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More on "Our Class Action System is Unconstitutional" -- Sigh, Pray

Walter Olson recently posted on key points made in an important article by George Krueger and Judd Serotta about cy pres settlements in the August 6, 2008 Wall Street Journal. In a nutshell, these "cy pres" proceedings represent a new species of legal activity whereby judges assign portions of lawsuit settlements or recoveries to non-party persons or entities chosen by them as somehow approximating the goal of the legal proceeding. (Long-time POL contributor Ted Frank has recently published a scholarly article on this new phenomenon.) These "approximation" awards are just one aspect of the larger problem created by regulation through litigation -- though a particularly alarming one. Point of Law has numerous contemporaneous prior posts on these developments. These cy pres practices are even more widespread and far-reaching than those attorneys report, and suffer from manifold constitutional and legal infirmities.

The good news? Any student in a high school civics class can recognize this racket.

Krueger and Serotta's central point is that these wealth transfers by judges of millions of dollars extracted from defendants in our state and federal courts given to institutions like legal aid societies or universities which were never injured, who possess no standing to sue, and who are chosen in an ad hoc and unreviewable process violate the federal Constitution's case and controversy clause. These ad hoc remedies additionally violate state and federal constitutions's due process clauses and that legal infirmity should be addressed before a case proceeds to settlement or trial, not at some much later date when a judge is trying to figure out what to do with millions of undistributable cash paid by a class action defendant. (I am indebted to Martin Newhouse, President of the New England Legal Foundation, for articulating this latter point.)

Kreuger and Serotta limited their discussion to private class action suits. But this practice of cy pres distribution is in widespread use by state and federal governmental officials, and represents an unconstitutional abuse of power. Consider a few examples:

  • In 2004, Mass. AG Thomas Reilly sued Walgreens, Home Depot and Wal-Mart for violations of state "item pricing" regulations" that arise when a shopper picks up an unmarked item or an item that is marked $3.19 but is charged $3.59 at the checkout. Rather than try to return such zero-to-trifling amounts of money per incident to the injured consumers, the state hired class action lawyers and richly compensated them. According to the Boston Globe, the proposed settlement involved the payment of $3.2 million to the private attorneys, $3.9 million to "an eclectic group of charitable, consumer, and nonprofit groups," and $425,000 to the AG's Office. The list of favored groups "includes $150,000 for the Massachusetts Bar Association, $120,000 each for the American Heart Association, the American Cancer Society, and the Juvenile Diabetes Research Foundation; $100,000 each for the National Consumer Law Center, the Roscoe Pound Institute of Washington, the New England Patients' Rights Group, and the attorney general's office; $50,000 for Public Citizen, and $40,000 for the Greater Boston Jewish Coalition for Literacy." (See earlier POL post by Mike DeBow) Meanwhile the overcharged consumers get nothing. (To add irony to idiocy, a recent detailed study shows that the item pricing laws themselves raise retail prices for consumers in states that have such laws.)
  • The U.S. attorney for New Jersey, Christopher J. Christie, entered into a deferred prosecution agreement ("DPA") with Bristol-Myers Squibb because of a potential securities violation for inflating its quarterly earnings by a business practice known as channel-stuffing. As an article in the Wall Street Journal noted, "[t}he naive reader might think that a DPA should prohibit the firm from engaging in future conduct of the sort that got it into hot water in the first place." (Richard Epstein, The Deferred Prosecution Racket, WSJ, 11/28/06). The "most striking evidence of the abuse of power is paragraph 20 of the agreement, which requires Bristol-Myers to endow a chair at Seton Hall University School of Law," Mr. Christie's alma mater, "for teaching business ethics."
  • West Virginia AG Darrell McGraw's office appointed special assistant attorneys general and outside counsel to sue pharmaceutical companies and software giant Microsoft, among others and received multi-million dollar recoveries. But the settlement dollars don't make their way into the state's treasury for the Legislature to disperse. Although an editorial from the Wheeling Intelligencer called it a "disturbing philosophy" that the AG's "office keeps the money - millions of dollars." The editorial stated. "He ought to turn the windfalls over to the state treasurer, of course ... McGraw seems to view the money as his own personal hole card in the popularity contest that politics can be."
    McGraw's free-wheeling exercise of the power of the purse has drawn the wrath not only of state legislators, but the federal government. Kim Strassel of the Wall Street Journal reports:
    Mr. McGraw had sued on behalf of state agencies (including the state's Medicaid program) -- yet his office kept the rest of the settlement money.The federal government, which pays a significant portion of the state's Medicaid bills, remains furious the program received none of the settlement, and is now threatening to withhold millions in Medicaid money. . . .[Nonetheless] Mr. McGraw remains relatively popular in the state, in part because one of his greatest innovations has been the art (as with the OxyContin suit) of turning settlement proceeds into political patronage. When the West Virginia attorney general crafts a settlement, he makes sure it goes to his own office, where he doles it out with great fanfare to universities, health-care centers and county commissions. In January, he grandly announced that a $12 million settlement he'd negotiated with Visa and MasterCard would be going to fund statewide sales-tax holidays.

These cy pres arrangements represent a complete breakdown of the rule of law. In addition to violating the case and controversy and/or due process provisions of state and federal constitutions, they violate the doctrine of separation of powers. Recoveries in lawsuits brought by governmental entities belong to the state or federal treasury and may be expended only by the legislature.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.