PROPOSED SOLUTION The U.S. Chamber Institute for Legal Reform respectfully submits the following comments to the Federal Trade Commission in conjunction with the FTC workshop entitled
“Protecting Consumer Interests in Class Actions.” I.INTRODUCTION The Institute for Legal Reform (ILR) is a non-profit organization established by the Chamber of Commerce of the United States. Its purpose is to work toward making America’s
civil justice system simpler, fairer and faster. ILR promotes legislative and judicial solutions to
reduce excessive and frivolous litigation, to address vexing legal problems (such as the current
class action crisis), and to restore sanity to the legal system. ILR commends the FTC for its growing involvement in the important issues surrounding class actions and class action settlements. The FTC’s focus on the class action issue – most
notably by filing amicus briefs objecting to improper settlements – has helped bring the issue of
frivolous filings, collusive settlements, and exorbitant attorneys’ fees to the forefront of public
attention. Every year, thousands of class actions are filed in the United States – the vast majority in our state court system. The attorneys who file these lawsuits purport to represent thousands or
even millions of allegedly injured individuals. But too frequently, the interests of the supposedly
injured parties are not really represented at all. Instead of pursuing the interests of their
supposed clients, the attorneys strike a deal under which the money ends up in their own pockets
– rather than the hands of the supposedly injured parties they claim to represent. The result is
more and more class action filings, concentrated in certain state courts, and a growing pattern of
settlement abuse.1The Institute for Civil Justice/RAND, in a study jointly funded by the plaintiffs’ and defense bar, took a systematic look at where the money goes in class settlements. That study
indicates that in state court consumer class action settlements (i.e., non-personal injury monetary
relief cases), the class counsel frequently receive more money than all class members combined.2 Significantly, another study found that this phenomenon was not occurring in federal courts –
“[i]n most [class actions handled by federal courts], net monetary distributions to the class 1See Deborah R. Hensler et al., PRELIMINARY RESULTS OF RAND STUDY OF CLASS ACTION LITIGATION15 (1997) (observing a “doubling or tripling of the number of putative class actions” that was “concentrated in the state
courts”); Analysis: Class Action Litigation, Class Action Watch,Spring 1999, at 3 (Figure 2), available at http://www.fed-soc.org/publicantions/classactionwatch/classaction1-2.pdf. (finding that while federal court class
actions had increased somewhat over the past decade, the frequency of state court class action filings had increased
1,315 percent – with most of the cases seeking to certify nationwide or multi-state classes); Deborah R. Hensler et
al., CLASS ACTION DILEMMAS:PURSUING PUBLIC GOALS FOR PRIVATE GAIN15 (1999) (PRIVATE GAIN) (confirming the explosive growth in the number of state court class actions and concluding that class actions “were more
prevalent” in certain state courts “than one would expect on the basis of population”). 2PRIVATE GAINat 15.exceeded attorneys’ fees by substantial margins.”3 Class action abuse is unjustifiably draining millions of dollars from our nation’s economy by transferring large amounts of capital from companies to plaintiffs’ lawyers with no
commensurate benefit to society at large. It is also undermining public confidence in the law by
suggesting to American citizens that our judicial system condones a distorted system of justice in
which plaintiffs go without any real compensation, while their supposed lawyers walk away with
millions in cash. ILR has steadfastly supported legislation – The Class Action Fairness Act of 2004 – that would address many of these problems by allowing federal courts to hear more interstate class
actions, by requiring heightened scrutiny before coupon settlements are approved, and by
limiting attorneys’ contingency fees in coupon settlements to the value of the coupons actually
redeemed.4II.STATE COURT CLASS ACTION SETTLEMENTS: A RECORD OF ABUSE Class actions – when used properly – are a powerful tool for large groups of individuals who cannot seek justice individually. The problem is that in today’s class actions, the
individuals are typically left out of the picture. More often than not, the lawyers conceive of the
lawsuit, the lawyers direct the lawsuit, and the lawyers get all the benefits from the lawsuit. The
so-called “plaintiff” in the case is usually just a titular representative – an acquaintance recruited
by the plaintiffs’ lawyer because he or she lives near a “magnet” state court, reputed to be
friendly to class actions. As FTC Commissioner Leary has pointed out, class action lawyers have effectively appointed themselves as private cops and arrogated the responsibility for policing corporate
behavior.5What’s wrong with this form of so-called “private law enforcement”? It’s analogous to permitting self-appointed “cops” to go out on the streets, set up speed traps, pull drivers over
(whether they were speeding or not), and give those drivers the option of either: (a) spending a
few nights in jail, or (b) resolving the problem by paying the “cop” (for personal benefit)
whatever he demands. No doubt, the “cops” would argue that this is a marvelous system – on
the theory that it discourages speeding. But justifiably, the public would have no trust in – or
respect for – such a system of law enforcement, since prosecutorial decisions would be driven (or
at least have the appearance of being driven) by the overwhelming financial self-interest of the
“cops” themselves. This is precisely what is occurring in class actions, and it has spawned a troubling pattern of abuse. Over the last several years, there have been 100 editorials in major newspapers – and 3Federal Judicial Center, EMPIRICAL STUDY OF CLASS ACTIONS IN FOUR FEDERAL DISTRICT COURTS 68-69(1996).4The U.S. House of Representatives passed H.R. 1115 on June 12, 2003. Although more than 60 Senators have expressed support for the Senate version of the bill, S. 2062, the Senate has not yet voted on the legislation
because of a disagreement between Democrats and Republicans regarding non-germane amendments that led to a
filibuster. See Senate Abandons Class Action Lawsuit Bill, Associated Press, July 8, 2004. 5Thomas B. Leary, The FTC and Class Actions, available at www.ftc.gov/speeches/leary/classactionsummit.htm. 2countless more news stories – highlighting the problems of frivolous class actions, abusive
coupon settlements, and excessive attorneys’ fees, nearly all of which are occurring in state
courts.6In the words of the Washington Post, class actions have become a “high-stakes extortion racket . . . in which truly crazy rules permit trial lawyers to cash in at the expense of
businesses.”7Or, as the Wall Street Journal put it, “[t]he lawyers who bring the suits make a mint, while the court approved settlements award the actual victims only pennies or coupons.”8Numerous examples of abusive class action settlements abound. A list can be found in a compilation on our website, at www.legalreformnow.com/issues. Some other recent examples of
abusive state court settlements include: