The Cost of Suing Business

To listen to the Chamber of Commerce, one would think that class actions are the most significant scourge on business ever conjured up by man. In brief after brief to the Supreme Court, the Chamber of Commerce and other business amici tell the same story: Meritless class actions, filed by rapacious plaintiffs’ attorneys, are so devastatingly expensive to defend against, and threaten such financial ruin if plaintiffs prevail, that corporate defendants cannot help but accept “blackmail settlements” that harm both businesses’ bottom lines and society at large.

The Supreme Court appears to have premised several recent civil procedure decisions—including Twombly, Concepcion, and Wal-Mart—in part on this depiction of class action litigation. But little more than anecdote supports these claims. And at least some available evidence undermines them. In my essay for the Clifford Symposium, I describe the evidentiary support for five claims made by the Chamber of Commerce and others about the costs and burdens of class actions.

First, although commentators have despaired for decades about the dangers of blackmail settlements, available evidence indicates that corporate defendants are not systematically accepting settlements in meritless class actions to avoid the costs of discovery. If they were, one would expect that they would do so immediately after certification to avoid these costs. Instead, a study by the Federal Judicial Center found that defendants do not generally settle soon after a class is certified and often, instead, proceed through discovery. When defendants did settle, the FJC found that the timing of those settlements “did not support any inference of a relationship between certification and settlement.”

Commentators have pointed to the extremely high rates of class action settlements as proof of blackmail, but both class and non-class cases usually settle and very rarely go to trial. To be sure, settlement and trial rates for class actions and non-class cases are not precisely the same. But, as Charlie Silver concluded, looking at this evidence: “When compared to conventional lawsuits, class actions do not seem exceptionally coercive.”

A second argument made by business amici to the Court is that class actions impose “massive,” “catastrophic” and “potentially bankrupting” costs on corporate defendants. Businesses undoubtedly spend a great deal of money on class actions – Brian Fitzpatrick found that businesses paid $38 billion over two years in settlements and attorneys’ fees in federal class actions, and the total spent by businesses—including state court cases and defense costs—would be significantly higher. But corporations appear to spend even more money suing each other.

Businesses sue other businesses far more often than classes of plaintiffs sue businesses. Less than one percent of cases filed in state and federal court are class actions; Gillian Hadfield found that intra-business disputes make up more than 20 percent of the federal docket. Businesses may fear being buried in class actions but these fears are unwarranted. Fulbright & Jaworski (now Norton Rose Fulbright) found, when it surveyed its clients 10 years ago, that class actions were among business’s “top five litigation concerns” but were not actually among the business’s “five most active areas of litigation.”

Of course even a small number of class actions could impose massive costs if each case was staggeringly expensive to defend against. But available evidence indicates that non-class commercial disputes may be as expensive or more expensive to litigate. The FJC found, for example, that intellectual property cases cost, on average, 2.37 times more to litigate than similarly sized and complex consumer cases.

Consistent with this finding, mid-sized companies surveyed by Fulbright & Jaworski reported that intellectual property cases were the “most expensive on average” for mid-sized companies to litigate. Regulatory matters were the most expensive on average for the largest companies. Class actions were not identified by any industry surveyed as the most expensive to litigate.

As part of their claims about the massive costs of class actions, the Chamber of Commerce and business amici repeatedly assert that enormous judgments in class actions can bankrupt even large businesses. To be sure, class action settlements can be very large. The largest securities class action settlements have been several billion dollars apiece. But median class action settlements are much smaller: $8 million for securities class actions, $2.9 million for consumer class actions, and $1.8 million for labor and employment class actions.The focus on the costs of class action settlements also overlooks the fact that settlements and judgments in non-class, intra-business disputes can be huge. The largest settlements—like those in class actions—have cost defendants billions of dollars. Countless other suits have required companies to pay each other tens and hundreds of millions of dollars.

Intel Corporation wrote in its amicus brief in Wal-Mart that a grant of class certification “can transform an ordinary lawsuit into ‘bet-the-company’ litigation, even for a company of Intel’s size.” Yet the case that recently required Intel to “bet the firm” was not a class action but, instead, an antitrust lawsuit brought against Intel by another company, Advanced Micro Devices (AMD). Intel reportedly paid its attorneys $116 million to defend it in this case, and paid AMD $1.25 billion to resolve the case. In contrast, a decades-long class action against Intel recently settled, resulting in payments of $15 to each customer; although consumers are still filing claims for proceeds of the class action, the maximum total amount that Intel would be required to pay under the terms of the settlement is $70 million dollars.

Although the Chamber of Commerce and business amici suggest that class settlements dwarf all other types of litigation exposure, the settlements and attorneys’ fees Intel has recently paid to resolve an antitrust case dwarf those it will pay to resolve a decades-long class action.

The fact that businesses likely spend more money on intra-business disputes does not mean that businesses prefer being sued by a class than a corporate rival. I can think of several reasons why a corporation, given the choice, might elect to be sued by another business instead of by a class of consumers, employees, or shareholders. For one, when a business is sued by another business, it can assert counter-claims; if the business defendant prevails on those counter-claims, it might even come out ahead. In contrast, counter-claims are rarely available in class actions. As a result, a corporate defendant sued by a class stands only to lose money; even if the class claim is dismissed, it will still need to pay attorneys’ fees and has no chance of recovering from the other side.

My goal here is not to investigate the different litigation dynamics in intra-business disputes and class actions, or to weigh with any precision the relative costs of these different types of cases. Instead, I aim to question the validity of claims about the debilitating costs of class actions made in an effort to restrict plaintiffs’ abilities to bring these types of suits. Although the Chamber of Commerce and other business amici despair of massive, catastrophic, and potentially bankrupting class actions, the absolute costs of class action litigation appear comparable to or smaller than businesses’ other litigation related costs.  One may believe that all litigation is too expensive. But if class actions are no more financially devastating to businesses than intra-business disputes, there is no basis to single out class actions as particularly deserving of limitation.

The Chamber of Commerce has raised—and the Supreme Court has endorsed—two additional, related critiques of class action litigation; that class action claims are often meritless, and that plaintiffs’ class action attorneys bring these meritless claims not to benefit class members but to line their own pockets. There are, to be sure, examples of frivolous class actions suits and unscrupulous plaintiffs’ class action attorneys. Yet similar critiques could be made about all types of litigation, including non-class, intra-business disputes. For example, Caterpillar sued The Walt Disney Company to block the direct-to-DVD release of George of the Jungle 2, which, according to Caterpillar, damaged the bulldozer’s reputation with children by making it part of “an ‘evil attacking army’ of industrialists seeking to destroy the jungle.” Intel, a company that filed an amicus brief in Wal-Mart, has been criticized for going into “hyperdrive on trademark enforcement,” filing 15 trademark-infringement lawsuits in 2008, including one against an electrician’s one-man business and another against a two-person travel agency.

And just as plaintiffs’ class action attorneys have been criticized for focusing overmuch on lining their own pockets, corporate attorneys have been criticized for doing work and charging fees against their clients’ best interests. In one survey of hundreds of attorneys, over half of respondents admitted that they “had sometimes performed unnecessary tasks just to bump up their billable output.”

The Chamber of Commerce chides the class action plaintiffs’ bar for creating disputes that would not have been brought otherwise, only to cash in on the legal fees associated with those cases. Yet scholars have told a version of this same story about the rise of corporate litigation. Before the 1960s, businesses rarely resorted to the courts when they had disputes. During the 1960s, corporate lawyers were increasingly willing to advise clients to breach contractual obligations and sue. This advice led to increased lawsuits, which, in turn, led to increased work (and profits) for corporate attorneys.

Corporate firms applaud themselves for these kind of aggressive tactics, yet they criticize similar tactics by the plaintiffs’ class action bar. Skadden Arps authored the Chamber of Commerce’s amicus brief in Wal-Mart, arguing that liberal class certification standards would encourage plaintiffs’ attorneys to bring cases that hobble businesses and society at large. Yet, on its website, Skadden Arps congratulates itself on its “[rising] to prominence in the ’60s and ’70s by taking on the proxy fights and hostile tender offers that white-shoe law firms deemed ‘ungentlemanly.’

I have a final concern with the current conversation about the costs and burdens of class action litigation – it underestimates the costs of restricting plaintiffs’ access to the courts. Although heightened pleading standards and limitations on aggregation are meant to screen out only meritless cases, some meritorious cases likely have been and will be caught in the mix.

Plaintiffs whose claims are dismissed are most directly affected by heightened procedural gateways, but there are also social costs associated with these procedural barriers unaccounted for by the Court. Lawsuits have raised critical information about corporate harms to the public, politicians, and regulators. During discovery in lawsuits against the makers of Ephedra, Vioxx, and Prozac, plaintiffs discovered that defendants knew of and failed to disclose information about the harms of the pills they were producing. Discovery in the environmental contamination lawsuit against DuPont, depicted in the movie A Civil Action, revealed that DuPont had long known of the hazards of chemicals used in making Teflon, but failed to report those hazards to regulators. In recent years, several products liability suits and toxic tort cases have been dismissed for failing to comply with Twombly and Iqbal or Wal-Mart. We will never know what information would have come to light had these cases been allowed to proceed to discovery.

Closing the courthouse doors also prevents defendants from learning about their own behavior from the lawsuits brought against them. For example, since the early 2000s, at least fifty-six people have died because a defect in Chevrolet Cobalts’ ignition switches caused the cars to power off and their airbags not to deploy in a crash. General Motors and the National Highway Traffic Safety Commission investigated for years but could not determine the cause for the stalls. It was only during the litigation of a case, brought by the family of a woman named Brooke Melton who died in a Cobalt, that the truth came to light. When the plaintiffs’ expert disassembled the ignition switch in Melton’s car and compared it to that in a later-model Cobalt, he discovered that the design of the switch had been surreptitiously changed to make it more difficult to disable. This discovery “set in motion G.M.’s worldwide recall of 2.6 million Cobalts and other cars, and one of the gravest safety crises in the company’s history.” Barriers to suit can prevent this type of critical information from being uncovered both to the public and to corporate leadership.

For each of these reasons, prevailing depictions of the costs and burdens of class actions appear to be both unfounded and incomplete. I do not, however, mean to suggest that the current state of class action litigation could not be improved. I also do not offer my own calculations of the precise costs of class actions, the relative costs of class actions and non-class intra-business disputes, or the value to plaintiffs and society at large of suits that could be barred by recent procedural decisions. These types of calculations would be impossible, as available data on these and many other aspects of modern civil litigation are woefully inadequate.

Instead, I intend to caution the Court against relying on anecdote, exaggeration, and fabrication when interpreting the rules of civil procedure. My recommendations could be summed up with an old carpentry proverb – “measure twice, cut once.” The Court should not heed advocates’ and amici’s assertions about the effects of class actions and other procedural features when no empirical evidence is available to support those assertions. Instead, the Court should defer the assessment of claims about the costs of class actions to other entities—including Congress and the Judicial Conference—that are better situated to examine the effects of these rules on litigants and adjust procedural rules accordingly. And so long as procedural rules are impossible to “measure,” there should be more hesitation to “cut” and a greater inclination toward procedural adjustments that do not so dramatically impair the ability of plaintiffs to bring suit.

The preceding post comes to us from Joanna C. Schwartz, Assistant Professor of Law at UCLA Law. The post is based on her recent article entitled “The Cost of Suing Business” and available here.