Class Action Abuses and Recent Reforms in the United States:

Lessons for Europe (?)

Daniel MeronPrincipal Deputy Assistant Attorney GeneralCivil DivisionU.S. Department of Justice

“Class actions permit almost infinite venue shopping; national class actions can be filed just about anywhere and are disproportionately brought in a handful of state courts whose judges get elected with lawyers’ money. These judges effectively become regulators of products and services produced elsewhere and sold nationally. And when the cases are settled, the ‘clients’ get token payments, while the lawyers get enormous fees. This is not justice. It is an extortion racket that only Congress can fix.”

The Washington Post, “Making Justice Work,” November 25, 2002.

Scott v. Blockbuster (Jefferson County, TX, 2001)

Dispute about late fees imposed by video rental chain

Customers get a $1 coupon off future rentals

Lawyers divide $9.25 million fee award

Southwestern Bell and Cellular One (Illinois State Court, 1998)

Each class member gets coupon for $15 off future services

Cannot use against current bills, only for new services

More than $1 million in attorneys’ fees

American Airlines Case (Cook County, Illinois, 2000)

Members of the class receive vouchers worth $25 to $75 for future flights on American

Travel experts quoted as saying that “practical value of those discounts will be modest” and that

“American could end up generating enough extra revenue to more than offset the cost of the offer”

Lawyers get up to $25 million in fees

Challenged length of time that Bank held money in escrow

Average plaintiff recovered $9

Agreement stated that Bank would not contest legal fees, and that the fees would be deducted from plaintiffs’ accounts

Court awarded $8 million to the lawyers, based on 1/3 of the value of escrow accounts, rather than based on true recovery to the plaintiffs (lost interest)

Hoffman v. Bank of Boston (Alabama state court, 1994)

Hoffman v. Bank of Boston (Alabama state court) cont’d

Notice did not alert class members as to the method of recovery of the legal fees.

Many plaintiffs suffered a net loss. For example, one Dexter Kamilewicz received a credit of $2.19 and a debit (for legal fees) of $91.33.

When Kamilewicz objected and accused the lawyers for the class of malpractice, the lawyers sued him for libel and slander.

Traditional Rationale For Class Action Device

Solving the “Insufficient Incentive” Problem

Does the Class Action Mechanism In Fact Solve the “Insufficient Incentive” Problem?

Does the Class Action Mechanism In Fact Solve the “Insufficient Incentive” Problem?

Do class members have an incentive to monitor and control the litigation on “their” behalf?

Costs of monitoring: Does the pendency of the action alter incentives in any meaningful way?

Will class members even know of the existence of the lawsuit prior to execution of a settlement agreement?

When class certified before settlement reached: no “opt-out” ability.

When class certification is simultaneous with settlement agreement execution, agreement is a fait accompli.

Do the class lawyers have an incentive to represent class interests?

No individual within the class is a client to whom the lawyers owe duties of loyalty

Class members are not paying clients in any meaningful sense

Class members’ lack of knowledge and limited incentive to monitor conduct of lawyers

Does the Class Action Mechanism In Fact Solve the “Insufficient Incentive” Problem?

Does the Class Action Mechanism In Fact Solve the “Insufficient Incentive” Problem?

Do the defendants have an incentive to protect class members’ interests?

Defendants want releases Broad class definitions Narrow opt out opportunities Settlement terms can generate new revenue and

business for the defendants Legalized extortion

Pressure on Defendants To Settle

Matter of Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir. 1995)

Recognizing “blackmail settlements”: “settlements induced by a small probability of an immense judgment in a class action”

Castano v. American Tobacco Company, 84 F.3d 734 (7th Cir. 1996)

Class certification creates insurmountable pressure to settle

Does the Class Action Mechanism In Fact Solve the “Insufficient Incentive” Problem?

Can judges protect class members’ interests?

Lack of access to information• Settlements prior to substantive litigation• Limited access to facts pre-trial in adversarial judicial

system Institutional inability to assess utility

Can elected (state) judges be insulated from pressures?

Who Will Guard the (self-appointed) Guardians?

Recent US Federal Procedural Reforms (2003)

Notice and “opt-out” opportunities:

Preexisting provisions

Parties to settlement must direct notice in a reasonable manner to all class members who would be bound

If class already certified, no right to opt-out at settlement stage, only to object

Recent US Federal Procedural Reforms (2003)

Notice and “opt-out” opportunities:

New provisions

In action previously certified by the court as a class action, court may refuse to approve settlement unless a new opt-out right is provided to class members

Parties to settlement must disclose any so-called “side” agreements

Recent US Federal Procedural Reforms (2003)Clarification of Class Counsel Role:

Must fairly represent interests of class Rule drafters: counsel represent class as a whole, not

individual members Class representatives cannot fire class counsel or

order them to accept or reject a settlement offer

Are servants to all, servants to no one?? Independent, thus unaccountable??

Recent US Federal Procedural Reforms (2003) Court may award attorneys’ fees, whether authorized

by law or by agreement of the parties, only upon motion

Served upon opposing party Directed to class members in a reasonable manner Class members may object (not just opposing party) Court must “find facts and state its conclusions of law on

the motion” May refer issues related to amount of award to a special

master

Legislative Reform: Class Action Fairness Act of 2005 Provides for federal court jurisdiction over most

large class actions Independent federal judges with life tenure v. elected

state judges

Controls fees in coupon settlements Attorneys’ fees, if based on value of settlement to the

class, must be based on value of coupons as redeemed Court may condition approval on distribution of

unclaimed amounts to governmental or charitable orgs.

Is the US Experience Relevant for Europe?

Litigiousness of culture

No elected judges

No or limited jury use in civil cases

Limitations on contingency fees

Issues to Consider

Standing of organizations/class counsel

Lawyers fees based on percentage of recovery

Collusive settlements

Opt-in requirements

Appointment of master/expert with access to evidence to evaluate settlement

Issues to consider (cont’d)

Centralized law v. regional autonomy (US – EU comparison)

Ott v. MCI WorldCom, Inc. (Aug 28, 2000)

Plaintiff, from Delaware, sues Mississippi Corp. in Madison County, Illinois

Nationwide class action challenging MCI’s advertising

Ask judge to issue nationwide injunction based on Illinois Deceptive Business Practices Act

Only basis for venue is tiny fraction of MCI customers residing in county