Mass litigation in Europe – A legal, empirical and economic analysis

Mass litigation is a hot topic in Europe in various areas of law. The European Commission seeks to improve private enforcement of competition law, e.g. through representative actions brought by consumer associations. Victims of mass-produced products which turn out to be defective may want to bring a collective products liability claim. Environmental pollution may negatively affect many individuals, so that collective claims become more important in this field as well. The financial crisis also gives rise to many potential claims of ill-informed consumers who have bought financial products which were not suitable for them. Insurance companies are involved in several mass claims regarding the too high costs they have charged their consumers for such services as mortgages, annuities and pension plans.

In the European debate on mass litigation, the American-style class action is often used as an example of an undesirable scenario. The fact that the class attorney is paid on a contingency fee basis is regarded as undesirable because ‘an attorney should not have a personal interest in winning the case’. Furthermore, the characteristic of class actions that individuals who did not explicitly agree to join the class may be bound by the verdict is regarded as contrary to the principle of autonomy. In addition, the class action combined with contingency fees is supposed to lead to a ‘flood of litigation’, which results in nuisance suits, only initiated to extract a settlement.

However, this fear of ‘American circumstances’ is not usually backed up by any evidence. In fact, if one studies American literature on this topic, it is doubtful if Americans are more litigious than Europeans. In non-mass injury litigation, if litigation was evenly distributed over the population and over time, a typical American would file a contract or tort claim once every 150 years. Given that mass injury litigation amounts to less than one per cent of all civil lawsuits in the area of contracts, torts and property, it remains to be seen if the fear for ‘American circumstances’ is justified.

The proposed research consists of three parts:

• First, the project aims at investigating how the fear for ‘American circumstances’ has influenced the debate on mass litigation in Europe, for instance by limiting or blocking initiatives to introduce class actions and/or contingency fees. By studying and evaluating (mainly American) literature on this topic, the research project will provide an answer to the question whether this fear is justified.
• Second, the project will survey several forms of mass litigation and result-based fees which already exist in Europe. The Dutch Law on Collective Management of Mass Damages and the Cartel Damage Claim are examples of the first topic, while various forms of conditional fee arrangements and ‘no win, less fee’ are examples of the second.
• The first and second parts of the proposed research are legal and empirical in nature. In the third part, the American combination of class actions and contingency fees, as well as the existing European possibilities for mass litigation, are analyzed from a Law and Economic point of view. This approach enables a study into the behavioural incentives provided by the various systems, i.e. on the decision whether to bring suit, on the decision whether to settle if suit is brought, and on the principal-agent relationships between the plaintiffs and their representatives. Such research can also provide valuable insights in the potential of the systems to reach the goals attributed to civil litigation, such as compensation of victims and deterrence of undesirable behaviour.

The research will result in a comparison of the American-style class actions with several existing European possibilities for mass litigation. It will show if these European approaches are a good alternative for the American-style class action, when it comes to compensation and deterrence.

The prospective researcher will have to limit her/himself to one or two areas of civil law (e.g. product liability, environmental liability, competition law, financial law). The expertise of the researcher will determine this choice, so that it cannot be made already at this stage.

Recently in law and economics scholarship, a lot of attention has been paid to the importance of so-called behavioural law and economics. The interest in behavioural studies has grown from the fact that the behavioural studies and, more particularly, the results of field and lab experiments seem to cast doubts on some of the assumptions of the traditional economic analysis of law. It is normally the so-called rational choice approach; assuming that man is a rational maximizer of his ends in life; which is challenged by the behavioural studies. Studies in cognitive psychology have shown that individuals are subject to many so-called heuristics and biases, as a result of which many do not act in the way as predicted by traditional economic analysis of law.

Even though the insights of the behavioural literature have now largely been incorporated into economic analysis of law (into the new domain referred to as behavioural law and economics), less attention has so far been paid to the impact of the behavioural literature on the economic analysis of accident law. Nevertheless, the behavioural literature may have important consequences for the economic models of accident law. Indeed, traditional economic analysis of for example tort law assumes that the parties involved in an accident (tortfeasor and victim) react rationally and on the basis of information concerning the legal rules, prevention costs and damage. It is also assumed that, for example when applying the negligence rule, judges are able to adequately set a standard of care on the basis of information available to the injurer at the moment of the accident.

Reality can be quite different. As a result of cognitive limitations injurers may in some cases largely overestimate the probability of accidents. This may be the result of so-called probability neglect (focussing on the large amount of the losses when the accident occurs, but not on the low probability of their occurrence) or of the so-called availability cascade (leading people to think that an event that recently happened is very likely to happen again in the near future). Over-precaution and thus over-deterrence may be the result. However, other biases, such as more particularly over-optimism (which is according to empirical studies a serious problem with most car drivers), may have the reverse effect of a too low level of care and thus under-deterrence.

Furthermore, judges may suffer from a so-called hindsight bias (assuming that the probability that the accident would happen was in fact a lot higher simply because the accident did occur). The result may be that judges too easily accept that injurers should have done more to try to prevent a certain accident at the time when it occurred. The result of this hindsight bias may be that in retrospect a too high duty of care is imposed on injurers and thus defendants are held liable more often than would be efficient.

Similar biases may also affect insurance decisions. For example, insurance theory based on the expected utility hypothesis assumes that individuals will base their decision to insure or not on available information on the risks involved, the probability and magnitude of losses and the attitude to risk. However, many behavioural studies, more particularly with respect to disaster insurance, have shown that many individuals do not insure even if insurance would increase their expected utility. Some take an ‘it will not happen to me’ attitude and have difficulties imagining low probability/high damage events happening to them. Moreover, many individuals consider insurance as an investment and thus refuse to take insurance coverage for low probability high damage events, since they may never receive a return on their ‘investment’ during their lifetime. Underinsuring for certain possibilities such as flooding and other natural disasters may be the result.

The central research question of this thesis is therefore: Does the behavioural literature (the results of cognitive psychology) affect the classical economic analysis of tort and insurance (accident law); and if so, in what way? This leads to the following sub-questions:

• Which are the assumptions underlying classical economic analysis of tort law and which are the assumptions underlying the economics of insurance?
• What are relevant insights provided by the behavioural literature that may have an impact on the economic analysis of tort and insurance?
• What may be consequences of the behavioural literature for the economic analysis of tort and insurance?
• Can policy recommendations be formulated when incorporating these behavioural insights?

The goal of this thesis is to examine the relevance of the insights from behavioural studies for the economic analysis of accident law. In this respect a distinction will be made between on the one hand predictive analyses and on the other hand normative implications. Indeed, the behavioural literature may have an impact on the way economics models are used to predict how people will behave in real life situations, but behavioural models may also be relevant to explain actual behaviour of people. Learning from these predictive analyses, the question can also arise whether this may, at a normative level, lead to changes in the policy recommendations that usually follow from economic analysis of accident law. These questions are obviously intertwined, but have to be separated methodologically.

First, the question will indeed be asked whether the behavioural studies allow making better predictions about reality and more particularly about how people will react in potential accident situations. Another (and more debated) issue is to what extent the behavioural studies also have implications at the normative level. This obviously requires identifying which standards one adopts in such a normative approach. Traditional economic analysis of law takes efficiency (in the sense of maximising welfare for society as a whole) as the paramount goal of law. Therefore, the overriding normative aspiration of law and economics is that law should serve the goal of efficiency. Hence the question could arise how normative suggestions formulated on the basis of the efficiency criterion would change if it were to take into account the results from behavioural studies. In the latter respect, questions could be asked such as whether particular biases would be an argument in favour of strict liability rather than negligence (or the other way around), whether they would constitute a case for regulation of safety and for example whether these biases may justify the introduction of comprehensive disaster insurance.

The structure of an organisation will be influenced by a number of factors relating broadly to the technical conditions of production and transactions costs and the incompleteness of contracts. Some of these factors will be ‘internal’ to the firm while others will be external to it. A very interesting research agenda considers the role of one such ‘external’ influence: the liability system (see Klaus Heine’s recent work). A related one could be seen as the fees available for paying lawyers. Both of these affect a set of risks faced by a firm and, hence, its choice of outputs and, in principle, how it organizes itself to manage the risks. In the case of legal fees, an obvious issue might relate to a corporate firm’s decision to run an in-house legal team, or when to use it (a ‘make-or-buy’ decision). Another might be an insurer’s decision to use panel’s of legal firms rather than contract on a spot basis as a case arises.

We would be interested to receive proposals for doctoral research on this topic. The proposal could be for conceptual and/or empirical work, though the latter may involve the initial collection/collation of data.

Basic description of the topic, to be expanded and specified in research proposal by the candidate

There is an extensive Law and Economics literature of (substantive) tort taw, in which it is analyzed under which conditions strict liability results in higher social welfare when on the contrary negligence is preferred. This analysis also encompasses the question whether a defense of contributory or comparative negligence is desirable and if yes, which type of defense is to be preferred.

However, rules of procedural law are known to potentially have a substantial impact on the outcome of a lawsuit. Examples are a reversal of the burden of proof, the doctrine of res ipsa loquitur, lowering the burden of the plaintiff to state his claim and substantiate it with enough information and raising the burden of the defendant to refute this claim and providing enough information, et cetera.

This implies that, for example, it may be easier for a plaintiff under a rule of negligence with a reversed burden of proof to win his case than for a plaintiff under a rule of strict liability without a reversed burden of proof. If that is the case, the Law and Economics analysis which focusses on substantive law may not result in adequate conclusions and policy recommendations, because there it is generally argued that strict liability is in the advantage of the plaintiff because he has to prove less.

This research project aims at analyzing the way in which different rules of procedural law, which are regularly applied in tort cases (often to help the plaintiff overcoming informational hurdles), affect the conclusions of the economic analysis of tort law. By analyzing the impact of both substantive and procedural rules, the project enables Law and Economics scholars to provide more accurate policy recommendations about the way in which tort law should address issues of liability.

Introduction

Inspectorates operate in an ideological climate in which they are no longer automatically seen as the main or ultimate responsible authority for the supervision of economic activity (Almond, 2015). This ideological climate is based on the conviction that the ability and willingness to realize public goals by means of regulation and oversight are divided between the government, the market and civil society. Therefore, it often happens that state inspectorates delegate or share supervisory responsibilities with the business community and civil society (Lobel, 2012).
However, this does not in any way mean that in practice the distribution and coordination of responsibilities, tasks and powers with regard to supervision run smoothly and harmoniously. Concerns about regulatory capture by private regulators or their clients and concerns about the dominance of public regulators (‘reverse capture’) (Martinez, Verbruggen, & Fearne, 2013) can alternate or occur simultaneously with various network partners and ensure conflicts about the division and coordination of responsibilities, tasks and powers (Van der Voort, 2015, 2017). The institutional logic of various network partners may also conflict (McPherson & Sauder, 2013). The degree of instability and the conflict sensitivity of institutional practices may depend on the extent to which network partners are shielded from their environment, legitimize the prevailing institutional practices and are able to impose institutional practices on the other network partners (Zietsma & Lawrence, 2010). Especially when participants are not able to protect themselves from their environment, practices are controversial and none of the partners is able to impose their will on the other partners, instability and conflict are likely to occur.

Research question:

1. How are the tasks, responsibilities and authorities with regard to standard setting, monitoring and supervision divided and coordinated in regulatory governance networks?
2. In what ways are regulatory practices in regulatory governance networks unstable and susceptible to conflict?
3. In what ways can any differences in the stability and conflict sensitivity of regulatory governance networks be explained by the extent to which participants are able to shield themselves from their environment, the support of the distribution and coordination of tasks, responsibilities and powers regarding these tasks and power asymmetries between the network partners?

Methodology

Answering the questions demands a comparative case study of regulatory governance networks. An example of two regulatory governance networks that could be selected for the comparison concern two Dutch networks that supervise the import of goods.
The first network is responsible for monitoring the import of endangered animals and plants. The protection of endangered species has attracted much social and political attention in recent years, for example in the form of the many reports that the Dutch Commodity and Food Authority (NVWA) receives annually from citizens, interest groups, government bodies and companies. Various government agencies (NVWA, customs, the Governmental Agency of Dutch Entrepreneurship and the police) have been working together since 2013 in the so-called CITES experimental garden (‘Proeftuin CITES’), which is aimed at detecting rule violations. The plan is
to gradually expand this cooperative project with traders in endangered animals and plants and with interest groups.
The second network is centered around customs and deals with the supervision of the import of cross-border goods in general by means of the so-called ‘Authorized Economic Operator’ (AEO) certificate that is valid in all member states of the EU. The certificate is based on the assumption that the business community and customs are jointly responsible for the safe and traceable flow of goods that cross the external borders of the EU. Companies themselves are responsible for protection measures, customs for checking the extent to which these safety guarantees are sufficient.
The surveillance network with regard to the import of endangered species seems to attract more involvement of citizens and politicians, to be more controversial and to include more equal partners than the AEO certificate network. By way of a comparative case study, it can be examined whether this also means that the former network is more unstable and more susceptible to conflict than the latter.

Requirements

Candidates who want to apply for this research proposal are expected to complement it with a separate document in which they present their own ideas about how to proceed and a critical reflection on the research proposal.

Literature (suggestions)

Almond, P. (2015). Revolution blues. The reconstruction of health and safety law as ‘common-sense’ regulation. Journal of Law and Society, 42(2), 202-229.
Lobel, O. (2012). New governance as regulatory governance. University of San Diego School of Law, Research paper No. 12-101(November), 1-27.
Martinez, M. G., Verbruggen, P., & Fearne, A. (2013). Risk-based approaches to food safety regulation: What role for co-regulation? Journal of Risk Research, 16(9), 1101-1121.
McPherson, C. M., & Sauder, M. (2013). Logics in action: Managing institutional complexity in a drug court. Administrative Science Quarterly, 58(2), 165-196.
Van der Voort, H. van der (2017). Trust and cooperation over the public–private divide: an empirical study on trust evolving in co-regulation. In: Six, F. & Verhoest, K. Trust in regulatory regimes. Edward Elgar.
Van der Voort, H. (2015) Co-Regulatory failure in the food industry, European Journal of Risk and Regulation, 4, 502-511.
Zietsma, C., & Lawrence, T. B. (2010). Institutional work in the transformation of an organizational field: The interplay of boundary work and practice work. Administrative Science Quarterly, 55, 189-221.

Introduction

The central research question is how formal and informal strategies of handling occupational health and safety risks interact. There is a trend towards the formalization of the handling of occupational risks (Dekker, 2014). This trend refers, among others, to organizations implementing and expanding management systems based on regulations, formal training, and enforcement. It also refers to organizations commissioning certifying agents to monitor their compliance with private standards and to accounting for the suitability of management systems to regulators. However, the formalization of risk-handling has not extinguished informal risk-handling strategies such as the use of discretion (responsibly bending rules when necessary), tacit knowledge (experience based, unverbalized knowledge) and taking personal responsibility by craftsmen.
Three incompatible ideas of how these formal and informal risk-handling strategies relate to each other can be found abreast in the literature (Mascini & Bacharias, 2012). Some researchers conceive of informal risk-handling strategies as the opposite of formal safety policy. This can either be because parties whose interests are underrepresented in the formal safety policy frustrate or sabotage it by applying informal tactics or because employees revert to informal strategies because formal policies fall short. Another reason may be that formal risk-handling strategies enable management to render individual employees responsible for things that go wrong and to avoid blame (Almond & Gray, 2017). Conversely, the so-called high-reliability theory states that a centralized formal safety policy optimizes the reliability of organizations precisely in combination with decentralized informal risk-handling strategies. This presupposes that the positive effects of the formal and informal risk-handling strategies complement each other. Still others argue that the relationship between formal and informal risk handling strategies is context dependent. They assume formal and informal risk-handling strategies are most likely to be complementary when the trust exists between hierarchical layers and professional categories within organizations, while it is most likely that divergence between safety management systems and informal risk-handling strategies becomes routinized and institutionalized when intra-organizational trust is absent (Gunningham & Sinclair, 2009). This project addresses the question how formal and informal risk-handling strategies interact.

Research question:

1. To what extent are formal and informal risk-handling strategies applied in accident-prone organizations such as utility companies, construction companies, chemical industries, or health care institutions?
2. To what extent do formal and informal risk-handling strategies prevent incidents and accidents within these organizations?
3. To which extent determines intra-organizational trust the compatibility or incompatibility of formal and informal risk-handling strategies?

Methodology

These research questions can answered by combining a comparative case study with a survey.
For a comparative case study at least two work units (preferably within the same organization) have to be selected: one with high levels of trust between hierarchical levels and one
with low levels of trust. In each work unit the use of formal and informal risk-handling strategies are to be studied as well as the relation between these strategies.
For the survey, several work units (teams, departments or branches) within preferably one large organization have to be chosen, so that the use of the different risk-handling strategies can be compared between different work units.
Requirements
Candidates who want to apply for this research proposal are expected to complement it with a separate document in which they present their own ideas about how to proceed and a critical reflection on the research proposal.

Literature (suggestions)

Almond, P., & Gray, G. C. (2017). Frontline safety: Understanding the workplace as a site of regulatory engagement . Law & Policy, 39(1), 5-26.
Dekker, S. W. A. (2014). The bureaucratization of safety. Safety Science, 70, 348-357.
Gunningham, N., & Sinclair, D. (2009). Organizational trust and the limits of management-based regulation. Law & Society Review, 43(4), 865-899.
Mascini, P., & Bacharias, Y. (2012). Integrating a top-down and a bottom-up approach: Formal and informal risk handling strategies in a utility company. Risk Analysis, 32(9), 1547-1560.