Class Actions As Firms

Sunday, April 9th, 2017 at 1:52 pm by Alex Atticus Parkinson

Alex Atticus Parkinson, Class Actions As Firms, 2016 Colum. Bus. L. Rev. 741 (2016).

Class action literature is fixated on principal-agent problems—a near-singular focus that has largely been tracked by the courts, which frequently treat the class action mechanism as a Pandora’s box of agency costs. The ascent of the “principal-agent framework” is unsurprising. The divide between class members and class counsel gives rise to a host of classical principal-agent problems: self interested class counsel often have incentives to act contrary to the interests of class members, and class representatives are poor monitors of such behavior. However, the hegemony of this framework can misguide courts, which not only aggressively regulate genuine principal-agent problems, as they should, but also regularly constrain the size and scope of class actions without explaining why doing so mitigates agency costs. That said, the principal-agent framework rests on an often-assumed, important, and inarguable foundation: principal-agent problems arise because class actions separate ownership (litigation interests belonging to class members) from management (class counsel). This Article refracts the frame of analysis by one degree—from the principal agent framework to Coasean firm analysis. Descriptively, the class action is a like firm. Class actions are, like firms, comprised of ownership interests that aggregate to avoid the higher costs of acting alone in the market, cede control to a manager to achieve efficiencies, and operate pursuant to a profit motive. Moreover, like a firm, there is a natural—almost organic—limit to the growth of a class action: it will expand until litigating outside the class action would prove less costly than additional “growth.” This Article’s “firm framework” is consonant with the most useful components of the principal-agent framework—those that rest on the separation of ownership and management—yet breaks with the traditionalist account in important ways.

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