Aggregate Litigation Goes Private

• Jurisdiction: United States,Federal
• Publication year: 2014
• Citation: Vol. 63 No. 6

Aggregate Litigation Goes Private

Dana A. Remus

Adam S. Zimmerman

AGGREGATE LITIGATION GOES PRIVATE

Dana A. Remus^* Adam S. Zimmerman^**

Abstract

In Disaggregative Mechanisms, Professor Jaime Dodge documents how corporate defendants increasingly design their own mass resolution systems to avoid collective litigation—what she calls "disaggregative" dispute resolution. According to Dodge, such schemes promise benefits not only to putative defendants, but also to plaintiffs—resolving disputes quickly, handling large volumes of claims predictably, and sometimes, offering more compensation than would be available through aggregate litigation. She observes, however, that these systems also risk underdeterrence. Dodge concludes by endorsing disaggregative mechanisms while suggesting a need for more public oversight.

In the following response, we argue that, left unregulated, such high-volume claim systems threaten transparency, deterrence, and even the rule of law. We therefore agree with Dodge's call for public oversight. But we observe that a number of policing and oversight mechanisms already exist. Today, lawmakers and regulators police collective arbitration and private settlement funds, in a wide variety of areas—from financial and environmental regulations to employment and consumer protection laws. After reviewing the ways that policymakers currently regulate corporate dispute resolution, we examine their effectiveness by exploring two regulated private settlement systems in more detail: (1) regulations developed by the Obama Administration that require airlines to offer "liquidated damages" using a preapproved settlement grid when they overbook customers on a flight and (2) regulations imposed by the Office of the Comptroller of the Currency following accusations that many of the nation's largest banks executed "robo-signed" mortgages that required banks to perform a detailed "independent foreclosure

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review" of past loans with borrowers. These case studies demonstrate both the challenges to, and opportunities for, government bodies that attempt to encourage sound regulation of mass private settlement systems without compromising their potential contributions to increased access, equality, and efficiency.

Introduction............................................................................................1318

I. Regulating Private Aggregate Settlement...........................1321
II. Two Examples of Existing Private Regulation......................1325

A. Airlines ..................................................................................... 1325
B. Mortgage Foreclosure Review................................................. 1328
C. Challenges to Administrative Regulation ................................. 1332

1. Cost ..................................................................................... 1332
2. Capture and Ossification .................................................... 1333
3. Timing................................................................................. 1334

III. Reform............................................................................................1335

A. Stakeholder Participation ......................................................... 1335
B. Administrative Regulation ........................................................ 1336

Introduction

Much like everything else in the United States today, American civil justice is increasingly outsourced and mass-produced. So says Professor Jamie Dodge in her new article, Disaggregative Mechanisms.¹ From grounded cruise ships off the coast of Italy² to the tiny "Aqua Dots" beads that once induced comas in children,³ Professor Dodge documents a rising trend—the bulk outsourcing of civil justice. When threatened by many similar claims, corporate defendants are increasingly using entirely private and ready-made dispute resolution systems to avoid mass litigation.⁴ Relying on arbitration agreements and privately-managed, mass settlement funds, they are finding new ways to

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resolve disputes privately and efficiently, without class actions or other kinds of aggregate litigation. Hence the tag: "disaggregative mechanisms."⁵

Dodge shows that the charged, but generally distinct, debates over mandatory arbitration and large settlement funds are part of the same phenomenon. Both reflect a comprehensive strategy by corporate defendants to bypass class actions and other traditional aggregative court procedures.⁶ For Dodge, the main difference is timing—while people generally enter arbitration agreements before a dispute arises, they decide to participate in mass settlement funds after the fact.⁷ But whether corporations sidestep the courtroom through ex ante boilerplate agreements or their own ex post private settlement facilities, Dodge details how they similarly benefit from outsourced dispute resolution.⁸ Relying on commercial economies of scale, corporate actors hope to resolve disputes cheaply, quickly, predictably, and in a high volume.⁹

These goals are consistent with rationales the Supreme Court¹⁰ and some scholars¹¹ have offered for favoring arbitration and settlement agreements. But, as Dodge acknowledges, disaggregative mechanisms can also impose heavy costs. They risk underdeterrence as corporate defendants resolve disputes quickly, quietly, and out of public view. They may allow corporations to exploit differences in bargaining power with their customers.¹² And they may permit defendants to contract around important laws, undermining the consistent, open development of legal rules.¹³ Disaggregative mechanisms therefore threaten to become even more controversial than the class actions they seek to replace.¹⁴

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In light of this, Dodge cautiously embraces mass private dispute resolution. She acknowledges its advantages and limits and suggests a need for more public regulation.¹⁵ Her goal is not to articulate the precise contours of an effective system of oversight but rather to establish its importance in ensuring legitimacy, neutrality, and consistency. In this response, we build on Dodge's insights by exploring a number of ways that policymakers may police mass dispute resolution.

We agree that, left unregulated, corporate high-volume claim systems threaten transparency, deterrence, and the rule of law. But we argue that policymakers already have a number of oversight tools at their disposal.¹⁶ Currently, lawmakers and regulators require and oversee collective arbitration and private settlement funds in a variety of ways. In some cases, they regulate the process and substance of mass arbitration and settlement agreements openly and prospectively. In other cases, they rely on retrospective, informal, and more flexible governmental actions, such as agreements not to prosecute companies that adopt desired dispute resolution agreements. In all cases, the core challenge is to encourage the sound regulation of private settlement agreements without compromising their potential contributions to increased access, equality, and efficiency.

This Response proceeds as follows. In Part I, we survey a range of existing public regulatory approaches to private arbitration agreements and settlement funds. In Part II, we examine two regulated private settlement systems in more detail: (1) regulations developed by the Obama Administration that require airlines to offer "liquidated damages" using a preapproved settlement grid when they overbook customers on a flight, and (2) regulations imposed by the office of the Comptroller of the Currency following the "robo-signing" scandal that required banks to perform a detailed "independent foreclosure review" of past loans with borrowers. These case studies demonstrate both challenges and opportunities for government agencies that regulate privatized

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mass settlement systems. In both cases, government actors hoped private dispute resolution would offer more flexible and timely relief than court for large groups of similarly injured parties. But they soon confronted other significant regulatory challenges, such as (1) policing deeply sophisticated settlement systems at a reasonable cost; (2) preserving transparency, participation, and flexibility; and (3) ensuring such systems remained current and legitimate.

Accordingly, in Part III, we recommend two reforms to improve the disaggregative mechanisms described by Dodge: (1) consumer or other stakeholder participation in the design of the private resolution system and (2) administrative regulation designed to avoid coercive settlement practices and increase transparency.

I. Regulating Private Aggregate Settlement

In recent years, federal laws and administrative agencies have increasingly encouraged or required various forms of private dispute resolution, but with different approaches to oversight and regulation. As described in this Part, these approaches vary in terms of timing, formality, and substance.

With respect to timing, governmental bodies may regulate mass settlement systems before or after a dispute arises. Some legislation and agency actions lay ground rules for the resolution of future mass disputes. For example, the Financial Industry Regulatory Authority sets broad rules for arbitration agreements between brokers and investors to guard against the imposition of one-sided burdens on investors.¹⁷ Among other things, FINRA requires that arbitration agreements (1) alert customers to the presence of an arbitration agreement and inform them of how arbitration differs from litigation,¹⁸ (2) determine hearing locations based on the investor's residence,¹⁹ (3) permit extensive document discovery,²⁰ and (4) mandate that the arbitral forum subsidize and, in some cases, waive investors' fees.²¹

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Other examples of prospective regulation abound. The National Labor Relations Board recently barred class action or collective litigation waivers from labor agreements.²² Congress has...