David A. Dana, Adequacy of Representation After Stephenson: a Rawlsian/behavioral Economics Approach to Class Action Settlements

• Publication year: 2006

ADEQUACY OF REPRESENTATION AFTER STEPHENSON: A RAWLSIAN/BEHAVIORAL ECONOMICS APPROACH TO CLASS ACTION SETTLEMENTS

David A. Dana^*

INTRODUCTION

In both federal and state practice, judges must certify class actions for the class actions to proceed and must approve class settlements for those class settlements to have any legal effect.¹Judges may or may not make explicit findings regarding the adequacy of representation class members received, but even where there are no explicit findings, judicial certification of a class and approval of a class settlement implies a finding of adequacy of representation.²

Why then should class members ever be able to challenge the settlement in subsequent actions? Why should they not be bound to the settlement if a court explicitly, or even just implicitly, has held that they were adequately represented in the process that produced the settlement?

To answer that question, we must first unpack the concept of "adequate representation." Adequacy of representation in the class context cannot mean what it means in non-class litigation: that the lawyer faithfully attend to the client's interest, advise the client of the various options available to her, and give her the opportunity to make the ultimate decisions about whether to accept or reject a settlement offer.³In the non-class-action litigation context, the client is actually present, or at least could be if she so chooses. It seems reasonable, therefore, that the law hold her to the choices she made even if those choices result in different consequences from those that she anticipated.⁴

In the class action context, the client-the class members or at least almost all of them-are not present; indeed, many class members are never even aware of the existence of the class litigation to which they are, in theory, a party. They are represented only virtually, by means of class representatives. And since class representatives are almost always nominal actors,⁵the absent class members are in truth represented only by class counsel, acting, typically, with minimal or no real client input.

The absence of the client is most striking in so-called "futures class actions," in which some or all class members are defined as those who may become sick in the future as a result of some past exposure to a hazard, such as exposure to asbestos. In such cases, no one can say for sure who will be or will not be a class member when the class is proposed for certification, when a settlement is submitted for court approval, or perhaps for many years thereafter. Futures class actions are the variant of class action that most dramatically belie the legal construct of client participation in class action decisionmaking.

Because class members are in fact absent, and sometimes (as in futures actions) necessarily absent, it is untenable to tell a class member that, because she "constructively" "agreed" by means of "virtual" representation to a settlement, she must accept no or even negative compensation as the dispositive relief for an otherwise cognizable legal wrong. More generally, fundamental principles of fairness dictate that class members be held to settlements only if the relief provided to them by the settlement is something that a person conceivably could have accepted, before knowing her exact position within the class, in return for ceding for all time her legal claims for redress.⁶Thus, although the adequacy of representation inquiry certainly entails an examination into the presettlement structure of representation and the content of the proceedings, the inquiry also has, or at least should have, something to do with ex post substantive outcomes-about what the settlement actually delivers in the way of relief to individual class members. Adequacy or inadequacy of representation, as a practical matter, sometimes unfolds only over time.

From this perspective, that adequacy of representation in a class action and hence boundedness to a settlement must mean that a person plausibly could have agreed to accept the settlement terms before knowing her position in the class, the Second Circuit's holding in Stephenson v. Dow Chemical Co.⁷and the Vermont Supreme Court's decision in State v. Homeside Lending, Inc.⁸seem unremarkable, even obviously correct. In Homeside, the Vermont

Supreme Court held that Bank of Boston customers whose accounts were reduced as a result of a class action settlement with the bank had not been adequately represented, and hence could bring a subsequent challenge to the settlement.⁹In Stephenson, the Second Circuit held that veterans exposed to Agent Orange who became ill more than ten years after the 1984 settlement date,¹⁰but who received no cash payments from the settlement fund,¹¹had not been adequately represented, and hence were not barred from bringing a subsequent challenge.¹²As explained in this Article, it is unreasonable to suppose that any class member actually would have agreed to a settlement in the Bank of Boston litigation that might leave him or her financially penalized, even if only by a few hundred dollars, or any settlement in the Agent Orange litigation that might have provided him with no relief whatever.

Yet the holdings in Stephenson and Homeside, which both allowed subsequent challenges, are far from uncontroversial. The Vermont Supreme Court's decision in Homeside was several years in the making, and this delay suggests that that court regarded the case as difficult. For its part, the Seventh Circuit in Stephenson affirmed a federal district court's dismissal of a subsequent challenge to the Bank of Boston settlement.¹³And the Supreme

Court in Stephenson affirmed the Second Circuit only by a 4 to 4 vote.¹⁴

Moreover, prominent commentators have argued that the result in Stephenson is incorrect, and that the American Law Institute should adopt a statement to that effect.¹⁵

This Article's normative claim-that a rule allowing subsequent challenges to class action settlements is compelled by our basic intuitions of fairness and justice when class members could not conceivably have agreed to the arrangement had they been present but not known their precise position in the class-builds on the Rawlsian construct of fairness as the product of (hypothetical) decision making in an "original position," behind a "veil of ignorance," and the economics of human decision making under conditions of uncertainty. This approach suggests that certain types of settlements in both high-individual-stakes/toxic torts/personal injury class actions and small- individual-stakes/consumer fraud class actions should be subject to subsequent challenge.

First, this combined Rawlsian/economics analysis strongly suggests that all class settlements that provide for the possibility that any class members will receive negative relief, as in the Bank of Boston litigation, are unfair and should be subject to challenge on adequacy of representation grounds.¹⁶

Second, with regard to high-individual-stakes class actions, the approach also suggests that settlements that create the possibility that some class members will receive no relief always should be subject to subsequent challenges.¹⁷

Third, again in high-individual-stakes class actions, subsequent challenges should be permitted with respect to settlements that provided all class members some relief, but that grossly deviated from a principle of equal payment for equal harms without investing administrative cost savings in the improvement of the position of the most severely-injured such that the most-severely injured receive more than they would have under an equal-compensation-for-equal- injuries formula.¹⁸Fourth, even in small individual stakes litigation, subsequent challenges should be permitted to settlements that provided for the possibility of providing zero compensation to any class members or that deviated from an equal-compensation-for-equal-injuries approach compensating without thereby reaping significant administrative cost savings that are dedicated to increasing the overall compensation pool for class members.¹⁹

The essence of the Rawlsian approach is a thought experiment regarding the ordering of society as a whole. In the thought experiment, Rawls postulates the presence of human beings under certain conditions-"original position" conditions-and then reflects on what arrangements or rules those individuals would agree to as fair for the distribution of goods and entitlements in the society as a whole. The conditions Rawls sets for his thought experiment-individual decision making, ignorance on the part of each individual as to their morally irrelevant, or contingent characteristics beyond the veil, very high stakes for individual welfare and life prospects for the decisionmakers, a generally shared moral sense of the fundamental equality of human beings²⁰-readily translate from original position (persons deciding on the rules for social ordering as a whole) to the toxic tort/products liability class action original position, in which class members must choose a distribution regime for compensation for possible current and future cases of disabling or even fatal diseases, conditions, or injuries. Thus, if persons in Rawls' original position adhere to a maximin principle of avoiding worst possible outcomes, and that adherence deserves normative weight, we should expect that class members in toxic tort/products liability cases behind a veil of ignorance will adhere to a maximin approach, and we should accord normative weight to that adherence.

This Article does not, however, rely solely on the extension of the Rawlsian original position thought experiment to the class action context. One of the predictions of neoclassical economic theory, as well as a basic finding of behavioral/experimental/empirical economics, is risk aversion in human decision making in the absence of an ability to self- or third-party insure against bad outcomes. Other findings are an aversion to unequal...