Mature Product Line: Class Actions
THE REAL CLASS WARFARE
Predatory class action lawsuits drive up consumer costs and reduce innovation.
Class actions were conceived as an expeditious way for people with similar grievances to join in a common suit and get compensated for injuries. But class actions have evolved into a favored means for Trial Lawyers, Inc. to launch predatory assaults on businesses and large institutions, often in the name of clients who don’t even know they are being represented.
Despite the absurdity of many of these suits, legitimate companies are hard-pressed to defend themselves because they face thousands or even millions of plaintiffs. As they watch their share prices sink with bad publicity, companies almost always have to settle rather than risk billions of dollars in punitive damages.
Increasingly, the end result is huge fees for the lawsuit industry—an average of over $1,000 per hour according to Class Action Reports—but relatively tiny awards for individual plaintiffs. For example, in one Texas case, lawyers sued two auto insurers for overbilling because the insur-ers rounded up premium bills to the next dollar (a practice that was sanctioned by the state insurance department) and pocketed almost $11 million; policyholders got a paltry $5.50 each.
Sophisticated Customer Targeting
Predatory class action lawsuits are getting significant traction from Trial Lawyers, Inc.’s sophisticated marketing tactics. Websites help trial lawyers troll for class members online: “Justice is now a click away” announces a headline on ClassActionAmerica.com, where for $8.95 a month consumers can get information on hundreds of class action “opportunities” and sign up to get “the money that you may be due.”
Moreover, innovative new financing mechanisms are enabling the lawsuit industry to initiate many more costly suits. Outfits such as ExpertFunding.com and American Asset Finance are the industry’s venture capitalists, assembling portfolios and expecting to hit on two or three out of every dozen investments.
A Race to the Bottom
Unlike traditional lawsuits, class actions tend to involve plaintiffs from multiple jurisdictions, if not from all over the nation. Thus, in-stead of filing suit at the place of residence or injury—as is normally required in the typical single plaintiff lawsuit—Trial Lawyers, Inc. is able to “shop” class action suits in search of the most favorable forum. Quite predictably, the best forum winds up being a state “magnet court” well known for its hospitable treatment of class action lawsuits.
For instance, Madison County, Illinois—recently made famous by handing out a $10.1 billion verdict against Philip Morris for alleg-edly insinuating that its “light” cigarettes were “safer”—has seen a tremendous upsurge in class action filings in recent years. From 1998 to 2000, class action filings in Madison County increased over 1,800%; over 80% of these suits were brought on behalf of proposed nation-wide classes.
The costs associated with the proliferation of magnet courts go be-yond the increased settlement values they generate for often tenuous claims. The fact that major national policy decisions are increasingly being made by county court judges, who are elected by and account-able to only the several thousand residents of their home communities, presents a serious threat to the democratic and federalist principles underlying our constitutional design.
Between 1997 and 2000, U.S. firms saw a 300% jump in federal class actions and a 1,000% spike in state class actions filed against them.
For example, in November 1999, an Illinois judge in a county ad-jacent to Madison County awarded a national class of plaintiffs $1.2 billion in a lawsuit against State Farm Insurance. State Farm had allegedly been “fraudulent” in authorizing the use of generic parts in automobile repairs, even though using generic parts was not only al-lowed but actually required by some states to reduce insurance costs. The local Illinois judge thus unilaterally overrode the considered policy decisions of many other states’ democratically elected officials.
MAGNET COURTS—IN THEIR OWN WORDS
Don’t believe us about the “magnet court” phenomenon? Take it from king tobacco lawyer Dickie Scruggs, who had this to say about “magic jurisdictions”:
[W]hat I call the “magic jurisdic-tion,” . . . [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected; they’re State Court judges; they’re popul[ists]. They’ve got large populations of voters who are in on the deal, they’re getting their [piece] in many cases. And so, it’s a political force in their jurisdiction, and it’s almost impossible to get a fair trial if you’re a defendant in some of these places. The plaintiff lawyer walks in there and writes the number on the blackboard, and the first juror meets the last one coming out the door with that amount of money. . . . The cases are not won in the courtroom. They’re won on the back roads long before the case goes to trial. Any lawyer fresh out of law school can walk in there and win the case, so it doesn’t matter what the evidence or the law is.
The Costs of Class Action Abuse
Between 1997 and 2000, American corporations reported a 300% increase in federal class actions and a 1,000% spike in state class ac-tions filed against them. This explosion in class action suits is driving up costs for all consumers. Moreover, the fear of litigation—especially in health care—has kept new products off the market. Lawsuits against IUDs and Norplant rods, for example, are the main reason that only three new contraceptive products have come to market in the U.S. in the last decade, all of them variations on existing technology; not surprisingly, American companies today spend 20 times more on developing new cosmetics than on research into contraceptives.
Perhaps nowhere are class action suits more pervasive—or more pernicious—than in the securities industry. Within days of a drop in a company’s stock price (usually a high-growth technology stock with a naturally high share-price volatility), Trial Lawyers, Inc. swoops in to file a claim—often lacking any real proof of corporate wrongdoing. Corporations faced with the inevitable, extremely onerous discovery process must defend themselves at great expense; little wonder that such cases typically settle, with one-third of the proceeds going to Trial Lawyers, Inc.
These actions merely redistribute wealth from one class of shareholders to another—with a sizable cut for Trial Lawyers, Inc.—and thus do nothing to curb management abuse. Some critics have called this system noth-ing less than “legal extortion”; a Florida judge rejecting a recent securities class action settlement compared the lawyers in that case to “ ‘squeegee boys’ who . . . run up to a stopped car, splash soapy water on its perfectly clean windshield and expect payment for the uninvited service of wiping it off.”
The plaintiffs’ firm in that Florida case was none other than Milberg Weiss Bershad Hynes & Lerach, Trial Lawyers, Inc.’s 800-pound gorilla for securities class actions. Headed by New York’s Mel Weiss and San Diego’s Bill Lerach, the firm handles the majority of all securities class actions nationally (though a reported rift between Weiss and Lerach has recently led the firm to announce a decision to split its East and West Coast offices).
Incredibly—though hardly unpredictably—Lerach and his lawsuit industry colleagues have tried to place the blame for the Enron debacle and other corporate implosions on the 1995 Private Securities Litigation Reform Act (PSLRA), which was intended to curb some of the worst abuses of the Trial Lawyers, Inc. squeegee boys. But since the empirical evidence shows that securities class actions’ settlement values are unrelated to the merits of the underlying cases, the argument that the securities class action system offers any meaningful deterrent to corporate misconduct is wholly unpersuasive.
Indeed, Lerach’s public posturing on the PSLRA notwithstanding, the law actually created barriers to entry for Milberg Weiss’s potential competitors. And despite the PSLRA, the securities gravy train for Trial Lawyers, Inc. rolls on: securities class action filings rose 31 percent in 2002, and Milberg Weiss negotiated three recent settlements of $300 million or more.
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45. See Victor E. Schwartz, Mark A. Behrens & Leah Lorber, Federal Courts Should Decide Interstate Class Actions: A Call for Federal Class Action Diversity Jurisdiction Reform, 37 HARVARD J. ON LEGIS. 494, 490-92 (2000) [hereinafter “Schwartz, Behrens, & Lorber”].
46. See 24 CLASS ACTION REP. 197 (Mar.-Apr. 2003) (showing hourly class action fee of $1509.77 from 2001-03).
47. See generally Schwartz, Behrens & Lorber, supra note 45, at 492-95.
48. See Mirel Testimony, supra note 22.
49. See http://www.classactionamerica.com.
50. See http://www.expertfunding.com; http://www.amasset.com.
51. See Ill. Court Orders “Landmark” $10B Judgment against PM in Light-Ciga-rette Suit, Vol. 14, No. 3, ANDREWS PROD. LIAB. LITIG. REP. 3 (Apr. 2003).
52. See John H. Beisner and Jessica Davidson Miller, They’re Making a Federal Case Out of It . . . in State Court, 25 HARV. J. L. & PUB. POL’Y 143, 160 (Sept. 2001), also published as No. 3 CIV. JUSTICE RPT. (Manhattan Inst. Center for Legal Pol’y, Sept. 2001), available at http://www.manhattan-institute.org/html/cjr_3.htm [hereinafter “Beisner & Miller”].
53. See Avery v. State Farm Mut. Ins. Co., No. 97-L-114 (Cir. Ct. Williamson County, Ill., filed July 28, 1997).
54. See Victor E. Schwartz & Leah Lorber, State Farm v. Avery: State Court Regula-tion Through Litigation Has Gone Too Far, 33 CONN. L. REV. 1215, 1226 (2001); Beisner & Miller, supra note 52, at 174; see also State Farm Mutual Automobile Insurance Co. v. Campbell, 123 S. Ct. 1513 (2003).
55. See Federalist Society, Analysis: Class Action Litigation—A Federalist Society Survey, 1 CLASS ACTION WATCH 1, 5 (1999); Deborah Hensler et al., Preliminary Results of the Rand Study of Class Action Litigation 15 (Rand Inst. for Civ. Just., 1997).
56. See William M. Brown, Déjà Vu All Over Again: The Exodus from Contracep-tive Research and How to Reverse It, 40 BRANDEIS L.J. 1, 30-32 (2001); Marc M. Arkin, Products Liability and the Threat to Contraception, No. 36 CIV. JUST. MEMO (Manhattan Inst. Center for Legal Pol’y, Feb. 1999), available at http://www.manhattan-institute.org/html/cjm_36.htm.
57. Richard Scruggs, Asbestos for Lunch, panel discussion at the Prudential Secu-rities Financial Research and Regulatory Conference (May 9, 2002), in INDUS-TRY COMMENTARY (Prudential Securities, Inc., New York), June 11, 2002, at 5.
58. See James A. Kassis, The Private Securities Litigation Reform Act of 1995: A Review of Its Key Provisions and an Assessment of Its Effects at the End of 2001, 26 SETON HALL LEGIS. J. 119, 122-24 (2001).
59. Cf. Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 STAN. L. REV. 497 (1991) (concluding that settle-ment value in securities fraud cases is not function of merit).
60. See H. Rep. 104-50, Part I (1995), available at http://thomas.loc.gov/bss/d104/d104laws.html.
61. Judge Compares Milberg Weiss Case to the Squeegee Man, NEW YORK LAW., Apr. 18, 2002, available at http://www.nylawyer.com/news/02/04/041802e.html.
62. See Jason Hoppin, Milberg Weiss Firm to Split with Lerach, THE RECORDER, Jun. 12, 2003, available at http://biz.yahoo.com/law/030612/177461c76e99fe197037348a8810ae5b_1.html.
63. See generally William S. Lerach, Plundering America: How American Investors Got Taken for Trillions by Corporate Insiders, 8 STAN. J.L. BUS. & FIN. 69 (2002); Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (1995).
64. See Alexander, supra note 59.
65. See Tamara Loomis, In Spite of Reform Law, Milberg Weiss Emerges as Winner in Securities Suits, 229 N.Y.L.J., Apr. 22, 2003, at 1.
66. See id.; http://www.iii.org/media/facts/statsbyissue/litigiousness.