Class Actions and the Annihilation Defense

    Class actions have always presented the risk of a draconian remedy against a defendant.  That is one of the principal criticisms of the use of that device, but it unfortunately comes with the territory, airisng from the prospect of sizable plaintiff classes.  But just because class actions anticipate large plaintiff classes, and by definition potentially large classwide damages, an argument that a defendant should not have to risk such liability is not irrelevant.  Indeed the risk of such liability, even on weak liability facts, has been considered a factor that counsels against certification. [In re  Rhone-Poulenc Rorer, Inc. 51 F.3d 1293 (7th Cir. 1995)].

    The dilemma of class actions is that the greater the aggregate damages in relation to individual damages, the worse this problem seems.  Yet the smaller the individual damages, the more likely class certification is appropriate because individual actions are unlikely.  In the language of Rule 23, the class device is likely to be "superior" to other methods of adjudication. 

    This tension has been highlighted recently by  cases alleging violations of the Fair and Accurate Credit Transaction Act, which prohibits the disclosure of more information on a credit card receipt that the last five digits of a credit card number.  Violations result in individual statutory damages of from $100 to $1,000 per violation.  A small business that has run afoul of the act for any significant period could face hundreds of thousands of dollars in group damages.  Some have suggested the damages per defendant could reach the billions.

    As a result, defendants have begun to assert an "annihilation" defense to these claims -- that class certification should be denied because it would result in annihilation of the defendant.  A series of pieces have circulated in the last week or so describing this litigation, which seem to raise all of the best arguments both in favor of and against small stakes class action.  You can find some of these here and here. So far, the defendants have not fared very well with this defense, at least in these cases.  Many of these case have relied, apparently, on the Seventh Circuit's decision in Murray v. GMAC Mortgage Corp., 434 F.3d 948, under the Fair Credit Reporting Act.  Law.com this week reprinted a fairly comprehensive review of the current state of this litigation.  

    These cases should provide pretty fertile material for civil procedure teachers over the next few years.  In the meantime, they also seem to be providing fairly fertile grounds for plaintiff class action lawyers.