Who Will Class-Action Lawyers Go After Next?
from
July/August 2006
by Randy Myers
In which high-risk industry is your company engaged? Nuclear power? Tobacco? How about soft drinks or home loans? Corporate attorneys say cola makers and mortgage lenders could both be popular targets of the plaintiffs’ bar in the years ahead.
True, your odds of being hit with a class-action lawsuit fell a bit last year; there were only 2.4 such filings for every 100 publicly traded U.S. companies, down from 2.8 in 2004. But plaintiffs’ attorneys have hardly gone on holiday, and they’ve shown a nimble ability to home in on fresh prey when traditional targets begin to yield fewer pickings. According to Stanford Law School’s Securities Class Action Clearinghouse, filings against companies in two of the most-sued industries of 2004, technology and communications, were down 32% last year. But filings against consumer companies increased, rising 11% for noncyclicals, such as food and beverage outfits, and 38% for cyclicals, such as automakers, airlines, and leisure businesses.
Which companies are likely to find themselves in the hot seat in the years ahead? Attorneys speculate that they will include:
Fast-food and soft-drink manufacturers.
Thirty years after they took on the tobacco industry, plaintiffs’ attorneys are zeroing in on companies whose products might be linked to obesity. Never mind that most suits of this kind have thus far gone nowhere; the three-decades-long battle against tobacco, which produced a $246 billion settlement in 1998, shows that the plaintiffs’ bar has plenty of patience. The Center for Science in the Public Interest has already announced that it will sue food manufacturer Kellogg Co. and Viacom Inc., owner of CBS, MTV, and Nickelodeon, to stop them from marketing foods high in sugar, saturated fat, trans fat, or salt to children. The center also has plans to sue Coca-Cola, PepsiCo, and other companies to get soft drinks out of public schools. Meanwhile, McDonald’s is still wrestling with a class-action lawsuit filed in 2002—initially dismissed but reinstated last year—on behalf of two New York City teenagers who claim that its Big Macs and Happy Meals made them McFat.
Makers of pharmaceuticals and medical devices, and health-care providers.
Companies that push the boundaries of science in an effort to change the way the human body performs have always been engaged in risky business. And the aging of the baby boomers—the 76 million people born between 1946 and 1964—presents a whole new wave of customers for them to target. “Plaintiffs’ lawyers go where the food is,” says the general counsel of a NASDAQ-listed company in an unrelated industry, who asks to be anonymous. “If there’s any sort of junk science out there that suggests a medical device or drug is in any way linked to hiccups, it’s going to trigger a class-action lawsuit.” Michael J. Mueller, a partner, litigator, and leader of the class-action team at Akin Gump Strauss Hauer & Feld in Washington, D.C., suggests that as employers push employees into so-called consumer-driven health-care plans, in which the employees pay for more services directly, health-care providers could be hit with class-action suits over billing practices if patients conclude that they have been improperly charged. The baby boomers’ aging, warns Mueller, might also prompt more lawsuits in areas such as nursing-home abuse, retirement-fund fraud, and disability discrimination.
Financial institutions.
With interest rates rising, some attorneys warn that mortgage lenders and credit-card companies may find themselves under attack from variable-rate borrowers who are suddenly unable to meet their monthly payments. The likely argument from the plaintiffs: Overzealous lenders allowed them to borrow more than they could afford to repay, charged illegal fees, or otherwise mismanaged their accounts. There’s precedent for such actions. Early this year Ameriquest Mortgage Co., which specializes in making home loans to borrowers with poor credit, agreed to a $325 million settlement of a suit alleging that it had defrauded and misled customers.
Consumer-products companies and government-regulated companies.
Attorneys say directors should pay special attention to litigation threats at companies where products are recalled for safety reasons and at government-regulated outfits that become the subject of investigations, hearings, or findings by governmental bodies.
Companies with access to sensitive data about customers and employees.
Yes, this applies to just about everybody, but with concerns about identity theft zooming, any company that accidentally discloses data protected by privacy laws runs a risk of litigation. BJ’s Wholesale Club is being sued, for example, by an organization of credit unions called CUNA Mutual over allegations that BJ’s failed to protect the credit-card information of its customers. The retailer entered into a settlement with the Federal Trade Commission last year in the matter, agreeing as part of the deal to beef up its data-security processes. Although these cases don’t appear to have prompted any litigation yet, several big companies suffered high-profile losses of sensitive data last year, including Citigroup Inc.’s CitiFinancial unit, Bank of America, and Time Warner. The two financial institutions reported that computer tapes containing sensitive information about customers, such as their Social Security numbers, were lost while being moved to offsite locations by delivery companies. Similar Time Warner computer tapes went missing during transport to a backup facility by a records-management company. All three corporations said there had been no reports that the compromised information had been misused.
If you’re on the board of a company that finds itself under the gun in any of these areas, Sheila L. Birnbaum has some advice. Birnbaum is the partner who heads the complex mass-tort and insurance group at the New York City headquarters of Skadden Arps Slate Meagher & Flom. She says the board must be open about any missteps the company might have made and must avoid doing anything that suggests a cover-up. Akin Gump’s Michael Mueller advises directors of any company operating in a high-risk industry to cultivate a culture of compliance and insist that legal counsel vet all advertising, product labeling, product literature, and other public statements that might be relied upon by people using the product. He also says such companies should select their business partners carefully. “Vendors and suppliers should be able to indemnify manufacturers,” he says, “while downstream sellers should inquire from upstream suppliers as to their quality-assurance programs and remedies for defective products.”
Even if a company isn’t on this list of potential class-action targets, legal experts recommend that boards take measures to head off trouble and anticipate problems. Directors should make sure their companies pay attention to hot-button accounting issues such as revenue recognition, channel stuffing, and classification of expenses. They should be alert to any spike in negative media coverage related to their company or industry, and to complaints made to government regulators. And they should advise management to assign in-house or outside counsel to monitor the Internet periodically for warning signs of class-action litigation. Good places to look include websites operated by plaintiffs’ law firms and various clearinghouses for class actions. Among the latter are Stanford’s Securities Class Action Clearinghouse (
www.securities.stanford.edu
) and Lawyers and Settlements (
www.lawyersandsettlements.com
), a site run by Online Legal Marketing Ltd. that lists new lawsuits and settlements and solicits plaintiffs. Companies should also monitor financial chat rooms and product-review sites; plaintiffs’ lawyers sometimes use them to build cases and locate clients and witnesses. In today’s litigious climate, no board or company is immune to the threat of a lawsuit. There’s no reason to be blindsided.
