As Seen By The Dean
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By Professor Roger Trangsrud

Professor Roger Trangsrud, GW Law’s James F. Humphreys Professor of Complex Litigation and Civil Procedure, addresses how the current class action rule is flawed and suggests innovative revisions.

Little doubt exists that Rule 23, the class action rule, is the most controversial provision in our procedure today. It has allowed a remedy to large groups of plaintiffs who would otherwise have no practical means of going to court, but it has also been abused in ways that proved unfair to absent class members or to institutional defendants who must defend these civil juggernauts. I believe it is possible to reform class action practice to avoid the abuses, retain the benefits, and help this kind of litigation rest more comfortably within our adversary system.

Started in 1906

A major impetus for dramatic reform of federal civil practice began in 1906 when Roscoe Pound addressed the American Bar Association and complained about the complex procedural rules of common law pleading and the “sporting theory of justice” they facilitated between adversary counsel. As a remedy he proposed changing procedural rules to make it “unprofitable to raise questions of procedure for any purpose except to develop the merits of the case to the full.” Four years later he proposed in a law review article that procedural rules should be general in character, that trial judges be given broad discretion in interpreting and administering them, and that the rules should be applied only to allow parties to present their case and meet the case against them.

The reform campaign continued. In 1934 Congress passed the Rules Enabling Act, and in 1938 the Supreme Court used the act to promulgate the Federal Rules of Civil Procedure. To curb excessive pretrial gamesmanship by counsel, pleading rules were greatly simplified, and, for the first time, the same procedural rules applied to all types of civil actions. The identification and definition of contested issues was left for the post-pleading period, and broad rights of discovery were extended to all parties.

A curious provision in the 1938 rules was the original Rule 23 that created three categories of class actions: true, hybrid, and spurious. This rule traced back to Federal Equity Rule 38, but its meaning proved obscure and uncertain to the practicing bar, and very few class actions were actually brought in federal court under this original rule.

All this changed in 1966 when Rule 23 was completely rewritten. This revision to the class action rule was largely written on a clean slate because there had been very little experience with class actions in federal courts between 1938 and 1966, nor was there useful precedent from procedural systems in state courts or abroad.

Today we have more than 40 years of experience with group litigation in our state and federal courts and a more informed basis for how to revise the class action rule.

Rule 23 Drawbacks

Rule 23 specifies prerequisites to group litigation and allows four types of class actions: b1a—Incompatible Standards Class Actions; b1b—Limited Fund Class Actions; b2—Equitable Class Actions; and b3—Common Question Class Actions. Unfortunately, however, our federal courts have strayed from considering the key issues that should govern the class-certification under these provisions. Here are some examples.

The b1a and b1b class action provisions have proven to be of very little use in actual cases. Such class actions have rarely been brought in federal court or in state courts that adopted comparable language, so whatever the provisions’ drafters attempted to accomplish has not come to pass.

In recent years, some plaintiffs’ counsel sought to use b1a or b1b to justify class action suits in medical-monitoring cases, punitive damage claims, and certain types of settlements, but with only occasional success. When classes were certified under these provisions—as in a 1997 certification of a medical-monitoring class for recipients of defective heart pacemakers—trial courts had to contort the rule’s language to justify what they wished to do.

For most purposes, the only important kinds of class actions today are b2 Equitable Class Actions and b3 Common Question Class Actions. The former has been repeatedly used successfully in civil rights litigation to permit groups to seek injunctions forbidding future discrimination, to vindicate constitutional rights in suits to reform police practices, to obtain access to abortion services, to desegregate public schools, to improve prison conditions, and to change abusive policies in mental-health institutions.

The most important issue in Equitable Class Actions today relates not to its use in obtaining injunctions but to whether and to what extent plaintiffs may recover monetary remedies in addition to equitable relief. Rule 23(b)(2) was not drafted to provide a vehicle for obtaining compensatory damages and other monetary relief, but the plaintiffs bar seized on language in the advisory committee notes to the rule and persuaded our federal courts to allow monetary relief—so long as it is “incidental” to the requested equitable relief and not the “predominant” remedy the plaintiff class is seeking.

In my view, this interpretation has led our lower federal courts to ask the wrong questions when deciding whether to certify an Equitable Class action. Here is a celebrated example.

Earlier this year, in Dukes v. Wal-Mart, a panel of the 9th Circuit in a 2-1 decision upheld the certification of the largest nationwide employment class action in history. It alleged Wal-Mart discriminated against women in pay and promotion. The appeal to the 9th Circuit raised many issues. The court held the class action for equitable relief to be appropriate because it challenged a nationwide decision-making policy by Wal-Mart that left too much subjectivity in personnel decisions, because evidence existed of gender stereotyping in the corporate culture, and because statistical evidence showed gender disparities caused by discrimination.

The opinion’s more controversial portion, however, dealt with whether the plaintiff class proceeding under Rule 23(b)(2) could also seek billions in monetary relief, including an unspecified amount of punitive damages from Wal-Mart. Citing language from the advisory committee notes to the rule, the 9th Circuit said this depended not on the amount of money sought but on whether the plaintiffs’ primary motive in bringing the action was to obtain injunctive relief or monetary relief.

Based on some plaintiff affidavits and statements of plaintiffs’ counsel, the court concluded the equitable relief predominated and that the billions in damages were “incidental” to the equitable claim and thus allowable. In so holding, the 9th Circuit noted that it was not necessary for the trial court to permit class members to opt out of the class if they wished to pursue their monetary remedies individually. The 9th Circuit’s decision here was not aberrational—other circuits have also so held.

Whether this plaintiff class should be allowed to seek billions from Wal-Mart for its employment practices should not turn on why the class brought the suit, nor should it turn on which of the two important remedies predominates over the other. Obviously both remedies—an injunction against future discrimination and a damage award—were central, not incidental, to the plaintiffs’ case. Indeed, for the thousands of class members no longer employed by Wal-Mart, the monetary award would be the most important remedy.

The more important point is: Whether the plaintiff class, or some portion of it, regards the injunctive remedy as more or less important than the monetary remedy cannot logically be the reason why the class action for money is appropriate or not. It also should not determine whether class members should be afforded the opportunity to opt out. Regrettably, however, this is the basis for b2 Equitable Class Action certification decisions today.

Even more controversial is the interpretation given to Rule 23(b)(3)—the Common Question Class Action. The rule asks the court to decide, among other things, whether common questions predominate over noncommon questions.

In a famous 1986 asbestos case, the 5th Circuit upheld certification of a class action when the only common question shared by the class was the “state of the art” affirmative defense asserted by the defendant. All other questions relevant to liability and damages were noncommon questions, including the products plaintiffs were exposed to, the exposure’s duration and nature, the injuries attributed to the exposure, and the like.

If one common question can trump numerous noncommon questions, it is difficult to know what meaning the word “predominate” has in this context.

By contrast, the 2nd Circuit applied the “predominance” test very differently in a recent landmark securities fraud case involving 310 class actions against several of the nation’s largest underwriters arising out of a series of initial public offerings. The 2nd Circuit reversed the trial court and decertified the class actions largely because it found that one issue—the “reliance” issue—would require individualized proof, and thus common questions did not predominate even though it appeared that the many other liability issues and damages could be proven by common proof. Clearly the “predomination” test for common question class actions is not being applied literally or consistently.

More Negative Fallout

Rule 23 is not the only federal rule of procedure replete with ambiguities and inconsistently interpreted by our lower federal courts, but it is the most significant example. Unlike other preliminary rulings on pleadings issues or the scope of permissible discovery, the class action certification ruling is often the decisive moment in modern litigation. If certification is denied, the claims of the plaintiff class members may not be viable on an individual basis; even if a case is viable, the settlement value from the plaintiffs’ perspective has declined dramatically. If class action certification is granted, defendants are often unwilling to suffer the risks of trial and face enormous pressure to settle the case for very substantial amounts.

It is ironic that our current federal rules—inspired by Pound’s goal of keeping procedural decisions from interfering with a case’s substantive merits—should have led in Rule 23’s case to a world where procedural decisions dramatically drive the substantive outcome of most class action cases.

When so much turns on the discretionary decision of trial judges, we should not be surprised that judge shopping has become so important in class action cases. While judge shopping has always to some degree been part of our adversary system, it has always been cabined by rules on personal jurisdiction, subject-matter jurisdiction, and venue, as well as by the role of juries and appellate courts in civil cases. In the past decade, however, we have seen major nationwide class actions being filed in obscure venues in rural Illinois, Texas, or Mississippi for reasons—one surmises—unrelated to convenience or local weather.

In 2005, the business community responded to this phenomenon by lobbying Congress for the Class Action Fairness Act, which gave the defense bar additional judge-shopping opportunities by expanding the removal rules in class action cases. But a satisfactory response to the issues that plague modern class action practice will not lie in giving plaintiffs or defendants more judge-shopping options.

Three Solutions

To better assure the fair and proper use of this most important procedural vehicle, three changes would be most useful. One is partly accomplished, but progress on the other two has not even begun.

The first remedy: Increase appellate court oversight over the development of class action law. For its first 30 years, the modern federal class action rule received insufficient appellate attention because of the rule against interlocutory appeals and the prevalence of settlements in certified class actions, which kept many controversial cases from reaching an appellate court.

In 1998 Rule 23 was amended to allow appeals from orders granting or denying class actions but only when the relevant appellate court agrees to hear them. I urge that such appeals by plaintiffs or defendants be of right—not discretionary.

That said, the current rule has increased appellate oversight over lower court decisions that certify or fail to certify class actions and improved the possibility of greater consistency and coherence in class action rulings. I urge states that have adopted Rule 23, or some version, to also allow interlocutory appeal of certification decisions.

Second recommendation: Completely redraft the federal class action rule. As the case examples earlier made clear, even appellate courts have found it difficult to apply the current Rule 23 version literally or consistently. It is time to draft a more functional definition of permissible class actions and a more pragmatic set of criteria for judging whether to certify a class action. A revised rule should address three key issues:

First, divide class actions into two categories: mandatory and voluntary. The former would not allow class members to opt out; the latter would require notice and an opt-out option.

Mandatory class actions should be permitted when they facilitate the purposes underlying a case’s substantive claims or when substantive unfairness would likely result to the plaintiff class or the defendant if class members litigated individually. They should also be allowed when the sole remedy the class seeks is equitable, and certification assures that all future class members could challenge the defendant if it does not abide by the court’s injunction.

Mandatory class actions should not be ordered when class members have substantial individual damage claims that they may prefer to litigate on their own or where significant conflicts within the class exist over the proposed monetary remedy. In those situations, class members should be afforded notice and an opt-out opportunity as a matter of due process.

Voluntary class actions should be certified only when they are superior to other available methods for fair and efficient adjudication and when it is infeasible to adjudicate disputes using traditional joinder devices.

Second, explicitly distinguish between “litigation” and “settlement” class actions. In the former the court needs to consider whether it is fair and feasible to try the substantive claims of the plaintiff class in a unitary trial. In the latter no such trial is needed; the issue is whether the settlement was negotiated fairly and whether the terms are fair and reasonable.

Settlement class actions are a very important part of modern practice and today account for about a third of all class actions. Presently Rule 23, read literally, would apply the same criteria to settlement and litigation class actions, as the 3rd Circuit held in the 1996 Amchem case when it overturned a major asbestos settlement class action. The Supreme Court affirmed the 3rd Circuit on other grounds in that case, but held that settlement class actions need not require proof that they would be manageable if tried to judgment.

I believe the conclusion is correct, but to reach it the Court had to ignore Rule 23’s literal language. Moreover, shoehorning negotiated settlements into current Rule 23 categories limits the abilities of plaintiff and defense counsels to reach acceptable settlements in complex cases. A new class action rule that explicitly defines when settlement class actions should be approved would be a significant improvement, giving counsel and trial courts options for resolving complex disputes without further litigation—something now lacking.

Third, expressly distinguish between cases where class member claims are viable if pursued individually and where they are not. The current rule does not adequately reference this distinction; however, a careful study of trial court class action decisions suggests it is a major factor in decisions of some trial judges who certify classes, as well as a factor seemingly ignored by trial judges who deny certification.

When class member claims are not viable individually, the class action is the only procedural device for affording a day in court to plaintiffs on their substantive claims. If, as Pound and others argued, our federal rules should facilitate—not obstruct—a decision on the merits of the case, then we ought to strive to certify class actions whenever possible in such cases.

We also need to consider substantive rights of defendants. We must certify such class actions so defendants have a fair chance to meet the case against them and, if necessary, limit amounts the class can recover from a defendant to a reasonable sum.

Such adjustments would seem to run squarely afoul of the Rules Enabling Act’s prohibition on procedural rules that “abridge, enlarge, or modify any substantive right.” I disagree for this reason: In class actions involving claims that are not individually viable, the decision to deny certification to the plaintiff class denies those class members their substantive rights. They have no other access to a judicial remedy. Thus, any procedural ruling the court makes on the class action issue will affect (i.e. abridge, enlarge, or modify) the substantive rights of one party or the other.

The best approach: We should not ignore the actual substantive impact of denying certification to the plaintiffs (as the current rule and many trial courts have). Instead, we should equitably balance the substantive rights of the parties—if possible—by making needed adjustments in proof or remedies to yield an equitable outcome. For too long in such situations, we have let the perfect be the enemy of the good.

The third recommendation for reform: Improve class action practice for plaintiffs and defendants.

Class actions fit uncomfortably within our adversary system’s typical norms and incentives. In ordinary litigation a plaintiff has a much larger financial stake in a case’s outcome than his lawyer. That plaintiff is also an active decision maker on whether to sue the defendant and whether to accept a settlement offer.

Neither is true of many class actions. The lawyer typically decides to proceed as a class action, and class counsels may reach settlements over the objection of individual class members. The class action lawyer also has the prospect of recovering large legal fees, where individual class members often recover a much smaller amount. These dynamics dramatically change and can distort the proper relationship between lawyer and client—and the incentives governing their behaviors.

I think the Manual on Complex Litigation should be revised to recommend certain best practices in managing most federal class actions. In my view, a second judge or a judicial adjunct—such as a magistrate or master—should be appointed to assist the trial judge.

The original judge would make all the usual rulings as in an ordinary lawsuit. The judicial adjunct would select plaintiff’s counsel if competition exists for that role, would confer with class counsel on important decisions regarding the class action, would participate in and oversee all settlement discussions, and would recommend an appropriate fee for class counsel in the event of a settlement or judgment.

In short, the judicial adjunct would serve as a judicial guardian ad litem for the class, to protect the interests of absent class members, and to be on the alert for decisions or tactics not in the interest of some or all of the class. While these duties may seem unfamiliar and in conflict with traditional adversary procedure, I believe they are justified in some class actions because of conflicts of interest and anomalies cited earlier.

In Conclusion

Forty years of experience with modern class actions have taught us much. This joinder device is an enormous instrument for providing justice in many kinds of civil claims. For this reason we need to rewrite Rule 23 to facilitate the certification of nonviable claims.

Class actions also can cause substantial injustice to defendants and absent class members when improperly used. Therefore, we should insist on opt-out rights for absent class members in class actions involving substantial monetary claims, and we should expand judicial oversight over class action litigation and settlements.

Recently Canada and Australia began drafting new class action rules and have studied our experience. We should do likewise, then revise our rule to better accomplish the purposes for which this rule was intended.

Note: This article is an abridged version of an original lecture delivered by Trangsrud in his role as the James F. Humphreys Professor of Complex Litigation and Civil Procedure. The entire lecture can be found in a forthcoming issue of The George Washington University Law Review.