When Is A Class Action Superior to Multiple Individual Lawsuits?:
Part Two in a Two-Part Series on the New Jersey Supreme Court's Decertification of a Nationwide Vioxx Class Action

In my last column, I wrote about the case of International Union of Operating Engineers Local No. 68 v. Merck Co. Inc. A lower New Jersey court had previously certified the case, which centers on the drug Vioxx, as a nationwide class action. However, this month, the New Jersey Supreme Court reversed that holding and decertified the class.

What made the case interesting, I argued, was that the purported class was not made up of persons who had suffered heart attacks that they alleged resulted from their use of Vioxx. (Other suits have made that claim, but not this one.) Rather, the class in this suit was comprised of health-care plans, and the damages class members sought were not for personal injuries, but rather for alleged overpayments to their clients. That is, the plans claim they overpaid for the Vioxx they bought for their members, because the drug was not accurately described by its manufacturer, which had neglected to disclose a dangerous potential side effect.

The New Jersey Supreme Court decertified the class on a number of grounds. The leading reason was that the court refused to apply the "fraud on the market" theory to a consumer fraud claim that did not involve securities. In my previous column, I discussed the significance of the New Jersey Supreme Court's taking this rather conservative position, especially in light of the fact that it has historically been one of the most progressive and pro-plaintiff courts in the country.

In this column, I want to take up another ground for the decertification, which I think will receive less attention but is no less significant. At the end of the opinion, the New Jersey Supreme Court noted that plaintiffs' suit failed to satisfy the "superiority" prong of the test for class action certification. That is, the court reasoned that the class action form did not offer a superior way to resolve the high-dollar claims of large health plans, which could easily pursue their claims through individual suits.

The "Superiority" Prong of the Class-Action Requirements

Class actions, which are creatures of statute, are permissible only if the lawyers who propose a class can satisfy certain criteria, and among them is "superiority."

Under Rule 23 of the Federal Rules of Civil Procedure, or its state equivalents, a class action will typically be certified for damages issues if the class proposed shares questions of law or fact that are common to the class members; if those common questions predominate over non-common questions affecting only individual members; and if the resolution of these questions via the class action form would be superior to their resolution via individual suits brought by the class members. That final requirement is, of course, the requirement of "superiority."

The New Jersey Supreme Court's Misapplication of the "Superiority Requirement"

The New Jersey Supreme Court held that even assuming the Vioxx third-party suit were to satisfy the commonality and predominance requirements, it would still fail, due to the superiority requirement. The Court reasoned that, here, the class action would not be superior to individual litigation because each of the class members, as relatively large enterprises, could easily have brought a suit on its own.

This argument makes a certain degree of sense, if one assumes that the sole or main justification for class actions is to encourage tort suits by victims whose damages are too small to justify an individual lawsuit. However, we should be skeptical of any modern judicial doctrine of class certification that relies exclusively on this rationale, for two reasons.

First, the concept of "superiority" is comparative, not absolute; it asks if the class action form is "better," not if it is the only available way to sue. Moreover, even if class members - such as the health plans in the New Jersey case - could bring their own suits, it still might be the case that it would be better if the case were handled in one proceeding, as a single action. Thus, the court's point that the health plans could sue on their own should not end, but only begin, the "superiority" inquiry.

Ultimately, that comparative inquiry needs to focus on which method of judicial resolution is better. But "better" in what way?

In specific cases, the class-action form might have the following advantages, to cite just a few examples: It could relieve the courts of time-consuming, docket-clogging, repetitious cases. It could allow the plaintiffs, as a group, to keep more of the damages they are awarded, by allowing them to retain a small set of class-action lawyers as opposed to numerous contingency-fee lawyers. It could lead to a more generous settlement because through a single settlement, the defendant can achieve "legal peace" and be assured no further litigation will occur.

Second, the idea that class actions' main or sole purpose is to aggregate small claims is at odds with the modern, concerted effort by tort reformers to challenge exactly this kind of class action suit. In 2006, for example, Republicans in Congress argued in favor of the Class Action Fairness Act (CAFA) in part by attacking class action settlements that paid only pennies to class members and millions to class action lawyers.

The Debate Over Class Actions That Pay Millions in Attorney's Fees, But Pennies to Each Plaintiff

In most class action settlements, the lawyers' millions comprise a relatively minor portion of the total award--usually a percentage much smaller than the typical 33% a personal injury lawyer would receive. However, because the classes involve huge numbers of very low-value claims, the lawyers' fees dwarf any given class member's recovery.

The conservative attack on these low-value claims is that no one benefits when suits for these small-value claims are brought. Indeed, most of the victims, who may have been overcharged on a phone bill or a credit card statement by a few pennies, might never have known they were injured except that they received notice of the class action or the settlement.

Of course, one could argue low-value mass tort claims have a social value because they help deter wrongful conduct by defendants, but that is a highly speculative claim. Thus, these class action critics plainly have a good point.

Shouldn't We Be Encouraging, Not Disparaging, Class Actions Where Each Class Member Has Suffered a Large Injury?

In sum, the New Jersey Supreme Court was wrong to celebrate class actions as a vehicle for claims that would otherwise be too small for the tort system to handle. Embracing low-value-per-member class actions at the expense of high-value-per-member class actions marginalizes the potential of the class action form, and reflects the degree to which the class action has been successfully demonized in American law by the critics of the tort system.

In a new book entitled Mass Torts in a World of Settlement, Professor Richard Nagareda of the Vanderbilt University School of Law argues for a much more ambitious view of class actions. There is much in this rich and fascinating book with which I disagree, but I agree with one crucial point at its core: Nagareda argues that the best justification for class actions is that they are vehicles for the rights of litigants to be altered by third parties, in order to produce socially-valuable results. This vision of the class action is much larger and, I believe, much wiser than the vision put forward by the New Jersey Supreme Court.

Nagareda points out that the real function of class actions is to provide a vehicle for the settlement of mass torts. Settlement is a social good for a number of reasons, some of which I mentioned above. But settlement often cannot be achieved if the parties believe that they can always retreat back into the tort system.

For this reason, Nagareda argues that it is only appropriate that the class action become a vehicle for the modification of the individual's right to a remedy in tort. Just as Rousseau envisioned a democracy that "forced men to be free," Nagareda envisions a class action process that forces litigants to produce mutually-advantageous results which, if left to their own devices, they never would have been able to achieve on their own.

The picture of class actions as a socially-efficient mechanism for the resolution of mass torts is not restricted to (or even centered on) the enablement of compensation for low-value torts. A theory of class actions based on the promotion of "low-value" torts is one that sees class actions as, at best, a vehicle for deterrence, and, at worst, a trash-bin for claims with nuisance value.

A fuller, more robust theory of class actions--one similar to, if not identical with, Nagareda's vision - would see class actions, instead, as capable of solving complex problems of settlement and compensation involving large, high-stakes claims. This approach is as well-suited to personal injury suits, each worth millions of dollars, as it is to consumer fraud claims concerning minuscule overcharges and everything in between.

The decision by the New Jersey Supreme Court in the Vioxx third-party class action was, as a bottom-line matter, correct. But its treatment of the superiority prong of Rule 23 is very worrisome, and should be viewed with concern by anyone who believes in the social value of class actions, particularly in cases where the class members have each suffered very substantial harms.