Abstract: Shareholder litigation is the most frequently maligned legal check on managerial misconduct within corporations. Derivative lawsuits and federal securities class actions are portrayed as slackers in debates over how best to control the managerial agency costs created by the separation of ownership and control in the modern corporation. In each instance, early hopes these suits would effectively monitor managerial misconduct have been replaced with concerns about the size of the litigation agency costs of such representative litigation, which can arise when a self-selected plaintiff's attorney and her client that are appointed to pursue the claims of an entire class of shareholders have interests that may differ from those of the class. Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation, outnumbering derivative suits by a wide margin. Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with derivative suits and securities fraud class actions, good policy must balance the positive management agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. This new breed of suits has positive management agency cost reducing effects that may offset the litigation agency costs that accompany them. Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. We find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits. The acquisition-oriented class actions are a new, previously unstudied category of representative litigation, an area long dominated by studies of state derivative suits and federal securities fraud class actions. We find these suits do provide some management agency costs reductions, but these are concentrated in only one subset of the suits that are brought. Settlements leading to relief in an acquisition setting are not spread across all acquisitions complaints (including hostile, second bidder acquisitions, etc.), but rather concentrated where there is a majority shareholder who is attempting to cash-out the minority interest held by public shareholders on terms that have been picked by the majority. On the opposite side of the equation - whether these suits possess high litigation agency costs - we find conflicting evidence. The acquisition-oriented class action suits have many characteristics that have been identified in other contexts as indicators of agency costs (e.g., suits filed quickly, many suits per transaction). Yet, these litigation agency costs are below the level of perceived costs that spurred securities fraud legislation. Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs.

Abstract: Part I The Class Action Introduced Chapter 1 Introduction Chapter 2 Features of Modern Class Action Regimes Chapter 3 Objectives of Class Action Regimes Chapter 4 A Different Approach for England Part II Commencement of the Class Action Chapter 5 Suitability for Class Action Treatment Chapter 6 The Requisite Commonality Chapter 7 The Requisite Superiority Chapter 8 Assessing the Class Representative Part III Conduct of the Class Action Chapter 9 Shaping the Class Membership Chapter 10 Potential Impediments to Ongoing Conduct Chapter 11 Monetary Relief Chapter 12 Costs and Funding of Class Actions

Abstract: In May 2000, a class action lawsuit on behalf of California’s public school students, Williams v. State of California, was filed in state court in an effort to make the state address inequities in its public schools. The central issue of the case was students’ access to the “bare essentials” of public education: qualified teachers, current textbooks, and adequate and safe facilities. The author analyzes the relationship between school and district characteristics and the base year of the Academic Performance Index (API), the state’s main measure of school performance, focusing on variables related to the main issues in the Williams case. The findings support the plaintiffs’ arguments that the basic educational necessities targeted by the case should be the object of state policy in conjunction with accountability policies.

Abstract: Shareholder litigation, as illustrated by derivative lawsuits and federal securities class actions, has generated a long-running debate that sets its possible governance benefit in monitoring corporate management against the fears of its misuse by self-selected clients and attorneys. This article provides the largest empirical study of shareholder litigation to date, examining more than 1000 fiduciary duty suits filed in Delaware in a two-year period. It finds that more than 80 percent of these cases are class actions against public companies challenging one type of director decision-whether or not to participate in a corporate acquisition. These acquisition-oriented suits are now the dominant form of corporate litigation, outnumbering by a wide margin derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks. The acquisition-oriented class actions are a previously unstudied category of representative litigation, which permits us to shed new light on prior studies of state derivative suits and federal securities fraud class actions. These suits provide management agency costs reductions in some cases through substantial monetary settlements. The settlements leading to relief in an acquisition setting are not spread across all acquisitions complaints (including hostile, second bidder acquisitions etc.), but rather concentrated where there is a majority shareholder who is attempting to cash-out the minority interest held by public shareholders on terms that have been picked by the majority. And, within this subset, monetary settlement is more likely to occur where the initial takeover premiums was lower. The acquisition-oriented class action suits do have many of the characteristics that have been identified in other contexts as indicators of agency costs (e.g. suits filed quickly, many suits per transaction). Yet, these litigation agency costs are lower than the level of perceived costs that spurred securities fraud legislation. Placing these findings in the historical context of the debate over the value of representative shareholder litigation, this article suggests there are positive management agency costs reducing effects of acquisition-oriented class actions, while the litigation agency costs they create do not appear excessive. Shareholder litigation is the most frequently maligned legal check on managerial misconduct within corporations.1 Derivative lawsuits and federal securities class actions are portrayed as slackers in debates over how best to control the managerial agency costs created by the separation of ownership and control in the modern corporation.2 In each instance, early hopes that these suits would effectively monitor managerial misconduct have been replaced with concerns about the size of the litigation agency costs of such representative litigation. Such litigation agency costs can arise when a self-selected plaintiffs attorney and her client are appointed to pursue the claims of an entire class of shareholders and have interests that may differ from those of the class.3 Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation and outnumber derivative suits by a wide margin. Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with derivative suits and securities fraud class actions, good policy must balance the positive managerial agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. …

Abstract: It is rare that science owes a debt to law. To lawmakers, surely, such as those who regularly make generous appropriations to the National Science Foundation and the National Institutes of Health. But law, in the sense of the process and products of litigation? It’s hard to imagine. But this special supplement is deeply in debt to law in just that sense. The funding that supports the research reported on in this special issue owes everything to an unlikely lawsuit. Broin v. Philip Morris, Inc.1 was filed in 1991, when everybody knew that it was impossible to sue tobacco companies successfully. It was a class action, brought under a Florida court rule modelled on a federal rule that had generally been understood to bar class actions for “mass torts”. This particular class action, …

Abstract: Class actions face a crisis of governance The form of governance provided by Rule 23, governance by representative parties, is both vague in theory and ignored in practice Instead, by a combination of procedural rules, judicial interpretation and common practice, the class is governed by a regime of attorney dictatorship with limited judicial oversight This regime neither reflects the basic insight that the class and attorney do not have a traditional attorney-client relationship nor performs the task of transforming the inchoate collectivity of the class into an organization that protects and is responsive to the will of class members This Article proposes an alternative regime of governance for 23(b)(3) small claims class actions that accomplishes both these things, based on four fundamental principles: mandatory disclosure of material information, an actively adversarial process, expertise of decision-makers and independence of decision-makers from influence and self-interest

Abstract: This article examines the theoretical issues and surveys the evidence on the desirability of securities class actions. Class actions offer the promise of energizing private enforcement of the securities laws, including in particular antifraud liability. For shareholders of large, publicly-held corporations, the individual benefits of pursuing a fraud action are often outweighed by the considerable costs of litigation. Without a class action, many potential fraud lawsuits may simply not get litigated. Nonetheless, the article explores three related problems with class actions: (a) the problem of frivolous suits (and the need to allow meritorious suits); (b) the lack of incentives on the part of plaintiffs' attorneys to focus on smaller companies; and (c) the agency problem between plaintiffs' attorneys and the plaintiff class. The article then assesses the existing evidence from the United States (in particular on the impact of the Private Securities Litigation Reform Act of 1995) in addressing these problems and proposes future avenues for research. Understanding the impact of class actions is important not only for the U.S. but also for countries considering the adoption of a U.S.-style securities class action system. As an example, the article discusses whether securities class actions would be beneficial in South Korea, a country with a smaller capital market and fewer large companies compared with the United States.

Abstract: This article analyzes a data set of reported decisions from 1992-2003 in which the number of opt-outs and/or objectors to class action settlements was quantified. The numbers of opt-outs and objections were uniformly low and in some cases nearly trivial. On average, less than 1% of class members opt-out and about 1% of class members object to class-wide settlements. Civil rights and employment discrimination class actions have relatively higher objection rates, but even these are less than 5% of the class. Securities, antitrust, and consumer class actions have the lowest rates of dissent. Dissent rises with the average recovery per class member and falls as a percentage of the class as the size of the class increases. Dissent is not correlated with the attorneys fee as a percent of the class recovery. The rate of objection to a settlement is negatively correlated with the chance that the settlement will be approved, but the rate of opt-outs has no correlation with settlement approval. Levels of dissent exhibit a noticeable decline over the period of the study. This study has a variety of implications for the law of class actions.

Abstract: Delaware courts largely have privatized enforcement of fiduciary duties in public corporations and have expressly acknowledged this judicial policy. The Delaware courts also recognize that so encouraging private enforcement creates an obvious danger: Plaintiffs' attorneys, especially in class actions where there is no strongly interested plaintiff, may make litigation-related decisions primarily with a view to advancing their own economic interests, rather than advancing the interests of the corporation or shareholders that they purport to represent. Such decisions have the potential to impose substantial, litigation-related agency costs on corporations, shareholders and the courts, if not appropriately curbed through judicial monitoring of settlements and fee awards. This paper examines the development of Delaware law with respect to merger-related class actions, which have become the dominant form of shareholder litigation in Delaware. We offer two broad alternative hypotheses as to what drives merger-related class actions in Delaware: a "shareholder champion" hypothesis, and a "self-interested litigator" hypothesis. We then examine intensively all large mergers in 1999-2001 where the target was a publicly traded Delaware company, and all class actions filed with respect to those mergers. We conduct statistical analyses as well as a detailed qualitative analysis of the 104 class actions filed during those years. The pattern that we observe is redolent of a pattern of opportunistic filings, of a lawyer-driven process rather than a true client-driven process: systematic behavior with respect to which mergers were challenged; early and frequent complaints filed; a very high percentage of dismissed cases never reached a judgment on the merits; the absence of a single case that has been decided in favor of the plaintiffs on the merits; settlements tending to reflect free riding by plaintiffs' attorneys; plaintiffs' attorneys failing to challenge special negotiating committees' decisions or competing offers; attorneys with "real" clients and from outside the "traditional" Delaware plaintiffs' bar who were far more vigorous in their litigation efforts; no settlements overturned by the Delaware courts; plaintiffs' attorneys' fee awards in settlements usually paid by defendants and not out of common funds, and largely unchallenged; and plaintiffs' attorneys' fees representing a strikingly low percentage of claimed recoveries (but attractive on an hourly basis), which may well indicate that the attorneys added little value to the recoveries. We then offer suggestions as to changes in pleading standards and the Delaware courts' approach to reviewing settlements and plaintiffs' attorneys' fees that would help curb the excesses of class action litigation without seriously undermining the constructive role that plaintiffs' attorneys have the potential to play in policing corporate mis-governance with respect to mergers.

Abstract: Completely revised and up to date. Thoroughly covers the Class Action Fairness Act of 2005, the 2003 amendments to Rule 23, and numerous important court decisions rendered since the last edition. Covers all of the major topics of class action law and practice, such as commencement of a class action, requirements for class certification, class action discovery, notice to class members, ?opt-out? rights, Seventh Amendment and due process issues, class settlements, remedies, appellate review, issue and claim preclusion, and ethical and policy issues. Also contains a special focus on securities, mass tort, and employment discrimination class actions, defendant class actions and shareholder derivative suits. Explores the latest cutting-edge issues in multi-party litigation and discusses numerous ground-breaking court decisions.

Abstract: This article examines the concept of procedural fairness as a limit or constraint on decisions aimed at maximizing aggregate welfare, and focuses in particular on one type of fairness argument that has received some attention in recent procedure scholarship, an argument that I call the "ex ante argument" because it is based on the notion of hypothetical ex ante agreement or choice. The ex ante argument holds that a procedure is fair if all parties would have agreed to the procedure had they been able to contract for it in advance of (i.e., "ex ante") their dispute. The ex ante argument, if valid, has remarkably broad policy implications. It is capable of justifying a number of controversial procedures that are often challenged on fairness grounds. For example, one might defend the fairness of a mandatory damages class action by arguing that the defendant and all the class members would have agreed to the procedure in advance of the dispute, at a time when they did not know whether their future cases would be strong or weak. The article first surveys the existing process-based (dignitary) and outcome-based theories of procedural fairness and identifies shortcomings with each. This analysis sets the stage for the rest of the discussion by explaining why it is so difficult to articulate a coherent theory of procedural fairness and why, at least at first glance, the ex ante argument seems so promising. The article then critically examines the ex ante argument. First, it explains the essential link to contractarian moral theory. Second, it distinguishes between two different versions of contractarianism - egoistic and ideal. Third, it shows why neither version of contractarianism can furnish a satisfactory basis for the ex ante argument. As for egoistic contractarianism, it is incapable of supplying the requisite moral force needed to justify imposing a hypothetical agreement on parties who have never actually agreed. This means that the ex ante argument must rest on some form of ideal contractarianism, which imagines parties bargaining through representative agents for principles or rules behind a Rawlsian-type "veil of ignorance." But there are serious problems with ideal contractarianism. The parameters of the ideal bargaining situation are difficult to specify in a sensible way for procedure. The bargaining game, as properly specified, is likely to be extremely difficult to solve, if soluble at all. And there are good reasons to believe that agents in an ideal bargaining situation would not unanimously choose hypothetical ex ante agreement as a principle of fairness; nor would they necessarily choose the specific procedural rules that proponents of the ex ante argument seek to defend. The article concludes by recommending an alternative approach to evaluating the fairness of procedures. This alternative relies on a constructivist methodology, which develops general principles of procedural fairness from existing practice through a process of reflective equilibrium. The discussion then illustrates the constructivist approach by applying it to the question of when fairness requires the subclassing of mass tort class actions.

Abstract: This article presents the results of an empirical investigation of the frequency with which financial institutions submit claims in settled securities class actions. We combine an empirical study of a large set of settlements with the results of a survey of institutional investors about their claims filing practices. Our sample for the first part of the analysis contains 118 settlements that were not included in our earlier study. We find that less than 30% of institutional investors with provable losses perfect their claims in these settlements. We then explore the possible explanations for this widespread failure. We suggest a wide range of potential problems from mechanical failures in the notification and recordkeeping processes to more subtle issues such as portfolio managers' beliefs that only investment activities produce significant returns for their clients. In order to determine which of these problems were the main culprits, we surveyed institutional investors about their claims filing practices, asking them who was responsible for this task, how they performed it, and what, if any, performance monitoring was done. We learned that most institutions relied on their custodian banks to file claims for them in securities fraud class action settlements, that many of these institutions did little monitoring of whether the custodian actually performed these services, and that custodians had financial disincentives to file claims on behalf of their clients. We argue that any such failures should be evaluated as potential breaches of the duty of care consistent with the monitoring obligations embraced in Delaware's Caremark decision. Applying this standard to our problem, we believe that the trustees of institutional investors must, in good faith, insure that their fund has an adequate system in place to identify and process the fund's claims. Furthermore, they should create a monitoring mechanism to insure that this system is adequate, and if they learn it is inadequate they should take measures to fix the problem. Custodians that file claims on behalf of their institutional clients should perform the various aspects of this job with due care, too, or face potential liability for negligence. We then identify several discrete problems with the claims filing system that can be addressed to help remedy the current situation. We conclude our article with two observations about the implications of our results for the goals of securities fraud litigation. Our survey results show a serious mismatch between the beneficiaries of the settlement and those that have been harmed by the securities violation that gave rise to the settlement. Simply stated, many defrauded beneficiaries are not compensated for their losses, while others are unjustly enriched. Given the enormous importance of institutional investors in the market, this mismatch raises serious doubts about whether securities fraud class actions can be justified as compensatory mechanisms. Moreover, the poor claims filing records of institutional investors exacerbates this mismatch, as many investors are systematically deprived of any benefits from these settlements. This raises more doubts about the compensatory function of securities fraud cases. Rather we believe the more persuasive rational for these cases is the deterrence of fraud. But in order to accomplish that purpose, we think that the current process needs to undergo some changes. We therefore suggest targeting securities fraud litigation at the individual wrongdoers, and invoking vicarious liability only when the company benefits from the fraud.

Abstract: Derivative suits, long the principal vehicle for discussions about representative litigation in corporate and securities law, now share the stage with younger cousins - securities fraud class actions and state law fiduciary duty class actions. At the same time, alternative governance vehicles - independent directors, auditors and other reforms that have followed in the wake of Enron - potentially diminish the relative place of litigation such as derivative suits. This Article presents data from all derivative suits filed in Delaware over a two-year period. We find a relatively small number, certainly as compared to fiduciary class action and securities fraud class actions. Unlike these other representative suits, derivative suits are used for both public and close corporations. They arise usually in a duty of loyalty context. Contrary to earlier studies, we do not find evidence that these cases are strike suits yielding little benefit. Instead, roughly 30 percent of the derivative suits provide relief to the corporation or to the shareholders, while the others are usually dismissed quickly with little apparent litigation activity. In cases producing a recovery to shareholders, those amounts typically exceed the amount of attorneys' fees awarded by a significant margin. They do demonstrate some indicia of litigation agency costs (for example suits being filed quickly, multiple suits per controversy, and repeat plaintiffs' law firms), but each of these is much less pronounced for derivative suits than for other forms of representative litigation. Overall, the claim that derivative suits are strike suits is much weaker than in earlier periods. The Delaware judiciary, which hears most public company corporate litigation in America, has effectively monitored these cases. There is room to open the door for larger shareholders to utilize these suits to police corporate misconduct. Institutional shareholders, while not willing to take on as large a role in governance as many have suggested in terms of naming directors and the like, may be willing to take a larger role in derivative litigation. Thus we see potential for derivative litigation to play a more important role in the future. We therefore suggest that suits brought by a 1 percent or larger shareholder should be excused from the demand requirement currently applied in derivative suits. Are shareholder derivative suits at death's door? Once described as "the most important procedure the law has yet developed to police the internal affairs of corporations,"1 derivative suits are today regularly portrayed as nuisance suits whose "principal beneficiaries ... are attorneys."2 Even if these critics are wrong, there may now be less need for derivative suits, as other forms of representative suits have grown up that do much of their work. Federal securities fraud class actions increasingly address legal claims that raise issues about management care,3 and fiduciary duty class actions under state law are the principal litigation vehicle to remedy management misconduct in merger and acquisition settings.4 At the same time, American stock exchanges now require more independent directors for larger public companies, a change that will make it more difficult for derivative suits to survive procedural challenges under existing legal rules.5 Despite all this adversity, we believe derivative suits continue to play an important role. In fact, we see them having the legal equivalent of a cat's nine lives.6 They have survived vigorous reform movements in both the 1940s7 and the early 1980s.8 Public company suits continue to be filed and to make new law. The impact of decisions in derivative cases like Caremark,9 Disney,10 and Oracle11 goes well beyond the outcome of the cases themselves. These decisions changed the rules for future legal practice by allowing well-motivated legal counselors to get their clients to accept better conduct and procedures. Moreover, derivative suits against private companies perform an important, if less heralded, role in policing conflict of interest transactions and duty of care violations. …

Abstract: Although the phrase "private attorney general" is commonly employed in American law, its meaning remains elusive. The concept generally serves as a placeholder for any person who mixes public and private features in the adjudicative arena. Yet there are so many players who mix public and private functions in so many different ways that the idea holds the place for a motley cast of disparate characters. My goal in this Article is to map these mixes-to distill from the singular private attorney general concept a range of distinct private attorneys general-and then to show why this new taxonomy is a helpful heuristic device. Specifically, I argue that the new taxonomy illuminates a weakness in the governing model of the class case. Scholars loosely associated with the law and economics movement have helpfully described class action lawsuits as presenting a classic agency problem: class action attorneys (agents) pursue the interests of their class member clients (principals) with little oversight or control. Consequently, class action scholarship has focused on identifying ways to better align the interests of the agents with those of their principals. This obsession with agent incentives assumed, without significant investigation, that there existed a stable group of principals with easily-identifiable interests. My typology demonstrates that different types of private attorneys general serve different types of principals, each of which combine public and private interests in different ways. If the goal of class action law is to align the attorneys' interests with those of their clients, it is necessary to identify clearly the precise nature of these underlying principals. That is the contribution of this piece. I. INTRODUCTION May 17, 2004 marked the fiftieth anniversary of the Supreme Court's decision in Brown v. Board of Education.1 This precise day also marked the sixty-first anniversary of the Supreme Court's first use of the phrase "private attorney general."2 For about three decades after this initial 1943 appearance, the private attorney general concept surfaced only occasionally in the legal literature. Starting in the 1970s, however, its presence became quite regular, and that regularity has escalated steadily to the present: on average, during the past fifteen years, every single workday, somewhere in the United States, some judge has written a legal opinion or some scholar has penned an article invoking the private attorney general concept.3 That the phrase is employed so frequently suggests its utility as a concept. What is odd, though, is that when probed, the concept proves surprisingly mercurial.4 The phrase is sometimes used to refer to plaintiffs,5 occasionally used to refer to defendants,6 and typically used to refer to lawyers.7 (What other concept is so malleable that it can be deployed to signify either a plaintiff or a defendant, a lawyer or a client?) Legislatures create private attorneys general by statute, but before they did and when they have not, courts have created them by judicial decision, and executive agencies by fiat.8 Congress creates private attorneys general, but so do state legislatures, state courts, and state administrative agencies.9 The phrase is an integral part of the doctrine of standing10 and of the rules concerning attorneys' fees.11 In its single most important decision about private attorneys general, the United States Supreme Court ruled that the Constitution necessarily restrains the concept, while simultaneously implying that courts of equity nonetheless retain inherent powers to propagate it.12 If there is any fixed star in this constellation, it is that the private attorney general is a placeholder for any person who mixes private and public features in the adjudicative arena. Yet even that compass point proves elusive, as there are so many players who mix public and private functions in so many different ways that the concept holds the place for a motley cast of disparate characters. …

Abstract: It is reasonable to expect that courts will demonstrate great solicitude for the recent innovation that I term "collective action waivers" - i.e., contractual provisions contained within arbitration agreements whereby consumers and others waive their rights to participate in any form of collective litigation or class arbitration. The history of mass tort class actions and the hegemonic expansion of pro-arbitration jurisprudence compel this conclusion. And, as the now-dominant economic model of contract law has moved the focus of courts from the value of consent to the value of efficiency, arbitration agreements found in all manner of shrink-wrap, scroll-text and bill-stuffer notices are increasingly upheld. As a consequence, we are rapidly approaching a world in which companies may opt out of exposure to class actions in such areas as consumer cases, civil rights, antitrust and ERISA; even the classic Rule 10b-5 securities fraud class may be an endangered species. Legal scholarship to date has tended to focus on optimizing the rules that govern all the various aspects of class action litigation. Fundamentally and understandably accepting class actions as a permanent fixture on the legal landscape, scholars draw on their various perspectival theories to offer reforms to current practice. But the potency of collective action waivers under current doctrine, and inevitable forthcoming efforts to extend their reach into new areas of law and business, should force scholars to confront a more binary question: are class actions, warts and all, a good thing or a bad thing?

Abstract: From 1978 through 2002, federal regulators brought 585 enforcement actions for financial misrepresentation by publicly traded companies, naming 2,310 individuals and 657 firms as potentially liable parties. The legal penalties imposed on individuals and firms are substantial. For example, individuals were assessed $15.9 billion in fines and civil penalties, and 190 managers received jail sentences for financial reporting violations. Companies were assessed an additional $8.4 billion in fines and damages via class action lawsuits. As large as the legal penalties are, however, the reputational penalties are even larger. Our point estimate of the reputational penalty is twelve times the sum of all penalties imposed through legal and regulatory processes. This evidence belies a widespread view that financial misrepresentation is disciplined lightly. To the contrary, the SEC historically has pursued many enforcement actions for financial misconduct, resulting in substantial legal penalties but even higher reputational penalties. JEL classification: G38; K22; K42; M41

Abstract: This chapter describes how a team of civil rights attorneys working with grassroots activists filed and won the landmark environmental justice class action Labor/Community Strategy Center v. Metropolitan Transit Authority (MTA). The plaintiffs alleged that MTA operated separate and unequal bus and rail systems that discriminated against bus riders with disproportionately low-income people of color. The parties settled the case in 1996 through a court-ordered Consent Decree in which MTA agreed to make investments in the bus system that totaled over $2 billion, making it the largest civil rights settlement ever. The MTA agreed to improve transportation for all of the people of Los Angeles by reducing overcrowding on buses, lowering transit fares, and enhancing county-wide mobility. Despite the fact that the MTA agreed to the terms of the Consent Decree, it has resisted bus service improvements for the seven-plus years the decree has been in force. MTA has taken its arguments to set aside the Consent Decree all the way to the US Supreme Court – and lost every time. Ultimately, the MTA case was resolved through mediation and an out of court settlement, not a trial. The MTA case illustrates what can be accomplished under federal civil rights law in the US when a community organizes to protect against environmental injustices. This is an important difference between the United States (US) and the United Kingdom (UK), where no such legislation and litigation is available to populations that are discriminated against by transportation policies.

Abstract: In the courts and in the academy, the ostensible commitment of American tort law to individualized justice has experienced a sustained revival in recent years. Neither the modern mass tort case-law nor the scholarly literature, however, has adequately grappled with long-standing practices of de facto aggregation that have sprung up in the shadow of American tort law since the very beginnings of tort as a field. Reviewing more than a century of private aggregation from employers' liability to automobile accident litigation to the modern asbestos cases, this article contends that American tort practice has been characterized almost from the start by decentralized and private institutions for the aggregate resolution of what may be described as "mature torts": personal injury cases that resolve themselves into regular and reiterated fact patterns. Private settlement institutions constitute a powerful counter-tradition to much better-known traditions of individualized justice in American tort law. The article begins with a historic account of the role of claims agents, sometimes lawyers but sometimes not, in providing claimants' side aggregation to offset the economies of scale and information that the coordinated defenders of local manufacturers or public transport companies held. The article then traces the same pattern of routinization and efficient claims settlement from the industrial setting to seemingly idiosyncratic, one-time events such as auto accidents. By focusing on the institutional actors who administratively expedite settlement of similar claims, the article adds a missing ingredient to the theoretical literature on settlement. It is not only shared assessments of the legal authorities governing claims that inform settlement, but the actual experience of repeat-play legal representatives in resolving factually similar cases in the past.The article concludes with an examination of the mass asbestos settlements rejected by the Supreme Court in Amchem and Ortiz. In contrast to the Court's characterization on these mass settlement cases as departures from a "day in court ideal," the article argues that the persistent aggregation of mature tort claims in private settlement markets situates the mass tort class action on a continuum of aggregating practices in American tort law. Moreover, the long-standing existence of private markets in aggregated settlement indicates that the truly distinctive challenges raised by class actions arise out of the monopolistic representation awarded to class counsel and the difficult agency relations that may ensue, not out of the mere fact of aggregation.

Abstract: We study 236 cases in which we could ascertain quantitative information about the number of objectors, 159 cases with quantitative information about the number of opt-outs, 205 cases with both the size of the class and the number of objectors, and 143 cases with both the size of the class and the number of opt-outs. Opt-outs from class participation and objections to class action resolution are rare: on average, less than 1 percent of class members opt-out, and about 1 percent of class members object to class-wide settlements. Opt-out-rates and objector rates can be partly explained by observable factors in a particular case. Aside from variations across case types, the most significant factor explaining opt-out and objector rates is the recovery per class member. We do not find robust evidence that the rate of opt-out or objection is associated with the level of attorney fee or the fee's proportion of the client's recovery. Class dissent does not appear to increase when the fee is high, nor does dissent appear to exert a notable moderating effect on fees. The class's recovery is the overwhelmingly dominant feature in shaping the fee level. As predicted by theory, rates of dissent decline as the number of class members increases. The rate of objection to a settlement is negatively correlated with the likelihood that the settlement will be approved. However, we find no evidence that the opt-out rate has any effect on settlement approval. Although dissent rates have never been high, they exhibit a noticeable decline between 1993 and 2003. Class actions are a useful means for achieving economies of scale in litigation, facilitating the prosecution of claims that would be uneconomic to litigate individually, and strengthening enforcement of the laws. These advantages can be obtained only because the class action brings before the court the claims of absent parties - people who may not even know that their rights are being determined in absentia. Because class action judgments are entitled to res judicata effect, the procedure can foreclose significant rights of parties who do not wish to release their claims or who may not even wish for the litigation to occur at all. The problem is particularly acute in the case of damages class actions under Rule 23(b)(3), a procedure that allows for forced consolidation of individual claims that, aside from practical considerations, could theoretically be litigated individually without impacting the interests of other claimants. This tension between the advantages and disadvantages of adjudicating the rights of absent parties is a pervasive theme in class action law. The framers of the current Rule 23, adopted in 1966 and revised from time to time thereafter, understood this tension and included measures designed to ameliorate it. The commonality, typicality, and adequacy-of-representation requirements of Rule 23(a) work to ensure both that the interests of absent class members are effectively served by competent and loyal counsel and that the representative plaintiff is not disabled from properly performing his or her role. Settlements of class actions must be reviewed by the court and found to be fair, adequate, and reasonable to the class.1 Notice of any settlement must be distributed to the class under court supervision.2 As to (b)(3) class actions, in which the problem of absent parties is most acute, the rules also require that the class members receive the best notice of class certification practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort.3 Perhaps the most innovative requirement under the current Rule 23 - one not present under the pre-1966 iteration of the rules - is a provision allowing class members to exclude themselves from the class in a (b)(3) case.4 Over time, this procedure, commonly known as an "opt-out," has developed into a fundamental part of class action practice.5 Indeed, the right to opt-out provides a key premise for many of the basic principles that shape the (b)(3) action-jurisdiction over absent parties, due process considerations, judicial review of settlements, awards of attorneys' fees, and more. …

Abstract: Delaware courts largely have privatized enforcement of fiduciary duties in public corporations and have expressly acknowledged this judicial policy. The Delaware courts also recognize that so encouraging private enforcement creates an obvious danger: Plaintiffs' attorneys, especially in class actions where there is no strongly interested plaintiff, may make litigation-related decisions primarily with a view to advancing their own economic interests, rather than advancing the interests of the corporation or shareholders that they purport to represent. Such decisions have the potential to impose substantial, litigation-related agency costs on corporations, shareholders, and the courts, if not appropriately curbed through judicial monitoring of settlements and fee awards. This Article examines the development of Delaware law with respect to merger-related class actions, which have become the dominant form of shareholder litigation in Delaware. We offer two broad alternative hypotheses as to what drives merger-related class actions in Delaware: a "shareholder champion" hypothesis and a "self-interested litigator" hypothesis. We then examine intensively all large mergers in 1999-2001 where the target was a publicly traded Delaware company and all class actions filed with respect to those mergers. We conduct statistical analyses as well as a detailed qualitative analysis of the 104 class actions filed during those years. The pattern that we observe is redolent of a pattern of opportunistic filings, of a lawyer-driven process rather than a true client-driven process: systematic behavior with respect to which mergers were challenged; early and frequent complaints filed; a very high percentage of dismissed cases never reached a judgment on the merits; the absence of a single case that has been decided in favor of the plaintiffs on the merits; settlements tending to reflect free riding by plaintiffs' attorneys; plaintiffs' attorneys failing to challenge special negotiating committees' decisions or competing offers; attorneys with "real" clients and from outside the "traditional" Delaware plaintiffs' bar who were far more vigorous in their litigation efforts; no settlements overturned by the Delaware courts; plaintiffs' attorneys' fee awards in settlements usually paid by defendants and not out of common funds, and largely unchallenged; and plaintiffs' attorneys' fees representing a strikingly low percentage of claimed recoveries (but attractive on an hourly basis), which may well indicate that the attorneys added little value to the recoveries. We then offer suggestions as to changes in pleading standards and the Delaware courts' approach to reviewing settlements and plaintiffs' attorneys' fees that would help curb the excesses of class action litigation without seriously undermining the constructive role that plaintiffs' attorneys have the potential to play in policing corporate misgovernance with respect to mergers. I. INTRODUCTION Delaware courts have largely privatized enforcement of fiduciary duties in public corporations. In In re Fuqua Industries, Inc. Shareholder Litigation,1 Chancellor Chandler expressly acknowledged this judicial policy. He noted that Delaware courts implement it partly by allowing private attorneys, working on a contingent fee basis, to initiate and maintain derivative and class actions in the names of "nominal shareholder plaintiffs."2 Attorneys are subject only to the relatively weak constraints that they must inform their "clients" and receive their consent before they file shareholder suits. Further, Delaware courts use cost and fee shifting mechanisms to "economically incentivize"3 those attorneys to initiate such suits.4 Chancellor Chandler also explained that Delaware courts have adopted this policy because they believe that the plaintiffs' bar is capable of performing a valuable "service on behalf of shareholders."5 Plaintiffs' attorneys understand "abstruse issues of corporate governance and fiduciary duties"6 far better than do most shareholders. …

Abstract: This study examines investor response to three events that help define a federal class action securities lawsuit, specifically, the announcement that names an issuer as a defendant in the lawsuit (at the class action filing date), the disclosure or accounting restatement that 'corrects' the information deficiency (at the end of the class period), and the date at which the fraud on the market allegedly begins (at the beginning of the class period). We document a significant and predictable stock price response at each of these three events. Our tests also indicate that the market interprets these events not in isolation but as sequential and conditional events. Investor response differs on the basis of the characteristics of the issuer, the allegations in the complaint, and the outcome of the litigation. These results and the fact that we observe no systematic price momentum in investor response beyond the announcement dates imply that the market is reasonably efficient with respect to information about securities fraud litigation. Our results are robust to alternative definitions and procedures, and are based on a proprietary database that includes almost all federal securities class action lawsuits since 1990.

Abstract: The borderline between criminal and tort law has been increasingly blurred over the past quarter century by the emergence of new “crimtort” remedies which have evolved to deter and punish corporate polluters. Punitive damages, multiple damages, and other “crimtort” remedies are under unrelenting assault by neo-conservatives principally because, under this paradigm, the punishment for wrongdoing can be calibrated to the wealth of the polluter. If wealth-based punishment is eliminated by the “tort reformers,” plaintiffs’ victories in crimtort actions such as those portrayed in the movies Silkwood, A Class Action, and Erin Brockovich will become an endangered species.

Abstract: The nuisance-value settlement problem arises whenever a litigant can profitably initiate a meritless claim or defense and offer to settle it for less than it would cost the opposing litigant to have a court dismiss the claim or defense on a standard motion for merits review like summary judgment. The opposing litigant confronted with such a nuisance-value claim or defense rationally would agree to settle for any amount up to the cost of litigating to have it dismissed. These settlement payoffs skew litigation outcomes away from socially appropriate levels, undermining the deterrence and compensation objectives of civil liability. Yet current procedural rules are inadequate to foreclose nuisance-value strategies. Class action is commonly thought to exacerbate the nuisance-value settlement problem to the systematic disadvantage of defendants. This concern has contributed to the growing support among courts and commentators for subjecting class actions to precertification merits review (PCMR), generally understood as conditioning class certification on prior screening of class claims for some threshold level of merit. This article proposes mandatory summary judgment (MSJ) as a solution to the problem of nuisance-value settlement in class actions and in civil litigation generally. Essentially, MSJ denies judicial enforceability to any settlement agreement entered into before the nuisance-value claim or defense has been submitted for merits review on a motion for summary judgment or other standard dispositive motion. Assessing the potential costs of the MSJ solution, we conclude that neither the opportunity for evading MSJ strictures nor the possibility of adding expenses to the settlement of non-nuisance-value litigation outweighs the benefits of MSJ. MSJ will be most cost-effective in the class action context, given the already existing general requirements of judicial review and approval of class action settlements, but MSJ should also prove beneficial in preempting nuisance-value strategies outside of class actions in the standard separate action context. With the MSJ solution set out, the article moves finally to offering a more exhaustive analysis of the theoretical soundness and practical efficacy of MSJ in the class action context, where its marginal benefits are arguable the greatest. First, the article challenges the commonly held belief that class action certification exacerbates the nuisance-value settlement problem, attempting to displace the conventional understanding of complex litigation with a new conceptual framework based on the recharacterization of the class action as part of a continuum of litigation processes rather than an isolated litigation mechanism. Second, the article provides a comparative analysis of MSJ and PCMR as solutions to the nuisance-value problems that do exist in the class action context, concluding that MSJ presents the superior and more cost-effective option.

Abstract: Asbestos was once referred to as a miracle mineral' for its ability to withstand heat and it was used in thousands of products. But exposure to asbestos causes cancer and other diseases. As of the beginning of 2001, 600,000 individuals had filed lawsuits for asbestos-related diseases against more than 6,000 defendants. 85 firms have filed for bankruptcy due to asbestos liabilities and several insurers have failed or are in financial distress. More than $54 billion has been spent on the litigation higher than any other mass tort. Estimates of the eventual cost of asbestos litigation range from $200 to $265 billion. The paper examines the history of asbestos regulation and asbestos liability and argues that it was liability rather than regulation that eventually caused producers to eliminate asbestos from most products by the late 1970s. But despite the disappearance of asbestos products from the marketplace, asbestos litigation continued to grow. Plaintiffs' lawyers used forum-shopping to select the most favorable state courts techniques for mass processing of claims, and substituted new defendants when old ones went bankrupt. Because representing asbestos victims was extremely profitable, lawyers had an incentive to seek out large numbers of additional plaintiffs, including many claimants who were not harmed by asbestos exposure. The paper contrasts asbestos litigation to other mass torts involving personal injury and concludes that asbestos was unique in a number of ways, so that future mass torts are unlikely to be as big. However new legal innovations developed for asbestos are likely to make future mass torts larger and more expensive. I explore two mechanisms-- bankruptcies and class action settlements--that the legal system has developed to resolve mass torts and show that neither has worked for asbestos litigation. The first, bankruptcy by individual asbestos defendants, exacerbates the litigation by spreading it to non-bankrupt defendants. The second, a class action settlement, is impractical for asbestos litigation because of the large number of defendants. As a result, Congressional legislation is needed and the paper discusses the compensation fund approach that Congress is currently considering.

Abstract: Large-scale multiparty litigation often settles in clusters rather than one claim at a time. With or without the judicial imprimatur of class certification - indeed, with or without formal judicial aggregation of any sort - lawyers negotiate settlements of sizable portfolios of claims. Such settlements, in which multiple plaintiffs' claims against a common defendant are resolved together, are what lawyers variously call aggregate settlements, group settlements, block settlements, or similar terms that emphasize the collectiveness of the deals. The literature on aggregate settlements, however, is lacking any clear definition or articulation of what makes such settlements meaningfully collective. Group settlements in multiparty litigation vary significantly, and they vary in ways that make it difficult to determine whether certain deals ought to be understood as collective settlements or simply as groups of individual settlements bundled together. This article develops a typology of aggregate settlements. By defining settlements in terms of their essential attributes, it is possible to understand and describe multiplaintiff settlements with greater precision, and to develop a sounder approach to applying the special ethical duties that attend aggregate settlements. Under the aggregate settlement rule, some version of which is in effect in every state, a lawyer may not make an aggregate settlement unless the lawyer obtains each client's informed consent after disclosing the full scope of the deal. The rule does not define "aggregate settlement." Cases, ethics opinions, and other authorities do not define the term with any precision, but some of them contain statements to the effect that an aggregate settlement is one in which a defendant pays an amount to settle an entire group of claims. They describe, in other words, a lump sum package deal, which is the most obvious form of aggregate settlement, but they do not consider what makes such a deal aggregate. Closer inspection reveals that a lump sum package deal has two key attributes, each of which independently would suffice to make the deal collective. The attributes that combine to form such a deal are collective allocation and collective conditionality. Allocation refers to how settlement amounts are determined and allocated, the method for determining who gets how much. Conditionality refers to what conditions must be met for the settlement to stick, particularly the extent to which settlements are voidable by defendants for failure to obtain releases from all the plaintiffs. When authorities depict a deal in which the defendant pays an amount of money in exchange for releases of an entire group of claims, the allocation can be described as lump sum, and the conditionality can be described as all-or-nothing. When the lump sum package deal is understood as a combination of allocation and conditionality attributes, and when that understanding is combined with an awareness of the settlement structures actually in use in multiparty litigation, it becomes evident that each of these attributes appears in forms that range from purely collective to purely independent. Allocation and conditionality can be spread along two axes to form a grid of settlement structures. The resulting typology, by disaggregating the attributes of collective settlements, helps define which settlement structures should trigger the disclosure and informed consent requirements of the ethics rule, and offers an approach to describing both non-class aggregate settlements and class action settlements with greater precision.

Abstract: In Eisen v. Carlisle & Jacquelin, the Supreme Court declared that federal courts may not conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. This proscription - sometimes known as the Eisen rule - has become a pillar of class action practice, both under Federal Rule of Civil Procedure 23 and under state-court class action procedures. The rule can have a crucial influence on whether a case is certified as a class action - and, given the importance of certification, on the success or failure of the litigation. This Article analyzes the proper scope of a court's inquiry into merits issues when ruling on motions to certify a class. Part I of the Article distinguishes three approaches to this question: strong-form rules that prohibit inquiries into the merits and require the court to accept as true the well-pleaded allegations in the complaint; weak-form rules that permit reasonable inquiries into the merits as relevant to certification and usually place burdens of production and persuasion on the plaintiff; and super-weak rules which permit or require the court to investigate the class's chances of success in the litigation and place burdens of production and persuasion on the plaintiff. Parts II-VI compare these rules with respect to the values of fidelity to law, accuracy in adjudication, fairness in judgments, fairness in settlements, and judicial economy. Part VII argues that weak-form rules are superior to the alternative approaches.

Abstract: This study seeks to answer three related questions about costs of the mis-management of diversity: 1. What are the outcomes of lawsuits when firms are accused of racial or gender discrimination, including the legal costs when found guilty? 2. What are firms' stock price reactions to racial and gender discrimination lawsuits? 3. Do firms sued for racial or gender discrimination experience reputational losses; that is, do firms lose market value over and above the expected legal costs of the lawsuit? First, we analyze 1,240 racial or gender discrimination lawsuits and find that the damages paid by firms found liable in these lawsuits averaged $293,000 in the 10 years before the Civil Rights Act of 1991 (CRA91), and $1.0 million in the 10 years after CRA91. Gender discrimination lawsuits have a higher plaintiff verdict success rate than racial discrimination lawsuits. Regressions indicate that after controlling for other independent variables, the damages paid by firms in discrimination lawsuits are positively associated with size of firm, gender lawsuit (compared to race), and post-CRA91. Second, we find statistically significant negative price reactions to the announcement of gender discrimination lawsuits and private class action lawsuits, but not for racial discrimination lawsuits and EEOC lawsuits. Third, we estimate reputational costs of the lawsuit: the loss in the market value of the firm's equity when the lawsuit is announced less the predicted legal costs of the lawsuit. Our results imply that at least for publicly traded companies, discrimination charges can lead to both reputational and legal costs; and thus managers should be concerned with minimizing both. In addition, optimal public policy includes considering these nonlegal costs as part of the penalty to defendant firms in discrimination lawsuits.