Moody v Sears: Lawyers, $1M. Class, $2,402.

by Ted Frank on May 18, 2007

No, not $2,402 each. The $2,402 represents the total redemption of coupons by a 1,500,000-member class, or $0.0016 per class member. The Illinois state court (in the judicial hellhole of Cook County) awarded plaintiffs’ attorneys Gary K. Shipman of Shipman & Wright $1,000,000, presumably because they represented the face value of the unlikely-to-be-redeemed coupons to be in the millions of dollars. A North Carolina state judge was not impressed after he forced the forum-shopping attorneys (and defendants) to reveal the results of the settlement before dismissing a parallel lawsuit. (Moody v. Sears, Roebuck, & Co.) (via Nick Pace of RAND Institute at CL&P Blog).

Note that the widely-publicized Eisenberg/Miller class-action study, regularly cited for the proposition that state courts were no worse than federal courts in terms of awarding attorneys’ fees, would have erroneously calculated this attorney fee as 14% or so of the total settlement value, rather than the actual number of 100%. Garbage in, garbage out.

Pace mistakenly thinks that the class members were deprived of a remedy. Not really, though consumers are certainly worse off because of such litigation. Problems like this arise because a Sears is only willing to settle a frivolous consumer-fraud suit for nuisance amounts, and the plaintiffs’ attorneys just want a paycheck, so Sears is willing to pay the protection money to make the meritless lawsuit go away, since it will cost more in litigation expense to defend itself. When neither the plaintiffs’ attorneys nor the judge cares about the class members, plaintiffs’ attorneys can extract, as here, 99.9% of the settlement amount. If, on the other hand, a court ensures that the majority of a nuisance settlement must go to the ostensible plaintiffs, the plaintiffs’ attorneys will be less likely to find it profitable to bring the meritless suit and try to extort a settlement, because defendants will be more likely to find it worthwhile to defend against the suit, and the suit won’t happen in the first place. Which does make consumers better off, because then they realize a substantial part of the savings of doing business when there’s less protection money paid off to plaintiffs’ lawyers like Gary Shipman.

The Class Action Fairness Act fixes these matters—or at least it does in the cases where federal judges apply its rules and accept jurisdiction. First, CAFA effectively consolidates national class actions into a single federal jurisdiction, defendants are unable to play one plaintiffs’ attorney off of another, as happens when plaintiffs file several dozen identical and parallel class actions. Second, CAFA requires federal judges to apply meaningful scrutiny to class-action settlements and the award of attorneys’ fees, especially coupon settlements like this one. A $2402 coupon redemption with a million-dollar attorneys’ fee would have been impossible under CAFA.

When, however, judges misread the jurisdictional provisions of CAFA and remand legitimate removals back to the state courts that routinely approve such travesties, they undo the whole point of the legislation, and hurt consumers in the bargain. That Public Citizen regularly argues for such narrow readings of CAFA suggests their true interests lie with trial attorneys, rather than consumers, and that the true consumer advocates are those who support civil justice reform. (Cross-posted to Point of Law)

{ 6 comments }

1 Justinian Lane 05.18.07 at 12:24 am

I agree with you that these bogus coupon settlements are a travesty of justice, and that the attorneys who accept these settlements have only their own best interests in mind.

If it were up to me, I’d virtually eliminate these coupon settlements, except where they make sense: Like giving free movie rentals to someone ripped off with bogus late fees. But otherwise, I’m a show-me-the-money guy.

2 Dick King 05.18.07 at 2:16 pm

Mr. Lane, why is giving free movie rentals a good remedy for late fees? Why not refund the late fees?

I unexpectedly became a member of a class where the settlement was an in-kind service. It turns out that a water heater I bought used defective “dip tubes”, which are plastic tubes about five feet long that allow new cold water to be introduced at the bottom of the tank as hot water is delivered while still leaving the inlet at the top of the tank near the outlet. A good idea, probably, because it’s cheaper to do than it would be to force myriad plumbers to make longer lines. However, the bad dip tubes had a tendency to disintegrate and fill your home plumbing with plastic flecks about 1mm or so.

The settlement company sent a plumber to the house to replace the dip tube and flush out all the plastic that had already contaminated the house’s hot water lines. However, individual consumers differed greatly in the amount of damages they would suffer. Some dip tubes didn’t disintegrate at all, and some people only lost a few showerheads and others may have had to repair dishwashers and clothes washers.

There are detaily problems in how we decide how much the lawyer gets in a case like this. In this case I think the company set up to get the settlement repairs was a separate company — a part of one of those home warrantee companies that does plumbing repairs by subcontracting and that made a winning bid to the water heater company. I’m not unhappy that the company [probably] paid a lot less than I would have paid for the same repair. Economic efficiency was gained by having the company organize the mitigation. Therefore, in this case the obvious reform of paying the lawyers only a percentage of the actual company outlays would have worked well.

Consider, however, the common case where the service the coupon buys has a much lower marginal cost to provide than the retail value of that service, and is hard for an outsider to measure. This obvious reform fails in this common case [unless we believe that company marginal cost can be rationally figured, which I'm not 100% opposed to assuming]. The example that imemdiately comes to mind is the NetFlix settlement, which would cost the company essentially nothing.

3 Drew Drytellar 05.18.07 at 5:08 pm

Justinian–
Any changes you’d suggest to current laws or legal practices to prevent consumers from being ripped off by these bogus settlements?

4 Ross 05.18.07 at 7:45 pm

Drew–There is no suggestion for a positive change. Don’t bother looking for one.

I agree that the attorneys’ fees look inappropriate and perhaps they are. But, this is not a meritless case. Sears did rip off its’ customers and they should be willing to pay for their wrongdoing.

This should be the job of the State Attorneys’ General to enforce consumer rights. But these offices are overworked and understaffed so the burden of looking out for consumers has fallen to private, plaintiff lawyers. Should they work for free? Should they not be compensated for the risk they take? These are not inexpensive cases to litigate.

What’s forgotten in this article is that without lawsuits like this, Sears and other companies could rip off consumers without paying anything.

5 Ted 05.19.07 at 1:46 am

If there was a shred of merit to the claims, they would have been settled for more, rather than less, than a penny per class member. This is a claim of a $100 million ripoff that somehow got settled for less than the cost of defense.

One suggestion for positive change is to make CAFA retroactive. Another is to refuse class certification when the plaintiffs’ attorneys are not working in the best interest of consumers.

6 Andrew 05.19.07 at 9:57 am

Of course, the true remedy is to eliminate class actions altogether. If a harm is not sufficiently grave for a single plaintiff (or small group of plaintiffs) to file a suit on their own, then let it die without a lawsuit. Fewer lawsuits will not harm justice.

In addition, these “opt-in” suits, based on a single (or a few) “representative” plaintiff, are rarely used to resolve serious problems. If the problem is serious enough, a small group will sue.

Actually, the class action allows two different harms:

1. When there is little or no harm, it allows lawyers to still file suit for an easy payday
2. When there is real harm, it allows defendants to pay what amounts to a token amount to settle suits with the entire class and thus avoid real liability litigation on individual cases. (Who would bother to opt out when they think the case doesn’t apply to them. Later, should a problem arise, they already have their settlement, though it proves quite low for actual harm done.)

Class action is one of the engines driving the current explosion of litigation.

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