Allocation of Benefits from a Class Action Suit

Class action lawsuits have earned a questionable reputation. Purportedly class action lawsuits serve the public good by halting the misbehavior of a defendant and by reimbursing plaintiffs who suffered damages due to the defendant’s actions. You can expect to hear that high-road claim parroted by members of the class action bar. However, most consumers have developed a more cynical view.

We endure a barrage of television adverts recruiting plaintiffs for medical and pharmaceutical class action lawsuits, but class action suits are not limited to health care. A lawsuit against Roundup (a Monsanto herbicide) was decided in favor of Dewayne Johnson, who is dying from non-Hodgkin lymphoma. In August 2018, the jury awarded him $289 million in damages.

Class action suits usually result from an initiative by law firms who specialize in that type of litigation. Indeed, plaintiff members are being recruited for a class action suit aimed at Roundup. Already 8,700 people have registered as plaintiffs in lawsuits against Roundup.

Class action suits are not the peoples’ only venue for remedies. Consumers can file a claim for damages as an individual or can pursue a claim through arbitration. Consumers can also enlist the help of a government agency if the damages arise from criminal behavior. To ordinary consumers, the allure of joining a class action lawsuit may come from its low cost compared with other venues, but there are pitfalls.

Common criticisms of the class action process revolve around the distribution of monetary damages to the plaintiff’s attorneys, to the named plaintiffs, to the other plaintiffs, and to unrelated charitable organizations (so called “cy pres” beneficiaries that are sometimes given part of the awarded damages). The Competitive Enterprise Institute’s Class Action Fairness organization is watchful for unfair class action procedures and settlements. That vigilance is welcomed.

If plaintiffs’ attorneys agree to an inadequate settlement amount, the deduction of legal fees may leave almost nothing to split among the plaintiffs. For example, Sony claimed that its PS3 gaming console could be used as a computer. It withdrew that assertion, and then faced a proposed settlement of  $3.75 million in damages. Plaintiff lawyers claimed $2.25 million in legal fees (60% of the entire settlement). The plaintiff payout would have been limited to $55 for each plaintiff who followed an arduous proof of claim process. The judge wisely stopped the settlement, demanding better documentation of lawyer fees and less onerous proofs of claim from the plaintiffs.

In another black eye for the class action industry, the “Sixth Circuit Court of Appeals rejected a class-action settlement that would have paid it $2.73 million (four times the damages awarded to all the plaintiffs) to the lawyers who negotiated, absolved Procter & Gamble of any future liability, and handed $1,000 each to the named plaintiffs who were supposed to safeguard the interests of thousands of consumers who supposedly were the reason for the lawsuit in the first place. There was only one problem with this deal, the appeals court said: The lawyers hadn’t done anything for their client. The plaintiff’s attorneys claimed that Pampers Dry Max caused severe rashes but offered insufficient evidence to support that claim. Under the proposed settlement, some completely unrelated legal-aid groups would get $400,000 in cy pres donations (cy pres is French for “close enough”, suggesting that the charitable beneficiary is a good substitute for the actual plaintiffs).

In the Pampers settlement, unnamed plaintiffs (vast majority of Pampers plaintiffs) could claim a “one-box-per-household refund deal requiring a receipt for each box of Pampers.” The box per household “payout” was merely an extension of Pampers’ pre-existing promotion. An appellate judge noted: “when lawyers get cash and nobody else does, that’s one sign of a collusive settlement, designed to benefit the lawyers and the defendant at the expense of the clients.” 

The disreputable practice of giving large monetary fees to attorneys but non-monetary or inconsequential payouts to plaintiffs continues. Good examples can be found on the class action rebates website. At the low end, there is a $1.99 rebate for Testofen products, a $3.50 rebate for store branded CO-Q10, and an $8.75 rebate for Bertolli Olive Oil. Also shown are larger awards to plaintiffs such as $5,100 for VW emissions fraud.

Too many class action lawsuits feature outrageously high attorney fees and insultingly low damages awards. In personal injury lawsuits for individual victims, attorneys are usually compensated by 35% of damages awarded. In the examples cited here (PS3 gaming console and Pampers), class action settlements would pay attorneys at twice that ratio, and total settlements can be massively larger since they are the sum of damages for hundreds or thousands of similarly situated plaintiffs. Unfortunately, the details of class action settlements are sometimes intentionally opaque, preventing the public from seeing whether the settlement was fair to plaintiffs and defendants.

Class action suits often negotiate a settlement before going to trial, limiting both the risk to attorneys and the payout to plaintiffs. When the trial is skipped, there is no jury available to send a strong financial message to the defendant. As well, the cavalier insertion of cy pres donations as part of a settlement diverts funds that are rightly due to plaintiffs. The charitable organizations chosen for cy pres better serve the personal interests of attorneys and judges than the interest of plaintiffs.

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