Informational Externalities and Information Sharing in Class Action Suits

When several plaintiffs file individually a lawsuit against the same tortfeasor, the resolution of the various cases through repeated trials produces positive informational externalities, which benefit to the later plaintiffs (since there exist precedents, jurisprudence...). Thus, the first filers may have an incentive to initiate a class action as far as it enables the various plaintiffs to share their information. This feature has not been stressed in the literature, and in contrast strategic uses of class actions have been studied in more details (Che (1996), Marceau and Mongrain (2003)).In this paper, we elaborate on a basic strategic model of litigation settlement, focusing on the interactions between the characteristics of the discovery process (as a general technology of production of evidences) in mass tort litigation, those of the compensation rules set by Courts, and the structure of litigation costs, in order to study when a class action fails to occur, and when sequential trials are more likely.We consider the case of a perfect discovery process. We provide sufficient conditions under which a class action is formed. We show that when victims have heterogeneous claims, the compensatory damages rule awarded by Courts is of major importance for the formation of the class action, whatever the degree of heterogeneity: all else equal, there always exists a degree of damage averaging under which the class action occurs. We also show that when contingent fees are used to reward attorneys' services, plaintiffs become neutral to the arrival of new information on their case