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Editor’s Note: The following guest post was authored by Sara Collins, contributor to the consumer finance website, NerdWallet.  The views expressed in Sara’s article are her own.  Although those of us who tend to represent defendants in consumer class actions may not agree with all of Sara’s views on the benefits of class actions, we can certainly learn something from reading a consumer advocate’s views on the subject.  The article also provides an easy-to-follow primer on how class actions work.  Many thanks to Sara for her contribution. 

Class Actions – Do They Actually Help Consumers? 

By Sara Collins

Consumers in the United States are sometimes victims of bad business behavior. These behaviors cover a huge range of bad acts, particularly in the field of securities. Class actions allow consumers to band together and fight against bad business. As such, they have a number of benefits for consumers and are quite helpful in evening the corporation versus consumer playing field.

What are Consumer Class Actions?

A consumer class action is simply a lawsuit which takes place in a federal or state court. The case is brought by one or a small handful of individuals, acting as representatives for a larger group of consumers, known as the class. Typically the case is seeking damages on behalf of the named individuals in addition to the entire class.

Why is a Consumer Class Action Necessary?

Traditionally, class actions are used to combine small-dollar claims for a large number of people. One small claim is generally too small for a cost-effective suit. Consumer class actions offer a helpful alternative, justifying the litigation expenses and immensely improving the consumer’s odds of success, particularly when it comes to larger corporations.

How do Consumer Class Actions Work?

When a class action is first brought, the court initially decides whether it is a proper class action. This is a process known as class certification. The parties then work towards a trial, though settlement negotiations can take place at any point.  If the parties decide to settle the case, the court must approve the settlement and then order notice given to class action members.

Do Class Actions Work?

They definitely do. Billions of dollars are given back to the public every year which come from consumer class actions. In most cases, the money is given directly to the victims of the suit, rather than going into the hands of the government, lawyers or other non-consumers.

What Long-Term Effects do Consumer Class Actions Cause?

Class actions help to make bad business practices unprofitable. Class actions aggregate the power of isolated consumers, allowing class actions to compete against corporate behemoths. It levels the playing field, forcing businesses to operate in honest and trustworthy ways.  Markets in other countries where class actions are not allowed often suffer from corporate abuses like stock manipulation, insider trading and other problems.

Do Lawyers Benefit Excessively From Consumer Class Actions?

One argument used by businesses to protest the prevalence of consumer class actions is to claim that the lawyers benefit excessively from the cases. In fact, attorney fees in class action cases average just between 20 and 30 percent of the amount recovered. In stark comparison, personal injury lawyers typically reap 35 to 50 percent of their case winnings. Clearly businesses are using false arguments in an attempt to eliminate class actions and thus damages sought against them.

What is the Class Action Fairness Act of 2005?

The Class Action Fairness Act of 2005 (CAFA) was enacted by Congress in order to curb abuse of class action suits in state courts. Evidence showed that many class actions were being filed which benefited the counsel, rather than the consumers. Additionally, many cases were filed in courts which showed prejudice against business defendants, a problematic issue.

CAFA was enacted to extend federal jurisdiction to these state courts in order to diminish such abuses. CAFA has had a mild success and while most benefits are for businesses, some benefits are extended to consumers. Primarily, the legislation limits the monetary benefits for the attorneys. This ensures that money won in settlements goes to the members of the class, rather than the plaintiff counsel.

Consumer class actions are needed to ensure the financial safety of consumers, particularly in the realm of securities. Class actions allow consumers to band together, combining resources in order to sue a corporation as a singular entity. In turn, all consumers reap the benefits of the settlement, helping to prevent future bad behavior from the corporation in question. Class actions undoubtedly have a positive effect on the world of consumers and it is vital they stay legal for the foreseeable future.

Sara Collins is a writer for NerdWallet, a personal finance site dedicated to helping consumers learn about new ways to save money.

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An article posted by my colleagues Judy Selby and Zack Rosenberg in the BakerHostetler Class Action Lawsuit Defense Blog raises some important issues for any company that could find itself the target of a class action lawsuit.  With the proliferation of data privacy and other consumer class actions, that’s just about any company these days.  The article, titled Courts Are Liberally Construing Litigation Insurance Coverage for Class Action Defenses and So Should Defendants, addresses the important issue of liability insurance covering class action lawsuits.  

I’m often surprised in speaking with in-house attorneys and risk management personnel that they are unaware of the extent to which their current insurance coverage might protect them if they were ever sued in a class action, and that they have not considered certain types of specialty lines insurance, such as cyber risk insurance, that might protect them from potentially catastrophic liability and defense costs arising out of a class action.  This is an especially important consideration for companies in industries that aren’t frequently targeted in class actions, because those companies may not think about the benefits of insurance protection until it’s too late.

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Two readers sent me tips yesterday on important decisions from the Second and Third Circuit Courts of Appeals that will be of interest to class action practitioners:

First, John G. Papianou of the Philadelphia firm Montgomery, McCracken, Walker & Rhoads, LLP forwarded a copy of the Third Circuit’s decision in Long v. Tommy Hilfiger U.S.A., Inc., No. 11-1554 (3d Cir., Jan. 24, 2012).  The Third Circuit affirmed a lower court’s decision (summarized in this February 14, 2011 CAB Post) holding that 1) the Fair and Accurate Credit Transactions Act (FACTA) prohibits a merchant from printing a consumer’s expiration month (as opposed to the entire expiration date) on a credit card receipt but that 2) the standard for a willful violation of FAСTA is one of objective reasonableness, meaning that if a merchant acted in conformance with a reasonable, albeit erroneous, interpretation of the statute, it cannot be held liable for a willful violation, regardless of its subjective knowledge or intent.

Second, New York securities class action lawyer Noah L. Shube forwarded a copy of the Second Circuit’s highly anticipated decision in In Re American Express Merchants’ Litigation, No. 06-1871 (2d Cir., Feb. 1, 2012).  In that case, the Second Circuit reaffirmed its conclusion invalidating a class arbitration waiver on federal statutory grounds.  The case had been vacated and remanded by the U.S. Supreme Court to reconsider in light of its recent decision in  AT&T Mobility v. Concepcion.  Yesterday’s decision follows a previous ruling finding the clause unenforceable, which had previously been vacated, remanded for reconsideration in light of the Court’s decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), only to be reaffirmed by the Second Circuit in a March 8, 2011 ruling (discussed in this March 9, 2011 CAB entry).  In yesterday’s decision, the Second Circuit relied on the federal law of arbitrability, a concept not squarely addressed in either of the Supreme Court’s recent class arbitration decisions, in holding the class arbitration waiver unenforceable.

The Baker Hostetler class action team is putting together a more detailed alert discussing yesterday’s decision in In re American Express Merchants’ Litigation, and I’ll post a link to that alert as soon as it is available.

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It has only been a few months since the Supreme Court issued its decision in AT&T Mobility v. Concepcion, holding that state laws holding class arbitration waivers unenforceable as against public policy are preempted by the Federal Arbitration Act (FAA), and the Court is already considering a new case involving the enforceability of arbitration agreements in consumer contracts.  

Today, the Supreme Court heard oral argument in Compucredit Corp. v. Greenwood, No. 10-948, in which the issue is whether a federal law’s grant to consumers of a right to sue can be waived through an arbitration agreement.  A copy of the oral argument transcript is now available at the Court’s website.  Most of the questions were directed at issues of statutory construction under the Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq., and in particular whether Congress intended that the right to sue in court be non-waivable.  The Ninth Circuit’s decision below, the limited scope of the question presented for review, and the questions posed at oral argument would all suggest that the Court is unlikely in its ultimate opinion to address some of deeper questions remaining after Conception, such as whether and under what circumstances a consumer arbitration agreement can be held unconscionable under federal law.  Then again, as aptly illustrated in Justice Scalia’s opinion in Concepcion decision, the possibility that the decision will go beyond the limited statutory questions presented and address deeper public policy issues can never be ruled out.

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Class action news has slowed a bit over the Summer months, at least compared to the non-stop action we witnessed this Spring.  But one area that has seen continued development in the past few months has been the area of class arbitration waivers, where several lower court decisions have been issued in the wake of AT&T Mobility LLC v. Concepcion.  A view of the decisions shows that class actions are far from dead, despite the dire predictions of many experts following the decision.  As my partner, John Lewis, noted in a recent interview with the AmLaw Daily, “While many people thought Concepcion was the end of the line, now we’re seeing the reaction to Conception with district courts distinguishing it on various grounds.”  Here is a quick summary of several key decisions that have interpreted or applied Concepcion:

Chen-Oster v. Goldman Sachs, Inc. (link courtesy of Justia.com) - U.S. District Court for the Southern District of New York – July 7, 2011 – applying the federal common law of arbitrability in rejecting the argument that Concepcion required enforcement of class arbitration waiver in a gender discrimination pattern and practice case, holding that enforcement of the arbitration clause at issue would interfere with the enforcement of a federal substantive right.

Brown v. Ralphs Grocery Company (link courtesy of Impact Litigation Journal, which also has a  summary of the decision here) – California Court of Appeal – July 12, 2011 - holding that representative actions for state labor code violations under California’s Private Attorney General Act (PAGA) were not preempted by the FAA because Concepcion did not address preemption in cases involving PAGA’s statutory procedure and because the procedure did not involve many of the attributes of class action procedure that the Supreme Court had held were inconsistent with the purposes of arbitration.

Kanbar v. O’Melveny & Myers (link also courtesy of the AmLaw Daily) – U.S. District Court for the Northern District of California - July 21, 2011 –  holding in an employment discrimination case that notwithstanding Concepcion, an arbitration provision was unconscionable under California state law and that state law was not preempted under the FAA, but nonetheless compelling arbitration on the grounds that the plaintiff had waived her right to object to enforceability of the arbitration clause.

Cruz v. Cingular Wireless LLC - Eleventh Circuit Court of Appeals – August 11, 2011 - holding that Concepcion compelled the conclusion that arbitration clause was enforceable in a case involving the same exact arbitration clause that was at issue in Concepcion (the clause in AT&T’s mobile phone contract).

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In response yesterday’s entry discussing Daniel Fisher’s article on the potential impacts of Concepcion, I got one of the best comments that I’ve ever received on this site.  It comes from Portland complex injury and consumer class action attorney David Sugerman, who blogs at www.davidsugerman.com.  Of course, I disagree with just about every word of it, but with imagery like a bunch of corporate fat cats “fixing to celebrate the opening of the all-you-can-eat trough of greed,” I could not help but re-post it here:

I’m amused. As I said to defense counsel at a large multi-national firm, I guessed that midway through the second glass of champagne, the defense bar realized it had a real problem. He is apparently looking for a new job or to transition into other areas of practice.

Your one concrete example–retail sales–is, as you know, a less viable class because of problems of ascertainment, notice, locating the class, providing notice and obtaining and distributing relief. And not all retail sales cases survive. You likely recall the Gateway case some years ago with the forced mandatory arbitration clause in the paperwork in the box that was deemed accepted upon registration?

I love the concerted talking points in the defense bar that these cases are not done. Those of us who represent consumers know better.

We also know the torrent about to be unleashed when consumers can no longer take concerted action to stop nickel and diming on high-volume, small amount claims. AT&T, Comcast, banks, utilities, credit card companies are fixing to celebrate the opening of the all-you-can-eat trough of greed.

The argument that Congressional or Executive action *might* change things proves too much. Absent such action, consumer class cases are pretty much done. The argument also illustrates the crass overreaching in SCOTUS’ opinion, with views on federalism and statutory construction that are as breathtaking as the Citizens United case.

This is really not a problem for me because I handle a wide range of consumer and plaintiff problems. But my colleagues in high-priced defense firms who defend consumer class actions for a living are likely to have problems.

So no, if I were a high end defense attorney, I wouldn’t take much comfort in Forbes view or the talking points. It’s going to get bleak out there.

Lest you doubt my dire predictions, let’s set a wager for 12 months from the decision on how many consumer class actions have been filed, how many layoffs in the defense industry, or some other agreed-upon metric that we can revisit next year.

Ok, David, friendly banter on.

First, I must say that I don’t know a single defense lawyer who owns a private jet, but I know several plaintiffs’ lawyers who do, so all this talk about “high-priced” defense firms rings a little hollow to me.

Second, defense lawyers will have jobs for as long as there are plaintiffs’ lawyers around to file lawsuits, and somehow I don’t see the plaintiffs’ bar throwing in the towel this easily.  What you may see is simply a shift in the kinds of class actions that get filed in the future, or the industries that are targeted.  I say “targeted” because in my experience trends in consumer class actions are more often driven by the creativity of the entrepreneurial trial bar than by any epidemic of corporate greed.  Don’t get me wrong, I’m not saying there aren’t well-publicized scandals involving an epidemic of corporate greed (See Enron), but they tend to generate securities or ERISA class actions, not consumer class actions.

Finally, I’ll wager you, although not for money.  Only for pride.  (I’m not made of money after all, I’m just a defense lawyer).  I’ll bet that not only don’t we see a decrease, but we’ll actually see an increase in consumer class actions over the next year.  Sort of like the rash of class actions filed just before CAFA took effect.  I’m not sure at this moment how we’ll measure this, but I’d imagine that there’s a consulting firm out there (no doubt worried about the effect Concepcion is going to have on its own bottom line) planning just the kind of research we need.

So, if you’re a consulting firm looking for a project, we’ve got a job for you (pro bono, of course)…

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Daniel Fisher, who writes the Full Disclosure blog at Forbes.com, posted an article last Friday titled Has Scalia Killed the Class Action?  Fisher’s article one of the best I’ve seen in discussing the potential practical impact that the Supreme Court’s recent class arbitration waiver decision in AT&T Mobility v. Concepcion may have on future consumer class action litigation.  I highly recommend it. 

Although much remains to be seen about Concepcion‘s long-term impact, from a practitioner’s point of view, two things are clear to me. 

First, the consumer class action is far from dead.  As Fisher’s article points out, there are many cases that won’t implicate arbitration clauses in consumer contracts at all, such as those involving retail products.  Moreover, even setting aside the prospect of executive branch or Congressional action in effectively overruling Concepcion, there are a variety of legal arguments that are sure to be raised for invalidating or avoiding enforcement of class arbitration waivers in the lower courts, notwithstanding the Supreme Court’s decision.  There are countless theories, many of which have yet to be dreamed up by enterprising plaintiffs’ lawyers, for why a consumer class action in a particular case should be allowed to go forward in court notwithstanding an arbitration provision.

Second, the fact that future legislative or executive action or lower court judicial gloss may water down or limit Concepcion‘s ultimate impact should not keep companies from taking advantage of what is now, at minimum, an enhanced tool for protection against the significant cost of defending against class action litigation.  In the short term, any in-house or outside counsel charged with advising corporate clients should be considering ways to incorporate class arbitration waivers or similar provisions into the client’s form contracts and terms of use.  While it may not be failsafe protection from class actions, a well-drafted, reasonably limited class arbitration waiver, has an exponentially greater chance of being enforced than it did before the Concepcion decision was announced.

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Two op-eds published today highlight the philosophical debate over the impact of the Supreme Court’s recent decision in AT&T Mobility v. Concepcion.

The first, published by the New York Times, argues that the decision is a “devastating blow to consumer rights” because it makes it practically impossible for many consumers to seek vindication of their rights in any forum.

In response, Forbes contributor Daniel Fischer argues that Concepcion’s limitation on consumer class actions does not really harm consumers because consumer class actions really only benefit lawyers.  As a prime example, he points to the controversial proposed settlement in a class action involving DirectBuy to which 36 attorneys general and a consumer rights organization have objected.

I would recommend reading both articles for anyone interested in the possible social and legal implications of the Court’s recent decision.

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UC Irvine Law School Dean and noted constitutional scholar Erwin Chemerinsky authored an op-ed in today’s Los Angeles Times critical of the Supreme Court’s recent decision in AT&T Mobility v. Concepcion titled Supreme Court: Class (Action) Dismissed.  Dean Chemerinsky argues that Concepcion is part of an alarming trend in decisions by the Supreme Court’s conservative bloc that blatantly favor business interests over the rights of consumers and prevent access to justice to injured persons. 

Although Dean Chemerinsky’s article is worth a read, perhaps even more interesting are the user comments to the article, which frame the debate as being as much about business interests versus trial lawyers as it is about business interests versus consumers.

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According to this February 8, 2011 article from Lee Ann Schultz of the Twin Cities Daily Planet, the Minnesota legislature is considering a bill that, according to its sponsors, would curtail consumer class action litigation in the state.  The bill, HF211, has three key provisions of interest, which would:

  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).

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