The Class Action: Weapon of Mass Destruction
Warren Buffett presciently observed that financial derivatives were economic "weapons of mass destruction." Judge for yourself whether class action litigation has achieved "weapon of mass destruction" status.
A mortgage company mails a loan solicitation to 16 million people. A plaintiffs' lawyer files a class action lawsuit alleging that the solicitation did not meet the disclosure standards required under the federal Fair Credit Reporting Act (FCRA). Specifically, FRCA requires that any solicitation must include a "clear and conspicuous" statement informing the consumer that they may prohibit information in their credit file from being used in connection with offers of credit they did not initiate. The allegation is that the defendant company failed to include a clear and conspicuous disclosure in its solicitation. Mandatory statutory damages for violations under the FCRA are between $100 and $1,000 per violation, meaning potential liability for the defendant of between $1.6 billion and $16 billion.
Although the facts of the solicitation were not disputed, the defendant was unable to have the suit dismissed because the judge felt that the legal implication of the language used in the solicitation did not justify outright dismissal.
The parties thereafter hired a retired judge as a mediator who succeeded in arranging a settlement that provided the following:
(1) Class membership was defined as any person on the solicitation mailing list (whether or not they had actually read or even received the loan solicitation).
(2) Class members could request an educational brochure describing "important consumer protections under the FCRA."
(3) Class members who had the financial ability could obtain a home mortgage loan on terms "better than those available to the general public." [it was unknown how many of the class members would actually apply and receive a loan];
(4) Defendant would "refrain from disparaging the class representative publicly or in the media regarding any issue related to the case." (Apparently, class action lawyers are thin-skinned.)
(5) Defendant would pay class counsel $3.5 million in attorneys' fees.
The negotiation of the above referenced class's settlement benefits (1-4) was completed after a day-long mediation. By contrast, the negotiation of the amount of the attorneys' fee provision (5) covered three weeks. To establish the reasonableness of class counsel's attorneys' fee request before the court, class counsel hired two experts: a fee expert who opined that $3.5 million was a reasonable attorneys' fee, and a second expert to value the settlement benefits. The fee expert declared that the rates charged by class counsel were "consistent with the prevailing rate for attorneys of comparable skill, experience, and reputation in the greater Los Angeles area." This was in spite of the fact that none of the tasks billed by the six lawyers who worked on the case were billed at a rate lower than the partner rate of $450 per hour. One senior attorney billed at $550 per hour for answering telephone calls from class members. The settlement benefits expert opined that the educational brochure (2) alone had a potential value of between $63 million and $118 million to class members.
In approving the settlement, the court noted that given the fact that the defendant, if found guilty, faced mandatory statutory damages of between $1.6 billion to $16 billion, the defendant had "little realistic opportunity of proceeding to trial." [No sane defendant faced with that amount of liability would risk going to trial.] The court went on to state that settlement was highly likely, even though no plaintiffs were actually harmed by the defendant's actions. The judge opined that the solicitation amounted to "junk mail."
This is the class action mess in a nutshell.