INTRODUCTION :: When the Federal Rules of Civil Procedure first provided for a class action vehicle, hopes were high that individuals would be able to act collectively to hold corporations liable for small injuries imposed upon large numbers of victims. But after almost forty years of operation, hope has transformed into suspicion and cynicism. Class action litigation often seems to be a mechanism for greedy class counsel and shrewd defendants to negotiate settlements that undermine the interests of the class. Anticipating the risk of such shady deals, the Federal Rules of Civil Procedure required that any settlement of a class action be approved by the district court judge in charge of the case. However, any optimism about this safety valve has waned, as judges routinely approve class action settlements that often make the class worse off than no settlement at all. No rational class members would want a settlement that eliminated their right to sue while giving them little or nothing of value in exchange. But judges approve such settlements with disheartening regularity. This Article argues that one of the primary reasons judges approve fundamentally flawed settlements in class action litigation is because judges consistently misread the response of the class to the proposed settlement. In particular, judges misinterpret the significance of silence.
Part II details the nature of the collective action problem in litigation and how the class action vehicle solves the problem. Collective action problems exist whenever it is in individuals’ self-interest not to contribute to a group activity even though all of the individuals would be better off if everyone were to contribute. In a resulting irony, each individual is made worse off by pursuing her own self-interest. Litigation can represent a collective action problem when numerous individuals each suffer a small harm. Given the costs of litigation, each potential plaintiff may conclude that the game is not worth the candle, and rationally decide not to sue. When each wronged individual pursues her own self-interest, nobody brings suit and the wrongdoer is not held accountable. This may encourage more wrongdoing. The class action process facilitates the aggregation of numerous small claims in order to solve the collective action problem. By acting together, the class members can reduce their average costs and receive individual compensation that exceeds their litigation expenses.
Part III explains the agency problem inherent in class action litigation. Class counsel may collude with the defendants to contrive a settlement that rewards the class counsel for selling out the class by negotiating an inadequate settlement. For the same reason that class members may not find it worth their time to bring individual suits in the first place, they may also rationally decide not to monitor the class counsel’s activities or the terms of any proposed settlement. Congress attempted to solve this problem by requiring that the trial judge approve any settlement of a federal class action lawsuit. Part III notes the factors that federal judges apply in order to determine whether a proposed class action settlement is fair and adequate. One of the most important factors, according to many judges, is the reaction of the class to the proposed settlement.
After presenting the basic process by which courts solicit class member responses, Part IV shows how courts often focus on the absence of objectors when approving proposed settlements. In many cases, the courts interpret this silence as an endorsement of the proposed settlement. Part IV explains how silence is not acceptance. Silence may be a function of ignorance about the settlement terms or may reflect an insufficient amount of time to object. But most likely, silence is a rational response to any proposed settlement even if that settlement is inadequate. For individual class members, objecting does not appear to be cost-beneficial. Objecting entails costs, and the stakes for individual class members are often low. Indeed, objecting is unlikely to confer any benefit on class members because judges routinely approve proposed settlements over the objections of class members. In many cases, judges focus on the percentage of objectors instead of on the absolute number willing to bear the costs of objecting. When a small percentage of the class objects and the majority is silent, courts interpret this as majority support for the settlement, which outweighs the views of a minority of objectors. This attitude reduces an individual class member’s incentive to object because she knows that her objection (which is costly to her) will be ignored unless a majority of the class objects as well, which is unlikely given that objection is generally not cost- beneficial. This creates a negative feedback loop: Futility makes objection even less cost-beneficial. This reduces the number of objections, and then courts (incorrectly) treat the low number of objections as evidence that class members endorse the proposed settlement.
Finally, Part V considers several potential ways to address the silent objector problem. First, because coordination problems exacerbate most collective action problems (including the monitoring of class counsel and review of proposed settlements), judges should devise mechanisms to increase communication among class members and to create genuine two-way communication between the court and the class. In particular, courts can use the Internet more effectively during both the notice and settlement stages of class action litigation. Second, courts should make a concerted effort to read the reaction of class members more accurately. Part V advocates the creation of a one-way presumption as to class silence, whereby objections raise a red flag that should require greater investigation by the reviewing judge, but class member silence is not taken as evidence of the class’s support of the proposed settlement.
November 2014, Vol. 66, No. 6
Lily Kahng, The Taxation of Intellectual Capital