Why Enable Litigation? A Positive Externalities Theory of the Small Claims Class Action

Abstract

This Article appears in a Symposium commemorating the Supreme Court's decision in Phillips Petroleum Co. v. Shutts. The legal claims that gave rise to Shutts were meritorious, yet of relatively modest value.

Individuals are unlikely to litigate such negative value claims because the costs of doing so outweigh the benefits they will receive; defendants are well-situated to escape liability. Conventionally, scholars describe this situation as posing a collective action problem and demonstrate how the class action mechanism works to solve that problem.

In this Article, I discuss the problem of negative value claims in a related yet distinct manner. The fact that parties will not pursue these claims is, I argue, an example of the underproduction of a so-called public good. That good is a lawsuit. Litigation can be conceptualized as a public good, with its pursuit producing positive externalities. The Article enumerates these collateral social benefits, grouping them as: 1) decree effects; 2) settlement effects; 3) threat effects; and 4) institutional effects.

The addition of this analysis to the scholarly literature serves several functions. Among these is that it illuminates how little collective action really takes places in small claims cases; how relatively unimportant the compensatory aspects of the case are compared to its other social functions; how the concept of deterrence does not capture these non-compensatory benefits as well as the concept of externalities does; and how small claims class actions are more like other types of class cases than generally presumed.