I am trying to understand the economic “benefits” of these class action lawsuits, as directed to companies found guilty of either fixing prices are selling defective products.
As a hypothetical example, take a company that conspires with its distributors to fix the pricing of its product. Lets say that widgets go for $5.00 each-because of collusion, the company is actually able to sell them for $5.05 each.
Now, a “socially conscious” law firm finds ot, and files a class action lawsuit on behalf the widget users. The firm wins the lawsuit, and damages are awarded. Let’s say the court awards $100 million in damages. Now, the law firm gets half- $50 million. The rest is to be distributed among the 100 million customers-so each would get $0.50-not enough to cover the cost of mailing the checks!
You laugh-but just such a case just was settled (the CD overcharge case). I believe the award was so small that the court decided that that the money would be given to charity!
So how does this benefit society? To me, the conclusions are:
-the law firms is “unjustly enriched”-it has gotten a huge reward with no direct interest!
-society gets no benefit-the company will adjust its pricing to recover its loss.
Seems like “class action” should be called “extortion” !
You’re correct about the lawyers – they are being enriched.
However, as for the second point, if the company hadn’t been sued and forced to pay, they get to keep the benefits of their illegal acts. If companies can do whatever they want – even disobey the law, as in the case of price fixing – without fear of financial consequences, it will result in constant lawbreaking. Companies would collude to raise prices knowing that, even if they were caught, they would suffer only a small inconvenience, not the large payment of a class-action suit.
So the benefit is to prevent the company (and others) from doing the same thing again.
And its competition, which didn’t illegally price their products and therefore hasn’t paid any damages, will be able to price their products less than the bad acting company. Now there are two ways that their illegal proce fixing comes back to bit them on the bum.
ralph124c, I really think that you need to spend some time on your own understanding the American legal system. For example, I’m not aware that the CD settlement had a trial. Also, your OP suggests that all of the members of the class were plaintiffs in the trial. That would be a tad unusual for a class action.
More importantly, by positing a case where only $.05 was at stake for each individual, then concluding that a class action = extortion, you’ve left out all of the class actions that cover more significant sums. If you are willing to read part of a really big .pdf file, you can see that the Diet Drug Class action is prepared to handle claims from $0 in present benefits up to around $1,000,000. (E.g., the charts starting on p. 38) This is a class action that came into existence because a company decided to kill Americans to continue making a profit. They also decided to seriously damage the hearts of tens of thousands of people. This is not a class action where the plaintiffs’ lawyers are the bad actors.
If you want to conclude that class action = extortion, then you should understand what they do, how they do it, and how they have been used.
As well as being good for the lawyers, class action lawsuits can be more fair to the plaintiff and defendant, and more efficient as well.
To give an(other) example, my sister was rendered sterile when she got a uterine infection while using an IUD.* Thousands of other women used that particular model of device. Some had minor complications; others had to have hysterectomies. The manufacturer was sued and the lawsuit was given class action status. My sister received a few thousand dollars as her share. Others received more or less depending on how badly they were hurt (the dollar value each plaintiff received was determined by the court.)
If each woman sued individually, the courts across the U.S. would have had to hear thousands of cases and the defendant would have had to prepare separate defenses for every case. On the other hand, far fewer of the women (including sis) would have sued if they had to fight a very personal case like this through the courts. Also, some of the women who did sue would have won big; others would have won nothing. By making the suit a class action, court costs were less for all and the settlement was paid out more fairly.
*[sub]Please note that I am only posting this because I know none of you in real life. I would not have posted something this personal otherwise.[/sub]
The Supreme Court has explained the economic utility of the class-action device in these terms:
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 117 S. Ct. 2231, 2246 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997)).
The attorneys get “enriched” because they are the only ones investing in the case, and they bear the entire risk arising from that investment–after all, many cases never pay off, and the lawyers may sink years and fortunes into a case without ever getting a nickel back. Since they take the entire downside risk, they share a significant fraction of the recovery–but not all of it, as they would in a straightforward business investment.
Note that this sometimes gets turned on its head. Ordinarily defendants fight tooth and nail to avoid a class being formed. It’s one thing for them to face a single multi-thousand dollar lawsuit and quite another to have that multiplied by thousands of individuals in the class. Attorneys generally want the class to be formed because as brianmelendez mentioned they stand to gain significantly more money thus making their investment a risk more worth taking.
However, in the lawsuits brought against Dow for breast implants the company actually sought to have a class formed and some of the attorneys fought it. Dow lost. The attorneys in this case brought one suit after the other at the company and they lost many times. Eventually however the plaintiff’s attorneys caught a break/sympathetic jury and won BIG. Enough to make all the other losses worthwhile. Dow faced endless litigation that was incredibly costly and as soon as one case was lost the floodgates opened dooming the company. .(Link to details on this issue) Note that I am not commenting on the merits of the breast implant litigation…I’m just noting how the merits of forming a class can get flip-flopped.
I would say that story comes closer to extortion that that in the OP. Essentially, “Pay up or I will sue you for the next few decades…over and over agian for the same thing…and you had better pray I don’t win just one.” Even that however stretches the notion of extortion. In some fashion you might be able to view any civil action as potential extortion (i.e. give me what I want or I will cause you trouble).
Whack-a-Mole makes a good point (which cornflakes may have also been making in writing that "class action lawsuits can be more fair to the plaintiff and defendant, and more efficient as well’): the class-action device can benefit the party opposing the class as well. The Supreme Court has explained that part of the rule providing for class actions
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 117 S. Ct. 2231, 2245 (quoting Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure (I), 81 Harv. L. Rev. 356, 388 (1967)) (emphasis added).
Doesn’t “class action” then become perilously close to the crime of champerty? Essentially, the law firm bringing the case is able to recruit thousands of plaintiffs (even without their knowledge) into the class action. In the airline case, to opt out of the class action, YOU (the memeber of the class) had to reply to register your non-willingness to participate.
I still don’t see how making lawyers rich does anything positive - in a free market, you make your choices and pay what you believe is an appropriate price. I don’t need some third party to tell me what I should or should not pay for something.
One other point:I think the “loser pays” rule should apply to class action lawsuits-there seems to be no downside to bringing these things into court-as in the Dow Chemical case (silicone breat implants), the law firms sueing Dow could just keep filing lawsuits, till they hit the jackpot.
And, nobody has mentioned the fact that these lawsuits were scientifically indefensible!
According to the CD settlement info page the case is still in the courts and they have yet to approve the settlement amount. So there is still a chance this ridiculously small payout could increase.
How do you think class actions are formed, and what do you think is the purpose of a class action?
I don’t see what the price you are willing to pay has to do with a class action, unless you believe that someone in a class action dictates what the liable party pays. Whether a tortfeasor has to increase the price of its products after it pays damages is a function of the fact that it caused harm not a function of the mechanism that resolved the issue.
So, consider this:
Company knowing sells a product that causes health problems. The applicable statutory fine for doing this is $1 million. Company makes $10 million selling the product.
Without class action, the company’s profit is cut to $9 million. As a financial calculation, this sounds pretty good: count the fine as a cost of doing business. (And the fine can’t be increased ex post facto.)
With class action, company gets hit with a $20 million judgment. Now they have an $11 million loss (counting the fine). Now the finances don’t look so good.
Ultimately, the ability to go after a company on a class action suit reduces the incentive for a company to knowingly do something wrong.
You’re going with the fallacy that a free market solves all problems. However, there are many things that need to be done for the common good, not just for the profit on one particular entity.
I agree I’m uncomfortable with the lawyers benefitting, but that’s just the free market you’re so enamored of. Since it benefits society as a whole to discourage companies from ripping off people, it’s just the price you pay for better products.
** - in a free market, you make your choices and pay what you believe is an appropriate price. I don’t need some third party to tell me what I should or should not pay for something.
**When price-fixing is found, the judge has looked at the evidence and decided that the defendant fixed the market. There was no free market operating in that case.
**One other point:I think the “loser pays” rule should apply to class action lawsuits-there seems to be no downside **
See prior posts as to the downside.
to bringing these things into court-as in the Dow Chemical case (silicone breat implants), the law firms sueing Dow could just keep filing lawsuits, till they hit the jackpot.
The Dow suits were not class-action suits, they were individual suits.
And, nobody has mentioned the fact that these lawsuits were scientifically indefensible!
Note jury after jury dumped the plaintiffs until finally one went the other way. If it had been handled as one big class-action lawsuit, the plaintiffs would have had only one chance at winning. You can see why Dow tried to make it class-action.
You seem to be suggesting that the Dow issue not becoming a class was a good thing but maybe I am reading you wrong.
Maybe it is and maybe it isn’t. I guess it all depends on whether you think Dow was justifiably liable or taken to the cleaners.
Either way I have to admit I have a problem with what happened to Dow in the breast implant cases. It sits wrong with me that you can get sued over and over and over again for the same thing. The harrassment value of such a tactic alone is frightening.
Imagine you build an arbor in your yard and your neighbors don’t like it. Neighbor #1 sues you to take it down and loses. Neighbor #2 now sues you to take it down and loses. Neighbor #3 does likewise. Continue till one of them gets lucky or you get tired of the whole thing and capitulate.
Is that justice?
It seems to have been good for the plaintiffs and bad for Dow.
Dow didn’t get sued over and over for the same thing - the individual plaintiffs changed each time, but the type of injury alleged was similar. One of the realities of modern mass production is that one course of action can damage thousands of people at a time. Pondimin and Redux were widely popular, yet they’ve damaged thousands of people. The manufacturer has faced hundreds of lawsuits and likely faces many more in the future, yet there is also a settlement to the class action which will likely cover tens of thousands of claims at greatly reduced transaction costs compared to litigation
No, it’s silly.
This is more of a debate than a factual question, so I’ll move this thread to GD.
bibliophage
moderator GQ