In April 2011 the Mexican Parliament approved a legislative package that regulates such actions, foreseeing the publication of the same in the Federal Official Gazette during the month of July. The amended laws are six: (1) Federal Code of Civil Proceedings; (2) Federal Civil Code; (3) Federal Law of Economic Competence; (4) Federal Law of Consumer’s Protection; (4) Organic Law of the Federal Judicial Power; (5) General Law of Ecological Equilibrium and Environmental Protection; and (6) Law of Protection to the User of Financial Services. On August 30th 2011, the Federal Official Gazette published this amendment to the federal law.

Legislation limits collective actions to matters related to the consumption of goods or services (public or private) and the environment.

jdehoyos@dha.com.mx

Jorge de Hoyos Walther

http://www.dha.com.mx

I will leave it to Schonbrun and others to comment on the social value of professional objectors or class actions more generally.  As a defense practitioner, my concern is with the potential practical impact on my clients’ cases.  From a practical perspective, it is important to note that what most practitioners would consider “professional” objectors does not include nonprofit associations and lawyers whose motivation is based on a genuine belief that the settlement is unfair to consumers or that class actions should be reformed.  Nor would it include a lawyer who was retained by a client because of the client’s bona fide objection to the fairness of the settlement.  While it is possible that the motivations of a particular objector’s counsel could be mixed or unclear, most practitioners would agree that the term “professional objector” is susceptible to the same “I know it when  I see it” standard as Justice Potter Stewart’s  standard for identifying obscenity.

There is no doubt that there exists several cottage industries of entrepreneurial lawyers who have found creative ways to profit from class actions filed by other lawyers and their clients.  Professional objectors are but one of at least three groups of what many traditional plaintiffs’ attorneys would consider interlopers who seek to make a cheap buck off of someone else’s class action:

1) “Copy cat” lawyers, who file competing lawsuits in other jurisdictions

2) “Opt out” lawyers, who round up individuals to opt out of class action settlements in order to file mass actions raising the same claims

3) “Professional objectors,” attorneys who solicit members of a class in order to raise objections to a class settlement, in the hopes of being able to extract a portion of the fee or to take over as class counsel. 

From my perspective, the influence of these groups, at least in the consumer class action context, has waned over the past decade.  Five or ten years ago, it was common to expect one or more objections to a large class action settlement filed by attorneys who had an obvious track record of objecting to class actions (and no obvious political or charitable agenda).  Back then, many plaintiffs’ lawyers would simply agree to pay a small portion of the fee to the objector’s lawyer, rather than have the entire settlement held up for months or years while the objectors exhausted their appeals.  These days, by contrast, there are a variety of techniques that have been successful in  reducing the number of objections motivated purely by an outside lawyer’s attempt to profit from the settlement.  The most significant tool has been to file a motion to require the objector or his attorney to post a significant bond, measured by a percentage of the value of the settlement, pending any appeal of the denial of an objection.

The problem of dealing with professional objectors is customarily the role of plaintiffs’ counsel, although after having agreed to a settlement, the defendant has nearly as much of an incentive to overcome objections as the plaintiffs’ lawyers do.  There are several key preventative measures that both parties to a class action settlement can take to ward off professional objectors (or any objectors, for that matter), including:

• Avoiding the appearance of collusion.  This problem is usually avoided if the settlement is reached after an otherwise contested litigation, but can be a problem if the parties reach a settlement shortly after the complaint has been filed.  In most cases, experienced plaintiffs’ counsel will insist on at least performing some confirmatory discovery before agreeing to a settlement in the first place.
• Retaining a qualified notice expert to ensure that the notice program follows current best practices and to opine, if necessary, about the fairness, reach, and reasonableness of the settlement notice.  This is important because the most persuasive arguments that can be made by an objector is not that the settlement value is unfair (after all, the settlement is the result of a compromise between the parties) but rather it was procedurally unfair because it did not provide potential claimants with reasonable notice.

As noted in this February 14 CAB entry, class actions seeking statutory penalties under FCRA and similar statutes have been a controversial issue over the past few years.  Some say that it is unfair to subject a company (and, by implication its employees and shareholders) to potentially “annihilating” liability for acts that have caused no material injury to the vast majoirty of a class of consumers.  Others say that if class actions are to be prohibited in cases seeking penalties under these statutes, it is up to Congress to say so.

I will leave it up to the reader to decide whether these types of class actions portend an economic nuclear holocaust.

1. limit private actions under three consumer protection statutes to actions filed by ”natural persons who purchase or lease goods, services, or real estate for personal, family, or household purposes”;
2. require proof of personal loss of money in order to support a cause of action for damages under the consumer protection statutes; and
3. make class certification orders immediately appealable and imposes an automatic stay of proceedings at the trial court while the appeal is pending.

All three measures are similar to class action reform measures passed or at least considered by various states over the past decade or so.  However, there are at least three aspects of the proposed reforms that would make consumer protection actions in Minnesota more restrictive than in other states.

First, this bill appears to limit consumer protection actions to actual consumers.  Some state statutes broadly construe who is a “consumer” for the purposes of enforcing the consumer protection law, so that small businesses and other non-natural “persons” can sometimes qualify. 

Second, while most states have some sort of requirement that there be proof of causation of injury in a consumer protection case, HF211 would require a specific kind of injury:

No award of damages in an action covered by this subdivision may be made without proof that the person or persons seeking damages suffered an actual out-of-pocket loss. The term “out-of-pocket loss” means an amount of money equal to the difference between the amount paid by the consumer for the good or service and the actual market value of the good or service that the consumer actually received.

This language appears to restrict consumer protection claims to only those situations in which the named plaintiff and other would-be class members suffered a loss of value to the product or service purchased.  So, a claim that deceptive marketing or advertising practice caused consumers to suffer financial losses other than loss of value to the product itself would apparently be foreclosed.  The specific language may be intended to avoid the kinds of uncertainty that has plagued litigants in California following the passage of Proposition 64 in 2005, a voter-approved reform that requires proof that the named plaintiff “lost money or other property” in order to pursue a class action under the state’s Unfair Competition Law (UCL).

Curiously, the bill makes reference to a requirement that this injury be proved on an “individual” basis, even in a class action:

Each such person seeking to recover damages for violations of these sections, either in an individual action, a class action, or any other type of action, is required to plead and prove on an individual basis that the deceptive act or practice caused the person to enter into the transaction that resulted in the damages.

It is unclear whether this language, if adopted, would a) effectively prevent any consumer protection claim from being pursued on a class basis because all consumer protection claims would require individual proof of injury, b) be interpreted only as a threshold matter to insure that the class representative (but not absent class members) has standing before the case is allowed to proceed, or c) somehow introduce a new requirement of “individual” proof for all class actions, even while still allowing class actions to be pursued in some form.

Third, this bill would allow appeals of class certification decisions as of right and would create an automatic stay.  By contrast, federal rule 23(f), and the similar rules of many states allow interlocutory appeal of class certification orders only in the discretion of the appellate courts and do not mandate an automatic stay of proceedings at the trial court level while the appeal is pending.

The Bill was introduced in the state House on January 24.  It is not clear what the Bill’s chances of passage are.  Only one of the Bill’s 12 authors is a Democrat (or, for my Minnesota friends who want to be picky, DFL).

The bill, which now moves to the lower house, would allow Mexicans to bring class action suits against companies that provide consumer goods and services, financial services or that cause environmental damage, according to the bill. Mexican law doesn’t currently allow for such lawsuits.

For more on the bill, see this December 10 article in The News from Víctor Mayén, which characterizes the bill as authorizing collective actions

regarding the consumption of private or public goods and services, environmental services and financial services that harm the consumer, due to monopolistic or other undue practices.

Neither article assesses the odds of the bill’s passage in the lower house, although the unanimous passage in the Senate would appear to suggest that the chances are good.

The legislation follows an amendment to article 17 of the Mexican constitution, passed in June, granting authority to the legislature to pass legislation regulating class or collective actions.  For more on the amendment, see this entry posted in June at the Stanford University global class actions clearinghouse.

Despite a (somewhat) diligent Internet search, I have not been able to locate an English translation of the Bill, so unfortunately I can’t report on any of the details of the legislation.  This August 2008 report from emii.com hinted that the legislation being considered in Mexico at the time was following a more “Latin American” pattern, as distinguished from US-style class action procedure.

If any readers have more information about this bill, we welcome your comments.

The case of Thorogood v. Sears Roebuck & Co. is already famous for the suggestion made by plaintiffs’ counsel in oral argument that the Seventh Circuit panel’s three male judges poll their wives to see if they agreed whether the possibility that a stainless steel clothes dryer contained non-stainless components made them fearful of rust damage to their laundry.  The panel conducted the poll as suggested and the unanimous “no” result helped to solidify Judge Posner’s conclusion that the proposed fraud claims was not susceptible to common proof.

Today’s decision was an unusually lengthy denial of a rehearing petition, following an appeal of an earlier panel decision holding that the all Writs Act permits a federal district court to enter an injunction against future putative class actions in other courts on the same grounds in which the district court previously denied certification.  Judge Posner, also the author of the three previous decisions in the course of the litigation, explained the lengthy opinion by saying that it might be helpful to readers of the panel’s previous opinions in the case, as well as to the author of the petition for rehearing, “whose accusations are over the top, as we shall now explain, and who may wish to moderate his fury.”

Aside from being an exceedingly entertaining read (for anyone other than the petitioners’ counsel), the opinion is of interest for Judge Posner’s additional discussion of the potential (with an emphasis on the word potential) abuses of class action settlements by both plaintiffs’ attorneys and defendants.

No doubt there will great discussion about this opinion across the web in the coming weeks.

(a) Class action lawsuits are an important and valuable part of
the legal system when they permit the fair and efficient resolution
of legitimate claims of numerous parties by allowing the claims to be
aggregated into a single action against a defendant that has
allegedly caused harm.
(b) The lack of clear standards for the certification and
management of class actions in California has led to abuses of the
class action device that have harmed class members with legitimate
claims as well as defendants who have acted responsibly, and these
abuses have undermined public respect for our judicial system.

However, the bill now has an inactive status.  The last reported legislative history is a March 11, 2010 entry, “died at desk.”

The other day, a colleague tipped me off to a December 2009 blog posting by Oakland, California employment and civil rights attorney Bryan Schwartz entitled Death to the Reversionary, “Claims-Made” Settlement, a thoughtful, well-written article with which I completely disagree and to which I felt compelled to respond.  Schwartz is critical of what he alternatively calls “reversionary” or “claims-made” settlements and proposes that plaintiffs’ firms adopt strict policy of refusing to enter into them.  His critique may be best summarized in the following excerpt, although I would encourage reading the entire article:

The idea of a reversionary, claims-made settlement is that the defendants will actually be paying “up to” the amount indicated, depending on the number and value of the claims that are submitted. So, if only 50% of eligible claims are submitted, then defendants may wind up paying only half of the agreed-upon amount, with the rest reverting to defendants, though the plaintiffs’ attorneys still collect fees on the full settlement amount. Though many courts no longer permit this practice, defendants still frequently try to offer claims-made (aka reversionary) settlements (which can be easy to sell to the corporate client – “I know X sounds bad, but you’re really only paying Y, so don’t worry!”). Some plaintiffs’ counsel may still agree to claims-made/reversionary settlements, too – but I urge you not to do so!

Schwartz’s critique has surface appeal, and is no doubt shared by many plaintiffs’ lawyers and even judges.  However, I would respectfully urge lawyers and judges alike not be too quick to dismiss the possible benefits of these settlement structures for all parties and the courts.  If done properly, claims-made settlements provide a unique mechanism for resolving disputes that is both fair to all parties and reduces unnecessary burdens on the court system.

I wrote an article for ProductLiabilityLaw360 in 2008 in which I summarized different possible class action settlement structures and discussed the benefits of claims-made settlements over various alternatives (See full article here).   In that article, I drew a distinction between a true “claims-made” settlement and a settlement that involves a pre-determined capped fund with a reversion to the defendant.  The quoted section from Schwartz’s article above appears to refer to the latter structure.  By contrast, what I would consider a true “claims-made” settlement would be a settlement in which each class member is given the right to make a claim in a predetermined amount or based on a predetermined formula, but the total amount of the potential payments are not capped, and attorney’s fees and costs are paid separately and not taken out of any fund used to pay claims.  Unlike the structure described by Schwartz, the Defendant in this type of claims-made settlement takes on the risk, at least theoretically, that it will have to pay 100% of all claims submitted, plus fees and costs.  Typically, if the settlement involves a set fund with a reversion, fees and costs are taken out of the fund first, and benefits to class members are reduced pro-rata if there is not enough money left in the fund to pay 100% to all claimants.  Any unclaimed amounts revert to the defendant if, after paying all fees and costs and 100% of money claimed by class members, there is still money left over.  Despite these technical differences, however, both structures are subject to many of the same criticisms as outlined in Schwartz’s article, and I will not dwell on the differences in the discussion that follows but will rather refer to them both as “claims-made” settlements.

One of the main ideas in my 2008 article was that claims-made settlements can be beneficial to all of the true stakeholders.  By true stakeholders, I mean the named plaintiffs, their counsel, the defendant, the courts, and all class members who can be reached and who care to participate.  The main factor in making a claims-made settlement fair is in doing everything possible to ensure the best notice practicable, so that all class members have a fair opportunity to participate in the settlement.  In my view, this should be the primary goal, not forcing class members to benefit from a settlement or forcing a defendant to pay whether or not class members benefit.  Class members who receive notice may choose not to participate in claiming settlement benefits for any number of completely legitimate reasons, including that they don’t want to be bothered, they disagree with class actions generally, or they don’t feel strongly that the defendant did anything wrong.  In some cases, it is impossible to reach a portion of the class, so there is no way to benefit class members directly even assuming that they would have wanted to participate.

With these principles in mind, I have outlined below a few of the key criticisms leveled at claims-made settlements, with a brief response to each.  Whether my responses carry the day will obviously be left to the individual reader, but I would hope that anyone predisposed to think that claims-made settlements are generally a sham to benefit corporate America at the expense of the public will at least read them with an open mind.

Criticism 1: Claims-made settlements allow the defendant to get away with its misconduct.  The defense attorney’s easy retort to this argument is that class actions generally allow greedy plaintiffs’ lawyers to extort money out of innocent companies by filing frivolous lawsuits.  In most class actions, however, the defendant’s conduct was not clearly improper, nor was the lawsuit clearly frivolous.  That is one reason why most class actions are resolved by settlement in the first place.  The point is that a settlement is a compromise resolution of a dispute, not punishment for a corporate wrongdoer.  It is no more fair to call a defendant in a class action settlement a wrongdoer than it is to call the case frivolous.

Criticism 2: Leftover money should be given to charity, not returned to greedy corporate executives.  Aside from the previous observation that a defendant hasn’t been found to have done anything wrong in a class action settlement, this criticism also often rests on another flawed premise; that is, that any money saved by a corporation in settling a lawsuit goes to a select few corporate executives who use the money to buy a new private jet or vacation home.  This is a misconception of how large companies operate.  Every dollar paid out by a corporate defendant impacts a variety of groups of people who had nothing to do with whatever the alleged misconduct was.  When a company pays a settlement or a judgment in a class action, it is not required to specify where the money is going to come from.  So, every dollar paid in settlement negatively impacts the company’s shareholders, most of whom (at least in the case of a public company) clearly had nothing to do with whatever malfeasance the company is accused of.  Paying a settlement may require the company to increase the cost of its goods or services, which negatively impacts consumers.  In the case of an insurance company, the cost of settling a lawsuit is also borne by the  company’s policyholders in the form of higher premiums.  The cost of settling a lawsuit may also impact the job security of the company’s employees.  When these other stakeholders are taken into account, it becomes far less clear that it is more just to have any unclaimed funds be paid to a charity, which had nothing at all to do with the subject of the dispute, rather than returned to the company, where the funds might benefit certain executives but will also benefit innocent shareholders, consumers, policyholders, and employees.  There are a variety of other criticisms of cy pres awards in class action settlements.  (See CAB entries dated  October 11, 2009, October 28, 2009, and December 17, 2009 discussing cy pres awards).

Criticism 3: Claims-made settlements create perverse incentives for defendants.  In many cases, claims-made structures provide the only possible way to bridge the gap between what the Defendant is willing to pay, short of going to trial, and what the plaintiffs’ attorneys are willing to accept in fees, short of going to trial  (In my experience, the named plaintiff does not play much of a role in this process, but then again, I’ve never been in the room when settlement was discussed with a named plaintiff). The defendant doesn’t think it did anything wrong, and certainly doesn’t think that whatever it might have done wrong impacted everyone in the class (or would-be class), and it isn’t willing to pay 100% of what the plaintiff is claiming on behalf of the class.  In order to settle the suit, it will only agree to pay far less than what would take to make the entire class whole.  On the other side, the plaintiffs’ attorneys fee expectation, which is based on an assumed 1/3 share of a recovery on behalf of the class as a whole, becomes a key obstacle for resolution of the dispute, whether or not the actual class members would ever hope to benefit from the relief that the attorney is seeking.  So, it can be argued that claims-made settlements create perverse incentives for both defendants and plaintiffs’ class action lawyers.  

But incentives don’t necessarily have to translate into abuses.  There are checks in place to prevent abuses on both sides.  The perverse incentive for a defendant is to create artificial roadblocks to participation, such as making the claim form confusing or burdensome to complete.  This can be avoided by following strict plain notice guidelines and hiring a competent settlement administrator and notice expert.  The perverse incentive for a plaintiff is to trade class benefits for higher fees.  However, the potential for this abuse is limited by the requirement that the court approve any fee award.

Perhaps abolishing claims-made settlements would cause more consumers, shareholders, or employees to reap higher returns in class action lawsuits, but it would just as likely reduce the fee expectations created within the plaintiffs’ bar for settling suits for what they are actually worth both in terms of litigation risk and public benefit.  These are public policy matters that in my view are best left to the state legislatures and Congress to correct if they need to be corrected.  Removing claims-made settlement as an option, stated simply, means less class action settlements.  From the perspective of critics of the class action device generally, this may sound like a positive reform, but I can’t imagine that it would ultimately be a positive development for the plaintiffs’ bar.  Fewer class action settlements means a greater burden on the court system and lower fee expectations for plaintiffs’ lawyers generally, resulting in less people willing to pursue class actions, and less opportunity for the victims of alleged wrongdoing to recover any benefits.