September 3, 2010

Stockholm Syndrome in the Nachsin v. AOL case

The Center for Class Action Fairness filed its reply brief today in the Nachsin v. AOL appeal.

The principal-agent problem does not just affect class action plaintiffs' attorneys enriching themselves at the expense of their putative clients. I see it far too often in the case of class action defense attorneys beholden to the billable hour at the expense of their clients. I've had securities defense attorneys admit to me sotto voce that they don't want to see securities law reformed, because they're making money off the status quo. If I were a defense client, I'd worry about attorneys like that; they might prefer to lose their 12(b)(6) motion in the hopes of churning some billable hours in discovery disputes. In a notorious example, attorneys from defense firms lobbied the ABA to release a statement opposing preemption--something that would hurt their clients, though would certainly increase the demand for lawyers' services.

Continue reading   Stockholm Syndrome in the Nachsin v. AOL case

August 26, 2010

Trial Lawyers, Inc. Update: Environment

My Investors Business Daily piece linked by Ted yesterday was inspired by the latest short update in the Center for Legal Policy's Trial Lawyers, Inc. series, focusing on the environment (see links to right). In addition to Connecticut v. American Electric Power, the report discusses other climate-change lawsuits, as well as environmental torts stemming from the BP Deepwater Horizon spill and toxic torts like those involving MTBE and atrazine.

Brian Bolduc discusses over at NRO.

More: Julian Morris, the executive director of the International Policy Network (and formerly Director of the Environment and Technology Programme of the Institute of Economic Affairs), reacts to the report.

Dukes v. Wal-Mart certiorari petition

In a sharply divided 6-5 decision that conflicts with many decisions of this Court and other circuits, the en banc Ninth Circuit affirmed the certification of the largest employment class action in history. This nationwide class includes every woman employed for any period of time over the past decade, in any of Wal-Mart's approximately 3,400 separately managed stores, 41 regions, and 400 districts, and who held positions in any of approximately 53 departments and 170 different job classifications. The millions of class members collectively seek billions of dollars in monetary relief under Title VII of the Civil Rights Act of 1964, claiming that tens of thousands of Wal-Mart managers inflicted monetary injury on each and every individual class member in the same manner by intentionally discriminating against them because of their sex, in violation of the company's express anti-discrimination policy.

The questions presented are:

I. Whether claims for monetary relief can be certified under Federal Rule of Civil Procedure 23(b)(2)--which by its terms is limited to injunctive or corresponding declaratory relief--and, if so, under what circumstances.

II. Whether the certification order conforms to the requirements of Title VII, the Due Process Clause, the Seventh Amendment, the Rules Enabling Act, and Federal Rule of Civil Procedure 23.

Phrased like that, you have to think the Supreme Court is going to grant the petition for certiorari and reverse the lawless Dukes v. Wal-Mart decision. Earlier.

August 17, 2010

Against derivative shareholder strike suits

In the 1998 case of Felzen v. Andreas, the Seventh Circuit suggested that it was looking for an opportunity to take action against derivative shareholder strike suits, suits where a shareholder purportedly sues on behalf of the corporation, but in reality is seeking legal extortion to drop the suit:

Rule 23.1 provides for notice to shareholders only in the event of dismissal or settlement, so that other investors may contest the faithfulness or honesty of the self-appointed plaintiffs; we do not doubt that this monitoring is often useful and that intervention to facilitate an appeal could be justified. Many thoughtful students of the subject conclude, with empirical support, that derivative actions do little to promote sound management and often hurt the firm by diverting the managers' time from running the business while diverting the firm's resources to the plaintiffs' lawyers without providing a corresponding benefit. Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L.Rev. 497 (1991); Reinier Kraakman, Hyun Park & Steven Shavell, When are Shareholder Suits in Shareholder Interests?, 82 Geo. L.J. 1733 (1994); Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, 7 J.L. Econ. & Org. 55 (1991); Mark L. Cross, Wallace N. Davidson & John H. Thornton, The Impact of Directors' and Officers' Liability Suits on Firm Value, 56 J. Risk & Insurance 128 (1989); Daniel R. Fischel & Michael Bradley, The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis, 71 Cornell L.Rev. 261 (1986). The two shareholder-appellants in this case believe that the modest settlement, half of which will be paid to counsel, exemplifies this problem.

Unfortunately, the appeal in Felzen was thrown out on technical grounds, and no one has taken up the challenge, perhaps because it's more lucrative to agree to be paid off for withdrawing an objection to a bad settlement than for successfully challenging the bad settlement.

Until now. Plaintiffs brought a meritless derivative-shareholder suit over an alleged technical violation of the Clayton Act; the corporation found it cheaper to pay the plaintiffs' attorneys $925,000 to go away than to defend the suit. But the shareholders get nothing, so they're worse off because of the litigation.

Unfortunately for the plaintiffs, not only did they sue in the Northern District of Illinois, they sued a corporation, Sears Holding Corporation, where I own shares. After attempting to foreclose objections by mailing out notice three days before objections were due, the parties agreed to a new notice schedule, and I have moved to intervene and dismiss the action for failure to meet the Rule 23.1(a) standard for shareholder representation. The case is Robert F. Booth Trust v. Crowley, No. 09-5314 (N.D. Ill.) and the fairness hearing is August 27 in Chicago. (The Manhattan Institute is not associated with this litigation.)

August 16, 2010

Rosenberg & McCloud on Choice-of-Law and Class Actions

Via Chamblee Burch and Solum, David Rosenberg and Luke McCloud have written a paper proposing that the "problem" of nationwide federal diversity class actions where there are differences in state law that would normally preclude class certification be resolved by a judicially-created "average law," whereby the rights of class members subject to plaintiff-friendly state laws be abrogated to benefit class members who are subject to state laws that are not as plaintiff-friendly. The paper claims to "refute objections to using the average law approach" without once mentioning the Rules Enabling Act, 28 U.S.C. § 2072(b), and its provision that judicially-created procedural rules "shall not abridge, enlarge or modify any substantive right."

Now, if Rosenberg wants to argue that Erie was wrongly decided and there are sound reasons for application of federal common law in federal diversity cases, I'd be sympathetic to that claim, though Erie is so ingrained in our constitutional DNA that I've found even some of the most ambitious conservative constitutional scholars are loathe to question it. And if Erie is to continue to be applied to individual diversity cases, I fail to see how it does not preclude the Rosenberg proposal.

And Rosenberg's "average law" isn't even "federal common law." Rosenberg proposes "statistical sampling" to get to the right result, but that presupposes that individual state laws are one-dimensional algorithms where one plugs in a set of class members and a defendant's actions and the result spits out "$100" or "$200" or some other damages number—never mind that even in the single-state single-law scenario, there are often substantial factual disputes. The paper doesn't explain the practical realities of how, for example, one averages differing states' conceptions of reliance in consumer fraud cases or different statutes of limitation or different unjust enrichment laws or different scienter requirements. These are frequently binary variables not conducive to analog averaging. How can the "average law" be resolved on a summary judgment motion, much less at a manageable jury trial? How does one construct a jury instruction for 72% reliance?

If the answer is "No, no, we're proposing to hold several dozen individual trials, and then aggregate the results across the class," that holds its own problems. In a class of millions, one would need hundreds of trials to avoid the small-sample problem; even if one is satisfied with a "sample of 50 claims" (p. 23), why is statistical-sampling-of-dozens-of-claims-in-a-single-class superior to refusing to certify a class unless it is broken up into multiple subclasses?

August 10, 2010

AT&T Mobility v. Concepcion

The Ninth Circuit's holding in Concepcion v. AT&T Mobility, barring an arbitration clause that prohibits class actions as "unconscionable," rests upon a belief in the exceptionalism of class actions, namely, that they are a uniquely superior form of dispute resolution the availability of which is necessary to vindicate consumer rights. But, as the Center for Class Action Fairness's experience indicates, class actions are far from an exceptional vehicle for providing consumers with meaningful access to justice.  Yesterday, the Center filed an amicus brief in the Supreme Court case of AT&T Mobility v. Concepcion (No. 08-893) in support of the petitioners.  O'Melveny & Myers attorneys Brian Brooks, Charles Borden, and R. Seth Davis did a phenomenal job with the brief, and we're grateful for their help.  Public Citizen, which ironically represents the anti-consumer/anti-arbitration/pro-trial-lawyer side in the name of paternalism, has a page devoted to the case with links and resources, though the weight of those links and resources is pro-paternalism; the left side of the blogosphere has paid far more attention to this case than the right side.  Among the briefs is one filed by a number of law professors I know and admire, including (but not limited to) Randy Barnett, Henry Butler, Richard Epstein, Michael Krauss, Geoff Manne, Michael Moreland, Larry Ribstein, and Josh Wright; it raises important points about unconscionability and freedom of contract.

(CCAF is not affiliated with the Manhattan Institute.)

CCAF Ninth Circuit appeal - In re Yahoo!

Yesterday the Center for Class Action Fairness filed the opening brief in the appeal of the In re Yahoo! settlement approval. We make a process argument--the district court gave no reasoning for its decision, which by itself requires remand--but we also argue the substantive issue that no court could reasonably approve a $0-for-the-class/$4.3 million-for-the-attorneys settlement. Don't miss pp. 39-43, where we cite Seinfeld. (The Center is not affiliated with the Manhattan Institute.)

August 3, 2010

Class actions in the news

Miller-McCune has published a new article exploring class action abuses, which includes extensive quotes from our own Ted Frank.

(Note that although the author correctly cites Mississippi as a judicial hellhole, it's an inapt example for class action abuse, since the state lacks a class action rule. The state did have a problem, however, with improper joinders in mass-action torts, as described in this 2003 Manhattan Institute report.)

July 30, 2010

Want to be a pro bono economic expert? In re Apple & ATTM Antitrust Litig.

When Apple introduced its iPhone into a smartphone market where it had 0% market share, it cut a deal with AT&T Mobility to make it the exclusive provider of cell phone service. In exchange, ATTM subsidized the price of every iPhone by $450, thus ensuring that more consumers would be able to purchase iPhones, and introducing additional competition into the smartphone market.

Nonetheless, trial lawyers sued, bringing a class action alleging that this basic business arrangement violated the antitrust laws because it threatened to monopolize the previously non-existent market for "iPhone telephone service."

This is ludicrous on its face. The smartphone market is more competitive than ever: in addition to the longstanding Blackberry, there's new entrants Droid and HTC Evo (and vis-a-vis the latter, see this NSFW, but very funny, video). Without the phone carrier subsidization, many iPhone owners (including me) would be unable to afford an iPhone, and are clearly better off because of the exclusivity deal. Nonetheless, the Northern District of California has certified a class action over the practice—and not just any class, but a Rule 23(b)(2) mandatory class, meaning that every iPhone owner with an AT&T Mobility two-year contract is now involuntarily represented by attorneys that apparently care more about the possibility of extortionate settlement profit than the clients they purportedly represent.

The Center for Class Action Fairness (which is not affiliated with the Manhattan Institute) is in talks with a number of iPhone owners who are concerned about being represented by class counsel who don't have their best interest at heart, and considering filing papers moving to intervene and decertify the class. But economic experts willing to go on the record to refute quack antitrust analysis are not cheap; before we blow a good chunk of our annual budget on one, we're curious if there's anyone out there willing to work for a discount rate or, better yet, pro bono. (In the alternative, if there's another public-interest law firm out there who'd like to take the lead role on this, I am happy to serve pro bono as both the client class member iPhone owner and as the expert witness, as well as assist on the legal side. Unfortunately, legal rules prohibit me from serving as both lead attorney and as a witness.)

July 29, 2010

Thoughts on the proposed Dewey v. Volkswagen "water ingress" settlement

A tiny percentage of Volkswagen and Audi sunroofs will leak into the vehicle unless care is taken to keep the plenum clear of debris; a class action was brought over this. Let's assume for the moment that plaintiffs are correct that this is something that Volkswagen is liable for, and that there are contractual remedies for VW not foolproofing the cars against this problem. What's remarkable is how the parties settled the case in such a way so that wildly inefficient remedies would maximize attorneys' fees at the expense of the class. The settlement is structured as follows:

1. A million class members will get nothing but a letter telling them to check the plenum when they go for their 40,000-mile service.


2. VW will perform an expensive preventative service action on some, but not all, VWs that might suffer this problem.


3. An $8 million settlement fund is set up to pay damages for some, but not all, VWs that have suffered damage

The economic expert for the plaintiff made some remarkable calculations. For example, he valued the letter at over $29 million. After all, if you get a letter informing you of a potential benefit, that letter is worth just as much as the benefit itself—never mind that Volkswagen dealers charge $400 to $800 for 40,000-mile service, and can easily choose to raise the price $30 to account for the extra labor in performing the extra task during the maintenance service. So if Apple ever settles a class action by sending you a letter telling you you can buy a $700 iPad for $700, that is, according to the expert, indistinguishable from Apple writing each consumer a check for $700.

Let's look at #2 for a second. According to the plaintiff's own expert, VW will spend $55 million on that service action. According to the same expert, if VW does not perform the maintenance, those vehicles will suffer $24 million in damage. (The expert then remarkably triple-counts this as a benefit to the class: the $24 million in damage avoided, plus $55 million in VW expenses for the service action, plus another $24 million for the avoided diminution of value of the vehicle that would have occurred if the vehicles suffered damage and then weren't repaired. Thus, according to the expert, this component of the settlement is worth over $103 million.) Spending $55 million to avoid $24 million in damage is the very definition of economic inefficiency.

But consumers lose out. Some of the class members who are getting nothing but a letter—including one of my clients—have suffered actual damage from sunroof leakage. They're not getting paid under this settlement and are being forced to release their claims, which are no less meritorious than the claims that are getting paid.

The only possible reason for plaintiffs' attorneys to insist upon this convoluted remedy is to increase attorneys' fees. By making Volkswagen engage in wasteful spending, they pump up the alleged value of the settlement and then argue that they're entitled to over $23 million in attorneys' fees and costs, to be paid separately by Volkswagen.

It would have been very easy to structure a settlement so that Volkswagen created a $48 million fund to cover repairs to every vehicle that suffered water damage from a sunroof leak. Every VW owner who had the problem in the past or in the future would be able to collect; Volkswagen would be out of pocket $48 million instead of $70-$90 million; the attorneys could have made a plausible claim for $10 million in attorneys' fees and costs from the fund, which would still be close to twice an exaggerated lodestar. Instead, the parties negotiated a settlement that made everyone—consumers and Volkswagen—worse off. Well, everyone except the attorneys, if Judge Patty Shwartz buys the quack economic testimony and awards the full fee request.

Under Rule 23(e), a judge is not to approve a settlement unless it is "fair, adequate, and reasonable." It is hard to see how this settlement is fair or reasonable; and it demonstrates the failure of legal ethics that the class attorneys could structure this settlement and make that fee request without fear of sanction, even as they put their own interests ahead of their clients.

The four-hour fairness hearing, consisting mostly of the economic expert rationalizing his calculation and the attorneys arguing over fees, was last Monday in a Newark federal courtroom. I look forward to seeing how the judge will rule.

Cappuccitti v. DirecTV, Inc.

The Class Action Fairness Act created 28 U.S.C. § 1332(d), a new category of federal diversity jurisdiction for class actions that exceeded $5 million in value. The Eleventh Circuit just issued an opinion proclaiming that CAFA jurisdiction only exists when the § 1332(a) requirement of more than $75,000 in controversy applies to at least one class plaintiff. This extraordinarily tendentious reading of the statute contradicts every other circuit to examine the issue—including the Eleventh. [Trask; Andrews @ Forbes; Steinman] Expect a 9-0 per curiam decision from the Supreme Court in the near future, assuming an en banc court doesn't correct the travesty.

July 21, 2010

Ninth Circuit to consider propriety of cy pres distributions

Tuesday, the Center for Class Action Fairness filed its opening brief appealing the approval of a class action settlement against AOL.  CCAF (which is not affiliated with the Manhattan Institute) focused its appeal on the problematic cy pres award in that case:

Continue reading   Ninth Circuit to consider propriety of cy pres distributions

July 14, 2010

A post for Fed Jur buffs only

Parties in a class action agree to submit to the jurisdiction of an Article I magistrate under 28 U.S.C. § 636(c).  Then they settle the case.  Objectors show up, but have not consented to have the case heard by a magistrate.  Does the magistrate still have jurisdiction or does an Article III judge have to weigh in? 

Section 636(c) requires consent by "parties."  Are unnamed class members parties under § 636(c)?  One can't just give the answer of a blanket "no"; the statute and federal rules are silent, and Devlin v. Scardelletti, 536 U.S. 1 (2002), says that class members are sometimes "parties," and sometimes not. 

The problem, of course, is the possibility of heads-I-win/tails-you-lose gamesmanship, with an objector throwing a wrench into the proceedings by protesting after the fact that the court didn't have jurisdiction.  See, e.g., Mark I, Inc. v. Gruber, 38 F.3d 369, 370 (7th Cir. 1994) (vacating final decision of magistrate made after two years of litigation on jurisdictional grounds). To a certain extent, the Mark I problem has been eliminated by Roell v. Withrow, 538 U.S. 580, 590 (2003), which allows a court to infer consent by acquiescence. More worrying is the possibility that an objector in good faith appeals a magistrate's ruling to an appellate court, only to learn that the appellate court does not have jurisdiction and she missed the deadline for appealing to the district court.

It's an interesting academic question, but litigants don't like the uncertainty of academic questions.  It's come up in an objection CCAF (which is unaffiliated with the Manhattan Institute) made, and we've asked the court for clarification--since no one else seems to have even thought of the issue.

Well, perhaps someone did think of it.  A so-called professional objector has the incentive to sandbag, since the business model is to lose at the district court level and then threaten a colorable appeal that would delay the class counsel payday unless paid off; a defendant is likely indifferent to delay.  What astonishes me most, however, is that plaintiffs' attorneys asking the court for $2900/hour, and presumably concerned about "professional objectors" coming in and holding up the settlement and their attorneys' fees, didn't anticipate this potentially fatal flaw.  If the attorneys who think they're worth $2900/hour are missing this basic issue-spotting that I caught, maybe I'm worth $3000/hour and even more underpaid than I thought.  (And in that case, you, loyal reader, have just benefited from $1500 worth of my time.)

July 8, 2010

House left Class Action Fairness Act alone in SPILL Act

Right before leaving for its July 4th recess, the House of Representatives passed H.R. 5503, the Securing Protections for the Injured from Limitations on Liability Act, or SPILL Act, the bill to expand and make retroactive liability for offshore accidents, including the BP Deepwater Horizon accident.

The final House version of the bill does NOT include changes to the Class Action Fairness Act that were included in the legislation passed out of the House Judiciary Committee (which we wrote about here and here). Rep. Gerald Nadler (D-NY) and Rep. Maxine Waters (D-CA) both unhappily noted its omission in their floor statements.

Waters (Page H5335):

[While] I fully support H.R. 5503, I am very disappointed that critical amendments to the Class Action Fairness Act (CAFA) as well as my amendment that would have legally nullified BP's original attempts to make their $5,000 payouts legal settlements were taken out of the bill. All we have now is BP's word that they will not enforce these waivers or honor the $75 million liability cap current law provides. However, this is unacceptable.

Nadler (Page H5336):

I do want to say, however, that I am disappointed with a few changes that have been made since the bill passed the Judiciary Committee. A provision to deny the enforceability of ``gag orders'' that reportedly were being used by BP has been removed. Such secrecy agreements only serve to deny the public access to necessary information. And, a common sense change to the Class Action Fairness Act to ensure states could pursue actions on behalf of their own citizens in state court was stripped as well.

Business and civil justice reform groups sent a joint letter to the Judiciary committee on June 23 protesting the original inclusion of the provisions meant to undermine the Class Action Fairness Act.

July 7, 2010

All oil, all the time

The New York Times this week reported on legislative efforts in Congress to expand liability in the case of maritime disasters, including the far-reaching and retroactive SPILL Act, which we've posted about here. The article, "Calls to Update Maritime Laws," briefly notes the role of the trial lawyers lobby:

With some of the proposed legislation promising bigger payments to victims' families, a lobbying group for plaintiffs' lawyers, the American Association of Justice, is among those pushing for changes. Several lawyers said they have had to turn down otherwise compelling cases because existing statutes can sharply limit recovery -- often in random and scattershot ways.

The AAJ holds its convention in Vancouver, B.C., starting this weekend, and in the annual change of top leadership, succeeding current President Anthony Tarricone will be be the current president-elect, C. Gibson Vance of Beasley, Allen, Crow, Methvin, Portis & Miles, PC in Montgomery, Ala.

Beasley Allen is the most prominent trial lawyers' law firm in Alabama, headed by the legendary former governor, lieutenant governor and still political king maker, Jere Beasley. As Beasley Allen's website make clear, the firm has geared up to be a leader in the flood of anti-BP litigation for the Deepwater Horizon accident and oil contamination. For example, "Beasley Allen files its first lawsuit in Alabama state court on behalf of property owners":

MONTGOMERY, ALA. (July 6, 2010) - Beasley, Allen, Crow, Methvin, Portis & Miles, P.C. has filed a lawsuit in the Circuit Court of Baldwin County, Ala., against British Petroleum ("BP") and several other companies with ties to the Deepwater Horizon oil spill. The firm represents James E. Fisher and Kate C. Fisher, who have incurred damages related to the disaster, including damage to their real and personal property, earning capacity, business income and use of natural resources. This is the first lawsuit related to the BP oil spill disaster to be filed by Beasley Allen in Alabama state court.

The first of many lawsuits, judging from the Jere Beasley Report blog's summary of the firm's strategy in a June 4 post, "Our Firm Will Be Involved In The BP Oil Spill Litigation."

The AAJ is full of factions -- check out the list of litigation groups meeting in Vancouver -- and one wonders whether members might resent having an association President so closely associated with just one line of attack. By making an attorney with Beasley Allen its president, the AAJ is declaring to the world, "Our priority is suing BP."

Other targets may breath a sigh of relief.

July 5, 2010

Institutional Investor Educational Foundation

There's been a lot of tort reform blogosphere fuss over the June 22 Forbes article on the Institutional Investor Educational Foundation, which is securities law firm Grant & Eisenhofer's organization for hosting securities law conferences attended at discounted rates by public pension officials. [Overlawyered; American Courthouse]

I personally don't see what's the big deal.

Certainly the Forbes article makes it seem like something shadowy is happening: IIEF is a private LLC (presumably owned by Grant & Eisenhofer), and it thus doesn't have the same transparency as a non-profit charity that files public tax returns as part of its 501(c)(3) requirements. But my thoughts are colored from having gotten on the IIEF mailing list; it's quite clear to anyone who receives its brochures that IIEF conferences are Grant & Eisenhofer marketing devices, and quite clever ones since one pays for the privilege of being marketed to (even if at a discount).

Perhaps the panels are pure propaganda? Perhaps: one the one hand, I was invited to one conference panel, where I spoke freely (if without pay) about problems I perceived in the class action arena; on the other hand, I've never been invited back, so perhaps they made a mistake the first time. (My panel was in a New York hotel's distinctly unglamorous basement conference room.) The audience was, as best I can tell, almost entirely future plaintiffs, so I'm not even sure what my perspective would add to a panel other than entertainment value even if panels are generally stacked to be pro-plaintiff. Other law firms (including defense law firms) sponsor similarly educational gatherings for potential clients that are about as closed to the public than IIEF's, and for one of those that I attend almost every year, I've never seen a plaintiff's lawyer invited.

Don't get me wrong; I oppose pay-for-play. But this doesn't seem to me to come close to rising to that level. Just because the securities litigation system is rife with counterproductive problems and full of rent seeking doesn't mean that every marketing technique lawyers engage in to participate in that rent seeking is inherently evil. The appearance-of-appearance-of-impropriety standard being used to tarnish IIEF is much more likely to get used by the bad guys to undermine good causes like the Foundation for Research on Economics & the Environment's seminars educating judges about basic economic theory.

July 2, 2010

House rewrites maritime liability law...and more

With little debate and on a voice vote, the House on Thursday passed H.R. 5503, the Securing Protections for the Injured from Limitations on Liability Act, i.e, the SPILL Act. Sponsored by Rep. John Conyers (D-MI) the bill expands liability for offshore accidents, retroactive to Deepwater Horizon accident of April 20, 2010.

In the floor debate (starting on Page H5330 of The Congressional Record), Rep. Conyers noted the presence in the House gallery of family members of those killed in the accident and argued: "We have found that the current state of law regarding these liability issues is outdated, unfair and operates against our national interests.The three key laws all date from the mid-1800s--the Death on High Seas Act, the Jones Act, and the Limitation on Liability Act." Speaker of the House Nancy Pelosi spoke on the floor to add to the emotional appeals.

The bill was considered on the suspension calendar, usually reserved for non-controversial items that require a vote of two-thirds of the House to pass. It looked the the Republicans were wary of being attacked as uncaring apologists for BP, but Rep. Lamar Smith (R-TX), the ranking member of Judiciary, and Rep. Ted Poe (R-TX), both criticized the legislation for unnecessarily rewriting other law. As we've reported previously, the bill undermines the Class Action Fairness Act, and Rep. Poe mentioned other examples of its far-reaching impact:

H.R. 5503 repeals the Limitation of Liability Act, which is a drastic fundamental change in American maritime law. This change would end the longstanding practice in the United States that all maritime claims be determined in one Federal forum.

It also ends the limitation on U.S.vessels owners' liability, a limitation which is in place in virtually every other country in the maritime industry. The loss of this limitation will handicap U.S. ship owners in the competitive world of shipping.

The minority's comments in the House report on the legislation, Rept. 111-521, summarized the objections, starting with the lack of any committee hearing on the legislation before the bill was marked up and sent to the floor for a vote:

Continue reading   House rewrites maritime liability law...and more

Apollo Group verdict reinstated

The Ninth Circuit reverses a district court decision throwing out a $277.5 million jury verdict. So, let's get this straight: the Ninth Circuit holds that it's simultaneously reasonable for the jury to hold that the securities market didn't adequately process earlier disclosures made by Apollo that it had regulatory issues while at the same time the law was assuming an efficient market on plaintiffs' loss causation theory to preserve class certification. Can't have it both ways: either there's an efficient market permitting loss-causation theories justifying class certification and additional disclosures on the same subject weren't corrective, or there isn't an efficient market and a fraud-on-the-market theory doesn't fly for purposes of class certification. Judge Kozinski, you should know better. One hopes an en banc court or the Supreme Court reverses this travesty. [In re Apollo Group (unpublished), reversing D. Ariz. opinion via D&O Diary; Arizona Republic]

June 30, 2010

"The End of Objector Blackmail?"

Professor Brian Fitzpatrick has an interesting piece in the Vanderbilt Law Review on the holdout problem in class action objections, and efforts by plaintiffs' attorneys to get around it:

Continue reading   "The End of Objector Blackmail?"

June 24, 2010

Ninth Circuit appeal in Bluetooth class action settlement - reply brief

The Center for Class Action Fairness filed its reply brief in the Bluetooth case yesterday.

June 23, 2010

House Judiciary passes oil spill liability bill, attacks CAFA

The House Judiciary Committee today passed out of committee H.R. 5503, the Securing Protections for the Injured from Limitations on Liability Act, or SPILL Act. The vote was 16-11. Chairman John Conyers issued a news releasing the committee approval of the bill he sponsored, "Judiciary Panel Passes SPILL Act to Bring Liability Laws to the 21st Century, asserting that the legislation "updates" the "out of date and unfair laws," the Death on High Seas Act (1920), Jones Act (1920), and the Limitation on Liability Act (1851). According to Conyers, the bill:

• It amends the Death on the High Seas Act and Jones Act to permit non-pecuniary damages.
• It repeals the outdated Limitation on Liability Act.
• It amends the Class Action Fairness Act to allow attorneys general to bring remedial actions in their own state courts.
• It limits the ability of parties responsible for oil and similar spills to prevent their employees from speaking to the media.
• It prevents parties responsible for oil spills from using the bankruptcy courts as a subterfuge to leave victims without adequate legal recourse.
• It provides that these changes will apply to pending and future cases, consistent with previous liability law changes enacted by Congress.

Note the third bullet: The bill represents the first significant effort we can recall to undermine the Class Action Fairness Act of 2005 (or CAFA). The U.S. Chamber of Commerce joined by other business and legal reform groups sent a letter to the committee registering strong opposition to the provision.

Continue reading   House Judiciary passes oil spill liability bill, attacks CAFA

"Oddly enough, I admired one of the lawyers."

Bill McClellan of the St. Louis Post-Dispatch writes about the Bachman v. A.G. Edwards case and settlement:

The case against Jones was murky. The payments from the mutual fund companies were not illegal. In fact, news accounts at the time said they were common, and were called revenue sharing. But the feds decided that Jones had not disclosed to its customers that brokers were getting extra money for steering clients into certain funds.

The feds did not make that allegation against A.G. Edwards, but the class-action lawyers figured that if this so-called revenue sharing was common, A.G. Edwards must be doing it, and so the lawyers went ahead and filed their lawsuit in April 2005 contending that Edwards was guilty of whatever it was that Jones had done.

As is typical in these cases, the defendant company denied all wrongdoing but eventually decided it was cheaper to pay off the lawyers than to wage a long legal battle. So A.G. Edwards rolled over, and the class-action lawyers negotiated a settlement in which their "clients" would get coupons while they themselves would get cash -- and bundles of it.

Update: Dan Fisher of Forbes comments here.

June 22, 2010

Bachman v. A.G. Edwards update

You may recall the $60 million settlement that wasn't to which CCAF objected. Judge Angela T. Quigless approved the settlement and approved the $21.6 million award of attorneys' fees and costs without addressing any of the objections.

And if you ever hear a class action attorney tell you that what they really care about is "access to justice," you have my permission to laugh sardonically. The Bachman attorneys (including Milberg LLP) have asked the court to require any objector-appellants (each of whom have about $20 at stake) to post a $325,000 appeal bond—despite the fact that Missouri law does not permit such a thing. CCAF filed an opposition to the request (citing Professor Fitzpatrick's recent article disapproving of excessive appeal bonds), and I was in St. Louis yesterday to argue at the hearing. We will see whether CCAF gets to appeal the judgment or has to appeal an illegal appeal bond order.

(CCAF is not affiliated with the Manhattan Institute.)

June 15, 2010

$23 million for lawyers, $8 million for (some of) the class

The Dewey v. Volkswagen settlement where attorneys are asking for over $23 million for recovering an $8 million reimbursement fund for a small subset of the class (but attributing tens of millions of dollars to a valuation of injunctive relief where VW and Audi send a letter to class members) has gotten a lot of reaction around the Internet. (E.g., Major, Olson (and commenters), Pero, CJAC, Passat World.)

Today, the Center for Class Action Fairness filed an objection on behalf of four class members, including one who gets nothing despite water leakage into the passenger compartment that required over $1000 of repairs. The fairness hearing is July 26. Oddly (but all too typically), objections are due before the parties make their filings and present their evidence for the fairness of the settlement, so we'll need to make a supplemental filing July 12 to address the expert report's valuation of the injunctive relief.

The case is Dewey v. Volkswagen AG, No. 07-CV-2249 (D.N.J.). (CCAF is not affiliated with the Manhattan Institute.)

June 10, 2010

Coupon settlement in DC approved

"Some 15,000 students paid between $2,380 and $2,729 to attend" 2009 inauguration conferences organized by Envision EMI, which class action attorneys claimed, quite plausibly, was a ripoff. So the class members get... two $625 coupons for two more conferences from the same substandard vendor. And those coupons have several limitations, including the fact that only ten percent of seats at any given conference are eligible for coupon use. The settlement is characterized as a "$17 million settlement" in the press, though in fact claims will certainly be much lower. (If fewer than $8 million is awarded, the remainder will go to cy pres, but the settlement does not specify the cy pres recipient.) The lawyers, including the Hausfeld LLP firm, will get over $1.4 million. Several state attorneys general objected, but the court approved the settlement anyway, while holding the fee award in abeyance. Looks like the students will be getting ripped off twice.

June 8, 2010

William Lerach's redemption tour hits the D.C. Omni Shoreham

But you can be sure, it's not an apology tour.

William Lerach, who made hundreds of millions of dollars in class-action securities litigation and then went to prison, was one of scores of speakers today at America's Future Now! conference, a gathering of left-leaning activists organized by the Campaign for America's Future.

He held down a meeting room at the Omni Shoreham for an hour over lunchtime to present a "special issue briefing" entitled "America's Broken Retirement Plans and Retirement Systems: Another 'Gift' From Wall Street." (From the conference agenda.)

We always knew that Lerach believed in wealth redistribution, but in a more self-serving sort of way. Now he's apparently selling himself as a progressive redistributor. It's a tough sell, as the alt-weekly San Diego Reader made clear in a recent piece, "Out of Prison, Living in Luxury." The author, Don Bauder, has no truck with banks, whom he scores for "plutocratic thievery," but neither is Lerach a hero in his view.

Lerach, who recently emerged from an almost two-year stretch in prison, is greatly responsible for this rigged game. As an attorney who filed hundreds of class-action suits against corporations, he became a bigger fraudster than a lot of the companies he was pursuing. First, he filed many dubious suits, rejoicing when 90 percent of the companies decided to settle for millions of dollars rather than spend the time and money fighting. That stratagem wasn't illegal, but it was grossly unethical -- the classic shakedown. Companies called it getting "Lerached." Second, Lerach and his firms paid fat kickbacks to shifty characters to become plaintiffs in those lawsuits. That was illegal, landing Lerach in prison.

Now he is out, residing comfortably in one of the county's most luxurious spreads, a cliffside villa in La Jolla. He is worth an estimated $700 million. The government made him pay a mere $7.5 million for his crimes.

Right. Here's the Sept. 18, 2007, news release from the U.S. Attorney's Office in San Diego after Lerach agreed to plead guilty. Why would self-styled progressive reformers hang out with a convicted felon? Oh, right, he is worth an estimated $700 million. No enemies on the monied left.

We have yet to see any blog reports and just a few Tweets from Lerach's remarks, but will continue looking. In the meantime, we marvel at his audacious brazenness as captured in his conference bio:

William S. Lerach - lecturer, writer and investor advocate.

For decades, Mr. Lerach was one of the leading securities lawyers in the United States. He headed up the prosecution of hundreds of securities class and stockholder derivative actions which resulted in billions of dollars of recoveries for defrauded shareholders from Wall Street banks, big accounting firms, corporations and insurance companies. Mr. Lerach has been the subject of considerable media attention and is a frequent commentator on economic and political matters and securities and corporate law. His career was recently chronicled in the best-selling book "Circle of Greed."

The subject of considerable media attention!

June 7, 2010

Cy pres bill in Ohio House

I've previously written about the problem of cy pres, charitable donations used to expand the apparent value of class action settlements that often serve as double-compensation for the trial lawyers. One particular Ohio law firm, Dworken & Bernstein, has demonstrated this problem first-hand by regularly negotiating for cy pres awards in settlements that otherwise are pretty lackadaisical in terms of class benefits, getting the settlement approved by claiming the cy pres award is a benefit to the class (even when it benefits a charity affiliated with the judge, or is a local charity despite the fact that the money is supposed to be going to a national class), and then taking personal credit for the donation in ceremonies with oversized checks, as if the money being donated was the law firm's rather than that of their clients. (The website's stock photo of the grateful child with the flower is particularly compelling.)

Public choice aficionados would be fascinated by recent Ohio developments where the Dworken firm has lined up multiple charities to support pernicious legislation, HB 427, that would enshrine this conflict of interest and breach of fiduciary duty to one's clients into Ohio law. On May 18, I testified before an Ohio House committee on the subject.

June 1, 2010

"The Deal Breakers: A look at professional class action objectors in Maryland"

I'm quoted in a May 23 Maryland Daily Record story on professional objectors (and don't miss the correction at the bottom of the story).

Because class action settlements bind class members absent from court proceedings, and because class action attorneys are negotiating their fees as part of the same settlement as the class settlement (even when they engage in the fiction of negotiating seriatim), Fed. R. Civ. Proc. 23(e) requires class action settlements to receive court approval as "fair, adequate, and reasonable" to ensure that class attorneys are not breaching their fiduciary duty to the class.

This permits legitimate objections to the settlement. But it also permits holdups. If class attorneys are awarded a $4 million fee, but appeals of a class action settlement approval take two to three years, the time-value of money means that it's worth hundreds of thousands of dollars to the class attorneys to pay the objectors to go away. This leads to rent seeking.

A reform to the Federal Rules of Civil Procedure was meant to address this problem: an objection cannot be withdrawn in district court without court approval. This certainly rids the system of the more blatant holdup payments that do nothing to benefit the class—though, given that the resulting proceeding will be non-adversary and any approval will not be appealed, there's little incentive for district courts not to rubber-stamp objection withdrawals.

Of more concern is that there is no parallel rule in the Federal Rules of Appellate Procedure. Simply by filing a notice of appeal, a holdup objector can avoid the need for court approval: indeed, appellate court mediators formally will encourage settlement to lighten the appellate court's docket. There's some reduction in the value of the objection, because the buyoff comes later rather than sooner, affecting the time-value of money for both the objector and the class counsel, but there's no real reduction in the incentive for rent-seeking.

Worse, the structure leads to perverse incentives: a rent-seeking or "professional" objector is likely to be financially better off if the district court denies the objection, permitting an immediate appeal—especially since many district courts are reluctant to award attorneys' fees to objectors even if the objection improved the settlement.

This can lead to low-quality objections. Of course, even professional objectors can make legitimate objections: they object to bad settlements as well as reasonable settlements, and even win occasionally: see, e.g., Synfuel Tech. v. DHL Express, 463 F.3d 646 (7th Cir. 2006). But low-quality objections hurt consumers in four ways: first, poor objections lead to poor precedent that encourages judges to rubber-stamp bad settlements over objections; second, one would expect that class counsel anticipates the expense of buying off professional objectors, and builds that into the settlement fee, increasing the cost of class action litigation to the detriment of consumers; third, to the extent the settlement legitimately provides class members with benefits, rent-seeking delays reduce the value of the settlement to the class if the class counsel has not negotiated interest-bearing escrow accounts (which is why courts should condition findings of fairness on the establishment of such accounts); and fourth, there is a signaling problem whereby it is difficult for legitimate objections to be treated as legitimate objections because the objector cannot distinguish himself from rent-seeking objectors. (Indeed, an intelligent Bayesian would expect most objectors to be rent-seeking: for the same reasons we have class actions to aggregate litigation, an objector has no financial incentive to spend time and money petitioning the court over an unfairness to a settlement where an excessive attorneys' fee might deprive the class member of a few dollars or even less. This is why thoughtful courts do not equate lack of formal objections with class members' approval of the settlement.)

My non-profit public-interest law firm, the Center for Class Action Fairness (which is not affiliated with the Manhattan Institute) resolves the signaling problem in a unique way: we announce in advance that we refuse to settle unless the settlement results in an objectively fair and reasonable settlement, and we refuse to request a fee for more than 4.4% of the additional pecuniary benefit to consumers; to date, we've never settled an objection. Our interests are to put consumer welfare first. This hasn't stopped class counsel from trying to tar us with the "professional objector" brush, but we can demonstrate that they're being dishonest if they accuse us making a bad-faith objection for profit.

May 15, 2010

Waxman takes Toyota to task for defending itself

Toyota's pollster protests to Congressional investigators that "testing messages to rebut unfair or false assertions is a common and legitimate research practice and is no different than message testing our firm regularly does for Congressional candidates or Congressional campaign committees in response to critics or opponents," but that doesn't stop Henry Waxman and the Washington Post from making ridiculous hay over the fact that Toyota did so. Sean Kane, who makes quite a bit of money working with plaintiffs' lawyers in attacking Toyota, crows "If we weren't finding something that was meaningful, they wouldn't be spending this kind of time and money. But what we're seeing is that they're willing to go to great lengths to discredit anyone who asks questions about their products." This reminds me of James Randi's line: "They laughed at Galileo. But they also laughed at Bozo the Clown." (Update: Fumento sees the same article, has similar reaction. (h/t W.O.))

Separately, plaintiffs' attorneys are estimating that there has been $7 billion in economic loss from the Toyota controversy that they hope to recover in litigation. Ironically, almost all of that loss has been caused by bad publicity from plaintiffs' attorneys lying about Toyota products. This presents an interesting issue of Rule 23(a)(4) adequacy of representation given the likely conflict of interest between the court-appointed class attorney and the class.

May 14, 2010

Bachmann v. A.G. Edwards, Inc.

The attorneys in the case of Bachmann v. A.G. Edwards, Inc. negotiated what they call a $60 million settlement. Which sounds good, until you actually look at the settlement:

• The attorneys are asking for $21 million of the $60 million, or 35%;
• 35% is actually an underestimate, because $34 million of the $60 million consist of $8.22 coupons, issued in sets of three to be used once a year to pay for mutual fund fees--assuming that the class members remember to use an $8.22 coupon in 2012;
• the attorneys' fees get paid immediately, while the class does not get paid until ninety days after all appeals are resolved;
• and even if the court reduces the attorneys' fees, the reduction goes to a charity run by A.G. Edwards's successor, Wells Fargo, rather than to the class.

In reality, the class is getting more like $8 million, and the attorneys will be getting more than twice that. This settlement is similar to a settlement against Edward D. Jones of a couple of years ago negotiated by a similar group of attorneys; I asked a co-lead counsel who was involved in both cases for evidence of the redemption rate of the Edward D. Jones coupons. Needless to say, he refused to provide a response.

The Center for Class Action Fairness filed an objection on behalf of a class member who was justifiably appalled by the settlement. And I see many others are unhappy as well. The AG Edwards Settlement Fairness Hearing will be held today at 9:30 a.m., central time at the St. Louis City Circuit Court, Civil Courts Building, 10 North Tucker Boulevard, St. Louis, MO 63101-2044.

(CCAF's litigation is entirely separate from the Manhattan Institute.)