Posner on class actions: Minuscule damages shouldn’t doom cases

September 11, 2013

Reading opinions by Judge Richard Posner of the 7th Circuit Court of Appeals is like jumping waves in a calm ocean. You bob along in the buoyancy of Posner’s ideas until you turn around to face shore and wonder how you drifted so far from where you started. So it is in an 11-page ruling Tuesday, addressing whether a class of ATM users may be certified to seek statutory damages under the Electronic Funds Transfer Act for a tiny defendant’s failure to post stickers notifying users of ATM fees. As you know, these are more turbulent waters than they first appear, roiled by uncertainty about constitutional standing and appropriate classwide relief. Posner’s prose nevertheless carries you along so forcefully that you don’t even notice until you’re done that he has deposited you in a land where all the rules are Posner-made.

Okay, I’m exaggerating. But once again, the iconoclastic appellate judge has issued an important opinion on consumer class actions that reflects his vision, as an economic rationalist, of the potential efficiencies of resolving hundreds or thousands of individual claims with a single proceeding. He did it last month when, on remand from the U.S. Supreme Court, he and two 7th Circuit colleagues recertified a class of Sears washing-machine purchasers for the purposes of determining whether Sears is liable for a design that supposedly results in a moldy odor. Sears has called the ruling “judicial fiat.” In the new opinion, Posner and his fellow 7th Circuit panelists Daniel Manion and Diane Wood urge trial judges to use common sense in deciding whether to certify a consumer class seeking statutory damages, focusing on realistic solutions and not hypothetical problems.

The case is another in the spate of class actions filed against banks that supposedly failed to comply with the ATM law’s requirement that they not only notify users of add-on charges with an on-screen alert after users have begun their transactions but also provide advance warning of fees on the ATM machine itself. (That requirement has since been dropped in an amendment to the law.) Congress called for individual damages of between $100 and $1,000, but also anticipated class actions in which total damages could amount to $500,000 or 1 percent of the defendant’s net worth, whichever is less. In the class action before Posner, a class brought claims against the ATM operator Kore, which owned ATMs in two Indianapolis bars frequented by college students. U.S. District Judge Jane Magnus-Stinson of Indianapolis first certified the class based on 2,800 transactions at the two ATMs but later changed her mind for two reasons. With maximum classwide damages of $10,000 because of Kore’s small net worth, she said, class members might be better off suing individually for at least $100. She was also concerned that potential class members couldn’t be properly notified about a $10,000 settlement because it would cost so much to figure out who they were based on banking records.

Class counsel at Travis & Calhoun and The Frasher Law Firm asked the 7th Circuit to review the decertification ruling, arguing that Magnus-Stinson’s reasoning would gut class actions based on consumer protection statutes, many of which are fashioned with similar caps on classwide damages. Kore’s lawyers at Metzger Rosta did not oppose the appeal and did not submit a brief in opposition. (They also did not return my call.) Posner grabbed the opportunity to “further the development of class action law regarding issues of notice in cases in which the potential damages per class member are very slight, and the suitability of class action treatment of such cases.”

His opinion first considered Judge Magnus-Stinson’s finding that class members might do better to sue on their own for statutory damages of $100. (Posner said it was improbable they could seek more because Kore charged a small ATM fee.) What lawyer would bring a suit for $100, even in the anticipation that the defendant would have to pay fees? No reasonable and competent lawyer, according to Posner, who also noted that lawyers have not brought individual actions seeking statutory damages for violations of the ATM law.

So the only realistic way of enforcing the consumer protection law, Posner said, is a class action. “The smaller the stakes to each victim of unlawful conduct, the greater the economies of class action treatment and the likelier that the class members will receive some money rather than (without a class action) probably nothing, given the difficulty of interesting a lawyer in handling a suit for such modest statutory damages,” he said. He added that it’s not realistic to require individual notices to be sent to class members whose potential recovery is about $3.57. Courts have to be careful not to curtail class members’ right to sue for individual damages, he said, but they have to be reasonable as well. In a case like this, Posner said, where the potential recovery is extremely limited and the cost of identifying individual claimants is relatively high, it’s reasonable to post notices of the settlement in the bars where the ATMs were located. (Posner said this case calls for a cy pres settlement, noting that he doesn’t have to enter the appellate discussion of appropriate standards for such awards because it should be easy for the parties to identify a consumer protection charity whose interests align with those of the class.)

More importantly, the facts of the ATM dispute led Posner to a profound question about class actions: “Should (they) be permitted when the stakes, both individual and aggregate … are so small – so likely to be swamped by the expense of litigation – as they are in this case?” According to Posner, the answer is yes. “We don’t think smallness should be a bar,” he wrote. “A class action, like litigation in general, has a deterrent as well as a compensatory objective.” Clearly, Congress intended the goal of deterrence when it included provisions on classwide recovery in the ATM law. If the class succeeds in obtaining a settlement with Kore, Posner said, the case will further that goal, even if most of the pain to Kore comes in the form of fees for class counsel and not recovery for the class.

I’m not sure I agree with Posner on that. I’ve recently questioned whether defendants ought to fight harder to discourage plaintiffs lawyers from bringing class actions in which class members’ potential recoveries are so miniscule that the cases can’t be settled except with cy pres awards. (Remember what I said at the top about being adrift under the force of the judge’s reasoning?) But this 11-page decision, including Posner’s dicta on what constitutes a legitimate case, is now precedent in the 7th Circuit.

Class counsel in the Kore case, Eric Calhoun, told me Posner got things exactly right, unlike courts that are disposed to restrict the use of class actions. “This is a nice, fair opinion,” he said. “He sees the efficiencies involved in class actions, he gets it as far as the reasons for Rule 23.” There’s no question that Congress intended for consumers to be able to sue as a class for violations of the ATM law, Calhoun said, and Posner simply called for judges to use common sense when they decide whether to certify a class. “That’s what judges are supposed to do,” Calhoun said. “Too often you find courts not enforcing the laws written by Congress because of their interpretation of Rule 23.”

(Reporting by Alison Frankel)

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