Topic: Justice
Are Settled Class Action Suits Scams? If you are thinking about filing a class action suit, find an attorney who understands that if s/he is unable to negotiate a substantial award for each member of the settlement class, that you will insist that the suit be taken to trial; otherwise, you are merely involving yourself in a lawyerly boondoggle in which the lawyers will use your misery to enrich themselves. If your lawyer is not going to get you and your colleagues substantial awards, at least make sure that s/he does not get any either.by John Kozy
(centrist liberal libertarian)
Thursday, November 5, 2009
Have you ever been a member of a settlement class in a settled class action suit? Did the award satisfy you or did you find it to be grossly inadequate? Did it make you suspicious of such suits?
In 1996, Epson America announced a settlement of a class action suit over its practice of engineering its printers to monitor ink levels and incorrectly read cartridges as empty and therefore unusable even though there is still ink in the cartridge. It provided a $45 credit for eligible American customers for each purchased and registered printer. But the credit could be used only at Epson's online store, where prices are considerably higher than in most discount stores such as Wal-Mart. The settlement did not require Epson to modify cartridge software and technology so that ink cartridge readings reflect the true level of ink in a cartridge, so Epson could continue the deceptive practice. Epson also agreed to pay the Plaintiff's Attorney's fees, usually one third of the amount awarded. I doubt that many owners of Epson printers took advantage of this credit. I didn't! Instead, I junked my two Epson printers and vowed never again to buy anything manufactured by Epson.
My wife was a member of the settlement class in a settled class action suit that awarded her two dollars and some cents. Unfortunately, I lost this suit's details. But I do remember that to receive the award, she had to download, fill out, and mail a form to the suit's administrator. The expense of doing that would have reduced the award's value to less than a dollar. I remember telling her to forget it.
Recently I was a member of the settlement class in an ERISA suit against ACS. ACS was accused of violations of its fiduciary responsibilities in its 401(k) program. Three law firms ended up representing the plaintiffs (the Belek Law Firm of Houston, TX, Giney & McKenna of NY, and Stull, Stull, and Brody of NY). These firms settled this suit for $1,500,000. $566,482.99 went to the attorneys for expenses and fees; $933,517.01 was awarded to members of the settlement class. But the settlement class consisted of 24,777 members, so that if the award had been distributed equally, it would have been a mere $44.60, hardly anything to get excited about. (The similarity of this number to the credit offered by Epson is interesting. Do these law firms know something about what companies are usually willing to settle for in the same way that those in marketing know that people are more likely to buy something if it is priced under $20?)
But the award wasn't distributed equally. The distribution was based on a negotiated formula that calculated the actual losses in ACS stock ownership over the defined period. The result was that 32% received distributions of approximately 26% of their losses, 29% received a minimal award of $20, and 39% got nothing at all.
I found this to be curious. If ACS violated its fiduciary responsibilities in accordance with ERISA, it did so in to ways: it paid matching contributions in ACS stock, which encouraged employees to put all of their eggs in one basket, and it always employed firms that charged high transaction fees to manage its 401(k) accounts. During the period of time involved (7/1/2001 to 12/20/2007), ACS stock rose steadily until January, 2006, when began to fall. At the end of 2007, the stock price was still slightly higher than it was on July 1, 2001. So whether or not the class members made or lost money depended entirely on how they managed their holdings. ACS' practices had nothing to do with it. Wiser members who sold their holdings when the stock was up made money while those who neglected to manage their accounts effectively lost money. But ACS' practices affected all of the members of the class. In fact, it is likely that those who managed their holdings effectively lost more than those who actually experienced losses. A department of Labor study compared two 401(k) plans with starting balances of $25,000 earning 7 percent over 35 years without additional contributions. A plan with fees and expenses of 0.5 percent annually compared to a plan with fees and expenses of 1.5 percent yields $64,000 or 28% more. So the people who were selling stock when the price was up more likely than not had to pay more transaction fees than those who neglected their holding. So astute attorneys should have known that the formula negotiated to calculate the amounts to be awarded should have been based on transaction fees rather than profits.
The question is why didn't they do that? Why did they settle this suit for such a meager amount? And why did a federal judge (Barbara G. Lynn) approve this settlement? Why do attorneys negotiate any of these meager settlements and why do judges routinely approve them?
Well, the answer is apparent. Attorneys take on class action suits on a contingent fee basis. If the case goes to trial and the defendant prevails, the attorneys don't get paid and lose the resources they have expended in pursuing the suit. So the incentive is for them to settle. Defendant companies know this, and offer meager settlement terms. Accepting these terms is an easy way for the plaintiff attorneys to make one-third of the award without ever having put anything at risk. The three firms involved in the ACS ERISA suit netted a cool half million dollars just for filling out some papers and negotiating with ACS' attorney; most members of the settlement class got pocket change. And oddly enough, it took three firms to negotiate this settlement. Sound suspicious?
Why judges approve these settlements is a mystery. Perhaps is just because the law does not exist for you and me. (Most members of our corrupt Congress are also lawyers.)
So if any reader is thinking about filing a class action suit, find an attorney who understands that if s/he is unable to negotiate a substantial award for each member of the settlement class, that you will insist that the suit be taken to trial. And before you settle on a lawyer, analyze the settlements s/he has negotiated. Make sure that his/her settlements amply award all the members of the settlement class; otherwise, you are merely involving yourself in a lawyerly boondoggle in which the lawyers will use your misery to enrich themselves. If your lawyer isn't going to get you and your colleagues substantial awards, at least make sure that s/he doesn't get any either.
The legal profession in the Western world has never had an honorable reputation. As early as the fifteenth century, Erasmus wrote, "Lawyers are jackals." Shakespeare in Henry VI wrote, "The first thing we do, let's kill all the lawyers." And even Benjamin Franklin wrote, "A countryman between two lawyers is like a fish between two cats." Lawyerly jokes are almost as prevalent as dumb blonde jokes. One of my favorites is this: A man says, "Boy was it cold today." His friend asks, "How cold was it?" The man says, "It was so cold, lawyers were seen coming out of the Court House with their hands in their own pockets."
American courtrooms often have statues of the Roman Goddess Iustitia in them. She is always blindfolded. The reason, contrary to what people are led to believe, is that she must be prevented from seeing what goes on in them.
The views expressed in this
article are those of John Kozy only and do not represent
the views of Nolan Chart, LLC or its affiliates. John Kozy is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
It's easy to criticize these settlements, but if the cases were really that valuable, wouldn't the aupposedly greedy lawyer just litigate and litigate and jack up his fees? In fact most lawyers are rational economic actors, evaluate the case, weigh the pitfalls (there are many that you don't realize unless you practice in this area) and the possibilities of getting nothing, and they settle accordingly. The important point is made: the wrongdoer is held accountable , and its peers are deterred from engaging in similar practices.
The alternative is to have a large stable of government lawyers drawing salaries who would police the business world and bring the lawsuits. I think the "private attorney general" model works much better.
The situation is actually worse than what you described. Unless you send a written notice (I believe it has to be by certified mail) to the court having jurisdiction of the class action suit explicitly removing yourself from the plaintiff class, you are bound by whatever agreement is negotiated between the class action lawyers and the defendant company. This does not mean you will get part of the settlement -- unless you jump through all the hoops they have set up for you -- but it does mean that you waive the right to pursue relief in any future action. For this reason, some companies actually want to be sued in class actions because it gets them off the hook.
The primary actor in the suit does not make out too badly as the administrator of the class. Most often such suits have very heavy burdens of proof to overcome to assure success. Most of the class members find themselves as unknowing beneficiaries having no notice of the alleged issue until receipt of notice of participation in the class. The fact that a class is large enough for an attorney to find it economically feasible to file a claim is about as good as it gets.
A disturbing percentage of class action lawyers are nothing more than quick buck artists with every intention of dropping trou at the first settlement offer. There is no doubt they won't accept a contingency class action case unless they are 99% certain of a beneficial outcome, i.e., walking away with a few million for generating a few dozen court filings.
In June of 2006 I presented two well developed class action proposals to a Chicago law firm. Case files were presented to a partner and an associate. Within a few weeks of our initial meeting we entered standard agreement for case "A" and by week six they presented a lackluster 14 page complaint draft, promising a final draft in two weeks. The first warning sign was when the partner relegated "A" to (another) associate, which I presumed was responsible for numerous errors and oversights discovered in the complaint draft, requiring a 5 page response of clarifications and suggestions. The associate handling case B appeared more competent and promised to discuss case strategy 7 weeks after the initial meeting, although they had yet to provide an agreement for B. My law firm mysteriously ceased all communications 9 weeks after our initial conference.
Upon questioning their diligence they immediately terminated the lawyer/client relationship, negating the agreement for A, making no mention of their nefarious scheme to abscond with my work product for B in order to file the case in California. These lawyers elected to forsake case A, along with yours truly, in order for a California peer to take the reigns and create another class representative for B. The pieces of the puzzle were falling into place. Several weeks after presenting case materials the partner who was intially handling A mentioned he was conferring with an out of state associate affiliated with the Chicago office. Ironically, the email I received from the associate handling B (four weeks earlier) mentioning her intentions to conduct a teleconference upon her return, was dispatched from California.
18 months after this gang absconded with my work product I confirmed the conspiracy upon locating a web site they created involving case B: same defendant and same allegation. The case was filed in CA. Upon contacting these "professionals" for an explanation they incredulously maintained their involvement in the same case I presented was not associated or influenced by our relationship. These fork-tongue miscreants were now compelled to engage in character assassination and issued correspondence to justify severing our association 18 months earlier. Needless to mention, the original letter addressing this matter conspicuously lacked any reference or basis for their withdrawal.
Three years after they fled with my work product they proved capable of generating a settlement resulting in a $1,500,000 back room payoff by the prominent defendant. Prominent defined as ranked in the Forbes top 25. Despite the fact both of my case proposals had the attributes for nationwide certification these shakedown experts elected to bail, rather than engage the 800lb gorilla in protracted litigation. The substitute class reps received $2,000 each. Of course they deserved nothing in light of the fact they were merely created by the lawyers who stole my work product. I describe the payoff as a hush settlement for good reason. Upon researching the settlement I was informed by the court the case was "CLOSED" and they were not permitted to provide details. I obtained the 40 page Stipulation to Dismiss from PACE. The following paragraph is from that document.
CONFIDENTIALITY
The Parties acknowledge that this AGREEMENT will be a publicly filed document when it is attached as an exhibit to the Stipulated Judgement identical in form and substance as that attached hereto as Exhibit B. Notwithstanding the foregoing, the Parties agree that if they are ever asked by any member of the press or media about the resolution of this matter, they (as well their agents, attorneys, representatives) may only say, in words or substance, that the matter "has been resolved" or "is over", without stating or implying payment of any settlement sum or provision of any other consideration.
Time does not permit me to address what impresses many as the most bizarre and inequitable element of the class action process. I am referring to incentive award. It would appear the only parties to a class action lawsuit who are entitled to "unjust enrichment" are immoral professionals with a bar card.
Want to comment on this
article? Leave your comment here. Your email address is
required to track your comment. However, we will neither
publish your email address nor distribute it to other
organizations or persons. The only reason we might use
it would be if we needed to contact you regarding your
comment. All comments are subject to our
terms of use policy.
