Monday, April 19, 2010

It’s Time To Ban Class Action Suits

One of the plagues of our time is the class action suit. I understand the reason for them, but they don’t work. At this point, they are nothing more than enrichment vehicles for a small group of attorneys. We should ban them to protect our economy, to protect injured people, and to protect the integrity of our legal system.

Under our legal system, legal rights are inherently personal. That means that only the person who has been injured can sue, and they can only seek compensation for the injury they themselves suffered. But class action suits are different. They let one person sue on behalf of millions of others, and that’s the problem.

History of Class Action Suits
Class action suits first arose in the United States in 1833. They were created out of a doctrine called “virtual representation,” which was created to allow judges to settle all of the property interests of a deceased person’s estate. Without that doctrine, anyone trying to settle an estate would need to obtain jurisdiction over every person potentially interested in the estate before the matter could be resolved. This would be potentially impossible (as many could not be found and some wouldn't even be born yet). By using the virtual representation doctrine, this requirement could be skipped.

Between 1833 and 1966, this remained essentially an “equitable doctrine,” which was used mainly to prevent injustices that might otherwise arise because of legal procedures. The example of settling the estate is a classic example where such a doctrine could be used to prevent injustices.

But in 1966, the rule was amended dramatically. This change created the problematic modern version of the class action suit. In 1966, Congress created what was called the “opt-out class action.” What this means is that once the suit is classified as a class action, anyone who wants to bring their own suit needs to “opt out” of the suit or their interests will be decided as part of the class.
The Theory of Class Action Suits
In theory class action suits make sense. If a million people are injured or might still be injured, rather than having a million suits filed and clogging the courts, each needlessly duplicating the efforts of the others, you could have one suit filed that represents all million people. This dramatically cuts down on the burden to the person/company being sued, it cuts down on the burden to the courts, and it makes it easier for injured persons to obtain justice, because they don’t need to go through the trouble of bringing their own suits. Moreover, this theoretically prevents any one plaintiff from draining all of the assets of the company before others can bring suit (often, others don’t even know yet that they’ve been injured when these suits are settled). So far so good. But like all things lawyers touch, this has become corrupted.
Why Class Action Suits Don’t Work
Modern class action suits are dominated by a small group of predatory firms -- you’ve seen their ads on television. They spend their time frantically searching for the next big hit: be it a drug with side effects, harmful chemicals in products, or obvious dangers that hillbillies ignore when they go off-roading on ATFs at high rates of speed through the woods. When they find one of these, they scramble to find the most horrifically injured plaintiff they can, who also must live in a jurisdiction with favorable laws. Then they rush out and bring suit. Once the suit is filed, they move for class certification. To get this, they need to show that it will be impossible to identify everyone who was (or will be) injured and that their plaintiff will be fairly representative of the others.

Only one class can be certified and it's first come first serve. So once the class is certified, that suit becomes THE class action and that plaintiff becomes THE plaintiff -- everyone else becomes part of the class. At that point, the battle is over. The lawyers sit back and negotiate a settlement. One huge fee later, they leave the crumbs in a pool for each of the injured people to fight over.

The reason this is so attractive to these lawyers is that while they might have gotten a few hundred thousand dollars from suing on behalf of one client, they can get BILLIONS from a class action suit. They also rarely need to take these to trial, whereas individual defendants usually need to go trial if they want full compensation.

The problems are this. First, there’s an incredible incentive to bring these suits, far out of proportion to what the incentive should be for lawyers. In a normal suit, a litigator is likely to get 40% of the proceeds. That means $400,000 if their client gets a million dollars. But for the same amount of effort, a class action lawyer can walk away with a hundred times or a thousand times that because now they are technically representing thousands of plaintiffs. . . even though no additional effort is required. Thus, lawyers push these things like drug dealers pushing crack.

Further, because the potential damages are so high -- most class action suits will kill companies -- the companies have a major incentive to enter into settlements just to survive, even if they did nothing wrong. It’s the same principle as extortion. Give us 80% of what you have or we’ll take 100%.

Third, and most importantly, these suits are intensely unfair to anyone except the lawyers. In a regular suit, there is no need to fight about how to split up the verdict or settlement. In this case there is. That means that each plaintiff needs their own attorney just to get their share out of the fund that gets created. That means a 40% fee on what they recover, which is already reduced by the 40% taken by the attorneys who brought the suit in the first place. Thus, whereas a regular plaintiff would be assured of collecting 60% of whatever is recovered, most class action plaintiffs are, at best, looking at 36% -- even if we assume the split if fair. . . which it isn't.

When a class action arises, many more people are added to the class than would otherwise have sued. Indeed, many people whose claims are very minor or even frivolous suddenly are added to the class, as are people who are "expected" to become plaintiffs -- even if they never do. This means that more people split the pot than would have if each suit had to be examined on its own merits. That means that the legitimately injured receive a smaller share than they should have.
Conclusion
As the system currently sits, it’s bad for companies, bad for the victims, and bad for the integrity of the system. The only people who benefit are the lawyers. While it might be worth it to reform the system by dramatically cutting the attorneys fees, that still won’t solve all the problems. . . especially as lawyers will be doing the reforming. Thus, I think the time has come to simply ban these suits.

20 comments:

Joel Farnham said...

Andrew,

How about rolling back the clock to pre-1966? Change the law back to what worked?

AndrewPrice said...

Joel, I don't think class actions need to exist at all, and they should be removed entirely from the system. When you leave off pieces hanging around in the code, which a roll back would do, people have a way of turning those right back into the thing you were trying to get rid of.

Patti said...

i just got a ridiculous lawnmower class action notification thingy in the mail last week. if i opt in, i may get $35. my mind immediately went to "what the lawyers must be getting". yowza. good way to make a living, if you can get it...

i'm with you, let's end this bad practice.

AndrewPrice said...

Patti, That's exactly the problem. You probably weren't even injured, but you get $35 -- as do millions of others. That means that the people who are injured are out whatever gets paid to the people who didn't even know they've been "injured." At the same time, the attorneys will walk away with a fortune, and the lawnmower company will be severely damaged for something that might not have even been dangerous or which might have only hurt a couple people -- who could have been compensated without all the other wasteful effort.

This is a bad practice that lets these handful of firms basically plunder companies on the backs of genuinely injured people. It should be ended.

And keep in mind, I spent years as a plaintiff's lawyer, so I know what I'm talking about.

LawHawkSF said...

Andrew: Sometimes it seems as if half the ads on local TV are from some law firm that's advertising all the money they can get me for taking some life-saving drug or using some time-saving tool. I blame the outrageous explosion of product liability litigation as much as I do the class action.

I particularly loved the calls awhile back for people who worked in bars or on airlines in the 30s or 40s to file actions for getting cancer from secondhand smoke. Haven't they lived long enough?

These frivolous suits have taken billions (perhaps even trillions) out of the economy and bankrupted companies that were providing jobs and useful services. Gotta go--the ad for the mesothelioma/asbestos lawsuits is on, and I wouldn't want to miss it.

BevfromNYC said...

Wow, I so agree with you Andrew.

The Texas legislature tried to at least correct some of the inequity. Lawyers now have to be compensated the same way the plaintiffs are. If the plaintiffs are awarded coupons or 3 months worth of HBO, the lawyers get the same deal. Now if the lawyers want their fees, the plaintiffs must be awarded cash money. It slowed down the really stupid class action business for awhile. Now plaintiffs get $35 while the lawyers get $35M. They justify it by saying if it weren't for the lawyers they wouldn't get anything.

Writer X said...

Andrew, is anybody leading the charge to change this practice? Or, does change have to happen at the state level, like Bev mentioned it's happening in Texas?

Very interesting post. And yeah, those TV commercials are nauseating. It's like listening to carnival barkers.

AndrewPrice said...

Lawhawk, I agree entirely about the ads. That should be the next thing to go. In my opinion, they cross the ethical line anyway about encouraging lawsuits.

The problem with product liability is that the laws were changed to protect people who were hurt by bad companies that would then use all the legal loopholes in the world to keep from paying out a penny. And now we have a system that destroys so much else -- again, because of a few bad apples. There must be a better way.

Ponderosa said...

Shouldn’t a $35 “injury” just fall under Caveat Emptor? That wouldn't even makes small claims court.

OK. So if I could get my attorney to sue a company for $60 wouldn’t the case just be ignored/thrown out? But somehow there are 1 million such “injuries” it is a valid case?

The paper-cut market looks great. I’m going to law school baby!

If you can’t ban class actions suits at least make them pro bono.

Another question: why do attorneys get 40% commissions in the first place? A different column, a different day.

AndrewPrice said...

Bev, I think that unless they change the law so that class action attorneys only get the share that their own clients get (and maybe a minor fee on top of that), then these things will continue.

These are pure shakedowns that do nothing but enrich a small group of attorneys. But they enrich so much that this small group is very powerful, and they've been able to resist any changes to the law because they give so much money to politicians. After all, what's a million a year if you just collected $5 billion?

The Texas idea is a good one, but as you note, doesn't go far enough. At least it keeps the attorneys from taking the money and leaving the victims with a BS settlement.

AndrewPrice said...

Writer X, There are people leading the charge on this, but no one who anyone is listening to. The problem is that there are too many lawyers in the legislatures and they see the pros of class action suits, but refuse to see the cons -- not to mention that many of them are getting huge contributions from the class action guys.

LawHawkSF said...

Andrew: Another thing the average (non-lawyer) may not realize is that these class action firms are really nothing more than paper mills. After the first come-first served filing, nearly all the work is done by hordes of low-level clerks and banks of computers collecting the data. It's about as far from "practicing law" as Amazon.com.

AndrewPrice said...

Ponderosa, No attorney would bring a suit for $35, so while you could technically do it, it wouldn't happen (and yes, it would go to small claims or magistrate court).

That's one of the problems with class action suits, it gives attorneys an incentive to bring cases that never should have been brought. If attorneys switched to a flat fee or an hourly fee, then few people could afford it.

The reason for the 40% fee is the risk. Attorneys put an incredible amount of time and money into most suits, which the clients never see. I've had cases where I literally had to put out over $100,000 out of pocket just to get through trial.

AndrewPrice said...

Lawhawk, That's true. That's what the television ads are about. Those are suits that have already been certified and they just want to get the numbers up. So if you call them, they'll fill out some paperwork for you and that's about it.

StanH said...

“Let’s kill all the lawyers…” Isn’t Class Action where the sleazeball John Edwards got his millions? This is another area of plunder for leftist to shakedown the “evil” corporations. There are so many things that need to be fixed in this great land, this is yet another.

AndrewPrice said...

Stan, I could be wrong, but I don't think Edwards did the class action thing, I think he just brought medical malpractice suits against OB/GYNs -- who are prime targets.

Tennessee Jed said...

Andrew - as someone who worked his career as a commercial liability insuror, it is in my DNA to loathe the plaintiff's bar in general and the class action plantiffs in particular. Those fabulous methoselioma boys (Binder & Binder?), come to mind.

Of course we all know which political party's lips are planted firmly on the ass of the plaintiff's bar (the party of John 'sunshine' Edwards.

AndrewPrice said...

Jed, Having done plaintiffs work (I've done both actually, and then some), I can tell you that the defense bar is just as bad -- if not worse at times.

But I think class actions are misguided and need to be stopped.

Individualist said...

Is there something the Tea Party could do about the funding of Politicians who engage in class action suits. If it is just a small number or firms then tracking who gets what money should not be a problem.

The Tea Party (assuming a Republican Congress) could rally around stopping these suits and tort reform. Then we could watch the votes and name the congressmen that received money, how much, from whom......

We could even expand the calls to polite calls to the firms asking them to pleae quit standing in the way of Tort reform.

AndrewPrice said...

Individualist, It's not that hard to find out who gets contributions from these companies. The problem is that the public doesn't really hold the funding source against the politicians -- at least, not enough vote them out on the basis.

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