Lawyers, Not Class, Winners in Class Action Settlements

The story behind the only override of a Bill Clinton veto is a cautionary one if another Clinton occupies the White House.

The legislation Congress enacted in 1995 over a Clinton veto, the Private Securities Litigation Reform Act, was in response to the trial lawyers rampaging through U.S. corporations with securities class action lawsuits. Clinton vetoed the bill after meeting with William Lerach, then the nation’s leader in extorting money from US corporations through charges of insider trading, stock fraud, and stock manipulation. Lerach had a good run of it until 2007 when he pleaded guilty to obstruction of justice and began a two-year prison sentence. In 2009, he was disbarred.

If elected, Hillary Clinton will embrace similar alliances with the Lerachs of today, legal and political experts say.
“If she is elected, forget about any reform unless there is another override,” said legal ethics expert, Richard Painter, with the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School. “The trial bar has enormous influence in the Democratic Party and especially with Hillary Clinton.”

Painter noted that the entire class action system needs a major overhaul. Trial bar manipulation over the years has corrupted it, altering its very essence.

“It used to be more like the VW case is today where the class was really harmed and deserved compensation,” Painter said. “More and more we’re talking about cases where the loss to the consumer is minimal, as little as a nickel for each. The consumer, the class, really doesn’t have a dog in the hunt. It’s all about the lawyers.”

The manipulation of the class action system is another in a series of tragic and costly abuses of our legal system, according to PMA President David N.Taylor.

“Reform of these abusive practices is long overdue,” Taylor said. “The malign influence of the litigation industry on Pennsylvania’s courts and elected officials must be brought to an end.”

Much of the skullduggery in class action cases centers around the legal doctrine, cy pres. Cy pres enters into play when money left over in class action settlements is disbursed to charities – often charities recommended by the class action attorneys. Increasingly, money is left over because, as Painter points out, the awards to members of classes are so small that the intended recipients often don’t bother filling the paper work needed to collect, or in some cases simply don’t understand the notification of the settlement they received in the mail.

The rigged system survives, even thrives, because the fees collected by the lawyers go unnoticed with the spotlight shining on the donations to alma maters, community groups, shelters, and hospitals. With feel-good stories in the press, the lawyers become local heroes.

Howard W. Bernstein is one such local “hero.” Early this year, he helped direct $1.7 million to 10 charities near his home in Lake Worth, Florida -- among them, the Kravis Center for the Performing Arts in West Palm Beach.
 
His actions received glowing write-ups in the local papers, the kind you cut out, enshrine between glass, and frame in silver to hang in the home office. He was appropriately modest about his role in all of it. “This isn’t about me,” he told the Sun Sentinel.
 
Bernstein was the lead plaintiff in a successful class action suit against Chase Bank, and he recommended the charities receive the money the class didn’t collect from the $5 million settlement. Plenty was left over in this case since only a small number in the class returned the paperwork needed to collect the $20 they were each eligible for.

But the charities weren’t the big winners here. The law firm representing the class was - collecting $2 million in fees.

Interestingly, it turns out the law firm Dworken & Bernstein LPA, based in Ohio, was the one Bernstein retired from just a few years before. Bernstein also referred the action against Chase to his old firm, and as the lead plaintiff received $25,000, a “service award” for his efforts.

For many businesses, settling class action cases has simply become a cost of doing business. That cost is then passed onto the consumer in higher prices for products and services, a cost that reaches well into the billions, according to Ted Frank, an attorney with the Competitive Enterprise Institute’s Center for Class Action Fairness (CCAF).

“It’s impossible to calculate the amount precisely,” Frank said, “because there are a lot of confidential payments in class action cases, including payments to the defense counsel.” Cy pres is a major player in a system riddled with conflicts of interest, he said.

“When a class attorney settles a class action, he or she is not only negotiating class recovery, but is also negotiating his or her own fee,” he said. “A defendant may be willing to spend a certain amount of money to settle a class action to avoid the expense and risk of litigation, but that money must be divided between the class and their attorneys. Every dollar going to the attorneys does not go to the class, and vice versa.”

Mr. Frank cites another recent case where Facebook settled a suit by establishing a charity run by a Facebook board member, one that the board member was going to create and fund anyway.

“The class received no benefit,” Frank said. “The expense to Facebook was the $3.2 million fee paid to the class attorneys. If the charitable contribution is one that the defendant was making anyway, the effect on the defendant is one of a change of accounting entries rather than any cost to the defendant or benefit to the class aside from the attorneys' fees.“

The CCAF has been fighting back, winning landmark appellate decisions on the question of cy pres dating back to 2011.

A few years ago they  intervened in a Pennsylvania case, McDonough v. Toys'R'Us, where a settlement paid less than $3 million to the class, but the attorneys collected $14 million; a figure they justified by pointing to as-yet-undetermined cy pres recipients that would receive a chunk of money (the size of which hasn't been disclosed, either). CCAF attorneys represented someone who objected to the disproportionate distribution. The court reversed and vacated the settlement approval, and on remand directed $15 million go to the class members through direct payments.

Mr. Frank said the case is an indication some courts are starting to crack down on such abuses, but they are doing so inconsistently. “The parties are still trying to get away with the same shenanigans,” he said.
Reforms surrounding lawsuit abuse are badly needed in the arena of lawsuit abuse, both in Washington D.C. and in Harrisburg. The stranglehold the trial bar has on the political process is stifling economic growth and competitiveness and that must change at the ballot box in 2016.

 

 

 

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