverse the class, the more the defendant will have to make sure that it's addressing all of the major interests within the class. To do otherwise may invite objections to, and ultimately rejection of any deal the parties bring before the court.

This analysis, of course, assumes a best-case for having multiple decision makers. The article does not consider whether the number of decision makers may actually decrease the quality of the decisions. Instead, they assume that adding decision makers enhances the quality of the decision, because more brains are better than fewer. For some kinds of decisions, this may well be true. But for many other cases, too many cooks can spoil the broth. (This is the difference between crowdsourcing and gridlock.) Of course, where that is the case, you're not really deciding between benefits and costs, just costs and more costs.

Reliance & Civil RICO - Rowe v. Bankers Life Ins. & Cas. Co.

Andrew Trask — Tue, 10 Apr 2012 05:35:32 -0500

In Rowe v. Bankers Life & Cas. Co., 2012 U.S. Dist. LEXIS 43198 (N.D. Cal. Mar. 29, 2012), Estella Rowe, a senior citizen, bought an equity-indexed deferred annuity. After she did so, she learned that this particular kind of annuity (like most annuities) is not a very good investment. So she sued her insurance company, alleging that it

conspired with its independent sales agents and others to induce elderly consumers to buy equity-indexed deferred annuities, which, according to Rowe, are unsuitable investment vehicles for anyone over sixty-five years old.

Rowe asserted a cause of action for civil RICO. (Specifically, she alleged that Bankers Life & Casualty Trust had sent misrepresentations through the mail, violating the mail fraud sections of RICO.) Then she moved to certify a proposed nationwide class.

The court began by noting that, because she sought damages, the plaintiff could not get her class certified under Rule 23(b)(2).

Nor, it concluded, could it certify a class under Rule 23(b)(3). As it held:

The problem with Rowe's argument is that she has not identified any uniform misrepresentations or omissions made to each potential member of the nationwide class. First, Rowe asserts "on information and belief" that Bankers mailed the disclosure form to each potential member of the nationwide class. But that is not enough to affirmatively demonstrate, by a preponderance of the evidence, that every potential member of the nationwide class received this document. … As outlined above, when ruling on a motion for class certification, the Court must make whatever factual and legal inquiries are necessary under Rule 23. Rowe's bald assertion that each potential member of the nationwide class received the same disclosure form that she and her husband received is not enough to convince the Court that Bankers' allegedly fraudulent conduct was systematically directed to each potential member of the class.

Similarly, the plaintiff could not prove that there had been any common misrepresentations in either the sales literature or the oral misrepresentations she claimed she heard. As a result, the court refused to certify the proposed class.

The takeaway for defense lawyers: civil RICO--which often relies on fraud-like allegations--still requires proof of causation. And causation in fraud-like cases is basically reliance, which is usually an impediment to certification.