Not everyone is getting rich through tech stocks these days. There is a large group of people becoming wealthy through another hot investment: the state-based class action lawsuit. Unfortunately, it is the trial lawyers who reap huge benefits, while plaintiffs often receive only coupons. The Class Action Fairness Act of 1999 (S. 353) is a positive step towards reining in frivolous class action lawsuits and the trial lawyers who encourage them.
We all become victims when class action lawsuits are abused. A class action lawsuit is a vehicle that allows a series of identical or similar claims to be heard as one case, rather than filing each case individually. For instance, if a credit card company wrongly overcharged every cardholder by $1,000, each card member could participate in a class action, rather than suing the credit card company individually.
Class actions are designed for cases such as the credit card example. There are so many plaintiffs that having each bring the exact same claim would be inefficient. Moreover, the issue in each case is exactly the same: did the credit card company overcharge each cardholder?
A judge must certify a class action before it moves forward. In making that determination a judge must find that: The class is so numerous that joining all parties is impracticable, there are common questions of law or fact, the named parties adequately represent the interests of the class, and common issues of law or fact dominate over individual issues. Unfortunately, in many state courts, judges are no longer effective gatekeepers for class action lawsuits.
The problem with the current class action landscape is that most state courts certify classes when they should not. Specifically, state courts often certify groups of plaintiffs who do not necessarily have similar issues of law or fact. 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-actions. Further, sometimes state courts certify classes that bring frivolous or marginal claims.
For instance, The Chicago Tribune reported a class action settlement involving the rock band Milli Vanilli’s record label where the class members each received $1-$3, while the lawyers asked for nearly $2 million in legal fees.
State court certification of frivolous classes often forces the defendant to settle, even though they have done nothing 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 puts them into bankruptcy.
Only plaintiffs’ lawyers benefit from current class action rules. When defendants capitulate to the threat presented by class action lawsuits and decide to settle out of court, the trial lawyers get to negotiate their fees, often without their clients’ knowledge or approval. For trial lawyers this is critical, for the fees will be covered by the defendant as part of the settlement. These fees that sometimes reach into the billions of dollars, often leave the plaintiff with next to nothing.
Even if the class wins, individuals may not see any benefit. Class actions can result in consumers receiving coupons for nominal amounts of cash or merchandise credits, while their attorneys receive millions of dollars in fees. For example, a class action lawsuit settled against the manufacturers of a computer monitor resulted in each plaintiff receiving 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 $5.8 million in fees.
When attorneys reap their rewards they reinvest a portion to find a new class-action target. Indeed, an entire industry has emerged that exclusively focuses on finding new ways to identify class action lawsuits. Trial lawyers use mass mailings and other means to automatically force you into a class action lawsuit, unless you explicitly reply, opting out.
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 damage our economy, while benefiting no one but themselves. Injured class members do not fully benefit, businesses are hurt, and the rest of us are forced to pay. Businesses have no choice but to pass class action costs onto consumers.
Right now the Senate is considering a measure, S. 353, that may rein in runaway class action lawsuits. The legislation would make it easier to get class-actions moved out of state courts and into federal courts, which are more consistent in their decisions to certify a class, and are better equipped to handle these cases fairly. The House passed similar legislation last year.
The Senate needs to reform class actions throughout the United States. The reforms found in S. 353 are needed to ensure that the class action lawsuit remains a valued option to provide justice, rather than providing a cash cow for plaintiffs’ attorneys.