The intersection between law and economics was once again the focus of an important recent class action ruling by the U.S. Court of Appeals for the Seventh Circuit. In Hughes v. Kore of Indiana Enterprise, Inc., the court held that class certification may be proper even if the potential maximum recoveries by the class as a whole and individual class members are very small—even less than the cost of the litigation. The opinion was authored by Judge Richard Posner, one of the country’s most influential jurists.
The Hughes case was brought under the Electronic Funds Transfer Act (EFTA), and it alleged that the defendant's two ATMs did not have the posted fee sticker as was formerly required under the Act. The district court had initially certified a class, but later decertified it for two reasons: class members could potentially recover more money by bringing individual suits, and the ATM users' names were unknown, so individual notice to class members could not be provided.
Under the EFTA, the class recovery is limited to the lesser of $500,000 or 1 percent of the defendant's net worth. Since the defendant's net worth in Hughes was only $1 million, the maximum class recovery was just $10,000, and the maximum recovery for each of the 2,800 class members was only $3.57. By contrast, in an individual suit under the EFTA, a plaintiff who prevails is entitled to recover at least $100 in statutory damages.
The Seventh Circuit found, however, that it was not "realistic" to expect individual lawsuits because of the difficulty of finding a lawyer willing to file a suit for just a $100 recovery. As Judge Posner observed, "The smaller the stakes to each victim of unlawful conduct, the greater the economies of class action treatment and the likelier that the class members will receive some money rather than (without a class action) probably nothing, given the difficulty of interesting a lawyer in handling a suit for such modest statutory damages."
The court held that class actions should be permitted even when the stakes, both individual and aggregate, are very small, and indeed less than the expense of the litigation. Class treatment is appropriate, Judge Posner wrote, despite a potentially "meager" classwide recovery because "a class action, like litigation in general, has a deterrent as well as a compensatory objective."
The court suggested that since the prospect of recovering less than $4 in damages would not incentivize class members to bother submitting claim forms, the best solution may be a "cy pres" decree, under which money goes to a charity "if distribution to the class members is infeasible." As Judge Posner put it, "a foundation that receives $10,000 can use the money to do something to minimize violations of the Electronic Funds Transfer Act; as a practical matter, class members each given $3.57 cannot."
The Seventh Circuit also held that the trial court erred by decertifying the class because of its concerns over notice. Even though the class members' names and addresses were unknown, precluding the mailing of individual notice, the court held that it would suffice to place sticker notices concerning the lawsuit on the two ATMs in question, and also publish the notice in the local newspaper and on a website. While this might result in many class members being unaware of the class action and their right to opt out of the class, this risk was offset by the reality that no class member "has a damages claim large enough to induce him to opt out and bring an individual suit for damages."