The Choice-of-Law Problem(s) in the Class Action Context

Genevieve York-Erwin

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Over the past forty years, damage class actions have come to play an increasingly significant regulatory role in the consumer context. Recent legal developments, however, have greatly diminished the damage class’s practical utility:  While damage class actions remain viable on the books, in practice unfavorable federal precedent and nearly exclusive federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA)1 prevent certification of many damage classes, reducing the ability of consumers to hold defendant-wrongdoers accountable.

Choice of law has proven to be one of the most consistent obstacles to damage class certification in recent years. Federal precedent has developed such that when multiple state laws would apply to a class, federal judges usually deny certification. To the extent that states rely on class actions to enforce their regulatory regimes, CAFA’s jurisdictional shift appears to be weakening enforcement, resulting in underdeterrence and perhaps greater corporate misbehavior. Academics have suggested various solutions to this choice-of-law problem, but each proposal has failed to comprehend the full scope of the problem.

In fact, there are two choice-of-law problems, stemming from choice of law’s two distinct roles in the class action context:  (1) choice of law as a procedural gatekeeper for certification, and (2) choice of law as the mechanism by which substantive regulatory authority is allocated between states. In the current federal judicial climate, these two roles are in frequent conflict. The choice-of-law rules that facilitate the most fair and efficient consumer protection (those applying different states’ laws to different class members) tend to cause denial of certification, while rules that facilitate certification (those applying a single state’s law to all class members) produce suboptimal regulation of corporate conduct.

To achieve a real solution, one must account for both sets of concerns. To this end, I propose a two-pronged approach that would remove choice of law from the Rule 23(b)(3)2 analysis for CAFA cases and would prescribe a uniform federal choice-of-law rule directing courts to apply the law of the consumer’s home state.


I.
Background


A.     Choice of Law Allocates Regulatory Authority

Choice of law performs an essential function in our federal system, determining which sovereign authority will regulate conduct implicating several states’ interests. Each state has developed its own choice-of-law rules over time, guided primarily by federalism and substantive policy concerns. The earliest American choice-of-law rules looked to territoriality and nationality, strictly applying the law of the place in which some important event occurred or a particular party was domiciled. Most states now, however, employ “modern methods” that try to promote fairness to litigants and good federalism by applying the law of the state with the greatest regulatory interest in the controversy, as judged by the nature and extent of the state’s connections to the parties and the conduct.


B.     Damage Class Actions Perform an Essential Regulatory Function

Damage class certification is appropriate when the putative class meets the requirements of Federal Rule of Civil Procedure 23(a) and 23(b)(3)3—that is, when collective treatment would promote overall efficiency and fairness even when certification is not strictly necessary. Choice of law has proven to be one of the most consistent impediments to certification under Rule 23(b)(3). When the choice-of-law rule of the state in which the case is being heard points to the laws of different states for different class members, federal courts usually find “predominance” and/or “superiority” lacking and deny certification.

The certification decision has important implications for regulatory enforcement. Appropriately constituted damage classes promote efficiency by pooling plaintiff resources, avoiding duplicative discovery and litigation, and resolving large numbers of claims with minimal expenditure of judicial time and resources. They also promote the adjudication of meritorious claims, particularly when individual claim values are so small that the transaction costs of litigation would otherwise preclude plaintiffs from enforcing their rights. Without class actions as a claim-pooling mechanism, corporations would not fully internalize the costs of their conduct, causing inefficiencies, undercompensation, underdeterrence, and other social losses.


C.     Certification Trends Pre- and Post- CAFA

From the 1970s through the early 1990s, many judges—both state and federal—favored the damage class as a useful mechanism for resolving mass torts and consumer claims. Beginning in the mid-1990s, however, state and federal courts’ attitudes began to diverge in this respect, due in part to their different approaches to choice of law. Federal courts increasingly refused to certify nationwide damage classes, finding predominance lacking on choice-of-law grounds. Unsurprisingly, plaintiffs’ attorneys started filing more nationwide classes in state courts, which were more amenable to certification.

As part of the “tort reform” movement, certain business interests and politicians began calling for a congressional fix that would save corporate defendants from these “anomalous” state court certifications. CAFA did this by moving most nationwide class actions into federal courts, but it failed to address a more significant regulatory mismatch:  State rather than federal law continues to determine nationwide liability, regardless of forum. As a result, choice of law remains a significant obstacle to certification in federal courts, which now hear most large class action cases.


D.     Alternatives to Class Adjudication: What Happens When Certification Is Denied?

In theory, a variety of alternatives to the nationwide class exist; in practice, however, without nationwide certification, high value consumer claims usually settle in aggregate settlements, and low value claims generally go completely unredressed. Both are undesirable outcomes.

Contrary to many courts’ and commentators’ assumptions, high value claims rarely proceed to trial individually when class certification is denied; instead, they settle in the aggregate without judicial oversight mandated by the class form to protect claimants. Modern large scale litigation is dominated by plaintiffs’ firms that collect “inventories” of high value cases that are then typically disposed of in package deals, which create significant opportunities for collusion between plaintiffs’ attorneys and defendants, but offer none of Rule 23’s judicial safeguards.

Low value claims face even bleaker fates when denied certification. Most simply disappear. Individual representation is not an option, since by definition the claims are not sufficiently valuable for attorneys to pursue them individually, so these claims rarely settle—aggregately or individually—without certification.


II.
Why Proposed Solutions Fail to Address the Full Scope of the Problem

Choice of law creates two problems in the class action context. First, choice of law issues make certification difficult, which in turn leads to underdeterrence. Second, since state—not federal—law still determines defendants’ liability post-CAFA, choice-of-law rules as applied to these classes threaten to disrupt the balance of regulatory interests of the different states. Scholars have proposed a variety of solutions, each of which has failed to address both choice-of-law problems.

 
A.     Proposals that Would Remedy the Difficulty of Certification

Many scholars advocate for a federal rule that would mandate the application of a single state’s law to the entire class, eliminating choice-of-law-based predominance and manageability concerns. Professor Samuel Issacharoff recently proposed a federal choice-of-law rule for CAFA cases under which courts would apply the law of the defendant’s state of incorporation to all class claims.4

This proposal offers definite benefits. Ex ante, it would promote uniformity and predictability, helping defendants plan their conduct according to more accurate estimates of potential liability. Ex post, it would discourage forum shopping (since all federal fora would apply the same rule), and it would facilitate both certification and settlement (since a single, predictable law would apply). However, the proposal carries a serious risk of “capture”:  It creates strong incentives for a corporation to manipulate the political process in its home state to secure favorable laws that would shelter its wrongdoing. Issacharoff’s proposed rule would further the regulatory function of class actions by facilitating certification, yet it would undermine this function by applying defendant-friendly laws to corporate conduct. Further, it would impede choice of law’s other fundamental function, the proper allocation of regulatory authority among the states.

 
B.     Proposals that Focus on Federalism Concerns

Unfortunately, scholars who take choice of law’s allocation-of-authority role seriously tend to go too far in the opposite direction. They prioritize choice of law’s traditional concern for federalism and individual rights over any practical interest in achieving collective resolutions. These scholars would sacrifice certification in order to uphold the existing choice-of-law regime.

Professor Larry Kramer asserts that choice of law is substantive rather than procedural and that applying a single state’s law to all class claims impermissibly abridges class members’ and defendants’ rights when individual treatment would apply different laws.5 Along similar lines, Professor Richard Nagareda argues that federal courts should not be “bootstrapping”—applying a single state’s law to facilitate certification.6 In light of class actions’ significant regulatory effects, bootstrapping amounts to inappropriate law reform, supplanting existing state governance regimes and altering individuals’ rights. Professor Linda Silberman has focused particularly on federalism concerns in arguing against the application of a single state’s law.7 These scholars are right to highlight choice-of-law’s important federalism function, but they do not sufficiently account for the practical significance of the certification decision and its regulatory implications.


III.
A Two-Pronged Proposal for Amending CAFA

How then can reform address both the practical procedural problem of securing certification for meritorious cases and the substantive problem of properly allocating regulatory authority between states?  Below I introduce a two-pronged solution.


A.     Prong: One: The Feinstein Amendment

First, Congress should remove choice of law from the predominance analysis under Rule 23(b)(3). Senator Diane Feinstein’s proposed amendment to CAFA, rejected in the floor debates, provides a useful model:  “[T]he district court shall not deny class certification, in whole or in part, on the ground that the law of more than [one] State will be applied.”8

As explained in Part I, the regulatory function of most class actions cannot be realized without certification. This is not to say that all putative classes should be certified:  Sometimes differences between plaintiffs’ claims reveal inadequacies in representation, or factual dissimilarities indicate that class adjudication will over- or undercompensate or over- or underdeter. But when class treatment is otherwise warranted, the necessity of applying multiple states’ laws should not in and of itself result in a denial of certification.

Absent certification, meritorious negative value claims tend to disappear entirely, along with the deterrent and compensatory effects they were intended to achieve, while positive value claims settle aggregately in lump sums that advantage plaintiffs’ counsel without the procedural safeguards and judicial oversight afforded by Rule 23. Collective treatment has become a near inevitability, and for all its shortcomings, the class action mechanism effectuates more fair and efficient deterrence and compensation than the alternatives. Adopting the Feinstein amendment would facilitate class treatment of meritorious claims that CAFA and federal certification precedent currently have rendered unenforceable.


B.     Prong Two: A Federal Choice-of-Law Rule that Looks to the Home State of the Consumer

The Feinstein amendment alone would improve upon the status quo, but it attends to only half of the choice-of-law problem. I further propose a uniform federal choice-of-law rule for consumer cases that would apply the law of each plaintiff’s residence to his or her claim.

A federal rule is desirable because it would promote predictability and uniformity while discouraging forum shopping. Not only would this allow defendants to plan their conduct around known liability standards, but it would also facilitate more efficient settlements since parties’ claim valuations are more likely to converge when the applicable law is known. The more difficult question is which federal rule Congress should adopt.

Each option has downsides. A “modern method” would mirror the majority approach among states, but modern methods are famously indeterminate. In order to provide the predictability and uniformity justifying its adoption, the federal rule must clearly indicate which law will govern in any given situation. The other likely contender, Professor Issacharoff’s home-state-of-defendant rule, is similarly unsatisfying. This rule would be highly predictable but would likely lead to underregulation:  It is too open to capture by corporate interests and could easily create a race to the bottom, hindering effective deterrence and compensation.

My proposal—applying the law of the consumer’s home state—strikes a better balance between predictability and uniformity of results on the one hand and fair and appropriate allocation of authority on the other. A home-state-of-consumer rule would provide clear guidance to courts:  Parties could reasonably expect federal courts across the country to apply the rule with similar results. Defendants’ conduct would still be subject to varied state standards, but defendants would know ex ante that they faced each state’s particular standard of liability in fairly direct proportion to the amount of business they did in that state, allowing them to plan accordingly.

My proposal would also allocate regulatory authority more fairly and efficiently than the alternatives. Professor Silberman has noted that “justice” assumes definite meaning only in light of a particular political community’s values and principles.9 The fifty states remain the relevant politically accountable communities with respect to consumer class actions, defining consumer rights and justice through state law. Principles of federalism and political accountability therefore counsel that any federal choice-of-law rule should honor the respective states’ interests by compensating state citizens and deterring corporate wrongdoing in a manner and to a degree determined by each state’s democratic process.

Ultimately, my proposal offers a predictable, neutral rule that would foster greater political accountability. It would generate more effective regulation through settlement pricing and damage recoveries that more closely track the differentiated values of class members’ claims.


Conclusion

Society appears ready to embrace a new culture of corporate responsibility, yet the existing rules and doctrine make it nearly impossible for the class action mechanism to perform its intended regulatory function. It is time for Congress to address the full scope of the “choice-of-law” problem by telling courts to make meritorious nationwide class actions work and to do so in a manner that respects the regulatory interests of the different states. Only by attending to both aspects of the choice-of-law problem in this manner can Congress effectively revitalize the class action as a meaningful regulatory mechanism and ensure effective consumer protection.

Acknowledgments:

Copyright © 2010 New York University Law Review.

Genevieve G. York-Erwin received her J.D. in 2009 from the New York University School of Law. She is now clerking for Judge Lewis A. Kaplan of the Southern District of New York.

This Legal Workshop Editorial is based on the following Student Note: Genevieve G. York-Erwin, The Choice-of-Law Problem(s) in the Class Action Context, 84 N.Y.U. L. REV. 1793 (2009).

  1. Pub. L. No. 109-2, 119 Stat. 4 (2005) (codified as amended in scattered sections of 28 U.S.C.).
  2. Fed. R. Civ. P. 23(b)(3).
  3. Id.; Fed. R. Civ. P. 23(a).
  4. Samuel Issacharoff, Settled Expectations in a World of Unsettled Law: Choice of Law After the Class Action Fairness Act, 106 Colum. L. Rev. 1839, 1869 (2006).
  5. Larry Kramer, Choice of Law in Complex Litigation, 71 N.Y.U. L. Rev. 547, 549 (1996).
  6. Richard A. Nagareda, Bootstrapping in Choice of Law After the Class Action Fairness Act, 74 UMKC L. Rev. 661, 661–62 (2006).
  7. Linda Silberman, The Role of Choice of Law in National Class Actions, 156 U. PA. L. REV. 2001, 2028–29 (2008).
  8. S. 5, 109th Cong. amend. 4, 151 Cong. Rec. S1215 (daily ed. Feb. 9, 2005).
  9. Silberman, supra note 7, at 2023

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