Most American consumers have either received an email or postcard about a class action lawsuit or seen commercials from various legal forms informing the general public about these lawsuits where a collective group sues another entity, with the prominent class action suits being against corporations.
These lawsuits have come under criticism for a variety of reasons. One claim is that abusive, overly-litigious claims do harm to the legal process, especially to legitimate claims as opposed to frivolous lawsuits. While this concern was supposed to be addressed by the Class Action Fairness Act of 2005, another criticism which made legal headlines recently is the tendency of attorneys to charge excessive fees through deals with the defendants which actually end benefiting everyone but the “class” the attorneys are supposed to be representing.
Glucosamine may not Support Cartilage, but the Class Action Supports Attorneys
A recent class action settlement in the United States District Court for the Northern District of Illinois was called into question at the Chicago-based U.S. Seventh Circuit Court of Appeals.
The original class action suit was filed against NBTY, an American manufacturer of vitamins and nutritional supplements, and Rexall Sundown, a unit of NBTY, alleging that they falsely claimed glucosamine could rebuild cartilage and lubricate joints. Six lawsuits were originally filed by separate legal firms when studies surfaced suggesting the supplement wasn’t as effective as proposed. The six suits combined into one. Per 7th Circuit Court of Appeals case Pearson v. NBTY, “it is typical in class action cases of this sort … for the multiple class counsel to negotiate a single nationwide settlement and agree to submit it for approval to just one of the district courts in which the multiple actions had been filed.”
Enter the Northern District of Illinois, Judge James B. Zagel presiding. Zagel found in favor of the plaintiffs, awarding $20.2 million. The catch is that only $865,284 of that went to the class members in the lawsuit.
So where did the rest of that money go? Here is where the Court of Appeals Judge Richard Posner found in favor of the objectors, led by class member Theodore Frank of the Center for Class Action Fairness.
The Breakdown of the Class Action Settlement…and the System
When Judge Zagel made his decision, the $20.2 million settlement broke down as follows. Well, to not get ahead of the issue, here is where the proposed figure came from to begin with. The attorneys for the various firms figured that if all of the plaintiffs who were contacted went through what 7th Circuit Court of Appeals Judge Posner called “needlessly elaborate documentation” for their claims (which would be $3 per bottle for up to four bottles, $5 for up to ten bottles if they had kept their original receipts), the total to NBTY would be $14.2 million. Of the remaining $6 million, $1.5 million would go to the cost of the firms sending notice to the plaintiffs and $4.5 million to the attorneys.
In what Zagel believed to be a reasonable decision, he lowered the $4.5 million to $1.93 million, a paltry $538 per hour for billable time.
So the other $2.57 million would be distributed among the class members, right? Wrong. The extra $2.57 million would go back to NBTY. Herein lies part of what Posner criticized about class action suits, but it wasn’t the first aspect of such suits that he criticized.
The first flaw in this system of figuring a class action settlement deals with including the fees and costs in the settlement at all, something Posner called “costs, not benefits.”
In addition, referring back to the lengthy process to file a claim, Posner stated that it was unreasonable to expect every plaintiff to file a claim. In reality, only 30,245 of the potential 12 million plaintiffs went through the process. This resulted in a total reward for the class members of $865, 284. Posner said this difficult filing process was beneficial to Rexall and the attorneys, “because the fewer the claims, the more money Rexall would be willing to give class counsel to induce settlement.” Posner made several suggestions to remedy this quagmire, including having Rexal simply mail checks to the people who received the class action notification postcards.
When it came to the attorney fees, Zagel claimed the $1.93 million was a reasonable number because it represented an allowable 9.6 percent of the aggregate value of the award. However, that percent was based on the $14.1 million. When compared to the actual award, it represents closer to 69 percent.
Putting that aside, Posner also said the fact that $1.93 million represents approximately $538 per hour seems grossly exaggerated given what he called “routine trial preparation.” By the way, the originally proposed $4.5 million would have been $1254 per hour. And if you’re keeping track of the numbers, the attorneys received more than twice what the class members received.
Perhaps the largest criticism relates to the larger practice of what is known as a reversion or “kicker” clause, wherein the defendants (in this case, NBTY) are remitted any portion of the fee that the judge didn’t authorize (the $2.57 million). Forbes magazine called the practice by class action lawyers “a clever way to keep busybody objectors like Ted Frank … from breaking up their deals,” stating that class members have nothing to gain by challenging the attorney fees since any overage doesn’t benefit them; it just goes back to the defendant.
Posner also made a couple of suggestions to remedy this practice, including a rule that the fee should be judged according to what class members actually received and the fee itself. He stated that adding fees into the equation “gives class counsel an incentive to design the claims process in such a way as will maximize the settle benefits actually received by the class, rather than connive with the defendant.”
Posner also proposed a rule where judges would appoint an independent auditor to evaluate billing rates.
For class members everywhere, hopefully Posner’s decision and recommendations will have an impact of the future of legitimate class action lawsuits.