MI Conference Series
No. 9 October 24, 2002
Unfair Competition and Consumer Fraud Statutes:
Recipe for Consumer Fraud Prevention or Fraud on the Consumer
Introduction: Welcoming Remarks
MR. ROBERT DEWEY: On behalf of the Federation of Defense and Corporate Counsel, I’d like to welcome you to our program this afternoon dealing with the use and, we think, the abuse of state consumer fraud statutes.
I’m Bob Dewey, president of the Federation. I’m going to tell you a bit about our organization as well as Lawyers for Civil Justice, and why we are partnering with the Manhattan Institute to put on this program. Then I will turn the microphone over to Judy Pendell of the Manhattan Institute.
It is truly an honor for the Federation to participate in this program. Our organization was founded in 1936 and consists of defense lawyers in private practice, in-house counsel, and risk management professionals. Membership is by invitation only and involves a thorough peer-review investigation similar to that conducted for candidates for the American College of Trial Lawyers. We have about 1,300 members, of which slightly fewer than 1,000 are lawyers in private practice; the limit is 1,000. We have about 300 risk management professionals who have regional or national responsibility for their corporate employers.
Like the Manhattan Institute, the Federation focuses on education. We publish a journal, The Quarterly, which features scholarly as well as practical how-to articles. We have 24 substantive law sections plus a Corporate Members’ Forum, each of which provides focus for continuing legal education. We meet twice a year, always in nice places: this year, we were in Boca Raton in February and Sun Valley in July.
Our organization has sponsored a number of special projects in recent years, such as a Defense of Nursing Homes Litigation Task Force, in which we partnered with DecisionQuest to do original jury research at various locations across the country in an effort to assist our members in defending those cases.
We hold a Litigation Management College annually at the Kellogg School of Business at Northwestern University to assist our corporate members in their risk management. We held a Risk Analysis Symposium in Atlanta this spring, which dealt with cutting-edge terrorism issues in the corporate environment.
The Federation has been very active on the civil justice reform front, together with other prominent defense organizations: the Defense Research Institute, or DRI, and the International Association of Defense Counsel, or IADC, both of which have representatives here this afternoon.
The Federation was a founding member of Lawyers for Civil Justice. For over 15 years, LCJ, as a national organization of defense and corporate counsel, has been very involved in providing policymakers and opinion leaders with the defense perspective on a variety of legal reforms and procedural rule-making issues.
For example, LCJ was instrumental in persuading the rules committees of the Judicial Conference last year to adopt recommendations calling for congressional action on fundamental class action reform. In addition to monitoring and responding to legislative and rule-making initiatives, LCJ has engaged opinion leaders in dialogue to engender a better understanding of the American legal system and how it might be improved.
The genesis for this program, at least in part, came from Barry Bowman, executive director of LCJ. The Federation was particularly interested in participating in this program because the manner in which the state consumer fraud statutes are being used and interpreted is creating significant burdens for our corporate members and other businesses.
Many of these businesses—for example, insurance carriers such as State Farm—are already subject to significant regulation by state agencies. I come from Illinois, which is one of the jurisdictions recently identified by the Manhattan Institute as a “friendly forum” for plaintiff attorneys filing class actions. Thus I am acutely aware of how these consumer fraud statutes are being used and, in some cases, abused.
You will hear more about that this afternoon in the presentations by Jeff Jackson of State Farm and Barney Shultz, who was lead trial counsel for State Farm in the Avery replacement parts trial, see Avery v. State Farm Mut. Auto. Ins. Co., 321 Ill. App. 3d 269 (2001), as well as in the remarks of Jack Trigg, a former president of the Federation who has been fighting these battles all over the country.
Let me now introduce my very distinguished colleague Judy Pendell, who is well known nationally for her leadership in the area of civil justice reform.
MS. JUDYTH PENDELL: I’d like first to express my appreciation for the support and the expertise of the Federation of Defense and Corporate Counsel, which made this conference not only possible but of exceptional quality.
Some of you are here today because of your affiliation with FDCC or with Lawyers for Civil Justice, and you may not be familiar with the Center for Legal Policy at the Manhattan Institute, so I’d like to explain our work.
The Manhattan Institute is a New York–based think tank with a national focus. The Center for Legal Policy, or CLP, focuses on key issues of concern in the civil justice system—class actions and mass torts, issues surrounding contingency-fee lawyering (such as fee abuses and the inappropriate use of private lawyers for government litigation), judicial selection and integrity, the erosion of personal responsibility and its impact on the courts, workplace liability, and scientific evidence.
We host conferences and other events that bring important issues and speakers before a diverse audience of lawyers and judges, policymakers, business people, and the media. We then produce edited versions of our conferences, which are made available on our website at www.manhattan-institute.org. They’re often also published in hard copy and disseminated to a wide audience.
Often our conference transcripts provide a valuable ongoing resource in which we address cutting-edge issues in the civil law and convene the most knowledgeable practitioners on all sides of the issue to debate and challenge one another. We’re proud of the fact that our transcripts are often cited.
In addition to holding conferences, we participate in the Manhattan Institute’s luncheon forum series here in New York, often at the Harvard Club. Recent speakers have included Judge David Levy, chair of the Federal Civil Rules Advisory Committee, who discussed class actions and the federal rules.
Finally, we support the publication of books, and we publish numerous papers. Walter Olson, senior fellow at the Manhattan Institute and the Center for Legal Policy (and founder of that organization), is here with us today to moderate the first panel. He has recently finished his new book, The Rule of Lawyers: How the New Litigation Elite Threatens America’s Rule of Law (Truman Talley Books, 2003), which will be released in January. It is a searing account of how plaintiff lawyers have turned lawyering into a ruthless business, one that is undermining the rule of law and the integrity of our courts.
Wally is also the editor of a wonderful website, Overlawyered.com, which has become a staple in the lives of those who follow important developments in civil litigation, and I recommend that to you.
Last, I want to note that we’re holding another conference here at the Harvard Club on October 30, where the subject will be the new class action targets. We will examine whether class actions are undermining regulation in the fields of financial services, high technology, and telecommunications. The Federalist Society will cosponsor that conference.
We have two very distinguished luncheon speakers today. I’m going to introduce them both. Each will speak, and then they will take your questions jointly.
Sheila Birnbaum is head of the products liability department at Skadden, Arps, Slate, Meagher & Flom. She practices primarily in the areas of products liability, toxic torts, and insurance coverage. She’s a prolific writer and was previously professor and associate dean at the New York University School of Law. She serves on a long list of committees and honorary organizations. For example, she is a member of the American Law Institute’s advisory committee, and was a member of the ALI’s advisory committee to the restatement of law of product liability. She is currently a member of the Judicial Conference Advisory Committee on the Rules of Civil Procedure.
She has so many honors that if I read them all, I would take up the time allocated for her remarks, so I’ll tell you just a few. She received the Florence Allen Award for distinguished achievement in the law firm from NYU School of Law and the New York Women’s Bar. She received the NYU Alumni Award for outstanding achievement in the legal profession and the Louis Brandeis Award from the American Jewish Congress. She was elected to the Hunter College of Fame and was selected by Fortune as one of the 50 most powerful women in American business, by the National Law Journal as one of the 100 most outstanding members of the legal profession, and by Crain’s New York Business as one of the 75 most influential women in business.
Professor Francis McGovern, from Duke University Law School, has the unusual ability of integrating practical experience, abstract thinking, and teaching. He has been a court-appointed special master or neutral expert in many cases and has developed solutions to some of the most significant mass tort claims in the United States, including DDT, toxic-exposure litigation in Alabama, the Dalkon Shield litigation, and breast-implant litigation.
He’s a prolific author on topics of mass tort litigation, civil procedure, and ADR. He has coauthored two books, Successful Litigation Techniques and The Preparation of a Product Liability Case, and has two books in progress, Toxic Substance Litigation and Alternative Dispute Resolution.
He is an engaging speaker in great demand. He has spoken before 50 audiences in addition to teaching a full course load at Duke Law School in the last two years. He has an international reputation, and countries outside the United States are now recognizing his abilities. He is working with the United Nations Compensation Commission, which was set up to ensure that Iraq compensates citizens, businesses, and government agencies for losses suffered in the Persian Gulf War.
It is with great pleasure that I bring you our two speakers. Thank you.
Deceptive Trade Practices Litigation: Context and Procedural Standards
MS. SHEILA BIRNBAUM: My job is to set the stage for the rest of the day by giving you a broad outline of how these consumer fraud statutes reached us, how they’re being applied, and what effect they’re having on litigation. Then Francis is going to talk about them from a procedural point of view, and then we’ll be happy to take your questions.
When I received my first complaint that said, “unfair competition,” I thought that I’d better call an antitrust partner, because I had never taken antitrust law. And, of course, it wasn’t antitrust law that we were dealing with. It is rare today that I see a complaint that doesn’t contain a deceptive trade practice and unfair competition count.
Deceptive trade allegations are a huge motivating force in litigation today, in the products liability area, in the insurance claims practice area, in almost any kind of business transaction area. As we reflect on the addition of so-called “consumer protection statutes” to the traditional common law, a transformation is occurring away from breach of contract and fraud, which are hard to prove, and toward deceptive trade practice litigation, which is easy to prove.
Although you usually see a contract cause of action and a fraud cause of action in a complaint, you now will almost always get a deceptive trade practice cause of action at the same time.
Why has this occurred? Why has the common law been replaced in large part by consumer fraud statutes? I’d like to take us through the evolution of this phenomenon, to try to understand how we got to where we are today, and to explore how these statues are going to be used in the future and what impact they are going to have, especially in the area of class actions.
We all know that to prove a fraud, there are all kinds of elements that must be demonstrated. We learned that in Torts 101. You have to show that there is: (1) a misrepresentation of a material fact, (2) scienter (that the speaker knew or believed the statement was false), (3) intent (the speaker intended to induce the listener to act or not act in reliance on the misrepresentation), (4) causation (the listener actually detrimentally relied on the misrepresentation), (5) justifiable reliance (generally reliance is justifiable only as to statements of fact, not opinions), and (6) damages. And, of course, there are numerous defenses that are available in a fraud case.
All of these elements and defenses are usually difficult to prove in a fraud case. In many jurisdictions, including most federal jurisdictions, you have to plead with specificity all of the elements of the fraud claim.
The breach of contract theory, in contrast, does not have all of the elements required in a fraud theory. Thus, it may be easier in some instances to prove a breach of contract than it is to prove fraud. Still, you have to show there was a breach. More important, in almost every jurisdiction, you can’t be awarded punitive damages in a breach of contract lawsuit. So you are limited to your contract damages.
That’s the state of the common law. For fraud, you can get punitive damages, but it’s very difficult to plead and to prove. For breach of contract, it may be a little easier to plead and prove, but you can’t get punitive damages.
So how did we get to where we are today with the proliferation of “deceptive trade practices” claims? The history begins with the federal government, not the states. First, Congress passed the Federal Trade Commission Act, which was meant to give the FTC the ability to proscribe “deceptive” or “unfair” trade practices. It is a very broadly worded statute. In the FTCA, Congress gave the federal courts and the FTC the discretion and ability to expound on what the words “deceptive and unfair trade practices” really means.
This was not, however, an unbounded license. Congress understood that the FTC did not have limitless resources; nevertheless, Congress did not include in the FTCA a mechanism for private individuals to enforce the Act. Only the FTC can bring an action under the Act. The FTC, of course, is not going to be indiscriminate, and it usually will resort to formal action only after having first given a party an opportunity to remedy what the agency considers an unfair or deceptive trade practice. Some of us may not like what an agency may do in an individual case, but the agency has scarce resources and is going to use its discretion to make the best use of the FTCA and try to stop real problems of deceptive trade practices.
In the late 1950s and into the 1960s, states began adopting statutes creating little FTCs (and that’s what they’re called, “little FTCs”). These statutes borrowed from the FTCA the same broad language prohibiting “deceptive and unfair trade practices.” That was fine, in the beginning, because only the state agency could bring enforcement actions under these statutes. The same factors that limited indiscriminate use of the FTCA also limited indiscriminate use of these statutes.
But very soon, all of the states began to adopt legislation that allowed for private causes of action under these very broadly worded—and vague—statutes. Suddenly, there were no more brakes on the types of actions that could be brought under these statutes. The lawyers and private individuals bringing these actions did not have the same incentives as the agencies charged with enforcing these statutes, but now they had the same enforcement power.
So now we have a combination of two things. First, private individuals have the ability and the economic incentive to bring deceptive trade practices claims under very broadly worded statutes that do not, for the most part, adequately define what conduct the statute is meant to proscribe. Second, some states, such as California, have extended the individual’s ability to bring consumer fraud claims on behalf of all consumers, rather than just on his own behalf. Everyone, I am sure, is familiar with section 17200 of the California Business and Professions Code, which has become notorious. There, the legislature and the courts separated standing in such a way that you don’t even have to be an injured party in order to bring a suit. An individual may sue under the section 17200 provisions as a private attorney general even though he has never been injured and never relied on the misrepresentation. California has perhaps gone the furthest and has the broadest statute. I’m sure that there is going to be much more discussion this afternoon about the California provisions and their impact.
Let’s talk about these state deceptive trade practices statutes. Why are they so powerful, from the point of view of plaintiffs’ lawyers, public interest lawyers, public interest groups, and some consumers?
Well, they eliminate many issues that arise under the common law. Many of these statutes eliminate the common law fraud requirements of reliance, or materiality, or that you have to prove that you suffered damages. In addition, many of the defenses that would be available either in a fraud action or in a breach of contract action—such as contractual disclaimers or the parol evidence rule—have been eliminated by virtue of the fact that these are statutory causes of action and thus common law defenses are not available.
They also allow for very broad interpretation of what is an unfair or unlawful practice. In California, for example, an “unlawful practice” can be a violation of a statute that does not itself grant a private right of action. Section 17200 thus has become a sort of transitive tool for private citizens to bring “enforcement” actions for statutes they otherwise could not sue to enforce. Moreover, under section 17200, you can also sue over “unfair” practices. There is, of course, a crucial difference between what is “unlawful” and what is “unfair.” What exactly is an “unfair” practice?
There was an action brought in California under section 17200 where it was alleged that the manufacturers of sweet cereals should have advertised their products not as cereals, but as candy. See Committee on Children’s Television, Inc. v. General Foods Corp., 35 Cal.3d 197 (1983). This decision had real world consequences for product advertising.
So not only does section 17200 bring plaintiffs’ lawyers, who are going to use this, to the fore; as we’re going to see it also brings to the fore public interest groups who have a social agenda to use 17200 (which is the broadest of the statutes) in a way to make changes that they think will meet their agenda.
What is the most perverse use of these consumer statutes? Most of these statutes provide for treble damages in many instances. Many of them provide for punitive damages. Many also provide a statutory minimum amount of damages, and almost all award attorneys’ fees to the winner.
So you can see that this is a major change in how the common law operates.
If you’re the plaintiff’s lawyer and you add one of these counts, it gives you enormous leverage to get the case settled, even if you never get to try the count. Because in the end, the ability to get treble damages, punitive damages, and attorneys’ fees changes the complexion of the case for the defendant from a settlement point of view. These are very powerful kinds of weapons that are available merely by pleading one of these actions, much less from the point of view of what the result at trial can be.
These state deceptive trade practices statutes are powerful weapons in the hands of a plaintiff’s lawyer. They eliminate common law elements and defenses, broadly (and vaguely) define what conduct is proscribed, and they permit the claimant (and his lawyers) to get extra-contractual damages and possibly attorneys’ fees.
What we have seen happening in the last few years is an even worse situation in which these state deceptive trade practices statutes are used to bring these claims as class actions where class actions would not otherwise be available on traditional common law theories. When you combine the coercive power of these statutes with the coercive power of class actions, you can see that this becomes an extraordinarily powerful weapon to use to coerce defendants to settle.
Just how have deceptive trade practices class actions changed the landscape? Well, there are a number of jurisdictions—especially federal jurisdictions—that deny certification of nationwide class actions where the laws to be applied differ substantially. Of course, the consumer fraud statutes vary from state to state. Some require reliance, some don’t. Some require materiality, some don’t. Some grant treble damages, some don’t. There are many differences among these different statutes.
Recently, however, plaintiffs have been asserting that a nationwide class action can be certified on deceptive trade practices claims by applying only one state’s law: the consumer fraud statute of the particular state where the defendant has its corporate headquarters. They try to convince the court that it does not have to apply the statute of each of the 50 states, but merely the statute from the state where the defendant resides. That is what has gone on in some of the state courts. But see Schein, Inc. v. Stromboe, 46 Tex. Sup. Ct. J. 103, 2002 WL 31426407 (Oct. 31, 2002) (rejecting a “manufacturer’s residence” rule that would facilitate the certification of nationwide class actions).
To give you an example and to set the tone for the discussion this afternoon, I cite the Avery v. State Farm case, 321 Ill. App. 3d 269. That was a case brought in Madison County, and you have all the literature on Madison County outside.
In that case, the plaintiff brought a class action alleging breach of contract, and asserted that the Illinois Consumer Fraud Act applied to a nationwide class because the defendant was headquartered in Illinois. The case was based on the allegation that State Farm was supplying non-original equipment for the repair of cars around the country instead of original equipment.
I’m not going to talk any more about the case, because you’re going to hear a great deal about it. You have both lawyers here who were involved in the case. But the court granted a class action on the grounds that the Illinois statute applied to all members of the class in all 48 states. (Two states were left out of the class.)
I think Francis is going to speak about the federalism implications of such an approach, so I won’t go into that here. I will, however, point you to the decision of the United States Court of Appeals for the Seventh Circuit—which includes Illinois—in the Bridgestone/Firestone case. See In re Bridgestone/Firestone Inc., 288 F.3d 1012, 1017 (7th Cir. 2002), cert. denied, 71 U.S.L.W. 3283 (2003). There the plaintiff argued that there were no conflicts of law problems inherent in the putative national class action because the court could apply the consumer fraud statute of the defendant’s headquarters to the claims of residents of any state. The Seventh Circuit squarely rejected this argument and reversed the lower court’s certification of a national class.
As an aside, one change in federal law that has been very helpful to defendants is the ability to take an appeal from a class action decision if the appellate court will accept the appeal. See Fed. R. Civ. P. 23(f). The Seventh Circuit accepted the appeal in Bridgestone/Firestone, reversing class certification because state consumer fraud statutes vary considerably and courts must respect these differences, rather than apply one state’s law to 49 other states. The court rejected a “manufacturer’s residence” rule and held that the class therefore was unmanageable.
We have a similar difference of opinion in Texas between the Texas state intermediate appellate courts (which have allowed class certification by applying the law of the manufacturer’s residence, Texas, to a nationwide class) and the federal Fifth Circuit, see Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996), which has held that class certification was inappropriate, in part because consumer fraud statutes vary from jurisdiction to jurisdiction. The Texas Supreme Court’s decision in Schein, rendered one week after this presentation, resolved this conflict by bringing Texas into line with the federal authorities. See Schein, 46 Tex. Sup. Ct. J. 103.
So with respect to the Avery decision in Illinois, if there is no reversal—and the Illinois Supreme Court has Avery before it and is confronted with these issues—then the plaintiffs’ bar will be emboldened to continue trying to use a single state’s consumer fraud statute to create a nationwide class action.
When such nationwide class actions are created and there is a real possibility of a classwide judgment that the consumer fraud statute has been violated, you can see how this changes the stakes dramatically for the defendant. It gives rise to the specter of punitive damages, treble damages, and attorneys fees on a classwide basis. This has an enormous impact on the defendant’s decision regarding whether to fight or settle.
As a result, the plaintiff’s bar is trying to transform almost every case into a deceptive trade practices action, whether it is a products liability case, a breach of warranty case, or an insurance sales practices case. This kind of litigation is dramatically changing the litigation landscape, and will continue to do so unless the state courts begin to do what the federal courts have done. In places like California, you don’t even need a class action to almost achieve the same result because under the statute you can get disgorgement or perhaps restitution for all of the people who have been affected without ever actually certifying a class action.
In closing, these vaguely worded consumer fraud statutes are being used by private litigants in ways that no one could have anticipated originally. Legislative initiatives in California and other states to change the statutes—to make them more specific and to do away with treble or punitive damages—have failed so far, although these attempts continue. But you can be sure that these types of consumer fraud statutes are going to continue to be used to bludgeon defendants into settling cases that they believe are illegitimate and might not otherwise want to settle. And for those few cases that actually reach trial, these statutes risk creating large verdicts and punitive damages if they are not modified either through statutory amendment or state supreme court interpretation.
PROFESSOR FRANCIS McGOVERN: When I went to law school in the Sixties, I took a course called Law and Poverty, from Jerry Mashaw, who now teaches at Yale. In that course, we discussed an economic analysis of the distribution of wealth and all kinds of fancy concepts. When the time came for me to apply to a law firm, the managing partner at Vinson & Elkins called up a friend of mine who is a professor at the University of Virginia and said, “I don’t know. I mean, this guy took something called Law and Poverty. What’s that?”
He replied, “That’s landlord-tenant law.”
Now—and I am a law professor—there isn’t even a course on consumer protection. Those courses were everywhere in the Sixties, and now they don’t even exist in the curriculum. I’m now teaching a course periodically for which we haven’t gotten the name down pat, but it’s business law, business torts or economic harms, or something that encompasses consumer protection, all the tort-like and economic non-personal kinds of harms that are out there. There’s no such course in the curriculum at all, but I’m trying to make those courses fashionable again. This field is a topic of major concern. But consumer protection isn’t even taught in law schools. What’s been going on since the Sixties that has led to this situation?
Let me propose two theories, both procedural and strategic. And that’s the world that I live in right now. I’m trying to figure out the strategic moves of both plaintiffs and defendants, because what I do is mediate cases. And I can’t mediate cases very well unless I anticipate where everyone’s going.
Today, I’d like to focus on the strategy of the plaintiffs’ bar. And I work for judges. I get appointed by judges to mediate. What’s the strategy of the judiciary?
It’s in those two areas- the plaintiffs’ bar and the judiciary- with the procedural devices of class actions where we can learn a lot about how we got to where we are right now. Maybe that will inform us a bit of where we might want to go from here.
There’s a term, “social issue torts,” that a number of us have done some fascinating work on. When I started practicing law, you had one plaintiff and one defendant, and when it was Joe Gimaio that I had a case against, I’d write him a big check for whatever it was that he wanted. It was at the very early stages of products liability, and we had a consumer protection/deceptive trade practices act on the books in Texas, but no one used it.
That leads me to point out the major time lag that is typically associated with the evolution of lawyers in understanding, appreciating, and utilizing new substantive and procedural devices. Every time a new statute comes on the books, it takes a while.
Take, for example, class actions. If, as they were originally designed, anyone had thought we’d have class actions in the personal injury context, he would have been in la la land.
So at the beginning, these statutes were not used for the purposes for which they’re used now.
What has happened? The one-plaintiff/one defendant product liability world has morphed into a very different world from the perspective of the plaintiffs’ bar. The plaintiffs’ bar learned—and I’ll put most of this at the feet of mass torts, specifically asbestos—that product liability law, Section 402A of the Restatement of Torts, the council that Elizabeth and Sheila are on, was written out of whole cloth. There was no legal precedent for it whatsoever. It was policy-driven. So we have an entire generation of plaintiffs’ lawyers in the product liability context that didn’t pay much attention to the black-letter law. It didn’t bother them a lot because product liability law at the beginning stages was all policy.
So you’ve got this whole generation of lawyers that aren’t bothered by the fact that there may be some bad policy. If you have the right policy, you’ll be able to move a case through the system.
At the same time, as you found mass torts emerging, if you didn’t file a class action or aggregate your torts, someone else would do so and take them away from you. I know that some of you have been in Jefferson County, Alabama; I remember Jerry Beasley and some of the cases he had. He was doing one-off cases in this area, and was very, very successful. Once, when he came to the University of Alabama, I asked, “Well, Jerry, why don’t you do a class action?”
He replied, “Oh, I don’t know anything about class action.”
I said, “If you don’t do a class action, Lanny Vines or someone else is going to do a class action.” And, lo and behold, he started doing class actions.
So you’ve got this generation of lawyers that learned about public policy as being the driving force, that learned about class actions as a way of maintaining the litigation. Then Elizabeth Cabraser, Mel Weiss, and others who had historically been in the class action arena and really knew class actions saw that there was a different application for class actions. So they started coming in, and the plaintiffs’ personal injury lawyers would use the expertise of the class action lawyers, and you had this very innovative group of folks who were ready to pursue litigation. Most of them were, let’s say, slightly left of center, and most of them were interested in pursuing certain kinds of social issues.
At the same time, it’s possible to do well by doing good, from their parlance. You found with asbestos, where there is no question that it was a defective product and that it caused harm, that the issues relate to how far back you’re going to carry it and what the amount of the damages should be. Aggregating the personal injury cases and the toxic substances cases—the first case that Sheila and I were in was a DDT case in Alabama—became sort of common.
Then the plaintiffs’ bar learned a major strategic move that I don’t think—correct me if I’m wrong, Elizabeth—was one that, at least in the personal injury context, folks had dealt with. That is, if you can somehow get enough chips on the table, it becomes real risky to draw the next card or roll the dice.
From a procedural perspective, if you can develop a strategy by which there are lots of chips on the table, there’s going to be tremendous risk aversion to having a trial. There’s a tendency to settle.
This strategy of putting the chips on the table, which didn’t find its origin in the context of the consumer protection, deceptive trade practices, became a strategy that has been very prominent and very successful for the plaintiffs’ bar.
As the plaintiffs’ bar got the funding to go into other areas, you were able to bring cases that put huge numbers of chips on the table. The asbestos money, the tobacco money was able to fund further actions that you wouldn’t have seen. Even the amount of money that I paid Joe Gimaio on behalf of General Motors, over the years when I was working for a living, was not enough to fund this kind of litigation.
So the funding, the evolution of plaintiffs’ personal injury lawyers into class action lawyers with substantial resources able to put the chips on the table, developed a new format that we had never seen.
The best way to do this was in the context of a federal class action. If it were possible to have a national case in front of a federal judge with lots of chips on the table, inevitably it would settle.
Now let me go over to the judicial side and look at what’s happening. Then we’ll hit the confluence, and I’ll give you an example of an interesting case where a state class action may actually be beneficial.
What’s happening on the judicial side? When most of us went to law school, the judge was viewed as an umpire, calling the balls and strikes. As far as the lawyers, the adversarial system—it wasn’t very inquisitorial.
Then with the judicial management school, the Federal Judicial Center, and its baby judges’ conferences, we saw the role of the judge shift from umpire to manager. The job of the judge is to manage litigation. Some of us have made the argument that it’s morphed even further, into the judge as player. When a judge aggregates huge numbers of cases in one particular forum to leverage a settlement, he is just as much a player as the attorneys.
In Multi-District Litigation, or MDL , judges originally were umpires. Their job was just to decide the pretrial discovery and to send the cases back for trial. In the Dalkon Shield case, that’s what happened.
When Jack Weinstein resolved Agent Orange, and as the managerial judging movement progressed, what we saw was a different model in the eyes of the federal MDL judges. Their role was to resolve the entire litigation without having to send it back. So we saw Judge Bechtel resolving any number of cases, most recently Fen-Phen, for example; that was the role of the federal judge.
There’s some uncertainty among federal judges as to what their role is. If you look at Judge Easterbrook’s opinion that Sheila made reference to in the Bridgestone/Firestone cases, the role of the judge is to say, “We’re not going to ceritify a class action. We’re not going to allow you to put all these chips on the table. We’re just not going to do it.” It’s the wrong policy model that Posner had.
In a pejorative sense, you could say that they’re abdicating their role. One could say the same thing in the context of asbestos, where all the asbestos cases went to one federal judge in Philadelphia, and they’ve been sitting there for, what, 15 years, 12 years? Something like that. So all the action is in state court.
And then a third theory goes back to the old umpire role of judicial devolution. You do the pretrial, and you send the cases back for trial.
So there’s a little disarray, I would argue, in the judicial strategy of the federal judges.
Now let me back up to the plaintiffs’ lawyers. The plaintiffs’ lawyers developed an unbelievable ability in the MDL cases to put the chips on the table and resolve the cases. Then AmChem and Ortiz hit. Everyone put the brakes on for a while.
It was typically the same group of plaintiffs’ lawyers that were leading the charge in those cases. Other plaintiffs’ lawyers knew that if they filed a case or sought MDL, any kind of judicial involvement from the federal judges would never be forthcoming. They saw some of the federal courts rejecting the use of class actions in federal court, and they said, “Okay, we can file in state court.”
At the same time, some of the MDL class action lawyers who were not getting their cases certified in federal court said, “Well, we can file in state court.”
What we’re seeing is a major strategic move to the state courts. Here is a concrete example: the Cooper Tire case. I was the mediator in it, it’s over, and it’s not being appealed, so I can talk about it. And this is a positive view of a class action in state courts.
Here’s what happened. Some plaintiffs’ lawyers knew some facts that they thought would provide the basis for a lawsuit against Cooper Tire. I don’t know whether you know Cooper Tires, which are all over the South. They make great tires. There happened to be a video taken in Biloxi or—I’m sure it was in one of the Virginia presidents’ counties—Mississippi, at a plant that made Cooper Tires.
Have you ever watched tires being made? They do layers of rubber and steel or whatever it is. And if you get any air underneath, little bubbles of air pop up.
Well, there was a video of folks with what they call an awl, or a knife, popping and sticking the knife into the tire, and then the tire would move along the line and be sold. Not exactly the kind of video, if you’re gas general counsel for Cooper Tire, that you’d like a jury to see.
So the plaintiffs’ lawyers thought they had a case. If they filed in federal court, they knew that they would not be selected as the MDL counsel. They just weren’t big-time enough. So they got together as a group and filed in 23 states. Not personal injury, but straight consumer protection across the board.
There were also some federal cases sent to an MDL judge. The claim was for $600. The last time I looked, the jurisdictional amount in federal courts was $75,000.
These cases were being remanded, and probably the MDL would have been sent back to state court, too. That is, they purposely wanted to fly under the jurisdictional map.
Cooper Tire was faced with class actions in 20 some-odd states in a coordinated effort. The idea was to put the chips on the table not in a single class action, but by multiple class actions around the country. Cooper Tire and the plaintiffs eventually agreed. I was appointed as a special master to coordinate the discovery among the judges. So I had a judge in New Jersey, Pennsylvania, Maine, and North Dakota—don’t ask me why—and three or four other states. We coordinated the discovery.
The time came when we actually did reach a settlement. The question is, if you want a settlement, how do you get it? So the decision was made with the acquiescence of the MDL judge to have the settlement in New Jersey with one state judge under the New Jersey consumer protection statutes that was national in scope, that flew under the jurisdictional amount for single plaintiffs, no fluid recovery. See Talalai v. Cooper Tire & Rubber Co., No. L-008830-00 (N.J. Superior Ct. Nov. 1, 2001), available at <http://neptune.spacebears.com/cars/legal/cooper.html>. That way, Cooper Tire, with no appeal, was extremely pleased that it was able to resolve this litigation.
I know you’re going to talk about Avery and some of the problems associated with class actions. But remember that sometimes it is helpful to have a device to end the day in such a way that the resolution can reach some form of fruition.
What was the reaction of the MDL judge? The MDL judge, the federal MDL judge, was extremely pleased.
What was the reaction of the state judges? Well, these were not judges who were out to be magnets per se. They basically wanted to resolve the litigation and were willing to work together to do so.
The difficulty you run into by having multiple filings is a lowest common denominator. I suspect you’ll talk about this more. Once that one judge decides that a document is discoverable, it’s out there in the public domain, and that’s it. Once that one judge has a confidentiality order that’s not particularly broad, that’s it. That information is out there.
When you start trying cases, you find that over time the degrees of freedom of the defendant go down. Plaintiffs can tell—if a trial time is storytelling time, which fundamentally it is, each side telling a story to a jury and the jury buying into the story—a different story for each new case. They’re not bound by history. But a defendant can’t do that. A defendant is bound by the deposition that was taken three years ago, by the trial testimony that was given in Minnesota.
When you’re trying cases in the bank in Los Angeles, you find that you are bound by what you’ve done in the past, and your flexibility is greatly reduced.
That leads us to federalism, one of the beauties and the good news as well as the bad news about our system. If we are going to have a federal system, we’re going to find these kinds of conflicts, particularly if the federal government decides or the federal judges decide or the U.S. Supreme Court decides that it’s not going to play. I would argue that the spirit of some of the federalism decisions from the U.S. Supreme Court that have been lauded by lots of folks creates a sea change for a large part of the federal judiciary. What we’re seeing that I’ve never seen before is a level of passivity in federal judges when it comes to these kinds of actions.
You didn’t see the Supreme Court taking West Virginia. You will find any number of circumstances where this Supreme Court’s approach is going to increase the power of the states substantially.
When looking at this, the Congress or the federal courts are appropriate forums to look to. But at the same time, focusing energy on the states, on the magnets where there are problems, is just as worthwhile in terms of an overall approach.
AUDIENCE QUESTION: Professor McGovern, what happened in the tire case? Are they still awling the tires? What kind of remedy was there, and what happened to the consumers in the other 30 states where there weren’t suits?
PROFESSOR McGOVERN: No, they’re not awling tires. There was a settlement, which consisted of an extended warranty, a change in practices, and an education program. So if someone came in with a separation in a tire, which was the manifestation of the awling, they could get a brand-new free tire, which was, in effect, a warranty that no one else would give. Now there’s a monitoring program in the plants to ensure that there are no similar kinds of problems in the operation of the plants. The education program teaches people about tire pressure.
This was a settlement agreed to by the lawyers in all the class actions. There were, I think, four objectors, one of which was Public Citizen that eventually agreed to the settlement. The settlement would apply to Cooper Tire consumers all over the United States. If it were attacked, then there’s an issue, as we all know. But, given the dollar amount per claim, I think most people felt as though the attack would not materialize.
MS. BIRNBAUM: What’s interesting is that there have been very few state class action settlements that have resolved national litigation. Most of the national settlements have occurred in federal courts. There are advantages to being in federal courts because the federal courts have injunctive power once a judgment is entered and the settlement is approved that state courts do not have. In state courts, you must simply rely on full faith and credit, which is not as secure a posture to have.
But in this case, there were good reasons for them to do it through a state court proceeding rather than federal court, and we may see more of these.
AUDIENCE QUESTION: Was the CPSC involved in your Cooper Tire case?
PROFESSOR McGOVERN: No.
MS. BIRNBAUM: It would have been National Highway Traffic Safety Administration, anyway.
PROFESSOR McGOVERN: NTSA had some standing; this was beyond the NTSA approach.
AUDIENCE QUESTION: I don’t understand your complaint about lawyers. That’s what they do: they find precedents and old laws, and they try to fashion a case for their cause. Their cause may be making money, and preferably making money for protecting justice, or what they consider to be justice.
So that’s lawyering. But you also mentioned public policy; when you talk about public policy, you’re talking about public ideas and attitudes toward business. I don’t understand where you’re headed in terms of remedy or relief that you’re seeking. Because if you’re talking about the courts, you’re talking about state legislatures changing statutes, which they’re not going to do because the public is antibusiness, particularly in terms of Enron and WorldCom and everything else like that. The attorneys general across the states are suing companies left and right in terms of injuries to people. So the public is really antibusiness. I don’t know where you think this relief is going to come from.
PROFESSOR McGOVERN: Let me respond. If I’ve confused you as to where I’m going, I did a good job. I’m a neutral, a mediator, and it’s not up to me to be prescriptive or normative. I try to be descriptive as to what’s going on. So I purposely am not heading anywhere in terms of what one should do. Instead, I’m trying to describe what I think is going on.
For those of you who do want to head somewhere, you might be able to apply an approach that would be helpful.
MS. BIRNBAUM: I’ll respond to that. There is a perception in many jurisdictions that there are a lot of runaway verdicts and prices to pay for what is going on, especially if people aren’t truly injured and there is a lot of money changing hands.
In asbestos litigation, when you have 50 to 60 companies in bankruptcy, that’s not good for shareholders, employees, and people who have pensions. So if you shift a lot of money to people who don’t deserve it, and if the RAND study is correct and a large percentage of asbestos claimants have no impairment—no injury as we know it—and we are shifting huge resources to them, that has significant public policy implications, too.
There are public policy issues on all sides. I agree with you that we are in a very antibusiness climate. A recent study in The New York Law Journal, see Tamara Loomis, Business Scandals Rock Juror Attitudes, NYLJ 1 (Oct. 16, 2002), said that about 85 percent of the people polled don’t trust corporations, think they’re lying, and think they’re putting out terrible products. So this is a very good time for plaintiffs’ lawyers to take advantage of those issues, because there has been an enormous public opinion shift against corporations.
That is going to continue for some time, until the pendulum swings back. The ability to get legislative reform is very remote because of these kinds of public opinion implications, and we are going to be seeing a great deal of this for a very long time.
AUDIENCE QUESTION: There were three points that were interesting, Professor McGovern, in your comments. First is the motivation of the individual lawyer to maintain control over his client, his case. Second, the motivation of the lawyer to aggregate as many chips as he can—notice, they’re not his chips, they’re the chips of someone else that are going to be put on the table. They’re just trying to aggregate a high risk for one player, not for all the players in the poker game.
Third is the race to the bottom, i.e., let’s go to the least qualified jurisdiction to determine whether this is appropriate for aggregation or class action.
What struck me about those three points was how high-minded you made them sound. What would you feel about minimal diversity jurisdiction where you could click all these into the most qualified courts with the best developed law, rules, and complex case matters, so that the most qualified courts in the country could be the gatekeeper for what should or should not be aggregated?
PROFESSOR McGOVERN: The problem that I personally—I will be normative here for a second—have is that I have a distrust of aggregating too much power anywhere. I remember doing a program at the University of Chicago on juries. My colleague Paul Carrington talked about an outrageous case of punitive damages in which the jury was just out to lunch. It involved a spermicide, and the case was tried in Atlanta.
The damn verdict, okay, was given by the judge. It was tried to the judge. It wasn’t tried to a jury in that particular case.
My solution would be a panel of judges, if you were going to do it. I’ve seen so much variation in the MDL judges that I am skeptical about giving anything to one judge. In fact, I can give you the names of some judges for whom you’d just as soon be in Madison County, or anywhere other than in front of them.
AUDIENCE QUESTION: Sheila, could you comment on the difference between procedural aggregation and gatekeeping, as we do for expert witnesses and evidence, and the substantive aggregation that Professor McGovern was just talking about? That is, the judge comes out with a one-person ultimate result. We might have a difference there that is worth exploring.
MS. BIRNBAUM: That’s a very interesting issue. Procedurally, it’s the issue of aggregation. Aggregation is what makes the difference and is what has changed everything. I am old enough to remember one plaintiff, one defendant, and one judge. It was usually downtown. I don’t practice in New York State any more; all of us who do this on a regular basis practice nationally, because it has all changed. Now, there are thousands of plaintiffs and dozens, if not hundreds, of defendants in a single case.
And it’s 200 lawyers at a status conference.
When we were doing breast implant litigation, we changed the entire economy of Birmingham, Alabama. When the lawyers came into town, every restaurant was jammed, and the two hotels were packed. In Cheyenne, Wyoming, where we did the Copley albuterol trial, see In re Copley Pharmaceutical, Inc., “Albuterol” Products Liability Litigation, MDL Docket No. 94-140-1013 (D. Wyo.), there were two hotels. The plaintiffs had one, and the defendants had the other. We changed the entire economy of Cheyenne for two years, until the case was resolved.
From a procedural point of view, aggregation is the big nut to crack. What we have is what Francis noted: the doctrine of unintended consequences.
The federal courts got rid of asbestos cases. They put them in the MDL, where they got stuck. There was no solution, really, that the MDL created. So everyone left for the state courts. There are no new federal asbestos cases any more.
They were very happy, I think, to get rid of that. But now the defendants are all in state courts.
Still, I think that overlapping class actions is the real issue. The minimal diversity bill, if it got through, would be very helpful in changing some of the worst parts of aggregation procedures in state courts.
The issue of overlapping class actions in various jurisdictions is overwhelming for defendants. There is no collateral estoppel that’s foolproof that you can use. If we do not do something about that issue, all the problems that the industry has are going to be accelerated and aggregated.
PROFESSOR McGOVERN: Let me add one thought on the procedural side. I’ve got a case now for which I’m special master that involves a drug, and I’ve been coordinating between the MDL judge and the state judges over a Daubert hearing. See Daubert v. Merrill Dow Pharm., 509 U.S. 579 (1993). How do you do a Daubert hearing in the MDL?
It’s absolutely fascinating, far beyond the amount of time that we have today to discuss it. But one could make an argument that it’s worthwhile distinguishing between pretrial and trial. That is, I can make a very strong argument for aggregating pretrial, then sending cases out for a marketplace of litigation with the capacity for an overall settlement. I would argue in favor of a Rule 23 to have a relaxed standard for settlement classes—not for trial classes, but for settlement classes. Because my problem is—and this is speaking as a mediator—when I get these cases, how do I wrap them up? There’s no procedural vehicle out there that’s real nice to wrap them up with.
So I would disaggregate minimal diversity provisions, depending upon the state.
MS. BIRNBAUM: I agree with Francis that there are times when a defendant wants aggregation at the end of the road if they’re going to get a global resolution. Defendants, in certain types of cases, also want one pretrial discovery so that they’re not being hounded to death. On the other hand, they don’t want to try the one “bet-your-company” case.
So I think Francis and I have approached it from the same way and have tried to get others to look at this not as a single issue but one with pretrial, trial, and settlement components.
AUDIENCE QUESTION: Francis, I’d like to hear about the distinguishing characteristics between the Cooper Tire case and other competing class actions in the state courts that haven’t resolved favorably.
My impression is that it’s all about the judges. I’d be interested to know your thoughts about that and if there are other factors.
PROFESSOR McGOVERN: I’ve spent an enormous amount of time academically and professionally coordinating between federal judges and state judges, and coordinating among state judges. Under our system of federalism, Arthur Miller in the ALI and Mary Kane had an idea that was the complex litigation program. And they wanted top-down reform. I was on one of the advisories on it and thought it was a great idea. I just didn’t see it going anywhere.
MS. BIRNBAUM: And it didn’t.
PROFESSOR McGOVERN: And it didn’t. But mine was bottom-up reform. So is the work I’ve been trying to do with the National Center for State Courts. In fact, Elizabeth, Sheila, and I are going to Washington tomorrow for a program to work on that.
Bottom-up reform uses peer pressure to try to get the judges to work together. It’s not perfect and it’s not a silver bullet. It’s idiosyncratic. In silicone gel breast implants, as you remember, reform wasn’t perfect, but it was almost perfect in terms of getting it done. I was appointed by Judge Pointer, who is the MDL judge, to work for the state judges to keep Madison County from having these outrageous verdicts. And we kept a lid on it.
The same thing happened in the Cooper Tire cases. We got all the relevant judges to work together because it was in the interest of the plaintiffs’ lawyers not to have enormously expensive redundant discovery.
So it is possible to get folks to work together. Then what you find is really interesting. Peer pressure is just phenomenal. Then you don’t go to the lowest common denominator; you tend to go to the highest common denominator, the best common denominator. And the judges will work together with the smartest, the best, and the ones that are willing to go through everything.
But it’s not perfect. It’s just the best idea I’ve got right now, other than some type of change in 1407 or minimal diversity.
AUDIENCE QUESTION: I had a question about the role of the MDL procedures and whether you all think that that’s the perfect combination of aggregation and disaggregation from the perspective of the defendants.
My perspective is in the context of unfair competition claims, that the cases will always end up going back to the state court in order to have the trial there, and that if you are able to aggregate the cases by removing them to federal court and then MDL’ing them someplace, you can have the choice of trying to settle it all in one package or not. Of course, the risk that the plaintiffs face in that context is something that you can use in the context of trying to negotiate something.
I also wanted to know what you all thought the state of the law was on this whole issue of the jurisdictional amount and supplemental jurisdiction and how that factors into the strategies that defendants have to try to get out of state court, get out of the Madison Counties, and at least get in federal court someplace.
MS. BIRNBAUM: Unfortunately, I thought we were going to get some guidance from the Supreme Court in Ford Motor Co. v. McCauley [123 S. Ct. 584 (2002), appealed from In re Ford Motor Co./Citibank, 264 F.3d 952 (9th Cir. 2001).], which was argued on the question of whether you can count injunctive relief and punitive damages and toward the jurisdictional amount. Do you look at it from the plaintiffs’ point of view (i.e., individually), or the defendants’ point of view (aggregate)?
The Court, after argument, decided that it didn’t have jurisdiction, so we will have to wait a while to get some answers. This is a very difficult and important issue that’s going to have to be resolved with regard to whether you can keep the cases in the federal court in the MDL court.
Multi-districting cases does one thing: it gives you relief as the defendant from multiple discovery. Francis has done such a good job with the state court judges and the multi-district judges that they cooperate. Right away, you go in and ask them to begin dialogue and cooperate.
But once you get in there as a defendant, you are never going to get out. You are going to have to settle those cases or you’re dead meat. There are very few cases that go back for trials, and you have now increased the stakes as to settlement. You have made settlement possible, but you have increased the stakes.
I have fought the creation of multi-district litigations on behalf of certain defendants when we could have done that to get rid of it, but we thought it would be too expensive to do it that way, and we could handle litigation better by litigating it jurisdiction by jurisdiction. Because some of these judges get envious and what I call “MDL-itis,” and they don’t want to let go. They will not dismiss cases when they should have, such as in the Dow Corning case.
Initially, Dow Corning (and defendants like G.E.), which made component parts, should have been out of the litigation, but the court kept them in right to the end, hoping that they would put in money for settlement. When it finally became clear that they wouldn’t, and the case was being settled, summary judgment was finally granted. But no one gets out. It’s only a strong judge who will do that; otherwise you’re in for the duration.
PROFESSOR McGOVERN: Of course, one can make the argument that the judicial panel on multi-district litigation is pulling the trigger too quickly. If you think about the repetitive stress cases and the IBM’s—those cases were not MDL’ed and never went anywhere.
I would argue maturity. You shouldn’t aggregate these cases until you know that there’s some viability to them. If there is some viability, typically a defendant wants to aggregate them, because it wants to go ahead and move on down the line. But conceptually, you want a fair shot to be able to win your cases. If there are too many chips on the table, you can’t take a chance.
So what kind of system could be set up? If you had the cases aggregated for pretrial and you then farmed them out to statistically significant representative jurisdictions, give the litigation a try, see what’s there and then you’re able to extrapolate from those decisions—that’s why I’m trying to disaggregate the pretrial from the trial and the settlement.
AUDIENCE QUESTION: Could you talk about the unfair deceptive trade practice cases and the nebulous standards, the amorphous nature of the actions, and talk about how class actions specifically affect that and the interplay among class actions and the unfair trade statutes and deceptive trade statutes?
MS. BIRNBAUM: There are very few cases that have gone to trial as a class action in an unfair trade practice case. Avery, which is going to be talked about in the panel, is one of those cases that went to trial in which the court certified a 48-state class, applying the Illinois Unfair Trade Practices Act to everyone in the entire country, and applied Illinois’s breach of contract law to everyone in the entire country.
In that case, the overall verdict, with punitive damages, was over $1 billion. So you can see that when you aggregate large numbers of people, even with potentially very small claims, you can quickly get to very large numbers through this kind of a statute.
This leads back again to juries and judges. It was actually the judge in that particular case who handed out a $600 million punitive damage award. So the proofs are very different from a fraud case.
PROFESSOR McGOVERN: Here’s a concept: elasticity. What you’re trying to do as plaintiffs’ lawyers is find a cause of action that applies to a very large number of people. If you’re talking about personal injury cases, where there has to be blood on the floor, you’re not going to find so many people. But a concept such as medical monitoring allows you to deal with huge numbers of people, and that’s what the consumer protection deceptive trade statutes do. They provide you with a cause of action that applies to a huge number of people.
The class action device provides you a procedural vehicle by which, with minimal kinds of notice, you can contact those people and provide peace to a defendant. That is, the class action is elastic as well. Procedurally, you don’t have to try each case one at a time.
So what you’re doing conceptually is marrying two very elastic substantive and procedural approaches that lead to the potential for great good or great harm, depending upon how they’re used.