The malleability of collective litigation.

• Author: Lavie, Shay
• Position: III. Selective Pre-Damages Contracts through Conclusion, with footnotes, p. 728-758

3. SELECTIVE PRE DAMAGES CONTRACTS

   While the discussion thus far has centered on the capacity of defendants to take advantage of class action doctrine to avoid class certification, this Part takes this logic further and discusses a broader form of malleability--defendants' avoiding collective litigation through selective ex ante contracts.

   While class action is the most effective collectivization mechanism, it is not the only one. (104) This section argues that the very formation of collective litigation is, in general, vulnerable to ex ante manipulations. In contrast to the previous Part, individualizing the prospective class, the phenomenon described in this Part is not based on doctrinal gaps; rather, it has deeper roots, which stem from the freedom of potential victims to contract with the would-be defendant. In fact, this is the pre-damages manifestation of strategic settlements, in which defendants can selectively buy out plaintiffs to reduce their overall liability. This phenomenon is explored below.

   1. Ex Ante Divide-and-Conquer

      As previously discussed, mass injurers can strike strategic selective settlements, after damages materialize, to eliminate strong claims. I argue that similar strategies can be used by mass injurers before the occurrence of damages. Conceptually, the two settings are similar. Basically, whatever defendants can do after damages materialize, they can also do when there is only a prospect of harm. While the strategies do not diverge conceptually, their practical implementation is different. In the post-damages setting it is strategic settlements; in the pre-damages setting it is waivers of prospective liability. To demonstrate the blurry line between the two, consider the following illustrative example:

      A golf course is negligently operated and golf balls hit adjacent premises. There are two identifiable classes of victims: the first includes those who border the golf course, and the second consists of farther landowners. The second class suffers fewer damages, and the longer distance makes it harder to prove the golf course's liability. The golf course buys out the first class's rights to sue--either before, after, or during damages, through liability waivers or settlement agreements. The second class's members are less likely to initiate a lawsuit, and if they do, their odds of winning are lower. If the second class's damages are sufficiently low, it poses no credible threat of litigation. (105) As this example illustrates, there is no substantive difference between post-damages strategic settlements and pre-damages selective waivers. Of course, the two settings are not identical. The post-damages victims are known--typically, they are the ones that initiate the legal proceedings; pre-damages, the defendant has to reach out to the would-be plaintiffs. Where settlements are agreed upon in the shadow of uncertainty regarding the results at trial, ex ante selective waivers implicate another layer of uncertainty--whether damages would occur or not.

      These differences do not mean that pre-damages selective waivers are necessarily less effective, from the defendant's perspective, than post-damages strategic settlements. In fact, it is plausible to believe that, in some contexts, ex ante agreements are a better way to buy out strong plaintiffs. In the post-damages environment lawyers spring up, creating information networks that counter attempts to strategically and confidentially settle. (106) In contrast, before damages occur there are typically no agents who share information and negotiate on behalf of the group of victims. A related advantage of pre-damages liability waivers, from defendants' perspective, stems from their subtlety. Strategic settlements are a more blunt measure to buy out strong claimants, and they may streamline further political, judicial, and public reaction against the defendant. Ex ante exclusion, i.e., liability waivers, might be safer and more effective in this respect. (107) Another difference that can make liability waivers more effective than settlements is the tendency of post-damages victims to be driven by non-economic motives, such as feelings of vengeance and a desire to restore equity. (108) These non-economic motivations inhibit post-damages strategic settlements. As one commentator observes, "irrational litigation decisions help counteract the resulting [pro-defendant] bias and should be applauded." (109) Because these non-monetary incentives do not typically appear before the occurrence of damages, they can make pre-damages waivers easier to implement, from the defendant's perspective. (110) Finally, defendants may be better than plaintiffs at assessing the risk of an injury, making liability waivers more valuable for defendants. (111)

      In short, by the time the defendant is facing a multi-million dollar lawsuit, counteraction might be too late or too costly. (112) Selective buyouts, then, can be a highly effective tool to thwart future collective litigation. This result conflicts with a prominent position in the literature, mostly articulated by Howard Erichson. (113) According to this view, class actions are not as important an aggregation tool as they are considered to be; plaintiffs' lawyers often fulfill a similar aggregatory role, informally coordinating and sharing information across plaintiffs. However, this reliance on lawyers overlooks the ex ante perspective. Defendants have the capacity to exclude, pre-damages, some victims, hence avoiding the benefits created by post-damages lawyers. The following paragraphs further illustrate this phenomenon.

   2. Examples

      There are numerous ways in which defendants can implement selective contracts that affect the formation of prospective collective litigation. The gist is identifying the strongest would-be plaintiffs, who have the greatest influence on the prospective class. This section provides several paradigmatic examples.

      1. Nuisances

         Nuisances, and more generally environmental damages, suffer from severe enforcement problems. Damages are typically dispersed and most victims have no credible threat to sue. (114) In this state of affairs, a single, strong would-be plaintiff is highly attractive for the defendant. Buying-out this strong plaintiff makes the defendant (and the strong plaintiff) better off at the expense of weaker plaintiffs/victims. And as explained above, there are good reasons for the prospective defendant to prefer a pre-damages waiver to waiting for the strong plaintiff to initiate a lawsuit, settling thereafter.

         As the golf course example demonstrates, the strong would-be plaintiffs--whom the defendant wants to exclude the most--can often be the neighbors of the harmful activity. Those who live near the nuisance have greater incentives to eliminate it; those who are far away are not likely to successfully array their legal weapons. The story of the Campo Band of Mission Indian reservation is illustrative.

         In the early 1990s, San Diego looked for an out-of-town place to establish a new landfill. The reservation surroundings--a "scrub-covered ridge" amidst a "desolate patch of windswept high desert" (115)--seemed like an excellent location. Apart from the Indian tribe there were very few inhabitants. The major would-be victim of the landfill, the tribe, agreed to have the nuisance in its terrain in exchange for an appropriate compensation. This, however, ran counter to the other inhabitants' interests. "For the 250 inhabitants of the reservation ... the landfill means big money.... To their ranch and farm neighbors, though, it is a potential source of contamination...." (116) Lacking the strongest potential plaintiff--the Indian tribe that was bought out by the landfill--the remaining would-be victims had much less ammunition to resist the nuisance. As they lived further away from the landfill, their prospective harm was likely to be smaller and their damages harder to prove; in essence, these prospective victims had a very weak credible threat of a lawsuit. Indeed, their attempts to stop the landfill failed. As local activists attest, "[i]n spite of all [our] efforts and successes, we could not stop the [project's approval;] ... [we] did not have the financial resources to file suit. The County did file suit.... Their one young attorney.., was outgunned by multiple well-heeled big shots, including an ex-US Attorney, representing the landfill proponents." (117)

         While the landfill project ended due to other reasons, (118) this story illustrates ex ante divide-and-conquer contracts. The major prospective plaintiffs are bought out by the defendant. In the absence of the strongest would-be victims, the remaining--even when they are able to collectivize themselves--find it harder to vindicate their rights. In the Campo landfill case, it seems that the contract between the tribe and the landfill was an indispensable reason for the residents' inability to stop the creation of the nuisance. Moreover, this incident is not unique; rather, it is typical of other nuisances in which one (or several) known neighbor is the primary victim, while others--the majority of the victims--suffer only minor harms, (119)

      2. Products Liability: Disclaimers and Standard-Form Contracts

         Products liability is another paradigmatic case to implement selective contracts. One defendant harms multiple consumers, who diverge on several characteristics. As the parties have pre-existing contractual relations--through standard-form contracts between the defendant and the consumers--the defendant can easily locate and exclude plaintiffs. Indeed, many common provisions in standard-form contracts can serve to exclude stronger plaintiffs. Technically, these provisions can be selective, optional disclaimers, which encourage the strong consumers to get a discount in exchange for waiving their rights to sue. As before, the key factor is identifying "strong" consumers/plaintiffs, whom the defendant desires to...