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Class Action Litigation: Who's the Real Winner?

Jan Lee headshotWords by Jan Lee
Investment & Markets

Class action litigation is a contentious issue these days. The Internet is filled with debates and discussions challenging its success – and purpose – as a form of litigation. Does it work? Does it really recover losses for consumers? Does it really deter crime and improve business practices?

Not surprisingly, the answers often depend on whom you ask.

For those who receive an email or a postcard in the mail telling them that they are class members in a litigation that now represents the interests of hundreds of thousands of consumers, the news can be intoxicating … that is, until they realize that what they are really entitled to receive may be as small as a box of cereal, a gig of RAM  or a second jar of sandwich spread. To the inexperienced class member, the award can seem more like the benefits of a lottery than a legal grievance that took years to organize, has cost millions of dollars to prosecute and involved hundreds of thousands of disgruntled consumers.

The Goal of Class Action Litigation

But a class action these days isn’t supposed to enrich the plaintiffs. It isn’t even supposed to compensate the class members for pain and suffering. The purpose, says Michael Kirkpatrick, who serves as an attorney for the nonprofit consumer advocacy organization Public Citizen Litigation Group, is to stop the illegal action and make sure the accused can’t benefit from the monies he or she has acquired in the process.

“[You] are stopping the bad behavior,” Kirkpatrick explains.

Think of it as sort of a large community advocacy meeting rather than a personal lawsuit. The citizens decide to band together and pool their resources because they want something stopped. The victims – or plaintiffs in this case - may not get all of the money back that they lost, but the problem, whether it is misleading advertising or an unfulfilled contract for services, gets halted.

But does that mean that the class-action litigation system always works the way it is supposed to?

The answer to that question, as class action members in two similar suits recently found out, often depends upon where the court case is heard.

One Defendant, Two Class Action Results

In 2012, a trial court in Florida made history. Its ruling may not have seemed out of line when it came to the defendant’s financial claims, but the resulting outcome of the judge’s decision made nationwide news.

Persels and Associates, a debt-settlement firm that included its own cadre of attorneys was slapped with a class action for onerous, misleading fees for its promised debt relief.

The suit started out representing 12,000 Florida residents. Kirkpatrick says Persels then requested that the court wrap in the rest of the 125,000 nationwide members. The court agreed and extended the class action to include all plaintiffs from 49 states. Washington state was left out because it had already initiated a class action against Persels under its own weighty consumer protection laws.

When it came time for the case to be settled, Persels claimed that it did not have enough money to do so. The judge accepted Persels financial claims and ruled that the 125,000 class members would receive nothing, and the representing attorneys would be compensated $300,000 for their time and expenses. The court also ordered Persels to make a charity contribution (what is called a cy pres), which is common in cases of negative value.

“But the Persels case isn’t a negative-value case,” Kirkpatrick says. Class members each lost $1,000 or more. The plaintiffs have since won an appeal, and the case has been sent back to the trial courts.

But Washington state saw things differently. According to Kirkpatrick, one reason had to do with an exception that Persels and its affiliated debt reconciliation company, CareFirst, were trying to claim. Debt-settlement laws allow companies like CareFirst that utilize legal services for debt negotiations to exempt legal firms from litigation rulings. The exemption was recognized in Florida, but was rejected in Washington, which said Persels wasn’t providing contracted services; this was its full-time business.

The loss of that exemption weakened Persels’ hand and forced it to negotiate settlements with the class members, who on average saw payments of about $500 each.

But Is It 'Fair, Reasonable and Adequate'?

Kirkpatrick admits that good class-action settlements often rely upon careful oversight from the bench.

“We [Public Citizen] feel the class-action device is a good thing, but it does have to be policed,” says Kirkpatrick. The court has the responsibility of approving the settlement, by saying it is "fair, reasonable and adequate," a role that recognizes problems like the "reverse auction" approach in which a defendant’s lawyer, faced with hundreds or thousands of class litigants, may go “shopping” for the best settlement with a plaintiff’s lawyer. Oftentimes that's determined by whether the plaintiff's state of residence has stiff consumer protection laws like Washington, or weaker ones, like Florida.

And that’s also why state attorneys' offices and organizations like Public Citizen play such a vital role as the Big Brother that is willing to lodge an objection to poor settlements. He says Washington’s settlement will now allow the plaintiffs in the Florida case to call Persels' financial claims into question.

The Internet: The Commercial Angle

But while the Internet has made it easier for people to be notified when there are class-actions that may affect them, it’s also put a commercial spin on class action litigation. Consumers can now go to any number of websites and, with a push of a button, join a class action. Some require proof that they were customers of the defendant, but others rely only on the consumers’ electronic signature that they are eligible to win an award. Kirkpatrick points out that the latter category is usually for purchases of only a few dollars, as was the case in the Kellogg’s Frosted Mini Wheats and Nutella class actions.

And the relatively small award shouldn’t be interpreted as a bad settlement, Kirkpatrick says. “It may be that a large number of people were defrauded for a very small amount of money. And, in the aggregate, it is millions and millions of dollars and is important. [The] wrongdoer needs to be held accountable and should have those ill-gotten gains disgorged.”

A Worldwide Appeal

The Class Action Fairness Act of 2005 was intended to streamline class actions. If anything, however, the number of litigations has grown, and so have the questions of whether plaintiffs always receive "fair, reasonable and adequate compensation."

Some courts have attempted to address that concern, such as in the 2010 case of Van Horn vs. Nationwide Property and Casualty Co., where the court decided to reduce the class council's requested fees from $5.9 million to $3.2 million, stating why it felt that "the class members did not receive especially good benefit"  (Pg. 16). But as Mayer Brown's study shows, there is still ample room to question whether both courts and counsel have consistently done their best to ensure that the class-action device lives up to its instructed purpose.

The increasing popularity of class actions throughout the world these days suggests that the problem may not be in the model of litigation or whether it has value in the courts, but in the priorities that govern their outcome.

"A plaintiff’s lawyer who takes on a class action needs to be prepared to put time and money at risk," Kirkpatrick notes in regard to the Florida Persels case.

And they need to be willing to decide whether it is better to walk away voluntarily if they feel they can't ensure the class members receive a just settlement. "It is wrong for them to end up sort of caving in and taking a bad settlement because they feel they can’t invest properly in the case."

Image credit: Sam Howzit

Jan Lee headshotJan Lee

Jan Lee is a former news editor and award-winning editorial writer whose non-fiction and fiction have been published in the U.S., Canada, Mexico, the U.K. and Australia. Her articles and posts can be found on TriplePundit, JustMeans, and her blog, The Multicultural Jew, as well as other publications. She currently splits her residence between the city of Vancouver, British Columbia and the rural farmlands of Idaho.

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