Aggregation as disempowerment: red flags in class action settlements.

Author:Erichson, Howard M.


Class action critics and proponents cling to the conventional wisdom that class actions empower claimants. Critics complain that class actions over-empower claimants and put defendants at a disadvantage, while proponents def end class actions as essential to consumer protection and rights enforcement. This Article explores how class action settlements sometimes do the opposite. Aggregation empowers claimants' lawyers by consolidating power in the lawyers' hands. Consolidation of power allows defendants to strike deals that benefit themselves and claimants' lawyers while disadvantaging claimants. This Article considers the phenomenon of aggregation as disempowerment by looking at specific settlement features that benefit plaintiffs' counsel and defendants without benefiting class members. Recognizing that protection of disempowered class members lies with judges who review settlement agreements, the Article identifies red flags to alert judges to problematic settlement terms and fee requests. By showing how certain settlement features reflect improper cooption of the power of aggregation, the Article offers a framework for understanding class action power dynamics and a path for reclaiming class actions as an empowerment mechanism.


Class actions empower plaintiffs; that is what we used to think. Aggregation levels the field, the theory goes, by creating economies of scale, by permitting investment based on aggregate stakes, and by offering leverage in settlement negotiations. (1) Class certification is supposed to turn David-versus-Goliath into Goliath-versus-Goliath. Much of the bench, bar, and public still seem to believe this gospel. Indeed, it is the one point on which class action critics and class action proponents agree. Critics complain that class actions over-empower plaintiffs and put defendants at a disadvantage, (2) while proponents defend class actions on grounds of consumer protection and enforcement of rights. (3)

Aggregation still holds out the promise of empowerment, but, in too many instances, collective litigation has become a tool for disempowering claimants. The very thing that makes aggregation empowering--the separation of ownership and control that consolidates power in claimants' lawyers--allows defendants to strike deals that benefit themselves and benefit claimants' counsel while disadvantaging claimants. The goal of this Article is to understand this type of disempowerment both as a theoretical matter and by examining specific features of class settlements. Too often, class settlements include terms that leave one scratching one's head and wondering why a settlement would include such a term. And too often, the answer is not that the provision added value for the class, but rather that it served the aligned interests of the defendant and class counsel. By cataloguing features of class settlements that fit this description, this Article offers red flags that judges should look for when evaluating settlements, that objectors should highlight when fighting settlements, that defendants should hesitate to offer, and that class counsel and class representatives should hesitate to demand or accept. And by showing how these settlement features reflect defendants' cooption of the power of aggregation, the Article aims to reframe how we think about power dynamics in class actions in the age of settlement.

Objectionable class settlements are nothing new. For a while, coupons were the remedy that everybody loved to hate. (4) More recently, the popular target became cy pres remedies that allocated settlement funds to charitable organizations. (5) But even as observers recognized particular instances of bad class settlements, (6) and even as the academic literature has long recognized agency risks in class actions, (7) many still perceive aggregation in general, and class certification in particular, as empowering to claimants. Perhaps this is because the most prominent class action disputes, unsurprisingly, involve disputed class actions. (8) Thus, the class actions that get the most attention tend to be ones in which defendants resist rather than embrace class certification. But most class actions now are certified only for settlement, not for litigation. Particularly when these undisputed class actions show up on a judge's docket--with the supposed adversaries hand-in-hand asking the judge to bless their deal and thereby make it binding 011 the entire class--the judge needs a keen awareness of how defendants and class counsel design settlements to serve their own interests.

The irony is that the seeds of disempowerment are sown by the very mechanism that makes aggregation empowering for plaintiffs. Class certification and appointment of class counsel put power in the hands of class counsel over class members. Just as the separation of ownership and control creates both opportunity and risk in the corporate context, (9) so it does in mass representation of plaintiffs. (10) The plaintiffs own the claims but relinquish control to their lawyers, who represent a class of numerous similarly situated clients. Control of numerous claims not only permits lawyers to invest based on aggregate stakes, it also provides leverage at the negotiating table because the lawyers can threaten substantial liability and offer substantial peace. Consolidation of control empowers claimants through their lawyers. (11) But the consolidation of power in plaintiffs' lawyers creates opportunities for exploitation. Defendants negotiating multi-claimant settlements seek advantageous terms for themselves by offering attractive terms for the plaintiffs' lawyers.

Agency risks occur in every client-lawyer relationship, but they have proved particularly problematic in mass settlement negotiations. I have described elsewhere how some of these problems play out in non-class aggregate settlements, where leadership counsel in multidistrict litigation or lawyers engaged in mass collective representation sometimes use their power to negotiate settlements on terms that are more favorable for defendants and themselves than for their clients. (12) The present Article focuses on class action settlements both because they present the most extreme version of the problem and because they offer the strongest opportunity for judicial intervention.

The interests of defendants and of class action lawyers line up in important ways that do not match the interests of the class members. Both defendants and class counsel prefer to make settlements comprehensive--defendants in order to strengthen protection from liability, and class counsel in order to build fees. Class members, by contrast, might be better off retaining claims that are poorly compensated in the deal. Both defendants and class counsel prefer to settle promptly to reduce litigation costs. Fees may not fully reward class counsel for additional hours spent on litigation, (13) and, more to the point, they do not sufficiently reward the risk plaintiffs' attorneys incur if they fail to take the bird in hand. Class members may benefit by holding out for a better deal, but the lawyers who control the negotiation do not fully internalize that benefit. Both a defendant and class counsel share an interest in making a settlement appear larger to the judge than its true value to class members or its true cost to the defendant, in order to secure judicial approval of the settlement and fee. Finally, class counsel may trade larger attorneys' fees for smaller class recovery, permitting a defendant to lower its overall settlement cost. These aligned interests explain why some defendants negotiate fees with class counsel. They explain why some class settlements include stunningly broad releases even when large swaths of claimants get little or nothing of value. And they explain why some class settlements include otherwise inexplicable remedies--illusory injunctive relief, predictably unclaimed funds, non-transferable coupons, or off-point cy pres awards--to create the illusion of value for the class.

Defendants, in short, have coopted the power of plaintiff aggregation. They have learned how to buy res judicata on the cheap. Defendants and their lawyers understand that aggregation puts control in the hands of plaintiffs' lawyers rather than plaintiffs, and defendants and their lawyers know that they have something of value to offer these plaintiffs' lawyers in exchange for advantageous settlement terms. In settlement, aggregation disempowers claimants by empowering their lawyers.

My point is not to disparage aggregation in general or class actions in particular. Aggregate litigation remains as essential as ever for empowering plaintiffs to pursue claims in mass disputes. Rather, my point is to show that even as aggregation empowers claimants in litigation, it disempowers them in settlement when courts look the other way as lawyers pursue self-interest at the expense of client interests. When thinking about the resolution of mass disputes, one is drawn to a tempting but inadequate syllogism: Aggregation is good (and inevitable). Settlement is good (and inevitable). Therefore, aggregate settlement is good (and inevitable). Each of the steps of this syllogism makes sense as far as it goes, but it stops short of the key point. Yes, aggregation is essential for empowering claimants in mass disputes. Yes, negotiated resolutions often are superior to adjudicated resolutions. And yes, collective approaches to settlement in mass disputes make more sense than independent individual settlements. But what the syllogism misses is that there are many ways to resolve a mass dispute through collective litigation and negotiation, and some are better than others. Collective settlement may be both inevitable and desirable as the endgame of mass disputes, but it need not be so disempowering to claimants.

Part I of this Article traces the recent history of class actions and mass...

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