all-encompassingly

Vioxx, settlements, and lawyers…oh my!

My paper on Class Actions:

One of the most controversial legal subjects today is that of class actions. Holding both the potential for immense social good and great economic madness (depending on your point of view) there seems to be precious little space for neutrality between the battling forces of legal opinion. This perception, however, is largely incorrect. If we leave the world of TV talking heads and newspaper Op-Ed columnists, there is, in fact, a substantial middle ground when discussing such topics as fees, certification requirements, and class action reform. In this paper I will examine the debate that consumed much of the legal/political discourse, with particular emphasis on the question: are class actions really worth it?

Background

As with almost any subject matter, to better understand the contemporary issues we should at the very least cast a cursory glance at the past and examine what has brought us to this point. The history of class actions is an interesting one, and the development of this novel legal strategy plays a key role in the varied forms of its current incarnation.

The concept of multi-party litigation dates back to medieval England . While the lexicon was distinct, the ideas were remarkably similar to those that we have today. Groups of citizens could bring complaints about “communal harm” before the government to be heard. Were merchants banding together and manipulating marketplace prices? Were certain church officials disturbing the “religious peace” of the community? To combat these social ills the law provided a way for multiple citizens to have there grievances heard by the government as one (as if they were one). With the steady development of a justice system based upon individual rights this sort of multi-party “litigation” was swept aside. The individual was now king and multi-party “litigation” would decrease in popularity and virtually disappear.

It would not be until 1833 that the United States would adopt Equity Rule 48, which set out a way for parties to have their potential cases consolidated when their number was too great to reasonably pursue as distinct cases. Thus multi-party litigation was born in the United States . Rule 48 gave birth over one hundred years later to the current regulation governing multi-party litigation, Rule 23. While much has changed since 1938 and Rule 23’s adoption, the path onto which it set American jurisprudence is an historic one.

Rule 23 provided for three types of class actions: true, hybrid, and spurious. The most important characteristic of Rule 23’s implementation was the binding nature of true and hybrid class actions. The ability for a class of litigants to bind nonparticipating class members to the class was a substantial change in legal custom. Yet class actions that were certified as “spurious” classes did not have the power to bind unnamed class members. The general difficulty of the courts to distinguish with any sort of clarity or consistency the difference between the three classes led to an ever-increasing amount of confusion and frustration regarding class actions. By the 1960s something had to be done.

Thus in 1960 the Chief Justice of the Supreme Court appointed a new Advisory Committee on the Civil Rules tasked with addressing the multitudinous problems that had arisen vis-à-vis class actions during the previous twenty-plus years. Finally in 1966 the Advisory Committee proposed several changes to Rule 23. The fundamental change, and most controversial, was a complete overhaul of the distinct class certification requirements. In other words, the Committee eliminated the true, hybrid, and spurious classes and entirely rewrote the certification requirements of the three types of classes (while eliminating the true, hybrid, and spurious labels). This was undertaken in 23(b) where the different types of classes were outlined.

A couple of the seismic (and many claim “cataclysmic”) changes warrant a brief explanation. First, the inclusion of 23(b)(2). The addition of this form of class was a dream come true for many who saw class actions as a potentially effective tool in fighting social injustice. The 23(b)(2) class was vital to the bringing of class actions that sought injunctive relief (e.g. many civil rights cases). In other words, while not monetary in nature, they were able to stop “bad behavior” by the defendant against a large group of plaintiffs. The second change of note was the introduction of the 23(b)(3) class. It simply stated that a class could be certified when it was logistically effective and the questions of fact that the plaintiffs had in common predominated those that distinguished their cases. Yet since the adoption of the 23(b)(3) class the floodgates have not stopped. It is under this type of class that mass torts were eventually certified and to this type of class that the majority of headline-grabbing cases pertain, which is why great controversy surrounds even the tiniest changes to Rule 23.

Ironically, many on the Advisory Committee did not anticipate the broad changes in the legal landscape that these modifications would affect. In fact, there has been no small amount of controversy regarding the intended effects of their changes. Nonetheless, the legal landscape today, intended or not, is what it is in large part thanks to the modifications that the Advisory Committee undertook back in 1966. And despite the changes made in 1998 and 2003 (and the venue issues that the recently passed Class Action Fairness Act of 2005 addressed) it is still the transformations that Rule 23 underwent in 1966 that affect the majority of the debate that this paper will address.

Contemporary Situation

This all brings us to the contemporary discussion of the worth (or worthlessness) of class actions. A more nuanced view of the issue suggests that the relative worth of class actions depends on several factors. Are they an effective means of deterring bad behavior? Are they an efficient way to recoup consumer losses? In summary: are class actions worth it?

Approaching the question as to whether class actions, and those certified under 23(b)(3) in particular, are effective is a daunting task. Opinions abound, data is scarce, and the stakes are especially high for many of those commenting on the situation. There is not a central clearinghouse or registry of class action filings. In addition, one of the aspects of class actions that many claim plagues it is the strong incentive to settle. Plague or not, the incentive is strong and evident in the fact that so many class actions end in settlements. This consequently clouds the potential data that researchers would be able to glean from litigation. Nevertheless, the shear amount of relevant literature indicates that academics are undeterred by the dearth of hard data.

An examination of the available literature demonstrates that there is a surprising middle ground that can be built on. As with any appraisal of a policy tool that is especially contentious, such as class actions, those “without a horse in the race” play an important role in determining where the truth lies between the two extremes. When they are consulted the rhetoric takes a back seat to a rational examination of the strengths and weaknesses of the policy tool in question.

The study of class actions is no different. The loudest forces, especially in the popular press, seem to fall on either extreme, far from the middle. Either class actions are the common man’s only tool against evil corporations or they are the tool of diabolic trial lawyers trying to oppress economic prosperity. The truth, of course, lies somewhere in between. The existence of a middle ground, however, does not answer the question: are class actions worth it?

The Players

The class action unlike any type of litigation, not only because it is a complex form of multi-party litigation, but also because of the factors that determine class certification and the roles that judges, lawyers, and class members play in class actions. To answer the question as to whether they are worthwhile, a thoughtful consideration of its more unique characteristics help us understand if they are “worth it” or not.

Judges

The role of judges in class action litigation is a peculiar one. During most other types of litigation the judge plays a relatively passive role; ruling on motions, issuing opinions, approving sentences, etc. In the Olympic world of class actions, however, judges take on an almost mythical role akin to that of Zeus. Not only are they the arbiter of justice, but they involve themselves heavily in the process of the litigation, acting as a pseudo-guardian of the class and actively helping the case move along.

Before a case even receives the label of “class action” it must be certified as such. And judges are important in this aspect of class action litigation from the beginning. It is they who decide if a class will be certified. Given the incentives for settlement for both plaintiff counsel and defense counsel, which will discussed later, the power of certification is perhaps the judge’s most potent weapon in class action litigation. In many cases, deciding on class certification is essentially an adjudication of the case (in favor of the plaintiff).

Once a class action has been certified and begins to go forward, the pressure is on the judge to bring the parties together for settlement. One of the chief pressures that judges face today is clearing their dockets. The courts are overcrowded, and the situation does not seem to be improving. There is an immense incentive for judges to encourage class action cases to settle, and to settle quickly. While this incentive is certainly not unique to class actions, the power that judges wield in class action litigation to effectuate their desires is real. Given their peculiar role in this type of litigation they are in a rare position to bring to fruition their wishes regarding rapid settlement.

This irregular role that judges play in class actions distorts other incentives as well. In other words, the power that judges have in class action litigation can lead to a magnification of the incentives present in other types of litigation, thus affecting outcomes in ways that they do not have the power to in other areas of the law.

Another part of the judge’s enlarged role in class actions is the approving of fees for plaintiff counsel should the case be settled or decided in plaintiff’s favor. This provides the judge with enormous influence over plaintiff counsel for all the obvious reasons. In addition, it speaks to the changed playing field for plaintiff counsel. Their fees are not determined as they are in many other types of litigation; beforehand, in an agreement between clients and counsel. Instead, they must be approved by the judge after the case ends. As will be discussed further at a later portion of the paper, this oversight by the judge provides one of the few protections for class members.

In summary, the judge plays an increasingly more important part of class actions. After all, it was judges, not the legislature or executive, which decided to certify mass tort class actions, starting with Agent Orange. This example alone should provide adequate evidence of the impressive role that judges play in the field of class action litigation. Yet for all their unique characteristics in class actions, judges are not alone in facing exceptional incentives in class action litigation.

Plaintiff Counsel

Another involved party in class action litigation that is subject to irregular incentives is plaintiff counsel. In a normal case the counsel for the plaintiff will press for the best possible outcome for his/her client. Due to the unique nature of class actions, however, this is not always true in this category of litigation. There are several reasons why plaintiff lawyers many times act in ways that would surprise an uninformed observer. There are two key incentives that lead to this conduct and they closely related: first, the issue of fees, and second, the issue of time.

Unlike a traditional tort case where fees are agreed upon by plaintiff and counsel, in class actions the fees are decided as the case is settled or decided. The principal of plaintiff counsel working on contingency is the general practice, but the percentage and amount of the fee awarded to plaintiff counsel is up in the air until the judge approves the fee as litigation ends. This leads to some interesting incentives for the plaintiff counsel.

As was mentioned earlier, in a normal case the counsel for the plaintiff will generally press for the best possible outcome for his/her client. Given the way that fees are assigned in class actions, this may not always be true. Class members do not have the oversight role on fees in class actions that they do in traditional civil litigation. Due to the very nature of class actions, class members are many times locked into the class and have little say as to the direction of case, including decisions to settle (and, hence, the distribution of attorney’s fees). This lack of oversight leads to many times an allocation of fees that many class members would disagree with. But because most class members play no role at all in the litigation, there is exceptionally limited oversight as to the fee structure that is eventually approved. As will be discussed later in the case study, this can lead to attorneys collecting even more than the class after litigation.

The second incentive that plaintiff counsel faces is that of time. A couplet explains this incentive:

So many cases, so little time.

Turn’em fast and make a quick dime.

 

There is a Hollywood caricature of class action cases where the plaintiff is your average Joe who in some way is being wronged by corporate America . Cases are setup as The Little Guy vs. The Colossal Company of Malfeasance. Like almost all caricatures from the movies, this one is dead wrong (most of the time). It is not to say that there is a dearth of wrong doing in corporations around the United States , but the idea that class actions are somehow a battle between the forces of the weak and the strong is bologna.

Class actions are generally not battles between lawyers and big business. They are battle between big business and big business. Why? It would be dishonest to say that the plaintiff’s bar is anything but a big business. They are well financed, well educated, and very experienced at suing large corporations. In essence, class actions are as much a business for members of the plaintiff’s bar as making soap is for Proctor & Gamble.

Like any good retail business, plaintiff counsel wants to turn their inventory as quickly as possible. What does this mean? It means that they have an incredibly strong economic incentive to cycle through their caseload as quickly as possible. If a firm can settle a class action for $1 million after one year of litigation, or litigate for four years and have a decision awarding $2 million, the firm is obviously going to opt to settle. This of course assumes that firms can predict how much they would be awarded if the case actually played out. Doing that kind of predicting is undeniably a dark art at best. But firms do not even need to be able to predict with reasonable accuracy the potential future rewards for the incentive to still exist.

Like any other business (and much like the defense counsel, which will be discussed next), plaintiff counsel wants to eliminate uncertainty. Going back to the example, even if plaintiff counsel predicted a windfall of $5 million from litigating the case to conclusion over four years, there is still uncertainty as to the veracity of the prediction. In the end they could end up with nothing. Accepting the settlement of $1 million remains the “smartest” business decision for them.

This incentive to settle is one of the fundamental problems that most legal scholars accept as a valid criticism of class actions. The idea that plaintiff counsel would go against the best interests of their client solely to further their own economic well-being is appalling to most, especially those who saw class actions as a way to right “social injustices.” But displeasure with the incentive does not make it disappear. In many class action cases there are examples of plaintiff counsel settling for less than the class would “deserve” should the case be litigated completely. By “turning their inventory,” plaintiff counsel is able to dispense with their current case and move on to another. And as was mentioned earlier, by settling the case plaintiff counsel is able to not only move on to the next lucrative case, but also eliminates the risk of actually losing the case should it go to trial.

Not only are there incentives for plaintiff counsel to ignore the best wishes of their clients, but there are no incentives to protect those members of the class who wish to opt-out of any possible settlement. In other words, the system is not setup to help those class members who choose to not be a part of the class, if in fact opt-outs are allowed at all. There is a lot of debate regarding this aspect of class actions, but reform is unlikely. There is simply nothing that would entice any of the parties involved in the class action debate to want to accommodate the opt-outs any more than they are now. For example, if opt-outs are discouraged, or even disallowed, then plaintiff counsel can represent a greater number of clients (and take home a piece of a bigger pie), the defendant is able to settle all claims in one fell swoop (and prevent future lawsuits against them), and the judiciary is able to keep the legal process streamlined and avoid additional litigants entering the system down the road litigating the same questions all over again.

Another aspect of class actions that affect the dealings of plaintiff counsel is the ability of this type of litigation to bind all members of the class. Consequently, this means that a plaintiff attorney can search for a jurisdiction that would be most “friendly” to the litigation in question, and then use the class action to bind all members of the class, even those in other jurisdictions where bringing such a case would be unsuccessful. Aside from the questions of federalism that this raises, it presents a strong incentive for plaintiff counsel to do what is known in the popular vernacular as “venue shop.” But it is not just the plaintiffs that venue shopping. Defense counsel does this as well.

Defense Counsel

Plaintiff attorneys are not the only counsel that has their normal incentives distorted by the nature of class action lawsuits. The defense counsel has a unique set of incentives that influence their decision making as well in this genre of litigation.

The very nature of classes affects defense counsel. In other words, it is the ability to bind all class members to a specific case and preclude further litigation. Now obviously this aspect of class actions is not particularly appealing to defendants initially, since their obvious goal is to win the case. But many times the cost of litigating a mammoth class action is simply too spectacular for some companies, especially since they run the risk of then losing and have to outlay damages to the plaintiffs after they have paid their own attorneys already. This is why certification is so crucial. Certifying a class can, in many instances, decide the case and force the parties into settlement negotiations. Once a class has been certified there is then a powerful incentive for the defendants to settle, especially when they can then bind that settlement on everyone who may have been able to bring their suit. On top of the desire to bind all class members to the terms of a settlement, defense counsel are in essence able to venue shop much like their colleagues representing the plaintiffs. Instead of venue shopping by geographic location, however, defense counsel can venue shop for the kindest plaintiff counsel. A better term, perhaps, would be “settlement shop,” because in every sense of the term that is exactly what they are doing.

Nevertheless, this principle of defendants actually wanting to settle, rather than drag the case out and hope to outlast the plaintiffs or win at trial, is at first glance counterintuitive. After all, the caricature that we have of typical individual vs. corporation lawsuits is that the corporation will try to drag the case out using all sorts of diabolic machinations of delay and postponement. In class actions the reality in many cases is quite the opposite, which is not to say that there are not “innocent individuals” getting hurt still, only now they are “off camera.”

For example, assume that Capital One is being sued by a nationwide class of credit card holders who allege that they were charged late fees when they should not have been. Once this nationwide class is actually certified for the purposes of the lawsuit, Capital One may very well want to settle the case. In doing this they are able to take care of all the claims that might arise due to their actions charging these late fees when they should not have been. Throughout the settlement process they possibly would maintain their innocence as to the facts of the case, but at the same time recognize the prescience of taking care of all claims at once.

As I mentioned, however, there would most likely still be “innocent people” being hurt. Although now these folks would not be wronged by the corporation alone, but from the entire system: the judiciary, the plaintiff lawyers, and (of course) the evil incorporated entity of private enterprise. This harkens back to the concept of opt-outs, or in the case of Capital One it could be that class members would have to opt-in. Remember, there are strong incentives that both the plaintiff counsel and defendants face to settle the case, and there is always the judiciary’s wish to dispose of the case as quickly as possible. Consequently, there is a tendency to end up wronging not only those who do not end up participating in the class, but even the class members as well.

One way that defendants are able to satisfy the incentive to settle big cases but also protect the bottom line is the issuance of coupons as compensation. To add insult to injury, it would seem, the lawyers in cases where coupons are issued are not given coupons themselves, but cash. Of course this is something that has been criticized by both proponents and opponents of class action litigation. Supporters of class action suits see the “coupon settlements” as a sell out by the plaintiff counsel and a sacrifice of principle to the gods of lucre. And opponents of class actions point to the coupon settlements as yet another example of how class actions do not actually do anything substantive for the allegedly injured class members, but just enrich the plaintiff’s bar.

Class Members

This brings us to the final player in the class action landscape, the class members themselves. Who are these individuals who comprise the amorphous groups that occasionally grab headlines when they snag multi-million dollar settlements or decisions? The answer is that most of us have probably been a member of a certified class at one time or another. Of course, it is easy enough to ignore the notices that arrive in the mail telling us that we have “certain rights” and “can possibly collect” refunds, coupons, cash, or some tangible good for the trouble that we were hitherto unaware of. Or at least we were unaware that there was anything that we could do to recover compensation for the trouble we had been through. And this goes to the heart of the class action debate: if class members would have been unconcerned with the problem that the suit addresses had the suit not been filed, is there really any reason to have the suit at all? This question will be explored later in the paper.

Since so many of us have been class members at one time or another it is perhaps a little easier to understand the odd nature of being a plaintiff in legal action of such a massive scale. One peculiar, but self evident, characteristic of class members is that the vast majority of them are completely uninvolved with the litigation.

If your mortgage company wrongly collected thousands of dollars of interest from you and you sue them, you are likely to be highly involved in the litigation (interested in developments of the case, trial dates, etc.). But this simply is not the case in class actions, and the reasons are quite practical. First of all, there are usually not gargantuan amounts of money in question for each individual class members, which in turn means that there is not the same incentive to be personally involved. In addition, thinking about the large amount of plaintiffs suggests that personal involvement by each and every plaintiff would not only be impractical and a detriment to a prosecution of the case, but downright impossible.

Born out of this detachment from the case spring several peculiar roles (or lack thereof) that class members play. One such non-role is playing the client in the attorney-client relationship. When the client is in every sense of the word absent , there are inevitably consequences to the client not playing a role alongside the attorney in the litigation. Many critics point to this as one of the key reasons that plaintiff counsel is much of time willing to settle for less than the client could get if litigation was to move forward. In a cruder sense, it is not just the greedy lawyers; it’s the fact that their client is not around to keep them from being too greedy.

Another consequence of the absent plaintiff phenomenon is that clients not only are not there to provide due diligence vis-à-vis counsel conduct, but by not being present they inherently do not cultivate interest in the case. This implicitly means that they do not really know if a settlement, for example, was in their best interest. The adage “ignorance is bliss” need not apply here, although the arrival of an unanticipated refund, check, or coupon in the mail is unlikely to elicit angry responses from many plaintiff “clients.”

In summary, the client is generally absent from all proceedings of the class action. Their only contact with the process is the receipt of notification that they are members of a class, and the potential delivery of their slice (however small it may be) of the settlement or decision. Yet despite their absence, their non-participatory nature plays an important role in shaping the incentives that affect the other players in the litigation.

Case Study

One of the most comprehensive studies ever conducted on class actions was published by the RAND Corporation (one of the most independent and widely respected policy think tanks) five years ago. Despite its 2000 publication date, this study along with the principal author’s follow-up in the Duke Law Journal, is still one of the most widely cited documents when academics write on class actions. In it they examine several randomly selected class action lawsuits. One such suit that this paper will examine in greater depth is Graham v. Security Pacific Housing Services, Inc . Out of the various class action cases that I have researched this one is the best at demonstrating all the aspects of class actions that make them so controversial: from the plaintiff counsel (from Mississippi) who specializes in class actions to the outrageous fee structure in the original settlement to the willingness to settle on both sides, this case has it all. By dissecting the various aspects of Graham v. Security Pacific Housing Services, Inc. we will be able to see the topics that have been discussed thus far in action in the real world.

Case Background

As anyone who watched more than fifteen minutes of the evening news in the Eighties knows, the banking industry underwent a seemingly endless chain of failures during the decade. One of the criticisms of the industry is that they had “undersecured” many of their loans. In other words, when people were unable to repay their loans the banks were left holding the bag, so to speak, in many cases because they had not done enough to ensure that the proper collateral was in place.

As a solution to this problem of undersecured loans the banks began enforcing a policy of mandatory collateral insurance. So, loan agreements began requiring insurance for collateral based loans. In other words, for loans that required that the borrower put up collateral, the borrower was required to have the proper insurance in place so that if something should happen to that collateral they would still have assets sufficient to preserve their collateral to the loan in question.

Of course many of the people who were borrowing for things such as cars or mobile homes did not have the resources to purchase this “collateral insurance” when they were taking out their loans. As a solution the banks bought insurance for the borrower, adding the insurance premiums to the principal of the loan. In turn this meant that the borrower was now not only borrowing for the purchase of their collateral (for example, their mobile home, as was the case in this specific litigation), but also borrowing for the insurance and paying interest on the premium of the insurance.

On its face this all appears rather innocuous, after all it seems pretty reasonable that banks would want the collateral for the loans their offering to be insured. And if the borrower was not able to purchase such insurance then the bank offered the service of allowing the borrower to borrow a little bit more so that they could insure the collateral. If that was the end of the situation then there probably would not have been a lawsuit, but of course there is more to the story.

As it turned out some banks did not simply provide this collateral insurance, but conducted business which made it appear as though they intended to use the collateral insurance loan requirement as a profit center as well. For example, many banks would use their own insurance branches to buy the insurance, thus taking a healthy commission on the sale of the insurance. This created incentives to oversell coverage (sell policies that provided more coverage than was required by the loan agreement). This is exactly what happened in many cases. On top of basically overselling insurance to their borrowers, the banks were then making money, in the form of interest payment, on the bloated policies whose premiums were accumulating interest as part of the principle of the loans.

Understandably many borrowers were upset when these practices began to come to light. One lawyer who had previously handled a case on behalf of borrowers was John Deakle, a consumer attorney in Hattiesburg , Mississippi . A former client of his, John Graham, approached Deakle regarding the possibility of suing the lending institution that had financed the purchase of his mobile home. Graham’s interest was piqued by a newspaper article that talked about the success that Deakle had suing Deposit Guarantee National Bank. Graham knew that he had been required to buy collateral protection insurance and wondered if he might have grounds for a case. He did, and Deakle filed suit on April 1, 1996 in the U.S. District Court for the Southern District of Mississippi. The judge assigned to the case was Judge Charles Pickering, a Bush (41) appointee, who was no stranger to class actions or to Deakle. Pickering had also been the presiding judge in Deakle’s suit against Deposit Guarantee National Bank.

The Case Gets Started

The complaint alleged that the bank acted as the borrower’s fiduciary, or agent, and it outlined two specific breaches of the fiduciary duty on the part of the lending institution:

“two…instances when the defendants were allegedly not acting according to the best interests of the plaintiffs. First, the insurance that Bank of America was placing for the borrower allegedly had coverage limits exceeding those required under the provisions of the loan agreement, and sometimes it insured types of losses not required to be covered under the terms of the insurance agreement. Second, the plaintiffs alleged that the insurance was obtained from wholly owned insurance-broker subsidiaries of Bank of America and that the rates obtained from the insurance brokers were up to ten times higher than competitive market rates. In addition, they alleged that the insurance brokers were awarded commissions that were then incorporated into the loan principal.

 

“As a result of these practices, plaintiffs claimed several hundreds of dollars in damages per policy holder. For example, representative plaintiffs Dewey and Elmer Brady, who had been charged $818 per year over a two-year period for insurance for a loan that had previously cost them only $440 per year, alleged damages totaling approximately $800.”

 

Ironically the defendants never really put forward a defense in the case. Almost immediately after it was filed they began settlement negotiations with Deakle. Bank of America saw the benefit of taking care of all the potential litigation in one fell swoop.

The Players in Graham

So far we have examined the various players in the class action drama and the effects of distorted incentives on their roles. Judges, for example, find themselves confronted with the ever-present desire to dispense with cases as quickly as possible and clear their dockets. In addition, they play a more active role in class actions by acting as a pseudo-guardian of the class and approving the settlement (with special attention to fees).

Plaintiff counsel is principally motivated in their involvement in class actions by the fees available to them upon settlement or a favorable decision. As such, their motives are many times not in the best interests of their clients, especially since plaintiff counsel generally wants to cycle through their “inventory” (pending cases) as quickly as possible. Additionally it was pointed out that framing the class action debate as big business vs. the little guy is inaccurate, in as much as there is nothing “little” about the plaintiff’s bar.

Both the defense and plaintiff counsel “venue shop” although in different senses of the phrase. Plaintiff counsel looks for a favorable jurisdiction in which they can file suit, while defense counsel shops around for the most favorable plaintiff counsel. By finding the most favorable plaintiff counsel the defense hopes to terminate all litigation in one case and extinguish the possibility of further lawsuits down the road, thus leveraging the all encompassing nature of class actions.

Which brings us to the class members themselves; they are (ironically) the most uninvolved party in class litigation, but their non-participatory nature does not diminish the role that this deficiency of involvement plays in influencing other players. Without their direct involvement there is little oversight of the process, including the decisions of their own counsel (with particular emphasis on fees and quick settlement). The fact that many class members are happy to receive something (rather than nothing) for a wrong act that they did not know about does not nullify the disturbing trends that their non-involvement in the litigation presents.

Using Graham as a model provides a useful to examine all these issues and provides a useful data point for answering the original question: are class actions worth it?

The Judge

Overseeing Graham was Judge Charles Pickering. He had handled previous class action litigation brought by Deakle, and so had at least some limited experience with both the subject matter and the plaintiff counsel involved. Like most jurists, Judge Pickering was anxious to move cases through his court in an expeditious and efficient manner. In Graham this would initially prove not too difficult, since both parties entered into settlement negotiations immediately after the filing of the case. Pickering ’s desire was then to help both parties come to a quick settlement. He moved the case along by issuing an order temporarily certifying the class in June 1996 (the case had been filed on April 1 st of that year). By certifying the class, if only temporarily for the purpose of moving settlement negotiations along, Judge Pickering indicated that the class would be certified and that it would be prescient to pursue duly diligent discussions to terminate the litigation in settlement.

As the case progressed Judge Pickering certified three classes, first all those in the entire nation who had been “victim” to Bank of America’s practices with regard to collateral protection insurance. The second class was all citizens of Mississippi in the same predicament. And the third class was simply comprised of all members of class two but was binding with regard to punitive damages. In other words, Bank of America wanted to limit their exposure for punitive damage in future litigation brought by Mississippians. This speaks to the favorable venue that Mississippi is for class actions.

The case meandered its way through settlement negotiations a preliminary settlement was finally reached. It established what would be called a “common fund” from which plaintiff counsel and class members could receive compensation. The costs of class notification were covered by the defendant. In the preliminary agreement it was stipulated that all class members who would draw from the common fund would need to “opt-in” to the settlement and that by not opting-in they disqualified themselves from not only the common fund but any future litigation. Only those who proactively opted out of the class would be eligible to pursue future litigation against Bank of America and if more than five class members opted out then the settlement would be void.

The fee structure that was proposed in this preliminary settlement drew the suspicions of Judge Pickering that the settlement was unfair to the class members, in that if the injunctive “benefits” to class members were excluded the plaintiff counsel would receive greater than 80% of the settlement. Under the preliminary settlement agreement there was to be $6.7 million put into the common fund, from which plaintiff counsel would take $5.4 million in fees. This understandably was a cause of concern for the ostensible guardian of the class (Judge Pickering).

In addition the case had drawn the attention of a non-profit organization in Washington DC , Trial Lawyers for Public Justice (TLPJ). Funded by the plaintiff’s bar (ironically) they serve as a watchdog for the members of class action lawsuits, among other pursuits. What caught the TLPJ’s attention was the large portion of the settlement that was going to the plaintiff counsel. Judge Pickering allowed them to become involved in settlement negotiations until the settlement satisfied all parties involved.

In its final form the settlement created a common fund much larger and with more money available to class members. The common fund was established with $10.5 million, from which only $1.92 million would be taken as plaintiff counsel’s fees. In addition, notification costs were taken from the common fund ($350,000) and the TLPJ even received $350,000 for their trouble. This was perceived as a much more equitable settlement, and Judge Pickering approved it in June 1997, barely a year after the original suit had been filed.

Judge Pickering’s involvement in the case was very consequential; he moved the case along in an efficient manner, he was able to clear his docket of it in fourteen months, and his involvement in settlement negotiations and “fee setting” led to the involvement of a third-party (TLPJ) and a more favorable settlement for class members than would have otherwise occurred.

The Lawyers

The lawyers in this litigation played the most important role, as is usually the case in class actions. The plaintiff counsel, having previously demonstrated the ability to turn their inventory quickly did not disappoint. The incentive to settle the case as fast as possible played an important role in the fact that settlement negotiations began in earnest right after the filing of the case.

The principal motivation in this case for plaintiff counsel was obviously the fees that they were going to garner; it was not some lofty goal of social justice, otherwise there would not have been the indifference that Deakle showed to the class’ ability to recover anything meaningful in the preliminary settlement. The representative class members had been allegedly cheated out of $1,636 and $880 respectively, but Deakle was satisfied with a settlement that would have provided $22 to each eligible class member if everyone in the class opted in. Even in the final settlement there was only enough money for $130 to be distributed to each class member. Plaintiff counsel’s lack of concern for the gaping disparity between actual losses and the damages awarded in settlement is due as much to the class’ lack of presence in the litigation as it does to counsel’s desire to dispense with the case and take home their fees.

The defendant, Bank of America, did not believe that they had done anything wrong, but nonetheless were incentivized to settle the case in the most expeditious manner possible. Since Deakle had positioned himself as the lawyer willing to settle the case (having also filed suits in several other states in a sort of preemptive strike against the possibility of other lawyers filing class actions elsewhere) the defense was wont to negotiate with him rather than venue shop to another location and different plaintiff counsel. And in typical fashion for a class action defendant, Bank of America was able to harness the all encompassing power of the binding class action by getting all class members nationwide included in this litigation. They were even successful in attaining the certification of the third class, that of Mississippians who would then be unable to pursue additional litigation seeking punitive damages.

Class Members

Class members in Graham were emblematic of their counterparts in most class actions around the country: uninvolved. Their absence from the entire process, save for the five class members that TLPJ brought to intervene in the settlement, inevitably contributed to the lopsided preliminary settlement, and consequently the still rather unfavorable settlement (from class members’ point of view). With no oversight from class members the lawyers were happy to settle on terms that were clearly objectionable, reinforcing Woody Allen’s maxim: “Eighty percent of success is showing up.” Class members rarely show up, and thus further distort the incentives of others in class action litigation.

Conclusion

Class actions are without a doubt one of the most controversial legal subjects today. One of the motives for their contentious nature is the incentive structure that actors face in the class action drama. The unbelievably strong incentives to settle can not be overstated; judges, plaintiff counsel, and defendants are all provided with incentives, especially after class certification, to settle the case quickly and “efficiently,” many times without regard to what is actually best for class members.

This leads us back to our original query: are class actions worth it? Like so many questions in the law, it has become obvious that the answer depends on your perspective. The inclination of the author of this paper is to answer in the negative, if the litigation seems to benefit everyone but the so-called victim it would seem that something needs to be done with the system. But just as there are powerful incentives in the class action system, reforming the system amplifies these vested interests and leads to the confusing and shrill debate that consumes so much airtime and print space today. The purpose of this paper is not to examine the possible alternatives to class actions or the necessary reforms, but suffice it to say that any such legislation will have to weigh the various incentives intrinsic in the class action system.

 

 

 

 

 

 

 

 

 

 

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