Wednesday, May 28, 2014

Tidmarsh on Trial by Statistics and Auctioning Class Settlements

As I've slowly emerged from my grading slump, I've caught up on a number of interesting articles dealing with class actions, two of which are authored by Professor Jay Tidmarsh at Notre Dame.  In case you missed them, too, I thought I'd mention them here.  

The first is a new take on auctions.  Auctions have been proposed and used to pick class counsel, but Tidmarsh proposes using them to increase settlement prices.  Once the parties reach a settlement, the court puts the class's claims up for auction.  If an entity--presumably a corporation, though perhaps a third-party financier?--outbids the settlement price, that entity purchases the class's rights to sue and can continue to litigate against the defendant.  Here's the idea in Tidmarsh's own words in his SSRN abstract

Although they promise better deterrence at a lower cost, class actions are infected with problems that can keep them from delivering on this promise. One of these problems occurs when the agents for the class (the class representative and class counsel) advance their own interests at the expense of the class. Controlling agency cost, which often manifests itself at the time of settlement, has been the impetus behind a number of class-action reform proposals.

This Article develops a proposal that, in conjunction with reforms in fee structure and opt-out rights, controls agency costs at the time of settlement. The idea is to allow the court, once a settlement has been achieved, to put the class’s claims up for auction, with the settlement acting as reserve price. An entity that outbids the settlement becomes owner of the class’s claims, and may continue to pursue the case against the defendant. A successful auction results in more compensation for the class. On the other hand, if no bids are received, the court has evidence that the settlement was fair. The prospect of a settlement auction also deters class counsel and the defendant from negotiating a sweetheart deal that sells out the class.

The Article works through a series of theoretical and practical issues of settlement auction, including the standards that a court should use to evaluate bids, the limitations on who may bid, and the ways to encourage the emergence of an auction market.

Tidmarsh's second article returns to a long-espoused notion: trial by statistics (or, as Justice Scalia used in the pejorative sense in Wal-Mart Stores, Inc. v. Dukes, "Trial by Statistics.").  Here's the abstract, which explains the idea concisely:

“Trial by statistics” was a means by which a court could resolve a large number of aggregated claims: a court could try a random sample of claim, and extrapolate the average result to the remainder. In Wal-Mart, Inc. v. Dukes, the Supreme Court seemingly ended the practice at the federal level, thus removing from judges a tool that made mass aggregation more feasible.

After examining the benefits and drawbacks of trial by statistics, this Article suggests an alternative that harnesses many of the positive features of the technique while avoiding its major difficulties. The technique is the “presumptive judgment”: a court conducts trials in a random sample of cases and averages the results, as in trial by statistics. It then presumptively applies the average award to all other cases, but, unlike trial by statistics, any party can reject the presumptive award in favor of individual trial. The Article describes the circumstances in which parties have an incentive to contest the presumption, and explores a series of real-world issues raised by this approach, including problems of outlier verdicts, strategic behavior by parties, and the parties’ risk preferences. It proposes ways to minimize these issues, including a requirement that the party who reject a presumptive judgment must pay both sides’ costs and attorneys’ fees at trial.

The Article concludes by showing that this approach is consonant with important procedural values such as efficiency, the accurate enforcement of individual rights, dignity, and autonomy.
Although, as Professor Tidmarsh notes, Justice Scalia frowned upon using statistics to resolve aggregated claims in federal court, the opinion didn't say that using statistics would violate federal constitutional due process.  That seems to leave the door open for the legislature to act and authorize statistics were it so inclined.  
 
Happy reading!

http://lawprofessors.typepad.com/mass_tort_litigation/2014/05/tidmarsh-on-trial-by-statistics-and-auctioning-class-settlements.html

Aggregate Litigation Procedures, Class Actions, Mass Tort Scholarship, Procedure | Permalink

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