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When Taline Soualian bought a cup of coffee at The Coffee Bean in January 2007, she may not have expected it to be her path to riches. But the tiny numbers on her receipt turned out to be a legal lottery ticket: The receipt, you see, had not only the last five digits of her credit card number, but also the expiration date — in violation of a federal law that only allows businesses to print the last five digits, but nothing else. Of course, nobody could possibly steal Soualian’s identity or buy anything in her name using just five digits of her card number and the forbidden expiration date, but the federal Fair and Accurate Credit Transactions Act, or FACTA, sets statutory damages of between $100 to $1,000 per violation, so Soualian and her lawyers filed a multimillion-dollar class action against the owners of The Coffee Bean. The company stands to lose as much as $48 million, not counting punitive damages that could be 10 times as much. All this for an accidental infraction of the law that the company fixed in two days after they were notified, and that even Soualian’s lawyers don’t claim actually injured her in any way. This case might seem like another dreary instance of jackpot justice, but it is actually one of at least 15 almost identical lawsuits filed in California’s federal courts in just the past two years, all seeking enormous damages from businesses that accidentally printed expiration dates on credit card receipts. In nearly all these cases, district courts have refused to certify the proposed classes, on the grounds that the infractions are so minute and the damages demanded so unreasonable, that class status would not be “superior,” as Federal Rule of Civil Procedure 23 requires class actions to be. But that conclusion is controversial. Although Rule 23 provides that trial judges must decide whether “a class action is superior to other available methods for fairly and efficiently adjudicating the controversy” before certifying a proposed class, the U.S. Supreme Court declared in Eisen v. Carlisle & Jacquelin (1974) that courts should never look at the merits of a case when making its certification decisions. In later cases, the Court acknowledged that “the class determination generally involves considerations that are �enmeshed in the factual and legal issues,’” and therefore that judges should take a “close look” before deciding whether class status is “superior.” And several appellate jurisdictions, including the U.S. Court of Appeals for the 9th Circuit, have found that where defendants face “horrendous, possibly annihilating punishment” for minor or accidental violations of the law, class certification should be denied. But the Eisen case has never been overruled, and many other decisions have declared that trial courts should only evaluate the procedural efficiency or other logistical matters, and not the content of the dispute, when making that judgment. These cases hold that the facts should only be considered later in the case, when the parties move for summary judgment or finish presenting their evidence. FORMALISM VS. REALISM Now that the Soualian case has been appealed to the 9th Circuit, the judges will have to confront the question of whether the facts of a dispute can count for or against the “superiority” of class status. The dispute is a classic example of what last century’s legal scholars would have called a confrontation between formalism and realism. The formalistic rule is that facts matter only when making judgments about liability. But the realistic fact is that in major class actions, class certification operates as a de facto guilty verdict. When a class is certified, businesses face the risk of such enormous losses that they are pressured into giving up even meritorious defenses and settling for cash on the barrel head, even if the case is frivolous. Given the enormous stakes of a class certification decision, it makes little sense to force trial courts to make that decision while blinding themselves to the possibility that a lawsuit is frivolous. After all, the word “superior” means preferable or desirable, and there is nothing desirable about a plaintiff filing a frivolous case, formalistically satisfying the class status requirements, and then twisting a defendant’s arm into a settlement that violates common sense and justice. As professor Milton Handler put it 35 years ago, “Any device which is workable only because it utilizes the threat of unmanageable and expensive litigation to compel settlements is not a rule of procedure — it is a form of legalized blackmail.” DUE PROCESS Along with its lack of basic fairness, the certification of such abusive lawsuits also raises questions of due process. Since the Supreme Court has made clear that disproportionate punitive damages awards violate the due process clause, the certification of a class action case that threatens such safeguards is also not “superior” under Rule 23. In the famous Napster case in 2005, U.S. District Judge Marilyn Hall Patel granted class certification despite the defendants’ argument that the enormity of the requested damages threatened their due process rights. She found that there was no difference between whether the damages were obtained through a single class action or through myriad individual suits by record companies. But class action treatment actually increases the danger of an excessive damages award. Legal scholars Kenneth Bordens and Irwin Horowitz have pointed out that aggregating claims in a class action can influence juries and judges, increasing the chances of a defendant being found liable and increasing the size of damage awards. As the 5th Circuit has concluded, class certification can “skew trial outcomes.” Judge Patel was wrong that the sum of damages will be the same if a case is brought as a class action lawsuit or as a collection of individual suits. The evidence shows that granting class status often influences the result. JUDGED BY RESULTS A century ago, Roscoe Pound warned that the law “must be judged by the results it achieves, not by the niceties of its internal structure; it must be valued by the extent to which it meets its end, not by the beauty of its logical processes or the strictness with which its rules proceed from the dogmas it takes for its foundation.” To require trial courts to ignore the frivolous nature of a case or the disproportionality of damages when certifying classes will mean that most business defendants will cry “uncle” and sign exploitative settlement agreements long before they get a chance to be vindicated on the merits. Giving trial judges the tools they need to safeguard defendants from frivolous lawsuits would not only protect businesses from unjust lawsuits and consumers from higher prices; it would also safeguard the courts from being cynically exploited by opportunistic plaintiffs.
Timothy Sandefur is the lead attorney in the Free Enterprise Project at the Sacramento, Calif.-based Pacific Legal Foundation, which filed an amicus brief in the Soualian case. This commentary first appeared in The Recorder , an ALM publication.

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