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One of the most intense political and legal battles of the last decade has been the effort to rein in class actions. Corporate leaders have demanded it; lawmakers have debated it; different parts of the legal community have either denounced it or delighted in it. And despite the passage of the new Class Action Fairness Act, which does provide needed reform, the jury is still out on how effective the new law will be in combating frivolous and misplaced lawsuits. Whether CAFA will provide corporations with meaningful protection from lawsuits that should be filed as individual claims or resolved outside the class action process is speculative at best. Given this uncertain environment, corporations are well-advised to take steps to identify litigation risks and to develop strategies to protect their corporate credibility, their long-term assets, and especially their most valuable asset, their reputation. THE PLAYBOOK LIVES ON Expanding federal court jurisdiction to include a plethora of cases that would otherwise be litigated in state court injects a far greater degree of judicial independence into the class action process. Forum shopping for “friendly” jurisdictions will not be as easy. CAFA, however, does not directly curb the plaintiffs bar “playbook,” a collection of strategies and tactics including robust plaintiff recruitment, active engagement in the court of public opinion, useful relationships with Wall Street insiders, and other techniques that animate their cases vividly. Unfortunately, this process has led to many perversions in class action litigation, and CAFA alone cannot dismantle the blueprint that has led to billions of dollars in awards and settlements for the plaintiffs bar. In fact, CAFA may create the need for greater use of the playbook, because lawyers will now be screening cases more carefully to make sure, whenever possible, that the cases they take will resonate in the court of public opinion. Remaining intact are dozens of firms that are recruiting stations for the larger class action specialty firms. When it becomes apparent to these firms that their clients’ claims may either form the basis for class action or fit into an existing pool that may be already seeking class action certification, the referral process can be automatic. These firms simply do not have the financial resources to handle contingency cases that may take years to settle or litigate, nor do they have the fire-power of the best trial lawyers in America. These smaller firms generate substantial referral fees by handing off plaintiffs to the elite group of firms that have the resources, both financially and experientially, to take on some of the biggest companies in the world. Because CAFA will likely impose a far greater degree of selectivity in class actions, these smaller firms will play an even more important role, as they provide the arms and legs for reaching a national class of worthy plaintiffs. Also left untouched is the industry of private companies that fund civil litigation and buy discounted equity stakes in its outcome. The LawFinance Group, Case Financial, and Linsure Management Limited are a few of the many companies that furnish lawyers with the financial endurance to see cases through trial. These firms, too, will be more selective in choosing the cases in which they invest, but they continue to provide needed capital for many large cases, particularly in appellate courts where many law firms have already exceeded their budgets. Finally, the American tort system remains unchanged. And while CAFA will probably force most class actions into federal court, there is an abundance of state statutory schemes, including the Illinois Consumer Fraud Act and many others like it, that will continue to fuel class actions even in the wake of CAFA. Historically, federal legislation has not been a bar to the ingenuity of enterprising lawyers. In 1995, Congress passed the Private Securities Litigation Reform Act, which was designed to limit the scope of class actions involving securities fraud. The legislation was intended to stymie efforts of high-profile plaintiffs firms � Milberg, Weiss in particular � by imposing significant investigative hurdles on the process. Judges would not allow discovery to begin until and unless due diligence was completed. It was believed at the time that requiring the demonstration of corporate fraud would entail an inherently substantial allocation of resources and thus would slow down the plaintiffs’ securities litigation machine. This financial deterrent was Congress’ attempt to fire a silver bullet at frivolous securities litigation. Despite congressional intent, however, Milberg, Weiss used the legislation strategically and advantageously: first, because the firm had the resources to conduct lengthy investigations, and second, because it also had the strategic savvy to capitalize on the publicity associated with the legislation by dramatizing the cases of sizable institutional investors who could demonstrate larger “theoretical” damages. Paradoxically, then, the measure actually enabled the firm to pursue these cases and ultimately made it easier for the best plaintiffs firms to increase profit margins from shareholder derivative suits and other securities litigation. Many states’ regulatory schemes also continue to lend themselves to the filing of national class actions. Under the Illinois Consumer Fraud Act, for example, plaintiffs do not have to prove reliance on a company’s product representations to establish a claim for misrepresentation and fraud: It is sufficient merely to demonstrate that misrepresentations were made about a product or service. The ICFA certainly affords strong legislative protection for consumers, but the danger within it, and other statutes like it, is its vulnerability to exploitation. WIGGLE ROOM Lawyers have offensively used the “wiggle room” that is a byproduct of many of these statutes to bring product-based lawsuits that can and have secured headlines, but do not provide the individual consumer with any real damage award. These cases tend to be claims for misstatements of a product’s capability or contents. For example, a class action was filed against one of the largest producers of jelly preserves because the company allegedly misstated the “fruit contents” of the product. While the allegation may have had some basis in fact, paradoxically, class action litigation by its very nature overstates the injury to the individual consumer. And it is precisely this category of claims that the sponsors of CAFA hope will be resolved in a more appropriate and cost-efficient manner. In a similar vein, a number of corporate consumer fraud cases have been brought successfully based on representations about a product’s capability that stem from inherent or systemic difficulties in measuring the product’s performance with mathematical precision. In the Pentium 4 litigation, for example, a variety of personal computer manufacturers were sued for making claims that the Pentium 4 processor was superior to earlier versions. These suits contained allegations that the speed of certain computer functions did not comport with the manufacturer’s performance measurements. In many challenges concerning product descriptions, particularly in a highly innovative business like technology, two factors are often present: The alleged “misrepresentation” is indiscernible to the individual consumer, and the performance measurements manufacturers provide require at least a minimal degree of rounding in order to keep research and development costs � and thus the eventual price of the product � at a level that consumers will tolerate. Again, the remedial use of class actions in these cases imposes a far greater degree of cost and comparably little return for individual consumers than alternative means of redress for bona fide claims. THE NEXT TOBACCO CASE Given the legacy of many state statutory schemes, plaintiffs’ class action litigation, on this basis alone, purports to be a profitable business in moving forward. Although CAFA may cause some consolidation among law firms, the feeder firms become even more important for identifying ripe plaintiffs for referrals; the investment firms will be more selective with equity placements, but will likely remain in the game given the returns they have enjoyed in this category; and the plaintiffs bar will go deeper into the sinews of corporate America to search out the next tobacco litigation. The preoccupations of a number of influential sectors also support conditions favorable to class actions. The media continue to provide prominent coverage of allegations of corporate wrongdoing, Wall Street punishes stock prices during litigation, short-sellers actively seek out the next profit opportunity that arises from litigation, and regulators keep a watchful eye on the buzz. Amid those realities, trial lawyers have more incentive than ever to use the proven track record of their playbook. Trial lawyers recognize that most corporations have historically stood almost mute in the face of litigation, whether or not the claims are meritorious (and many are). In the context of this silence, everything is at stake, including business assets, stock price, employee morale, and corporate reputation. Unless and until corporations realize that, CAFA or not, this mode of operation yields disastrous results, trial lawyers have every reason to try cases in the court of public opinion. One method for combating the surviving legacy of the “old” class action system is referenced in CAFA itself � innovation. Congress was compelled to pass the legislation, among other reasons, to “benefit society by encouraging innovation.” This phrase contemplates a desirable business environment in which companies’ risk-taking and edgy product development will not give way to the potentially punitive consequences of proliferating class actions. The notion of innovation, however, should not only describe a legislative aspiration for business, but should also serve as a catalyst for an innovative dialogue about what matters most to corporate America � its business and its reputation. Corporations must now have their playbook, and transparency should be the guidepost for it. Sloganistic transparency will not work; the plan must include an engaged dialogue with critical stakeholders and the public about risk and the process by and through which critical business decisions are made. Letting the threat of litigation stymie this dialogue is counterproductive. It is the perceived secrecy of corporate America that arouses the interest of everyone � including lawyers and regulators. Class litigation, like any other operational business risk, should be factored into business planning affirmatively. American business must respond with at the least the same vigor to CAFA as does the plaintiffs bar. RISK MANAGEMENT Just as the Sarbanes-Oxley Act set in motion a flurry of activity on systems design for financial reporting and operational risk management, so CAFA should be a catalyst for reputational risk management. The financial stakes are equally high. For at least the past two decades, the trial bar has recognized that corporate reputation is the most prized asset of any business; yet corporate America has done comparably little to protect it in advance of or during litigation. Here are some precepts for action: • Systems should be developed that regard reputational risk management, specifically in the context of litigation, as a fundamental business exercise. An interdisciplinary team should be formed within each corporation to identify litigation risks and then to create the blueprint for confronting them on a proactive basis. This exercise runs the gamut from product or service refinement to effective communications to the education of critical stakeholders. • Plans must clearly identify the constituencies or stakeholders that matter most to a particular litigation risk, understand their likely questions and concerns, and develop systems to communicate with these stakeholders “early and often.” In many cases, research is required to ensure accuracy in anticipating risk and stakeholder concerns before litigation or other crises emerge. Pharmaceutical companies, for example, are providing much more information during product testing and after products are approved. Consumers are now far better equipped to make informed decisions about the medications they take. This “dialogue” with the patient diminishes risk. • In order to consider reputational risk management a success, companies should develop fluent messages buttressed by proof points on each issue, and communicate with their constituents directly and proactively. Waiting for the class action certification motion to be filed can never be a precursor for undertaking a reputational risk management program. • A plan should always include a networking capability designed to find common cause with other businesses that may share a particular risk exposure. Whenever companies observe systematic abuses of statutory intent, a powerful lobby can be created to press for needed legislative reform. A risk management capability is a deterrent to flimsy claims and a key element of corporate self-defense in the context of strong legal challenges. With a comprehensive policy in place, companies will be far better positioned to litigate cases in which there is no other option, and where litigation is less costly and more palatable to key stakeholders. By showing their opponents the strength of their position and resolve, potentially vulnerable institutions can deflect their adversaries and cause them to look for other targets. Harlan Loeb is the Chicago-based U.S. director of the litigation practice at Financial Dynamics, an international business communications consultancy, and an adjunct professor of law at Northwestern University Law School.

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