31 August 2017Print This Post

Class actions do have deterrent effect, academic finds

US Supreme Court: rulings had deterrent effect

Class actions do have a deterrent effect in reducing corporate misbehaviour, a US academic has found.

Brian T Fitzpatrick, professor of law at Nashville’s Vanderbilt University, said some critics claimed that the theory of deterrence could not be applied to class actions.

He said academic studies on the impact of class actions in the US were “not numerous” but they were “unanimous” in finding that “the threat of a lawsuit deters misconduct”.

Professor Fitzpatrick said class actions were “not known” for their success in delivering compensation to claimants, and although sometimes they did it well, “in the run-of-the mill case, only a small percentage of victims are made whole”.

He went on: “None of this has bothered me or many other scholars because we have always pointed to the deterrence virtue of the class action, arguing that alone is enough to justify the class device.

“In recent years, however, critics have begun arguing that class actions may not even offer us any deterrence. This is a change from the usual complaint critics make about class actions and deterrence: that they deter too much.”

The professor said some critics even argued that the “entire theory of deterrence” was inapplicable to class actions and whatever the theory, there was no “empirical proof” that they did what the theory said.

However, in a research paper entitled Do Class Actions Deter Wrongdoing?, Professor Fitzpatrick cited four studies, covering different types of class action, which had all found that they deterred misconduct.

Two of the class action studies assessed the impact of a US Supreme Court decision in 2010 to insulate some foreign companies from American securities fraud class action lawsuits. Under the securities fraud laws, it is illegal for companies to misrepresent or hide relevant information from shareholders.

Both studies found that, without the threat of a class action lawsuit, the companies disclosed less information to their shareholders.

A further study examined disclosures to shareholders from 1996 to 2010, attempting to compare disclosure by companies regarded as at a “higher risk” of class actions, because of their size or industry or “a host of other variables”, with those at lower risk.

“They found that companies at higher risk of being sued disclosed more information to shareholders, updated their disclosures more often, and rendered those disclosures in more readable language than companies at lower risk.”

A fourth study looked at what influenced corporate decisions to misrepresent earnings to shareholders from 1997 to 2008.

“Did the fact that a company got sued in a securities fraud class action for earnings manipulation discourage other companies in that same industry or geographic region from manipulating their own earnings?

“Here again, after controlling for numerous other variables, the authors concluded that the answer was ‘yes’: class actions deter misbehavior.”

Professor Fitzpatrick said there were numerous studies of other lawsuits, which for “decades and decades” had corroborated what the class action studies showed – that the threat of legal action deterred misconduct.

Among the examples of findings he gave were that when compensation increased for workplace injuries, there were fewer workplace deaths, and when liability for medical negligence decreased, less time was spent on patients and deaths followed.

Studies of tort reform and traffic accidents found that when liability for accidents decreased, there were more accidents.

Professor Fitzpatrick concluded that the theory of deterrence was “still sound” and there was “empirical evidence to support it, both for class actions as well as other lawsuits”.

By Nick Hilborne

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