Yesterday, Blawgletter rhapsodized on The Value of Class Actions to consumers.  Today we speak of their riskiness to class counsel.  The Fifth Circuit will help us illustrate the point.

Last Friday, the court affirmed summary judgment against a class of pension plan participants and beneficiaries.  In Kirschbaum v. Reliant Energy, Inc., No. 06-20157 (5th Cir. Apr. 25, 2008), the plaintiffs alleged that Reliant Energy, as sponsor of a pension plan for employees, shouldn’t have allowed investments in Reliant stock.  Shenanigans in Reliant’s accounting department inflated the price of the stock by more than 65 percent, making it an imprudent investment.  Evental exposure of the shenanigans popped the bubble, and the stock price tumbled, wiping out 40 percent of the value of the plan’s stock holdings.  The plaintiffs claimed that Reliant and other plan fiduciaries violated their duties under the Employee Retirement Income Security Act.

The district court, after certifying the case as a class action, granted summary judgment to the defendants.  The Fifth Circuit, per Chief Judge Edith H. Jones, affirmed.  The documents that governed the ERISA plan, the court noted, required a company stock fund as an available investment and mandated that the fund invest almost exclusively in the stock.  The plan’s terms thus compelled a presumption that the fiduciaries acted prudently in allowing the fund to continue holding and investing in Reliant stock.  And the plaintiffs failed to rebut the presumption, the court held.

The decision means that the Reliant plaintiffs take nothing on their ERISA claims and will recoup none of their losses.  Class counsel will share in their clients’ misfortune.  They likely spent several million dollars in time and expenses on litigating the case.

Kirschbaum thus illustrates the plaintiff-side perils of class litigation.  A huge investment and years of effort may come to naught. 

Our advice:  If you want sure bets and easy money, try another line of work.

Our feed works hard for its money.  So hard for it, honey.

A question of leverage.  Chief Justice John G. Roberts volunteered the other day, at a moot court competition, that "a class action is a dramatic departure from the normal rules of litigation." He went on to suggest that the device serves merely to increase plaintiffs’ leverage in settlement talks.

Hmmm. True, aggregating small claims of thousands (or millions) into one class case does increase the plaintiffs’ bargaining power relative to the defendants’. True also that almost every civil case settles. But does the Chief Justice see aggregation — a "dramatic departure from the normal rules of litigation" — as a bad thing?

His Honor’s remarks do suggest that he tends to see more downside than upside. Why else would he call a 42 year-old procedure that originated in old equity practice "a dramatic departure"? Why else would he stress its plaintiff-side leverage-enhancing properties?

Consumer friendly.  A counterpoint to the Chief Justice’s skepticism about class actions came last Friday in the form of a Second Circuit decision.  In Ross v. Bank of America, N.A. (USA), No. 06-4755 (2d Cir. Apr. 25, 2008), the plaintiffs, representing a putative class of credit cardholders, sued 20 of the largest issuing banks under section 1 of the Sherman Act for conspiring to use arbitration clauses that prohibit class actions.  They alleged:

After preliminary meetings and communications, the banks formed an "Arbitration Coalition" to recruit other credit card issuers into using mandatory arbitration clauses. Over the next four years, the Arbitration Coalition held more meetings, shared plans for the adoption of arbitration clauses, and spun off additional working groups. Ultimately, "Defendants jointly forced unwilling and unaware cardholders to accept arbitration clauses and class action prohibitions on a ‘take-it-or-leave-it basis’ through the joint exercise of immense market power."

Ross, slip op. at 4-5.

So what?  Why shouldn’t corporations get together on a strategy to fight a common enemy — the class action lawyer?  As the Second Circuit explained, class action lawyers protect consumers:

[B]ecause the banks conspired not to offer cards permitting class actions, the cardholders will be forced to expend time and legal fees to monitor the legality of the banks’ behavior, whereas if the cardholders had access to a card that permitted class actions, they would have the option of relying on motivated class action attorneys to perform this function. If the cardholders chose not to monitor the banks – which would perhaps be more likely because, as the Complaint observes, actions that result in significant aggregate revenue to the banks (concerning, e.g., late fees, overlimit fees, foreign transaction fees, APR, etc.) generally harm individual consumers in only small amounts – they would still lose the services of class action attorneys. Either way, the cardholders would have been forced to accept a less valuable card as a result of the banks’ alleged collusion.

Id. at 10-11.  Ah — the banks conspired to deprive customers of "the services of class action attorneys" in "monitor[ing] the legality of the banks’ behavior".  You won’t see that passage in a U.S. Chamber of Commerce ad anytime soon!

Reconciliation.  Can we reconcile the Chief Justice’s dourness about class actions with the Second Circuit’s focus on their utility? 

We think so.  Class actions work precisely because the aggregation of many small claims makes the claims economic to pursue.  The whole point is to increase plaintiff-side leverage — from zero to something approximating a fair fight.

Chief Justice Roberts doesn’t believe corporate wrongdoers should go free.  He just seems to worry more about the potential for abuse than about effective enforcement of consumers’ rights. 

Suspension of disbelief.  But where does that worry come from?  As we’ve said before, judges who ought to know better commonly assert that class certification allows plaintiffs to "extort" settlements.  They say that the threat of "ruinous" liability terrifies defendants into raising the green flag of surrender.  They in effect take judicial notice of a "fact" that makes no economic sense. 

How much, for example, should a defendant facing a 10 percent chance of losing at trial pay to eliminate the risk of getting hit with a judgment for $100 million?  Did you say $10 million (.10 x $100 million)?  You are correct. 

That’s a lot of money, but it’s not extortionate.  It’s economic rationality.  And it’s no reason at all to cast asparagus on class actions.

Our feed likes asparagus — and casting it.

On this springy Friday, when the world looks new and everything again seems possible, Blawgletter offers a second installment to a thingy we’ve undertaken to pen for the Litigation Section of the State Bar of Texas in its new Hot Topics for Trial Lawyers:

Let’s take another stroll down memory lane, shall we? Back to when Texans knew more about tortas than torts. Before our legislature started winging personal injury torts and business torts with the same buckshot. 

Now we take up what UT Law Professor David A. Anderson calls “judicial tort reform” – specifically the Texas Supreme Court’s role in making tort cases harder for plaintiffs to win. See Judicial Tort Reform in Texas, 26 THE REVIEW OF LITIGATION 1 (2007). Gary P. Nunn’s London Homesick Blues will furnish our background music.

Putting ourselves back in that place again. A quarter-century ago – a mere decade after the Lost Gonzo Band recorded the epochal Viva Terlingua! album in the Luckenbach Dancehall – torts enjoyed a golden age in Texas, in large part because a let-the-jury-decide attitude prevailed on the Supreme Court. Holdings that reflect that view include:

• Reviewing courts must disregard all evidence that tends to negate a jury finding of gross negligence. Burk Royalty Co. v. Walls, 616 S.W.2d 911 (Tex. 1981).

• A jury may award damages for any percentage of harm that defendants’ conduct caused – even if the plaintiff caused more than 90 percent. Duncan v. Cessna Aircraft Co., 665 S.W.2d 414 (Tex. 1984).

• If a defendant denies making a promise, a jury may find that he made the promise with intent to defraud. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986). 

The Court also, um, neglected procedural matters that might hinder trial on the merits. Before 1995, for instance, the Court seldom rejected expert evidence. Despite a complete re-write of the class action rule in 1977, the Court didn’t reverse a single class certification order until 1996. And only in the following year did the Court revive forum non conveniens as a doctrine allowing dismissal of cases that involve foreign corporations as plaintiffs.

I’m leavin’ just as fast as I can. The 60 Minutes report in late 1987 on the coziness of some justices with the personal injury bar – that “Justice for Sale” thing – helped prompt a backlash. At that moment, Democrats – as they’d done since 1876 – held all the positions on the Court. Then the Dems commenced a not-entirely-voluntary exodus. Three Republicans sat on the Court in 1988-90, four during 1991-94, five in 1995, six in 1996-98, and nine since 1999.

When a Texan fancies, he’ll take his chances. Has the change in personnel made business tort litigation riskier for plaintiffs? Yes. Heavens, yes. As UT Law Professor Anderson found, defendants won a whopping 87 percent of tort cases in the Supreme Court of Texas during 12 months in 2004-05. 

Interestingly, the cornucopia of defense victories resulted mostly from the harsher way the Court interprets statutes, construes pleadings, applies procedural rules, and reviews evidence. “No evidence” analysis of verdicts has proven especially fatal for plaintiffs. See City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005) (holding that reviewing court must disregard evidence that court concludes “reasonable jurors” could not have believed even though they did). And, in the 15 or so decisions since Southwestern Refining Co., Inc. v. Bernal, 22 S.W.3d 425 (Tex. 2000), the Court has disallowed, affirmed disallowance, or substantially narrowed every class certification order it reviewed.

You can put up your dukes. The Court’s shift from a let-the-jury-decide ethos to a judge-centric approach coincided with, and likely contributed to, a decline in civil trials generally. Fewer cases got past pre-trial motions to jury trials, and the ones that juries did decide a lot more often died in post-trial proceedings. 

According to the “Jury Activity” reports by the Texas Office of Court Administration for 1996, Texas district courts tried 2,971 civil cases to verdict and directed verdicts in 253. Ten years later, the same courts put a mere 1,335 civil cases to juries while instructing verdicts in 459 cases. That comes to a 55 percent drop in jury trials and an 81 percent increase in taking cases out of jurors’ hands.

I want to go home with the armadillo. Party affiliation probably doesn’t define any justice’s judicial philosophy or determine justices’ votes in any particular case or on any specific issue. But balance does seem to improve the quality of decisions. A recent study of state supreme courts’ “influence” shows a fascinating – and in its way encouraging – phenomenon at the Texas Supreme Court: It wielded by far the most influence during the six years, from 1993 through 1998, when a mix of Democratic and Republican justices sat on it.  (See Don Cruse’s in-depth analysis on the Supreme Court of Texas Blog.)

Should we — dare we — hope for a return to balance?

Up Against the Wall Red Neck Mother doesn’t mean what you think.

An ancient doctrine.  A new twist on the good old cy pres doctrine lets judges redirect money that a defendant presumptively owes to a group of people — often members of a class in a class action — to other deserving folks.  That doesn’t sound good.  Why on Earth should a court divert funds from the people to whom the cash ought to belong?

Short answer:  Because the parties can’t find the beneficiaries through reasonable effort; the beneficiaries choose not to fill out and return paperwork (often a "proof of claim"); or the tiny amounts don’t justify the cost of distribution.

But, you say, if the beneficiaries won’t get the cash, what purpose does the litigation serve?  The Council of the American Law Institute answers thus:

The cy pres remedy — also known as "fluid recovery" — originated in the context of charitable trusts.  The concept was that, if the testator’s precise terms could not be carried out (for example, because a specific charitable organization no longer existed), the court could modify the trust in a manner that would best carry out the testator’s intent (for example, by selecting a similar charity).

Principles of the Law of Aggregate Litigation, Council Draft No. 1, comment a to section 3.07, at 209 (Nov. 19, 2007).

Ah.  The "remedy" aims to "best carry out" the purpose of the litigation.

Why should strangers benefit?  But that, too, strikes Blawgletter as problematic.  How can you justify a civil lawsuit that benefits — only or even mostly — strangers to it?

Under usual principles of "standing", you can’t.  But what happens if you do have a group, or class, who did suffer loss from a defendant’s wrongdoing?  Should the wrongdoer go free because few class members submit a proof of claim or because the cost of writing and mailing checks would consume the face amount?

The ALI says no.  We agree.  And we especially see little or no danger of abuse in cases that go to judgment or in ones that end in settlement and distribute residual funds in cy pres fashion after most of the money goes to class members.

Problem cases.  The worries come in lawsuits that settle for a purely cy pres remedy.  Because in those cases the rigor and discipline of litigation play a weaker role.  Class members may not care about funds they won’t receive.  Settling defendants probably just want to get the process over with.  Class counsel shift focus from maximizing the recovery to getting something for their efforts.  And judges have few guideposts on where to send the cy pres funds.

The ALI Council’s draft addresses the concerns in two principal ways.  First, by providing that residual settlement funds "should presumptively [go] . . . to participating class members unless the amounts involved are too small to make individual distributions economically viable".  Id. sec. 3.07(b).  Second, by allowing for (but not requiring) a "cy pres approach if the parties can identify a recipient involving the same subject matter as the lawsuit that reasonably approximates the interests being pursued by the class."  Id. sec. 3.07(c).

Attack the bar.  The American Enterprise Institute, on the other hand, sees cy pres as a problem of enriching "the plaintiffs’ bar":

[The Class Action Fairness Act] bases fee awards in coupon settlements on the actual redeemed value of the coupons; if coupons are donated to charity, those coupons cannot be used to calculate a fee award.  The same principle should apply when cash is involved.  Contingent-fee attorneys should be rewarded only for benefits going directly to the class.  Moreover, if a cy pres settlement benefits the plaintiffs’ bar directly or indirectly, that settlement should off set the contingent fees.  A $20 million cy pres award to Public Citizen or the Impact Fund should count as part of the attorneys’ fee award, not as a justification for additional attorneys’ fees.  Such a mechanism would give plaintiffs’ attorneys the proper incentive to align their interests with those of the class when devising a settlement:  if the class members do not get paid, the attorneys do not get paid.

We think the AEI’s solution confuses the process of negotiating a maximum settlement amount with class counsel’s fee application.  Those are separate things.  Indeed, if class counsel ask for a fee guarantee before the parties arrive at the settlement amount, the defendants’ counsel should so advise the court.  Absent such collusion, the "common fund" that class counsel created is the total settlement amount.

The AEI proposal also conflates class counsel with "the plaintiffs’ bar".  Perhaps repeat defendants view private lawyers who serve as class counsel and public interest groups such as Public Citizen as a monolith, but class counsel don’t view the world in that way.  A dollar to Public Citizen buys no groceries for class counsel.  It’s a fantasy to think otherwise.

Solutions, please.  We applaud debate about cy pres as a way to redress wrongdoing.  The remedy is explicitly imperfect.  Let’s try to make it better, shall we?

The perfect is the enemy of the good.