The Efficiency Trap

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In a recent Seventh Circuit decision that has received much attention, Judge Posner explained the predominance requirement of Rule 23(b)(3) in a way that no doubt will be cited frequently by plaintiffs’ class action lawyers.  In Butler v. Sears, Roebuck & Co., Plaintiffs were purchasers of Whirlpool washing machines that allegedly had two problems:  a defect that caused mold, and a defect that caused sudden stoppage of the machines.  The district court certified the sudden stoppage class, but denied certification of the mold class.  With respect to the mold class, the district court accepted the argument that, because Whirlpool had made a number of design modifications, so that some models may not be defective at all and others may be defective in a variety of ways, common issues did not predominate over individual issues.  The Seventh Circuit rejected the district court’s predominance analysis, and reversed the denial of certification, holding that the basic question whether the machines were defective was common to the entire class, although the answer may vary with the different designs, and that the individual questions were simply the amount of damages owed to particular class members.

The portion of the decision most likely to be quoted is the explanation of predominance that frames the court’s analysis.  Judge Posner wrote:

Predominance is a question of efficiency. . . . Is it more efficient, in terms both of economy of judicial resources and of the expense of litigation to the parties, to decide some issues on a class basis or all issues in separate trials?  A class action is the more efficient procedure for determining liability and damages in a case such as this involving a defect that may have imposed costs on tens of thousands of consumers, yet not a cost to any one of them large enough to justify the expense of any individual suit.

Judge Posner’s equating of predominance with efficiency may be fine as far as it goes, but it tells only part of the story.  Rule 23 is also about fairness and due process, neither of which should be sacrificed on the altar of efficiency.  In many cases where the aggregation of class claims would deprive the defendant of the opportunity to present viable, individualized defenses to the claims of any class members, fairness to the defendant should trump efficiency and class certification should be denied.  An over-reliance on the goal of efficiency risks losing sight of the balance of interests that Rule 23 was designed to accomplish, as explained in our most recent prior post.

Importantly, the holding of Butler may apply only to breach of warranty claims for mass-produced products in which there are no issues regarding the mishandling of the products by the purchasers or third parties, no issues of individual reliance, and no other liability issues that depend on class members’ individual circumstances.  Although the defendants argued that changes in design meant that only some class members’ products were arguably defective, Judge Posner pointed out that there were only five design changes relevant to the mold issue, and concluded that these few variations could be managed by subclasses.  The only issue apparent from the court’s opinion that would vary by plaintiff, as opposed to by model, was the issue of damages, which courts often hold is insufficient to defeat predominance.

Still, when one considers the individual damages issues, the efficiency analysis starts to break down.  Judge Posner opined that, “[i]f necessary, a determination of liability could be followed by individual hearings to determine the damages sustained by each class member . . . .”  Such a process does not sound particularly efficient, so Judge Posner continued: “But probably the parties would agree on a schedule of damages based on the cost of fixing or replacing class members’ mold-contaminated washing machines.   The class action procedure would be efficient not only in cost, but also in efficacy, if we are right that the stakes in an individual case would be too small to justify the expense of suing, in which event denial of class certification would preclude any relief.”

This passage reveals the flaws of the court’s analysis.  The court elevated its concern that, if the class were not certified, the class members’ claims would go unaddressed, over the countervailing concern that the defendant may be pressured to agree to some alternative to judicial process to determine the class members’ damages.  A “schedule of damages” would substitute for accurate calculations of what each class member was owed.  Perhaps a defendant that has already been held liable to the class would indeed agree to such a streamlined process for determining damages, but it would be presumptuous to assume that every defendant would willingly forfeit its right to contest individual damages in every case, especially in cases involving large numbers of class members or substantial damages amounts for some class members.  Allowing the efficiency of class actions to overshadow defendants’ opportunities to challenge the individualized claims asserted against them converts the class action process into a mechanism for expanding and contracting substantive rights, in violation of the federal Rules Enabling Act.

Judge Posner’s concerns no doubt are well motivated and pragmatic, and likely are more balanced than the “efficiency” language, taken out of context, might make them appear.  But courts presented with the language in Butler should remember that, while a pragmatic approach to managing litigation has its virtues, pragmatism at the expense of fairness has no place in our justice system.  The overall design of Rule 23, as well as the Supreme Court’s observation that class actions are the exception and not the rule, reflect a better balance than efficiency alone.

Written by former litigation partner, Donald R. Frederico.