Recently in Class Actions Category

For being the first Overlawyered blogger to have a post cited in a federal case. In Taylor v. XM Satellite Radio, Inc., 533 F.Supp.2d 1151 (N.D. Ala. 2007), XM argued that the class action demanding a refund for a 24-hour outage was moot because they offered refunds well before the class certification motion was made. Plaintiffs disputed this, arguing they did not know about the refund offer until after they moved for class certification. One questions the relevance of the time of the certification motion (and, indeed, the court found this factual claim irrelevant) given that the refund offer was to the entire class rather than just to the named plaintiffs, but one reason that the court expressed skepticism at the attorneys' claims was the existence of an Overlawyered post by David discussing the refunds and the ludicrousness of the suit. Case dismissed for mootness, though the court also noted that XM had no contractual obligation to provide continuous uninterrupted service.

My latest Liability Outlook looks at the abusive litigation created by a statutory drafting oversight: a bill designed to protect against identity theft has instead become a mechanism for the entrepreneurial plaintiffs' bar to attempt to bankrupt innocent businesses that haven't harmed anyone.

Last month Public Citizen drew extensive and largely uncritical publicity for a report blasting credit card arbitration. The report's most dramatic number, picked up by many papers, was based on newly available California data: "In a sample of 19,300 cases, arbitrators ruled in favor of consumers 5 percent of the time." (Phuong Cat Le, "Binding arbitration a loser for consumer", Seattle Post-Intelligencer, Sept. 27). Such results, charged a Public Citizen official, show “a stunning bias against consumers”. Kansas City Star consumer columnist Paul Wenske's reaction was typical: "Would you agree to let someone arbitrate your dispute with a credit card company if you knew he or she almost always decided in favor of the company?" ("When you sign up for a credit card, you sign up for arbitration", Oct. 6). It was all a great publicity coup for the litigation lobby, which has been gearing up a campaign to do away with predispute arbitration agreements that divert potentially lucrative disputes away from the lawsuit system.

If, however, you happened to read Bob Ambrogi's Legal Blog Watch entry on the story, you might have noticed the following reader comment:

Bob, I am an arbitrator for NAF [National Arbitration Forum]. My statistics would show that I rule for the Claimant in an extremely high percentage of cases. The statistic is misleading as 95% plus cases are default cases, where the consumer never bothers to answer.

Posted by: legal eagle | Sep 28, 2007 1:19:06 PM

And there you have the little trick behind Public Citizen's sensational assertion that only 5 percent of consumers manage to beat the house. The vast majority of cases that go before the arbitrators are in fact uncontested collections, which present no active dispute to resolve one way or the other. Where there is an active dispute, it is plain that consumers' win rate is very much higher than 5 percent. Why did so many journalists in recent weeks convey the mistaken impression that there's almost no hope of success for the consumer who contests the lender's story at arbitration? Because those journalists were falling into a hole skillfully dug for them by Public Citizen.

Any system of resolving routine consumer collections, including traditional courtroom litigation, is likely to generate a high rate of default judgments or their procedural equivalent. The National Arbitration Forum at its website refers to one pertinent study which it summarizes as follows:

Default Judgments Against Consumers: Has the System Failed? (Sterling & Schrag, 1990; 67 Denv. U. L. Rev. 357, 360-61)

A Georgetown University law professor analyzed a sample of claims filed in 1988 against consumers in the Small Claims and Conciliation Branch of the Superior Court of the District of Columbia. The small claims procedure did not require the consumer to submit a written answer. Instead, the consumer only had to show up in court at the specified time. Nevertheless, according to the study, 74% of the cases resulted in a default judgment. In 22% of the cases, the consumer acceded to full liability. In the remaining 4%, the plaintiff voluntarily dismissed the case. None of the cases resulted in a trial.

Making full allowance for the somewhat different mix of cases in the two instances, one still is left here with an even lower "consumer win rate" than in the California data. And a recent news story from Texas about debt collection by lawsuit includes an allegation that more than 80 percent of consumers fail to contest the matter, resulting in default judgments; if creditors are winning even half of the contested cases, the resulting "consumer win rate" is below 10 percent. (Teresa McUsic, "Unpaid credit-card bills giving rise to lawsuits", Fort Worth Star-Telegram, Aug. 31).

Of course, some of us would suspect that Public Citizen's really major beef with arbitration clauses is not so much with the way they divert the collections process away from the courts, but with a quite different effect they have on litigation: they impede the filing of class actions by the entrepreneurial plaintiff's bar (arbitration clauses typically rule out class treatment of complaints, which means law firms who've signed up one client can't proceed to enroll millions of other cardholders as plaintiffs too without their say-so). But of course the casual newspaper reader is likely to be a good bit more sympathetic to individual consumers supposedly facing a deck stacked 95-to-5 against them than with the business reverses of class action law firms who find themselves no longer able to extract the sorts of fee-driven settlements they once did.

Here's precisely why the Class Action Fairness Act was passed: in 2000, the Texas Supreme Court ruled that Texas law did not apply to out-of-state members of a putative nationwide class in a lawsuit filed against Texas business Compaq. So what do plaintiffs do? They just filed the same lawsuit in Oklahoma, and the Oklahoma Supreme Court disregarded the Texas Supreme Court opinion (as well as the constitutional requirements of the Full Faith and Credit Clause) to certify the exact same class that the Texas court rejected, holding that Texas law did apply to the nationwide class. Yesterday, the United States Supreme Court refused to intercede, and Hewlett-Packard will now face a class of 1.7 million customers: most risk-averse corporate defendants settle rather than attempt to vindicate their rights in such a circumstance. (AP/Law.com, Oct. 10). Such multiple bites at the apple would not be allowed if the suit were brought today.

Updating our Jun. 22 item: Madison County, Ill. Circuit Judge Andy Matoesian has dismissed without prejudice a racketeering suit brought by class action lawyers against outside class members and lawyers who'd raised objections to the alleged inadequacy of a settlement. Attorneys Stephen Swedlow and Stephen Tillery, who'd reached a $63.8 million settlement with GlaxoSmithKline over its marketing of the drug Paxil, claimed the objections of lawyers N. Albert Bacharach, Jr. and Paul S. Rothstein and citizen Lillian Rogers were frivolous and extortionate. (Steve Gonzalez, "Matoesian dismisses suit against Paxil objectors", Madison St. Clair Record, Sept. 7).

For $800,000, one could buy a nice house, two thousand iPhones, about five days' worth of Alex Rodriguez's contract, or 1,700 hours of class action lawyers producing absolutely nothing of any value to anybody.

In January 2006, The Smoking Gun reported that James Frey's A Million Little Pieces memoir had significant inaccuracies. After a few days of denial, Frey admitted that the book was inaccurate. The publisher, Random House, immediately posted a statement to that effect on its website and offered a refund to anybody who was upset. Approximately 12 seconds later, hordes of trial lawyers copied down the allegations from The Smoking Gun's website and rushed to the courthouse to file "consumer fraud" class action lawsuits against Frey and Random House. They demanded... that Random House post a disclaimer and give refunds to anybody who was upset. In a sane world, those lawyers would have been sanctioned for filing a frivolous lawsuit, and then sanctioned again for wasting everyone's time by asking for a remedy that had already been achieved.

But as we know, this world is Overlawyered, so, more than 1,700 hours of trial lawyer time later, Random House agreed to settle the case for "up to" $2.35 million, to cover refunds, costs, and attorneys fees for the up-to-3.5 million people who purchased the book before Frey admitted it was inaccurate.

And now the other shoe has dropped, exactly as Walter predicted in May. The deadline for class members to submit their claims was October 1st, and according to filings by the class lawyers, a grand total of 1,345 people had done so by September 17th; based on past experience, they expected another 250 submissions in the last two weeks before the deadline. Yes, that total would be less than one-half of one percent of those who bought the book -- the alleged "victims" of the alleged "consumer fraud."

But despite this dismal response rate, the class action lawyers have now submitted their fee request... $783,333.33 -- or one third of the imaginary $2.35 million settlement. Plus $14,000 in expenses. The lawyers defend this fee as reasonable on the grounds that they spent those 1,700 hours preparing their case. (h/t The Smoking Gun) $800,000, and 1,700 hours -- for a case where the research was all done by the Smoking Gun before the suit was filed, and the only thing the lawyers had to do was create enough of a nuisance to induce Random House to settle.

For those of you scoring at home, assuming a $15 refund for each claimant, that would be a total recovery of approximately $24,000 for the class members. And $800,000 for the lawyers. Or, in other words, about 3% of the recovery for the consumers, and 97% for the lawyers. Ain't America grand?

Canada has moved toward more liberal allowance of class-action litigation in recent years; it has also, like most non-U.S. countries, chosen to retain its historic principle of "loser-pays", or "costs follow the event", fee shifting. What happens when prevailing defendants seek an award of costs against losing class plaintiffs, assuming that the individual class members cannot be reached for the purposes of assessing costs? In a bitterly fought lawsuit over unclaimed veterans' pension accounts, the federal government in Ottawa went after three class lawyers for C$4 million in costs out of their own pockets. The Ontario Court of Appeal denied its petition, but the lawyers say they feel chilled from organizing more such suits. In all, the federal government spent an estimated C$6 million in legal fees and C$10 million in other costs successfully defending the pension suit. (Randy Richmond, "Ottawa claimed denying justice", London Free Press, Sept. 20). Earlier London Free Press reports by Randy Richmond on underlying lawsuit: "One Last Battle: Dark Politics", Oct. 30, 2006; "An ugly fight for veterans' benefits", Oct. 31.

By reader acclaim: "A New York Jets season-ticket holder filed a class-action lawsuit Friday against the New England Patriots and coach Bill Belichick for 'deceiving customers.'" Carl Mayer of Princeton Township, N.J., is suing over revelations that the Patriots unlawfully videotaped signals from Jets coaches in a Sept. 9 game. Mayer and his attorney, Bruce Afran,

calculated that because customers paid $61.6 million to watch eight "fraudulent" games, they're entitled to triple that amount -- or $184.8 million -- in compensation under the federal Racketeer Influenced and Corrupt Organization Act and the New Jersey Consumer Fraud Act.

Mayer and Afran, who consider themselves public interest lawyers, have been thorns in the side of New Jersey politicians for years, filing lawsuits and demanding investigations to advance their grievances. They are well known in the state but generally have had little success in their causes.

Both have lost bids for elected offices, and Mayer once served as a presidential campaign adviser to Ralph Nader.

(Dennis Waszak Jr., "Jets fan sues Pats, seeks $184 million", AP/Boston Globe, Sept. 28; ProFootballTalk "Rumor Mill", Sept. 28). More: Sadly, No!.

In the latest issue of the Federalist Society's Class Action Watch, Mark Behrens and Christopher Appel look at recent rulings from the New Jersey and Missouri Supreme Courts that reject lead paint public nuisance claims. James Beck looks at the American Law Institute’s “Principles” projects. Brian D. Boyle and Julia A. Berman look at fact-based scrutiny in securities and antitrust actions. Jessica D. Miller and Nina Ramos look at fluid recovery. Kenneth J. Reilly and Frank Cruz-Alvarez look at an Eleventh Circuit case that may have set a new standard for federal diversity jurisdiction. Last, but not least, there is a front-page article from me analyzing an omission in the Fair Credit Transactions Act (FACTA) that might provide a substantial windfall for the plaintiffs’ bar.

Critics long derided the federal investigation of Milberg Weiss as slow to produce results, but things are moving along at a brisk clip now, with an indictment charging the nation's best-known class-action securities lawyer with conspiracy, racketeering, obstruction of justice and making false statements, just after his best-known former colleague at the firm, William Lerach, agreed to cop a plea deal. "In addition, Steven G. Schulman, a former senior partner at the Milberg Weiss firm, agreed to plead guilty to a racketeering conspiracy charge, prosecutors said." (AP/Business Week; Jurist "Paper Chase"; ABA Journal first and second stories. Documents, all PDF: Milberg Weiss superseding indictment; Schulman charge, plea, press release).

The Sirota & Sirota law blog, an "unfriendly competitor" of Milberg Weiss in the class-action biz, has this post from June offering some perspective on the ongoing investigation.

Clients as figureheads dept.: One of the Lakin Law Firm's class actions hit a snag when the firm discovered that the named plaintiff, Manuel Hernandez, had died two years earlier. And so the law firm petitioned an Illinois court to force the defendant, American Family Insurance, to release customer names so that it could more conveniently line up a new client and keep the action going. (Steve Korris, "American Family should provide name of live plaintiff to substitute dead one, attorneys argue", Madison St. Clair Record, Sept. 13).

The Washington Post quotes me on the hubris that the now-disgraced class-action potentate came to symbolize (Carrie Johnson, "Guilty Plea to End Crusading Lawyer's Lucrative Run", Sept. 19). Few tears will be shed in Silicon Valley (Wired "Epicenter" blog, Sept. 18). The John Edwards campaign says it's handing over Lerach's contributions to charity, and the Joe Biden campaign says it's already done so; no word yet from Hillary Clinton, who took Lerach money for her Senate bid (Josh Gerstein, "Fortunes Darken for Lawyer Melvyn Weiss", New York Sun, Sept. 19). More coverage: Lattman, What About Clients?, NAM Shop Floor. Plus: Ben Smith at Politico has more on the John Edwards connection: "Though he's giving away the $4,600 from Lerach, Lerach is also listed as a bundler, and employees of the lawyer's firm are his third-largest group of donors, mostly giving in the first quarter." (Sept. 19).

I'll be speaking at the Tower Club 5 pm on Thursday, along with Paul Bland of the CL&P blog. If that's not incentive enough to show up, there is apparently free food.

In unusually strong language, an appeals panel in south Florida has condemned the conduct of prominent Miami law firm Adorno & Yoss, which filed an intended class-action lawsuit against the city over an unconstitutional fire-rescue fee, and later (to quote the WSJ law blog) is alleged to have "reached a secret $7 million settlement and paid it out to seven individuals, thereby breaching its duty to the entire class". In its defense, the law firm says that it had no fiduciary duty to the class since a class was never certified, but the appeals panel took a different view, saying that class certification was inevitable and that the case was handled throughout from a class perspective. “It defies any bounds of ethical decency to view class counsel’s actions as anything but a flagrant breach of fiduciary duty,” said Judge Juan Ramirez, writing for the court. In a concurrence, Judge Angel A. Cortiñas was if anything more severe in tone. "Plainly and simply, this was a scheme to defraud. It was a case of unchecked avarice coupled with a total absence of shame on the part of the original lawyers. The attorneys manipulated the legal system for their own pecuniary gain and acted against their clients’ interests by attempting to deprive them of monies to which they might otherwise be entitled. More unethical and reprehensible behavior by attorneys against their own clients is difficult to imagine." (Billy Shields, "Fla. Court Calls Law Firm's Role in Fire-Fee Deal 'Reprehensible'", Daily Business Review, Aug. 9). More links on the Miami fire-fee scandal here.

Law.com reports in its summary:

Renowned plaintiffs attorney William Lerach, lead partner at Lerach Coughlin, announced Tuesday he's stepping down from the firm he started when he split off the West Coast offices of what is now Milberg Weiss. Lerach said he's planning to take some time off. That could include going to prison, or at least the U.S. Attorney's Office. Lerach is said to be nearing a deal with federal prosecutors related to legally questionable payments Milberg Weiss made to its lead plaintiffs and a former expert witness.

The WSJ Law Blog similarly reports that "Lerach has not been charged, but he is in advanced talks with prosecutors on a plea deal that could be announced in September and involve serving prison time, according to two people familiar with the investigation." It also has Lerach's departure memo to colleagues at the law firm that will now be known as Coughlin Stoia Geller Rudman & Robbins (cross-posted from Point of Law).

In the August 27 Legal Times:

To the editor:

I appreciated the chance to speak with reporter Tony Mauro about Stoneridge v. Scientific-Atlanta, an upcoming Supreme Court case that will be discussed at an AEI panel on Oct. 5. Unfortunately, a sentence in his Aug. 20 article [“High Court Head Count at Issue,” Page 1] incorrectly implied that I thought the decision by the U.S. Court of Appeals for the 8th Circuit in the case was an “anti-investor ruling,” when that characterization is solely Mauro’s.

On the contrary, as I have written in The Wall Street Journal and told Mauro, I believe that the 8th Circuit’s dismissal of the case redounds to the benefit of investors in general and that the best result for investors (if not for trial lawyers) would be affirmance by the Supreme Court. And I say that even though I am a putative class member in Stoneridge.

Theodore H. Frank
Resident Fellow
American Enterprise Institute for Public Policy Research
Washington, D.C.

Among things you've missed if you haven't been keeping up with our sister site: law firm tells silicosis clients that "unfortunately" they've checked out healthy and don't have the disease after all; American Express pays $3 million, and class action objectors go away; Harvard's Larry Tribe apologizes to the widow of the late Prof. Bernard Siegan; French consumerist vows not to replicate U.S. folly on class actions; Madison County, Ill. courts due for upgrade to heckhole status?; Hillary bashes Obama for supporting class action reform; Deborah La Fetra concludes her week of guestblogging on premises liability, negligent security and other matters; and much, much more.

The Ninth Circuit, bound by California Supreme Court precedent, struck down a class-action waiver in an arbitration clause in a Cingular cell-phone contract. As I note to Business Week, forcing consumers to keep legal rights that they may not want ex ante raises prices: better to permit consumers and businesses the choice of how best to arrange their business affairs through freedom of contract. This is largely unpopular with the 17 commenters to the article.

The Supreme Court issued the following order today:

The motion of Former SEC Commissioners for leave to file a brief as amici curiae out of time is granted. The motion of John Conyers, Jr. and Barney Frank for leave to file a brief as amici curiae out of time is granted. The Chief Justice and Justice Breyer took no part in the consideration or decision of these motions.

Respondents had objected to the out-of-time filing by the Former SEC Commissioners. Separately, Tony Mauro speculates in the Legal Times whether Roberts or Breyer will "unrecuse" themselves. (Mauro quotes me and Professor Bainbridge (who gets all the good lines); the "anti-investor opinion" language is Mauro's, however, and not mine: as I wrote in the Wall Street Journal and expressed to Mauro, the lower-court decision was decidedly pro-investor, if anti-trial lawyer.) As the order suggests, however, if Roberts and Breyer are going to divest themselves of Cisco stock so they can participate in the case, they have not done so yet. Earlier: Aug. 15; POL May 20.

Full disclosure: As an unnamed class member, I am a plaintiff in Stoneridge, and would be entitled to some small amount of class recovery. Also, I hate hate hate respondent Scientific-Atlanta with a deep burning passion, not least because Scientific-Atlanta attorneys subjected me to a harassing subpoena. Nevertheless, a victory for petitioners would be disastrous.

The trial bar's efforts to broadly expand the securities laws through judicial fiat is challenged in an amicus brief filed in Stoneridge v. Scientific-Atlanta (earlier: Jul. 31, etc.), including former SEC chairs Roderick Hills, Harvey Pitt and Harold Williams; and law professors Richard Epstein, Joseph Grundfest, Stephen Bainbridge, and Larry Ribstein.

Update: Not only has the Department of Justice come out in favor of affirmance (despite extensive lobbying by the plaintiffs' bar), but both major stock exchanges—who interests unquestionably parallel the interests of investors as a group—filed amicus briefs seeking affirmance. But watch the press portray this as "businesses versus investors" instead of "businesses and investors versus trial lawyers and government officials seeking donations from trial lawyers."

Update: Oral argument is October 9. AEI will hold a panel discussing the case October 5.