Free-rider Problem in the Context of
Collective Actions under WAMCA
Student: Hama Othman Student number: 12334405 Master track: Law & Finance
Supervisor: prof. dr. A.M. (Alessio) Pacces Date: 17 July 2019
Abstract
On 19 March 2019, the Dutch Senate approved legislation amending the current collective action regime, making it finally possible to claim monetary damages in collective action proceedings on an opt-out basis. However, scholars have already voiced their criticisms regarding the Act on the Resolution of Mass Claims in Collective Action (Wet Afwikkeling Massaschade in Collectieve Actie, WAMCA) which is expected to enter into force in 2019. Scholars have argued that the free-rider problem under WAMCA may make it extremely difficult for Art. 3:305a-Organizations to consider initiating collective actions at all. Therefore, the research question of this thesis is: to what extent could the free-rider problem impede the effective functioning of WAMCA and how could this problem be overcome? After examining the proposed collective action regime, it is clear that the free-rider problem can have a significant negative impact on the effective functioning of WAMCA. Therefore, two recommendations are proposed to mitigate this problem: the introduction of a U.S.-style common fund doctrine and the limitation of margin of discretion of the court regarding the reasonableness test pursuant to art. 7:907(3)(b) Dutch Civil Code.
Index
Chapter 1 – Introduction
4Chapter 2 – Free-rider problem
72.1 Introduction 7
2.2 Meaning and consequences of the free-rider problem 7
2.3 Judicial system and the free-rider problem 8
2.4 Overcoming the free-rider problem 10
2.5 Interim conclusion 11
Chapter 3 – WAMCA
123.1 Introduction 12
3.2 Legislative history 12
3.3 Collective actions under WAMCA 14
3.3.1 Admissibility requirements 17
3.3.2 Costs of a collective action 18
3.4 Free-rider problem in the context of WAMCA 19
3.5 Interim conclusion 23
Chapter 4 – Class actions in the United States
244.1 Introduction 24
4.2 History of U.S. class actions 24
4.3 Structure of the U.S. class action system 24
4.3.1 Certification phase 25
4.4 Initiating class actions 26
4.5 Class actions and the free-rider problem 28
Chapter 5 – Recommendations
315.1 Introduction 31
5.2 Common fund doctrine 31
5.2.1 Objections 32
5.3 Limiting margin of discretion of the court 33
5.3.1 Objections 35
5.5 Recommendations 35
5.6 Interim conclusion 36
Chapter 6 – Concluding remarks
37Chapter 7 – References
39Chapter 1 – Introduction
On 19 March 2019, the Dutch Senate approved legislation amending the current collective action regime, making it finally possible to claim monetary damages in collective action proceedings on an opt-out basis. The goal of the Act on the Resolution of Mass Claims in Collective Action (Wet Afwikkeling Massaschade in Collectieve Actie, WAMCA)1 is, inter alia,
to make the settlement of a collective action more attractive by improving the quality of class representation, coordination of collective actions, and providing more finality.2 Although the
date of entry into force of WAMCA has yet to be announced, the new provisions will apply to any collective action initiated after WAMCA has taken effect relating to events giving rise to damages which occurred on or after 15 November 2016.3
Apart from making it possible for injured parties from mass damages to collectively claim monetary damages in collective action proceedings, WAMCA introduces new stringent admissibility requirements for the so-called “Exclusive Representative(s)” (Exclusieve
Belangenberharigers) representing a class. Among other things, these Exclusive
Representatives must be a legal person, and either be in the form of a non-profit foundation or association. Furthermore, stringent governance, representativeness, transparency and funding requirements found in art. 3:305a(1)-(3) of the Dutch Civil Code (Burgerlijk Wetboek, DCC) must be satisfied before a legal person can be found admissible to represent a certain class.
These new admissibility requirements, which with a few exceptions4 apply to every collective
action falling under the regime of WAMCA, have been introduced to ensure that the interests of the class are properly safeguarded. However, legal scholars have already voiced their criticism regarding some of the requirements and the way they will function. Tzankova, for example, notes that, among other requirements, the representativeness requirement has the effect of turning the opt-out collective action regime into a de facto opt-in regime.5 It has been
argued that this functional change coupled with, inter alia, the fact that the new act appears to
1 Wet van 20 maart 2019, Stb. 2019, 130.
2 Kamerstukken II 2016/17, 34608, 3, 1 and 6-7 Explanatory Memorandum (Memorie van Toelichting, MvT). 3 Art. 119a Transitional Act on the New Civil Code (Overgangswet nieuw Burgerlijk Wetboek, OnBW). 4 Art. 3:305(6) DCC.
make so-called “closed class settlements”6 impossible,7 will make it difficult for legal persons
to pursue collective actions on behalf of injured parties from mass damages due to the free-rider problem.
Prior research indicates that a well-functioning system for the collective resolution of mass damages contributes to the social welfare of a country.8 Not only does such a well-functioning
system prevent individuals from overburdening the courts with individual claims of a similar nature, but it is also often the only way for an individual to obtain compensation for his damages.9 It would therefore be undesirable if because of the free-rider problem mass claims
are not dealt with effectively and efficiently on the basis of WAMCA.
Furthermore, the free-rider problem as such is a highly topical issue both in the Netherlands and abroad. For example, in January 2018 a group of 36 distinguished economists and professors of law and economics, including three Nobel laureates, filed an amici curiae brief to the Supreme Court of the United States in which they argued that the free-rider problem constitutes a serious problem in achieving collective goals.10 On the other side of the Atlantic,
in the Netherlands in July 2018, the Amsterdam Court of Appeal ruled in the highly anticipated
Fortis case, where the parties had petitioned the court to declare a collective settlement
agreement worth 1.3 billion euro generally binding under the Dutch Act on Collective Settlement of Mass Damages Claims (Wet Collectieve Afwikkeling van Massaschade, WCAM), in which case the Court extensively considered the alleged free-rider problem.11
Therefore, this thesis focuses on the following research question:
To what extent could the free-rider problem impede the effective functioning of WAMCA and how could this problem be overcome?
6 Closed class settlements are settlements where only people who signed up to the initial collective action brought
forward by the legal person reaching the settlement with the defendant, receive a portion of the settlement.
7 Arons & Koster 2017, 492. 8 Faure & Visscher 2015, 11-12.
9 Keske, Renda & Van den Bergh 2010, 58-59.
10 Brief of Amici Curiae Economists and Professors of Law and Economics in Support of Respondents, Mark
Janus v. American Federation of State, County, and Municipal Employees, Council 31, et al., Docket No. 16-1466 in the Supreme Court of the United States (18 January 2018), via: https://www.supremecourt.gov/docket/docket.aspx.
Before answering the primary research question, Chapter 2 of this thesis first examines what the free-rider problem exactly entails. Subsequently, Chapter 3 examines how the free-rider problem can arise in the context of WAMCA. Chapter 4 encompasses a comparative analysis of the U.S. class action system to determine how that system functions and how the free-rider problem has been dealt with there, as the U.S. has had decades of experience with class actions which are also initiated on an opt-out basis. In Chapter 5, recommendations are provided that can adequately address the free-rider problem in the context of WAMCA. Chapter 6 concludes this thesis by providing an answer to the primary research question by summarizing the previous chapters.
Chapter 2 – Free-rider problem
2.1 IntroductionThe free-rider problem occupies a central place in this thesis. Therefore, to be able to answer the primary research question of this thesis, it is essential to have an understanding of what the free-rider problem exactly entails and how this problem can be generally dealt with. The sub question that is therefore central to this Chapter is:
What is the free-rider problem and how can this problem generally be dealt with?
This question will be answered by first briefly explaining the free-rider problem in section 2 of this Chapter. Then, Section 3 briefly discusses how the free-rider problem can arise within the context of the judicial system. Section 4 briefly discusses the solutions to the free-rider problem that have been proposed in the academic literature. Finally, a conclusion follows in section 5.
2.2 Meaning and consequences of the free-rider problem
The earliest definitions of the word “free-rider” found in dictionaries, referencing newspapers published in the 1800s, point to the “practice of travelling on a train without paying.” However, when the word free-rider is used in contemporary times, people often do not use it such a context. Rather, a free-rider is described as someone who “benefits in some way from the effort, sacrifice, financial outlay, etc., of others without making a similar contribution.”12
Although the word free-rider can be interpreted in a derogatory way and is usually used in the context of morally objectionable behavior, the word describes nothing more than purely rational behavior.13 However, the free-rider problem is particularly problematic in the context of public
goods.14 Public goods have, among other properties, the property of being “non-excludable.”
This means that once a public good has been produced, users cannot, or only with economically unreasonable costs, be excluded from the use of that good. Classic examples of public goods are clean air, dikes, and a functional defense apparatus. The free-rider problem can cause public
12 “Free-ride, v.”, “Free ride, v.”, “free-riding, n.”, and “free-rider, n.”, Oxford English Dictionary Online, June
2019, Oxford: Oxford University Press and Fontaine 2014, 361-363.
13 Olson 1971, 76-91.
goods not to be produced, or to be produced only in part.15 Consider the example of clean air:
it can be argued that everyone in the world benefits from having clean air and that this goal could hypothetically be achieved if everyone would buy a slightly more expensive car that would be more environmentally friendly than a cheaper car.16
Although everyone in the world would benefit from having clean air, a rational self-interested individual17 will not voluntarily contribute to achieving this group goal. After all, an
individual's contribution to achieving the collective goal has a negligible effect on the success or failure of the collective goal. Meanwhile, the individual would have to incur more costs if he wants to make a contribution to the realization of the collective goal. In this case, it would be rational for an individual not to take action and to reap the benefits of the contributions of the individuals who do take action. After all, once the air has been cleaned, the individual who has not contributed can still make use of the cleaner air without having to make any effort to do so. In this example, it is thus rational for an individual to be a free-rider and to benefit from other people's contributions, without having to incur any costs himself. However, there is empirical evidence that this line of reasoning is contagious and that an unaddressed free-rider problem in a certain context would only become worse over time.18 In this example, it would
mean that over time no one, or only a small group of people, would take action and as a result the air would not be optimally cleaned.
2.3 Judicial system and the free-rider problem
Although at first glance the judicial system may not necessarily resemble a public good, it is nevertheless susceptible to the free-rider problem due to the phenomenon of precedent.19
Despite the fact that from a strict legal point of view courts are not bound by previous cases, judicial decisions in the Netherlands nevertheless have a certain degree of precedent, which means that third parties who are not involved in a court case can still benefit from a court decision.20 This applies in so far as the individual cases of third parties resemble the precedent
in both a legal and factual sense.21
15 Cowen & Tabarrok 2015, 355-356. 16 Hardin 2013, para. 1.
17 Posner 1997, 1551-1575.
18 Kahan 2003, 71-72 and 79-80 and Fehr & Gächter 2000, 163-166. 19 Tzankova 2007, 5.
20 Snijders 2007, 431-444. 21 Tzankova 2007, 5.
In the vast majority of court cases, the free-rider problem is not a significant problem. This is because the private interests of the parties to an individual case justify a decision by the court, despite the fact that others may be able to benefit from this decision free of charge.22 This is
different, however, in the context of mass damages, where a large number of people suffer damages as a result of the actions of one specific actor or a group of actors. This is particularly the case with regard to so-called “negative value claims”,23 where the damages suffered by each
injured party is negligible, but the total amount of damages suffered by all injured parties can be considerable.24
In the case of mass damages, it is therefore important that as many injured parties as possible are involved in the process and contribute financially to the collective action if mass claims are to be settled adequately. Not only would this mean that the participation costs per injured party become lower the more active participants there are, but it also means defendants will be more willing to settle the case amicably because the negotiating position of the class representative is stronger due to the active attitude of the injured parties.25
Nevertheless, the free-rider problem prevents injured parties from taking an active stance in a mass damages case. After all, if even one injured party stands up for his own interests, this will automatically entail that the interests of free-riders will also be defended. Since the facts and circumstances of a mass damages case are virtually identical among the injured parties, unlike in private disputes, a free-rider can in most cases rely on the precedent achieved by the active injured party or parties without difficulty or great expense. As a result, a free-rider does not contribute to the costs of a mass damages case, nor does he run the risk of defeat with the possibility of being ordered to bear the costs of the case, including the lawyer’s fees of the defendant.26
22 For example, thousands of people may have benefited free of charge from landmark Dutch Supreme Court cases
such as Haviltex, Kelderluik and Hangmat, which often involved a private law dispute between only two parties.
23 Tzankova 2007, 111 ff.
24 In the case of negative value claims, the phenomenon of rational apathy also plays an important role for injured
parties to take no action; Faure & Visscher 2015, 7 ff.
25 Legal scholars have noted that perhaps the most important reason for the failure of a conclusion of collective
settlements, or its late conclusions, is the inability to offer the defendant finality. However, the larger a group of active injured parties is in a collective action, the greater the degree of finality will be, as a result of which a case can be settled more quickly; Hermans 2015, 368-374.
2.4 Overcoming the free-rider problem
As explained above, the free-rider problem is present in all collective actions, and this could in the end lead to no collective action being initiated at all. Philosophers and scholars alike have for centuries asked themselves why some groups succeed in achieving a collective goal, while other fail to do so.27 One of the most cited works on this subject is Mancur Olson’s seminal The
Logic of Collective Action first published in 1965 and later republished in 1971.28
Olson argued that the success or failure of a group depends to a large extent on the size of the group that benefits from achieving a collective goal. The smaller the group, the more likely it is that the group will reach the collective goal. The opposite is also true: the larger the group, the smaller the chance that the group will be able to achieve the collective goal.29 After all, if
a group represents the interests of only a small group of people, then the chance is much greater that each individual, whether or not under social pressure, will commit to achieving the collective goal. For large groups, on the other hand, it is much more difficult to encourage the individual stakeholders to make an effort for the collective goal because the stakeholders do not know each other well and everyone's individual interests does not necessarily have to run parallel to the group interest.30
Olson argued that large groups could only succeed with a collective action if “positive incentives” exist for stakeholders to contribute to the achievement of a collective goal or if stakeholders are forced to contribute to the achievement of the collective goal.31 Positive
incentives are incentives that reward stakeholders when they take action to achieve a collective goal. Examples of this include group outings, discounts, and tax reductions. Positive incentives can partly alleviate the free-rider problem, because in this situation it would no longer necessarily be rational not to participate actively in pursuing a collective goal. After all, a free-rider is not rewarded in the same way as someone who has contributed to achieving the group objective. On the other hand, the most far-reaching option for overcoming the free-rider problem is through coercion. In this way, stakeholders may be forced against their will to contribute to the pursuit of a collective goal. An example of coercion to achieve multiple collective goals is state taxation. Through compulsory state taxation, the state is able to realize
27 Hardin, 2013, para. 1.1. 28 Olson 1971.
29 Ibid., 52; for a detailed mathematical analysis of this premise, see Molander 1992, 756-770. 30 Olson 1971, 9-22.
many different collective goals, such as the construction of dikes and roads and the establishment and maintenance of a defense apparatus.
2.5 Interim conclusion
Every collective action is susceptible to the free-rider problem, because a free-rider does not have to incur any costs to be able to make use of a public good. In other words, it is rational to be a free-rider than to incur costs to achieve a collective goal. However, if everyone behaves as a free-rider – and empirical evidence demonstrates that free-rider behavior is contagious – then there is a chance that a collective goal will never, or only partially, be achieved because too few people are willing to take action.
The free-rider problem could be overcome either by positive incentives or by coercion. By using positive incentives, active stakeholders are rewarded for their actions, while coercion forces stakeholders to contribute to the achievement of a collective goal.
Chapter 3 – WAMCA
3.1 IntroductionNow that it is clear that every collective action is susceptible to the free-rider problem, this chapter examines how this problem effects collective actions under WAMCA. Therefore, the sub-question that is central to this chapter is:
In what ways can the free-rider problem hinder collective actions under WAMCA?
This question will be answered by first briefly diving into the legislative history of the current collective action regime and WAMCA in section 3.2. Section 3.3 examines how a collective action procedure under WAMCA is structured. Section 3.4 examines how the free-rider problem can hinder the creation of collective actions under WAMCA by analyzing the provisions of the Act and examining recent case law related to collective actions. Finally, a conclusion follows in section 3.5.
3.2 Legislative history
In 1994, the current collective action regime found in art. 3:305a DCC was introduced which established general provisions for a collective action.32 In short, art. 3:305a (1) DCC provides
that a foundation or association (Art. 3:305a-Organization) may bring an action for the protection of similar interests of other persons in so far as it looks after these interests pursuant to its articles of association. However, Art. 3:305a (3) DCC explicitly prohibits collective damages actions.
The reasoning behind this prohibition was that it was believed that the question of whether, and if so to what extent, a person to whom a wrongful act was allegedly directed has suffered damage as a result, could only be answered on an individual basis.33 Questions of causality,
amount of damages, attribution, and own fault were taught to be unsuitable for collective actions, because the answers to these questions could differ for many individuals affected by the same event giving rise to damages.34 The question of whether a specific act that gave rise
32 The introduction of this statutory regime was mostly a codification of case law from the Dutch Supreme Court;
Frenk 1994, 110 ff.
33 Kamerstukken II 2016/17, 34608, 3, 3 (MvT). 34 Ibid., 5-6 (MvT)
to (mass) damages was unlawful could be answered on a collective basis. Therefore, most of the collective actions that were, and are, initiated under the current collective action regime requested the court to declare a certain act giving rise to damages unlawful. If the court ruled that a certain act giving rise to damages was indeed unlawful, then individuals could rely on this judgement and claim for damages on an individual basis or hope that the 3:305a-Organization reached an acceptable out-of-court settlement with the defendant. These settlements could then possibly be presented to the Amsterdam Court of Appeal for a general declaration of binding effect of the settlement under WCAM.35
Therefore, although it is currently not possible for injured parties from mass damages to claim for damages in a collective action, these injured parties can still benefit from a collective action in the form of a positive ruling by the court which ruling can be relied upon in a subsequent individual case, or a settlement (declared generally binding under WCAM). Nevertheless, in November 2011 a motion was adopted by parliament commonly referred to as Motie Dijksma. In this motion, members of parliament requested the government to “make the fundamental right of consumers to compensation a reality” by means of a collective damages action.36 The
government responded to this call and in 2014 published a draft bill on Redress of Mass Damages in a Collective Action for consultation.37 In short, this draft bill proposed to lift the
prohibition on collective damages actions.
The response to this draft bill from both the academic38 and the professional39 field was
overwhelmingly negative. The Dutch Council for the Judiciary (Raad voor de Rechtspraak), for example, summarized the proposed procedure in the draft bill as “not effective, efficient, enforceable or manageable in court.”40 Others noted that the proposed procedure looked likely
to create never-ending litigious collective actions (in the worst case), or forced settlements (in the best case).41
35 Arons & Koster 2014, para. 2.
36 Kamerstukken II 2011/12, 33000 XIII, 14. 37 See internetconsultatie.nl/motiedijksma/.
38 Kortmann 2018, 555 footnote 6 provides a non-exhaustive compilation of academic papers on the draft bill. 39 The responses can be consulted via: internetconsultatie.nl/motiedijksma/.
40 Response from Raad voor de Rechtspraak, 11 november 2014, 2 (via: internetconsultatie.nl/motiedijksma/). 41 Van Duin & Lawant 2015, 15.
In response to these critical remarks, the government organized several stakeholders’ meetings and was ultimately advised by a group of legal practitioners from the mass damages practice (Juristengroep uitvoering Dijksma, Group). In December 2015, this Group published a document outlining five concrete recommendations for an alternative bill. They published the following recommendations:42
1. stricter admissibility requirements for Art. 3:305a-Organizations;
2. introduction of an exclusive Art. 3:305a-Organization, similar to the lead plaintiff model in American class actions;
3. collective actions based on opt-out;
4. effective scope rule (close link between collective action and the Dutch legal sphere); and
5. simplification of the collective action procedure.
On the basis of these recommendations,43 the government created a completely new bill, which
was formally presented to the House of Representatives in November 2016.44 This bill was then
amended three times by the minister45 and was subject to several amendments by members of
parliament,46 but, as stated in the introduction, was ultimately adopted by the Senate in March
2019. Therefore, after almost 8 years since the Motie Dijksma in November 2011, a bill was adopted to make collective damages actions possible in the Netherlands.47
3.3 Collective actions under WAMCA
Although the main feature of WAMCA is the fact that it makes collective damages actions possible, the explanatory memorandum to WAMCA makes clear that the possibility of awarding damages by the court should only serve as a “threat” rather than being the standard.48
42 This document was attached to Kamerstukken II 2016/17, 34608, 3; see also Haazen et al. 2016.
43 In the explanatory memorandum to the bill, the minister notes that due to broad support from different
stakeholders, “[he had] chosen to follow the recommendations of the [Group] as far as possible and to deviate from them only on a limited number of points, which [he] considered to be necessary in the interests of the proper administration of justice.”; Kamerstukken II 2016/17, 34608, 3, 5 (MvT).
44 Wetsvoorstel afwikkeling massaschade in collectieve actie, Kamerstukken II 2016/17, 34608, 2.
45 Kamerstukken II 2016/17, 34608, 7; Kamerstukken II 2016/17, 34608, 10, and Kamerstukken II 2016/17, 34608,
20.
46 Handelingen II 2018/19, nr. 46, item 12. 47 Wet van 20 maart 2019, Stb. 2019, 130. 48 Kamerstukken II 2016/17, 34608, 3, 1-5 (MvT).
In fact, the collective action procedure under WAMCA is structured in such a way that parties to the collective action are given ample opportunity to settle a collective action.49
In short, a collective damages action under WAMCA consists of a “formal” phase and a “trial” phase and is structured as follows.50 The collective damages action commences with the formal
phase where only Art. 3:305a-Organizations51 may bring forward a collective action by means
of a writ of summons. This writ of summons must include a considerable amount of information that must, inter alia, enable the court to assess which event(s) the collective action relates to and whose interests the collective action is intended to protect.52 After sending this writ of
summons to the court, the Art. 3:305a-Organization must, under penalty of inadmissibility, register the writ of summons in a newly established register of collective actions.53 After this
has been done, the court will stay the case for a period of at least three months to allow other Art. 3:305a-Organizations to take similar action.54
After this period, the court will assess whether the registered Art. 3:305a-Organizations in the collective actions register meet the admissibility requirements under art. 3:305(1-3) DCC. Additionally, it will determine whether the Art. 3:305a-Organization has sufficiently demonstrated that bringing such a collective action is more efficient and effective than bringing an individual suit and whether it does not appear that the collective action is prima facie unfounded at the time of the filing of the writ of summons.55 If more than one Art.
3:305a-Organization is found to be admissible and have satisfied the other formal requirements, the court will designate one Art. 3:305a-Organization as the Exclusive Representative in the collective action.56
After an Exclusive Representative is designated, the court will assess the precise nature of the collective claim and the narrowly defined group of persons for whom the Exclusive
49 Art. 1018g Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering, DCCP); Kamerstukken II 2016/17, 34608, 3, 48 (MvT).
50 Arons & Koster 2017, 489-490.
51 That is, a foundation or association with full legal personality; art. 3:305(1) DCC. 52 Art. 1018c(1) DCCP
53 This must be done within two days of sending the writ of summons to the court; art. 1018c(2) DCCP. 54 Art. 1018c(3) in conjunction with art. 1018d DCCP.
55 Art. 1018c(5) DCCP.
56 Art. 1018e(1) DCCP. The court also has the ability to assign multiple Art. 3:305a-Organizations as Exclusive
Representative will represent the interests in the collective action.57 The Exclusive
Representative will then be the only one able to act in the interests of the narrowly defined group of persons in the collective action.
After the court has designated the Exclusive Representative, everyone falling under the description of the narrowly defined group of persons will have the opportunity to opt-out of the collective action by filing a notification of opt-out at the court registry within one month after the designation of the Exclusive Representative.58 If too many59 persons opt-out of the
collective action, the court may decide that the collective action shall not continue.60 The effect
of an opt-out notification is that the one sending the opt-out notification will then no longer be bound by a possible court decision.61 This means that if a collective action results in a loss for
the Exclusive Representative, the opted-out persons can still pursue individual claims relating to the matter which gave rise to mass damages. However, this also means that if a collective action results in a win for the Exclusive Representative, the opted-out persons are not entitled to compensation under either a collective settlement or court awarded damages. In order for opted-out persons to receive compensation for their damages, they may have to incur their own costs, for example, by instituting separate legal proceedings.62
After designation of the Exclusive Representative and during the opt-out period, the court will again stay the case for a period determined by the court to give the Exclusive Representative and the defendant the opportunity to test a settlement.63 If the parties do come to a settlement,
they will be able to bring this settlement before the court, where the settlement will be assessed on fairness grounds and can ultimately be declared binding upon everyone falling under the description of the narrowly defined group of persons.64 These persons then have another
opportunity to opt-out, this time from the settlement.65 If no settlement is reached, the trial
phase of the collective action commences where the collective action will be assessed on its
57 Art. 1018e(2) DCCP. 58 Art. 1018f DCCP.
59 Art. 1018f(1) DCCP: “[a number] […] too large to justify the continuation of the proceedings”. 60 Art. 1018f(1) DCCP.
61 Kamerstukken II 2016/17, 34608, 3, 9-10 (MvT). 62 Ibid., 33 (MvT).
63 Art. 1018g DCCP. 64 Art. 1018h DCCP.
65 Art. 1018h(5) in conjunction with art. 1018f DCCP. It is noted that only the persons who had not already opted
out during the designation of the Exclusive Representative have the possibility to opt-out from the collective settlement agreement; Kamerstukken II 2016/17, 34608, 3, 33 (MvT).
merits and can ultimately result in a collective damages award by the court.66 If the collective
action ends in a collective damages award by the court, there will be no possibility of opt-out and everyone falling under the narrowly defined group of persons will both be bound by the decision and be entitled to compensation in accordance with the court decision.67
3.3.1 Admissibility requirements
The previous section explained that an Art. 3:305a-Organization may only move forward with a collective action and possibly be designated an Exclusive Representative if it satisfies the admissibility requirements of art. 3:305a DCC. As stated in Chapter 1, apart from the lifting of the prohibition of collective damages actions, the new (stricter) admissibility requirements for Art. 3:305a-Organizations are a major development and have primarily been introduced with the aim to ensure adequate representation of injured parties in collective actions.68
These admissibility requirements relate to the governance, representativeness, transparency and funding of an Art. 3:305a-Organization. For instance, pursuant to art. 3:305a(2) DCC an Art. 3:305a-Organization must satisfy the following requirements to be deemed admissible:69 an
Art. 3:305a-Organization must have a (a) supervisory body, (b) appropriate and effective mechanisms for participation or representation in decision-making by persons whose interests are the subject of the collective action, (c) sufficient financial resources to bear the costs of initiating a collective action, (d) a publicly accessible internet page (containing relevant information such as the management report, the articles of association and the management structure of the Art. 3:305a-Organization), and finally (e) sufficient experience and expertise with regard to bringing and pursuing legal proceedings. Furthermore, pursuant to art. 3:305a(3)(a) DCC, the directors of an Art. 3:305a-Organization must not have any direct or indirect profit motive that could be realized through the organization. Finally, art. 3:305a(5) mandates that an Art. 3:305a-Organization shall create audited annual and directors’ reports.
Furthermore, if the court has to designate an Exclusive Representative pursuant to art. 1018e(2) DCCP (see section 3.3), the criteria the court will use in its assessment to designate an Art. 3:305a-Organization are the following: (a) the size of the group of persons whom the Art.
66 Art. 1018i DCCP. 67 Art. 1018k DCCP.
68 Kamerstukken II 2016/17, 34608, 3, 6 (MvT). 69 Bauw & Voet 2017, 243.
3:305a-Organization represents; (b) the size of the financial interest represented by this group; (c) other work that the Art. 3:305a-Organization performs for the persons whom he represents both in or out of court and (d) previous work performed by the Art. 3:305a-Organization or previous collective actions instituted by the Exclusive Representative.70
Multiple scholars have noted that these strict admissibility requirements are too stringent in their quest to ensure adequate representation of injured parties in collective actions.71 In fact,
some scholars have noted that due to these strict requirements, coupled with the free-rider problem, Art. 3:305a-Organizations might even ignore and not even use the possibilities under WAMCA.72
3.3.2 Costs of a collective action
Scholars have noted that the previously mentioned admissibility requirements put a large burden on the shoulders of prospective Art. 3:305a-Organizations willing to initiate collective actions. For example, just by establishing an Art. 3:305a-Organization in terms of incorporation expenses, maintaining a website, finding suitable supervisory directors and paying them, and insurance costs, several hundreds of thousands of euros must be spent before the Art. 3:305a-Organization has even sent a simple letter to the defendant.73
However, the actual cost of a collective action can be up to several million of euros per case. Unfortunately, no systemic empirical research has been conducted into the precise costs of collective actions in the Netherlands.74 However, in the most recent collective settlement case,
the Fortis case,75 the court requested from the parties in that case to hand over information
regarding the costs and financing of the collective actions related to that case, from which an indication and/or extrapolation can be derived.76
In the Fortis case, there were four Art. 3:305a-Organizations (VEB, SICAF, Deminor and Stichting FortisEffect) that had initiated collective actions on behalf of different (sometimes overlapping) groups of people. These four Art. 3:305a-Organizations had all commenced with
70 Art. 1018e(1) DCCP.
71 Bauw & Voet 2017, 244-245; Van Boom & Weber 2017, 294-299; Tzankova 2017, 112-113. 72 Tzankova 2017, 116-117; Arons & Koster 2017, 492.
73 Tzankova 2017, 112-113. 74 Ibid., 113.
75 Amsterdam Court of Appeal 13 July 2018, ECLI:NL:GHAMS:2018:2422, JOR 2018/246 (WCAM Fortis). 76 Tzankova 2017, 113.
their collective actions in or around 2008, after Fortis was nationalized by the Dutch and Belgian governments due to financial struggles at the bank. Hundreds of thousands of investors saw the value of their shares in Fortis go up in smoke.
It took these four Art. 3:305a-Organizations about eight years of litigation before the case was settled and the settlement agreement declared generally binding by the Amsterdam Court of Appeal. Furthermore, it cost each Art. 3:305a-Organization anywhere between 4 and 13 million euro, and almost 30 million euro in total for collective action proceedings in multiple instances.77
The information that these Art. 3:305a-Organizations handed over to the court demonstrate that these organizations directly represented about 57,000 people (Active Claimants) who had lost money due to the nationalization of Fortis, while 100,000 to 150,000 others were indirectly78
represented by the organizations (Non-Active Claimants).79 These 57,000 Active Claimants all
had entered into an agreement with these Art. 3:305a-Organizations to actively join one of the organizations. Indeed, all of these organizations were partly financed by the contributions of the Active Claimants. These contributions ranged from one-off contributions of 50 to 1,000 euros, annual contributions of 24.50 to 75 euros and/or contingent fees of 10% to 25% of the possible compensation to be received from Fortis.80 The Non-Active Claimants, on the other
hand, had not entered into an agreement with the Art. 3:305a-Organizations and would therefore not owe any money to the Art. 3:305a-Organizations if they were to receive money from Fortis due to the legal actions of the Art. 3:305a-Organizations.
3.4 Free-rider problem in the context of WAMCA
The cost structures for the Active Claimants in the Fortis case demonstrate that participating actively in a collective action can involve significantly high costs. In such a situation, it is therefore more rational for an injured party to wait patiently for other injured parties to take action, but at the same time reap the fruits of their labor. After all, under the old collective
77 Ibid., para. 5.14-5.15.
78 These people were in the same situation as the Active Claimants, but they had not joined one of the Art.
3:305a-Organizations.
79 Section 3.3 of the petition for a binding declaration of 20 May 2016 via:
https://www.rechtspraak.nl/Bekende-rechtszaken/WCAM-Verzoekschrift-Ageas-SA-NV.
80 Amsterdam Court of Appeal 13 July 2018, ECLI:NL:GHAMS:2018:2422, JOR 2018/246, para. 5.35-5.39.
action regime, some scholars even described free-riding in a collective action as a fundamental right in the Netherlands.81 Under both the old collective action regime, as well as the regime
under WAMCA, no injured party is by any means obligated to contribute to a collective action, but they are entitled to benefit from the result of such an action.
One could argue that the court decision in the Fortis case makes an even stronger case for free-riding in collective actions. In short, the court held in this case that a possible free-rider problem is no justification for a differentiation in compensation for Active and Non-Active Claimants in mass damages cases.82 In the Fortis case, the four Art. 3:305a-Organizations had tried to
mitigate the free-rider problem by stipulating in the collective settlement they had reached with Fortis, that the Active Claimants would receive higher compensation than the Non-Active Claimants. After all, the Active Claimants in the Fortis case had already incurred hundreds if not thousands of euros in fees and would have had to pay a contingent fee to one of the Art. 3:305a-Organizations directly representing them in case they would be compensated by Fortis. Therefore, under the conditions of the collective settlement first proposed to the court, the Active Claimants would have received, on average, about 50% more compensation than the Non-Active Claimants.83 As the parties had requested to declare the collective settlement
generally binding pursuant to the WCAM, the court had to assess whether the compensation scheme in the collective settlement was reasonable pursuant to art. 7:907(3)(b) DCC. Under WAMCA, the court has to assess whether a proposed collective settlement is reasonable pursuant to the same article.84
In his assessment of the reasonableness of the compensation scheme in the collective settlement, the court vehemently rejected the proposed differentiation in compensation for Active and Non-Active Claimants in the Fortis case.85 For instance, the court held that a
differentiation in compensation between parties who have suffered exactly the same (alleged) damage can only be made if an objective justification can be found. The court held that proposing to award Active Claimants about 50% more compensation than Non-Active
81 Van Boom & Pavillon 2015, 792. For a critical response to this assertion, see Tzankova 2015, 87.
82 Amsterdam Court of Appeal 16 June 2017, ECLI:NL:GHAMS:2017:2257, JOR 2018/10, para. 8.22 (Interim
judgement WCAM Fortis).
83 Ibid., para. 8.16-8.17.
84 Art. 1018H(2) DCCP declares that art. 7:907 DCC applies mutatis mutandis.
85 Amsterdam Court of Appeal 16 June 2017, ECLI:NL:GHAMS:2017:2257, JOR 2018/10, para. 8.22 (Interim
Claimants to mitigate the free-rider problem was no objective justification for the differentiation in compensation.86 The court therefore ruled that the proposed collective
settlement could not be declared generally binding in its proposed form because, among other things, the compensation scheme was not reasonable pursuant to art. 7:907(3)(b) DCC. The court then gave the parties the opportunity to amend the proposed settlement in order for the compensation scheme to be considered reasonable pursuant to art. 7:907(3)(b) DCC.87 The
parties accepted this opportunity and presented the court an amended collective settlement agreement.88
In the amended collective settlement agreement, the parties had still stipulated a differentiation in compensation to Active Claimants and Non-Active Claimants, but this time the difference in compensation was not 50% but 25%.89 The parties justified this differentiation by arguing that
without the additional 25% compensation, every Active Claimant would have been worse off than the Non-Active Claimants.90 This additional 25% compensation in most of the cases only
covered the (contingent) fees the Active Claimants had already paid to the Art. 3:305a-Organization or would owe them after they had received the compensation. In some cases, though, the additional 25% did not even cover the full fees some Active Claimants would have to pay the Art. 3:305a-Organizations.91 These Active Claimants would therefore have been
better off if they had not joined (one of) the Art. 3:305a-Organizations in the first place. After hearing these arguments and an extensive assessment of the new compensation scheme, the court did in the end consider the new collective settlement reasonable and therefore declared the collective settlement generally binding under the WCAM.92
Declaring the collective settlement agreement generally binding by the court was something positive for both the Active Claimants as well as the Non-Active Claimants, as they were now entitled to compensation under the collective settlement agreement after eight years of uncertainty and litigation. However, the court decision was a major setback for tackling the free-rider problem in the context of collective actions in the Netherlands. After all, the Active
86 Ibid., para. 8.27 and 8.41. 87 Ibid., para. 8.42 and 10.9.
88 Amsterdam Court of Appeal 13 July 2018, ECLI:NL:GHAMS:2018:2422, JOR 2018/246, para. 3.1 (WCAM Fortis).
89 Ibid., para. 4.7. 90 Ibid., para. 5.44-5.45. 91 Ibid., para. 5.47. 92
Claimants were only entitled to an additional compensation insofar this would cover their actual expenses, and nothing more. Therefore, from an economic point of view, the considerations of the court do not make much sense.
If it is held that Active Claimants can only receive additional compensation for the actual costs incurred, then from an economic point of view it is better to not participate in a collective action and free ride on others’ activeness. After all, if one decides to actively participate in a collective action, this person most likely has to pay fees to (partly) finance the Art. 3:305a-Organization taking action. In the best-case scenario, this person will receive additional compensation covering the actual fees paid if the collective action results in a collective settlement. However, the chance is higher that the collective action will not result in a collective settlement, in which case the active claimant has already paid fees but will not receive any additional compensation, whereas free-riders would not have incurred any costs at all for the collective action.
This free-rider problem in the context of WAMCA is thus problematic for two main reasons. First, free riding in collective actions in the Netherlands is in not discouraged sufficiently by both the legislature and the court. This could lead to a situation in which the majority of people in mass damages cases decide to free ride instead of contribute to a collective action by, for instance, becoming a member of an Art. 3:305a-Organization.
The second reason is that if too many people do decide to free ride, Art. 3:305a-Organizations will likely face both financial difficulties as well as admissibility difficulties. After all, many Art. 3:305a-Organizations partly rely on the contributions of Active Claimants to finance collective actions. If too many people decide to free-ride, Art. 3:305a-Organizations will most likely face difficulties in financing expensive collective actions. Furthermore, as established in section 3.3.1, the admissibility requirements for Art. 3:305a-Organizations have been significantly toughened under WAMCA. One of the key determinants of admissibility under WAMCA is representativeness. For an Art. 3:305a-Organization to demonstrate that it is sufficiently representative of its claimants to initiate a class action, it needs members. The free-rider problem might seriously dissuade people from joining an Art. 3:305a-Organization. This would not only make the financing of a collective action difficult for an Art. 3:305a-Organization, but they would also face difficulties demonstrating they are representative of their intended claimants.
3.5 Interim conclusion
Almost eight years after the Motie Dijksma was adopted by parliament, the Netherlands will finally have a mechanism which will make collective damages actions possible under WAMCA. However, although one of the main features of WAMCA is making collective damages actions possible, the legislature primarily wants the possibility of court awarded damages in collective actions to act as a threat that will make defendants more willing to settle. Coupled with the introduction of collective damages actions under WAMCA are the new strict admissibility rules. These admissibility requirements, coupled with the free-rider problem that is in no way mitigated by the legislature or the court in the Netherlands, may make it extremely difficult for Art. 3:305a-Organizations to consider initiating collective actions at all.
Chapter 4 – Class actions in the United States
4.1 IntroductionAlthough collective damages actions are new to the Netherlands, the U.S. has had experience with such procedures for many decades. This chapter therefore focuses on the system of class actions in the United States to examine whether the system in the United States may offer points of departure for solving the free-rider problem under WAMCA. Therefore, the sub-question that is central to this chapter is:
How does the class action system function in the United States, and how is the free-rider problem dealt with in this country?
This question is answered by briefly discussing the history of U.S. class actions in section 4.2. Section 4.3 briefly discusses the structure of the U.S. class action system. Section 4.4 then examines how class actions are initiated. Section 4.5 addresses how the free-rider problem in class actions is dealt with in the U.S. Finally, this chapter offers conclusions in section 4.6.
4.2 History of U.S. class actions
In the United States, the general rule concerning class actions is established in Rule 23 of the Federal Rules of Civil Procedure (Rule 23),93 and largely dates back to 1966, although Rule 23
already existed in 1938.94 When the modern Rule 23 was introduced, its purpose was to
facilitate public interest litigation95 and to enable the bundling of small, similar claims (negative
value claims, see section 2.3), so that from an economic perspective it would make sense for injured parties to initiate legal action against an alleged party causing the damage. 96
4.3 Structure of the U.S. class action system
The Rule 23 system consists of two phases: the certification phase and the trial phase. The certification phase can be viewed as an admissibility phase in which the court assesses the
93 Different types of class actions exist in the U.S. Roughly speaking, a distinction can be made between class
actions in which a declaration of right or commandment or prohibition is demanded, and class actions in which damages are claimed. Since in practice the latter variant is the most common and leads to a settlement most often, only this variant will be discussed in this chapter; Tzankova 2007, 86.
94 Rule 23 was first adopted in 1938, but until its drastic amendment in 1966, class actions were practically never
initiated. Moreover, Rule 23 is only legally applicable in federal courts. The rules concerning class actions in U.S. state courts may therefore deviate from Rule 23. However, the vast majority of class actions take place in federal courts. In this chapter, therefore, only the system of the federal Rule 23 will be discussed; Miller 2018, 1-8.
95 Enneking & De Jong 2014, 1542-1543. 96 Miller 2018, 5-6.
request for a class action against the legal requirements of Rule 23. Only if the court is of the opinion that the request complies with Rule 23 will it proceed to the second phase, the trial phase, in which the court assesses the class action on its merits and passes judgment on the alleged liability of the defendant.97 Within this two-stage system, the parties to the proceedings
can reach a settlement at any time. They can then submit this settlement to the court, which can make this settlement binding for the entire class if the certification requirements are met and the settlement meets the requirements of Rule 23(e)(2).98 If the settlement is made binding by
the judge, all persons covered by the settlement will be bound by this settlement, unless one has opted-out in a timely manner or an objection has been made in a timely manner.99
4.3.1 Certification phase
Before a class action is assessed on its merits, or a settlement is declared binding by the court, a class action must first pass the certification phase. This certification phase acts as a gatekeeper for two possible problems. Firstly, during a class action, absent class members can be bound by the result of the class action. Therefore, in the certification phase, the judge thoroughly assesses whether the interests of these absent members are adequately represented.100
Secondly, the financial interests in a class action may be so great that the class action may be abused. A defendant may feel “forced” to settle with a claimant in a class action, for example, because the claimant fears a loss of reputation or wants to get rid of a potentially costly class action as quickly as possible, even though the class action may consist to a large extent of unsubstantiated claims. The aim of the certification phase is therefore to reject such unsubstantiated class actions, even before the class action is assessed on its merits.101 In fact,
recent case law demonstrates that it has become increasingly difficult to obtain certification for a class action over the years because the certification test is being applied increasingly strictly by the courts.102
It is also important to note that, even during this certification phase, the defendant has the power to file a wide range of motions. On the basis of, for example, a motion to dismiss or a motion
97 Lavie 2018, 73.
98 Macey & Miller 2009, 167-177. 99 Lavie 2018, 76.
100 Ibid., 73-77. 101 Ibid., 73-77. 102 Ibid.
for summary judgement, a defendant can achieve a dismissal of the class action even before the court has ruled on the question whether the class action meets the certification requirements.103
If a class action survives this costly certification phase and survives all motions,104 the class
action will be certified, all (absent) class members will have to be informed of this “certification”105, and the procedure can be continued to the next phase, the trial phase, where
the claims of the claimant will be assessed on its merits. However, empirical research indicates that a certified class action almost always ends in a settlement.106 The costs of a lengthy trial
process and the risk that the class action will be lost107 do not outweigh the relative simplicity
of reaching a settlement for both the defendant and the plaintiff.108 Scholars have noted that
recently, more class actions have proceeded to the trial phase than in the past, with varying results. Nevertheless, in the vast majority of cases, a class action after class certification ends in a settlement.109
4.4 Initiating class actions
Unlike in the Netherlands, representative organizations in the U.S. are not responsible for taking collective action or reaching a collective settlement as a result thereof, but this task is reserved for the class representative(s).110 Rule 23(a) states that “one or more members of a class may
sue [...] as representative parties on behalf of all members [...]”. If a class representative initiates a class action, then a class representative is obligated to safeguard the interests of all class members “fairly and adequately” (Rule 23(a)(4)). In short, the class representative is legally the central party in a class action, because he is the one who can initiate a class action on behalf of all injured parties from mass damages and he is also the one who is legally obligated to pre-finance the class action.111
Although legally the class representative is the central party in a class action, in practice this role is reserved for the class counsel, the lawyer of the class. A class representative rarely
103 Ibid., 75. 104 Ibid.
105 The class members will have the opportunity to opt-out; Tzankova 2007, 98-99. 106 Frankel 2010, footnote 144; Tzankova 2007, 87.
107 The defendant also risks being ordered to pay punitive damages; Frankel 2010, 599-601. 108 Tzankova 2007, 87.
109 Klonoff 2016, 1643-1645. 110 Tzankova 2007, 93-95. 111 Ibid., 94.
actually takes the initiative to initiate a class action; this initiative almost always comes from lawyers who want to be appointed as class counsel.112 Thus, it is always the class counsel who
pre-finances a class action, rather than the class representative.113
The reason why in practice the class counsel is the central party in a class action has to do with three characteristics of U.S. civil procedure law: contingency fee agreements, the application of the American Rule, and the workings of the common fund doctrine.114 Firstly, in the United
States, unlike in the Netherlands,115 contingency fee agreements with lawyers are permitted.
This means that a class representative generally does not have to pay for a class action initiated in his or her name. The lawyer pays all the costs in advance and the class representative only owes an amount to the lawyer if the class action ends with a victory for the class.116
Secondly, unlike most countries in the world, including the Netherlands, in the U.S. the losing party does not have to pay the costs of the winning party (American Rule).117 A lawyer who
pre-finances a class action therefore only has to take into account his own costs, and not the costs of the defendant if the class action does not result in a legal victory or settlement. 118
The third, and perhaps most important, reason why the lawyer is at the center of a class action in the U.S. is because of the common fund doctrine, which was first established in 1881.119 This
doctrine was developed in the Trustees v. Greenough case in 1881. In this case, the Supreme Court held, in short, that if the efforts of a plaintiff in a court case would benefit people other than himself, the plaintiff would be entitled to have part of his lawyer's fees reimbursed by those others. These others might otherwise be unjustifiably enriched.120 For the plaintiff, this ruling
meant that he could have his lawyer's fees split with anyone who would benefit from the decision in his court case, and because of the contingency fee arrangement, no costs would be owed to the lawyer if his case would not end in a legal victory.
112 The class counsel is appointed by the court; Klonoff 2017, 74-86. 113 Tzankova 2007, 92-98.
114 Coffee 2015, 18.
115 Van Boom & Luiten 2015, 189. 116 Coffee 2015, 19-22.
117 However, in many jurisdictions where the losing party has to pay the fees of the winning party there can be a
so-called “recoverability gap”; Van Hooijdonk & Eijsvoogel 2009, 40-41 and Hodges 2010, 20.
118 Coffee 2015, 22-26. 119 Coffee 2015, 26.
The developments of the common fund doctrine did, however, not stop at the considerations of
Trustees v. Greenough. Only four years after this ruling, the Supreme Court in Central Railroad & Banking Co. of Georgia v. Pettus held that if a lawyer achieved a ruling that would benefit a
group of persons, this lawyer was not only entitled to reimbursement of the costs he had agreed to with his own client(s) for this case, but was also entitled to a reasonable part of the benefit obtained as a whole. This is because the efforts of the lawyer had provided an advantage not only for his own client(s), but also for all others who would benefit from a legal victory.121
Almost one hundred years later in Boeing Co. v. Van Gemert, the Supreme Court ruled that the considerations in Greenough and Pettus still reflected the applicable law.122 In practice, these
rulings meant that lawyers could be richly rewarded if a class action were to be won, or end in a settlement, because a “reasonable part of the benefit obtained” would be deducted from a possible class settlement or court awarded damages as compensation for the lawyer’s work.123
In short, the procedural system gives lawyers in the United States both the possibilities and sufficient incentives to initiate a class action on behalf of a class representative. Additionally, as mentioned in section 4.3.1, a certified class action almost always ends in a settlement, whereby the lawyer is entitled to a reasonable part of this settlement in accordance with the common fund doctrine.
4.5 Class actions and the free-rider problem
Contrary to the system in the Netherlands, everyone benefitting from a class action lawsuit in the United States equally pays for the costs of the collective action. In accordance with the common fund doctrine, the “reasonable” lawyer's fees124 will be deducted from a possible
settlement amount or court awarded damages. This effectively means that everyone will have contributed indirectly to the costs of a successful class action. Therefore, in a system such as the U.S. class action system, substantial free riding cannot occur.125
121 Supreme Court of the United States, Central Railroad & Banking Co. of Georgia v. Pettus, 113 U.S. 116 (1885);
Coffee 2015, 26-28.
122 Supreme Court of the United States, Boeing Co. v. Van Gemert, 444 U.S. 472 (1980): “Since the decisions in
[…] Greenough, and Pettus […], this Court has recognized consistently that a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole.”
123 Coffee 2015, 26-28.
124 Eisenberg et al. 2017, 937-947 and Fitzpatrick 2010, 830-832. 125 Tzankova 2017, 116-118.
Individuals can only “escape” from contributing to the costs of the collective action if they opt-out or object to a possible settlement in time. By doing so, these individuals are not bound by the result of the settlement or court awarded damages, and therefore do not have to pay for it indirectly. However, this also means that they will not be entitled to compensation under the collective action and that they may have to incur their own costs to obtain compensation for the damages they have suffered, for example by instituting separate legal proceedings.126
One area where a free-rider problem could occur in the U.S. class action system is when the class representative is appointed who will represent the entire class. Both the class counsel and the class representative are required to represent the interests of all class members fairly and adequately (see section 4.4).127 This requirement means that the class representative is not only
expected to make an effort to assert his own rights and those of the class, but is also expected to understand what the case is about and how a class action procedure should be conducted. Although these activities do not necessarily involve costs, this requires not only a certain level of intelligence of the class representative, but also a certain degree of reliability, perseverance, and integrity.128
Just as individuals in the Dutch context are not obligated to become members of an Art. 3:305a-Organization that tries to obtain compensation for mass damages for all injured parties, individuals in a mass damages case in the United States are not obligated to act as class representatives in a class action. It would therefore be more sensible for an injured party in a mass damages case to wait patiently for others to take on the role of class representative than for him to take action himself to be appointed as class representative. However, if everyone maintains such an attitude, a situation may arise where there are not enough people who want to take on the role of class representative. This could lead to a situation in which class actions cannot be initiated, at least not at an optimal level (see section 2.2).
American judges recognized this problem, and so in an effort to mitigate the free-rider problem in this context, judges have the discretionary power to grant an incentive payment to the class
126 However, empirical research shows that the percentage of individuals who do not want to be bound by a
settlement is very low; Tzankova 2007, 98-99 with further references there.
127 Klonoff 2017, 74-86. 128
representative(s) in class actions. This means that in a successful class action, a class representative can claim, in addition to his normal compensation, an additional compensation for any costs and inconveniences that the other (inactive) injured parties did not incur. Recent empirical research has revealed that in almost 80% of successful class actions, US judges award an incentive payment to the class representative(s) with a median of approximately USD 5,000 and an average of more than USD 11,000 per class representative.129 This is despite the fact
that the average compensation for individuals in accordance with class action settlements rarely exceeds a few hundred dollars.130 In summation, the common fund doctrine and the possibility
of granting incentive payments to the class representative(s) appear to adequately address the free-rider problem in U.S. class actions, in contrast to the situation in Netherlands.
4.6 Interim conclusion
This chapter focused on the U.S. class action system. Section 4.2 briefly touched upon the history of Rule 23. Section 4.3 examined the structure of the U.S. class action system and noted that after a certification of a class action, a class action almost always ends in a settlement. In section 4.4, it was discussed that although the class representative is legally speaking the central party in a class action, in practice it is the class counsel who initiates and funds a class action due to the workings of U.S. civil procedure law. Finally, in section 4.5 it was noted that the free-rider problem in the context of U.S. class actions seems to be adequately addressed by both the common fund doctrine and the possibility of granting incentive payments to the class representative(s).
129 Rubenstein 2018, § 17:7 and § 17:8. 130 Ibid., IV.
