Some Law & Economics of the Class Action

Abstract

Class actions aim to bring economies of scale to bear on legal proceedings, by joining cases that have a common cause of action against a common defendant into a single lawsuit leading to a judgment or settlement that binds the entire class. Legal procedures, lawyer time, evidence by experts and court resources are thus all used once for all, rather than multiple times during individual lawsuits. Where individuals would not have brought suit because the damage they suffered is too small in relation to the minimal fixed cost of a lawsuit (small claims, but, in a different sense, also mass torts, where the evidentiary problems may be extraordinarily complex and costly), the class action may make it possible to impose on a wrongdoer the full weight of individually small harms inflicted on many persons, that would otherwise go unchallenged. From an economic point of view, this "internalisation" of costs, shoring up the deterrent effect of legal rules, is a desirable development. Where individual victims are facing a large enterprise that is a repeat player in similar matters, with an interest in fighting to prevent any adverse judgment, the class action may (somewhat) level the playing field. Even where the individual interest at stake is large enough to justify a lawsuit, resorting to a class action may still be worthwhile given the more ample resources that can be mobilised, considering the size of the class, to collect evidence and present the case in court. While the class action's potential deterrent effect and the economies of scale in legal proceedings are undisputed, the procedure generates its own transaction costs, in particular as regards the agency problem of supervising the class counsel handling the case, whose interests may diverge from those of the class members. Class actions also create a risk of litigation about trivia, which in ordinary proceedings is controlled by the de minimis judex non curat rule. Furthermore, the size of the class may cause difficulties in contacting some of the members and of distributing the sums collected, such that a leftover amount may have to be paid to an outside entity whose activities favour the class. As the class action makes its deterrent effect felt, it becomes apparent that it is an alternative to direct regulation of potentially wrongful behaviour. This raises the question of the comparative advantages and disadvantages of this procedure.