April 18, 2003

Class Action Settlements: Federal Courts Are No Better than State Courts When It Comes to Protecting Consumers

Class Action Settlements: Federal Courts Are No Better than State Courts When It Comes to Protecting Consumers

A chief claim of the business lobby promoting federal class action legislation is that it will stop class action settlements that hurt consumers. While there are abuses in state court class actions, the premise that these abuses will disappear upon removal to the federal courts is flawed. Too often, proposed class action settlements in both state and federal courts are reviewed perfunctorily with little regard for consumers’ interests. These abuses generally manifest themselves in two ways: the undervaluation of plaintiffs’ claims and the overvaluation of plaintiffs’ attorney’s fees. Such arrangements often occur through collusion between the attorneys for the defendants and plaintiffs. However, nothing in proposed federal class action legislation addresses either of these issues. Allowing the removal of the majority of state-based class actions is definitely not the solution, as class action abuse occurs in the federal courts as well.

 

Consider the following results in a Federal Judicial Center study that looked at class actions in two federal district courts:

 

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• The rate of settlement approval was high. In the Eastern District of Pennsylvania, 34 out of 38 proposed class action settlements (89 percent) were approved without any changes. In the Northern District of California, 26 out of 30 (87 percent) class action settlements were approved without any changes. In the 28 cases throughout the four district courts where motions to certify and approve settlement were submitted simultaneously, 86 percent (24 of 28) of the settlements were approved without any changes.

   

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• The median length of court fairness hearings to determine whether or not to approve class action settlements was short – 38 minutes in the Eastern District of Pennsylvania and 40 minutes in the Northern District of California.

   

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• Attorneys’ fee requests were not generally scrutinized carefully. In the Eastern District of Pennsylvania and the Northern District of California, the court awarded the exact amount requested by the plaintiffs’ attorneys in 83 percent of the cases.

   

 

As John C. Coffee, Jr. stated in his Columbia Law Review article, Class Wars: The Dilemma of the Mass Tort Class Action, these statistics demonstrate a pattern in the federal courts of “judicial passivity” regarding class action settlements. This “judicial passivity” can have a devastating impact on injured plaintiffs in federal class actions.

 

On the following pages are just a few examples where federal courts have approved class actions settlements that do little or nothing to help injured plaintiffs:

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• In In Re Domestic Air Trans. Antitrust Litig., plaintiffs filed a series of class actions alleging that a number of major airlines, including American, Continental, Delta, Northwest, TWA, United, and USAir engaged in the price fixing of passenger air transportation. The case was consolidated for pretrial matters in the Northern District of Georgia. The case settled and the District Court approved the settlement that provided plaintiffs with coupons worth between $10 and $200 for flights costing between $50 and $1,500. The plaintiffs’ attorneys were awarded approximately $10 million in fees. While coupon, or “scrip” settlements like this one offering discounts on the defendant’s product are popular, they often offer no greater discount than what would be available in volume purchases, cash sales, or using a particular credit card. In addition, restrictions are generally placed on the transferability of these coupons, making them even less likely to be used.

   

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• In Hanlon v. Chrysler Corp., plaintiffs filed a class action suit in federal court in San Francisco because the rear latch on Chrysler’s minivan was defective and had a tendency to disengage. These latches had caused serious personal injuries to a number of plaintiffs. The case was settled on a nationwide basis; the settlement provided that Chrysler would offer class members a new improved latch if the owner presented the van to a dealer. While this sounds like an appropriate outcome, Chrysler had already previously agreed to replace the latches under an informal agreement with the National Highway Traffic Safety Administration (NHTSA). Moreover, at the time of settlement, the retrofit latch was not ready. So, class counsel apparently agreed to something it could not have properly assessed to determine its sufficiency and which the government had already obtained outside the litigation process. In addition, the agreement provided for up to $5 million in attorney’s fees for the plaintiffs’ counsel. The settlement was approved by the District Court in 1996 and upheld by the 9th Circuit Court of Appeals in 1998.

   

 

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• In In Re: Orthopedic Bone Screw Products Liability Litigation, the U.S. District Court for the District of Pennsylvania approved a notice plan where the plaintiffs’ attorneys only sent a full notice package to people who had already filed suit against AcroMed. Although defendant AcroMed possessed records of the physicians and hospitals to which it sold the defective screws, no effort was made to contact them or their patients. Class members who did not see the published notices in time to register were left out of the settlement, despite the fact that there was an efficient way to find them with the defendant’s sales records. Those left out of the class were not allowed to file individual suits or recover anything for the injuries caused by the defendant’s defective product.

The same case contains another problematic ruling by a federal judge. Some plaintiffs allege claims against their surgeons on the ground that the surgeons should have warned of FDA refusal to approve the AcroMed bone screw implanted in their bodies. Plaintiffs also claim that surgeons and hospitals took stock from AcroMed and put those financial interests ahead of their patients in a clear conflict of interest. However, the settlement bars claims against the surgeons who implanted the screws and hospitals where the surgeries took place, despite the fact that those surgeons and hospitals were not parties to the settlement and the class received nothing in exchange for dropping their claims against those surgeons and hospitals. The settlement release goes so far as to bar claims against doctors who told their patients that the device was FDA approved when they knew it was not. AcroMed defends the release of the surgeons and hospitals on the ground that it needs to maintain good relations with its customers to insure future profitability.

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• In Reynolds v. Beneficial National Bank the Seventh Circuit Court of Appeals reversed a $25 million settlement of class action lawsuits over H&R Block’s tax refund loan program after concluding that the federal district judge who approved the settlement did not provide the “beady-eyed scrutiny” required to ensure that the settlement was “fair, adequate, and reasonable, and not a product of collusion.” The litigation arose out of refund anticipation loans (RALs) made jointly by Beneficial National Bank and H&R Block. When Block filed a refund request with the IRS for one of its customers, the refund normally arrived within a few weeks. But even a few weeks is too long for the neediest taxpayers, and so Beneficial through Block offered to lend the customer the amount of the refund for the period between the filing of the return and the receipt of the refund. The annual interest rate on such a loan often exceeded 100 percent. Block arranged the loan but Beneficial put up the money for it. Not disclosed to the customer was the fact that Beneficial paid Block a fee for arranging the loan and that Block also owned part of the loan.

   

 

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• In the Mexico Money Transfer Litigation, plaintiffs filed a class action for treble damages against Western Union and MoneyGram. They claimed fraud because the advertised wire transfer fee they paid over the counter (typically $15) did not represent the full cost to customers. In practice the companies also collected and retained for themselves the difference between the retail currency exchange rate quoted to the customers and the wholesale (interbank) rate, the so-called FX spread, which averaged about $25 per transaction. Class representatives estimated that defendants make as much as $300 million per year from the FX spread, and they sought treble this sum, over many years, as damages. The proposed recovery thus ran into the billions of dollars. The case was settled for much less and the settlement was challenged as being inadequate. This is one of many class actions in which everyone other than the plaintiffs has been paid in cash – the attorneys got cash, the charitable organizations got cash, but the customers got coupons. The coupons had a face value of $400 million, but experts estimated that about half of the coupons would not be claimed, and only 20-30 percent of those claimed would be used, implying a net value of $40 million to $60 million.

   

 

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• In In re General Motors Corp. Pickup Truck Fuel Tank Prod. Liab. Litig., the Federal District Court in Philadelphia approved a settlement of a nationwide class action to obtain repair damages or retrofit of the 5-6 million side-saddle fuel tank GM Trucks. Class members were to receive a $1,000 coupon, good for 15 months, toward the purchase of a new GM Truck or minivan. The class included truck owners in all states except Texas. Class members could transfer the coupon to third parties, but then the coupon was worth only $500 and could not be used in conjunction with the ubiquitous GM rebates and credit deals. Other restrictions on the $500 coupon made it virtually worthless. The settling parties’ expert himself conceded that 54 percent of the class members would get nothing at all from the settlement. Nevertheless, the district court awarded $9.5 million in attorney fees and $500,000 in expenses. Public Citizen and other groups objected to the settlement without success in the district court. We then appealed to the Court of Appeals where we succeeded in overturning the settlement.

   

 

It is clear that there are abusive class action settlements in both state and federal court. To assume that removing the vast majority of state class actions to federal court will solve this problem is erroneous. Nothing in the so-called Class Action Fairness Act takes this into account. This legislation is not the way to solve anti-consumer abuses in the class action system.

 

April 15, 2003