Fitzpatrick v. Frank: Should Conservatives Embrace Class Actions?
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Professor Brian Fitzpatrick of Vanderbilt Law School and Ted Frank of the Center for Class Action Fairness will debate Professor Fitzpatrick’s provocative new book, The Conservative Case for Class Actions (University of Chicago Press). Please join us for this lively conversation.
Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society’s Litigation Practice Group, was recorded on Thursday, February 6, 2020, during a live teleforum conference call held exclusively for Federalist Society members.
Micah Wallen: Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is titled “Fitzpatrick v. Frank: Should Conservatives Embrace Class Actions?” My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today's call.
Today, we are fortunate to have with us Brian Fitzpatrick, who is a professor of law at Vanderbilt University and who is also the author of the book that was the impetus for this teleforum, The Conservative Case for Class Actions, which was published this past November. We also have Theodore Frank, who is an attorney with Hamilton Lincoln Law Institute and the founder of the Center for Class Action Fairness. After our speakers give their opening remarks, we will then move to audience Q&A. Thank you both for sharing with us today. Brian, the floor is yours.
Brian Fitzpatrick: Thank you so much to The Federalist Society and to Ted for participating in this debate with me today. I’m just delighted to be here to talk with you about my very first book, The Conservative Case for Class Actions. I know it’s going to be counterintuitive to many of our audience members, and so I’m happy to take a few minutes to explain why I think conservatives should stop worrying and start loving the class action.
And let me just begin by telling you why I wrote this book, The Conservative Case for Class Actions. I wrote it because of an amicus brief that was filed in 2009 by the United States Chamber of Commerce in a case called AT&T v. Concepcion. That case is probably familiar to many of our listeners. It involved the question of whether a particular type of arbitration agreement was enforceable, despite state laws of unconscionability. The arbitration clause that was at issue in Concepcion was called a class action waiver. It said that if you had a dispute with the company, you had to go to arbitration, and you had to go one-on-one. You had to go by yourself. You couldn’t join a class action.
And it was obvious to everybody back in 2009 when this case was before the court that if you took away the class action, if you enforced these class action waivers, it’d be very hard for people with small injuries, $50, $100, $500, to hold companies accountable because no one sues on their own, and no one even goes to arbitration on their own. And so without the class action, companies would be able to take small amounts of money from us with impunity.
This was a concern to everybody back in 2009. Enter the U.S. Chamber of Commerce. They wrote this amicus brief, and they told the United States Supreme Court, “Do not worry about the little people. Do not worry about the $50 injuries. There is another way to police the marketplace, and the better way,” the Chamber said, “is federal regulators.” Federal regulators.
Now, I’ve been a member of The Federalist Society ever since my very first semester of my very first year of law school. I’m sorry to say that’s over 20 years now. But I’ve been going to a lot of Federalist Society meetings is what that means, and I’ve never once heard anyone say that federal regulators, federal agencies were the solution to any problem. The last time I checked, I thought we were trying to roll back the administrative state in The Federalist Society.
So I decided to write this book because I don’t think that federal regulators are the answer to policing the marketplace. I think the conservative way to police the marketplace is private enforcement of the law, and one important element of private enforcement of the law is the class action lawsuit. And I’m happy to take a few minutes to explain why I think that and why I made the case for class actions in the book.
So to begin with, I think that private enforcement of the law is preferable to federal agencies because I think private sector solutions to problems are better than government sector solutions to problems. And I rely in the book upon the privatization literature that became very popular when Ronald Reagan and Margaret Thatcher were in office. I go back to this literature and I try to assess what are the reasons why conservatives love to privatize everything? And I identify -- I isolate six reasons in the literature why conservatives like private sector solutions, and I argue in the book that all six of the reasons apply with equal force to private attorney generals enforcing the law instead of government enforcing the law.
And so what are the six reasons? Well, we like smaller government, everything else being equal. It means lower taxes, and it means fewer government agents looking around for things to do to us. This is obviously consistent with private enforcement of the law. If we didn’t have the private bar, including the class action bar, holding companies accountable when they do wrong, we would have to hire thousands upon thousands upon thousands of more government lawyers to do it. That’s a lot of extra taxes and it’s a lot of people looking around for things to do to us.
Number two, we like self-help. We prefer people to rely on themselves and their neighbors when things go wrong, not wait around for the government to bail them out. We don’t like creating citizens that are dependent upon the government. This, too, is consistent with private enforcement of the law. Class action lawsuits are private citizens being represented by private lawyers instead of people waiting for the government agency to come do something about something when they get hurt.
The third reason we like private sector solutions, probably the most important reason in the literature, is incentives. The private sector is profit motivated. The government is not. We think that profit-motivated people to a better job than people who get the same salary day in and day out no matter what they do. This is consistent with private enforcement of the law. Plaintiffs’ lawyers, class action lawyers, they work on contingency fees. They only get paid if they actually do something. They get paid more the more they do because they get a percentage of what they recover from the defendant. This gives the class action lawyers and private lawyers the incentive, the fire in the belly, to do a good job the government lawyers frankly don’t have.
Better resources, and this is the fourth reason. The private sector has better resources to bring to bear on problems than the government does. The government is always strapped for cash. We’re always slashing budgets. Enforcement budgets are the first thing to go. The private sector has unlimited resources to fund profitable ventures, including lawsuits. Plaintiffs’ lawyers have been borrowing money from banks and each other for years. Now, there’s a whole new area of third-party litigation finance. If there’s contingency fees to be made in the private sector, someone will finance the lawsuit. The government does not have that luxury.
Lack of bias is the fifth reason and probably the second most important reason why conservatives like to privatize. The government is biased. The government is captured by the industries they’re supposed to be policing. We call it agency capture in law school. Outside of law school, it’s sometimes called crony capitalism. Campaign contributions, the revolving door of personnel does not make the government an even-handed participant in enforcement. The private bar is independent of the people they are policing. They’re single-mindedly focused not on campaign contributors. They’re single-mindedly focused on contingency fees and there’s a purity in that, in my opinion.
The last reason we like private solutions is we like decentralized solutions to problems. We don’t like to put all of our eggs in one basket. That’s why we like federalism. We like to try different things out, hedge our bets so that if we have our eggs in different baskets, if we drop a basket, not everybody is harmed. Private enforcement is the decentralized way to police the marketplace. Different lawyers representing different citizens in front of different judges is a lot more decentralized than relying on one of the Chamber’s federal agencies up there in Washington, D.C. So I think all of the reasons why we normally like to privatize apply to private policing of our marketplaces with equal force.
Now, a lot of times when I make these arguments, I do hear from some of my Federalist Society friends who say, “Professor Fitzpatrick, I understand why we want profit-motivated trash collectors. They’ll collect more trash. Do we really want profit-motivated lawyers, though? Profit-motivated lawyers will bring more lawsuits. Are lawsuits a good thing? Aren’t they a bad thing? Won’t the profit motive always drive these lawyers to abuse the system, file too may lawsuits, etc., etc., etc.?”
And I do not think there’s anything different between a profit-motivated lawyer and a profit-motivated anything else. Number one, lawsuits are not necessarily bad if the harm they seek to prevent is bad. And I rely in the book for that idea from two University of Chicago Nobel Prize winning economists, Gary Becker and George Stigler. I also rely a lot in the book on Milton Friedman, Friedrich Hayek, people like this. But Becker and Stigler said the idea that litigation is wasteful in whole or in part is simply mistaken. Litigation is as important as the harm it seeks to prevent.
And conservatives do believe that we need some legal rules in our marketplaces. No one believes in complete laissez-faire. Conservatives believe we at least need things like laws against breach of contract, laws against fraud, laws against horizontal price fixing. Even Friedrich Hayek, libertarian economist, believed we need some legal rules in the marketplace. Lawsuits to enforce those rules should be encouraged. We want to encourage accountability to stop those bad things in our marketplaces from occurring. And so I don’t think that encouraging lawsuits is necessarily a bad thing. If the laws are good laws, then the lawsuits are good too.
The second response I have to people that think that profit-motivated lawyers are different is a profit-motivated anybody can go too far. A profit-motivated anybody can abuse the system. Profit-motivated corporations can go too far and abuse the system. We don’t throw up our hands and say, “Oh, I guess we need to turn over all of our industries to the government.” We say, “No, we’re going to put rules into place to harness the corporate profit motives for good.” And we can put rules into place to harness class action lawyer profit motives for good as well. We don’t have to give up on lawyer profit motives any more than we do on corporate profit motives.
The good news is, as I argue in the book, I think we pretty much already have good rules in place when it comes to the class action profit motive. All class actions have to survive motions to dismiss. They have to be certified by judges as class actions before they’re allowed to proceed as such. Any settlement in a class action must be approved by the judge. Any attorney’s fees in the class action must be approved by the judge. I think that judges are largely exercising these powers wisely. Can we make some improvements to the system? Of course, and I have one chapter in the book at the end where I recommend some reforms to tighten up the system. But I think the system is basically working as it is.
And I think some of the horror stories that we hear from the Chamber of Commerce are not representative of the system as a whole. So let me give you a couple of examples of that. Number one: The Chamber complains about the flood of meritless class actions that are filed all of the time. They love to talk about this Subway footlong case which I’m sure many of our listeners have heard about. Some of the footlong Subways were only 11 inches, and there were consumer fraud lawsuits brought about this.
This was a frivolous case. It was a stupid case. The same amount of dough was used in every Subway; it just bakes a little differently sometimes. It was a dumb case. Frankly, a halfway decent lawyer should have been able to get that dismissed on a motion to dismiss. After Twombly and Iqbal, it’s easier than ever in American history to dismiss meritless cases. Any lawyer worth their salt should have been able to dismiss that case. Subway didn’t even file a motion to dismiss. But the bottom line is if you look at the data, which I try to do in one chapter of the book, I slice and dice the data as many ways as I can. There’s no reason to believe that Subway is a typical class action case. The Subway case is an extreme outlier. Most class actions are not ridiculous cases like that.
And to prove that point even beyond the data, I took a look in the book at the Chamber of Commerce’s own lists of the ten most frivolous cases filed every year in America. And more than half of the class action cases on the Chamber’s own list are not even frivolous cases. They’re at least debatable cases, if not meritorious cases. If the Chamber can’t find more than three or four class actions in five years — I looked at five years of lists — that are clearly meritless, we don’t have a meritless cases problem in our system. But in the book, I say, “Listen, if we’re still worried about meritless cases, we can do a few easy things to discourage meritless class actions even further.” And I offer some reforms to tighten the system up even further on meritless cases.
The other thing the Chamber likes to say is class action lawyers are getting all the money in class action settlements. The class gets nothing. The defendant pays nothing. Everything just goes to the class action lawyers. This is not true. I have done empirical studies of class action settlements. I’ve added up every dollar that defendants pay out in settlements. I’ve compared it to every dollar that judges award class action lawyers. And do you know how much class action lawyers are getting? They’re getting a whopping 15 percent, 1-5 percent, of what defendants are paying out.
Now, can we find isolated examples of class action settlements like the Subway example where there was fake relief for the class and the defendant didn’t end up paying up anything except for attorney’s fees so in fact, the lawyers got all the money? Yes, of course we can find some isolated examples of cases where there was fake relief and the lawyers got everything. And Ted, his organization does a good job of trying to ferret out those cases and make it clear to the court that this is not a good settlement. And I appreciate all the hard work that Ted and his organization does on that. But the notion that this is the majority of class action settlements or even anything close to the majority is just not true. Most class action settlements provide real relief, and the lawyers get only a small fraction of that for themselves.
It is true that class actions are not very good at compensating class members. Even though the lawyers are only getting 15 percent, the class members are often not receiving compensation from the settlement. So for example, the Federal Trade Commission just did a study of consumer class actions, a very good study, and they concluded that the median claims rate in a consumer class action in 9 percent. That means 91 percent of class members are not getting anything from settlements. That’s low, 9 percent; 91 percent not getting anything is high. That’s a bad thing.
Now, it doesn’t mean the other 91 percent of the money goes to the class action lawyers, as I said. They only get 15 percent. The money is split up among the 9 percent that file claims after you deduct the attorney’s fees. It’s spilt up among them. Or if that would give them too much, the money is given to charity. It does not typically go back to the defendant. But it is true that only 9 percent, in a lot of cases, 9 percent of people are getting compensated.
And so that’s a bad thing, and I agree that’s a bad thing. But the question is what’s the alternative? The government. Is the government going to do a better job getting money to victims than the class action lawyers do? The government is not even allowed to give money to victims most of the time. It collects money from corporate wrongdoers. The federal code says the government has to deposit the money they get in the U.S. Treasury. So the government’s claim rate is usually zero percent.
Even when the government does try to distribute money to the victims, who do you think they hire to do it? They hire the same people the class action lawyers hire to do it, these settlement administration firms. The government’s claim rate is 9 percent too, and they actually do try to send the money out. The reason why claims rates are low is because it’s not worth a lot of time and money to find people to give them small amounts of money back. This has nothing to do with the class action procedural device, it just has to do with the small amounts of money that are at stake. The government’s no better than the class action lawyers are.
I, frankly, am not worried about low compensation rates because I think the class action can be justified solely on the basis of its other important function, which is deterrence. That’s a conservative law and economics idea. It came from Frank Easterbrook, Richard Posner, Gary Becker, and George Stigler. It’s okay to use the class action to make companies pay, even if we can’t get the money back to victims because when companies pay when they do something wrong, they’re less likely to do the wrong thing to begin with. And there’s some very good law and economics both theory and now empirical evidence that the threat of class actions do reduce corporate misconduct. And so I think we can rest the case of the class action on deterrence alone, even if we can’t achieve compensation.
I’m going to turn it over to Ted in 30 seconds, but before I do, I want to just tell one last little story. And this story is about how everything I’ve said today was the typical view of conservatives for most of the 20th century. Things changed in the 1980s. I talk a little bit in the book about why things changed. But what I’ve said, private enforcement of the law is the way to go, not government, that was the conservative view for most of the 20th century.
I give a bunch of examples of that in the book, but the one example that I want to close on is my favorite one from 1978. In 1978, a bill was introduced in Congress to abolish consumer class actions, abolish them. This is the U.S. Chamber’s dream bill today. In 1978 that bill was introduced by Ted Kennedy at the behest of Jimmy Carter. Why? Because they were going to create one of the Chamber’s federal agencies to do all the work instead. What I say in the book, and what I say today, is that conservatives should not be taking advice from Ted Kennedy and Jimmy Carter. Thank you.
Theodore Frank: Thank you, Brian. This is Ted Frank, and thank you to The Federalist Society for hosting this. I think this is an interesting discussion. I think it’s important to discuss the terms of the discussion and make sure that Brian isn’t just taking on the straw man. I agree not all lawsuits are bad. I agree that class actions as a procedural device can be a meaningful way of aggregating litigation and efficiently handling small claims among thousands, hundreds of thousands, millions of litigants.
And I also agree with Brian that substantial reforms are needed. And if you look at the reforms that Brian has in the last part of his book which include loser pays, interlocutory appeals, cost shifting on discovery, these are not minor reforms that are just tweaks to the system. These are things that are just simply never, ever, ever going to pass Congress. And saying the class action system works so long as we get these minor changes in is really saying the class action system doesn’t work. And I think there’s where our major disagreement is.
And the line Brian used was, “Good rules are in place.” And I think the crux of our disagreement is the difference between theory and practice because there are good rules in place. But as applied by judges today, we have a system -- and I agree with Brian, incentives are very important. But I think he ignores how the incentives actually work in real life. And that’s a lot of what my non-profit does. We’re at hlli.org, and you can see our cases there and see some of the things I’m going to be talking about today.
When you talk about the incentives of the class action system, this is not private enforcement. This is a government appointed attorney and an attorney appointed by a judge without marketplace mechanisms because there isn’t competitive bidding. The judge picks their favorite attorney, usually a local attorney. And there are coalitions that avoid bidding against each other and avoid providing competitive market rates. The judge will appoint a close friend or just somebody known to the judge rather than the most efficient attorney for the class.
They’ll appoint a large committee because everybody wants to reduce their risks and share the costs rather than one firm with real responsibility and the incentive to maximize recovery for the clients. We’re talking about a system that it’s a misnomer to call it private enforcement because it’s anything but private enforcement. It’s replacing one set of government regulation with another set of government regulation.
But let’s look at the actual incentives when you talk about class actions and class action settlements. Yes, attorneys have the profit motive, and their goal is to maximize the fees they receive in the class action settlement. And the defendant’s incentive -- they engage in the class action settlement processes to minimize the cost to themselves. But it’s not a bilateral negotiation. It’s a trilateral negotiation, and the attorneys are simultaneously negotiating their own fee and the relief for the class. And maybe they’ll do it sequentially, but everybody knows that every dollar that the defendant pays to the class is a dollar that is not going to end up in the attorneys’ pockets.
And so the incentive for everybody involved is not to maximize the relief for the class but to maximize the illusion of relief for the class. That incentive creates tremendous distortions, both in the incentives to bring good cases and the incentives to bring bad cases, the way class actions are settled, the way the type of relief that is given to the class, the good that is done, the effect of deterrence. All of the things that Brian says are good about class actions fail because though good rules are in place, they are not consistently enforced by district courts, and attorneys know that they’re not consistently enforced by courts and that they can make more money doing things the wrong way.
In fact, they will give up millions of dollars if they do things the right way because if you take, say, a case that has $8 million in litigation value and you do it the right way, and the class gets $6 million and the attorneys get $2 million, that’s costing you millions of dollars. If you do it the wrong way and you have a claims-made process, you get a -- you hire a quack economist for $50,000 to say I have some injunctive relief that’s worth $20 million to the class, and suddenly you now have a settlement that’s $7 million to the attorneys, $1 million to the class, but it’s justified because you have this fake injunction.
The reality is that fake injunctions are the norm, not the exception. The Subway case is the norm, not the exception. The judge approved the Subway case. The judge approved the Subway settlement where the class got nothing and the attorneys got all fees. The only reason you know about it at all is because my non-profit went in and objected. And the only reason that there’s a Seventh Circuit decision on this is because the district court was highly critical of the objector for coming in and objecting to the settlement and approved the settlement. And the Seventh Circuit had to reverse it.
When we were faced with virtually the identical settlement in New York federal court over Barilla pasta, whether a box that says 12 ounces of pasta is defrauding consumers because the pasta in the box settles and there’s air in the box, there’s slack fill in the box. Again, same sort of lawsuit as Subway; no consumers actually injured, phony baloney injunctive relief, no money going to the class, all the monies going to attorney’s fees. We even have a precedent. Look, Subway footlong says you can’t approve this settlement. District court approves the settlement, rejects Subway, and we have to take it to the Second Circuit. You can find the briefing on our website, but that’s pending. We might have a circuit spilt.
Dozens of cases a year involve mergers, and even Brian acknowledges that these are bogus lawsuits. You open the merger. You get phony baloney injunctive relief giving it additional disclosures that are completely worthless to the class. The attorneys get a few hundred thousand, a few million dollars to go away. It’s just a tax on the merger without any benefit to shareholders. It’s a cost to shareholders. It’s a cost to the consumers -- excuse me, to the class members that these attorneys are supposed to be representing.
They’re highly profitable for the attorneys, and these are getting rubber stamped except when we show up to object. And even then, we have to take it up on appeal a lot of the time. The attorneys know that we’re not going to show up for every one of these cases, and if we don’t show up, nobody else will. And so they’re happy to get paid in 95 percent of the cases and fight the other 5 percent, and maybe even win some of that other 5 percent.
The problem is because all attorneys need to do is create the illusion of relief, they no longer have the incentive to bring good cases and only good cases because bringing bad cases is profitable. You can bring a meritless case over mergers. You can bring a meritless case over Subway. You can bring a meritless case over Barilla spaghetti. You can bring a largely meritless case over Wesson oil because the cost of winning a case is so high for defendants, so long as you can get away of just paying class the illusion of relief rather than real money, the attorneys can extract that settlement value for themselves, and it becomes profitable to bring the bad litigation.
And then the deterrent value goes away because the lawsuits aren’t being brought because the defendant did wrong. The lawsuits are being brought because the defendant is a deep pocket and is facing a large class. The frictions of litigation mean that an extract settlement litigation value, because there’s no loser pays, because there’s no shifting of discovery costs, and extract that settlement value for yourself as an attorney. And because of that, we get a lot of bad lawsuits. Maybe not frivolous because Rule 11, as any litigator on this call knows, is hard to actually get sanctions for. We have an appeal pending.
The attorneys explicitly lie, and the judge refused to impose sanctions. We’re going to try to get that changed because the strategy class action attorneys use against good faith public interest objectors like ours is to smear them as much as possible to win on an ad hominem basis, and maybe the judge will get mad at the objector and criticize them and ignore the merits of the objection. And we face this in every single one of our cases. We get hit with these abusive ad hominem attacks. In some tiny fraction of cases, the judges adopt them, and it becomes a national law journal headline that we’re terrible human beings for objecting to these settlements.
When Brian talks about lack of bias, the attorneys don’t have any less bias than the government does. It’s just a different bias. The bias is to go after the deep pocket. The bias is to go after the quick and dirty settlement. Let’s take a case where money actually went to the class. It’s a rare case where rather than having a claims-made process, money was actually directly distributed to the class. Brian is very proud of this case. He trumpets its in his book and in some of his op eds.
It was a case over debit card overdraft fees. The charges on the debit card were sequenced the way it was disclosed in the contract. Attorneys argued that this was unfair because it led to more overdrafts than if it was sequenced in a different way other than what was agreed to. This was settled for class members receiving 7 percent of their overdraft charges back as rebates. And the attorneys made thousands of dollars an hour, 30 percent of the total, in part because it was a highly risky case, in part because Brian testified on behalf of the attorney’s fees.
Now, let’s look at the two possibilities there. Either this was a meritorious case, and the attorneys profited, and the class got minimal compensation with just a tiny tax on the so-called wrongdoer’s banks for following the wrong contracts. They got to keep 93 percent of the proceeds. The attorneys make money, the banks make money, the class gets a tiny bit back. Is that really the system working? Is that really deterrent against wrongdoing? I’d say I’m skeptical.
And if, on the other hand, banks didn’t do anything wrong because they were following enforceable contracts, clearly the attorneys didn’t think that they had a great case if they only settled for less than 10 cents on the dollar. Then that’s just a tax. That’s just a wealth transfer from banks doing the right thing to attorneys with a tiny rebate going back to class members and banks making up for it by raising fees in other ways. It’s hard to say that that’s a system that’s working.
I don’t want to take up all the time here. I’m happy to answer other questions. But Brian started his discussion with AT&T Mobility v. Concepcion, the horrors that consumers had the freedom of contract to opt out of class actions in advance when signing up for an AT&T Mobility service. And what’s happened in the nine years since? Has AT&T started defrauding consumers left and right? Have they raised prices? And the answer to both of those questions is no. The lack of class actions hasn’t hurt consumers at all.
In fact, I’ve had an AT&T contract for 15, 16 years now. My phone bills have gone down. I’m paying half of what I paid 10 years ago, and I’m not being defrauded. There’s no evidence that the lack of class actions has caused AT&T to decide to defraud me. What merit of Brian’s call, which doesn’t sound like a very conservative call, to limit freedom of contract in that regard and preclude arbitration clauses with class action waivers?
There are a few other numbers I want to take issue with. Brian cites his empirical study saying attorneys only get 15 percent of the fees. Brian, there, I think, confuses means with medians. He took a very unusual year where there was a $7 billion settlement regarding Enron shares, and the attorneys got 9 percent of that, which was thousands and thousands and thousands of dollars an hour, including for $20 an hour document review where they were compensated thousands of dollars an hour for it.
And then averaging that with all of the $1 million settlements and $5 million settlements, and yes, if you take the numerator and denominator, that $7 billion settlement where the attorneys, quote, unquote, “only” got 9 percent, and you can get a total number that looks like 15 percent. That number is largely fictional once you strip out these securities cases.
For example, we had a case in the Eleventh Circuit, Poertner v. Gillette. The press coverage called that a $50 million settlement. And we went in and we said, “Wait a second. This is a claims-made settlement, and you didn’t actually give notice to the class.” That 9 percent claims rate Brian mentions is a 9 percent claims rate when you give direct notice to the class. And the vast majority of settlements do not have direct notice to the class. They have publication notice on the back pages of Section C of USA Today or they enter ads on websites you never see. And the claims rate is, on average, less than 0.3 percent.
And that’s not our number. That’s the settlement administrator’s number because in Poertner v. Gillette, a case over Duracell batteries, a rare case where the judge actually demanded that the attorneys produce the number of claims actually made rather than accepting their fictional $50 million number, and it was disclosed that there were $340,000 of claims and a 0.5 percent claims rate. They attorneys came back and said, “But a 0.5 percent claims rate is great because here’s our settlement administrator saying the median claims rate is 0.3 percent.” But in Brian’s data, he’s going to call that a $50 million settlement because the data does not exist in the vast majority of settlements. How much is actually going to the class? It’s not disclosed. And many judges never even ask for it.
We had to win cases in the Third Circuit and the Seventh Circuit demanding these sorts of disclosures, but in the Eleventh Circuit, they still don’t require it. Eventually, the Supreme Court will resolve these disputes, but again, these settlements are not actually paying class members. So where we disagree is, are good rules in place? And in practice, it’s not happening or we’d be winning -- or my organization would have no need to exist because the judges would be enforcing the good rules in place, and there would be no need for us to be objecting because the bad settlements would get rejected, and the attorneys who bring these bad settlements would be punished rather than rewarded.
Brian Fitzpatrick: Thank you, Ted. I’m going to take maybe five minutes to respond to a few of your points, and then, of course, I’m happy to give you a few minutes to respond back before we get to the questions. Let me just say, as I’ve told you many times, I have the greatest respect for you and your organization and the good work that you do. You serve a very valuable purpose in our class action system to create some adversarialness in these settlement processes where there is not any adversarialness.
I do worry, though, Ted, that because you get involved in handful of bad cases every year that you think everything looks like the handful of the bad cases you get involved in. And I really tried, as a scholar, to do some honest, neutral, empirical work that looks at all class actions, not just a handful of class actions. And I have to say, I just don’t think the picture that you paint is an accurate picture of our system.
So let me just respond to a couple of points about my empirical studies. So it is true in my empirical studies when I calculate the fee percentages, I have to use the face value of settlements because we do not usually have a report about what happened to all the money after the settlement was approved. This is a problem, and scholars have been complaining about it for years, and some judges are starting to listen to us and require these reports. But I can say with great confidence that my 15 percent number is still very close to what the number would be even if we did have these reports.
And I can say that with great confidence because in the vast, vast, vast majority of the settlements, especially the settlement money, the money is distributed what we call pro rata. It’s just divided up among the people that file the claims. It’s only situations where the money reverts back to the defendant if there isn’t enough claims, these claims-made settlements where the percentage number would be affected. But that’s a small minority of cases. I don't know how small of a minority, I have to admit. That wasn’t something I tracked closely in my previous studies. I’m tracking it now in my current study. But the vast majority of the money comes from securities fraud settlements, which are all pro rata, and so I know the 15 percent number is close to correct.
Ted says, well, my numbers are skewed because one year had the Enron settlement in it. And it’s true. One of my years included Enron, and that year, the attorneys as a whole, for all the cases in that year, actually got 13 percent, not 15 percent because my study actually included two years. And the other year didn’t have Enron in it, and the total that the class action lawyers got that year was 20 percent. And if you put the two years together, it ended up being 15 percent. So use the 20 percent number if you want to. That’s still very low, in my opinion. As I argue in the book, we should be paying class action lawyers more, not less, if we’re good law and economics conservatives.
And it’s not just securities cases where those numbers are lower than we expect. I go through all the different types of class actions in my empirical study: labor and unemployment, consumer, employee benefits, civil rights, debt collection, antitrust, commercial cases. You can look at the percentages. They’re all well less that a third. Sometimes they get up to 28, 29 percent, but a lot of times, they’re 12, 13 percent, just depending on the year and the type of case. So again, I don’t think we’re paying lawyers too much. We’re probably paying them too little.
Much of Ted’s rebuttal focused on this incentive that everyone has to create an illusion of relief, and I agree that everyone does have that incentive. But it’s easy to counteract that incentive by paying the lawyers a percentage only of real relief, like cash that does not revert back to the defendant. And that is what happens in the vast majority of class action cases. Now, there are 350 class actions in federal court alone every year. How many cases can Ted point to with this phony baloney relief that he mentions? Nowhere near 350 --
Theodore Frank: -- The majority.
Brian Fitzpatrick: Nowhere -- well, I’d love to see a list then, Ted. Give me a list of one year where you’ve got at least 175 phony baloney cases, and then I’m more willing to meet you halfway on that. But I see no evidence that we’ve got 175 phony baloneys a year.
And for example, the illusion of relief point relies very heavily on injunctive relief that’s meaningless but given some fake value by an economist. But I’ll just tell you that when I looked at the relief in every single one of these settlements for my empirical studies, 89 percent of class action settlements include cash payments not to the attorneys made by the defendant; 89 percent of cases include cash relief.
So yes, there are a lot of cases with injunctive relief. That’s 23 percent, from my data. Some of those may be phony baloney, but most of those cases also have cash relief. We can pay the lawyers a percentage of the cash. If we want to try compensate them for getting an injunction, we can find another way to compensate them for that, maybe a lodestar or maybe something else if we’re afraid we can’t value the injunctive relief properly.
One last thing I want to say, and that is his criticism of the overdraft fee settlement. I do think these were wonderful cases. Not just the Bank of America case, which I think is the one that he was referring to when he mentioned the 7 percent back that the class got from their damages, but a lot of banks reordered people’s debit card transactions before they processed the transactions. They took them out of chronological order as you buy things. They held the transactions for a few days and instead processed them from highest to lowest because they knew if they did that, people would hit overdraft more quickly and they could charge more fees on every transaction after they hit zero.
It was a sneaky little scheme. I think it was pretty below the belt, and so did a lot of other people. And there were a bunch of class actions filed against these banks. The banks that had class action waivers in their arbitration clauses got off scot-free, and they got to keep billions and billions of dollars of reordered overdraft fees. The banks that didn’t have class action waivers, they had to actually pay something back to consumers.
Now, Ted is right. In the Bank of America case, the bank only paid back 9 percent of the overdraft fees that were taken there. The reason for that is because there was another class action settlement that let the bank off for a fraction of that in state court in California. And the lawyers were objecting to that settlement. Their objections were overruled. They were on appeal trying to stop that settlement. And so they were in a compromised situation against Bank of America.
But there were like 17 other banks, I believe, that ended up paying out in these class actions. And some of the banks paid 50 to 60 percent of the overdraft fees that they took from people. And so there were a lot of success stories in the cases that didn’t have special compromising facts. And so I still stand by the overdraft fee cases as good use of our system. And there’s a lot of other examples in my book of good class actions, a lot more examples of good than the Chamber of Commerce can find of bad.
Theodore Frank: I mean, the reality is that attorneys aren’t paid by the percentage of what they recover for the class. We have just so many appeals pending now. We lost a Sixth Circuit case where the attorneys weren’t paid based on a percentage what the class recovered, even though that’s what we explicitly asked for and we explicitly pointed to our Seventh Circuit victory. And they said, “No, Brian Fitzpatrick says that attorneys aren’t being paid enough, and therefore it’s okay for the attorneys to get more than the class.”
And that’s a case called Gascho v. Global Fitness, a 2-1 decision rejecting Pearson v. NBTY. And you can look up their cite of Brian Fitzpatrick in that. You can give us an amicus in our pending case over Wesson oil where the attorneys got $7 million and the class got $1 million. I’d asked for the same thing in the Farrell v. Bank of America case we’re going to be arguing in March where the attorneys got $14 million and the class got $18 million. But you already testified for the attorneys in that case.
Brian Fitzpatrick: Which case was this, Ted, that I testified at?
Theodore Frank: This was Farrell v. Bank of America. Maybe -- I don’t know if you testified or they cited you, but I think you gave an expert report.
You say you don’t have data on what the injunctions are, and you say you don’t have data on what the actual class recovery is in the consumer settlements which is the bulk of the abusive settlements that I’ve been talking about. And you merge it with all these Fair Debt Collection Practice Act cases that recover $50,000 and all these securities cases that recover whatever they recover, a tiny fraction of shareholder losses. But those who distributed pro rata, usually to large shareholders at the expense of small shareholders, and then large shareholders that were largely hedged to begin with anyway, make these broad generalizations that your data simply doesn’t support because you don’t have the data.
And I’m telling you what we see on the ground because you know that we only object to a dozen settlements a year isn’t because, oh, it’s anecdotal and it’s hard for us to find settlements to object to. It’s that I have an organization on a shoestring budget with lawyers working really hard, and we have to commit triage every month. Sometimes we can’t find a class member who wants to put up with the abuse that they risk of being subpoenaed or being harassed by attorneys. We had a law professor object to the Wesson oil settlement, and they accused him of unethical conduct. And the judge was one of the 5 or 10 percent who just rubber stamp whatever class action comes his way. Our poor client would have been smeared.
The system simply is not working the way Brian thinks it is. If we had twice as many attorneys and twice as many clients, we could bring twice as many objections. Some of the worst ones, unfortunately, involve demographics of class members who just don’t know to look for attorneys, can’t understand the class notices, and don’t realize that they’re being ripped off or don’t know how to access attorneys who can help them object to abusive class settlements. And even when they can, as in Farrell, they’re up against attorneys with millions of dollars who can hire expensive experts to say, “Oh, this is perfectly okay for attorneys to be getting these wildly disproportionate amounts so that we can return 4 or 5 percent of the class’s alleged damages.”
Brian Fitzpatrick: I do want to respond to a couple things that you’ve said about me as an expert witness and the data in my empirical studies. Now, Ted, I agree. It’s tough to be a class action objector out there. The lawyers don’t make it easy on you. The defendant doesn’t make it easy on you. No one is your friend. I understand that. It’s a hard job, what you have to do, and I appreciate that you do it, and I think that we need more people like you. One of the things I advocate for in the book is a devil’s advocate to be appointed in every class action settlement situation so the judge always has an adversarial presentation. I think we ought to make the parties pay for a special master to do that.
Theodore Frank: Let’s stop for a second. If we need that, if you think that is going to make a difference, how can you say that good rules are in place and the system is working?
Brian Fitzpatrick: Because I can say it, Ted --
Theodore Frank: -- It’s an accidental procedure that it’s worth spending money to have a special master for would make a material difference.
Brian Fitzpatrick: It would improve the system, but that doesn’t mean the system is not better as it is than the alternative, which is the government. That’s what we’ve got to keep in mind. We are always running a race here against the alternative.
I do want to say a couple things, though, about what you said about me and my work. The Farrell case, if I remember correctly — and you know, I do admit to being a bit of an absent minded professor at my age — but if I remember correctly, the Farrell case was against Bank of America. It included two types of relief, non-reversionary cash and non-reversionary forgiveness of debt that the class owed to the bank. The lawyers were getting a percentage of the cash and the forgiveness of debt. I consider forgiveness of debt a cash equivalent. The lawyers were getting a percentage of that. They were getting a smaller percentage of what the bank was actually losing than what the class members were going to get in the end.
The real fight on appeal in that case is not about whether the lawyers are getting more than the class members. It’s about our friend, the lodestar cross-check. The lawyers want to be paid, like every other contingency fee lawyer in America, a percentage of what they extracted from the defendant. And people like Ted say, “No. The lawyers should be capped in their compensation some multiple of how many hours they worked.” This is a very poor formula for incentivizing people to work hard for the class. It caps their incentives because they have to worry about how many hours they’re billing, or it gives them an incentive to drag things out so they can get paid a decent return.
So that’s what that case is about. It’s not about the lawyers getting paid more than the class. It’s about whether we’re going to ask for compensation lodestar --
Theodore Frank: -- No, Brian, it’s actually about the phony baloney debt relief because Bank of America had --
Brian Fitzpatrick: -- Well, debt relief is not phony baloney.
Theodore Frank: -- Bank of America had already written that off, and you’re valuing it dollar for dollar for money that they would never collect again, never hope to collect again, and has no effect for the people whose debt is forgiven. So that’s $32 million of phony baloney relief.
And how do we know it’s phony baloney relief? Because it was a throw in after everything else in the settlement was negotiated. They said, “Oh, can we throw in some debt relief?” And if you were to believe Brian, Bank of America negotiated a full settlement and then doubled the value of the settlement as a throw in at the end. And you can read our briefs and you can see who’s characterized the case correctly here. We’re getting into some real weeds here.
Brian Fitzpatrick: You brought it up, Ted. And I think it’s only appropriate that I have a chance to respond. The other thing that I want to respond to is your statement that I make broad generalizations based on data that that does not support my broad generalizations. And the only thing that I would say about that is I think you make broad generalizations, but in your case, you don’t even have data to support them. You just have your anecdotes of the cases you’ve worked on. I’ve tried very hard and spent a lot of time on my empirical studies, and I do think that I am interpreting my own studies properly. But at least I have the studies, Ted.
Micah Wallen: All right, let’s go ahead and open up those phone lines for any questions. We’ll go ahead and move to our first caller.
Bob Fitzpatrick: Hi. This is Bob Fitzpatrick in D.C. I want to see if I can get you guys to agree on something that might resolve all this. I think you guys would agree that it is ridiculous to say two people with a $50 claim that you can’t represent a class, that you’ve got to go to arbitration because there’s an arbitration agreement post-epic. I think I hear both of you agreeing also that there is need for class action reform. I like Brian’s idea of the devil’s advocate, special masters.
While there’s disagreement, I, for one — and I’m a plaintiff employment lawyer — I know there’s abuse on notice to the class. It isn’t sufficient sometimes. I know there’s abuse on cy pres, and I know there’s abuse on legal fees. And Brian and I -- you and I could argue about that till the cows come home, but I see it. I’ve been doing this 50 years, and I see it over and over.
So I wonder if you guys would agree. Let’s amend the civil rules to get this devil’s advocate, get this special master, and get mandatory review on certain criteria of class action settlements. And on the flip side of that, on legislation class action, how about a reverse CAFA? If plaintiff can prove that they couldn’t possibly attract council to pursue a $50 claim or whatever the dollar amount might be in arbitration, then that’s a ticket to ride to attempt to bring a class action. Any chance you guys could agree on a package of civil rules reform and legislation like that?
Brian Fitzpatrick: Bob, you have explained very eloquently the last chapter of my book. I try to put together a grand bargain. I try to say let’s meet the Chamber halfway. When they make legitimate complaints, let’s give them something to deal with the complaint. And I have a lot of reforms in there. The plaintiffs’ bar does not like them. And I say in exchange for that, let’s amend the Federal Arbitration Act to stop this ridiculousness of the class action waivers.
Theodore Frank: I disagree on the class action waivers. I’ve written extensively about arbitration and why it works and why the attacks on it are unfair. But I also agree that if we had real class action reform and we had the Brian Fitzpatrick/Ted Frank package of fixing the class action system so that attorneys only got paid when the class got paid and there was loser pays, which I haven’t even asked for because that would never, ever, ever happen, that I think arbitration clauses would go away. They’re there because right now, the system encourages meritless litigation, and by having an arbitration clause in there, vendors can provide lower prices for consumers than if they didn’t have the arbitration clause in there.
Consumers still have recourse under an arbitration system because if the consumer has actually been wronged, the company will never actually go to arbitration. They will settle with the consumer and give them their $50, and that’s been my experience every time I have had a dispute with a vendor with an arbitration clause. I have no arbitration statistics because I’ve never had to actually even initiate the arbitration because in the pre-arbitration disputes provision of the contract, I say, okay, this is my 30-day notice that I’m going to initiate an arbitration and then I get paid back.
Brian Fitzpatrick: That assumes you know you’ve even been wronged by the company. This overdraft fee scheme that I described earlier, that was hard to figure out for normal people — not Ted, he’s very sophisticated — but for normal people, those kinds of things are hard to figure out. That’s one of the virtues of the class action is when one person figures it out, that person can hold the company accountable for everybody.
I don’t think it’s pie in the sky to think we can get serious reforms through, including some kind of loser pays or discovery cost sharing. I put them as alternatives in the book. The reason is this: The Concepcion decision gives all the cards to conservatives. If we just sit there and do nothing, the class action is going to wither away because companies are putting class action waivers in more and more and more of their agreements. We have all the cards. We can demand whatever reforms we want from the left, and I think we can get it because they know that unless you amend the Federal Arbitration Act, the class action is on the road to the end.
Micah Wallen: We have a few other questions in the line. We’ll go ahead and move to our next caller.
Sam Miorelli: Hi. This is Sam Miorelli in Florida. I’ll start off by just saying I have an enormous amount of respect for both of you, and I think you both know that. I’ve litigated alongside Ted for various family members over the years and discussed this a lot with you, Brian. And Brian, I read your book, and I find a lot to agree with on the private enforcement versus letting the government do it situation. But I’ve also been out there with Ted and had my grandfather called names a couple months before he died, and my mom called names while she was caring for him on his death bed. I’ve been called names myself just because we stood up and said, “Hey, giving people a coupon when their dishwasher could have caught on fire and then giving the lawyers $15 million isn’t a good deal.”
And so I wonder, Brian, if the rules changed and we said there’s no more cy pres, the money all goes, say, to the treasury, so you get rid of quote, unquote, “charities” like plaintiff lawyers for justice. And if we went to a situation where you really only did pay -- or the lawyers really only did get paid if they got something for the class in money, where you have a true common fund, where you don’t have all of these Bluetooth red flag things, where it’s just a straight common fund and the lawyers get X percentage, and you don’t have these lodestar situations where the lawyers want the lodestar if it gives them more money and then they don’t want the lodestar if it gives them less. If we just did a straight percentage, which is what some states have done on personal injury, do you think that that would maybe be an acceptable outcome?
Brian Fitzpatrick: I think those are good reforms. And as I said when I was responding to Ted, I think the way that objectors are treated is abominable. They do make it very rough on people to come forward. I would like to normalize the objection process so that people do not think that you guys are villains. The attitude toward objectors grew out of people that were objecting in years before Ted got involved, these profit-motivated objectors that were just holding up settlements in order to extract side deals from the lawyers. They call it objector blackmail.
I think we need to ban all side payments to objectors, ban, ban, ban, ban. Then we only get people who are interesting in actually improving the deal. And I think that would normalize the process. If we do the devil’s advocate idea, it normalizes the process even further. So I’m totally sympathetic to your plight here, and I think we largely agree, you, me, and Ted, on some of the rules that we need to put into place to harness the lawyer profit motive for good. I think we have a lot of rules, but some judges -- I agree, not all judges are created equal. And some judges aren’t doing what they should be doing. And I’m all in favor of tightening the system up.
Theodore Frank: By the way, there already is a devil’s advocate provision in the class action rules. It’s 28 U.S.C. 1715 saying state AGs can come in and point out problems with a settlement. We’re finding that -- we’re finally getting state AGs in the Department of Justice getting involved in these things. And we’re finding that a majority of the time, it doesn’t matter. They come in and they make the right objections. They say, “Look, this is a coupon settlement, and most of these coupons won’t be redeemed. And you’re paying the attorneys as if they have 100 percent value.” And the judge says, “I don’t care. You’re just trying to get in the way of the settlement. And I want a settlement, and settlement is good. And Brian Fitzpatrick says that attorneys aren’t paid enough, so I’m approving it.”
Brian Fitzpatrick: It’s not just Brian Fitzpatrick, but it’s law and economics that says that.
Micah Wallen: We have one more question in the line to get to before we close out today, so without further ado, we’ll move to our last caller.
Andrew: Hi. My name’s Andrew, and I’m actually a law student, a private enforcer. I have been a class representative in class actions under the TCPA. And my question is for Mr. Fitzpatrick. What rules or things that you would change because what I have found is discovery abuses from the entities which I sue tend to discourage private enforcement of these statues that Congress enacted and seem to make -- the defendants’ bar seems to want to act like bringing class actions is not normalized. What suggestions would you have, particularly with respect to some suggestions to potentially resolve these issues where defendants are engaging in abusive discovery and also to help normalize the conduct of class actions?
Brian Fitzpatrick: So Andrew, you’re not going to like my response, I’m sorry to tell you. [Laughter] So number one, I think that the discovery abuse is really a problem more that plaintiffs inflict upon defendants than vice versa. And I’m happy to talk to you offline and learn about what discovery abuses you’re facing on the plaintiffs’ side. But in my experience, it’s plaintiffs asking for excessive materials from defendants to drive up their costs and therefore the litigation or the settlement value of the cases. And so I favor discovery cost sharing. I have a proposal on SSRN. It’s an article I’m working on called the discovery tax where I think every time a requester of discovery asks for something, they should pay a tax that’s a percentage of whatever it costs the responder to respond to their request. And this would give people better incentives around discovery than they have now.
The other thing you’re not going to like, Andrew, is I’m not a fan of these TCPA class actions. I worry that statutory damages class actions where the statutory damages have absolutely no relation whatsoever to the harm caused by the defendant, I worry that these statutory damages class actions inflict massive overdeterrence on defendants. Some of these TCPA cases, you can have a trillion dollars of potential liability. None of us like robocalls, but I’m not sure we want to put Apple out of business over a robocall. So I just don’t think the class action is the best way to deal with these statutory damages situations.
What I say in the book is we need an alternative. You either use the class action and go after actual harm or some capped amount of statutory damages that’s reasonable, like one percent of revenue or profits or something. Or you say if you want statutory damages, you have to file individual actions because I don’t think Congress intended when they said you get $500 or $1,500 per robocall to put Apple out of business. I think we have aggregated two different devices and we get overdeterrence from it. So I’m sorry to have to tell you that, Andrew, but that’s where I come down on that.
Theodore Frank: I’ve been a class representative in TCPA cases. And I think the problem with TCPA class actions is that there are a lot of TCPA violations, but they’re done by organizations that the profit motive gives no incentive to sue because they’re offshore or they’re fly by night operations. And so the defendants in TCPA class actions are rarely the people who are actually the ones calling you several times a day offering you cruises and health insurance and auto warranties, but they’re Walgreens trying to tell you about your prescription renewal, and there’s a lawsuit saying they didn’t dot an I or cross a T appropriately in getting your permission to text you. And because they’re such a deep pocket and because the cost of losing a TCPA class action is so huge it’s worth paying a dollar or two a class member to go away. But that turns into millions of dollars and very profitable for the attorneys.
And we did do an empirical study on this as part of discovery in the Capital One TCPA litigation, and we found that attorneys, win or lose, are averaging well over $1,000 an hour for this, and most of that time is spent post-settlement rather than actually litigating the case. The risk is beyond minimal. It’s just tremendous windfalls to attorneys that would not happen if it was actually a market mechanism and competitive bidding.
Brian Fitzpatrick: And by the way, on the market mechanism point, I do agree with Ted that the class action is not the purest form of privatization because you do have class council being granted basically a monopoly over representation in one action by a judge. What I say in the book is that this is more akin to a franchise being granted by the government like a utility. I have a privatization spectrum in the book that I get out of the privatization literature, and you can see that the franchise is in the middle of the spectrum. It’s not pure privatization, but it’s also better than the government.
But I do think we can improve the way that judges award the franchise to the class action attorney. I am all in favor of auctioning off class council. My ideal formula, I argue in the book, would be the following: You auction off class council by saying what firm is willing to take this case for the lowest percentage plus their lodestar? I think that is the best formula to compensate class council. Auction it off to see who’s willing to do it for lodestar plus the smallest percentage. Of course, you have to consider quality when you’re looking at the bids, but we do bidding for everything else successfully. I think we can do bidding for class actions too.
Micah Wallen: All right. Do either of you have any closing remarks for us today?
Brian Fitzpatrick: No. I think it was a lot of fun. Thank you, Ted. I always appreciate your thoughtful remarks.
Theodore Frank: Thank you, Brian. Thank you to The Federalist Society.
Micah Wallen: And on behalf of The Federalist Society, I would like to thank our experts for the benefit of their valuable time and expertise today. We welcome listener feedback by email at email@example.com. Thank you all for joining us. We are adjourned.
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