The End of the Class-Action Carnival

The U.S. Supreme Court has taken aim at mass lawsuits and the huge settlements they generate. Big Business is smiling
Photo illustration by Crash!; Photographs by Getty Images (3)

F. Paul Bland Jr. brings class-action lawsuits for a living. Over the years he’s represented groups of plaintiffs in suits against payday lender Check ’n Go and financial institution Wachovia. He’s worried about business drying up. As a result of hostile Supreme Court rulings over the last several years, scores of mass consumer and employment suits that would have been viable a decade ago have been dismissed, says Bland, a senior attorney with Public Justice, a nonprofit in Washington. “People bring me cases against cable companies or big employers, and I say, ‘Forget it. It’s impossible. Not even worth trying.’ ”

The mass lawsuit—in which hundreds or even thousands of plaintiffs join together to go after a corporate defendant—is in deep trouble. Growing judicial skepticism toward such suits and toward the lucrative settlements they generate has caused plaintiffs’ attorneys to shy away from accepting lengthy, complicated cases. That’s tilting the legal playing field decisively in favor of Big Business—and as the Supreme Court reconvened on Oct. 7 for its 2013-14 term, trial lawyers are bracing for more setbacks.

Not everyone is shedding tears. Walter Olson, a legal expert at the libertarian Cato Institute in Washington, attributes the decline of mass lawsuits to a predictable—and welcome—backlash against “a wild carnival” of frivolous damage claims and outrageous conduct by plaintiffs’ lawyers. To consumer advocates, however, the increasingly high barriers to mounting mass lawsuits could give companies the wrong incentives. “We’re in danger of losing an important deterrent to corporate misconduct,” says Brian Fitzpatrick, a professor at Vanderbilt Law School. As is usually the case in legal arguments, there are elements of truth in what both sides say.

Reliable data on class actions are in regrettably short supply because courts don’t track them. The only helpful gauge over time measures just a slice of the relevant cases: federal securities fraud claims. The economic consulting firm Cornerstone Research says in the first six months of 2013, 74 securities class actions were filed in U.S. district courts. That’s down 22 percent from the 16-year average from 1997 to 2012 and off 42 percent from the peak in the second half of 1998. “Securities filings have definitely fallen off,” Fitzpatrick says, “and anecdotally we’re starting to see other kinds of cases decline as well.”

Mass litigation took off in the U.S. in the 1960s. Plaintiffs’ attorneys seized on loosened court rules and expanding liability theories to hold corporations legally responsible for injuries that previously had been written off as the inevitable hazards of life. In the 1970s and ’80s, huge cases were launched on behalf of laborers exposed to asbestos and patients who suffered harmful side effects from drugs and medical devices. In the name of rough justice, judges suspended traditional requirements, such as quantifying the precise harm to each plaintiff.

Class-action lawyers assume upfront costs to investigate cases and gather as large a pool of clients as possible: the more purported victims, the more menacing to a corporate foe. Companies fight fiercely to get the cases dismissed and, if they fail, tend to settle rather than risk a jury’s wrath. In a better world more closely resembling junior high civics textbooks, many of the social ills that generate class actions would get addressed by legislation or regulation. In response to political sclerosis, the trial lawyers saw their opportunity and took it. The mass tobacco litigation of the ’90s extended the pattern as well-heeled plaintiffs’ firms, allied with state governments, forged multibillion-dollar settlements and reaped hundreds of millions of dollars in fees.

Business interests complain that class actions discourage innovation, drive up insurance premiums, and unjustly enrich a trial lawyer elite. Rigorous research on the economic effects of large lawsuits, though, has yielded muddled conclusions. The corporate-backed Rand Institute for Civil Justice published a paper in February on big-dollar cases against drug manufacturers since 1990. “There is little direct empirical evidence concerning the economic effects of product liability,” Rand found.

What’s really turned the legal tide against class actions in recent years has been the excesses of plaintiffs’ attorneys. “Coupon cases” typify one pervasive problem: lawyers making out like bandits while putative victims get little or nothing. Exhibit A: In 2007 a group of lawyers in California took home $25 million in fees for what they advertised as a $500 million settlement on behalf of owners of allegedly defective Ford Explorer SUVs. The fine print revealed, however, that each consumer became eligible for nothing more than a $500 coupon toward the purchase of—wait for it—a new Ford. Relatively few people sought the dubious benefit.

Other episodes have revealed class-action titans up to their necks in sleaze. Bill Lerach of California, once labeled “the lawyer who brought corporate America to its knees,” pleaded guilty in 2007 to a $251 million kickback scheme to recruit clients. His former partner, Mel Weiss of New York, the country’s top securities class-action attorney, pleaded guilty the following year to similar charges. Dickie Scruggs, the legendary Mississippi antitobacco attorney, pleaded guilty, also in 2008, to crimes related to a judicial-bribery scheme. This year Stanley Chesley, a scourge of the pharmaceutical and chemical industries, was disbarred in Kentucky for receiving “unreasonable” multimillion-dollar fees from diet drug litigation.

The toppling of the pillars of the plaintiffs’ bar has engendered an I-told-you-so glee in conservative and corporate-defense circles. Against this backdrop, Justice Antonin Scalia has been leading a concerted campaign to rein in expansive class actions. “Judges are human beings,” says Vanderbilt’s Fitzpatrick, who clerked for Scalia in 2001 and 2002. “They come to cases with a certain point of view shaped by what they read in the Wall Street Journal and the Washington Times, what they hear in lectures and from friends.” (In a rare interview published on Oct. 6, Scalia told New York magazine that he avoids the Washington Post and New York Times because, in his view, they are too liberal.)

In 2011, Scalia wrote for a five-member conservative majority that blocked a sexual-discrimination class of 1.5 million female employees of Wal-Mart Stores. The women “wish[ed] to sue about literally millions of employment decisions at once,” he wrote. “Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question of, ‘Why was I disfavored?’ ” Scalia didn’t see much glue. “Plaintiffs’ claims must have core common components that you just don’t see in a group of a million employees in thousands of retail locations,” says Wal-Mart’s attorney, Theodore Boutrous, a partner at Gibson Dunn & Crutcher. In dissent, Justice Ruth Bader Ginsburg asserted that the evidence presented by the plaintiffs showed “gender bias suffused Wal-Mart’s company culture.” The majority, however, “disqualifies the class at the starting gate.”

As the Wal-Mart precedent ripples through the lower courts, trial judges are dismissing cases, and consumer advocates are filing fewer of them. Meanwhile, the Scalia-led majority has built additional blockades to the courthouse. A 5-4 ruling last March shielded Comcast from a monopolization suit seeking $875 million on behalf of 2 million cable subscribers.

The justices have already put two more class-action cases on their 2013-14 calendar. They’re expected to announce whether they’ll review a third dispute involving a suit filed against Facebook on behalf of millions of users whose privacy the social network allegedly violated. Under a settlement of the Facebook case, the plaintiffs’ lawyers would receive about $2.3 million. The company would cough up $6.5 million for a new foundation that it would partly control. And the class members would get zip. Social network members unhappy with this arrangement asked the Supreme Court to intervene.

They should be careful what they wish for. If the justices agree to hear the case, the odds are they’ll take another swipe at class actions. Celebration will follow in boardrooms around the nation. Absent new legislative oversight, consumers should wonder who’s got their interests in mind. And overreaching plaintiffs’ attorneys will have themselves to blame.

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