Study Shows Consumer Class-Action Lawyers Earn Millions, Clients Little
Did you hear about the class action where consumers came out ahead? Neither did I. And a new study commissioned by the Institute for Legal Reform confirms that in terms of obtaining meaningful compensation for consumers, most class actions are a joke.
Scratch that. They are far from being a joke for plaintiff lawyers, or their brethren on the defense side. Plaintiff lawyers often win even when they lose. About a third of the cases are voluntarily dismissed with the lawyers and a few select plaintiffs being paid to go away, while the rest of their would-be clients get nothing. Defense lawyers, of course, get paid in every case.
Even in cases where lawyers actually negotiate a settlement on behalf of the class, abysmal amounts of money flow to the consumers who were the supposed reason for the lawsuit in the first place.
How abysmal? Researchers at Mayer Brown looked up every consumer class action in federal court in 2009 reported by two major commercial litigation publications. They found that in five of six cases where settlement distribution data was actually available, the percentage of class members who actually got money ranged from a high of 12% down to a low of 0.000006%. (The sixth case had close to a 100% payout ratio, but it involved the Bernie Madoff scam.)
“For practical purposes, counsel for plaintiffs (and for defendants) are frequently the only real beneficiaries of the class actions,” the authors conclude.
I can hear the objections already. The ILR is financed by the U.S. Chamber, whose corporate members hate class actions. Mayer Brown generally works for the defense.The research was on a sample of the thousands of class actions that are filed each year. But that doesn’t change the facts, which Mayer Brown researchers went to great lengths to compile.
They picked the year 2009 because it was four years after the Class Action Fairness Act of 2005, which cut back on some of the most egregious practices of the class-action bar. Those include negotiating “coupon” settlements where clients win the privilege of buying discounted products from the same companies that supposedly ripped them off, while the lawyers are paid in cash. (Now they can only be paid a fee based on the coupons actually cashed in.) And the law removes most national consumer class actions to federal courts, where judicial oversight is generally considered to be more rigorous.
Based on this study, CAFA didn’t help consumers much. The researchers identified 148 class actions from the 2009 vintage, after eliminating labor- and securities-related cases, which operate under different and more rigorous legal rules. They also eliminated me-too cases by lawyers who typically gang up on companies hoping for a small piece of the fees from any settlement. Out of the 148 remaining cases, 28% were settled, 27% were dismissed on the merits, 30% were voluntarily dismissed by the lawyers or settled on an individual basis, and 14% were still pending.
Not a single case went to trial, illustrating the reason plaintiff lawyers love the class-action system so much. Once a judge certifies a case as an acti0n on behalf of thousands or millions of consumers, the stakes are usually too high for companies to consider anything other than settling. While lawyers voluntarily dismiss some weak cases and judges dismiss others, odds are lawyers get paid something for each of them. Like a union boss cutting a deal to keep his members off of a job site, the class-action lawyer is not above dropping his case in exchange for a fee.
“It’s not uncommon to be able to make a deal with the named plaintiff and kill the putative class action,” said Andy Pincus, a partner in Mayer Brown’s Washington office and contributor to the report. Even if the judge dismisses the case, he added, “if you’re smart you can still go to the defendant and say, ‘Look, I think I can appeal this.’”
Most voluntary dismissals are confidential, so class members never find out how much their onetime lawyers and named plaintiffs were paid to drop what once seemed like such a promising case. They do pay, of course, in the form of higher prices on the goods and services they buy in the future.
As a result of the judicial and voluntary dismissals, the authors conclude, consumers get zero in more than half of the proposed class actions filed. The class-action settlement rate of 33% is far lower than the average of 67% in federal courts. Even the trickiest federal cases involving constitutional questions settled at a higher rate.
When consumer class actions do settle, lawyers usually negotiate a deal that pays them and their named plaintiffs well, but delivers little to nothing to their other clients. The most common tool is a “claims made” settlement, under which everybody who supposedly lost money because of a company’s chicanery is bound by the terms of the settlement, but must make individual claims to be paid. Lawyers on both sides know almost no one will take the time to fill out paperwork for a 50-cent settlement check; defense attorneys count on this when calculating the ultimate cost of a settlement.
Judges, unfortunately, don’t approach the matter with a similar level of financial acumen. They frequently award plaintiff lawyers a percentage of the purported value of the settlement, even if the people who negotiated it know the payout will be much smaller. One way they “fix” this problem is by allowing lawyers to steer the money they know consumers will never receive into charities under the cy pres doctrine. That’s become a playground for mischief, as lawyers and judges try to send money to unrelated charities that just might further a personal agenda of their own, including medical centers affiliated with prestigious universities their kids might want to attend, or in the case of an infamous Facebook settlement, a “charity” that will be under the control of the company funding it.
Only in a rare subset of settlements do the lawyers set up a mechanism by which plaintiffs are paid automatically. This is difficult to impossible in class actions over consumer products, where the settling company doesn’t know who its customers are. The Mayer Brown team found only two consumer class actions with automatic distribution, one involving banking services and the other an online game where class members got game “points” deposited to their account.
One big problem confronting anyone who wants to study the effectiveness of class-action lawyers is their penchant for secrecy when it comes to the amounts their clients actually collect. Judges, for reasons best known to themselves, rarely require lawyers to disclose how much money is actually paid out in such settlements even though the entire process is supposed to be open and subject to judicial review. The secrecy serves lawyers’ interests by reducing pressure on fees that would appear enormously inflated if the true value of their settlements was revealed.
That’s why the researchers were only able to pull distribution data for six cases, but research by the RAND Corp. and others suggests most cases have similarly low payout rates for consumers.
- In re Heartland Payment Systems Data Security Breach: Out of a purported class of 130 million customers injured by a data breach, 11 claims were paid for a total of $110,000. Lawyers’ take: $641,000.
- DirectBuy litigation: Class members receive discounts on membership renewals from business that supposedly ripped them off; lawyers get as much as $1 million in fees.
- Kellogs Rice Crispies litigation: Consumers receive the right to a $5 refund, while lawyers seek half of the supposed $2.5 million claim fund.
- Marek v. Lane: Class members receive right to attend future conferences by company that supposedly failed to deliver promised services; lawyers get $1.4 million for their shrewd negotiating skills.
This study was timed in part to generate evidence for the Consumer Financial Protection Bureau, which is studying whether it should ban class-action waivers in consumer contracts. The U.S. Supreme Court has repeatedly upheld the validity of such waivers, which steer consumer complaints into the arbitration system, against complaints by plaintiff lawyers that consumers are better served under the class-action mechanism.