Class Action Suits Benefit Few Other Than Attorneys

For decades, class action lawsuits (CALs) have been criticized as vehicles for enriching trial lawyers at the expense of consumers.  The idea behind CALs is laudable; people who have suffered the same wrong from the same defendant can join together in a single suit, which is far more efficient than thousands of consumers filings separate lawsuits against a company.  However, the potential for abuse lies in the sheer size of some of the lawsuits.  A company willing to risk a trial in a CAL faces the possibility of being found liable for damages large enough to force it into bankruptcy.  This can be true even if the lawsuit lacks merit and there is only a small chance of the plaintiffs prevailing in a trial.  For example, a company worth $500 million facing a $1 billion CAL may find it wise to settle with the plaintiffs even if the plaintiffs have only, say, a 10 percent chance of prevailing in a trial.  In short, the mere threat of a CAL can force a company to settle with the plaintiffs.

To make matters worse, even meritorious CALs often fail to adequately compensate plaintiffs for their injuries. The plaintiffs’ attorneys can claim a third (or even more) of the settlement, and the remainder is divided among thousands of plaintiffs.  It is not unusual for CALs to result in payment of a few dollars to each of the plaintiffs while their attorneys pocket millions.   The abuse does not end there.  Judges often “rubber stamp” the legal fees claimed by the plaintiff’s lawyers, even though the lawyers may be billing clerical or paralegal work at lawyer’s rates of several hundred dollars an hour.

Businesses fearing CALs have countered by using contracts with clauses providing that arbitration will be the mechanism for settling disputes, rather than litigation in the courts.  The Supreme Court recently heard oral arguments in the case American Express Company v. Italian Colors Restaurant.  The plaintiffs sued American Express for alleged anti-competitive behavior.  The lower courts split on whether an arbitration clause in the contracts the plaintiffs signed with American Express should control and thereby remove the case from consideration by the courts.  A Supreme Court ruling in favor of American Express will encourage companies to require arbitration clauses in their contracts with vendors and consumers.