Rethinking anti-aggregation doctrine.

Author:Noll, David L.
 
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This Article proposes a new approach to "anti-aggregation agreements "--contractual provisions that purport to prohibit parties from participating in class actions and other aggregate proceedings. Anti-aggregation agreements are permitted by Supreme Court doctrine under the Federal Arbitration Act but eliminate financial incentives for attorneys to seek out and prosecute wrongdoing. Where private litigation performs an important deterrent function, anti-aggregation agreements raise the prospect that protected companies will be permitted to violate the law with impunity.

Taking the Supreme Court's arbitration doctrine as a given, the Article argues that an anti-aggregation agreement's enforceability should be tied to its effect on actual regulatory compliance. Consistent with the Court's preference for privately-designed dispute-resolution procedure, this test allows an anti-aggregation agreement to be enforced by default. But if a party shows that the agreement permits significant, unremedied wrongdoing, the agreement is not enforced.

In contrast to the leading approach in the doctrine and scholarship, this test allows enforcement of anti-aggregation agreements that eliminate claiming against a protected company. At the same time, the test invalidates agreements that result in substantial wrongdoing, regardless of their effect on claiming. In doing so, the test ties the decision not to enforce an anti-aggregation agreement to a fact of normative and legal significance. Where it is shown that enforcement of an agreement permits significant unremedied wrongdoing, there can be little doubt that eliminating incentives for private attorneys to enforce the law creates an impermissible gap in the regulatory enforcement framework.

The disagreements and circuit splits that have followed the Supreme Court's decision in AT&T v. Concepcion (1) provide a much-needed opportunity to reconsider doctrine governing the enforceability of anti-aggregation agreements--contractual provisions that purport to prohibit either side to a contract from asserting claims in connection with others. (2) A basic justification for rules that authorize aggregate claiming is to overcome the problem of process costs overwhelming the stakes in individual proceedings. By permitting similarly-situated claimants to share the costs of claiming, aggregation enables claiming that otherwise would be a money-losing proposition. (3) Together with rules that permit an attorney to recover reasonable fees from the "common fund" created by a successful lawsuit, (4) this creates a powerful incentive for private attorneys to seek out and prosecute violations of the law. (5)

Anti-aggregation agreements pose a direct challenge to this mechanism of law enforcement. Formally justified as an effort to simplify and streamline dispute resolution, their most important practical effect is to eliminate the cost-spreading made possible by aggregation. In doing that, anti-aggregation agreements eliminate incentives for attorneys to seek out and prosecute violations of the law.

The challenge for courts, underscored by Concepcion, is that private agreements governing dispute resolution procedure are sheltered by the Federal Arbitration Act (FAA). (6) Although the FAA allows an anti-aggregation agreement to be invalidated "upon such grounds as exist at law or in equity for the revocation of any contract," (7) the Supreme Court has read the Act to express a "liberal federal policy favoring arbitration," (8) which ordinarily demands enforcement of arbitration agreements "according to their terms." (9) In the absence of wholesale revision of the Court's FAA jurisprudence, the question is what, if anything, overrides the FAA's default policy of enforcing private dispute resolution contracts according to their terms.

This Article proposes that the enforceability of an anti-aggregation agreement should turn on its effect on actual regulatory compliance. Consistent with the Supreme Court's preference for privately-designed dispute-resolution procedure, this approach allows an anti-aggregation agreement to be enforced by default. But if a party shows that an agreement permits significant unremedied wrongdoing, it is not enforced. I refer to this as the "outcomes approach."

The outcomes approach differs substantially from the leading approach in the doctrine and scholarship--here termed the "claiming approach." (10) Under the claiming approach, the enforceability of an anti-aggregation agreement depends entirely on its effect on claiming: if an anti-aggregation agreement has too great an effect on the incidence or availability of claiming against a protected company, it is not given effect. The outcomes approach, by contrast, enforces agreements that eliminate claiming, but only if they do not permit significant, unremedied wrongdoing.

The benefits of this change in focus are twofold. First, the decision not to enforce an agreement is linked to a fact of normative and legal significance. Where it is shown that enforcement of an anti-aggregation agreement permits significant unremedied wrongdoing, there can be little doubt that eliminating incentives for private attorneys to enforce the law creates an impermissible gap in the regulatory enforcement framework. Second, the outcomes approach avoids problems of tailoring endemic to the claiming approach; because of its focus on claiming, the claiming approach fails to account for the possibility that mechanisms other than private litigation will provide adequate enforcement of the law, as well as the possibility that wrongdoing will persist despite de minimus claiming (a phenomenon made possible by anti-aggregation agreements that cover the costs of claiming on an individual basis). As a result of these benefits, the outcomes approach is far less susceptible to claims that it is inconsistent with the FAA.

Admittedly, the shift to fact-intensive analysis focused on regulatory outcomes requires parties seeking to escape an anti-aggregation agreement to make an additional, threshold showing of unremedied wrongdoing. That showing, however, is analogous to the showing required at other threshold procedural checkpoints. And the costs of demanding a showing of unremedied wrongdoing are offset by the new approach's increased accuracy and greater compatibility with Supreme Court arbitration doctrine.

The Article proceeds in four parts. Part I describes the rise of anti-aggregation agreements and the evolution of the claiming approach. Parts II and III describe previously unidentified problems with the claiming approach and their influence on the Supreme Court's troubling decision in Concepcion. Part IV outlines the basic features of the outcomes approach, considers how the approach would operate in practice, and addresses objections.

Before proceeding, two notes about the Article's scope. First, I focus on the issues raised by anti-aggregation agreements, leaving to one side debates about the general desirability of shifting dispute resolution from public courts to private tribunals. As a factual matter, practically all anti-aggregation agreements appear in arbitration agreements. (11) Nevertheless, it is useful to isolate anti-aggregation provisions for analysis, because they raise a different set of concerns than the general shift to private dispute resolution.

Second, in arguing that the doctrine should focus on an anti-aggregation agreement's relationship to significant unremedied wrongdoing, I do not suggest that this is the only way of invalidating an anti-aggregation agreement. Some rights are "fundamentally defined by their aggregative or public nature," (12) so that enforcement of an anti-aggregation agreement will eliminate substantive rights. (13) In addition, some anti-aggregation agreements cannot be enforced because they violate generally applicable principles of contract law, such prohibitions on fraud or misrepresentation. (14) The argument here is that a focus on regulatory outcomes (and not claiming) is the best general response to the problem of anti-aggregation agreements. I claim that regulatory outcomes should drive the analysis in the majority of cases that do not involve features like group rights, fraud, or misrepresentation.

  1. THE CLAIMING APPROACH

    As noted, a basic justification for rules authorizing aggregate claiming invokes aggregation's potential to facilitate enforcement of the law. By holding out a financial incentive for private attorneys to prosecute wrongdoing, aggregation encourages attorneys to bring lawsuits. Aggregation thereby creates a market in law enforcement, which shapes regulated actors' expectations about the payoff of violating the law. (15) Instead of relying on government enforcement, the law is enforced through "an infrastructure of private prosecutors who earn a living, at defendants' expense, practicing in the relevant area of law." (16)

    Building on this logic, the claiming approach reasons that eliminating financial incentives for private attorneys to prosecute wrongdoing will generate harms that justify invalidating an anti-aggregation agreement. The approach assumes that too great a reduction in claiming "prevents the effective vindication of federal rights" or extinguishes "the only economically feasible means for enforcing ... statutory rights." (17) The approach remedies this problem by requiring that anti-aggregation agreements honor the incidence and availability of claiming when aggregation is available.

    To explain this approach, it is necessary to briefly review the Supreme Court's current understanding of the FAA, the efforts of the corporate defense bar to leverage the Act into a protection against aggregate litigation, and the judicial response to those efforts. My primary argument in this Part is descriptive. In reviewing the evolution of the claiming approach, I hope to show that although they differ in superficial respects, the dominant responses to...

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