The Class Action as Trust

TLDR: In this paper, the authors pointed out that the lack of direct control of the class members in a class action is a defining feature of the trust and that the trust can be used as a more useful model for the class action than the corporation.

Abstract: IntroductionThe class action is one of the most controversial procedures in civil litigation.1 This is because the class action allows the class attorney to litigate and settle the claims of the class members without their consent.2 Courts and scholars have expressed concern that the class attorney may enter into suboptimal settlements to the detriment of the class members3 or fail to treat the individual class members fairly.4Many scholars have looked to the law of corporations to address the potential for abuse by the class attorney. Some scholars have directly analogized the class action to a corporation or similar entity.5 Others have used the literature on agency costs in corporate law.6 Generally, these scholars have argued in favor of opt-out rights for class members in class actions involving damage claims. Analogizing the class members to the shareholders in a corporation, they have argued that opt- out rights allow class members to assert some control over their claims, and thus provide a check against a potentially disloyal class attorney.7 They have also argued in favor of avoiding significant class conflicts to prevent unfair treatment of some class members over others.8 The law on class actions has generally mirrored the proposed reforms of these corporate law-influenced scholars, requiring opt-out rights for damage class actions9 and that such class actions can only be certified if the class is "sufficiently cohesive."10The turn to corporate law, particularly its literature on agency costs, has significantly influenced class action scholarship.11 In fact, the American Law Institute's recent Principles of the Law of Aggregate Litigation uses the agency cost literature in the corporate context both to support opt-out rights in class actions involving damage claims and to recommend against the certification of such class actions when "structural conflicts" exist.12However, these reforms have had disastrous results for class actions involving damage claims. Even supporters of opt-out rights have conceded that such rights can cause collective action problems, which undermine beneficial settlements.13 Moreover, the class cohesion requirement has made it difficult to certify even litigation involving small claims because in many cases, the claims lack "some glue holding" them together.14 This is ironic because the Supreme Court has stated that "[t]he policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights."15In analyzing the agency costs that may arise between the class attorney and the class members, scholars have ignored the trust and its unique features.16 In part this is because scholars have tended to lump together all organizational forms that separate ownership and control rights.17 Moreover, the scholars who have applied the corporate law literature on agency costs to the class action context are also corporate law scholars.18 Finally, the trust has only recently been subject to functional analysis by scholars.19But in ignoring the trust, scholars have overlooked a more analogous organizational form to the class action. For example, although scholars and courts have bemoaned the lack of direct control the class members can exercise over the class attorney, a similar lack of direct control is a defining feature of the trust.20 This lack of direct control distinguishes the trust from the corporation, which allows shareholders to choose corporate directors and officers.21 In addition, despite the prohibition on conflicts among class members, conflicts are pervasive in all class actions,22 and unlike corporate law, trust law uniquely facilitates the creation and maintenance of trusts with beneficiaries who have conflicting interests.23 These shared features of the class action and the trust provide a clue that the trust, rather than the corporation, may serve as a more useful model for the class action. …