In a November 25, 2014 article by Adam D. Maarec of Davis Wright Tremaine, my old alma mater, posted here, he notes that attorneys general from sixteen states signed a letter to the ubiquitous, omniscient, and otherwise ever-vigilant, Consumer Finance Protection Bureau, aka the “CFPB” – or as they like to refer to themselves, using the Hoover-esque nom de plume, “the Bureau,” urging that it adopt rules imposing “prohibitions, conditions, or limitations on the use of pre-dispute arbitration clauses in consumer agreements for financial products or services.”
One of the sixteen attorneys general to sign the letter includes our esteemed Oregon A.G., Ellen F. Rosenbloom. This post should not be construed as a denigration of any of the signers, and especially, Attorney General Rosenbloom, whom I supported.
However, I find the sentiment expressed in the letter, while perhaps well-intentioned, to be short-sighted and mildly naïve [not the signers!]. Here’s why: Although I am an attorney myself, I have watched in dismay the class action bar, seizing on many and varied so-called ‘consumer causes’ that have no redeeming social value except to line the pockets of the plaintiff attorneys. The moment contractual arbitrations are forcefully removed from contracts for consumer financial services, it will benefit no one but the class action attorneys [who are undoubtedly waiting for this moment].
Apparently, one of the favorite targets of the class action bar is companies selling bottled water. And of course, the more successful the purveyor, the bigger the target and larger the fees. Now these class actions are not about mercury or lead in the water, or any other perceived danger to human health. Rather, it’s a fight over whether the water is from a “spring.”[1] In another case, the class action was filed over just how “green” the bottler was.
Here’s an article appearing in Fortune magazine ten years ago, as class action attorneys were just learning how to hose the drinking water industry:
If you’ve had a sip of Poland Spring Natural Spring Water over the past seven years, then you, like me, are a plaintiff in a class-action suit that recently settled. (Congratulations!) If you have Poland Spring delivered to your home, the company sent you a letter saying not to worry–all parties now agree that Poland Spring is natural spring water after all. The settlement is pretty standard: next to undetectable benefits for us–some discount coupons and whatnot–and $1.35 million in cash for the plaintiffs attorneys.
Reassuring though it was, the letter was not, strictly speaking, accurate. The settling plaintiffs lawyer did not actually concede that Poland Spring Natural Spring Water was spring water. He agreed, rather, to stop challenging that labeling. In fact, based on the evidence presented to the judge who approved the settlement, the most anyone can confidently say about Poland Spring–the nation’s leading brand of spring water–is that geologists disagree about whether it’s spring water.
In 2010, it was reported that Fiji Water Company had “… been named in a class action lawsuit filed in the U.S. District Court in Santa Ana, Calif. that alleges the company has profited by greenwashing claims that its water products are carbon negative—which means that the production, packaging and shipment of the water removes more carbon pollution from the atmosphere than it releases into it.
The lawsuit was brought by the Newport Beach, Calif.-based Newport Trial Group on behalf of Desiree Worthington and other similarly situated individuals to seek restitution for “the false claims from which Fiji Water Company [has] richly profited.”
For anyone who picks up a newspaper or surfs the web, they cannot have missed the fact that almost all of these class actions benefit no one but the attorneys, and perhaps to a lesser degree, the class representatives, who have been known to collude with the attorneys in the pocket lining business.
Exhibit A is the following 2010 article: CLARKSBURG, W.Va. (Legal Newsline) – When Harrison County Circuit Court Judge Thomas Bedell asked for any objections to $127 million being paid to attorneys in a class action lawsuit against DuPont during a 2008 hearing, no class member in attendance responded.
Two months later, those same attorneys asked Bedell if he would authorize $75,000 payments to the 10 lead plaintiffs in the case.
Despite the company’s objection, Bedell eventually ordered $50,000 for each of the lead plaintiffs. The payments will come out of the attorneys fees.
Those payments are termed “incentive awards,” but DuPont called them incentives for collusion.
And what about today? Has the class action bar cleaned up its act, doing God’s Work, and helping the Little Guy who was injured, maimed, or otherwise scammed by Big Business? Read on….
Exhibit is a very recent op-ed piece in the Wall Street Journal, by a young teacher’s assistant, who received a whopping $20.91 from the Toyota Unintended Acceleration Economic Loss Settlement” class action.[2] Why did he get a check? Because he drove a Toyota. And so did his family. Nonetheless, the author of the article was a member of a class he never joined, received a check he never sought, and drove a Toyota that worked perfectly.
Herewith are snippets of the article:
But this particular settlement wasn’t for personal injury or property damage. It was for economic loss tied to the value of my car and any suffering I might have experienced as a result of the alleged defect.
So I went to the website printed on the bottom of the check statement to find out more. Straight from the FAQ page: The court awarded attorneys fees totaling $200 million, plus $27 million for expenses. And what did that get? Well, besides my $20.91 check, the 25 primary plaintiffs and class representatives—those connected directly to the case and participating in the actual lawsuit—received $395,270.
I got angry because of the economic loss caused by this lawsuit in the years following the settlement. For me to get that $20.91 check is costing Toyota more than half a billion dollars in litigation, fees and the settlement awards.
How much will that cost me in the future? Will it add $200 to the price of my next car? Or $500? Or $1,000?
Dirty Little Secrets. Here is the dirty little no-so-secret, secret of class actions: If there is a consumer or financial product that has a perceived problem, makes a perceived unsupportable claim, makes an unwarranted charge, or is alleged to have defectively designed a product, plaintiff attorneys are far more interested in aggregating them together and have the court certify the litigation as a “class action.” The class includes any consumer who ever had the product, even if they are presently unknown, and even if they were never injured or deceived. The larger the size, the larger the settlement and the larger the fee. Who wants to work hard trying a single tort claim, when, if there are several similar ones, they can be bundled up, certified as a class, and settled for millions? Everyone knows that the vast majority of class actions are settled, so it’s like shooting fish in a barrel.
The second dirty little no-so-secret, secret, in many class actions is that while the attorneys receive real dollars, often in the millions, the class members get little, and in many case, merely receive redeemable coupons toward their next purchase.[3]
While there is a time and place for class actions, e.g. in toxic tort litigation, or environmental disasters,[4] where there is no other efficient or economic way to assess damages and pay claims, one has to wonder about the public benefit of subjecting makers of everyday consumer products to litigate for years over a claim that, in the final analysis, had little or no negative individual impact on consumers or the public at large.
The sad truth is that many class actions are simply solutions looking for problems.
Class Actions and Arbitration. So what does the above rant have to do with arbitration? Many purveyors of financial products have dispute resolution provisions in their contracts, which mandate arbitration rather than court litigation. They may also have provisions against the filing of a class action through arbitration.[5] And against punitive damages.
The goal, of course, is to contain costs and attorney fees which can run amuck in grinding litigation. The other goal is to avoid the risk of runaway juries, making awards in the millions or billions, which then have to be appealed to be set aside or reduced.
Is this fair to consumers? Shouldn’t they be able to file class actions if they want? It depends on who you ask. The plaintiff’s class action bar will attempt to dignify their work, saying that it brings justice to the Little Guy, who couldn’t otherwise afford to pay an attorney to fight for him.
The business attorney will look at the view from 30,000 feet, saying that the explosion in class action litigation, and spiraling attorney fee awards, merely get buried into the cost of the consumer products that we all pay for.
Consumers might be on both sides of the fence, depending on their political persuasion.
But the following facts are, in my opinion, irrefutable:
- Arbitration is clearly faster and cheaper than grinding litigation;
- Arbitration awards, made by seasoned arbitrators, are far less likely to be driven by emotion, and therefore are more measured;
- If companies providing financial services are prohibited from protecting their bottom line through mandatory arbitration provisions, the cost in litigation will merely be borne by all consumers – just like any other line item expense;
- The biggest financial beneficiaries of outlawing mandatory arbitration will be the class action attorneys, not the consumers; and,
- Given their record, it is questionable whether class actions will result in any tangible financial benefit to the consumers sought to be avenged.
So here’s why I suggested above that the letter to the attorneys general was “short-sighted and mildly naïve.”
First, the minute arbitration is removed, it will be open season on financial service providers. The result will be higher costs, more and more pages of disclaimers, and nothing will change. Remember, the providers have the pen; they draft the contracts; they will find ways to limit claims and the risk of claims.
Second, to suggest that the courtroom is the only venue for redress, ignores reality. There are volumes of consumer protection laws today. Consumers use and enforce them every day. These laws come with attorney fee provisions to the prevailing party.
Third, what about the regulators themselves? Isn’t it part of the AG’s job to protect consumers? What about the CFPB, who’s been busy since the first day of its inception, extending its regulatory tentacles into virtually every aspect of business, large and small. Why can’t they ride roughshod over the bad guys?
Regulations and fines are a far more efficient and cost-effective tool to change bad corporate conduct, than filing class actions that will take years to sort out, with dubious results for the consumer. Why should regulators, such the nation’s AGs and the CFPB, hand over the reins to plaintiff’s attorneys so they can create another cottage industry, suing financial service providers in court, looking for a big payday from an overzealous and sympathetic jury?
Conclusion. It is true that the financial services industry, in the form of the Big Banks, were almost singularly responsible for precipitating the Great Recession, including the crash in the credit and real estate markets. As we know, the banks have paid billions in actual penalties, and continue to suffer in reputational damage.
But there are consumer and regulatory laws in place already. The only thing that has ever been lacking, before and after the crash, was regulators prepared to enforce the laws. Deputizing class action attorneys to do what regulators are already paid to do, is not the answer. ~PCQ
[1] To put a finer point on the dispute, the issue comes down to this: When spring water percolates out of the ground, it becomes “ground water.” Ergo, it appears we have a class action over whether water from a spring stops being “spring water” as it runs over the ground. I am reasonably certain that thIS technical distinction was lost on consumers who bought Poland Springs Natural Spring Water. BTW, here’s a tip for some enterprising class action attorney: Sue the company because its bottled water doesn’t come from Poland. It’s actually from Poland, Maine. I bet that’s worth a few million in attorney fees!
[2] It is important to understand this class action did not relate to damages or injuries from the defect; it was for “economic loss,” i.e. the loss in value he (and all other owners of similar Toyotas) ostensibly incurred due to the fact that he owned a Toyota, and the Toyota corporation made the autos that had unintended acceleration issues. In other words, if and when the author sold or traded in his car, the buyer or dealer would silently say: “This car is a Toyota! Did you hear about the unintended acceleration problem some of them had? I’m going to knock $20.91 off the price of your car because of that!”
[3] In this case, the class action was against Coach for an alleged violation California law by asking customers for an email address or mailing address. The attorneys undoubtedly got cold hard cash. The class got a 1/3rd discount on their next purchase of a Coach product.
[4] Full disclosure: I was a partner in one of the law firms that participated in class action arising from the Exxon Valdez disaster.
[5]For a good post on the subject go to the following legal blog post here.