United States: The International Class Action: Comments On The Geneva Group Action Debates

Recently, the law faculties of Duke University and the University of Geneva convened a major conference regarding class actions in Geneva, Switzerland. The conference, entitled Debates Over Group Litigation in Comparative Perspective, took place in Geneva on July 21-22, 2000. DRI was one of the sponsors of the conference. The controversial discussions took place in the aftermath of the recent $145 billion class action verdict against the tobacco industry in Florida and the recent 5.1 billion mark settlement of the American slave labor class actions by the German government. The conference was attended by judges, practitioners, corporate counsel, and law professors from common law and civil code jurisdictions throughout Europe, the United States, Canada, Australia, Japan and Brazil. Richard O. Faulk, partner in the trial, appellate and environmental sections of Gardere & Wynne, LLP, attended and participated on the firm's behalf and offers the following comments regarding the proceedings.

The debate regarding the efficacy and scope of class actions is not restricted to the United States. The continued use and abuse of the class device in America has engendered a passionate international debate regarding the utility of American-style class actions in foreign countries, irrespective of whether those nations' legal systems are based upon common law or civil code traditions. Last year, the Commission of the European Communities issued a "Green Paper" which solicited input regarding possible amendments to the European Union's Product Liability Directive. One of the major questions raised by the "Green Paper" was whether the Directive should provide for class actions or other types of "group actions" as special measures to "improve access to justice" by persons injured by defective products in Europe. The storm of controversy raised by this suggestion continues to rage.

The debate over the scope and utility of class actions is a controversy over fundamentals, namely, the role of private litigation in governance. Differing cultures have widely contrasting views on that subject. In the United States, there is a strong tradition, especially in civil rights litigation, that supports the utility of class actions to impact social policy and to modify citizen behavior. Outside the United States, virtually no nations have such a tradition. Instead, other countries commonly have relied upon governmental regulation and public enforcement proceedings to protect the public interest. The concept of the "private attorney general" — a citizen or advocate who "represents" the public interest and who uses the judicial system, as opposed to parliamentary action, to advance social aims or redress public wrongs — is not commonly accepted outside the borders of the United States. This fundamental disagreement over the role of private litigants and the judiciary underlies

many of the obstacles to expanding class action procedures into Europe and other regions.

In the Geneva debates, it became clear that many important voices believe that the American-style class action, with all of its potential for abuse, should not be grafted wholesale onto foreign procedural systems. Although foreign systems typically provide lesser incentives for lawyer entrepreneurship by precluding contingent fees and following a "loser pays" rule that saddles unsuccessful litigants with their opponents' attorneys fees and costs, many foreign counsel still fear that class actions carry seeds of abuse. Even without juries, many are concerned that aggregating tort claims, for example, enhances their significance and value beyond the range normally allowed in foreign systems. There are concerns that the size of awards will necessarily increase with the perceived magnitude of the impact on large numbers of plaintiffs. Other voices raised concerns that the difficulty of apportioning and allocating compensatory damages between mass tort plaintiffs would lead to de facto awards of punitive damages — which are typically not allowed outside the United States, especially in civil code jurisdictions. As Judge Dag Bugge Norden of Norway remarked, "it is sometimes easier to figure out what the culprit is supposed to pay than to calculate how the injured should be compensated."

Questions were also raised regarding the compatibility of American-style class actions, which require substantial judicial discretion and flexibility, with the relatively rigid rules governing judicial conduct in civil code jurisdictions. Generally, judges in civil code nations are governed by strict procedural rules that are applied inflexibly to regulate the progress of disputes. There is a strong tradition in such countries which is reluctant to entrust broad powers to judges, who may be less responsive to democratic processes. Instead, more power is entrusted to parliaments, which are directly accountable to citizen concerns. In such cultures, use of class action principles, which necessarily require substantial judicial discretion to ensure that they are applied fairly, may have unintended and unfair consequences when they are applied with greater rigidity.

Another cultural impediment to importing class action principles into European practice concerns the member states' greater propensity to rely upon governmental regulation and public enforcement as alternatives to civil litigation. Europeans are apparently more willing than their American counterparts to trust regulated industries to comply with legal requirements. In civil code nations, for example, the scope of procedural devices available to investigate and redress misconduct generally varies according to the nature of the proceeding and the extent of the public interest underlying the controversy. The broadest range of inquiry is typically available in criminal proceedings, followed closely by administrative actions filed to protect legitimate public interests. Suits dealing with private interests, such as those involving personal injuries, are substantially more restricted. In certain situations, however, a private civil proceeding may be annexed to a criminal or administrative case and, upon conviction or resolution of the public matter, a civil court may quantify damages and render a private judgment. When numerous private claims are involved, civil courts may appropriately consolidate the claims and select one or more claims as a "model" claim for individual attention. The court may then use the "model" claim to guide its inquiries and decisions on the remaining cases similarly to a non-binding "bellwether" trial under U.S. practice.

Generally, no res judicata or collateral estoppel arises unless the issue has been adjudicated in a prior criminal proceeding.

The concept of civil liability as a deterrent to unlawful behavior is not a prominent factor in European jurisprudence. Even when mass injuries occur, compensation of private parties is often achieved legislatively by creating statutory "funds" against which victims may make administrative claims. According to some commentators, the compensation realized through these parliamentary remedies does not differ significantly from the amounts received by individual plaintiffs in American mass tort controversies. Additionally, the interests of victims and tortfeasors are more often resolved through conciliatory procedures outside the United States, either as a part of a political settlement, or through a privately negotiated process. For example, the liabilities for major pollution incidents, such as the noted Rhein river environmental claims, were apparently adjusted without significant litigation through private negotiations between the parties and their insurers. In the United States, such conciliatory results probably would not occur. Instead, the entire controversy would be dominated by massive lawsuits, some of which would undoubtedly seek class relief.

This is not to say, however, that there are not strong undercurrents of discontent with current procedures for managing mass controversies in Europe and elsewhere. Traditional common law and civil code procedures are viewed by many authorities as inadequate, unfair and fraught with unnecessary cost and delay. For those reasons, many states now permit "group actions" which allow many claimants to aggregate their causes of action and which enable them to pursue those claims in single forum. Generally, these suits are designed to vindicate "diffuse public interests" such as consumer protection, unfair competition, and false advertising, instead of individual rights.

In most circumstances, these "group" actions are not truly "class actions" within the American understanding of the term. In "group actions," the plaintiffs must affirmatively join the case and agree to be bound by the result. Joinder can be accomplished in varying ways, such as being a member of an association which is then named as the plaintiff, or by transferring the individual claimants' rights to a named representative. Typically, these cases do not allow a party to be impressed into the case involuntarily, as in American class actions, subject only, in some instances, to a right to "opt out." This distinguishing characteristic of the American "class" device is generally unavailable under "group action" procedure. Moreover, many states restrict the utility of the "group action" to injunctive proceedings, as opposed to suits for money damages.

Among the common law nations, Canada truly follows the American class action model, including the availability of contingent fees to plaintiffs' class counsel. The class device has strong proponents in Canada, such as Professor Garry Watson of Osgoode Hall Law School of York University, who pointed out that class actions have resulted in a number of significant settlements in Canada of both large and small-scale commercial and tort disputes. Australia, with certain modifications, also permits class relief, although the success of plaintiffs in securing large-scale relief in Australian proceedings apparently has been somewhat inconsistent. The United Kingdom, however, does not recognize true "class" claims. Instead, it permits "group actions" and consolidations similar to those discussed above, albeit with significant limitations, including application of the "loser pays" principle to class litigants — a significant deterrent to aggregated claims.

Certain Scandinavian civil code countries, such as Sweden and Finland, appear to be more favorably disposed toward the American class action model, at least in consumer cases where large numbers of persons with small claims aggregate their claims to rectify a wrong that might otherwise go unredressed. In Sweden, for example, work has proceeded on a class action act since at least June, 1999, and a revised statute is expected to be introduced next year. The act's supporters believe that the social and legal differences between Sweden and the U.S. provide adequate safeguards against abuse and the "blackmail" effect of aggregating mass claims against defendants. The proposed Swedish act incorporates most of the major components of Federal Rule 23, but requires only "common issues" not a predominance of such issues, and allows the class action to proceed without a formal certification.

Although it appears that the Swedish act may be enacted, its opponents stress several important objections. For example, it appears that the Swedish statute will permit class counsel to enter into fee agreements which enhance their compensation if they prevail — agreements which, although subject to court approval, strongly resemble "contingent fees." The opponents are concerned that adding these entrepreneurial incentives plant the same seeds of abuse that ultimately produced the dangerous growth of mass tort class actions in America. More importantly, the opponents stress that the Swedish act, if passed, will burden Swedish courts with countless class actions filed under Swedish procedure against non-resident defendants by classes which include non-resident plaintiffs. In other words, the Swedish act creates the peril of the "European class action" in which the courts of one member country assume jurisdiction over controversies that involve and affect citizens throughout the continent. This scenario may be a real danger, especially since European courts typically do not recognize the doctrine of forum non conveniens. The risk is further compounded by Article 22 of the Lugano Convention, which grants jurisdiction over controversies affecting different states to the court in which the first action is filed. Arguably, if a class action is filed in Sweden under the proposed Swedish act, the Swedish court could acquire complete jurisdiction over the controversy, thereby disenfranchising individual plaintiffs who may prefer to sue elsewhere. This situation would be a strong incentive for "forum shoppers."

The Swedish proposal is an example, in microcosm, of the dangers of following the American class action model. The "blackmail" threat of American class action litigation, as that term is used by American courts, is already being felt outside the borders of the United States. The cases seeking class recoveries by Holocaust survivors and workers impressed into slave labor by the Third Reich have already had their desired effects. For example, even though the slave labor class claims have, to date, proved unsuccessful in U.S. courts, the German government recently orchestrated and implemented a comprehensive settlement of the controversy and, in the process, provided for billions of marks to be paid to laborers and millions of dollars to be paid to American class action lawyers. Germany created a special foundation that will pay up to $5 billion in compensation from a fund comprised of contributions from government and industry. The agreement was delayed by haggling over how much of the foundation's money should be paid to the American lawyers, who were hoping to secure large contingency fees, as is customary in class-action suits. Attorney payments were ultimately capped at $50 million, with two arbiters selected to make sure that any legal fees would not be exorbitant. Unfortunately, the victims themselves will only recover between $2,500 and $7,500 each.

It would be naive to presume that the threat of American class actions was not a major factor in the German government's decision. These claims have jeopardized German business activities even outside the context of the litigation, such as the merger between U.S. investment bank Bankers Trust and Deutsche Bank AG. Similar class action claims are currently pending against numerous Austrian companies. Recently, the Austrian Parliament recently approved a compensation fund exceeding $400 million to partially resolve the American class action claims. Apparently, neither the German nor Austrian governments nor their various defendant industries have any intention of seriously defending the American class actions in court, irrespective of their apparent lack of legal merit, in view of the social, political and moral pressures engendered by the lawsuits' allegations.

Although the Nazi-era claims raise particularly heinous allegations, it is not difficult to foresee how other allegations, such as those arising from mass torts, might produce similar results. In a real sense, these cases have transformed the American class action into an "International" proceeding, thereby allowing American private litigation to impact business and personal activities far beyond the borders of the United States — even though the impacted cultures might never empower their own courts to exert similar influences.

Presently, the power of these "international" class actions is primarily exerted through moral, political and diplomatic pressure. As a matter of law, it is questionable whether American class action judgments are actually enforceable against defendants' assets located outside the United States. The adoption of American-style class action rules in other nations, however, may render such judgments enforceable, at least in part. If such rules are adopted, foreign defendants may no longer be able to resist enforcement by arguing that the American class action is fatally dissimilar and fundamentally contrary to their homeland's legal principles and policies. Indeed, even without formal adoption of class action principles in other nations, American class action awards soon may be rendered enforceable by treaty. For example, enforcement might ultimately be permitted by the Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters — a critical agreement which is currently proceeding toward finalization and implementation.

If American class action judgments become enforceable against non-U.S. assets, can there be any doubt that entrepreneurial American lawyers will attempt to transform the United States the "Courthouse for the World?" Under such a scenario, the "long arm" of American justice may reach out to impact business practices on a global basis, thereby depleting the coffers (and regulating the conduct) of any entity "doing business" in the United States — irrespective of where the entity's coffers are located. The global consequences of this strategy should not be underestimated. If sovereign states, such as Germany, are currently bowing to U.S. class action pressures even without existing enforcement mechanisms, the threat of collectible judgments may prove overwhelming.

The political impact of enhancing the power of American jurisprudence in this manner is nothing less than imperialistic. Accordingly, any reforms which permit the proliferation of the class device, either procedurally or though enforcement of United States class action judgments, should be carefully scrutinized. Proposed reforms should be evaluated to ensure that by superficially enhancing access to justice, the reforms do not surrender currently exempt assets to a system which ultimately denies justice by exploiting the "blackmail" of oppressive aggregation. Clients doing business in the global marketplace should consider these risks before blindly endorsing uniform legal principles and dispute resolution procedures. Otherwise, what are now perceived as global opportunities may translate into global liabilities — liabilities assessed by American juries and judges in remote forums which may prove utterly insensitive to foreign cultures.