Opting out of liability: the forthcoming, near-total demise of the modern class action.

• Author: Gilles, Myriam

INTRODUCTION I. THE DEMISE OF MASS TORT CLASS ACTIONS A. The Short Story of "Mass-Class" B. The Lesson of Mass-Class II. THE COLLECTIVE ACTION WAIVER A. Arbitration Hegemony B. The Birth of the Collective Action Waiver 1. The Clandestine Role of the Credit Card Industry C. First-Wave Challenges 1. Unconscionability a. California's Minority Position b. The Future of Unconscionability 2. Facial Inconsistency of Arbitration with Federal Statutory Rights D. Second-Wave Challenges E. The Chimera of Classwide Arbitration III. THE REACH OF COLLECTIVE ACTION WAIVERS A. Locating the Contractual Predicate for Waivers 1. Consumer Cases 2. Antitrust Cases 3. Civil Rights, Employment, and Entitlement Cases 4. Other Commercial Cases 5. The Special Case of Securities Fraud B. How the Waiver May Come to Rule the Earth C. Political and Policy Considerations CONCLUSION INTRODUCTION

In recent years, there have been hundreds of academic articles and scores of books written about class action litigation. (1) The law reviews abound with doctrinal critiques, letters to Congress, moralist manifestos, and economists' prescriptions for optimized class action rules. Reading it all, one would certainly think that abusive class action litigation is running amok in the United States.

On the doctrinal front, for example, Professor Martin Redish raises the objection that much of contemporary class action litigation is, in reality, a "lawyer-driven" hunt for bounty and that, when a court in such a case applies Rule 23 procedures to a substantive federal statute, it is effectively grafting a qui tam provision onto a law that contains no such remedy. Redish would have courts hold that Rule 23 may not be applied to lawyer-driven suits, lest it conflict with the remedial scheme of the substantive congressional enactment upon which the suit is based. Alternatively, he would settle for legislation banning the widespread scourge of lawyer-driven class actions. (2)

From the moralist corner, Professor Charles Wolfram raises the somewhat less nuanced objection that plaintiffs' lawyers are, well, immoral. Professor Wolfram's attack focuses on the "low state of ethical practice in class actions" and the "sell-out lawyers who, for millions in fees, are willing to sign away the rights of tens of thousands of faceless and lawyerless class members." (3) The moralists (4) purport to be pessimistic about "reform" efforts so long as a "sizable number of lawyers ... are attracted to the big-money rewards of morally compromised (but legal) professional work." (5)

Law and economics, of course, has had a field day criticizing class actions. Economic analysis has led some scholars to conclude that the agency costs inherent in "entrepreneurial litigation" (that's law and economics for lawyer-driven suits) produce inefficiencies that can only be addressed by a free market for legal claims, in which attorneys may purchase outright the claims of class members. (6) Related scholarship focuses on auctioning the lead counsel position in class actions, (7) on the problems of collusion between plaintiffs' lawyers and defendants, (8) on the concomitant problems of self-dealing by class counsel] or on the supposedly outsized leverage that class certification gives even the most baseless of class claims. (10) Indeed, economic analysis has been brought to bear on virtually every imaginable issue related to class action litigation, prompting innumerable proposals for "reform."

It is, I think, overly dramatic to say that all of this scholarship misses the point. And yet, almost universally, the staggering heap of academic reform proposals ignores a fundamental and transformative point: in the ongoing and ever-mutating battle between plaintiffs' lawyers and the protectors of corporate interests, the corporate guys are winning. And they are winning because they have developed a new set of tools powerful enough to imperil the very viability of class actions in many--actually, most--areas of the law. In fact, I believe it is likely that, with a handful of exceptions, class actions will soon be virtually extinct.

Two factors guide this prediction: the demise of mass tort class actions and the rise of contractual class action waivers. First, as recently as ten years ago, a significant percentage of all class actions were tort cases; by most accounts, almost twenty percent. (11) Since that time, the mass tort class action has met a fate similar to that of the Dodo bird. The latter was last seen on the island of Mauritius in 1680; the former has rarely been glimpsed since the issuance of broad class decertification opinions by federal appellate courts in asbestos, tobacco, and product liability cases in the 1980s and 1990s. (12)

Second, and more significantly, the vast majority of the remaining class actions are based on some sort of contractual relationship. Virtually all consumer class actions, for example, arise out of some form of contract (adhesive or otherwise), just as employment discrimination class actions arise out of employment contracts. Federal antitrust class actions necessarily grow out of contracts (indeed, standing rules require as much), and the same is true for class actions relating to insurance benefits, ERISA plans, mutual funds, franchise agreements, and an endless variety of other matters.

All of these contract-based class actions are, I believe, on their way to Mauritius. Corporate caretakers have concocted an antigen, in the form of the class action waiver provision, that travels through contractual relationships and dooms the class action device. Where class actions are based on some sort of contractual relationship, this toxin is quite lethal. Developed in the late 1990s by marketers for one of the arbitral bodies, (13) among others, (14) the waiver works in tandem with standard arbitration provisions to ensure that any claim against the corporate defendant may be asserted only in a one-on-one, non-aggregated arbitral proceeding. More virulent strains of the clause force the would-be plaintiff to waive even her right to be represented as a passive, or absent, class member in the event some other injured person manages to commence a class proceeding.

These provisions, which I term "collective action waivers," (15) still face important judicial challenges, which have the potential to significantly limit their scope. The first round of attempts by plaintiffs' lawyers to invalidate collective action waivers was rooted in state law unconscionability doctrine and allegations that the waivers were inconsistent with substantive federal statutes. (16) These arguments have met with failure everywhere except California, which has proven hospitable to the unconscionability challenge. (17)

The plaintiffs' lawyers, however, are not going down without a fight and are beginning to bring second-wave challenges to collective action waivers, which are subtler and more surgical than the broad state-law unconscionability attack. For example, creative plaintiffs' lawyers are arguing that the collective action waiver's implicit prohibition against cost-spreading across multiple claimants precludes plaintiffs from vindicating federal statutory rights in complex matters that would be expensive to litigate, at least where each plaintiff has relatively little at stake. (18) On this theory, the anti-cost-spreading feature should be treated no differently than mandatory cost-splitting provisions, which current doctrine holds invalid where they would preclude the exercise of federal statutory rights. (19) The coercive imposition of collective action waivers by parties with market power has also been challenged under the Sherman Act. (20) It remains to be seen how much traction these second-wave challenges will find in combating the collective action waivers. Certainly, the scope of these challenges is more limited than the broad first-wave challenges. (21)

Assuming the collective action waiver emerges more or less unscathed from the current round of judicial challenges, it is only a matter of time before these waivers metastasize throughout the body of corporate America and bar the majority of class actions as we know them. It is true that, to date, the collective action waiver has likely had only minimal penetration; (22) early adopters include financial services companies, telephone and Internet firms, and a handful of other aggressive firms with a keen interest in avoiding class action liability. But I regard it as inevitable that firms will ultimately act in their economic best interests, and those interests dictate that virtually all companies will opt out of exposure to class action liability. Why wouldn't they? (23) Once the waivers gain broader acceptance and recognition, it will become malpractice for corporate counsel not to include such clauses in consumer and other class-action-prone contracts.

Ultimately, owing to new technologies and the emphatic judicial embrace of arbitration over the past twenty years, there are few areas of class action law to which the collective action waiver will not extend. Technology has vastly broadened traditional notions of contract and acceptance. Any transaction that may be cemented with the click of a mouse is susceptible to a class action waiver. (24) Judicial preferences for arbitration, meanwhile, have led courts to an unprecedented solicitude for unilateral "envelope-stuffer" amendments of adhesion contracts--for example, the unread notice stuffed in a consumer's monthly bill stating that, by continuing to use her credit card, or her telephone, she agrees to arbitrate any dispute that may arise. (25) Increasingly, these unilateral notices are taking the form of mass emails, or even website postings, which have been held to support the imposition of arbitration provisions and even collective action waivers. (26)

One seemingly contract-free bastion of class action practice is securities fraud litigation--specifically, the...