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Capitol Comment

    Capitol Comment 243 - Class Action Lawsuits: America's New Boom Industry

    07/20/1999

    The class action lawsuit: a good idea gone bad. A class action lawsuit allows adjudication of the claims of many similarly situated plaintiffs in one trial, as opposed to each individual plaintiff bringing his or her own claim. For instance, if a credit card company wrongly overcharged every cardholder by $1,000, cardholders could join together in a class action, rather than each suing the credit card company individually.

    There is a new multi-billion dollar investment opportunity emerging in America – a deal that creates percentage returns in the tens of thousands. America’s new hot investment is class action lawsuits in state courts. While plaintiffs often receive only coupons, trial lawyers are reaping huge benefits. But all is not lost, H.R. 1875 would be a positive step towards reining in frivolous class actions and the trial lawyers who bring them.

    Class actions are designed for cases such as the credit card example. There are so many plaintiffs, that having each bring the same claim would be an inefficient use of both time and resources. Because the plaintiff’s claim in each case is exactly the same – did the credit card company overcharge the credit card holder? – it is less of a strain on the court system if the cases are consolidated into one lawsuit.

    The problem with the current class action landscape is that most state courts certify classes when they should not. Specifically, state courts certify groups of plaintiffs who do not necessarily have similar issues of law or fact, making it less useful to try and combine the claims into one lawsuit. Further, state courts sometimes certify classes that bring frivolous or marginal claims.

    State court certification of frivolous classes often forces the defendant to settle, even though they may not have done anything wrong. The class action allows one lawyer to represent literally thousands of plaintiffs against one defendant in one trial. Because of the sheer magnitude of the class, corporations often settle class actions, rather than risk a verdict that could force them into bankruptcy.

    Only plaintiffs’ lawyers benefit from current class action rules. When a big enough class action suit is filed, and the trial lawyer has essentially forced a settlement, that particular lawyer gets to negotiate his own fee from the defendant, often without his clients’ knowledge or approval. Fees that could reach into the billions of dollars and often leave the plaintiff with next to nothing.

    Even if the class wins, individuals may not see any benefit. Consumers often receive useless coupons, while their attorneys receive millions. For example, in a class action settled against the manufacturers of a computer monitor, each plaintiff received a coupon for $13 off a new $250 monitor or the right to a $6 cash rebate in the year 2000. The lawyers representing the class received a $5.8 million fee.

    Like smart business people, attorneys reinvest a portion their reward to find a new class-action target.

    Normally, we would applaud such enterprising behavior. After all, our country was founded on free enterprise and the entrepreneurial spirit. But the majority of these class-action lawyers are damaging our economy, while benefiting no one but themselves. Injured class members do not fully benefit. Businesses are forced to pay these outrageous fees, which end up on the balance sheet as expenses. These new expenses are covered by higher prices. In the end we all end up paying the lawyer’s bill.

    According to the Federal Judicial Conference’s advisory committee on Civil Rules, corporations are facing a 300 percent to 1,100 percent increase in class action lawsuits. This increase is forcing corporations to focus on lawsuits rather than manufacturing better products or lowering their prices. This fact alone is proof that class-action lawsuits are in desperate need of reform.

    Right now the House is considering a measure that might rein in runaway class actions lawsuits. The legislation would make it easier to get class actions lawsuits out of state courts and into federal courts, which decide more consistently when these lawsuits should be allowed and are better equipped to handle these cases fairly and efficiently.

    Congress needs to reform class action lawsuits throughout the United States. Reforms like those found in H.R. 1875 are needed to ensure that this legal mechanism remains a valued option to provide justice, rather than providing a cash cow for plaintiffs’ attorneys.