fbpx

Can the Rule of Law Afford the Private Attorney General?

The “private attorney general” is one of the most polarizing figures in U.S. civil litigation. Class action lawyers claim the title to justify high fees for representing classes of plaintiffs that generally receive only nominal individual recovery in contexts ranging from securities, to products liability, to false advertising, to antitrust. The private attorney general, according to this argument, benefits society by deterring corporate misconduct beyond what the government, with its limited enforcement bandwidth, can achieve. Critics of this model point out that these actions drain corporate resources, fail to compensate the purported victims, and invite collusion between plaintiff’s counsel and defendants, neither of whom has any incentive to legitimately represent the plaintiffs themselves.

In his early work, Columbia law professor John Coffee was one of the first to identify the class action as a problem of agency costs. Because the ostensible “clients” exert no meaningful control over their counsel—indeed most class members are unaware that litigation is even occurring—the attorneys may behave opportunistically, seeking high fees for themselves while agreeing to sub-optimal terms for their clients. As Coffee put it in a 1987 law review article, due to the high agency costs in these representations, “it is more accurate to describe the plaintiff’s attorney as an independent entrepreneur than as an agent of the client.”

While class action critics have often invoked Coffee’s work to make their case, in his new book, Entrepreneurial Litigation, Coffee says his goal is “not to bury the private attorney general but to rehabilitate it.” The book provides a comprehensive legal history of entrepreneurial litigation and a useful distillation of the past fifty or so years of scholarly debate around it. But Coffee also expands upon his earlier work to propose reforms to the current class action practice, intended to address its pitfalls rather than abolishing it.

Two broad themes wind implicitly through the project. One is that not all class actions are created equal, and that we should attend to the jurisprudential and policy landscapes that create unique incentives and challenges in different substantive areas. The second is the idea that it is important to deter frivolous lawsuits while also encouraging the private attorney general function in cases where the claims are truly valid but not valuable enough for plaintiffs to pursue individually. Coffee suggests we have become so political in our thinking about class suits that neither supporters nor detractors fully appreciate this distinction. With these commitments, he makes two primary normative contributions. First, he proposes a set of context-specific procedural reforms. Second, he re-conceptualizes the relationship between public enforcement and private litigation.

Coffee begins his discussion of procedure with the observation that recent Supreme Court cases such as Wal-mart v Dukes have used Rule 23’s “commonality” requirement to limit the size and scope of actions to classes of genuinely similarly situated plaintiffs. He argues, essentially, that the Court’s cabining of class actions in this manner is both over- and under-inclusive because it eliminates potentially legitimate suits yet does not directly address the most significant problems of opportunism by plaintiff’s counsel and collusion between the parties. He provides a number of more tailored suggestions, including:

  • An inter-state body, similar to the federal Judicial Panel on Multi-District Litigation, empowered to consolidate state law claims, in lieu of the current redundancy, particularly in often merit-less M&A litigation, which incentivizes defendants to settle quickly with the least effective plaintiffs.
  • A more active role for trial judges in assigning control over a litigation to a single firm, on the basis of the quality of its initial pleadings, rather than allowing numerous firms to try to share in the profits.
  • Use of “partial certification” to overcome the commonality problems in Dukes. Under this model, a federal court could certify a class on the issues definitely common to all plaintiffs (for example, in a case involving fraudulent advertising, the issues of materiality and scienter) and individual class members could subsequently litigate the non-common issue (in this case reliance) on their own.
  • Adopting a modified version of the English, “loser pays” model of civil litigation, shifting fees to at least those plaintiffs whose claims cannot survive a motion to dismiss.
  • Refocusing the securities class action to avoid its current “circularity” problem whereby one group of innocent shareholders essentially pays out to another. Coffee proposes greater liability for individual officers and “gate-keepers” such as accountants and investment banks, instead of the corporate issuer itself. (One difficulty with this proposal, which he does not directly address, is what we are to do in cases where the issuer has taken affirmative steps to deceive such gate-keepers.)

Each of these points deserves more detailed consideration, yet all of them have the potential to impose some order on the feeding frenzy of plaintiffs’ firms that swarms whenever a merger occurs or a corporation’s stock price drops. To the extent that such order reduces the economic waste caused by these actions, particularly in cases where the underlying claims are wholly meritless, this is all to the good. The difficulty with his agenda for reform is that, with the partial exception of the “loser pays” idea, it does not directly address the toughest question at the heart of the debate over class actions: how are courts supposed to decide what settlements, particularly those featuring significant injunctive components, actually add enough value to society to justify the enormous fees they extract from the corporation?

Implicit in the private attorney general model, which Coffee endorses on principle, is the idea that we are more worried about deterrence than compensation. Ted Frank and I have written elsewhere that, once we give up on the attempt to compensate plaintiffs, courts are essentially asked to be policy-makers, often undermining agency enforcement by upholding case-by-case injunctive remedies that preclude further litigation by class members. (As we noted, this has the curious effect of allowing potentially collusive class settlements to create safe harbors against civil liability that government agencies themselves generally cannot create).  In short: even if we streamline the process to eliminate some of the collusion and redundancy we do not have much of a substantive check against frivolity, simply because courts are not experts in the complex policy areas the class actions impact. This is especially true in cases where injunctive remedies, such as new labeling requirements, changes to corporate practice, etc., function as regulatory policy-making.

Coffee’s structural point indirectly addresses this question. He proposes that, in lieu of our current divide between government enforcement and private litigation, perhaps enforcement agencies such as the SEC should hire private firms to pursue these claims. He argues that this would, first, achieve greater deterrence than the underfunded, risk adverse agencies can achieve on their own. And, second, this would lead to greater accountability on the part of plaintiff’s lawyers as the government could monitor against their self-interest better than an unwitting class of plaintiffs can.

The clear benefit to this proposal over the current world is that, as he notes, agencies could wield enforcement discretion, deploying private firms only in cases where their expertise had already determined enforcement was warranted. But it is not entirely clear how this would function in practice. By what mechanism would private firms be prevented from beating their publicly-enlisted counterparts to the courtroom? If the substantive law recognizes private causes of action in the first place, and Rule 23 provides a process for class certification, it seems as though we would need a new theory of preemption to prevent the exact same abuses from occurring, particularly in cases where the relevant agency has concluded that enforcement is not necessary.

Finally, Coffee makes a point in passing that scholars in the field would be wise to engage with: the importance of “expressive” or “symbolic” justice. He suggests that one of the pitfalls of relying on private firms for enforcement is that they lack the incentive to pursue these goals, as they are motivated by profit as opposed to forcing accountability in cases where the greatest amount of actual public harm has occurred. It is important to consider what sorts of expressive goals we expect of private litigation in the first place. While tort and contract do not have the explicitly retributive goals of criminal law, they unavoidably send an expressive message as to what constitutes a civil wrong or breach. Outside of the class action context, however, these wrongs are defined by the extent to which an individual has been harmed and ought to be made right by the law.

If we abandon the compensatory function of private law altogether, in favor of the deterrence goal implicit in the private attorney general, the traditional expressive function of private law has become muddled. These theoretical questions will only become more pressing in a world with a public-private hybrid enforcement mechanism of the sort Coffee suggests. Answering them would provide welcome clarity to the debate over class actions in general.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.