The Struggle Against Class-Action Suits Continues
from
November/December 2007
by James Burnett & John Ward
Should Steven Hantler ever decide to pursue a career in politics, he will make a formidable speaker out on the stump. The veteran litigator, an assistant general counsel for DaimlerChrysler, displays a natural gift for bombast. Especially when discussing his favorite issue—class-action lawsuits and the plaintiffs’ attorneys who bring them—he can hurl stinging sound bites with the practiced aim of a seasoned talk-radio host. “Trial lawyers have America scared to death. We’re afraid to do anything anymore,” he says. “It’s a threat to our culture. It’s a threat to our free-enterprise system.” He is just getting warmed up.
It isn’t surprising that Hantler, 54, feels this way. Like many major companies, Chrysler has faced its share of questionable suits. One that jumps out in Hantler’s memory involved a lead plaintiff who helped win a $58.5 million judgment against the carmaker after she was mildly burned by the hot gas that deployed the airbag in her LeBaron—an airbag that evidence suggested saved not only her life but also the life of her unborn child.
Hantler is dismayed that a recent reform push didn’t manage to do more to curtail a system that he and many likeminded critics decry as out of control. Passed in 2005, the federal Class Action Fairness Act, or CAFA, was hailed at the time by business groups as an important win. Under the new law, most class actions seeking more than $5 million in damages and involving 100 plaintiffs or more from multiple jurisdictions must be filed in the federal courts, where such suits, the reasoning goes, typically face a higher bar than state judges impose. By changing how the attorneys’ fees are set, CAFA also addresses the disproportionate paydays trial attorneys reap from class-action settlements—the kind in which, in Hantler’s words, “the lawyers walk away with millions of dollars and the class walks away with coupons and 25-cent checks.”
CAFA does not attack some of the underlying causes of class-action abuse. “It’s been more a positive than a negative,” says Aubrey B. Harwell Jr., 65, chief manager of the Neal & Harwell law firm in Nashville and a director of Piedmont Natural Gas. “But I don’t think it even suggests to be a total and complete answer to the problems.” David C. Hardesty Jr., 62, president of West Virginia University and a director of Consol Energy Inc., says that “the effects of CAFA are often seen as being less far-reaching than anticipated. So far, both the hopes of businesses and the fears of plaintiffs seem to have been overblown.”
Certainly lawsuits that look abusive to corporate defendants continue to abound. In February, for example, the Ninth U.S. Circuit Court of Appeals upheld a San Francisco district court’s ruling certifying a gender-discrimination class action against Wal-Mart. In a dissenting opinion, justice Andrew Kleinfeld argued that the original plaintiffs had brought disparate accusations rather than one shared, unifying complaint, and that the action risked damaging not only individual women who had legitimate discriminatory claims but also Wal-Mart’s right to due process in handling such cases. Nonetheless, as in the earlier round, the case was allowed to move forward, and the certifying court allowed the original plaintiffs to represent all women who have worked at Wal-Mart stores since the end of 1998. From the original group of seven female Wal-Mart associates, the class had grown to encompass an estimated two million women—the largest class-action sex-discrimination case in U.S. history.
According to Stanford Law School and Cornerstone Research, securities class-action filings in the first half of 2007 were below the historical average for the fourth consecutive six-month period. The 59 filings from January through June 22 were up from 53 in the second half of 2006, but nevertheless represented a 42% drop from the average semiannual filing rate of 101 from July 1996 through June 2005.
A key guilty plea was entered this year in a U.S. Justice Department case against the legendary class-action law firm formerly known as Milberg Weiss Bershad & Schulman. The firm had been indicted in 2006 for alleged “secret and illegal kickback payments” to—in the words of U.S. attorney Debra Wong Yang—“a stable of individuals ready and willing to serve as paid plaintiffs.” Two name partners, David J. Bershad and Steven G. Schulman, were personally charged in the case, and in July Bershad pleaded guilty and agreed to cooperate with prosecutors. In September, former partner William Lerach, who had left to start his own firm, pleaded guilty to a conspiracy charge involving his past outfit and has agreed to give up $7.75 million to the government, pay a $250,000 fine, and accept a sentence of one to two years in federal prison. Senior partner Melvyn Weiss reportedly declined to take a similar path and remains under investigation.
Directors’ complaints about class-action suits have traditionally been ardent and expected. James T. Hackett, 53, chairman and CEO of Anadarko Petroleum Corp. in Houston and a director of Fluor Corp. and Temple-Inland Inc., told
Corporate Board Member
last year, “Property and tort litigation is out of control.” W. Arthur Porter, 66, former vice president for technology development at the University of Oklahoma and a board member of Electro Scientific Industries and Stewart Information Services, had been harsher: “There are a lot of vulture lawyers who love to take advantage of any little crack they can find and sue the company. Settlements are given, which in turn only further breeds those vulture attorneys.”
Even many lawyers have joined them. A widely publicized class-action suit against Netflix (
see “Bloggers Challenge a Class-Action Settlement,”
Corporate Board Member
, March/April 2006
) made an unlikely crusader out of Jay Edelson, a partner at Blim & Edelson in Chicago. The suit was filed in 2003 by disgruntled customers who claimed that Netflix had not made good on its advertised one-day-DVD-delivery guarantee. The settlement gave a free one-month upgrade to the members of the class, but at the end of the month Netflix automatically began charging the class members for the more expensive service if they didn’t request otherwise. Meanwhile, the attorneys who had pursued the suit against the DVD-rental giant were awarded $2.5 million, an amount the plaintiffs have appealed.
Trial lawyer Edelson was inspired to draft a pro bono objection on behalf of the plaintiffs. He was worried that the lopsided settlement was bad for his profession. “When you have those types of settlements, they get a lot of attention and that’s how everyone sees class-action attorneys,” he says. “Even if you only have 2% of lawyers doing that, that’s how everyone sees it.” Says Tim O’Donovan, 61, board chairman of footwear marketer Wolverine World Wide Inc.: “For somebody to get a coupon worth a couple of dollars, what does that really accomplish?”
In theory, CAFA has made it harder for plaintiffs’ attorneys to collect those sorts of eye-popping sums, mandating that any portion of their payment related to the value of coupons must be based on a percentage of coupons redeemed rather than on the total number issued, as in the past. But even with that revised calculus, attorneys can be awarded as much as 33% of the amount recovered by the class, points out Thomas Allen, a corporate defense attorney with Reed Smith LLP in Pittsburgh. “What that means is,” he says, “you don’t have to have a very big class to end up with a multimillion-dollar fee.”
The one way for a company to avoid paying out anything in a class action, of course, is to refuse to settle, take the case to trial, and work for a favorable ruling—and if one is not forthcoming, to keep fighting. That’s what Hantler and DaimlerChrysler did in the Chrysler airbag case. After losing in the original verdict, they put together an appeal that got the penalty thrown out. “We were thinking long-term,” says Hantler. “Short-term, it may have been cheaper to settle. But long-term, we wanted to send a message to plaintiffs’ lawyers that filing a meritless lawsuit against DaimlerChrysler is an exceptionally poor investment. We happen to think they’ve gotten that message.”
But even this approach is not without costs: To get the $58.5 million penalty voided, DaimlerChrysler racked up $8 million in legal bills. For many front-office decision-makers, the risks of rolling the dice in open court are simply untenable. “From the standpoint of being good stewards of corporate money,” Piedmont Natural Gas director Aubrey Harwell says, “officers, directors, and general counsel often feel they have to agree to a settlement.” Says Tim O’Donovan: “It’s a diversion for the company. People are worrying about that instead of bettering the company. This leads the company to say, ‘Okay, let’s just write these guys a check so we don’t have this cloud hanging over us and we don’t have to devote our top management’s time to dealing with it.’”
Hantler, Home Depot co-founder Bernie Marcus, and former Michigan governor John Engler, 59, a director of Dow Jones & Co., Northwest Airlines, and Universal Forest Products, helped establish the American Justice Partnership in 2005 to agitate for class-action reform. Hantler says that the best hope for squashing dubious suits lies not with regulating lawyers but with putting pressure on their de facto co-conspirators, the judges who give a legal blessing to the cases in the first place. “Frankly, they’re not doing their jobs,” he says. “They are certifying too many cases that have no business being certified.” One consequence of that, and an unanticipated CAFA loophole, is a new kind of so-called forum shopping. Where lawyers once tried to base class actions in plaintiff-friendly state courts, they’re now plying the same tactic at the federal level by doing what they can to ensure that their claims will be heard by sympathetic appellate jurists.
No critic, including Hantler, is suggesting that the class-action system is inherently evil. When used correctly to bring meritorious claims against actions that have injured or prevented gains to a number of people, class actions can provide justice. As Harwell puts it, “We certainly don’t need to throw the baby out with the bathwater in addressing reforms.” But Harwell also believes that there needs to be a “real rethinking of class-action litigation in America—one done in a way that’s consistent with the public interest.”
At the moment, no formal proposals for further legislation are in the pipeline. But in addition to the American Justice Partnership campaign against forum shopping, the other major change needed, says Hantler, has to come not from courtrooms or Congress but from consumers. Cranking up the rhetoric, he says, “I call class-action suits the silent killer of jobs and the silent killer of medical advances. Few appreciate how bad it is.” For real reform to happen, he adds, “the public has to realize this is serious. It’s not just something for Jay Leno to make lawyer jokes about.”
No kidding.
