Unfairness Incorporated:The Corporate Campaign Against Consumer Class Actions

Unfairness Incorporated:

The Corporate Campaign Against Consumer Class Actions

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E
xecutive Summary

Any doubt that big business expects to benefit greatly from a federal takeover of most state class- action laws is dispelled by the overwhelming amount of money and manpower that major companies and industries have spent on legislation that is now before Congress. This Public Citizen investigation into lobbying on class-action legislation – and into the corporate interests financing that lobbying – reveals several cogent points:

  1. At least 100 major corporations and pro-business associations have banded together to spend millions of dollars and to employ at least 475 lobbyists to make sure that class-action legislation is tilted in their favor.
  2. Many corporations that portray themselves as victims of unjustified class actions have, in fact, engaged in unfair and harmful practices that would not have been corrected if consumers had not been represented in class-action lawsuits.
  3. Legislation now under consideration in the U.S. House (H.R. 1115) and Senate (S. 274), the so called Class Action Fairness Act, contains a number of changes that will enable corporations to injure or defraud average Americans while hiding behind legal loopholes or procedural technicalities.

Findings of this Public Citizen report include:

Class-Action Campaign Attracts a Swarm of Lobbyists
  • At least 100 major companies and pro-business associations have unleashed at least 475 lobbyists to Capitol Hill since 2000 to promote their class-action agenda. This is nearly five lobbyists for every U.S. senator. Public Citizen’s analysis of lobbying disclosure records from 2000-2002 reveals that industries active in the class-action effort have included: insurance (with 193 lobbyists), including life insurance companies (79), property and casualty insurers (60) and health maintenance organizations (59); banks and consumer credit companies (36 lobbyists); automotive manufacturers (32 lobbyists); retailers (31 lobbyists); pharmaceuticals (21 lobbyists); gas and oil corporations (21 lobbyists); and tobacco companies (17 lobbyists). [See Figure 1 and Appendix A]
  • Chamber of Commerce orchestrates business lobbying for federal class-action legislation. The U.S. Chamber of Commerce and the Chamber’s Institute for Legal Reform have employed 45 lobbyists in the class-action campaign. In 2001, the Business Roundtable agreed to coordinate its class-action efforts with the Chamber and its Institute for Legal Reform, which subsequently spent more than $22 million lobbying on tort issues in 2002. According to published reports, the Institute plans to increase that figure to $40 million this year. And the Institute for Legal Reform has spent between $5 million and $15 million on an advertising campaign that targets class-action lawsuits.
  • Many class-action lobbyists have "revolving door" connections to top government offices. At least 131 of the 475 lobbyists (28 percent) who registered to work on class-action legislation have some kind of "revolving door" connection. This list includes at least 10 former members of Congress. At least 10 other lobbyists have connections to the House and Senate Judiciary committees, which have jurisdiction over the class-action bills.
  • Influence of special interests also is reflected in political contributions. The 29 corporations and business groups that have lobbied most actively for class-action legislation – those that have employed seven or more lobbyists to work the issue –gave a combined $49 million in PAC and soft money political contributions over the past three election cycles. According to data gathered from the Center for Responsive Politics, 82 percent of that money supported Republicans and 18 percent supported Democrats. [See Figure 2]
Proposed Legislation Would Give Corporate Defendants Advantages

Class-action bills in the U.S. House and Senate, H.R. 1115 and S. 274, would not change the underlying laws under which class-action lawsuits are brought – but the legislation would give corporate defendants subtle, but substantial, procedural advantages. Most significantly, the legislation would divert most class-action lawsuits from state courts to federal courts.

  • Class certification rules are applied more stringently in federal courts. While most states’ rules for class actions are copied from the federal rules, there are significant differences in the way the rules are applied. The question of whether common issues – such as companywide fraudulent practices – "predominate" over individual issues is more often answered "no" by federal judges. The result is the dismissal of many more class actions in federal courts.
  • Federal judges feel constrained to apply state laws conservatively. Even though H.R. 1115 and S. 274 would place most class actions into federal court, they would still be tried on the basis of state law. This would provide an advantage to businesses because of the reluctance of federal judges to extend state law to embrace new theories of compensation. For example, medical monitoring is a newly accepted common law remedy that provides medical testing for persons exposed to toxic substances. Federal judges in Virginia and New Jersey have refused to certify class actions for medical monitoring, saying state courts should rule on the question first.
  • Federal judges are more likely to find that federal law preempts state laws. Although federal regulations are intended to protect Americans from health and safety hazards, the doctrine of preemption can make them a double-edged sword. If Congress enacts a comprehensive regulatory regime governing a certain type of commerce, any state regulation that doesn’t fit into that regime must give way. Often a corporate defendant will argue that a federal regulation trumps state law and mandates that a lawsuit be dismissed.
  • Restrictions on incentive awards would discourage challenges to discrimination and other illegal practices. The class-action legislation under consideration in Congress would prohibit "bounties" – a disparaging term used to describe incentive awards to named plaintiffs (individuals who come forward as class representatives). Named plaintiffs are subject to such inconveniences as depositions and risk of retaliation by employers. To compensate for these intangibles, courts can grant "incentive awards" to named plaintiffs. Restrictions imposed by the "bounty" provisions in the proposed legislation, however, would make it less likely that individuals would be willing to come forward as named plaintiffs.
  • The House bill stretches the definition of "class action" to repeal California’s consumer protection law. California has a strong consumer protection law that gives courts the power to remedy unfair business practices. A portion of the law, known as Section 17200, provides that a public official, a consumer group or "any person acting for the interests of itself, its members or the general public" can bring such lawsuits Although these consumer protection lawsuits have the same effect as class actions, they are not class actions and do not require a court to determine whether common issues predominate over individual issues.

    Buried in the U.S. House version of the class-action bill, H.R. 1115, is a provision that would bring California’s Section 17200 lawsuits under the definition of "class action" – effectively repealing it for any company doing business in California but headquartered or incorporated in another state. Senate Republicans are expected to add such a provision to the Senate bill when it reaches the floor.

  • An appeals provision would delay meritorious cases. Although the federal rule that sets out procedures for class actions allows discretionary appeals of class certification decisions, H.R. 1115 would go further – giving an absolute right to appeal certifications. This would ensure that every decision to certify a class action would be appealed by corporate defendants. This would delay disposition of every class action by an average of 11 months, the median time it takes a U.S. Court of Appeals to decide a case. The delay will be even longer in some places – more than 16 months in the Ninth Circuit, the largest circuit. Defendants would be able to earn an additional year of interest on ill-gotten gains before they are required to make refunds to consumers.
Industries that Want Federal Class-Action Legislation – and Why
  • Insurance: No industry has thrown more manpower into federalizing class-action lawsuits than the combined efforts of insurance companies and their industry associations, which have devoted at least 193 lobbyists to the issue since 2000. These lobbyists have been divided among life insurance (79), property and casualty insurance (60) and HMOs (59). Some lobbyists have worked for more than one segment of the insurance industry. Some lobbyists worked for clients in more than one of the sectors.

    Insurance companies would benefit from proposed class-action legislation because the law would send more cases into federal courts, where judges often fail to find a "predominance" of common issues – resulting in the dismissal of cases. In fact, a Public Citizen review of 43 class-action cases involving life insurance marketing practices found that 11 of the 17 state cases (65 percent) were certified for class-action adjudication, but only nine of 26 federal cases (35 percent) were certified. In other words, life insurers were nearly twice as likely to avoid class-action certification in federal court. [See Appendix B]

Life Insurers: Consumers have used class actions successfully to win compensation from life insurance companies for a number of unfair practices. Some such class actions have resulted in:

  • A settlement by Prudential for more than $2.3 billion involving fraudulent conduct.
  • A settlement by Metropolitan Life Insurance for $1.7 billion involving fraudulent sales practices.
  • A settlement by Nationwide Insurance at a cost of between $84 million and $104 million involving deceptive sales practices.
  • Settlements by Equitable Life for age discrimination ($12.5 million) and for improperly increasing premiums on major medical policies ($42.5 million). Equitable also lost a $6 million fraud suit relating to life insurance sales practices and faced class-action suits for similar misconduct.
  • A settlement by New York Life Insurance for $87 million to settle claims that it misrepresented policies that it sold to customers.

Property and Casualty Insurers: These companies, which have employed techniques similar to those used by HMOs to reduce payouts, are facing allegations in individual lawsuits and class actions that these techniques cross the line separating good faith cost-cutting efforts and bad faith denial of claims. Unfair practices ascribed to property and casualty insurers include:

  • Manipulating software in order to systematically lower payments to injured claimants, in some cases by as much as 10 percent. At least six insurers that are lobbying for federal class action bills use a software program called "Colossus" to assess claims. In October 2002, a New Mexico state court certified a class-action complaint against Allstate, the nation’s first class action against a company accused of using this controversial tool in an abusive fashion. Farmers Insurance now faces similar allegations in Washington state courts.
  • Bad faith review of claims. An ongoing class action in Washington state accuses State Farm of denying claims for medical expenses by more than 5,000 policyholders based on an "unscientific paper-review system."

Health Maintenance Organizations: Sometimes HMOs emphasize cost savings at the expense of good medicine and fairness to patients. Such practices that have drawn class-action lawsuits fall into three broad categories:

  • Billing customers for the standard cost of medical services instead of the discounted rate the HMO actually pays to providers. HMOs that have denied their customers the benefit of this "billed/paid" distinction settled class-action suits in Ohio for $9 million and Rhode Island for $4.4 million.
  • Systematically underpaying health-care providers through "downcoding" – reclassifying claims as lower-paid services. In May, Aetna Inc. agreed to pay $100 million to plaintiff doctors and to change its reimbursement policy.
  • Failing to provide a standard quality of care. An ongoing class action against Prudential seeks damages against the corporation for breaking its promise to base its patient care decisions on accepted medical expertise.

Bank and Consumer Credit Companies: At least seven credit card companies, mortgage lenders and their trade association employed at least 36 lobbyists to urge lawmakers to pass class-action legislation.

Consumer credit companies and lending institutions would benefit from H.R. 1115 by having cases under California’s consumer law, Section 17200, reclassified as class actions and diverted to federal court, where defendants are more likely to prevail.

  • Consumer credit and lending companies have drawn lawsuits from consumers and enforcement actions by state officials for a number of unfair and deceptive practices:
  • Household Finance agreed to pay $484 million to settle charges brought by dozens of state attorneys general that it systematically misled customers about interest rates and fine print in loans. Following Household’s settlements with the states, several class-action petitions are pending in state and federal courts.
  • In April, MasterCard and Visa were found liable for charging a hidden 1 percent fee in currency exchange transactions and ordered to pay refunds that could total $800 million.
  • Citigroup agreed to pay $240 million for deceiving customers into signing ill-advised home equity loans and hiding extra charges.
  • A California class action revealed that the Bank of America failed to credit car loan payments when they were received, resulting in increased interest payments and late charges. Bank of America also settled a class-action lawsuit and agreed to pay $700,000 to account holders in Washington state for operating "undercover" automated tellers and charging their own customers out-of-network fees to use them.
  • MBNA Corp. agreed to pay $8 million to settle a class-action lawsuit in New York that alleged deceptive pricing practices.
  • Wells Fargo Bank settled a class-action lawsuit and refunded approximately $35 million to trust beneficiaries who were overcharged fees over a 20-year period.

Automotive: The automotive industry has employed at least 32 lobbyists, representing a mix of those with Republican and Democratic connections, to work for class-action legislation. At least seven auto companies and parts makers have contributed to the effort.

Automotive corporations would benefit from a provision in the House’s version of the class-action legislation, H.R. 1115, that would make it mandatory for circuit courts to allow corporations to appeal all class certification decisions.

The current procedural rule permits appeals, but doesn’t give a right to an appeal – and the question of whether an appeal will be heard is at the discretion of the U.S. Circuit Court. Two automotive companies, General Motors Acceptance Co. and Bridgestone/Firestone, have had favorable experience with class-action appeals – receiving hearings and subsequently overturning the class certifications.

Consumers have received compensation through class-action lawsuits against automotive companies for a range of unfair and unsafe practices. The results of these class actions include:

  • A settlement by Ford Motor Co. involving allegations that 12 million Ford cars had defective ignitions. The case revealed that Ford had withheld data from the government for more than a decade concerning a defective design that was blamed for 11 deaths. The lawsuit resulted in a national settlement in 2001 in which Ford agreed to accept returns on poorly engineered ignitions and to reimburse owners who had been forced to replace their ignitions. The settlement could cost Ford $2.7 billion.
  • A $58.2 million settlement by Ford Motor Credit Co. (FMCC) in a class action involving inflated premiums for unnecessary insurance coverage on the cars it financed. The suit further alleged that FMCC routinely assessed periodic finance charges on the inflated premium amounts.
  • An order for General Motors Acceptance Corp. (GMAC) to pay $3 million to class members after a jury found that GMAC breached its contracts with 14,000 auto buyers by systematically imposing finance charges on insurance policies that either never took effect or were cancelled before completion of the coverage period.
  • A $10.6 million settlement by Ford Motor Co. in a state-court class action filed by more than 150 of its managers alleging that the company’s performance review process subjected them to unfair age and gender discrimination.

Retailers: The retail sector has devoted 31 lobbyists to class-action legislation, including 20 lobbyists employed by three retail corporations that settled or lost verdicts in class-action lawsuits concerning their practice of forcing employees to work unpaid overtime.

Retail corporations could gain an upper hand under legislation that diverts class-actions lawsuits into federal courts because federal judges are less inclined than state judges to rule that common issues of a case "predominate" over individual issues. This means that fewer class-actions are certified in federal courts. A case in point: three federal courts have declined to certify class actions against Wal-Mart for unpaid worker hours – but at least three state courts have done so.

Workers have relied on class-action lawsuits to win compensation from retailers who have engaged in unfair employment practices:

  • Sears and 25 other retailers settled the largest sweatshop lawsuit in history in September 2002 for $20 million. The class-action lawsuit claimed that thousands of Asian workers were kept in indentured servitude in Saipan, forced to pay recruitment fees and give up a wide range of personal freedoms to keep their jobs and avoid reprimand.
  • Wal-Mart agreed to a $50 million settlement in a Colorado class-action lawsuit and $500,000 in a New Mexico class action involving allegations that it forced employees to work off the clock. It currently faces about 40 class-action suits involving similar allegations.
  • Home Depot paid $87.5 million in 1997 to settle a class-action case alleging discrimination on the basis of gender. The lawsuit’s class comprised more than 25,000 women.
  • RadioShack settled a 2001 class-action case for $29 million for failing to compensate employees for overtime.

Pharmaceuticals: America’s largest pharmaceutical companies have dedicated at least 21 lobbyists to passage of federal class-action legislation. One advantage drug companies can expect if the proposed legislation diverts class-action lawsuits into federal courts would be the tendency of federal judges to apply state laws conservatively. This would prevent relatively new remedies – medical monitoring, for example – from being expanded.

Consumers have received compensation through class-action lawsuits against pharmaceutical companies for a range of unfair and unsafe practices:

  • A class-action lawsuit against American Home Products (now Wyeth) was settled when the company agreed to provide medical monitoring to millions of consumers who had used its anti-obesity drug, Redux. Testimony revealed that the company had delayed warning customers of possible heart-valve damage linked to the drug.
  • In 1996, 11 pharmaceutical manufacturers agreed to a $351 million settlement in a class action by more than 3,800 pharmacies alleging price discrimination, unfair business practices and price fixing.
  • Aventis and five other vitamin makers agreed to pay $19.6 million to settle price-fixing claims brought in a class-action suit in a Massachusetts state court. The class action alleged that the companies had engaged in an international conspiracy to fix prices and allocate markets for bulk vitamins that are used in many processed products, including cereals, milk and bread.

Gas and Oil Corporations: Since 2000, the gas and oil industry has devoted at least 21 lobbyists to the push to rewrite class-action laws. Under the proposed legislation, gas and oil corporations could expect to benefit from the doctrine of "preemption" under which state laws must give way if they exceed or conflict with federal laws because federal judges are more likely to accept the supremacy of federal law.

Consumers have received compensation through class-action lawsuits against gas and oil corporations for environmental problems and unfair business practices:

  • Mobil Oil Corporation is embroiled in a class-action lawsuit certified by a Louisiana state court on behalf of 6,000 individuals claiming injuries, emotional distress and economic loss caused by hazardous substances in their drinking water. A Mobil refinery in Chalmette, La., allegedly discharged oil and grease into the Mississippi River in 1998. Approximately 3.4 million gallons of untreated, contaminated waste water and storm water, containing more than 52,000 pounds of oil, grease and other contaminants, infiltrated the drinking water of the surrounding parish.
  • Exxon settled a New Jersey class action alleging deceptive advertising designed to convince consumers who did not need high-test gasoline to use it in their cars. The Exxon advertising campaign drew scrutiny from the Federal Trade Commission, which said consumers paid as much as 20 cents a gallon more for premium gas. In 2002, Exxon agreed to issue one million $3 discount coupons for Exxon 93 Supreme gasoline.

Tobacco companies: At least two major tobacco firms have lobbied for class-action legislation in Congress, underwriting the efforts of 17 lobbyists. Tobacco companies would benefit from legislation that diverts class-action lawsuits into federal courts because federal judges are inclined to find that federal law "preempts" state law.

Cigarette companies make no secret of their preference for federal courts. And they have successfully argued that the Federal Cigarette Labeling and Advertising Act of 1965 and the Public Health Cigarette Smoking Act of 1969 provides them with a preemption defense against liability claims in state-related actions. In fact, Richard A. Daynard, chairman of Northeastern University’s Tobacco Products Liability Project, has observed that, "To send tobacco class actions to federal court is to send them to their death."

Consumers have been successful, however, in bringing class-action lawsuits in state courts alleging that cigarette companies have misrepresented the tar and nicotine levels of so-called "light" cigarettes. Details of such class actions include:

  • An Illinois judge awarded Philip Morris customers $7.1 billion in a class-action lawsuit involving the false advertising of Marlboro Lights and Cambridge Lights. Testimony in the case revealed that the company has known through its own scientific testing for 25 years that its light cigarettes are actually more dangerous than regular cigarettes because they burn with less oxygen, releasing more toxins.
  • Class-action certification was granted in 2001 to smokers of Marlboro Lights in Massachusetts and Florida in a lawsuit against Philip Morris. And class-action lawsuits alleging fraudulent claims for "light" cigarettes have been filed against Philip Morris in California, Minnesota, Missouri, New Jersey, Ohio, Tennessee and West Virginia. Class-action certification was granted in separate lawsuits filed against R.J. Reynolds and Brown and Williamson Tobacco Corp. in Illinois claiming that the companies misled consumers about the safety of "light" cigarettes.

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• Press Release •