Why Class Actions Are Necessary
Class actions are necessary because they are an effective tool for deterring, and when necessary, punishing institutional wrongdoing that would otherwise occur unimpeded because of the economic realities involved in litigation. One only needs to walk the halls of corporate America to hear executives and in-house counsel bemoan the fact that, “If it wasn’t for class actions, we could do . . . ”
It is an unfortunate reality that businesses no longer seek to improve profits through providing quality products at a reasonable price. The reality is that many businesses seek to improve profits by marketing products and services with features that do not work as advertised, with undisclosed costs/fees, or that were poorly manufactured/performed so as to save a few dollars. While it is myopic to alienate existing consumers and possibly damage a brand image for a couple of dollars, if you consider that a couple of dollars saved per unit produced, amounts to tens of millions of dollars on items that are mass produced, many businesses are willing to take the risk. Further, it has been our experience that when businesspeople discuss the savings a dubious program realized for a company, they always neglect to factor in the litigation costs and eventual payout in damages. We are at a loss for why the business community cannot understand the basic concept of, treat your customers the way you would want to be treated and you will not get sued!
Businesses realize that no rational person is going to sue for the diminished value of the product if the diminished value is not substantial. Instituting litigation is extremely expensive, and in most cases, small claims court is unavailable for these minimal disputes.1 However, as recognized in the case law, class actions exist for adjudicating these small disputes, where the “class action is superior to other available methods for the fair and efficient adjudication of the controversy.”2 Class actions are required to be brought where injunctive relief is sought on behalf of a group. While many people have a problem with class actions and the results they currently produce, few people outside of corporate America have a problem the concept of a class action.
Class actions are subject to abuse, just like any other legal process or device. Common examples include coupon settlements for class members with substantial damages, excessive class representative and class counsel fee awards, state courts adjudicating the rights of parties across the nation and overly broad settlements. Part of the abuse stems from collusion between class counsel and the defendant (e.g., the defendant pays class counsel an excessive amount in attorneys fees in exchange for class counsel agreeing to a settlement that provides little relief to the class while simultaneously releasing most if not all the class members’ claims against the defendant). The fact that this abuse exists is not the fault of the class action device, but of unethical conduct by counsel and lack of adequate supervision by the court. We feel that judges do not fully appreciate their responsibility to review the terms of the settlement in a class action. While the class representative(s) is supposed to be ensuring the class members are not getting abused, in many cases, class representatives are collecting windfall representation fees in exchange for acquiescing to the collusive settlement. Judges must be active participants in evaluating the terms of settlements and cannot count on objectors to appear at the fairness hearing, or on class representatives to object. Further, when "non-frivolous objectors"3 do appear, judges need to pay attention, and judges should not be hesitant to remove their conditional approval of the settlement if it becomes clear at the fairness hearing that the settlement is inadequate. It boggles the mind to understand how judges can be approving class settlements where there has been no discovery or evidence produced as to the value of the class members claims, assuming the claims were to be found valid. A lot of the problems with class actions could be fixed with a mere increase in the attention paid by judges to the settlements they are presented with for approval.
It is not the goal of this article to explore how to fix the class action device, but rather to demonstrate that the business community’s arguments against class actions are without merit. As already discussed, the class action as a concept is accepted by most of the general public. Anyone with even the barest notion of fair play is offended by the idea of an entity reaping windfall profits from false advertising or cutting corners. So the question becomes, how does one prevent the entity from gaining any benefit from their dishonest acts? You reach a settlement or obtain a judgment that deprives the entity of its ill-gotten gain, but now a different problem arises; what to do with the amount that has been retrieved? There is no formula for distribution of the proceeds that will work with every, or even the majority of class actions, however one should consider the following arguments regarding current distribution methods.
It goes without saying that class members getting coupons while class counsel gets hundreds of thousands of dollars if not millions seems unreasonable. However, one has to look beneath the surface to determine what the claimed injury is and what the individual class member’s damages are. If the violation was a technical violation of the law, or the product/service’s value was not significantly diminished, then a coupon might make sense, especially if the coupon’s value is greater than the alleged injury and class members are likely to remain customers of the Defendant. As for why class counsel needs to be paid in cash, and a significant sum at that, class counsel has taken an extreme risk in prosecuting the suit and has likely incurred significant expenses in prosecuting the matter. In fact, by aggressively prosecuting the class’s claims and trying to get the best possible results for the class, class counsel risks the Defendant going to one of the copycat lawsuit attorneys and settling with them for less. Finally, do not blame class counsel for suggesting coupon settlements, it is the Defendant(s) who suggest coupon settlements, and who try to turn the settlement into nothing more than an attempt to extinguish liability while increasing business.
Excessive Class Counsel Fee Awards
Companies usually do not just roll over once a class action lawsuit is filed and pay up. Companies tend to hire large law firms that file every motion and objection one can imagine, many of which are frivolous, each of which the class counsel has to respond to. When corporate defendants finally respond to discovery, the response is usually a blizzard of paper which class counsel has to analyze in short order and before the reply briefs are due on the summary judgment and class certification motions. It also amazes us that none of the class action “reform” advocacy groups ever question the amount defendants spend on their attorneys. A comparison between what class counsel is awarded and what defense counsel billed would probably make most class counsel awards seem reasonable. These factors along with others only serve to further illustrate why class counsel fees can and should be high, but only after a thorough review by the court.
Excessive Class Representative Fee Awards
Assuming that a class representative actually participates in the litigation and reviews any proposed settlement to ensure that it is fair, a $2-5K class representative fee is easily justifiable. The range should depend on the amount of time the class representative spent at depositions and answering other discovery, and also needs to take into account the harassment endured. Believe it or not, many defendants harass and intimidate the class representative(s) in an effort to get them to drop out of the lawsuit, thereby causing the lawsuit to fail.
State Courts Adjudicating the Rights of Parties Across the Nation
This is yet another red herring presented by class action reformers. First, state courts are called upon all the time to interpret another state’s law and apply it to the parties. There are complex rules regarding conflicts of law which state and federal judges both use to determine which law should be applied. Further, moving all class actions to the already overburdened federal courts does nothing to solve the problem of one judge, sitting in a given state, deciding the rights of the parties across the nation. In reality, class action reformers are showing their true colors with this argument, because the logical result of this argument is to not certify multistate let alone nationwide classes. We thought the proponents of class action “reform” wanted to cut down on duplicative and dueling class actions, yet all this argument does is require fifty separate class actions to be filed.
Overly Broad Settlements
Again we get back to judges having to pay attention to the class settlements being proposed. No amount of legislative reform here will fix the disconnect between the rules and clear appellate precedent with the trial court judiciary that is in the trenches certifying classes and approving settlements. Perhaps the only way to fix the problem of lax judicial supervision or review of class settlements is for appellate courts to start reversing and remanding any settlement that appears to be improper. Judges could also cut down on collusive settlements being presented in the first place by making clear that they are willing to revisit their finding of adequacy of representation under FRCP 23(a)(4) and its state counterparts.
There can be no argument that in many cases, class members are being abused by class counsel and harmed again by the Defendants. However, the “reform” efforts being proposed in Congress do nothing to fix class action abuses,4 and only protect putative class members by making it next to impossible to have a class certified. We must remember that the “reformers” are being funded by industries that are typically class action defendants. If they were concerned about class members, they would not be proposing coupon settlements to begin with. In November, we will be posting an article on proposed legal system reforms that would actually fix the class action device without killing it.
1Not because of the value of the claim but because of the complex issues involved and the fact that small claims court rules often require no attorneys and allow for no discovery.
2See Amchem Products, Inc. v. Windsor, 117 S.Ct. 2231, 2245 (1997)(citing Adv. Comm. Notes) & Fed. R. Civ. P. 23(b)(3).
3By "non-frivolous objector" we mean someone who has actual proof that the settlement is unfair. Increasingly, we are seeing sham objectors (members of the certified class who are pawns recruited by other attorneys) appearing at fairness hearings and claiming the settlement is unfair, but fail to explain why or how they could do better. While we believe objectors are an invaluable asset to the courts in protecting absent class members from sham settlements, but we also believe that courts must impose severe sanctions on counsel for frivolous objectors, who are merely attempting to extort attorney's fees from the parties.
4There are plenty of federal judges approving abusive settlement agreements, and we know of no study showing that class action abuse is more severe in state courts. What the studies do show is that while it is more difficult to get a class certified in federal court, once certified, a federal court is just as likely to approve a settlement as a state court.