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When the Wheels of Justice Grind Out … Coupons

Critics draw attention to massive class actions that compensate attorneys well but recompense the afflicted with little or nothing of value.

Class-action lawsuits are becoming so prevalent that some legal experts worry the headlong rush to certify so many cases — and the settlements that result — may compromise fundamental principles of justice and place an unsustainable burden on an already creaky court system.

The most barbed criticisms are aimed at settlements that increasingly line legal pockets with millions of dollars in fees while plaintiffs make do with paltry sums or, more controversially, coupons for compensatory goods or services. In some cases, the awards would be so inconsequential to individuals that the money goes into a public trust that may never directly benefit the aggrieved plaintiffs.

Law professor Mary Davis, from the University of Kentucky College of Law in Lexington, talks of the class-action method turning into “some kind of Nirvana for plaintiffs’ lawyers.” Some firms, such as securities class-action specialists Milberg Weiss, were described as “lawsuit factories.”

But other charges are leveled too: that judges often do little more than rubber-stamp settlements, effectively reducing the court’s role to that of a processing center; and that settlements can provide an easy exit for defendants looking to buy their way out of trouble.

Robin Effron, assistant law professor at New York’s Brooklyn Law School, says coupons are not always a bad thing but she worries that in many cases these in-kind settlements can be far too lenient.

“Defendants shouldn’t be off the hook just because the harm they’ve done is spread out over a lot of people,” she says. “We don’t want to insulate defendants from liability.”

Davis agrees. “There’s value in identifying wrongdoing,” she says.

In the United States these days, it’s rare to discuss faulty consumer products, a company’s plunging share price, any type of discrimination or other perceived widespread wrongdoing, without hearing the words “class action.”

For example, Toyota’s mechanical problems had lawyers lining up to heap responsibility on the Japanese auto giant for matters ranging from the deaths of drivers and passengers to the potential drop in resale value for millions of vehicles.

More recently, The Economist weighed in with a story about a similar pattern unfolding against BP and others in the wake of the rig explosion and subsequent oil spill in the Gulf of Mexico.

“Trial lawyers are dreaming of one of the biggest paydays since they feasted on tobacco litigation,” said the magazine, referencing the largest ever class settlement when U.S. states sued leading tobacco companies and won $206 billion over 25 years.

While these are headline cases, hundreds of others are humming along under the radar. An online attorney marketplace lists more than 1,000 investigations and pending lawsuits, conveniently searchable under the headings “product or service,” “injury,” “topic” and “company.”

Ted Frank, president of the Center for Class Action Fairness, a Washington, D.C.-based public interest law firm he founded last year, is on a mission to rebalance the scales between class-action plaintiffs and their attorneys.

“It’s often cheaper for defendants to give lawyers some money to go away,” laments Frank, now an adjunct fellow with the Center for Legal Policy at the free-market-oriented Manhattan Institute.

He cites a case brought against Motorola and other headset makers in 2006 claiming their Bluetooth products carried insufficient warning about potential damage to hearing. Under the settlement — since appealed — the plaintiffs receive nothing, their lawyers get $850,000 in fees and expenses, and the instruction manual was reworded.

Frank, who puts this suit into what he considers the overflowing category of “meritless class actions,” says it’s good when defendants are held accountable but not so good when anyone can just be hauled into court; cases that have no merit are not helpful to consumers and may punish companies trying to do the right thing.

“I want class actions to benefit the class more than the lawyers,” says Frank, who goes to court to object to settlements — nine so far, including Bluetooth — that richly reward a few attorneys at the expense of their many clients.

Peter Thompson, a professor at Hamline University School of Law, in St. Paul, Minn., has some sympathy for the plaintiff legal team. He points out that class actions are not all successful, not easy to prosecute, and require an upfront commitment borne by the attorneys.

Thompson, who 30 years ago co-authored the book A Class Action Suit That Worked: The Consumer Refund In The Antibiotic Antitrust Litigation, also notes that class-action defense attorneys command high fees, often more than the plaintiffs’ lawyers.

Brian Fitzpatrick, assistant professor at Vanderbilt University Law School, in Nashville, sought to pin down the size of settlements and lawyers’ fees in a study published this year in The Journal of Empirical Legal Studies.

During 2006 and 2007, he found 688 approved class-action settlements worth almost $33 billion with lawyers’ fees roughly $5 billion. Though the median fee was around 25 percent, the overall figure was closer to 15 percent because larger settlements tend to reap a smaller percentage.

Fitzpatrick feels the rubber-stamp charge against judges is a “bit unfair” and says if it were true, then plaintiffs’ lawyers would be asking for 95 percent. He thinks lawyers generally are careful about what they ask for and keep claims within reason.

Class-action critics have been especially scathing about settlements offering plaintiffs discount coupons for the very businesses that ripped them off in the first place. Not surprisingly, Frank says, redemption rates are sometimes as low as 3 percent.

He mentioned one settlement against the brokerage firm A.G. Edwards where the plaintiffs received about $24 worth of coupons toward mutual fund fees — to be used over three years — while their lawyers split $21 million in fees. (Frank’s group objected to the settlement but the St. Louis (Mo.) County judge hearing the case approved the deal.)

Another settlement, over alleged cosmetics price-fixing, involved giving away $175 million worth of beauty products at leading department stores. However, the process was so haphazard that stores quickly ran out of supplies and many plaintiffs missed out though their lawyers still pocketed $24 million.

Fitzpatrick, while not advocating coupon settlements, says there may be times when that’s a better option for class members: if they are going to use the coupon, it can be worth more to them than a cash settlement.

In some instances, where the alleged wrong was widespread but the amount destined for those hurt would be trivial, courts have designed “cy-pres" systems that collect the damages and while not necessarily helping those directly hurt, it puts the money to “next best use” in, say, a government program or public-service fund.

“Cy pres awards may be used by parties to conceal problematic types of class actions, such as settlement class actions and faux class actions, where the class action procedure is used primarily for the benefit of participants in the process other than the absent claimants,” Martin H. Redish, Peter Julian and Samantha Zyontz wrote in a July paper in the Florida Law Review on fashioning class-wide relief. (See a comprehensive examination of their work here.)

In that paper, the authors identified 120 federal class actions lawsuits between 1974 and 2008 where cy-pres featured in the settlement, and noted that both cy-pres settlements and so-called “faux class actions” had risen dramatically since 2000.

They suggested the option of cy-pres gave life to many cases that would otherwise be tossed. “Finally, not only do cy pres awards have the potential to increase the total available fund and legitimize cases where the class might not otherwise be certified, but they can also increase the likelihood and absolute amount of attorneys’ fees awarded without directly, or even indirectly, benefitting the plaintiff.”

Potential abuses of the coupon system were addressed by the 2005 Class Action Fairness Act which, in a move called “ingenious” by Fitzpatrick, sought to align attorney fees with the value of coupons redeemed rather than issued.

The act, widely seen as a piece of business-friendly Bush-era legislation, also made it easier to move actions out of local jurisdictions and into federal courts where decisions were more likely to favor defendants. (In the A.G. Edwards case, for example, the brokerage’s attorneys fought to move the case to federal court, where they expected the case to be dismissed.)

The provision also acted as a check on the many state court judges who were overly-friendly toward plaintiffs and “certified actions that had no business being certified,” said Frank.

(At the time, states like Mississippi had been declared “judicial hellholes” and “magnet jurisdictions” for class actions by pro-business groups like the American Tort Reform Association. Groups like the consumer-oriented Public Citizen countered that these descriptions were based on anecdote, not data. “Moreover,” Public Citizen wrote in 2005, “if one or two court systems are a problem, that is no justification for rewriting class action rules across the country that will dramatically reduce the legal rights of consumers and workers.”)

Class actions evolved in the 1930s but only gathered momentum after a key change to the Federal Rules of Civil Procedure. Previously plaintiffs had to opt in to join a class action. From 1966 onwards, anyone not opting out automatically became part of the suit.

Since then, billion-dollar class actions have attached to such household names as Enron, WorldCom, AOL Time Warner, Exxon Mobil and Wal-Mart, and to issues ranging from silicone breast implants to oil spills to sex discrimination.

Cornerstone Research, a nationwide attorney consulting service, reports that last year securities class actions alone generated $3.8 billion in settlements, up more than one-third over 2008, with plaintiff lawyers paid an estimated $600 million in fees.

But if settlements are so skewed toward the best interests of attorneys, why do judges sign off on them?

Partly, say critics, because once plaintiffs and defendants have reached agreement, judges have little incentive to scrutinize too closely; and partly because they want cases off their court docket.

Thompson, however, argues that the fees component of any settlement is examined closely by the court, with attention paid to things like total hours worked, the skill level and number of lawyers involved, meals and other perks claimed, and fees as a percentage of the total award.

Frank agrees the rules are already in place to enable “fair, adequate and reasonable” settlements and believes it’s just a question of judges following those steps. Until then he says the only recourse is to shine a light on poor settlements by appealing them, a process that may eventually lead all the way to the Supreme Court.