Manhattan Institute for Policy Research.
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Event Transcript
October 30, 2002

The New Class Action Targets: Are Class Actions Undermining Regulation in the Fields of Financial Services, High Technology, and Telecommunications? continued

Panel 2: Regulators’ Roundtable

MR. THOMAS HAZLETT: This is panel number two, “Regulators’ Roundtable.” My name is Tom Hazlett and I’m here to kick it off. I’m an economist and Director of the Center for the Digital Economy at the Manhattan Institute,  which deals largely with information technology, including the many regulatory issues surrounding the telecommunications industry. 

Neal Wolin is Executive Vice President and General Counsel to Hartford Financial Services. Until early in 2001, he was General Counsel of the U.S. Department of Treasury. Prior to that, he was deputy general counsel for several years at the U.S. Department of Treasury. In these capacities, he had extensive experience over many regulatory, legal, and policy undertakings that are the purview, of course, of the U.S. Department of Treasury.

Mr. Wolin also served in the Clinton White House as the Executive Assistant to National Security Advisor Anthony Lake and then Deputy National Security Advisor Samuel R. Berger. Before joining the federal government, he practiced law with Wilmer Cutler & Pickering in Washington, D.C.

Mr. Wolin received a B.A. degree in history summa cum laude from Yale College where he was elected to Phi Beta Kappa.  After college, he studied at Balliol College at the University of Oxford as a Charles and Julia Henry Fellow, earning a Master of Science degree in Development Economics. He received a J.D. degree from Yale Law School, where he was a Coker Teaching Fellow in Constitutional Law.

MR. NEAL WOLIN: It’s quite clear, based on a wide range of data and evidence, and as the last panel discussed, that class actions are increasing in number. They are increasingly being brought against highly regulated industries and are increasingly based on consumer-type claims.

This central set of facts gives rise to a host of questions about the actual and optimal interaction between class litigation and regulatory oversight. This panel is an opportunity for the regulators to have their say on some of those questions.

We have assembled here today a very distinguished group of regulators from both the state and federal levels who regulate a range of different industries. They will share with us their perspectives on some of these questions. We’re going to run this panel as a roundtable. Each of our panelists is going to give an introductory set of comments, and then I’m going to try to engage them in conversation about some of these issues, and then open it up to questions from the group.

I should note—as the panelists have requested—that, given their status as government officials, their views here today represent, of course, their own views and not necessarily the views of the institutions in which they serve.

Bill Kovacic is the general counsel to the Federal Trade Commission, which he joined in June 2001. He is on leave from George Washington University School of Law, where he has been a professor since 1999. He holds a law degree from Columbia University. He clerked in the Federal District Court in Maryland. Prior to his current service at the FTC, he worked there once before, was a private lawyer. He was also a professor at George Mason University.

Lee Covington is the director of the Ohio Department of Insurance, someone whom we at the Hartford Financial Services Group know well. Lee is a leading member of the National Association of Insurance Commissioners, really a star within that body. He’s a member of its executive committee and is the chair of a number of its committees: the Speed to Market Committee; the Task Force on Regulatory Reengineering; and the Electronic Commerce Working Group.

Before he took over as commissioner of insurance in Ohio, he was deputy commissioner in Arkansas, and before that he was in private practice. Lee is a graduate of the law school at the University of Arkansas.

John Rogovin, who was a former colleague of mine in the government, is deputy general counsel to the Federal Communications Commission. Prior to that, he was a partner in the Washington, D.C., office of O’Melveny & Myers, and before that he was at the Justice Department, as a deputy assistant attorney general in the Civil Division and as an assistant to Attorney General Janet Reno.

He is a graduate of the law school at the University of Virginia and clerked at the U.S. Court of Appeals in the D.C. Circuit for Judge Silberman.

MR. BILL KOVACIC: Thank you, Neal. I’m grateful to the Manhattan Institute and the Federalist Society for the opportunity to discuss this set of issues today. I do have to mention the disclaimer that Neal referred to: I’m not speaking on behalf of the Federal Trade Commission, but only expressing my personal opinions based on my experience.

I’ll begin by identifying two characteristics of the existing regulatory environment that we deal with at the Federal Trade Commission that give rise to a number of issues that we’re talking about. These characteristics of the system have fairly powerful consequences for the interaction between public regulatory oversight and private rights of action.

The first was discussed by the previous panel during the question-and-answer session, and that is that there might be a tendency to model the regulatory state as a monolith, but in fact, it’s not.

Instead, the reality of regulation in many sectors that we’re familiar with at the FTC is not one of a unitary body making commands and carrying them out, but rather a fragmentation of regulation. The fragmentation is the result, over decades, of the sequential addition, either of new regulatory bodies or new regulatory commands without effort to rationalize them as the next new command is layered onto the ones that preceded it.

What’s the consequence? We’ve had the emergence of an extraordinary array of overlapping parallel regulatory gatekeepers, many of whom are overseeing the same mechanism. We have overlapping relationships, both with respect to the federal stratum of the regulatory sphere and between the feds and the states.

To give you a couple of examples: the credit practices area, where we’re deeply involved, features a remarkable collection of participants. The Gramm-Leach-Bliley Act, the newest and most important enactment in this area, gives rule-making authority over the single same statute to seven federal regulatory agencies. And all that the statute does about specifying a path of coordination is simply to give the general exhortation to try to achieve some consistency.

But there’s not even a formal mechanism specified in the statute by which that consistency might be achieved.

In the case of telecom or energy, if we ask who regulates—well, who doesn’t? If you have a competition policy problem involving energy, for example, you’re likely to be implicating the jurisdiction of either the Federal Trade Commission, the Department of Justice, the Federal Energy Regulatory Commission, the Public Utility Commission of every jurisdiction in which the energy company does business, and separately, the state attorneys general of every state in which the parties do business—all of whom have, in some dimension, significant competition policymaking authority with respect to the very same conduct.

The consequence is that if we ask what the public regulatory policy is to be superimposed on the operation of private rights of action, as a way of deciding how those rights could be delimited or applied over time, that’s an extraordinarily complicated question.

We’ve had experiences—a dramatic one in the past few months—in which we were in a courtroom arguing against another federal instrumentality about the interpretation of commonly held jurisdiction. You can imagine the perplexity of the court when it said, “We’ll now hear from the United States,” and two people stood up on different sides of the courtroom to talk about the same point.

If anything, the fragmentation of authority has been growing over time. We made a very modest effort eight months ago to rationalize the treatment of mergers between ourselves and the Department of Justice by trying to specify exactly what kinds of deals we would look at.

Our legislative overseers vehemently objected; the principal objection, which was delivered to us on the day we tried to roll this out, was that it made the allocation of responsibility too transparent and too predictable. There was a clear preference for having a fuzzy, ill-defined distribution of authority that overlapped these two bodies.

If you can’t rationalize that small segment of the overlapping regulatory arena, how do you go about assimilating or identifying a common voice or perspective with respect to these other regimes?

The second characteristic I want to identify is an extraordinary feature of American jurisprudence and lawmaking, that is, more than any other country in the world, a broad decentralization of prosecutorial discretion. We do not have a single monopoly prosecutor, and even private rights of action are common.

Indeed, in the antitrust area, in deciding what the relationship between federal and private rights is, the statutory regime unmistakably contemplates a division of labor here in which the job of the feds—for the most part, with a couple of important qualifications—control conduct and structure, with the exception of criminal penalties.

But the real heavy lifting of damage recoveries on the civil side of the fence is unmistakably dedicated, for the most part, to private initiative. That’s a conscious design of our scheme.

So the question becomes not whether, in many areas where we’re active, there are going to be significant private initiatives; Congress has answered that question decisively.  The question becomes how is that powerful private right of action under our system going to be implemented? When there is a private action, how should federal agencies intervene?  Our view is that it should be principally through an amicus function.

In the past year, we’ve had, in carefully selected instances, something to say on both the competition and consumer protection side about how court settlements are designed and executed.

But the simple implication here is that the private role is unmistakably recognized, and, in fact, is a central characteristic of the system. The question is, what is the federal role in these private actions? How is it to be carried out? How are our policy views to be put before courts? Again, in my opinion, it’s principally going to be through an amicus role.

MR. LEE COVINGTON: I’d like to give you a picture of the landscape that we’re seeing in the insurance industry across the country. Then, I’d like to share with you where I think we should go from here.

In the class action arena, we’ve seen at least 12 OEM (Original Equipment Manufactured) parts cases. One resulted in a $1.2 billion verdict that most of you read about, which economists estimate will add $3–4 billion to consumer costs across the country.

We have over [unclear] modal [please explain] premium cases filed in the New Mexico court system. On the life-insurance and property and casualty side, we have a vanishing premiums case that’s been certified in Iowa, three cases that were not certified in three other jurisdictions, a computer error regarding a benefits case in Ohio, veritable life and veritable annuity misrepresentations under the Securities Litigation Reform Act in Minnesota that have been certified, very low policies sold to low-income and minority groups that have been filed in school in the Eleventh Circuit [please clarify] and in Louisiana six rate cases alleging fraud in Ohio when the Ohio department has already approved those rates [Transcription unclear; please verify]. We estimate that that would add between $750 million and $1.5 billion to consumer costs in the state of Ohio.

In addition, in the insurance context—I don’t know if this holds true in the FCC or FTC environments—many times, decisions that are made by courts that are coverage cases can have the same impact as a class action.

For example, in Ohio the court found that the wife of an employee was covered under the husband’s employer’s commercial policy. We estimate that that decision has added $1–1.5 billion employer’s insurance costs. It cost one of our companies 10 percent of its billion-dollar surplus. We have the Georgia diminished value cases, where State Farm has settled that case for $100 million to go to 700,000 Georgians for the diminished value of their cars after they had been in an accident, costs that State Farm did not and cannot charge for, now going forward.

If my math is right, that means that every person’s going to get about a hundred bucks out of this. And I guarantee you that they’re going to pay a lot more for that hundred bucks through increased rates because of the destabilization of the market and uncertainty in the marketplace. I would guess that they will lose that amount within a year or two because of destabilization in the marketplace and actual practices that can take into account that uncertainty in the court system there.  By the way, the attorneys got $50 million out of that settlement.

To be fair, there are 21 other cases that have not been certified, but as you can see, you have class actions filed all across the country in what appears to be almost a lottery mentality as to where we can file the class action to get it certified. But some courts have done the right thing in some of these cases and not certified them.

I did skip over one. We currently have a case that has been certified in California, Hill vs. State Farm, where the plaintiffs’ attorneys estimate that there will be $50 billion paid out. That’s $1,000 per policyholder. I hope that doesn’t happen, because the last time I looked, State Farm only had $37 billion in surplus. So we’re concerned about that case and are considering filing an amicus or intervention action in the California courts.

In my capacity as director of the Ohio Department of Insurance, I personally have filed ten amicus briefs or intervention actions throughout the country. Several of these cases are hard to keep up with. But we have taken a very aggressive role in moving forward. We think that class actions usurp the jurisdiction of state regulators.

Many of you have already seen the numbers published by the Federalist Society that document a 1,000 percent increase in class actions in state courts and a 300 percent increase in federal courts. You see reports of one the leading class action plaintiff’s lawyers saying that he has the best practice in the world because he doesn’t have any clients. That is a very troubling assertion coming from an attorney.

We see settlements without any relief to the plaintiffs. The first settlement that was agreed to or offered in the modal premium cases had no relief going to the plaintiffs. It appears to be an adulteration of the process.

We see 54 percent of the cases filed in five jurisdictions: Alabama, California, Louisiana, Ohio, and Texas.

So that’s the landscape. Where do we go from here? First, I’m a strong believer that courts should defer to the agencies when the agency has primary jurisdiction, including when the filed rate doctrine applies.

Second, courts should give deference to the agencies when the agency has spoken, whether that be through a formal rule-making process or by operations, procedures, guidelines, or in practice.

Let me give you an example. We have a case pending before the Ohio Supreme Court right now, Lemm vs. Hartford, where the issue before the court is whether uninsured motorist coverage is supplied under a homeowner’s policy. The insurance department has never formally stated in its rule-making process that a homeowner’s policy is not a motor vehicle policy, because we never thought that we had to do so. It was self-evident to us, and it’s self-evident in 49 other jurisdictions. So that’s an example of the agencies not being able to contemplate every fathomable theory that plaintiffs’ lawyers can dream up to bring cases.

I know that that is a difficult standard, but it’s one that needs to be looked at clearly. In fact, we would not have allowed the Hartford to collect rates for that coverage. We would have denied their rate filing for that coverage, had they said that they wanted to provide this coverage under the homeowner’s policy. We’d tell them to issue a motor vehicle policy. That’s what you have to do under Ohio law.

One of the judges of the [is this the U.S. or Ohio?] Supreme Court raised the question as to whether the insurance department was even doing its job during oral arguments last week, when I attended. We’ll be interested to see how that case comes out.

Federal law: the federal bills liberalizing the diversity jurisdiction requirements are a good first step because my analysis in looking at these cases across the country shows that state courts gloss over the rigorous analysis required by Phillips Petroleum and the other Supreme Court cases that address the standards for class action certification. But I question whether this will solve the problem.

While the increase is not as significant in federal courts as it has been in state courts, we’re still seeing a dramatic increase in class actions. So I believe that we need to raise the standard for certifying class actions. The Third Circuit in Eisenberg said that any error should be committed in favor of class action certification. The commentary in Rule 23B3 also is vague or ambiguous enough to support that conclusion.

I recognize the challenge in raising that standard, but a good place to start is to require courts to review state laws to consider a certification process to the agency that has jurisdiction. Perhaps courts should issue a stay while the agency is undertaking its evaluation as to certification.  That’s actually been done by the Fifth Circuit in a Louisiana case. They have allowed the insurance department in Louisiana to complete a rule-making process on a particular issue.

In the New Mexico cases, the court actually denied my request for an amicus brief. I know that courts sometimes accept them and don’t read them, but they ought at least to allow the amicus brief to be filed and make a record of it.

In short, there are a number of first steps that we can take to rein in abusive class actions.

Finally, we need a standard that protects the due-process rights of defendants. Phillips Petroleum talks about the due-process rights of plaintiffs, but I don’t see a sufficient focus in the case law on the due-process rights of defendants.

Victor Schwartz, in his Connecticut Law Review article published last year, cited the United States Supreme Court’s statement in BMW that says that the elementary notions of fairness in our Constitution dictate that a person receive fair notice of conduct that will subject him to liability.

We need to do that in some way because we’re seeing that a contrary result is happening in the insurance industry. Today, we have a risk assessment process and the financial solvency surveillance. When I talk to CEOs of insurance companies, the one question I ask them is, what is your biggest risk? What is the thing that you wake up in the morning thinking about and leave the office at night thinking about how to deal with? And they reply: the uncertainty of class action litigation and the liability that we have for that and not being able to charge a rate to cover liabilities that we can’t possibly predict.

MR. WOLIN: Let’s welcome Mr. Rogovin.

MR. ROGOVIN: It’s a pleasure to be here with you all, and it’s always a pleasure to be at a forum where Bill Barr expresses his concerns about the power and authority of the FCC.

I think the first panel described quite well the rise of consumer class actions, especially in the telecom area. The hard issue is exactly where to draw that line in terms of managing private litigation when it arises in this regulated environment. I don’t come to you today with an answer, but I’ve got three points, which I’ll refer to as the three Cs: certainty, the courts, and Congress.

The first point is the certainty of our rules. We at the FCC are regulating in a commercial environment where there are real companies out there trying to build businesses on a national scale. Without the certainty of knowing that our rules are going to be the national rules, it’s a very difficult environment for a company to operate in. It’s also important that that companies know—for certain, up front—what the rules are. It’s a real problem if those rules are established in a piecemeal fashion in 50 states in a court-by-court setting.

The second point is our relationship with the courts. I have in mind a reviewing court. A court that reviews an FCC rule does so typically with a substantial amount of deference, which flows from several factors. One of them is that often the regulatory rule-making process is complex and requires a lot of expertise. The FCC is, in many ways, uniquely set up to deal with gigantic volumes of information that often lead to a complex set of rules, as Bill Barr mentioned earlier.

There’s another aspect to this principle of deference, which is typically referred to as Chevron deference, referring to the Chevron case by the Supreme Court. It’s an aspect of Chevron that doesn’t get much notice: the point about political accountability. In reviewing these types of rules, it’s a good thing, not a bad thing, to know that the agency that’s picking the rule and establishing that optimal point—whether it’s safety or economic regulation—is in some measure politically accountable, as opposed to the judiciary, which isn’t accountable in a meaningful sense.

Another aspect of our relationship with the courts is that in private litigation, one model that has worked well for us at the FCC is when the court refers a matter to us under the primary jurisdiction doctrine and the agency has a chance to pass on the substantive issue.

One recent example is the Orloff case (Orloff v. FCC, D.C. Cir. No. 02-1189.), which probably didn’t get a lot of attention. It’s a consumer class action arising in the Midwest. Consumers were complaining about the level of discrimination between wireless plans. The court referred the matter to the FCC on the defendant’s motion, and the FCC ultimately held that there was no discrimination. In the wireless market, the FCC has regulated widely what the rules ought to be and has taken a largely deregulatory approach for lots of reasons, not the least of which is the intense competition among wireless providers.

The third point is our relationship with Congress. At the FCC, we have been delegated a quasi-legislative function to establish the very rules that come under attack in consumer class action cases. That’s why we’re there, and that’s what Congress wanted. And that is exactly the regime that Congress envisioned—that the FCC would establish broad national rules.

It is what we do at the FCC. We take account of precisely these policy considerations. There is no reason to believe that a class action is going to be better at weighing these policy issues than we are. I hope that we get it right in all cases—at least we try to.  Regardless of that, one thing of which you can be assured is that the Commission is guided by a very simple principle, which is to establish a rule that’s in the public interest. There are no other agendas and no other incentives guiding what the commission does in promulgating its rules.

Before closing, I’d like to mention the Trinko case. The hard issue in these cases is understanding where to draw the line in managing private litigation. At least a couple of aspects of Trinko concern me. One is its treatment of the “essential facilities” claim. It clearly has left that claim open, and it’s difficult to see how the court will get into the “essential facilities” issue.

For example, what is the proper level of unbundling of the local loop? That is at the core of the ’96 Act, and it’s at the core of what the Commission has been doing and will be doing. We are in the middle of an extensive proceeding, called the Triennial Review, of the unbundling rules. It’s difficult to imagine how a private case getting into this “essential facilities” issue—dealing, for example, with the local loop—is not going to bump up quite seriously into what the commission is doing.

Again, I don’t know where to draw the right line, as you manage those two regimes, but unquestionably there is going to be a lot of tension.

A second aspect of Trinko that concerns me is the court’s assertion that a damages claim would not necessarily be disruptive to the regulatory regime. This strikes me as somewhat akin to the Supreme Court saying that private litigation against the President of the United States is not going to disrupt his management or the fulfillment of his presidential duties. I think that the Court in that case was somewhat naïve in understanding what happens in a real civil litigation.

MR. WOLIN: I would like to address the following set of questions to our panelists.

Are agencies unambiguously better positioned on account of some of the things that John Rogovin mentioned—expertise, political accountability, and so forth? Are they unambiguously better positioned than courts to consider the range of interests and policy goals at stake in these kinds of contexts, particularly the consumer context? Or are there reasons why we should think about their not being able to fulfill the full range of public policy goals in a given context, where, so to speak,  class litigation fills in the gaps?

MR. ROGOVIN: For the sake of being provocative, I will say “yes”, absolutely. I think a regulatory agency is unambiguously better equipped to handle this. I have the bigger picture in mind, when I say this, particularly about the congressional scheme put in place by the ’96 Telecom Act for the FCC.

We shouldn’t lose sight of the fact that at the FCC and every other federal agency in Washington that has oversight for these issues, there is very rigorous court review. Our cases are exclusively reviewed in the courts of appeal. If nothing else, the track record of the Commission demonstrates that we get searching review. We do not win all our cases. And the courts are not at all shy about stepping in. If there were a health and safety issue that an agency grossly overlooked, and market competition bungled, I don’t think the U.S. Court of Appeals for the D.C. Circuit is going to miss that. It is a very smart court and very rigorous in its review. A lot of comfort should be taken in that.

MR. COVINGTON: I might comment, Neal, that obviously I don’t know the regulatory schemes in FCC and FTC in great detail, or anywhere close to that, but I think in the insurance context or in most class action contexts, most people would recognize that there can be a role for class actions in certain circumstances. Unfortunately, the cases we are seeing are bumping up against the regulatory scheme and the regulatory decisions that have been made by the regulator.

Let me give you an example. I don’t know if it’s a good one, but in the race-based premium class actions, there’s one cause of action that is always thrown into that litigation: it’s what is called the “upside-down policy,” in which someone might pay more in premiums than he ultimately receives in benefits. Some would argue that auto policies are upside-down policies. But regulators for 100 years have allowed those policies to be sold. It’s not an upside-down policy if you buy it two years before your death. It’s just the way that accumulation life insurance works. So that decision has already been made by the regulator.

Arguably, in some states the insurance departments have been given authority to remediate race-based premium practices. There appears to be jurisdiction given to the regulator to do that. Most regulators are working to settle those issues with class counsel without having to get into that debate.

But in most, if not all, of these examples, the regulator is indeed in a better position, whether it’s knowing how rates are filed or what kind of coverages are allowed under the policies, or any number of elements. Even if we’ve made a wrong decision, there are some due-process rights for the defendants—in most cases, insurance companies. They ought to be able to rely upon what the department has decided.

MR. KOVACIC: In the antitrust world, Congress has clearly decided that the role of the federal instrumentalities is, for the most part, with the exception of criminal enforcement with the Department of Justice,  limited to disgorgement in the competition context--especially for the Federal Trade Commission. For the most part, Congress has decided that the private rights of action are the best way to collect and disburse civil monetary recoveries. But let’s to put that aside for the moment.

Let’s look instead at the consumer protection side of what we do. If one were to identify our comparative advantages vis-à-vis other litigants, actions by state governments and actions by private parties, we think we’ve got a better database. That is why, in the past 12 months, we’ve been in court twice with amicus briefs contesting settlement or attorneys’ fee terms.

But one of these cases focused straightforwardly on the settlement terms. Why? We have a huge dataset in experience dealing with consumer protection remedies. It’s partly the result of having driven over lots of potholes on our own and taken settlements that blew up in our face. We’ve learned a lot about what works and what doesn’t work.

One thing we are in a very good position to do is offer guidance to courts about what kinds of conduct-related settlements work, what mixes of compensation or in-kind payments, pecuniary and non-pecuniary terms, are going to be effective. We can guide them on how they have to notify claimants in order to get their attention, and what they have to do, in short, to put together a good remedial package.

We feel we’ve got a good perspective on that, and we’re in a good position to inform courts about what settlement terms ought to be.

But we’re a small agency. We’ve got a total budget of about $160 million. We have the equivalent, as we put it, of about 1,050 work years. That’s a pretty small institution. We couldn’t do all the relevant work if we tried. Here again, there’s at least an implicit recognition that there’s an important role for private rights of action; not simply on the competition side, but doing the consumer protection side of things as well.

I’ve spent lots of time looking at the literature that deals with the relative efficacy of private and public rights of action. As you well know, one of the main justifications for creating a private right of action is that the feds get captured in one sense or another and, as a result, don’t exercise conceptually superior policymaking tools for the benefit of society as a whole.

But I think about my own agency, which is a pretty tough one to capture. Why is that? We deal with such a diverse and crosscutting collection of commercial interests deal all the time. It would be structurally difficult for our agency to be captured. So if I look at that variable or criterion for evaluating effectiveness, are we the right people to be playing a leading or dominant policy role in the area? I think so. 

I’m less concerned about capture and more concerned about the resources question. In a number of instances, we have particularly good substantive insights to offer courts about the quality and implementation of remedial schemes.

MR. WOLIN: I think that we have just, not surprisingly, validated the proposition that regulators think they’re perhaps better positioned than class litigators to deal with any issue out there.

But I wanted to explore something that Bill just talked about. I want to ask Lee and John whether—despite their comparative advantage, as it were, their superior position to take on any of these issues, especially in the consumer area—they view class litigation as potentially helpful for the real or perceived regulatory capture reasons that Bill articulates, or for the additional resources it might provide to accomplish their mission. Or is it better viewed by you, Lee and John, as impeding your being able to do what you’re seeking to do?

MR. COVINGTON: With regard to the first issue on capture, I think that class certification and the use of a class action vehicle are illegitimately used to address a capture issue. If you have some issue of capture, that’s a political issue that the will of the voters should be addressing. It should be done through that process, not through the judicial process.

Bill is right. Resources is an issue. Here is a controversial topic of giving regulators more resources and authority. Most people in business would not usually think about giving regulators more resources and authority.

In these class action matters, you heard the list of insurance cases. I am probably one of the very few insurance regulators in the country that have devoted resources from my individual department to addressing these cases. We’ve done it through the National Association of Insurance Commissioners. But in terms of where the class actions exist, and being able to be in on the ground floor to have an influence in that matter—that’s very difficult from a resources standpoint.

I’ve done an analysis of what helps the people of Ohio. I see rate destabilization. I’ve seen a marked destabilization in other states. That can cost consumers 10, 20, 30, or 40 percent more. Those are real dollars in real people’s pockets.

So we’ve tried to intervene in the class actions in which I think there is going to be some detriment to the people of Ohio. We’ve said that we’re going to make this a priority. Unfortunately, some regulators have said that the big insurance companies can take care of themselves. We recently had a court welcoming—we’re finding that courts are welcoming, in some cases, and in others not—our intervention into the lawsuit to give us their view. I don’t think they ever thought the insurance department was even interested in, or had a viewpoint on, this issue. [please clarify the above]

Another issue, frankly, is notice. In our society, sometimes people think about going to a lawyer before they think about going a regulatory agency. We don’t get notice of these problems, so how can we fix them if we don’t know about them? But the issue of capture isn’t a big one. It’s more of an issue of resources, and whether you know that the purportedly illegal activity is going on in the marketplace. It’s just hard to be everywhere at once as a regulator.

MR. ROGOVIN: In many respects, a lot of the consumer class actions that bump up into the regulatory environment that the FCC is dealing with are still at preliminary stages. They got knocked out of court. So we haven’t seen a lot of the kind of relief that has been fashioned by the court, although you can imagine where there would be interference, if certain kinds of relief were offered.

I’ve got no particular view on whether it’s a good or bad thing in and of itself. From our perspective, that’s a judgment we would leave to Congress.

MR. WOLIN: I want to turn to a slightly different angle on this, and that is procedural rules: how to fashion procedural rules in the class action context that “properly” dovetail with the kinds of regulatory issues we’ve been discussing. For example, does it make sense for class certification to be more difficult to achieve when an adequate regulatory or administrative remedy exists? Or, regarding Lee’s point, is court notice to a regulator adequate, without changing the procedural rules for certification, and then the regulator has an opportunity to come into the case, as Bill has done on behalf of the FTC in an amicus fashion?

MR. KOVACIC: Our view has been—and this was the basis of our comment to the standing committee on rules of practice and procedure for the federal judicial conference—that we want to know about matters related to things we’re doing. That is, we asked without success, not because the standing committee thought that the proposal was substantively ill-advised, but nonetheless decided not to embrace it.

Our view is that, more minimally, we don’t want to get in the way of the certification process. We didn’t have a particular view about that. But we want to know about matters that implicate our own activities. We want to be told about those, and, perhaps more importantly, we want the court to be told when we are doing something that is related to a litigant’s claims. Why? We want to be able to come in and put an oar in the water on issues that are important to us when those come up.

I suppose that in the absence of that kind of binding requirement, there are more things we can do to find out about it. We’re devoting more effort in areas that are of concern to us to follow these types of cases. A promising frontier for our relationship with state governments is to work together with them to identify areas in which our common interests are implicated in private litigation.

Short of dealing with the certification process, what’s important to us is having an opportunity early enough to know what’s taking place so that if there is a serious matter of doctrine or remedy at stake in litigation, we can have a say in how those matters are resolved by submitting briefs that make a difference.

A good example for us on the competition’s side is the Busparin [spelling correct?] litigation in the Southern District of New York. We had a chance to submit a brief, and we got in there early. We thought more than a little bit about the relevant issues. I’m happy to say, for the team of our folks who wrote the brief, that the district judge’s opinion on the issue in question paid close attention to what we had to say. I’d just say, and my colleagues have probably found this as well, that good briefs can make a terrific difference.

I’ve been working with a couple of other researchers to finish an antitrust casebook, whose key ingredient is notes based on our readings of Justice Thurgood Marshall’s papers and Louis Pall’s papers. The Marshall papers are available in the Library of Congress, and the Pall papers are at Washington and Lee University in Virginia.

Something that hits you in the face again and again—and I suspect, to an audience of lawyers, will not be surprising—is how powerful an influence the well-written brief has on how the court thinks about the issue.

So for us, the minimal request would be that we’d like to know about matters early enough so that we can have a voice on matters of doctrine and remedy that are within our expertise.

MR. ROGOVIN: Neal, we have at times been conflicted about this because, while in principle we would like to know and have an opportunity to weigh in, the practicalities are somewhat difficult because there can be so many cases to track, and also because the Commission speaks through its official orders, which have been voted on by the commission, and does not speak through its briefs.

Some of these issues are controversial, and the Office of General Counsel doesn’t have a mandate to take specific positions. That’s just a practical problem.

MR. COVINGTON: Neal, I agree with Bill that at a minimum, we should be given notice that there are complications. In the insurance field, I’ve given notice to 50 different regulators across the country.

In addition, we need to raise the bar from a substantive standpoint. It should be higher than the Eisenberg standard, where it says that any error should be committed in favor of a class action. What that standard is, I don’t know today, but we should consider whether the courts should have to find by preponderance of the evidence or whether it should be clear that the elements proscribed in Rule 23B and the Supreme Court cases are met. But it seems like the standard is very, very low at this point.

In Illinois, they have proposed a bill that places a requirement in fraud cases that the plaintiffs’ use the standard of reliance and misrepresentation on an individualized basis rather than how some courts are dealing with it using a reasonable person basis. They also required a rebuttable presumption that those cases dealing with fraud are not certifiable for class action status.

Finally, agencies should be given a right of intervention. I’ve been waiting on an intervention order from two courts in Cleveland for almost a year, to try to intervene. So that case hasn’t moved anywhere in a year, awaiting the motion for intervention.

Again, I’m proposing these as options that should be put on the table; each probably has pros and cons.

MR. WOLIN: I have one last question, and then we’ll turn to the audience. In asking this question, notwithstanding the moderator’s oath of evenhandedness, I feel as though I have to get up on the soapbox for a moment, so I apologize.

This may be more true, Lee, in your context, and it’s obviously something I’ve learned somewhat painfully over the last 18 months as the general counsel of an insurance company. I note that in one of the so-called non-OEM-parts cases that you mentioned—a national class action suit in Illinois—that the court granted relief on a nationwide basis to a class despite the fact that regulators in a number of states had actually required the defendants in that litigation to do what the plaintiffs were complaining of.

I wonder what you—and perhaps it’s also a reasonable question in the federal context, so to the extent that it is, Bill and John, can weigh in as well—think about a so-called regulatory compliance defense. That is, if the regulator has either passed on an activity that’s in question and approved it or perhaps even required. that should be an adequate defense to a suit in the class suit context.

MR. COVINGTON: I certainly like the idea in that. The downfall in that is that the lawsuit possibly would be framed in a different way. Let me give you an example. In Florida right now, there is a comprehensive scheme dealing with non-OEM parts in which they certify suppliers of the parts. This is a very developed   process for OEM parts. But the case is being brought under antitrust, saying that all the insurance companies have conspired to use non-OEM parts.

So I think that’s the struggle is with that to be comprehensive enough with regulatory compliance you would think would be dealt with under primary jurisdiction. That those two questions, or those two concepts are synonymous. But maybe having the regulatory compliance defense would make it clearer.

The court in Illinois said that State Farm’s deceptive practices were neither authorized by nor in compliance with the laws of any of the 48 states. It’s clear that rigorous analysis was not done.

Ohio has a law that sets up a statutory scheme for the use of non-OEM parts. It appears that the federal court system is better at applying the rigorous analysis that’s required.

MR. KOVACIC: We, I guess most dramatically on the antitrust side of things, live with the doctrine that dictates deference to the legitimate policymaking measures of state bodies called the state action defense, where we are obliged to [Transcription unclear; please clarify preceding paragraph.]

Looking at the state action defense, but at other areas, too, our view of the state regulatory process depends a lot on whether it’s taking account of things that we think are important. Most important, in the legislative as well as the regulatory arena, is whether there is proper sensitivity to the competition policy in consumer protection matters.

Part of our collaboration with state governments is to encourage this sensitivity. We have good partnerships in a number of areas for these concerns to be taken into account. But the short technical answer to Neal’s question is that it’s probably a system of law that will not be respected over time where you have the legitimate, authorized enactments or commands of states being contradicted in other processes in ways that could not have been anticipated by the business decision makers.

As those legitimate enactments are taking place, our strong preference would be that they account for the competition and consumer protection concerns that matter a lot to us.

MR. WOLIN: Let’s open it up to questions.

MS. LITTLE: I’m Margaret Little, chairman of the Torts and Products Liability Section of the Litigation Section of the Federalist Society.

Mr. Covington has identified some due-process concerns. My observation has to do with the contingency-fee aspect of many of these class action suits. In the earlier panel, someone was talking about having incentives to scrutinize policy. As I’m sure all of you are aware, when you took your jobs you were subject to state and federal ethics rules, divestiture rules, and so on.

The class action bar is not subject to any of those. Indeed, attorney’s fees are the subject of huge controversy. It seems to me that a very overlooked area of due process is that none of you could be regulating in this field if you had a personal stake in the outcome. Whereas the class action bar is, in fact, doing just that. Do you have any comments on incentives in regard to fees?

MR. ROGOVIN: I would just say that I’m extremely grateful that when I joined the FCC, I had to sell all my telecom stocks.

MS. LITTLE: Point well taken.

MR. KOVACIC: If the FTC had had broad-based common carrier jurisdiction, I wish I had gotten to do the same.

MS. LITTLE: This leads to the second point I’d like to make, which is that I perceive a problem with capture less at the regulatory level than with these settlements. The best example is coupon settlements, which are highly criticized. That’s effectively a collusive settlement between contingency-fee lawyers and the companies that are trying to get out of the class action as cheaply as possible.

I would simply identify that there is a capture problem within the litigation context precisely because these suits almost always settle, and therefore the settlement is not transparent; it is not subject to public review in the same way that agency actions are.

MR. KOVACIC: Just one comment on the settlement issue. We’ve been looking at settlements. We’re trying to be very careful to stay within what I’ve described as our experience base. That is, we want to build on our own accumulated experience in watching the administration and implementation of settlements involving either competition or antitrust matters.

So we’re looking very cautiously to make sure that we cannot be said to be talking about something that is not based on our own observations, so that if we file a brief, the court isn’t going to say, “Why should I listen to you as opposed to NASA or any other federal instrumentality that might come in?”

But when we do that, we’ve been very attentive to what the settlement terms look like. In the recently filed Erickson Ameritech matter, with which you may be familiar, we went into the Cook County court in Illinois with a settlement that involved a variety of undertakings that the telecom provider had offered to make as part of the settlement.

The punch line in our brief to the court was that consumers are better off if you deny this settlement completely and it collapses than if you take the deal. That is, from what we know, you’re better off.

On the fee side, I’ll give an example that goes back to your first question. Even with the element of self-interest—and indeed, the treble damage remedy in some areas anticipates that self-interest will be the driving force—the question for us is: Is the self-interest in specific instances properly aligned with consumer interests? And in many instances, it can be.

Again, we’re looking for instances where, say, a public instrumentality has really done the heavy lifting. In the Databank litigation, where the total common pool was $24 million, we felt that we generated $16 million of that. The private parties generated $8 million, and they did a good job. But when it came to the fee petition, the question was: What’s the denominator? Plaintiff’s counsel said it was 24, and we said it was eight. And we had a very good basis to tell Judge Jackson—he found it convincing—that in a sense that this was a cooperative relationship between us and the private parties.

We didn’t have a line in our brief saying that the private parties’ contribution was trivial; it wasn’t. But we did the evidentiary and discovery work that got things to 16, and then the eight that came on from them was fine, but the denominator for fee calculation should not have been 24; it ought to have been eight.

So in both instances, the element of self-interest points in exactly the right direction. We’re interested in areas within our experience base where it doesn’t point in the right direction.

MR. COVINGTON: As Bill mentioned, there are times when the interests align with one another, but far too often, we’re seeing that the settlement amounts and what the plaintiffs are receiving out of the settlement is less than the harm that it causes to the marketplace. In the OEM-parts cases and the diminished-value cases, the insurance companies said that we can’t take this risk; we’re going to stop using OEM parts. The increase in those parts within months of this decision dramatically went up. I think it was 300 or 600 percent..

It’s unfortunate and disappointing that far too often, it looks as though consumers lose and trial lawyers win.

MR. MEYERS: I’m Michael Meyers, executive director of the New York Civil Rights Coalition. If there were a panel of class action lawyers up there, they would have a good opinion about themselves as well as their work in the interest of the public. So I’m glad to hear that some of you think so well of yourselves as regulators.

My question is the inherent contradiction and tension between rule-making and regulation in the public interest and what some of you have referred to as “political accountability.” Administrations change, and with each administration there is a different view of regulation. I wonder how that gets translated down the pike in terms of rules that were made and policies that were established in previous administrations. Are those rules still sacrosanct in the sense of public interest, or do they also change by virtue of the nature and the climate in terms of enforcement because administrations change?

Second, I’d like to know your view of the public’s perception of regulation, since class action lawyers are obviously appealing to people’s perceptions that regulators are not doing their job, e.g., the SEC and Enron. But the list goes on and on and on.

MR. COVINGTON: I want to mention, on the rule-making process, that that’s the system in which we live, and that the political process does allow for those shifts in philosophy. Sometimes the rules and regulations remain in place, and sometimes they change. But that’s a political process, and I’m comfortable with that.

Second, about the public’s perception of regulators not doing their jobs, in many cases the regulators aren’t given an opportunity to do their jobs. Are there examples out there where regulators aren’t doing their jobs? I’m sure there are. I haven’t seen a system yet where all public officials or all class action attorneys or all defense attorneys or all companies are doing their jobs. So I’m sure that that does happen.

But the regulatory rules are prospective. They’re not retroactive. That’s an important point. The judicial rules are retroactive. The litigant doesn’t know—can’t know—the liability that it’s subject to. Under rule-making process, there is fair notice and the rules apply prospectively. So I think the issue of fairness is at play here.

MR. ROGOVIN: My footnote to all that, at least at the FCC, is that when we are called upon to defend a rule that a previous Commission promulgated for institutional interests, we almost always defend it. I can’t think of one where we haven’t. So that provides additional continuity. The rule may be changed, but it would be changed on a prospective basis.

MR. KOVACIC: On the matter of change (and I don’t know if it characterizes all the work that John, Lee, or other regulatory authorities do), the fields that we handle at the FTC—by definition in the statute and certainly by judicial interpretation—are considered to be inherently evolutionary. That is, not frozen in time. We are expected to make adjustments over time. For our own purposes, those adjustments are likely to take two forms: the law is going to expand outward in ways that it perhaps hasn’t before; and in some areas, it probably ought to contract.

In the competition policy area, 25 years ago the Supreme Court was saying that a post-acquisition market share of 4.49 percent between two companies was presumptive proof of illegality. That’s quite a change from today. What has happened is that there is a considerable degree of stability. But there is going to be an inherently evolutionary element. Perhaps you’re asking what guides the evolution; what is making it take place?

In the fields in which I work, philosophical perspectives do make a difference, but they’re much more evaluation of what is sensible economic policy. What is sensible? What does social science tell us about how people perceive information and react to it?

In the areas in which we operate, if we’re wrong and if you see things swinging too far, the fact of the fragmentation of authority that I referred to earlier means that just on the public side of the enforcement agenda, state attorneys general, other regulators, will step in if they think we’re doing too little--call them regulatory fail-safes. They will step in even before we start talking about the role of truly private litigants.

The effectiveness of institutions depends crucially on public perception of how they operate. I find that to be true in the areas in which we work. For example: What should be the consequence of listing something in the orange book? What’s the right mix of privacy policy? Does our proposed “do not call” rule draw the line in the right place?

A real challenge for us is to make clear just how difficult some of those choices are. As someone who used to talk to journalists a lot in the past, I don’t find that easy to do. I used to talk a lot about selected cases that were very complex. I would go into a long response about consequences, saying, well, is the government going to win or lose the Microsoft case? Let’s see, how much time do you have? And they’d say, how about 25 words or less? I chafed against that formula because drawing cartoons to answer serious questions was hard to do. And a challenge for policymakers is to engage in a discussion on a level that doesn’t involve cartoons, but in fact is comprehensible.

If you lose the ability to have the public have a sense of what you’re doing and why in a fair way, regardless of the underlying merits of this or that regulation, you’re losing the battle.

MS. ADOLF: I’m Maureen Adolf, with Prudential Insurance Company. I was drawn to this session because of the title, “Are Class Action Lawyers Systematically Targeting Regulated Industries?” As Mr. Covington’s numbers indicate, the insurance industry seems to have been targeted.

What are your views with respect to whether the insurance industry is more vulnerable than others simply because we are state-regulated and things such as primary jurisdiction and deference are not as clear-cut? In the insurance industry, we have 50 different regulators, some for whom there is no unanimity of thought and feeling on some issues.

MR. COVINGTON: I don’t know if the insurance industry is more vulnerable because I don’t know the scope and the number of class action lawsuits that arise in other contexts. So it’s hard to judge. But there are some factors that might make you conclude that the insurance industry may be more vulnerable.

Number one is that the concept of deference is not as well recognized in state courts as it is in federal courts. Any analysis of administrative law would clearly demonstrate that.

I’d be interested in other people’s views on whether there is a jackpot mentality in insurance litigation. Attorneys can take a case from state to state and see which state would allow them to certify the non-OEM parts cases. We haven’t quite seen that yet, but you’re seeing some evidence of it: non-OEM-parts cases in Ohio, Illinois, and Missouri, and now a new theory in Florida. [Is this an accurate transcription?]

So there are systemic factors that do make insurance more vulnerable as an industry. I’d be interested in whether the federal court system has some of those same attributes.

MR. KOVACIC: The industries at both levels that face the greatest problems are what I’d call “transition” industries: those that are transiting from comprehensive regulatory controls to less comprehensive controls. Our legal system doesn’t adapt well during the transition. Companies have a sense that they’re trapped between different regimes. It’s when they start to step out from under the umbrella of the comprehensive regulatory regime that there are other controls that come into play. Competition and other controls immediately start to confront them. Our system, again, doesn’t facilitate the transition in a fluid way.

Two things happen when that’s taking place: we can speak to legislators about it—and we do, on a regular basis; and we can show up in courtrooms in an amicus capacity saying, “Your Honor, you’re seeing a piece here. We see a lot of other pieces. This is what’s at stake in the individual decision that you’re making at this time. That’s how we felt that we can best deal with it.”

But if you looked at the experience of telecoms, energy, and any number of other sectors formerly subject to more comprehensive controls, transition industries, they bump into these problems more often than not. Our system does not facilitate the transition very effectively.

MR. COVINGTON: Bill, do most of your cases come before the D.C. circuit, or is it across the country throughout the federal court system?

MR. KOVACIC: We probably have more cases in the District than any other, but we are all over the country. John has experienced more in the D.C. circuit than we have, but we’re everywhere.

MR. ROGOVIN: As I think I mentioned earlier, we see a lot of deference to our rules when our orders are reviewed directly in the court of appeals. In the context of private civil litigation, we often see courts very grateful to hand over a complex technical issue and say, “You deal with it, and call me when you’re done.” That often works quite well.

MR. KOVACIC: Given this wide range of regulatory institutions, the important role of the private suit in the judicial process, and the decentralization of prosecutorial authority, we’re investing more and more resources in what I would call an “empirical” agenda. That is, part of what we think individual judges—and certainly, legislators—want to know is a lot of stories about what’s going on; what can we tell them about what is happening around them. And we have the capacity to do that.

We put out a report on generic drugs a couple of months ago. It was a conscious decision to spend two years looking in this field. Nine days ago, the president of the United States stood outside the White House, held up our report, and said that it was a real good piece of work and that it’s going to shape policymaking. One thing that concerns us is that so many people from different sides have said that it’s a good report that it’s almost become a wishing well into which people peer to see what they want.

But part of what we learn from that, as policymakers—if we want to shape the way that individual courts and the collateral institutions think about these issues—is that we have to pursue a truly empirical agenda.

<< panel 1


Center for Legal Policy.




Judyth Pendell, Director, Center for Legal Policy at the Manhattan Institute

Brian P. Brooks, Co-Chair, Class Action Subcommittee, The Federalist Society for Law & Public Policy Studies

Panel 1: Are Class Action Lawyers Systematically Targeting Regulated Industries?


William P. Barr, Executive Vice President & General Counsel, Verizon Communications

John Beisner, O’Melveny & Myers LLP

Barbara Hart, Goodkind Labaton Rudoff & Sucharow LLP

Moderator: Rick Lazio, President & CEO, The Financial Services Forum

Panel 2: Regulators’ Roundtable


Bill Kovacic, General Counsel, Federal Trade Commission

John A. Rogovin, Deputy General Counsel, Federal Communications Commission

Lee Covington, Director, Ohio Department of Insurance

Moderator: Neal Wolin, Executive Vice President & General Counsel, Hartford Financial Services

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