In meetings last fall and continuing this year, a little-known committee that includes one of the nation’s top class-action lawyers has been mulling changes that could make it easier to bring lawsuits on behalf of large numbers of plaintiffs and make it harder to challenge the resulting settlements.
Normally, the meetings of the Rule 23 Subcommittee of the Advisory Committee on Rules of Civil Procedure wouldn’t attract any interest outside of the small group of lawyers who specialize in class-action litigation. But this year’s discussions are drawing broader attention because the subcommittee is considering changes that could make the multibillion-dollar class-action business even more expensive and distracting for corporate defendants.
Any changes are at least a year away and the subcommittee is careful to state it is only throwing out “conceptual sketches” of new rules it may reject after further discussions and public comment. But those conceptual sketches are riling defense lawyers and class-action foes, who say the subcommittee should be talking about tightening the rules to eliminate abuses instead of making it easier to bring class actions. One model would be the Public Securities Litigation Act of 1995, which placed procedural roadblocks in the way of securities class actions designed mainly to enrich the attorneys who brought them.
“Let’s go with something we know works,” said Andrew Trask, a partner with McGuireWoods who has criticized the proposed Rule 23 changes for his Class Action Countermeasures blog. "Congress passed a set of rules that have changed things for the better. You don’t get as many frivolous securities class actions as frivolous product liability cases anymore."
According to the most recent report of the Rule 23 Subcommittee, issued last month, the panel is considering a new rule that would authorize “settlement classes,” or lawsuits that exist only to be settled. That’s a constitutionally dubious proposition since the U.S. Constitution restricts federal court jurisdiction to “cases and controversies” and no case or controversy exists when plaintiff lawyers and the defense walk into court arm-in-arm with a settlement agreement already in hand.
The subcommittee is also considering eliminating notice to class members when their claims are under $100 each, substantially eliminating the ability of people to participate in lawsuits that will bind them to their results. Also being discussed are new rules for the practice known as cy pres, under which judges award settlement money to charity if class members don't claim it. Plaintiff lawyers and some academics say this makes sense, since otherwise the money would go back to the defendants. But it would also formalize a process that some critics say is unconstitutional -- how can a court award damages to a party that doesn’t even have a claim in the lawsuit? -- and others say makes otherwise unworkable class actions possible.
“It necessarily concedes you can’t actually identify class members for relief,” said Trask. “If you can’t identify class members for relief, why are you bringing a class action in the first place?”
Businesses would do well to watch the rules committee closely. It was a seemingly minor change to Rule 23 back in 1966 that spawned the securities class-action industry, which generated nearly $14 billion in settlements over the past five years, according to a Stanford/Cornerstone Research report, and probably another $6 billion in fees.
The Federal Rules of Civil Procedure are a product of the Rules Enabling Act of 1934, under which a committee operating under the supervision of the U.S. Supreme Court determines the rules for bringing lawsuits in federal court. Committees consisting of lawyers and judges propose changes from time to time and if the Supreme Court agrees, they go into effect unless Congress objects.
Rule 23 was included in the original rules back in 1938 but was envisioned mainly as a way for courts to assemble multiple plaintiffs with identical claims into a single lawsuit. (Brown v. Board of Education, the school-desegregation case, was filed as a Rule 23 class action.) Then in 1966 academics and lawyers who thought class actions were a useful tool for achieving social justice added Rule 23(b)(3) to declare mandatory classes, where everybody sharing a similar claim would be included in the case – and bound by any judgment – unless they opted out. At the time there were about 10 class actions a year in federal courts and proponents thought the new rule would be good for plane crashes and other mass accidents but classes would rarely grow to more than 100.
Securities lawyers like Mel Weiss and Bill Lerach jumped on the changes to file lawsuits whenever a company’s stock fell, however, claiming executives fraudulently hid information from investors. With thousands or millions of “clients,” few of whom even knew about the suit, class-action lawyers could threaten companies with ruinous damages unless they settled. Plaintiff lawyers have long since expanded the procedure to include lawsuits over supposedly misleading food labels, mysteriously accelerating automobiles, and "memoirs" that play fast and loose with the facts.
Class actions have also generated a lot of controversy over the fees plaintiff lawyers win for negotiating settlements, even if their supposed clients get pennies on the dollar. Some lawyers are accused of colluding with the companies they sue to negotiate lowball settlements that pay them top dollar in fees, and sometimes lawyers have even landed in jail. Weiss and Lerach both went to prison for paying investors kickbacks for serving as representative plaintiffs in securities cases.
Class actions have “certainly attracted a huge amount of attention,” said Richard Marcus, a professor at the University of California-Hastings Law School and longtime “reporter,” or advisor, to the Rule 23 Subcommitee. “You can make very forceful arguments they are very peculiar things.”
The current Rule 23 Subcommittee is headed by Robert Dow, a federal judge in Illinois and former Mayer Brown partner who was appointed by George W. Bush. It also includes Robert Klonoff, a former Jones Day partner who now teaches at Lewis & Clark Law School; Elizabeth Cabraser, partner with Lieff Cabraser, the class-action firm; and Edward H. Cooper, a professor at the University of Michigan Law School.
While the majority of subcommittee members come from arguably conservative, corporate backgrounds, Cabraser’s presence worries corporate defendants. (She declined comment.) And some of the proposals being floated worry critics who say they will make it easier for lawyers to use the threat of ruinous litigation to extract fee-rich settlements. Giving judges the explicit power to certify classes only for settlement purposes, for example, raises the the risk that plaintiff lawyers will collude with defendant companies to negotiate deals that bind class members to their terms before any real litigation has occurred.
The risk of collusion increases if the lawyers can layer on a cy pres provision, meaning they don’t really even have to try to get the money to their supposed clients. Among the questions being discussed at the subcommittee are whether judges should be alerted to a cy pres agreement before approving the settlement. Prof. Martin Redish of Northwestern Law School believes the agreements to be unconstitutional, since the unrelated charities don’t have a case or controversy before the court and the gift to charity might be a new “remedy” not allowed under the Rules Enabling Act.
Other critics such as Ted Frank of the Center for Class Action Fairness, have filed objections against distributions to charities that have little relation to the case but may have connections to lawyers involved in it. That clearly worried the Rule 23 subcommittee.
“Including cy pres provisions in a settlement agreement is almost certain to draw objections in today's climate,” they said in their April report.
The committee also has discussed requiring objectors to post a bond if they appeal a lower court rejection of their complaint, so they don’t delay settlements with frivolous appeals.That worries class-action critics, who say objectors are frequently the only ones standing in the way of a collusive settlement that rewards the lawyers who negotiated it and nobody else.
Requiring bonds would suit Ross Good of Anderson & Wanca, however, a class-action attorney who has noticed a pattern of objectors who lob a complaint about a settlement only to have it rejected by the judge so they can threaten to appeal unless they are paid a fee of sometimes several hundred thousand dollars. Good says objecting class members are also sometimes are paid thousands of dollars to withdraw, in deals that are negotiated by plaintiff and defense lawyers out of view of the court.
“In order to tell if an objector has been paid off, just look at the timing,” said Good, who is working on a website to track serial objectors. If the objection disappears before an appeal has been filed, he said, that probably means the objector took money to drop it.
Some of the most common objectors are even threatening to bring in Frank, who has a successful appeals record including busting up an infamous settlement over Pella windows that was so bad the Seventh Circuit Court of Appeals tossed the lawyer who negotiated it and the lead plaintiff, who happened to be his father-in-law.
Frank is unapologetic about representing so-called “bad” objectors who sometimes drop their cases for a fee, however. Other times, they have a valid case that could establish an important precedent, Frank said. Since CCAF is a non-profit that can’t earn money from its work on objections, Frank subsidizes his non-profit salary by handling appeals as a private attorney.
“If they want to pay me my normal rates to bring an appeal, that’s a win-win-win,” he said. “I can get good precedents instead of bad precedents, which would hurt what CCAF is trying to do.”
One more proposal that has defense lawyers worried would eliminate the expensive and time-consuming notice process for cases where individual damages are “low-value” claims below $100. “The meaning of `individual’ notice in the Digital Age might need to be reconsidered,” the subcommittee noted.
Dispensing with notice, however, would fully abandon the original premise behind class actions, that they were designed to compensate individuals for their losses. That understanding would be replaced by an admission of what they have really become: Opportunities for lawyers to deputize themselves as private attorneys general who can sue companies for any perceived legal infraction and then settle the claim for a fee.
Finally, the committee is considering changing another rule that allows defendants to “pick off” lead plaintiffs by offering to settle their cases.
The Rule 23 subcommittee is careful to note that none of the measures it is discussing may wind up in recommendations the committee above them will present to the Supreme Court for review, perhaps next year.
Some critics, like Redish, think the entire Rule 23 superstructure should be blown up as an unconstitutional aberration that forces individuals to participate in lawsuits without their knowledge or consent.
But Marcus, who’s served on the subcommittee since 1996 and co-wrote a book on civil procedure with Redish, said it’s most likely the class action system stays pretty much the way it is. Even defense lawyers have a vested interested in the current system, both because it generates lots of work for them and because class actions offer their clients a way to settle cases quickly and in volume.
“Dismantling what we’ve got would be a highly challenging task,” Marcus said.
