Aggregation by Acquisition: Replacing Class Actions with a Market for Legal Claims

Author:Charles R. Korsmo & Minor Myers
Position::Associate Professor, Case Western Reserve University School of Law. J.D., Yale Law School/Associate Professor at Brooklyn Law School
Pages:1323-1386
SUMMARY

The traditional class action is broken, and we propose to replace it with a new mechanism for structuring mass claims: aggregation by acquisition. We argue that legal causes of action should be freely alienable, such that even small claims could be bought and sold. In such a world, financiers could purchase claims (or shares of claims) directly from individual claim holders, assembling a mass of... (see full summary)

 
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Aggregation by Acquisition:
Replacing Class Actions with a Market for
Legal Claims
Charles R. Korsmo & Minor Myers
ABSTRACT: The traditional class action is broken, and we propose to replace
it with a new mechanism for structuring mass claims: aggregation by
acquisition. We argue that legal causes of action should be freely alienable,
such that even small claims could be bought and sold. In such a world,
financiers could purchase claims (or shares of claims) directly from
individual claim holders, assembling a mass of claims that may be negative-
value if litigated individually but positive-value when litigated together.
Aggregation in this way would solve the same collective action problems as
class actions and derivative actions, but without generating the serious
pathologies that plague those procedural devices.
Our proposal may sound like a fanciful thought experiment, but in fact it is
already at work in one small corner of corporate litigation: stockholder
appraisal. We present the example of appraisal here—where claims effectively
trade with shares of stock and where litigation appears strongly meritorious—
as a microcosm of how aggregate litigation would work under our proposal.
As we explain in this Article, our proposal would improve the deterrent effect
of private litigation, would deliver faster and more concrete relief to injured
persons, and would minimize the volume of nuisance litigation. While
Associate Professor, Case Western Reserve University School of Law.
 Professor, Brooklyn Law School.
We have received helpful comments from Hannah Buxbaum, Robin Effron, Jill Fisch, Brian
Fitzpatrick, Keith Hylton, Avery Katz, Jim Lindgren, Sean Griffith, Geoffrey Miller, Dana Remus,
Suzanna Sherry, Kathryn Spier, Gordon Smith, Ryan Williams, and participants in the 2016 AALS
Section on Securities Law Annual Meeting, the 2015 American Law & Economics Association
Annual Meeting, the 2015 Vanderbilt New Voices in Civil Justice Scholarship Workshop, the
Federalist Society 2015 Young Legal Scholars Workshop, and the 2014 Corporate & Securities
Litigation Workshop. We are the principals of Stermax Partners, which provides compensated
advice on stockholder appraisal and manages appraisal-related investments, and we have
economic interests in the outcome of appraisal proceedings. We received n o compensation for
the preparation of this Article, and none of the views expressed here were develo ped directly out
of our advisory work.
A2_KORSMO.DOCX (DO NOT DELETE) 4/13/2016 10:59 AM
1324 IOWA LAW REVIEW [Vol. 101:1323
aggregation by acquisition may hold promise across a broad swath of
substantive law, it could most easily be put into practice in corporate and
securities litigation. We outline the reforms necessary for doing so. Extending
our proposal to other spheres of litigation would be more complex, raising
many serious but potentially surmountable obstacles.
I. INTRODUCTION ........................................................................... 1325
II. COLLECTIVE ACTION PROBLEMS AND AGENCY COSTS ................ 1330
A. PROCEDURAL SOLUTIONS TO COLLECTIVE ACTION PROBLEMS:
THE CLASS ACTION AND DERIVATIVE SUIT .............................. 1330
B. AGENCY PROBLEMS IN AGGREGATE LITIGATION ..................... 1333
C. FIXING PROCEDURAL AGGREGATION WITH MORE
PROCEDURE .......................................................................... 1337
III. THE PURCHASE AND SALE OF LEGAL CLAIMS .............................. 1342
A. HISTORIC PROHIBITIONS ON SALE OF LEGAL CLAIMS .............. 1343
B. SETTLEMENT AND CONTINGENCY FEES AS A SALE .................... 1344
C. THE RISE OF LITIGATION FINANCE ......................................... 1346
D. THE LIMITED PROMISE OF LITIGATION FINANCE FOR
AGGREGATE CLAIMS .............................................................. 1348
IV. AGGREGATION BY ACQUISITION: OUR PROPOSED MARKET FOR
LEGAL CLAIMS ............................................................................. 1353
A. A MARKET FOR LEGAL CLAIMS .............................................. 1354
B. VALUING LEGAL CLAIMS ........................................................ 1355
C. AGGREGATION BY ACQUISITION IN CORPORATE LITIGATION .... 1357
D. THE BENEFITS OF A MARKET FOR LEGAL CLAIMS .................... 1360
1. The Diminished Problem of Attorney Agency
Costs ............................................................................. 1360
2. Improved Compensation for Those Harmed ........... 1361
3. Improved Deterrence ................................................. 1363
4. Increased Accuracy and Access in Civil Justice ......... 1364
5. Equalized Influence on Legal Rules .......................... 1366
6. Diminished Litigation Costs ....................................... 1368
E. ACQUISITION VERSUS AUCTIONS ............................................. 1368
F. AN EXAMPLE OF AGGREGATION BY ACQUISITION: APPRAISAL
ARBITRAGE ........................................................................... 1370
V. OBJECTIONS TO CLAIM PURCHASE AND AGGREGATION BY
ACQUISITION ............................................................................... 1373
A. PERSONHOOD AND COMMODIFICATION ................................... 1373
B. PREDATORY PRACTICES ......................................................... 1375
C. MERITLESS AND VEXATIOUS LITIGATION ................................ 1376
A2_KORSMO.DOCX (DO NOT DELETE) 4/13/2016 10:59 AM
2016] AGGREGATION BY ACQUISITION 1325
D. CLAIM PURCHASE WOULD NOT BE SUITABLE FOR CLAIMS
SEEKING NON-MONETARY RELIEF .......................................... 1377
E. AGGREGATION BY ACQUISITION WOULD RESULT IN
INSUFFICIENT DETERRENCE .................................................... 1378
F. AGGREGATION BY ACQUISITION IS IMPRACTICAL ..................... 1379
VI. NECESSARY REFORMS FOR ENABLING AGGREGATION BY
ACQUISITION ............................................................................... 1381
A. ELIMINATE REMAINING RESTRICTIONS ON CLAIM
ALIENATION .......................................................................... 1382
B. ELIMINATE THE CONTEMPORANEOUS OWNERSHIP
REQUIREMENT ...................................................................... 1382
C. ELIMINATE CLASS ACTIONS IN STOCKHOLDER LITIGATION ...... 1384
D. REQUIRE CLASS ACTIONS TO BE SUPERIOR TO AGGREGATION
IN OTHER CONTEXTS ............................................................. 1385
VII. CONCLUSION .............................................................................. 1386
I. INTRODUCTION
The class action—the principal mechanism in our civil justice system for
dealing with mass claims—is a brilliant but fundamentally flawed procedural
device. When a large number of people have suffered an injury arising out of
a common set of facts, many or all of the individual victims may have suffered
harms that are small in relation to the cost of bringing a lawsuit. In the face
of collective action problems, the injured parties may go uncompensated
and—perhaps more problematically—private litigation can provide little
deterrence against conduct that generates substantial aggregate harm.
Scenarios abound where collective action problems threaten to paralyze
litigation, ranging from mass tort actions involving toxic exposures to
products liability actions to consumer antitrust actions to stockholder suits.
To solve this problem, American law currently relies on procedure. The
primary procedural mechanisms are the class action and, for certain types of
stockholder suit, the derivative action.1 In such actions, an individual plaintiff
1. As discussed below, the derivative action device is an attempt to solve a somewhat
different problem than the class action. In a derivative action, a stockholder in a corporation
seek s to r emed y an i njur y tha t is su ffer ed, i n the first instance, by the corporation. In theory, there
should already exist a mechanism—the corporation itself—for overcoming the collective action
problems that would otherwise plague dispersed shareholders. What the derivative action
mechanism seeks to address is not so much a collective action problem as an especially acute
agency problem as a result of the conflict of interest that arises when the alleged wrongdoers are
the directors and officers who control the corporation. Despite these somewhat different
purposes, derivative actions and class actions have sufficient similarities to be taken together for
most of the purposes of this Article.

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