Evading CAFA, class action lawyers also put ethics at risk

by Walter Olson on November 28, 2012

The Class Action Fairness Act of 2005 aims to steer all but relatively small nationwide class actions into federal court, in part because lawmakers wanted to prevent plaintiff’s lawyers from exploiting the system by forum-shopping cases into state courts that might be biased or ill-equipped to prevent abuse. It therefore allows defendants to remove cases to federal court where the aggregate claim exceeds $5 million. To evade that limit, plaintiff’s lawyers have been proffering stipulations that disclaim (at least temporarily) any intent to ask for more than that sum, even when plausible theories of the case would suggest a larger potential recovery. If the ploy works, they get to stay in the favored state court, and in later stages of litigation they sometimes succeed in using various further tactics to shuffle off the supposed limit and ask for more than $5 million after all.

Aside from the end run it does around the intent of the statute, this practice raises serious ethical issues arising from the lawyers’ duty toward clients, including absent class members who may not even be aware of the suit, let alone in a position to second-guess tactical choices. Disclaiming damages above $5 million, in particular, may be helpful to the lawyer (by obtaining less stringent oversight of the manner in which the suit is prosecuted) yet harm some clients’ interest in obtaining the best recovery.

The U.S. Supreme Court will take up this issue in the spring, and the Cato Institute has filed an amicus brief (PDF) urging the Court to recognize the ethical problem and direct lower federal courts to grant removal where appropriate. Ilya Shapiro has more. Ted Frank at the Center for Class Action Fairness also filed amicus briefs on behalf of certiorari and on the merits; related.

{ 30 comments }

1 boblipton 11.28.12 at 9:51 am

Ethics? Ethics? But they already passed that class! Just like they passed algebra.

Bob

2 No Name Guy 11.28.12 at 3:52 pm

Lawyers with Ethics……ha, ha, ha, ha, ha……stop it Walter…you’re killing me. I might have to sue you for splitting my sides. ;-)

3 Max Kennerly 11.28.12 at 11:01 pm

How nice of these organizations to look out for consumers being cheated by those big, bad lawyers! These corporate-funded organizations are not secretly trying to screw up class actions in general and thus screw consumers out of appropriate compensation, are they?

4 Anna 11.29.12 at 4:49 am

They have ethics, they just choose not to use them ;)

5 Ron Miller 11.29.12 at 2:45 pm

Max, I get your point and largely agree with it. But… usually it is not consumers getting screwed, just the plaintiffs’ lawyers in these kinds of cases. Unless you consider a $20 coupon redeemable only on a rainy Tuesday in October to be compensation that you could get screwed out of.

6 boblipton 11.29.12 at 4:46 pm

Max, I had a friend who invested in a publicly traded corporation. In the course of time, the insiders cashed out for half a billion dollars and the company later went under. Later, a class action case was begun and my friend received a notice that the disputants had come to an agreement and he could collect his share of damages by filling in a form, putting it in an envelope, putting on a stamp and mailing it.. I pointed out that to collect his damages on his $2000 loss, he would have to spend more on the stamp than he could collect. Meanwhile, the class’ lawyer collected several million dollars for their efforts.

Some time later I spoke with another friend of mine who is a lawyer. I sketched out the situation and asked if the settlement insulated the insiders with their half a billion from further claims. He said it did. I suggested a scenario in which the insiders had instigated the lawsuit to protect themselves. He said it was possible.

Collect half a billion and then pay out less than five million to insulate yourself? Sounds cheap to me.

Bob

7 Max Kennerly 11.29.12 at 9:16 pm

Bob,

So your friend is upset that, when a company went under, he got pennies on the dollar? That’s the norm for everyone. A $2000 loss is impossible to recover outside of small claims court; the filing of the case alone will chew through that.

Do you have a solution for that? Or do you think the solution is, “I’m mad that people with much bigger losses got a similar proportional recovery, kill class actions however possible,” which is the solution being proposed in the above post?

8 Max Kennerly 11.29.12 at 9:19 pm

Ron,

Last class action I was in was the Kaplan/BarBri one. I got real money in my pocket without lifting a finger or risking a dime. Organizations like Cato and CCAF are trying to kill those strongly meritorious, pro-consumer, anti-monopoly cases, along with all class actions.

But let’s assume there’s a big problem with coupon settlements. Tell me exactly how the CAFA fixes that, beyond simply making class actions go away and making it more profitable for companies to cheat consumers and break the law.

9 Walter Olson 11.29.12 at 10:33 pm

Twice in a row now, attorney Kennerly has leveled false charges backed by scurrilous motive-mongering. Cato’s amicus briefs have generously (if not over-generously) endorsed the class action device as one that advances important goals of the litigation system. Why Kennerly finds it advantageous to misrepresent Cato’s positions I don’t know, and probably shouldn’t speculate lest I too descend into the sort of motive-mongering that makes reasoned discussion so difficult at times.

10 boblipton 11.29.12 at 11:36 pm

You have missed my point, Max. There are times when class action suits are very appropriate. A class action suit can ease the clogging of the courts, at the very least. However, when members of the class are eligible for compensation that is not rationally worth applying for while the lawyers walk off with several million dollars, one is drawn to the question of who benefits? Are the lawyers serving their clients, their own interests or the interests of the management who walked away with half a billion dollars , drove the company into the ground and now, because of the settlement, are immune? Which brings us around to the issue of ethics, which is what this thread is about.

Stating that the loss of $2000 being irremediable is the norm is a statement of fact, not morality. Should it be irremediable? Unlike you, I don’t have answers — even if I don’t think your answers are on point. First let’s get a few good questions and then we can start working on the answers.

Bob

11 Ronald Miller 11.30.12 at 12:02 am

Max, I consider myself a layperson on these consumer class actions where there have been no real physical injuries. I get the purpose of them, I get the efficacy in having someone stand up for consumers when the economics would otherwise never dicate their having a voice, I get all of it. I’m in. But I am sympathetic to the frustrations of people who look at the fees lawyers’ get in these cases compared to the recoveries and take exception to it. We might get impressive paydays in some of our cases but at least our clients are too.

Walter, you are the king of civility but I can’t give you civility points for your “I’m-not-saying-the-thing-that-I-am-actually-now-saying” jab.

12 boblipton 11.30.12 at 12:07 am

Furthermore, is this not an example of the sort of case which class action is supposedly intended before? A loss ($2000) that if pursued as a separate case, would not be practical because the expenses involved would eat up recovery? I was under the impression that by combining thousands or tens of thousands of individuals in a class, the expenses could be split, leaving a real recovery, even if only partial, practical? Yet I offer an example in which the only clear beneficiary was the lawyer, with the defendant also gaining some benefit for his payment, while the plaintiff class loses because of a settlement. Your reply is that it is normal; it is the way of the world. Again, I ask should it be?

Bob

13 Ted Frank 11.30.12 at 6:11 am

CCAF refuses any corporate funding other than that it is awarded by courts from defendants for winning money for consumers and shareholders–money we win often over the opposition and obstructionism of plaintiffs’ lawyers. We’ve repeatedly publicly defended the class action mechanism, and oppose only abuses of it; I’ve been lead counsel in a putative class action. Max has been corrected on this multiple times, so the false claim is beginning to rise to the level of malicious lying.

14 Bored Lawyer 12.02.12 at 12:26 pm

But I am sympathetic to the frustrations of people who look at the fees lawyers’ get in these cases compared to the recoveries and take exception to it.

But is that frustration really fair? The whole point of proceeding as a class action is to pool the claims of many small plaintiffs so as to make the case worthwhile for someone to take it. A $2000 claim is too small to interest any lawyer. But as a small part of a $500 Million claim, it can be.

Let’s say the class action lawyers get a $500 Million recovery and then get a $50 Million fee. At first blush, it seems outrageous that they get $50 Million when the little investor only got back $2000. But the fee was for the whole class — 10% — not just the one investor. His share is only 10%. Would the investor be willing to hire a lawyer — on a full contingency, mind you — to prosecute a $2000 case where the fee is $200. That seems like a bargain to me. Of course, the only way to get that bargain is the class action mechanism, which allows him to pool his claim with others similarly situated.

Same thing applies in the “coupon” cases. Let’s say my wife buys a defective blender for $25. I might send it back on a warranty, but more than that is not worth it to sue or do much else. Normally I would just toss it in the garbage and buy a different brand.

Suppose a class action lawyer gets involved and gets me a coupon for a new blender. I am still ahead. His total fee may be in the millions, but that was divided among the class. If my part of his fee is, say, $5 (which does not even come out of my pocket — the blender company paid it), then why should I resent him for it?

I recognize that there is plenty of abuse, but it seems to me that some of it is sheer envy. Law is a business and lawyers work to make money. That is a fact of life. Class actions pool many small claims to make it worthwhile for someone to make a claim.

(BTW, I am a lawyer but not a class action lawyer. I was only once involved tangentially in a class action case.)

15 David Nieporent 12.02.12 at 5:26 pm

Boredlawyer:

You’re missing the point. Complaining about lawyers getting $50 million out of a $500 million settlement would be unjustified — but what about lawyers getting $50 million out of a $75 million settlement?

Also, if you get a $5 coupon for a new blender, you may well not be “ahead” at all. $5 cash is worth $5. A $5 coupon, depending on its terms, may or may not be worth much of anything to you. You’ve already given this company that makes poor quality blenders $25 of your own money. Now you get the right to give them $20 more of your money to get a second blender from them; if you’re not willing to do that, your coupon is of zero value. Companies hand out coupons all the time — as advertising, not as a gift for consumers.

16 HFB 12.02.12 at 6:09 pm

BL,

You present a too rosey scenario. Recovering all the stolen money would not likely happen since there were likely expenses that the initial investment went towards. But, suppose they received 10 cents on the dollar? In this hypothetical, that’s 50mil…no one would complain if the lawyers took even 1/3. Those are the ones we want: Lawyers fighting for US.

There have been too many cases (which you can find on this site) where there are multi-million dollar fees and just coupons for possible future savings at small fractions of what was possible to be paid. It really seems like a shakedown and this article is about how lawyers are trying to do an end-around so they can keep the racket going through these helpful courts. Companies looking at a huge liability for valid claims can even avoid them for much smaller “fee”.

If you bought a blender, online and direct from the manufacturer, with a warranty and they refused to make good on it to anyone with a valid claim, it seems that they should be made to honor the warranty. What if the lawsuit only gave you 1 dollar on the purchase of a new one? What if 10% of those sold went bad but the lawyers included EVERY unit sold in their fee computation? The comapny is still in business with the resources to supply all valid warranty claims with a new unit, but they dodge it with a convenient settlement for much less…good deal, huh?

17 Ron Miller 12.02.12 at 6:58 pm

Bored Lawyer, certainly you are right under the scenario you set out. But I think the details matter. If the consumer suffer a $2,000 loss and is getting back compensation under let’s say $50 and the lawyers are raking in a ton, it some sign that the suit really did not have any merit and the ultimate benefit to the consumer was insignificant. These cases give me cause for concern. It might just be a necessary byproduct of the system. But I just don’t like it.

18 Max Kennerly 12.02.12 at 8:34 pm

Hey Ted and Walter,

Hyperbole aside (Ted’s vague threats of litigation by use of the phrase “malicious lying” is particularly embarrassing coming from him), neither of you, nor any of your organizations, ever make any arguments in support of class actions. You make a passing reference to supporting “meritorious” — a meaningless, subjective term — litigation, then devote all of your efforts to quashing litigation. Your organizations’ work speaks for itself: you are wholly opposed to consumers’ interests, and the sum total of your arguments is that class actions should be destroyed entirely, the tort of negligence abolished, and the jury trial eliminated.

Ted’s “CCAF refuses any corporate funding other than that it is awarded by courts from defendants” is a new one, and I’d love to see documentation of that. There’s of course no evidence of that new claim online, perhaps you should post your bylaws. Last time I asked, you gave a vague non-answer that you took money from anywhere, claiming it didn’t affect your judgment.

I frankly believe that part; you don’t try to destroy class actions for money, you try to destroy them because you’re philosophically opposed to them. That’s fine, that’s your right, but quit pretending that you’re standing up for the little guy. You think the little guy should have no rights against the big guy. Why can’t you folks be honest about what you want?

You guys can easily prove me wrong. Get Cato and CCAF to start filing amici briefs in favor of the merits of class actions, instead of just objections to settlements or, as Walter’s post trumps, an amicus arguing for forcing more class actions into forums that you believe are more advantageous to corporate defendants. How could that possibly help consumers? Does Cato really think that forcing more class actions into federal court will help the little guy? Cut the crap. Be honest.

Indeed, if you’re standing up for the little guy, why don’t you file a couple of these class actions yourselves? Show trial lawyers how it should be done. You’re consumer protection advocates, right? Go protect some consumers.

I’m waiting.

19 Melvin H. 12.03.12 at 5:08 am

Max, they have already done that; go over to the main page of this website, if you have the time, and check the class action section; read about various class actions with what could charitably be described as “odd” results (i.e. lawyers getting $1.1 million for $0 benefit to the class is one such example). Lawyers’ fees should be proportional to what is won in the class-action; and like Texas’ law, if the award is in coupons, discounts, or gift cards–non-monetary relief–then the lawyers’ fees are in coupons, discounts, and gift cards. What is wrong with that?

20 Ted 12.04.12 at 11:03 am

I’m not philosophically opposed to class actions. I’ve been quoted saying that several times including in declarations under oath. My work has held defendants’ feet to the fire: as the court said in In re Classmates.com, where our multiple objections turned a settlement where the defendant would pay the class $56 thousand into a settlement where they’d pay the class over $2.5 million (fighting all the while against the strenuous and eventually sanctioned behavior of class counsel opposing efforts to get the class more relief), CCAF protected the plaintiffs’ interest more than class counsel did.

There are thousands of lawyers out there happy to defend or expand the use of class actions; other lawyers are making a good living bringing meritless class actions, so there doesn’t seem to be much of a shortage of representation for meritorious class actions.

On the other hand, I’m the only one doing what I do defending consumers from their attorneys in abusive class action settlements; between July 1, 2011 and June 30, 2012, there were a record seven cases where class action objectors won on appeal in federal court, more than any twelve-month period in history, and that was because I briefed and won four of those arguments myself. I have to turn down extraordinarily meritorious cases and appeals because of a lack of time, I have a backlog of a half-dozen law review articles I want to write and probably never will, I have turned down private and consulting offers to pay me $750/hour because it would take too much time away from my non-profit work, my girlfriend wants me to spend more time with her, and there are five continents I haven’t been to yet. I’m hardly going to sacrifice even more of my scarce time on a time-consuming exercise just to prove a point to a concern troll who would surely move the goalposts thereafter as he already has.

By the way, in Dewey v. Volkswagen, which Max mischaracterized in his blog in an attack on me when he falsely claimed I never supported plaintiffs in litigation, we’re about to get an amended settlement approved tomorrow that will give relief to a million car owners who were arbitrarily frozen out by a self-dealing settlement that would have paid them exactly zero. If I’m lucky, the judge will award my non-profit fees of about 0.9% of what she’s going to award class counsel that the Third Circuit found abused their fiduciary duty to the class.

21 DEM 12.04.12 at 11:17 am

“That’s fine, that’s your right, but quit pretending that you’re standing up for the little guy. You think the little guy should have no rights against the big guy. Why can’t you folks be honest about what you want?”
_________________

One could say the same about virtually every plaintiffs’ lawyer. Why can’t they be honest about what they want — fees, fees, and more fees? They want the “little guy” to have rights against the “big guy” so long as it greases the pockets of the trial bar. The “standing up for the little guy” shtick is tiresome already.

22 Ron Miller 12.04.12 at 1:05 pm

Yes, DEM, trial lawyers are in only for the money, as opposed to doctors, Indian chiefs, defense lawyers and plumbers.

I find life works best when we make broad generalizations about entire professions.

23 Max Kennerly 12.04.12 at 5:09 pm

Seeing Ted’s comments here, however, I updated my post on him to note that his objections did indeed modify the settlement to enable more claims. So there’s that.

But in the process he admits my point: he’s not in the business of arguing for “expanding” class actions, and he thinks there are still “meritless” class actions out there. The only reasonable interpretation of these two arguments is that he wants to further restrict consumer rights; since he gives no arguments at all for when a class should be certified or liability should attach, the assumption has to be he thinks both should be abolished. Some “consumer advocate.”

He’s also admitted he’s never going to file a class action, while also bemoaning how class action work doesn’t pay well because it’s risky and the fees aren’t consistent with the work. You’re preaching to the choir, Ted: I don’t file them either, because they’re too risky and the fees are too low! You, however, think the fewer class actions, the better, regardless of merit; I fret when companies get away with fraud.

Next up is CATO. I’m dying to hear how forcing more class actions into federal court — the focus of their amicus brief — is somehow good for consumers.

24 Walter Olson 12.05.12 at 12:34 am

Did Max even read the original post? If so, he would know that consumer clients can get hurt in two separate ways when lawyers cut ethical corners in an attempt to evade Congress’s intent in CAFA. First, they may wind up being held to the tactical stipulation of under-$5-million damages in cases where actual claimable damages were higher. Second, as Congress recognized when it passed CAFA, one reason some lawyers seek to forum-shop into favored state courts is that they wish to escape federal courts’ tougher expected scrutiny of the adequacy and loyalty of their representation and in particular the relative proportion of fees to actual recovery in an eventual settlement. This is all fairly obvious, which lends a comic aspect to Max’s tone of barroom impatience (“I’m still waiting to hear Cato’s side. Huh? Huh?”)

25 Ted 12.05.12 at 7:55 am

Max either didn’t read my response or is accusing me of perjury.

Furthermore, I didn’t say that I don’t file class actions because they’re too risky. I said doing so would take time away from my highest and best use and from what I like to do most. If Max wants to negotiate a contingent referral rate with me and take on the responsibility of finding typical adequate class representatives, and agree not to ask court approval of a settlement process that violates CCAF principles, I’ll happily pass along multiple class- action ideas that are at of at least as high quality as ones I’ve seen resulting in settlements with double lodestar.

26 Max Kennerly 12.05.12 at 9:13 am

So Ted has lots and lots of ideas for meritorious consumer lawsuits, but he doesn’t act on them, and hasn’t been able to find lawyer willing to act on them.

Walter genuinely believes federal courts are a better forum for consumer plaintiffs.

Seriously.

Just drop the pretense: occasionally improving a settlement is an incidental benefit; by and large, you want to destroy class actions, but you claim to be “consumer advocates.”

27 Ron Miller 12.05.12 at 10:54 am

This argument is more mean spirited than it should be. Let’s change gears and work together to find creative ideas to get Ted’s girlfriend to stop complaining about how much time she gets with him. If that domino falls, I think the others will too.

28 Ted 12.05.12 at 7:09 pm

Sorry, guy. I grew up wanting to be the next Ralph Nader or Marvin Zindler, reading Consumer Reports cover to cover; you can find early 1990s Usenet posts on line where I parroted the anti tort reform talking points. Then I saw the legal system firsthand and discovered how badly the civil justice system was hurting consumers, and you get the consumer advocate you see today. If all I cared about was saving defendants’ bacon, I wouldn’t have repped plaintiffs in NVIDIA, or Classmates.com, or Dewey v VW.

I have lots and lots of ideas in lots and lots of areas I don’t act on. I neither have the hours of the day nor the minions to execute more than a small fraction of my ideas. I can let that frustrate and paralyze me, or I can act on the ideas I find most fun and rewarding. I’ve discovered I’m happier in life when I’m doing things I like to do. I like being my own boss and master of my own schedule, like appellate work where I get to make only the arguments I believe are Platonically correct, and like preventing lawyers from ripping off their clients; I don’t like negotiating non-disclosure agreements and cold-calling strangers, asking people for favors, dealing with discovery disputes or junior associates with easily bruised egos, or being too busy to play video games. (Cf. Jonathan Rauch on introversion.) Someday a smart and honest plaintiffs’ lawyer will persuade me to trust him, sit down with me for ten hours, and make us both a lot of money. Max would apparently prefer to persuade me not to trust him by gratuitously insulting me and calling me a liar in the face of plenty of evidence I’m telling the truth.

29 Ted 12.06.12 at 11:00 am

In his updated blog post, Max states about this thread: “Ted slyly avoids answering in those comments if he thinks class actions should be abolished.” I honestly thought I answered that question in comments 13 and 20 above, as well as in published interviews with the Wall Street Journal and legal newspapers, but I’ll explicitly state it so that Max can’t claim otherwise: I don’t think class actions should be abolished.

30 Vern Dennis 12.07.12 at 12:14 am

I do believe that Class Action Lawsuitsa should be, if not abolished completely, then circumscribed in such a manner that there truly is a commonality of claimants and be limited to Federal Court

As one who has been the “beneficiary” of several class actions, where I saw stocks in which I had invested lose 15-40% of their value, in exchange for which I received coupons for $5 off on the purchase of a 757 or a miniature submarine, I don’t see how anyone can say with a straight face, that the plaintiff bar is doing anything other than lining the pockets of its members

I expect Max to dissent – he’s a brave lawyer who accepts comments on his own blog – but only if you agree with him. He isn’t brave enough to admit when he’s wrong
——
Ron Miller said
“Yes, DEM, trial lawyers are in only for the money, as opposed to doctors, Indian chiefs, defense lawyers and plumbers. ”

I agree but at least doctors, plumbers and Indian chiefs don’t spout off pious nonsense about seeking justice for the victims

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