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June 2011 Archives

Copland on Wal-Mart v. Dukes

Yesterday, MI's own Jim Copland spoke with Jim Blasingame on the Small Business Advocate radio show about Wal-Mart v. Dukes: Part 1 and Part 2.

You will recall that the Missouri appellate court in Bachman v. AG Edwards affirmed the approval of a coupon settlement without addressing CCAF's legal argument about the valuation of coupons. Under Missouri procedure, the next step is a motion for reconsideration/motion for transfer, and that's what we filed June 15.

The Center for Class Action Fairness is not affiliated with the Manhattan Institute.

What pro-business bias? (continued)

Today's testimony by Andrew Pincus before the Senate Judiciary Committee refutes any theorizing that the Supreme Court has a pro-business bias. As Alison Frankel documents, the hearing is part of a litigation-lobby-motivated push to roll back Supreme Court opinions that promote the rule of law. The 10:30 AM hearing will be webcast.

The D.C. Circuit is correct, I think, in holding that an attorneys' fee in a class action should be calculated as a percentage as the common fund. But does that mean that class counsel in a class action that settles immediately upon the filing of a complaint without any contested litigation is entitled to the same 25% that is the benchmark for a fully-litigated case where class counsel is actually facing risk? I argue no, and the Center for Class Action Fairness LLC filed an objection yesterday in Trombley v. National City Bank to the $3 million fee request in a $12 million settlement over debit-card overdraft fees (as well as to the odd duck of distribution scheme that shortchanged our client).

The Center for Class Action Fairness LLC is not affiliated with the Manhattan Institute.

What pro-business court? It was generally viewed as a good sign for the Rule of Law when Justice Scalia stayed judgment in a Louisiana class action that ran roughshod over the due process clause in awarding $270 million for a smoking cessation program, and it was generally expected that, at a minimum, the Court would remand the case for reconsideration in light of Dukes, but, in a move that surprises me, the Court simply denied certiorari today, letting the verdict stand. [Bloomberg]

Jim Dedman reviews trial-lawyer Susan Saladoff's Hot Coffee documentary, which tells one side of the story of the McDonald's coffee case, but not a fair representation of the other side, which I discuss in detail in this 2009 Washington Examiner op-ed about the making of the movie.

I've spoken about this case in talks to law schools across the country for years. The producer of the movie, Carly Hugo, emailed me asking to interview me on the pretense that they wanted to provide "both sides," but provided a release that made it clear the filmmakers could misquote me at will. When I asked for a modification of the release to ensure that I would be quoted accurately, they suddenly didn't want to interview me any more and I never heard from them again. I seem to have made a good decision in refusing to give the producers carte blanche: as the New York Times documents, tort-reformer Victor Schwartz was selectively edited to promote the filmmaker's litigation-lobby bias.

I've also previously written about the Jamie Leigh Jones case featured in the movie; and anyone who buys the movie's claim that Oliver Diaz was unfairly treated should read Walter Olson's contemporaneous coverage of his criminal trials.

Update: Glenn Garvin's Miami Herald review says "Hot Coffee is done in by its essential dishonesty. ... Makes you wonder if there's a legal remedy for documentarian malpractice."

Update: Questions for Susan Saladoff the press aren't asking.

Around the web, June 27

  • Some of the better Wal-Mart v. Dukes commentary and analysis—and don't miss my podcast. [Trask; Beck; Karlsgodt; Olson @ Cato; Olson @ Phil. Inquirer; Bloomberg; NYT; WSJ; Examiner; Bader; Omaha World-Herald; Entrepreneur; WLF; earlier; elsewhere on POL]

  • Best Buy employment-discrimination class-action settlement: $200,000 for plaintiffs, $10 million for lawyers. [Minn. Bus. J.]
  • The perils of vague criminal statutes. [Silverglate @ Reason]

  • More on Congressional hearing on FCPA. [Richer/Kendrick]

  • Louisiana narrowly rejects automobile forfeiture sanctions for littering. [OL]
  • Taiwan court imposes heavy damages on web reviewer who complained about salty food at restaurant. [MR]

  • DC-area Supreme Court roundups: WLF; Heritage
  • Corpus Christi Judge Longoria ignores Texas state law to impose felony conviction on mother who spanked her child. [Corner]

  • Not satisfied with ruining our toilets and light-bulb choices, environmentalists place New York Times story presaging campaign to save energy at the cost of it taking two minutes for our cable televisions to turn on. This seems awfully counterproductive: just as people now flush the toilet more often, people are going to respond to the inconvenience by keeping their televisions on all day. [NYT]

  • Our nation Depends on the TSA: Northwest Florida Regional Airport security officials keep us safe from 95-year-old invalid woman with leukemia by requiring her to remove her adult diaper. [NWF Daily News; CNN]

The attack on rule-of-law judges

Left-wing reporters and blogs pushed an anonymously-sourced story about Wisconsin Supreme Court Justice David Prosser attacking fellow justice Ann Walsh Bradley, but Byron York reveals that the reports are highly exaggerated and possibly even trumped up.

Almost as bad are the bogus ethics charges (led by the now-disgraced Anthony Weiner) against conservative Supreme Court justices; Curt Levey has details, and Randy Barnett comments.

FTC investigating Google

To a certain extent, Google is partially to blame for the FTC antitrust investigation into its practices, but not for the reason you might think. Google executives were big cheerleaders for the 2008 Obama campaign, but you have to expect Democratic-run federal agencies to adopt a view of antitrust that expands government oversight of successful companies.

Geoff Manne and Joshua Wright have done extensive writing on the subject of the economics of search engine, and their post on the investigation and the links therein are a must-read for anyone interested in the topic.

Around the web, June 24

  • West Virginia Supreme Court upholds non-economic damages caps in med-mal cases, correctly noting that it's not the role of the judiciary to second-guess the policy decisions of the legislature. [LNL; opinion at Torts Prof blog]
  • Can Republicans make an issue of the Obama administration's overcriminalization of business? After being beaten up for over two years, business leaders seem much less friendly to Obama's fund-raising overtures than in 2008. [Henderson via Kirkendall; NY Post]
  • Senate Judiciary Committee plans to bash Supreme Court at hearing on Wednesday. [SJC]
  • Jim Hannah has more on Chesley disbarment. [Cincy Enquirer]
  • FTC opposes Midland and Encore class-action settlement. [FTC; earlier (state AGs)]

  • Chutzpah: plaintiffs who won settlement in Texas judicial hellhole now seek to recover $5.6 M in payments to their attorneys because their attorney bribed the judge. Shouldn't the defendant be intervening in that lawsuit? [Courthouse News]

In CSX Transp. v. McBride, Justice Thomas joined the four justices from the liberal wing of the Court to agree to a broad plaintiff-friendly interpretation of the Federal Employers' Liability Act and whether it required a showing of proximate causation before liability would be imposed, in an opinion written by Justice Ginsburg. Chief Justice Roberts wrote a dissent, arguing that the majority opinion was confusing language abrogating contributory negligence with a diversion from the common-law principle of proximate cause. "[T]he causation test the Court embraces contains no limit on causation at all."

Podcast on Wal-Mart v. Dukes

What media bias?

"If the Constitution was intended to limit the federal government, it sure doesn't say so." —Time magazine, June 23

"There's nothing in the Constitution that restricts the government from asking us to do something or buy something or pay a tax -- even if we don't like it." —Id.

Well, alright then. Time magazine has spoken (if remarkably ignorantly), and the rest of us can go home.

A week ago, I scoffed at a claim in a lawsuit against Bayer that it violated Title VII by failing to provide work-life balance that was attractive to women seeking promotion. Now, an academic writing in the New York Times adopts precisely that argument: Wal-Mart's real discriminatory policy is that it asks its managers to work really hard (sometimes 80 to 90 hours a week!), and more men than women are willing to do that.

I don't know why more women aren't insulted by the risible claim that asking for hard work is the equivalent of sex discrimination, but we've now seen two instances of this argument in two weeks, and if one more happens, I can officially declare a trend—which would be a very dangerous trend if we start seeing courts abandoning the long-held position that the anti-discrimination laws do not make courts into a civil service board and instead interfering in the efficiency of workplaces.

The hard work that Wal-Mart requires of its managers benefits Wal-Mart's customers, many of whom are women. Why should they suffer so Professor Lichtenstein can feel good about social engineering?

See also Boudreaux and Sailer.

Around the web, June 22

"$7 million to sue Wal-Mart"?

Reuters unquestioningly accepts the claim of Joseph Sellers of Cohen Milstein Sellers & Toll that the firm "is in the hole by about $7 million" for its role to date on the Dukes v. Wal-Mart litigation. (Note also Reuters unquestioningly accepting the incorrect assertion that it is common for lawyers to get 33% contingency fees in large class actions.) But the actual breakdown is "$5 million in attorney hours and ... $2 million on experts and discovery," which does not translate into $7 million in cash. While the experts would be paid in full in advance, the $5 million figure reflects substantial markups in time: a $400/hour associate does not cost Cohen Milstein $800,000/year nor does a $200/hour paralegal cost them $400,000/year. The $800/hour partners don't get to collect $800/hour from the firm unless they win. There's opportunity cost, to be sure, but if Cohen Milstein believed they had more profitable opportunities available to them, they would be litigating those cases rather than Dukes. (It's also entirely possible that that $5 million figure includes $35/hour temp document-review attorneys being billed out at close to ten times that in a case with millions of documents.)

I can't tell you whether Cohen Milstein does it, but even on the expense side, many clever law firms have their partners holding stakes in the profitable outside discovery vendors, effectively vertically integrating when it comes to "expenses."

So don't cry for Joseph Sellers. The out-of-pocket cost to Cohen Milstein is likely much closer to half the $7 million figure. Given that a victory or settlement in the litigation would be rewarded with an attorney fee of hundreds of millions of dollars, it would be a profitable gamble for Cohen Milstein to take the case even if they believed they had well under a 10% chance of success. And a firm of Cohen Milstein's size has a diversified portfolio of litigation that gets them closer to the Law of Large Numbers when they engage in risky litigation. There's a reason they didn't sell off part of this case to a litigation finance company to protect their downside.

Wal-Mart, on the other hand, is paying full fare for its outside counsel (and experts), and the internal expense of producing documents is always greater than the expense of reviewing them. They're not going to recover their millions of dollars of costs for being subjected to an improper class action suit, even if they're completely vindicated. The effect of this is to hurt employees: if every employee hire is a potential lawsuit, the wise employer counts the expected expense as a marginal cost of doing business, and reduces wages accordingly. Given the ratio of large contingency fees and defense expenses to class-member recovery (I doubt that employees collect as much as fifty cents of every dollar spent on employment litigation and the human-resources apparatus employers establish to reduce the costs of employment litigation), it's doubtful that the average employee would prefer the "benefit" of being able to sue to the increased wages they could receive if their employment was at-will. This is why you shouldn't believe the hype about the Dukes case: the Supreme Court decision benefits employees in the long run.

The growth of the Center for Class Action Fairness LLC can be shown just by the breadth of its activities on Monday, June 20:

  • There were twelve objectors at the Cobell v. Salazar fairness hearing, and I was the only attorney representing an objector. Unfortunately, the district court overruled our objections, and approved the $3.4 billion settlement. There was some good news: if one takes the plaintiffs' request for $224 million in a fee and expense award seriously, rather than as a tactical maneuver to give the judge room to award high fees while appearing to cut the request, then the judge's decision to award $99 million in fees (and reject another $11 million in expense requests by the class representatives) means that there will be another $136 million available for class members when and if distribution takes place.
  • Dan Greenberg was at the fairness hearing in the Central District of California for Stetson v. West Publishing which drew some extra blogosphere attention because it involved BarBri expenses for many many recent law-school graduates. The court, from the bench, rejected the coupon settlement, which entailed over $1.8 million in attorney-fee requests. It's the second win from the bench in a row for Dan; we're still waiting for the official opinion in the coupon settlement rejection in Sobel v. Hertz (D. Nev.).
  • And Adam Schulman, our local counsel Chris Arfaa, and I helped file Dan's reply brief in the McDonough v. Toys "R" Us (E.D. Pa.) baby products class action settlement, where the attorneys are requesting about $14 million though the class is likely to receive less than $20 million. The fairness hearing will be July 6 in Philadelphia.
The Center for Class Action Fairness LLC is not affiliated with the Manhattan Institute.

Wal-Mart bet post-mortem

A post-mortem on my Wal-Mart bet, discussed June 5 and June 9.

For me to make money, a few things had to happen:

1. I had to be right that Wal-Mart v. Dukes would result in reversal. Check.

2. I had to be right that the marketplace would react as if this was a surprise, as had been my consistent experience. Even if the expected result was fully priced in, I expected a temporary surge in the price from day-traders irrationally responding to the opinion before the sharps traded the price back down. (I've seen this happen with other stocks just from getting favorable press coverage on CNBC.) Given the enormous market value of WMT, I expected a bounce between 1% and 4% in the stock price, which would correspond to a much larger bounce in the option price. Check: there was a 1.5% bounce after the Supreme Court announcement yesterday; that translated into an increase in the option prices of 20% to 50%. (Of course, post hoc ergo propter hoc doesn't fly: this isn't proof that I was right, rather than lucky, but I do think there was cause and effect.)

If I was right about those two things, my expected return was 15% to 60% depending on the size of the bump, minus the 4-5% transactions cost, plus or minus variance from other market factors.

Unfortunately, this variance issue meant I had to be lucky in two other factors:

First, there were eight or so possible days when the decision would be released; I had to hope the decision wasn't released on June 20, when I would be at a hearing in a courtroom, unable to act upon any rise in the stock price. Oops. By the time I learned of the decision at 1:30 PM, the day-trading bump from the news had disappeared.

Second, I needed the world to produce less bad economic news than good economic news. I was unlucky here: I purchased options June 1 to June 3, and there was bad economic news almost immediately; still, my break-even price was around $54, and I was ahead mid-day June 9. Then the Greek crisis hit, the stock dropped to $52.70 by the opening of June 20, and it was going to be hard for me to make my money back. And, indeed, the 1.5% bounce in the stock only went up to $53.50.

In the stock market, you can be wrong and make money, and right and lose money. It's better to be lucky than good. I'll liquidate today, and take a loss of over half my bet. C'est la guerre. I've made bigger financial mistakes in my life; I've had single trips to Las Vegas where I made more money than I lost on this three-week bet. (Heck, I'm an economist who understands opportunity cost. I lose more money than this every year I devote to the Center for Class Action Fairness instead of being a for-profit lawyer.)

Coverage: WSJ, proving that no publicity is bad publicity so long as they spell your name right; Frankel @ Reuters; Severino @ NRO; Ribstein; Blackman.

In two major decisions today that will interest the readers of this site, the Supreme Court held that the class alleging gender discrimination against Wal-Mart was improperly certified in Wal-Mart v. Dukes and that the EPA's governance of carbon-dioxide regulation under the Clean Air Act displaced the federal common law public nuisance suit brought by various states and municipalities in AEP v. Connecticut. The holding in both cases was unanimous, though not without underlying disagreement. In Dukes, the justices split 5-4 over whether to dismiss the suit outright (the majority decision) or whether to remand for further consideration as a 23(b)(3) class action (Justice Ginsburg's position, joined by Justices Breyer, Kagan, and Sotomayor). In AEP, the justices split 4-4 on whether the plaintiffs had standing to sue (presumably the same split as in Massachusetts v. EPA), and Justice Alito wrote separately, joined by Justice Thomas, to emphasize that his decision rested on the assumption that the Clean Air Act applied to carbon dioxide emissions (the position he rejected in Massachusetts v. EPA) (Justice Sotomayor, who was involved in the suit below, recused).

Those who didn't see our earlier discussion on Dukes, which pulled in various thinkers and practitioners, should check it out now and compare with the actual decision. The Manhattan Institute also wrote a fair amount on the AEP global-warming-as-public-nuisance case in last fall's Trial Lawyers, Inc.: Environment.

Josh Blackman summarizes Dukes here and AEP here. Walter Olson assesses Dukes here. And as Blackman notes, the Dukes decisions, both majority and dissent, are replete with citations to our dear departed friend Richard Nagareda's published writings, both The Preexistence Principle and the Structure of the Class Action, 103 Colum. L. Rev. 149, 176, n. 110 (2003) and Class Certification in the Age of Aggregate Proof, 84 N. Y. U. L. Rev. 97, 131-132 (2009).

Father's Day special: In "facilitated communication," an aide helps a profoundly autistic child type answers to questions. This is pure quackery: in reality, it's the communicator who's answering the question, rather than the child, as demonstrated by experiments where the communicator is unable to hear the questions. But it provides enough false hope that some believe in it, and it can lead to false sex abuse allegations as happened in the case of the Wendover family. The Detroit Free Press runs an extraordinary six-part series (via @walterolson) on the trauma inflicted on this one family by junk science and gullible prosecutors. The Wendover family civil suit against government officials is pending, but they seem relatively fortunate that they were only separated from their children for 106 days before prosecutors dismissed the case (while covering their butts by claiming it was because the ostensible victim was too scared to testify); we've certainly seen other prosecutors (cough, cough, Martha Coakley) continue witch-hunts until they lead to prosecutions. Worth noting: Brian Dickerson's criticism of the "cowardice and cronyism" of judges who delayed matters for four weeks past when it was obvious prosecutors had no case.

Around the web, June 18

  • Fallout: Ohio bars disbarred Chesley from representing it in class action. [Cincinnati.com; Adler @ Volokh; earlier and earlier]
  • Tennessee caps non-economic damages at $750,000 [LNL]
  • Is McLean County, Illinois, ignoring the law in asbestos cases? [Rickard @ Chi Trib]
  • Obvious except to Third Circuit: SCOTUS rules that defendants can challenge Tenth Amendment constitutionality of overfederalization of crimes they've been charged with. [Shapiro @ Cato; Bond v. United States]

  • It's not quite loser pays, but recent amendments to 28 U.S.C. ยง 1920 may at least shift costs of excessive e-discovery in some cases. [Beck]
  • Clifford Taylor takes on Sandra Day O'Connor on judicial elections and "merit selection" at Wayne State U conference. [Pero; Severino]
  • California high school tripped up by overbroad state child porn law. [Reason]

  • Why, yes, the Center for Class Action Fairness LLC is likely to object to the Pampers Dry Max diaper settlement. But I don't blog for Above the Law. [Jackson; Miller]
  • I strongly suspect that the requirements of dramatic arc and the fact that HBO got someone blue-eyed and hunky to play "Ted Frank" in the movie instead of Jon Lovitz or Judah Friedlander means that I'm going to be portrayed relatively sympathetically. [IMDB]

What media bias?

Brian Ross of ABC News repeatedly used footage of Sean Kane criticizing Toyota over sudden acceleration without telling viewers that Kane was being paid by plaintiffs' attorneys pushing bogus product liability claims; he also faked footage of a tachometer speeding out of control to push the "deadly Toyota" meme. All of these scare tactics and hysteria turned out to be utterly false, and refuted by a NASA/NHTSA report finding nothing wrong with the electronics in the automobile. Ross and ABC News haven't retracted their scare-tactic stories or even apologized, much less slunk off in disgrace. Rather, ABC News submitted Ross's quack reports for an Edward R. Murrow Award—and got the award, doubling the scandal. Where's the expose of biased reporters doing the bidding of plaintiffs' lawyers? [Gawker via @walterolson]

Post edited to correct name of reporter.

The program didn't improve safety (which would be better served by increasing yellow-light times), and actually cost Los Angeles more money than it brought in. Three quarters of the tickets were for rolling-right-turns, which were responsible for less than 0.1% of accidents in Los Angeles. [LA Weekly]

Around the web, June 16

  • Judge Bamberger, already removed from Kentucky bench for his role in the fen-phen scandal, faces disbarment. [Cincinnati.com]
  • Sensenbrenner seeks reform of "impenetrable" FCPA law; DOJ opposes constraints on prosecutorial power. [NYT/Reuters; WSJ; House Judiciary hearing]

  • Mississippi high court hears Sears case on non-economic damages caps. [AP/Forbes; earlier]
  • Haggling over med-mal reform in North Carolina; product liability reform dead. [News-Observer]
  • Special-interest defendants victimized by business-method patent troll who has already collected $400 million seek targeted legislation from Chuck Schumer in patent-reform bill helping with their particular case, while leaving other business-method patents relatively unscathed. [NYT via Yglesias ("Can't they both lose?")]

  • Good news for the First Amendment from New York: message board not liable for pseudonymous comments, even when message board reposts one of the comments as a separate post. [Volokh; Shiamili v. The Real Estate Group of New York, Inc.]
  • Sixth Circuit finds another disingenuous reason to indefinitely postpone an execution; Judge Rogers persuasively dissents. [Adler @ Volokh; Carter v. Bradshaw]

  • 38 state AGs oppose class action settlement by Encore Capital Group. [WSJ]
  • Medicare recipients already face de facto rationing through queueing effects. [MR]
  • A modest proposal to increase both jobs and safety. [Murray @ CEI]

The Ninth Circuit has established a 25% "benchmark" for attorneys' fees: the attorneys should not collect more than 25% of the common fund available to the class. I'm increasingly seeing plaintiffs' attorneys trying to get around this approach by (1) requesting expenses (often illegally undisclosed in the class action notice) separate from the fees, thus increasing the percentage going to the attorneys; and (2) improperly including payments to third parties such as the newspapers where a settlement is advertised or the claims-fund administrator within the "common fund," thus effectively collecting a commission on money paid to the claims administrator. The conflict of interest is apparent: if the attorneys get paid the same whether money goes to the class or goes to the claims administrator (or goes to a third-party cy pres recipient), the attorneys have no incentive to ensure that the class maximizes recovery or that the claims administrator isn't overcharging. The Center for Class Action Fairness LLC objected to such arrangements in the pending Stetson v. West Publishing and Babies "R" Us cases, for example.

The problem repeats itself in In re Accuray Securities Litigation, No. 4:09-cv-03362-CW (N.D. Cal.). Except in a PSLRA case like Accuray, the problem is even more egregious, because the attorney-fee request is statutorily limited to being based on class recovery. One hopes that a shareholder (institutional or otherwise) objects, and, that even if one doesn't, the court exercises its fiduciary duty to the unrepresented class members.

SEC whistleblower rules

Daniel Fisher notes that the new SEC whistleblower rules, which incentivize employees to dodge internal reporting (often at cross-purposes with that required by Sarbanes-Oxley) to instead seek windfalls, is going to overwhelm SEC staff with false leads, making real fraud detection less likely. Tonya Mitchem Grindon, writing for WLF, suggests internal whistleblower awards to compete with those the SEC offers, though one wonders about the astronomical compliance costs that that would create—especially given the threat of employment-law liability for retaliation against whistleblowers that already overincentivizes spurious reporting.

Kentucky disbars Stan Chesley

There was little chance that the Kentucky Bar was going to disregard the extensively papered recommendation of the trial commissioner after a 43-witness trial over the fen-phen scandal, but it's good to see the result, if one that was several years late. Commissioner Graham found that Chesley:

  • Led a "clandestine meeting" with Judge Joseph Bamberger in February 2002 to get the court's "stamp of approval upon this criminal enterprise" and his approval of fees totaling 49 percent of the settlement.

  • Responded with "misleading," "incomplete" and in some instances "outright falsehoods" when the Bar Association began investigating him.

  • Violated several disciplinary rules, including taking an unreasonable fee, making a false statement to a tribunal and failing to provide clients with information about the total value of the settlement.

Ohio will almost certainly pursue reciprocal discipline, but the 75-year-old has indicated that he will appeal to the Kentucky Supreme Court, which will likely delay the inevitable for a year or two. [Courier-Journal; Kentucky.com]

The order includes a requirement to disgorge $7.6 million—which means that Chesley will still have made $12.4 million from his unethical behavior. Nice work if you can get it. And once again, given the extensive record and overwhelming evidence of misconduct here, I note the odd decision of the U.S. Attorney's office not to criminally prosecute Chesley, who wasn't even much of a cooperating witness at the trials of his co-conspirators.

Rice Krispies class action settlement

In 2009, the state of Oregon complained to Kellogg that they said Rice Krispies and Cocoa Krispies were fortified with antioxidants, and Kellogg changed the description of the boxes of the cereal—though the cereal is fortified with antioxidants. Almost immediately, several plaintiffs' lawyers filed lawsuits on the basis of Kellogg's announcement, and after several amended complaints, Kellogg's agreed to a nuisance settlement of $2.5 million. Class members can request $5 refunds for up to three boxes of cereal purchased between June 1, 2009 and March 1, 2010, an amount that will be reduced pro rata if the settlement money runs out, though one might expect that there will only be a few thousand claims. Though the class is nationwide, Kellogg is giving another $2.5 million (retail value, so it's really costing them half as much) in food to two local charities in Santa Monica and Atlanta. The class representatives will seek $5000 each.

How much are the attorneys asking for? I don't know: it's not in the notice or settlement agreement, but it comes out of the $2.5 million settlement fund. (The attorneys will announce on July 18; objections must be received by July 25—a Monday. This abbreviated and substandard notice is arguably a violation of Rule 23(h) and Ninth Circuit procedure in In re Mercury Securities Litig.. The notice is otherwise substandard, as there are several hoops one must jump through to object that are not listed in the notice.) Anything left over after the class is paid will go to the two local charities and a trial-lawyer group.

The case is Weeks v. Kellogg, Case No. CV 09-08102(MMM)(RZx) (C.D. Cal.).

Law firms: what recession?

The National Law Journal reports (reg. required) that 98% of large law firms plan to add lateral partners, 41% plan to open new US offices, and the median billing-rate increase is four percent, faster than the rate of inflation. (And, of course, a 4% rate increase reflects a higher percentage increase in profits given the degree to which law firms face fixed costs.)

(The same column reports that Montgomery Blair Sibley's latest lawsuit against the federal judiciary for disbarring him has been dismissed. Given that his original suspension was in part for repeatedly initiating meritless litigation, one would expect a heavier exercise of discretion.)

The recently-filed class action against Bayer Healthcare documents some plainly actionable allegations of sexual harassment. But Suzanne Lucas is not impressed by an allegation that it violates the law that the most highly-promoted executives had to sacrifice "work-life balance" to further their careers. After all, it's not like the male executives are being treated any differently. "Perhaps people would be more inclined to take sex discrimination seriously if the complainants stuck to actual problems."

There are, of course, obvious public policy problems if employers are not allowed to reward hard work for fear of triggering some sort of disparate impact allegation. Now, perhaps, employers might reasonably choose to structure opportunity differently, insist upon work-life balance, and hope to offset the reduced productivity by being a more attractive place to work. (Given the low wages we pay, I couldn't get anyone to work for CCAF if I didn't offer work-life balance to attorneys.) But that should be a choice of the individual employer, rather than one required by law. (h/t Alkin)

More on California overregulation

Professors Ribstein and Bainbridge follow up on our earlier post on California overregulation; Bainbridge also notes the adverse effects of the California use tax. Separately, Walter Olson, like Bainbridge, points to an Economist story how California law makes an artisanal yogurt business untenable.

Someone looking for a long list of California eccentricities that make creating jobs difficult could do worse than to read the free e-book by Seyfarth Shaw's David Kadue, 2011 Cal-Peculiarities, which covers novel "employees' rights" laws involving, inter alia, mandatory time off for "good deed" service such as firefighting, banning trousers in the workplace, lactation accommodation, whistleblowing, English-only workplace rules, and compensation due employees for time spent undergoing security checks. Not clear how much good these rights do employees if the cost of administering the laws prevents them from getting a job in the first place.

The The New York Times documents a pilot program of "judge-directed negotiation" in New York where medical malpractice cases are assigned to an experienced settlement judge early in the process, one of many programs the Obama administration supports as an alternative to damage caps. It's certainly a good thing when truly injured plaintiffs can recover faster. And the program can certainly reduce litigation expenses by allowing the parties to come to a quicker assessment of the value of the case.

But that value is still dictated by irrational factors such as the expected sympathy of the jury (as one anecdote in the story reveals without any comment on the resulting injustice) and previous outsized awards given by New York juries. Without a fix of that underlying problem in New York law, New York doctors are still going to be facing outsized malpractice expenses. And because, as Lester Brickman documents, plaintiffs' attorneys' fees are rarely reduced by the fact that the attorney reached settlement quickly rather than after lengthy litigation, the program may have the perverse effect of making relatively meritless medical malpractice litigation more profitable. A federal Agency for Healthcare Research and Quality official estimates a $1 billion annual savings from the program, but it's far from clear that he has accounted for the countervailing effects: if you make litigation cheaper, you get more of it.

Around the web, June 13

  • More on the overcriminalization issues in the GSK in-house counsel Lauren Stevens criminal case. The FDA Law Blog, in particular, singles out the problem of regulating off-label use through criminal prosecution; Judge Titus took a decidedly different view on the legalities of the practice than the government. [FDA Law blog; Olson @ Cato; Main Justice; law.com; earlier on POL]

  • Engage review of Lester Brickman's must-read Lawyer Barons. [Little via OL]

  • Warms the cockles of my heart: layperson hipster successfully battles hedge-fund conflict of interest in bankruptcy hearing. Bondholders tried to "gerrymander" an impaired class of securities to approve a reorganization plan to freeze them (and other securities holders) out to the benefit of bondholders. [CCAF; WSJ (h/t L.O.); Thoma objection; In re Washington Mutual, Inc., 442 BR 314 (Bankr. D. Del. 2011)]
  • Dallas Fed chair touts role of tort reform in Texas job growth. [CNBC via CJAC]
  • Say what you will about Anthony Weiner for his hypocrisy, at least he's occasionally criticized overcriminalization. [NYDN (2008) via Sailer]
  • New Mexico court issues domestic-violence restraining order against celebrity on behalf of delusional woman who claimed he was harassing her through coded messages on his tv show—part of a long track record of judges in that state issuing inappropriate injunctions. [Bader @ CEI]
  • Wouldn't you know it, all that scapegoating of Goldman Sachs was based on a false premise. Will Senator Levin apologize? [Dealbook/NYT via Ribstein]

  • UK anti-racism advocates dismayed by "compensation culture" gone wild. [Telegraph via @walterolson]

What media bias? files

NPR reporter Snigdha Prakash has written a book on the Vioxx litigation, entitled All the Justice Money Can Buy: Corporate Greed on Trial.

Given that Merck has essentially been vindicated by the results of the Vioxx litigation, the title suggests extraordinary bias. (The book's description makes clear that the author was pretty much embedded on the Mark Lanier trial team.) I look forward to flipping through the book to see if the author took any opportunity to ask obvious skeptical questions of Lanier's tactics, but I can guess the answer. The index does not cite me or Richard Epstein.

The book does have the reveal (page 285) that the lawyers for the Humestons, who won a $47.5 million verdict, advised them to accept a settlement offer from Merck for $1 million, which shows the value that the plaintiffs' lawyers put on their own most successful cases if they had to defend them in appellate court, and vindicates my skepticism of the result in the face of criticism from plaintiffs' attorneys. The Humestons did settle for a confidential amount, and criticize their lawyers in the book.

Daniel Fisher has details at Forbes. The Chamber of Commerce takes a hard line with these arrangements, but I don't see anything particularly problematic as a public-policy matter with this particular contract, which is really structured as a very high-interest contingent loan with a de facto lien on the settlement proceeds. The funder doesn't control the litigation (unless there's a secret side agreement), and there isn't a conflict of interest.

What does strike me as interesting is the existence of a "non-profit," "Friends of the Defense of the Amazon" in the Chevron litigation, which is a decidedly for-profit endeavour. I find my non-profit project decidedly restrictive in terms of what litigation I can and cannot engage in while complying with tax law, but perhaps the Lago Agrio plaintiffs have been more creative in structuring their entities.

The Babies "R" Us settlement in McDonough v. Toys "R" Us, Inc., No. 06-cv-242 (E.D. Pa.) has the attorneys requesting a $14 million share of a $34.24 million settlement fund—over 40% of that denominator. But the remainder of the $20 million isn't even entirely designated for the class (third parties are designees for much of the amount, and there's an unedifying cy pres provision in the settlement), so the requested award to attorneys will likely be much higher than 40% of class benefit. The settlement demonstrates many of the ways class action attorneys maximize fees while minimizing cost to defendants unwilling to settle for much more than nuisance amounts. Last week, the Center for Class Action Fairness LLC, through attorney Dan Greenberg, filed an objection on behalf of a class member. (I manage CCAF, but it is not affiliated with the Manhattan Institute.)

The Court holds that felony flight under Indiana law is a violent felony for purposes of the federal Armed Career Criminal Act. In a typically biting dissent, Justice Scalia bemoans overcriminalization:

"We face a Congress that puts forth an ever-increasing volume of laws in general, and of criminal laws in particular. It should be no surprise that as the volume increases, so do the number of imprecise laws. And no surprise that our indulgence of imprecisions that violate the Constitution encourages imprecisions that violate the Constitution. Fuzzy, leave-the-details-to-be-sorted-out-by-the-courts legislation is attractive to the Congressman who wants credit for addressing a national problem but does not have the time (or perhaps the votes) to grapple with the nitty-gritty. In the field of criminal law, at least, it is time to call a halt. I do not think it would be a radical step--indeed, I think it would be highly responsible--to limit ACCA to the named violent crimes. Congress can quickly add what it wishes. Because the majority prefers to let vagueness reign, I respectfully dissent."

More at Blackman. (Update: Adler @ Volokh notes the same passage.)

I'm getting two major types of skepticism about my market bet on Wal-Mart v. Dukes, which I paraphrase as follows:

  • "Your bet makes no sense because everyone already knows that the Supreme Court is going to reverse Dukes."
  • "Your bet is too risky because there's a sizable chance the Supreme Court won't reverse Dukes."

I humbly suggest that the existence of the latter argument refutes the former.

That said, I have less confidence that I played this right than I did a few days ago. I think I underestimated the effect of the underlying variance of the options I purchased: it probably would have been sounder to purchase in-the-money options or longer-term options, even at the expense of somewhat muting the upside. (Transactions costs from the bid-ask spread mean that it doesn't make much sense to switch horses now.) I admit it's sometimes a little unnerving to see a $6000 fluctuation over the course of writing a blog post, and back up another thousand while I was writing this sentence.

In blackjack, if you're dealt an eleven and the dealer is showing a six, you double down. You don't double down because you're guaranteed to win: you might get a three, or the dealer might have a five as a hole card and end up with a 21. You double down because the odds are in your favor, and that's when you put your money on the table. Because of the random walk of stock prices, the noise from day-to-day movement of the stock price (which, unfortunately, dropped somewhat over the last week for reasons unrelated to the soundness of my hypothesis) may well overwhelm the signal from a Supreme Court decision. So I could be right ex ante and still lose money ex post; conversely, there's a chance that I'm wrong ex ante and still come out ahead ex post.

I'm not all that worried that I'm betting against the efficient market hypothesis. I've done something similar before. In February 2006, I blogged that proposed asbestos reform in Congress was very likely to fail after previously arguing that the Specter-Leahy bill was bad public policy. But the Associated Press reported that the bill was likely to pass; the reporter seemed unaware of a Senate procedural mechanism that would permit a minority to block the bill while simultaneously voting against a filibuster. In response to the AP story, asbestos-related stocks shot up in anticipation of a de facto bailout. I shorted those stocks, and closed out the position $14 thousand ahead a week later when Senator Ensign's point of order got the 41 votes needed to block the bill. And, as Alex Tabarrok reminded me, if I'm wrong and the efficient market hypothesis is correct, then my expected loss from the purchase is merely my transactions costs.

More coverage: Koppel @ WSJ; Frankel @ Reuters; Crede; earlier.

Last year, a divided Second Circuit decided Kiobel v. Royal Dutch Petroleum, which ended three decades of abusive application of the Alien Tort Statute—an eighteenth-century federal law—against innocent-bystander corporate defendants through application of amorphous concepts of international law. The losing plaintiffs have submitted a certiorari petition noting the circuit split with the Eleventh Circuit. [SCOTUSblog via Bashman; Jackson]

It seems an obvious application of choice-of-law principles, given Shutts, but the Toyota MDL judge has finally precluded the frivolous economic-loss class action claim that California law applies to the entire nationwide class. The Bloomberg Business Week article quotes POL's own Michael Krauss. Meanwhile, the lead plaintiffs' lawyer makes his putative clients worse off by continuing to insist contrary to scientific evidence that there is a product defect: at this point, the sole cause of any economic loss by the class is the continued insistence by plaintiffs' lawyers that there is something wrong with Toyotas.

Around the web, June 7

  • Contrary to claims that the Supreme Court is in big business's pocket, SCOTUS unanimously eliminates loss-causation prerequisite for securities litigation class certification, but that might not save the sketchy lawsuit against Halliburton. [Frankel; Trask; Erica John Fund v. Halliburton]
  • Plaintiff and defense bars work together in Texas Senate to water down loser pays legislation still further. [WLF]

  • Medicaid provision of PPACA has its own constitutional problems. [Epstein/Loyola @ WSJ]
  • SCOTUS lets stand Montana ruling expansively interpreting American Pipe tolling provisions. [Wajert; earlier on POL]
  • Congress considering expanding the already-overbroad Computer Fraud and Abuse Act. [Kerr @ Volokh; OL]
  • Seventh Circuit holds ADA permits suit by bridge worker who expressed fear of heights. [OL]

  • Driverless cars. [Tyler Cowen; earlier on POL]
  • Government engaging in unconstitutional searches of Web activity? [Titch @ Washington Times]
  • Obama relies on Bush administration OLC memo to argue that "signing" a bill includes authorized use of an autopen when president not physically present. [Volokh; OLC]

  • Liability fears keep first-aid kit away from Ed Helms on movie set. [Tonight Show (h/t Bob Dorigo Jones)]
  • Ted Frank puts his money where his mouth is. [Frankel; ABAJ; Blackman; Ribstein; the POL post they're all talking about]

Criminalizing scientific speech

In the Wall Street Journal, Scott Gottlieb details the case of the criminal prosecution of InterMune's CEO, Scott Harkonen, who committed the crime of publicizing the results of a study. The FDA disagreed with his conclusions (though federal health agencies use similar methodology in determining "comparative effectiveness"), and the federal government charged him with wire fraud, resulting in six-month sentence for house arrest. Harkonen is appealing to the Ninth Circuit on First Amendment grounds, but the problem is not new: the government has been going after pharmaceutical companies for truthful speech about scientific studies for some time if the consequence might be to publicize the possibility of an off-label use for a drug—an issue explored in detail at an AEI conference I helped organize in 2008. The tale of former District of Massachusetts federal prosecutor Michael Loucks in the New York Times illustrates the perverse incentives for overcriminalization by prosecutors: a prosecutor who makes a name for himself by aggressively expanding the government ambit of what can be criminally charged not only makes himself famous, but creates a market in private industry for his work later.

Cy pres slush funds

On the eve of my Ninth Circuit oral argument in the AOL cy pres case, Legal Newsline covers the cy pres controversy a bit sloppily, quoting me without interviewing me. WLF notes the recent Google Buzz settlement approval, where the slush fund for Chief Judge Ware was over $6 million. Most of the money was given to Google lobbyists, but Ware assigned $500,000 to a local university where he has affiliations. And if I knew he was going to give $500,000 to a non-profit objector to shut down their objection, I might have applied for some of that cy pres money if I could have thought of a way to do so without seeming like a hypocrite.

The John Edwards indictment

Longtime readers know that I was a critic of John Edwards for essentially stealing his millions from innocent defendants; I was even ahead of the game on the Bunny Mellon connection, which, as that post documents, was part of a long line of Edwards campaign financing going close to or over the line. But as abhorrent as John Edwards's conduct was, and as questionable as his financial dealings were, the federal indictment shows more problems with the incoherent nature of campaign finance law than with anything Edwards did criminally. Alternate-Universe Attorney General Edwards would have had no compunction about avoiding this sort of prosecutorial abuse, so, like Eliot Spitzer before him, there is a certain schadenfreude, but I still have to be on record opposing at least parts of this indictment. [Taylor; Kirkendall; WSJ; NYT; WRAL]

Vanity Fair on sex trafficking

I have no doubt that there are horrific cases of sex trafficking and slavery in the US; the May Vanity Fair describes some of them. (See also U.S. v. Martinez (2d Cir. 2010) for the appellate decision on the federal case discussed in the article.) But the article doesn't help its case for federalizing local vice laws when they claim there are "300,000" such victims in the US. There are 16 million or so women in the US between the ages of 13 and 24; can one really claim that 2% of them are in the sex trade? If nothing else, assume that a sex slave has forty "customers" a week (and that's likely an underestimate, as the Vanity Fair article suggests that the number is twice that): that would imply twelve million US men, or over ten percent of the adult male population, are seeing a sex worker every week.

"Intent to Harm"

An extraordinary story of prosecutorial abuse in the Texas Observer (h/t N.M.): nurses reported a quack doctor to the Texas Medical Board after hospital administration refused to take action; the sheriff, a business partner of the doctor in his sales of quack medicine, had the nurses arrested on trumped-up felony charges, and even put one of them through a trial (though at least she was acquitted within an hour). There's a quasi-happy ending: the nurses got a sizable settlement from the county, and a state special prosecutor has indicted the sheriff, county attorney, doctor, and hospital administrator for their role in the shameful affair.

The unhappy news is that the Texas Medical Board only slapped Dr. Rolando Arafiles on the wrist with a $5000 fine—less than they fined another doctor for yelling at a staff member. The costs of medical malpractice reform are higher if the medical community is not adequately policing their own. While civil litigation is rarely effective in doing anything about incompetent doctors (competent doctors are sued just about as often, and the litigation system is sufficiently inaccurate that there is no evidence that it provides any deterrent value), the political demand for it will be higher when trial lawyers can point to the case of a Dr. Arafiles.

Investment disclosure

Over the years I've been surprised when the stock market strongly reacted to judicial decisions that seemed like obvious outcomes. This surprises me: I don't have inside information; institutional investors have the ability to process the same public information that I do; the efficient market hypothesis predicts that this public information should already be reflected in the stock price; thus, if I can predict a ruling, the market can, too, and shouldn't treat it as a surprise when, say, the Illinois Supreme Court reverses a multi-billion-dollar judgment against Philip Morris, which bounced over 5% that week in December 2005. But apparently, the trial lawyer strategy to artificially depress stock prices to pressure defendants into settlements has an effect of creating market inefficiencies.

I'm very confident that Wal-Mart v. Dukes will result in a reversal of the class certification in the enormous multi-billion dollar class action against it. But the things that make me confident in that result—the briefs, the tenor of the oral argument, the language in AT&T Mobility v. Concepcion about the importance of protecting the rights of unnamed class members—did not produce movement in the market price of Wal-Mart stock. This leads me to suspect that the market is undervaluing the probability of reversal, and will be surprised when the Supreme Court does reverse later this month.

It's always bothered me when economists make clever predictions but aren't willing to bet on them, Julian Simon a notable exception. Here's a hypothesis that won't take twenty years to resolve; if I'm right, aren't I stupid if I don't make a quick profit on this predicted market inefficiency. So I've put my money where my mouth is: with the dip in stock prices last week, I invested a bit over 10% of my net worth in a leveraged bet that WMT stock will bounce this month when the Supreme Court releases its decision through purchases of July and September out-of-the-money call contracts.

Now I don't recommend anyone follow my lead: there are lots of ways I can be wrong. I might be overestimating the probability of Wal-Mart success in the Court, or otherwise suffering from Dunning-Kruger Effect. I might have been lucky (or suffering from selective memory) in previous cases where I observed stock-price movement in response to decisions I predicted. The market might have already priced this result in years ago, or think that the suit is just a minor nuisance relative to Wal-Mart's giant market value. And we could get hit with a terrorist attack or some other economic shock that hurts the price of Wal-Mart stock entirely unrelated to the Supreme Court decision. Moreover, options are expensive: I'm paying something like a 4-5% transactions cost between brokerage fees and bid-ask spreads, and then there will be the short-term capital gains taxes that reduce any upside. So I could be feeling pretty sheepish come July 1.

But now my interest in this case is a bit more personal than whether the Supreme Court gets class action law right.

Update: Larry Ribstein comments.

Around the web, June 5

So asks the Wall Street Journal, who notes that Republican Ohio AG Mike DeWine's Chesley-led lawsuit against Fannie Mae has so far cost American taxpayers $132 million. We've long covered Stan Chesley's role in the Kentucky fen-phen scandal.

So say David Houston and Jot Condie, who note that, for example, Carl's Jr. is halting expansion in California and moving its headquarters to Texas. The California permitting process can take up to two years; combined with other regulations, it costs an extra $250,000 more to open a restaurant in California than in Texas.

Parloff on Lago Agrio

The new Fortune magazine has coverage of the Lago Agrio scandal, and supplements it on the web with Roger Parloff's tale of the latest evidence of Ecuadorian corruption: a judicial opinion that quotes heavily not from any of the court filings, but from an internal plaintiffs' firm memo.

Daniel Fisher at Forbes beats me to it, but the intermediate appellate court signed off on a settlement that awarded $21 million to the attorneys (including Milberg Weiss) but only $5 million in cash and $34 million in face-value of coupons to the class. The court ruled that the settlement approval was not an abuse of discretion, because a 35% fee was within the court's discretion.

Wait a second, readers who have paid attention to this case might ask: the Center for Class Action Fairness argued that the trial court committed an error of law: Missouri class action law follows federal class action law, federal law holds that you cannot value coupons at face value, and it's only by valuing the coupons at face value that you get to 35%—otherwise, the fee is more like 70 or 80 percent of the total value of the settlement, which is plainly unfair and unreasonable. Remarkably, the court mentioned that we made that argument, but didn't address it.

The good news is that the appellate court denied a motion to dismiss the appeal and held that Missouri courts would follow the federal precedent of Devlin v. Scardelletti. Objectors in Missouri now have the right to appeal approvals of class action settlements there; before, an objector would have to move to intervene before having the right to appeal, raising the cost of objecting to a settlement, and giving the trial-court judge a means to prevent appeals of bad rulings.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.