Posted by: nplblog | 6th May, 2015

Waiver of Class Actions — Keith Hylton

Post by Keith Hylton

Waiving or agreeing pre-dispute to arbitrate a potential legal claim has always been a controversial topic in tort law. It’s especially controversial in the class action setting, since the Supreme Court’s decision in AT& T v. Concepcion, 563 U.S. 321 (2011) (holding that the Federal Arbitration Act preempted California’s application of unconscionability doctrine as a bar to the enforcement of an agreement prohibiting class-wide arbitration). In a piece forthcoming in the Supreme Court Economic Review I examine the question whether class action waivers should be enforced. Here is the SSRN version.

To answer this question, it is helpful to start by asking whether society’s welfare can ever be enhanced by allowing pre-dispute litigation waivers. The answer is yes. Society benefits from the threat of litigation, because the threat induces potential tortfeasors to take care. But that benefit is not ever-increasing. In particular, there is a cost associated with it, the cost of litigation. If the value of the “deterrence benefit” is less than the cost of litigation, then the threat of litigation actually reduces society’s welfare (after netting out the litigation cost). A litigation waiver may be socially desirable in this case.

In the standard one-on-one litigation scenario, if potential tort victims can accurately evaluate the prices they should charge for waivers, then waivers definitely enhance society’s welfare. This is for the same reason that any contract enhances society’s welfare: both sides gain.

The class action scenario is different. First, assume we are talking about a setting where the class action is the only way a lawsuit will be brought, because the per-victim reward is too law to economically justify a lawsuit. In this case there is a class action viability threshold, a number of victims below which the class action is no longer economically viable. If the number of non-waiving victims falls below the viability threshold, no class action will be brought.

Now, something interesting is observed in the class litigation scenario. It is possible for fully-informed potential victims to waive and thereby push the class size below the viability threshold. And once that happens, the victims are at the mercy of the injurers, because they will no longer have a credible threat to sue.

It follows that waivers can be harmful even with fully informed potential victims in the class action scenario. However, this is not a sufficient reason to ban class action waivers. Under a wide set of scenarios, the class action waiver can be efficient, just like the individual one-on-one waiver. If courts are going to try to restrict class action waivers, as some have scholars have urged, they should try to leave the door open for efficient waivers.

 

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