Republican leaders claim to have "reformed" class actions—by passing a bill that will pull more of these lawsuits into federal court. Too good to be true? You bet. Congress' reform package—the Class Action Fairness Act—doesn't go nearly far enough to end lawsuit abuse.
Right now, abuse of class actions is portrayed as a function of bad state judges who sign off on frivolous lawsuits. But the problem isn't that simple. Yes, state judges can turn losing lawsuits into winning ones. But it's not because state judges are less virtuous than federal jurists. It's because the class-action device is tailor-made to produce bad results.
Classes Gone Bad
Why? Judge Frank Easterbrook of the 7th Circuit put his finger on the problem in a 2002 opinion striking down a class action over defective Bridgestone tires. He called class actions a kind of judicial "central planning," akin to decision making by a central regulator.
The analogy is apt: A single class action is not really one lawsuit. It's a court-ordered aggregation of many similar lawsuits into a class. It can often include tens, or even hundreds, of thousands of individual claims.
And it puts all those lawsuits in the hands of one judge, who must determine how to value them.
Just like consumer goods, lawsuits have prices—namely, the payments that losing defendants must make to victorious plaintiffs. In theory, worthless lawsuits have a low price—the plaintiffs get nothing. Meritorious ones pay more. But as Judge Easterbrook noted, one judge is no more likely to set the right price for tens of thousands of lawsuits than Soviet central-planners did for the price of Ukrainian wheat or Lada cars.
Put simply, one-shot legal proceedings—like all other forms of central planning—carry a big risk of error. Inevitably, more bad claims are upheld, innocent defendants are extorted, and the public interest is ill-served—no matter what the quality of judge tasked with managing these cases.
Take a current class-action proceeding against multiple HMOs on behalf of more than a half-million doctors. Brought in federal court (the preferred venue for congressional reformers), the case claims that health insurers weren't properly reimbursing doctors for their services. The case raises national concerns: The Washington Post has warned that such class actions against HMOs will likely benefit lawyers, not patients.
As it turned out, the federal judge in Miami managed to engineer a deal between the plaintiffs' lawyers and Aetna, the country's biggest HMO and one of the original defendants, with ambiguous results. Lawyers received as much as $50 million, while 600,000 doctors got an estimated $150 each, together with promises from Aetna to adopt new billing procedures. HMOs cautioned that the money may come out of patients' pockets, since court-ordered payouts usually translate into higher insurance premiums.
Could another deal—one that better served doctors, patients, and Aetna—have been struck? We'll never know. In this one-shot proceeding, experimentation wasn't an option.
Break up the Power
Congress' latest "reform"—the Class Action Fairness Act—embraces the HMO lawsuit model. Not only does it give federal courts control over most class actions; it authorizes a special tribunal to consolidate similar actions and send them to one federal judge. This guarantees that a single court will have power to engineer one vast deal, settling the rights of thousands in a pen stroke. It's judicial central planning, pure and simple.
There is a better way. It's called decentralization.
Markets use it: Over time, the price of compact cars or sneakers is set by millions of individual transactions, not by one price control board. Our Constitution uses it: Power is dispersed among the states, ensuring that if one adopts bad policies, its citizens can move to a more congenial home.
Courts should decentralize as well. Imagine a company has harmed a class of 1,000 people. When their lawsuits are divided among several courts, there's less risk of injustice overall. If one court approves a settlement that cheats some plaintiffs or abuses some defendants, other courts might do better.
One bad judge won't spoil all the lawsuits.
Decentralization also checks abuse by lawyers. Those who truly protect their clients' interests will attract more plaintiffs to their cases; those who do not will attract fewer.
Put simply, competition—in court, as in politics and the marketplace—prevents abuse of power. As Judge Easterbrook put it in the Bridgestone case, when courts consider how to manage class actions, "they should think of market models rather than central-planning models."
Let the People Choose
How to decentralize? First, the existing rules that favor transferring all related federal class actions to one federal court should be changed. More, not fewer, judges should hear these suits.
Second, Congress must pass the Right to Choose Your Own Lawyer Act, soon to be introduced by Rep. Christopher Cox (R-Calif.). It would break class actions into smaller parcels. Here's how:
Current law presumes that you "consent" to be included as a plaintiff in a class action if you don't ask to be excluded. This takes away your control over where and when and how to sue. It's like a system in which the government forces you to buy a product from a preferred seller—here, it's a court and some plaintiffs lawyers that are "selling" a particular legal proceeding—unless you ask for permission to buy from someone else. Indeed, unless you raise your voice, this system forces you to buy from a preferred seller even if your preference would have been to buy nothing at all.
When people aren't at liberty to sue where and when and how they wish—because they've been shunted into a single proceeding—that one court essentially holds a monopoly on like claims. It becomes the only game in town.
Such a system doesn't foster competition. It suppresses it, while providing the illusion of choice.
The Right to Choose Your Own Lawyer Act would change this dynamic. It would force a court to assume that people don't want to be involved in a class action unless they actually ask to be included (or, in legal jargon, "opt in" after receiving judicial notice). That returns the power of choice to the lawsuit consumer.
When individuals themselves choose to file suit, they are more likely to select different lawyers, and different courts, to settle their rights—just as consumers select different suppliers for their cars or shoes. As astounded Soviet refugees discovered when they visited American supermarkets, competition promotes diversity.
To be sure, this opt-in rule isn't a panacea. But it's a start, one that points out the right path: Good reform doesn't give ultimate power to one federal judge. It checks that power—by putting control over lawsuits back in the hands of victims.