Compensation's Role in Deterrence

Russell M. Gold*

There are plenty of noneconomic reasons to care whether victims are compensated in class actions. The traditional law-and-economics view, however, is that when individual claim values are small, there is no reason to care whether victims are compensated. Rather than compensation deterring wrongdoing is tort law’s primary economic objective. And on this score, law-and-economics scholars contend that only the aggregate amount of money that a defendant expects to pay affects deterrence. They say that it does not matter for deterrence purposes how that money is split between victims, lawyers, and charities. This Article challenges that claim about achieving tort law’s primary objective and argues that there is an economic reason to care whether victims are compensated in class actions. It offers reason to think that compensating victims deters more wrongdoing than the same amount of relief in other forms, at least in damages class actions.

Put a different way, this Article contends that the primary objectives of class actions— compensation and deterrence—are intertwined in ways that scholars have not previously recognized. Compensation affects the amount of reputational harm that class actions inflict on defendants, and anticipating that reputational harm provides a source of deterrence. Because the public cares whether victims are compensated in civil litigation, if class actions were frequently to slight compensation that would undermine public perception of the class device; class actions would come to seem more like plaintiffs’ lawyers’ extortion mechanisms than legitimate means of redressing harm. Diminished procedural legitimacy makes the class action a less powerful signal about the validity of the underlying claims, which undermines reputational deterrence.

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© 2016 Russell M. Gold. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the author, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

*Associate Professor of Legal Analysis Writing and Research, Wake Forest University School of Law. I would like to thank Derek Bambauer, Rachel Barkow, Ryan Bubb, Elizabeth Chamblee Burch, Oscar Chase, Jaime Dodge, Howard Erichson, Brian Fitzpatrick, Mark Geistfeld, Stephen Gillers, J. Maria Glover, David Han, Samuel Issacharoff, Joanna Laine, Kate Levine, David Marcus, Kaipo Matsumura, Troy McKenzie, Geoffrey Miller, Robert Rabin, D. Theodore Rave, Christopher Robertson, Amanda Rose, Erin Scharff, David Skeel, Mark Spottswood, Maya Steinitz, Roger Trangsrud, Amanda Tyler, and Steve Vladeck, as well as the participants in the Junior Faculty Federal Courts Workshop and the NYU Lawyering Scholarship Colloquium for their valuable feedback on earlier drafts and helpful conversations. I would also like to thank Eliza Marshall for excellent research assistance. In the interest of full disclosure, I represented parties in Wal-Mart Stores, Inc. v. Dukes and Fraley v. Facebook, Inc. while in private practice. The views expressed in this Article—including views as to those cases—are mine alone, and the discussions of those cases are based entirely on the public record.