Thorogood v. Sears, Roebuck and Co.

• Decision Date: 28 October 2008
• Docket Number: No. 08-1590.,08-1590.
• Parties: Steven J. THOROGOOD, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. SEARS, ROEBUCK AND COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

547 F.3d 742

Steven J. THOROGOOD, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. SEARS, ROEBUCK AND COMPANY, Defendant-Appellant.

No. 08-1590.

United States Court of Appeals, Seventh Circuit.

Argued September 15, 2008.

Decided October 28, 2008.

Clinton A. Krislov (argued), Krislov & Associates, Chicago, IL, for Plaintiff-Appellee.

Philip M. Oliss, Robin G. Weaver (argued), Squire Sanders & Dempsey, Cleveland, OH, for Defendant-Appellant.

Barry Levenstam, Jenner & Block, Chicago, IL, for Amicus Curiae.

Before POSNER, KANNE, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

The plaintiff, a Tennessean, bought a Kenmore-brand clothes dryer from Sears Roebuck (Kenmore is a Sears brand name). The words "stainless steel" were imprinted on the dryer, and point of sale advertising explained that this meant that the drum in which the clothes are dried inside the dryer was made of stainless steel. The plaintiff says he thought it meant that the drum was made entirely of stainless steel. Part of the front of the drum, a part the user would see only if he craned his head inside the drum, is made of a ceramic-coated "mild" steel, which is not stainless steel because it doesn't contain chromium; stainless steel is a steel alloy that is at least 11.5 percent chromium. The plaintiff alleges that the mild-steel part of the drum rusted and stained the clothes that he dried in his dryer.

He filed this class action suit in federal district court on behalf of himself and the other purchasers, scattered across 28 states plus the District of Columbia, of the half million or so Kenmore dryers advertised as containing stainless steel drums. He claims that the sale of a dryer so advertised is deceptive unless the drum is made entirely of stainless steel, since if it is not it may rust and cause rust stains on the clothes in the dryer. His individual claim is that the representation that the dryer contained a stainless steel drum violated the Tennessee Consumer Protection Act, Tenn.Code. Ann. §§ 47-18-101 et seq. The Act provides in pertinent part that "any person who suffers an ascertainable loss of money or property, real, personal, or mixed, or any other article, commodity, or thing of value wherever situated, as a result of the use or employment by another person of an unfair or deceptive act or practice declared to be unlawful by this part, may bring an action individually to recover actual damages." Id., § 47-18-109(a)(1). The members of the class that the plaintiff represents are alleged to have similar claims under similarly worded state consumer protection statutes in their own states. Although some members of the huge class are citizens of the states of which Sears is a corporate citizen (New York and Illinois), so that diversity of citizenship is not complete, the suit properly invoked federal jurisdiction under the Class Action Fairness Act, 28 U.S.C. §§ 1332(d), 1453, 1711-1715, since the amount in controversy exceeds $5 million. The district court certified the class, and we have accepted the defendant's appeal from the class certification. Fed.R.Civ.P. 23(f).

The class action is an ingenious device for economizing on the expense of litigation and enabling small claims to be litigated. The two points are closely related. If every small claim had to be litigated separately, the vindication of small claims would be rare. The fixed costs of litigation make it impossible to litigate a $50 claim (our guess—there is no evidence—of what the average claim of a member of the plaintiff's class in this case might be worth) at a cost that would not exceed the value of the claim by many times. But the class action device has its downside, or rather downsides. There is first of all a much greater conflict of interest between the members of the class and the class lawyers than there is between an individual client and his lawyer. The class members are interested in relief for the class but the lawyers are interested in their fees, and the class members' stakes in the litigation are too small to motivate them to supervise the lawyers in an effort to make sure that the lawyers will act in their best interests. Saylor v. Lindsley, 456 F.2d 896, 900-01 (2d Cir.1972) (Friendly, J.); see also Susan P. Koniak & George M. Cohen, "Under Cloak of Settlement," 82 Va. L. Rev. 1051, 1053-57 (1996) (describing the class action as "lawyer selfdealing on a grand scale," id. at 1053); Jonathan R. Macey & Geoffrey P. Miller, "The Plaintiff's Attorney's Role in Class Action and Derivative Litigation," 58 U. Chi. L.Rev. 1, 22-26 (1991).

The defendants in class actions are interested in minimizing the sum of the damages they pay the class and the fees they pay the class counsel, and so they are willing to trade small damages for high attorneys' fees, especially since, as Judge Friendly put it, "a juicy bird in the hand is worth more than the vision of a much larger one in the bush, attainable only after years of effort not currently compensated and possibly a mirage." Alleghany Corp. v. Kirby, 333 F.2d 327, 347 (2d Cir. 1964); see also Bruce L. Hay, "Asymmetric Rewards: Why Class Actions (May) Settle for Too Little," 48 Hastings L.J. 479, 485-89 (1997); Bruce L. Hay & David Rosenberg, "`Sweetheart' and `Blackmail' Settlements in Class Actions," 75 Notre Dame L.Rev. 1377, 1389-92 (2000). The result of these incentives is to forge a community of interest between class counsel, who control the plaintiff's side of the case, and the defendants. (For a notable example, see Reynolds v. Beneficial National Bank, 288 F.3d 277 (7th Cir.2002); see also Mars Steel Corp. v. Continental Illinois National Bank & Trust Co., 834 F.2d 677, 681-82 (7th Cir.1987).) The judge who presides over the class action and must approve any settlement is charged with responsibility for preventing the class lawyers from selling out the class, but it is a responsibility difficult to discharge when the judge confronts a phalanx of colluding counsel.

A further problem with the class action is the enhanced risk of costly error. "When enormous consequences turn on the correct resolution of a complex factual question, the risk of error in having it decided once and for all by one trier of fact rather than letting a consensus emerge from several trials may be undue." Mejdrech v. Met-Coil Systems Corp., 319 F.3d 910, 912 (7th Cir.2003); see also Castano v. American Tobacco Co., 84 F.3d 734, 746 (5th Cir.1996); Lance P. McMillian, "The Nuisance Settlement `Problem,'" 31 Am. J. Trial Advoc. 221, 252-53 (2007); Jeffrey W. Stempel, "Class Actions and Limited Vision," 83 Wash. U. L.Q. 1127, 1213-14 (2005). Suppose a company is sued in a number of different cases for selling a defective product. It wins some of the cases and loses some, so that the aggregate outcome is a fair reflection of the uncertainty of the plaintiffs' claims. But when the central issue in a case is given class treatment and so resolved by a single trier of fact, a trial becomes a roll of the dice; a single throw will determine the outcome of a large number of separate claims—there is no averaging of divergent responses from a number of triers of fact having different abilities, priors, and biases.

The risk is asymmetric when the number of claims aggregated in the class action is so great that an adverse verdict would push the defendant into bankruptcy, for then the defendant will be under great pressure to settle even if the merits of the case are slight. In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1298-99 (7th Cir.1995); Hay, "`Sweetheart' and `Blackmail' Settlements in Class Actions," supra, at 1391-92; Barry F. McNeil & Beth L. Fancsal, "Mass Torts and Class Actions: Facing Increased Scrutiny," 167 F.R.D. 483, 489-90 (1996). It is true that in principle and often in practice, shareholders whose shares in a particular company are part of a diversified portfolio of securities are indifferent to the fortunes of a particular stock in their portfolio. But corporate managers—the shareholders' imperfect agents—are not indifferent to bankruptcy and so they are unwilling to bet their company on the outcome of a trial. This, however, is not such a case, as the aggregate claims are well within Sears Roebuck's ability to pay.

There is still another downside to the class action, and it is well illustrated by this case. It is the tendency, when the claims in a federal class action are based on state law, to undermine federalism. In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1020-21 (7th Cir.2002); In re Rhone-Poulenc Rorer, Inc., supra, 51 F.3d at 1300-02; Elizabeth M. v. Montenez, 458 F.3d 779, 788 (8th Cir.2006). Our plaintiff wants to litigate in a single federal district court half a million claims wrested from the control of the courts of the 29 jurisdictions in which those claims arose and the laws of which govern the claimants' entitlement to and scope of relief. The instructions to the jury on the law it is to apply will be an amalgam of the consumer protection laws of the 29 jurisdictions, and procedural rules by which particular jurisdictions expand or contract relief will be ignored. The Tennessee Consumer Protection Act, for example, does not authorize class actions. Walker v. Sunrise Pontiac-GMC Truck, Inc., 249 S.W.3d 301 (Tenn.2008).

Sears argues that the Tennessee rule precludes the maintenance of the present case as a class action. That is wrong. The procedure in diversity suits is governed by federal law. What is true is that some procedural rules are intended to implement substantive policy, and such rules do control in diversity cases. The clearest example is the parol evidence rule of contract law. Another is the contract doctrine of "mend the hold," which limits the right of the defendant in a breach of contract suit to change his defense in the course of litigation and is thus a facet of the doctrine of good-faith performance of contracts. Harbor Ins....