Archive for December, 2008

In the wake of the Wall Street meltdown, recent press on subprime mortgage class action litigation has focused on securities class actions and cases involving subprime investments.  Less has been written about trends in class actions seeking redress for alleged predatory lending practices.

However, that doesn’t mean that there aren’t any cases involving predatory lending practices.  In fact, as discussed in this editorial by Andy Meek of the Memphis Daily News, local governments in the Memphis area may be considering a resolution authorizing legal action against mortgage companies for certain lending practices that some say caused individuals poor and minority communities to accept bad loans.  A similar action is reportedly already pending in Baltimore.

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Mark Moller of the Cato Institute posted this commentary today arguing that true originalists should not be so quick to extol the virtues of the Class Action Fairness Act of 2005 (CAFA), which is often hailed as a conservative victory in tort reform.  Moller and various other conservative commentators argue that the Act, which expands the statutory grant of federal diversity jurisdiction of the federal courts over certain class actions, is unconstitutional.  He concludes that “[t]ort reformers who are faithful to the original meaning of the Constitution must confront the uncomfortable fact that the Constitution takes key provisions of CAFA, the tort reform movement’s greatest legislative achievement, off the table.” 

The argument mirrors one made by Florida personal injury lawyer David J. Sales, who, in an October article, remarked that CAFA is a “decidedly anti-federalist” measure that erodes States’ judicial powers in favor of greater federal jurisdiction.  (See ClassActionBlawg Commentary here).  

Could it be that the class action case of The American Trial Lawyers Association and The Federalist Society v. United States is just around the bend?

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Local Phoenix ABC affiliate KNXV-TV has a report today about a consumer scam in which people are told that they are eligible for money in a class action.  The scam involves individuals being contacted by telephone to tell them that they are part of a class action lawsuit and are entitled to recover hundreds or thousands of dollars, but that they first need to send in money to help pay for court costs.

The KNXV story refers to an alert on the website www.consumeraffairs.org, which can be found here.  Somewhat ironically, one of the Google ads in the left-hand column of that alert (at least when I viewed it) points readers to a website where they can “Get Cash Now” for their structured settlements in lawsuits.

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Given that it took me until Saturday to get last week’s Class Action Blogosphere Weekly Review out, I plan to wait until next week to do the next one.  In the meantime, here’s an interesting tidbit that Werner Kranenburg of With Vigour & Zeal  tipped me off to earlier in the week.  David I. Michaels, law clerk at the Delaware Court of Chancery and a UCLA law student will be publishing an article in the Rutgers Law Journal entitled An Empirical Study of Securities Litigation after WorldCom.  The abstract, which is available at SSRN, begins:

In this article I present the first empirical study analyzing whether and to what extent In re WorldCom, Inc. Securities Litigation impacted class action litigation brought under Section 11 of the Securities Act of 1933, one of the securities laws’ principal liability provisions. . . .

For those interested in trends in securities class actions, this article looks like an interesting read.

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The Colorado Supreme Court held oral argument today in the case of Farmers Insurance Exchange v. Benzing, No. 07SC483.  Audio of the argument is now available at the Colorado Supreme Court’s website.  Among the issues in the case is whether the “fraud on the market” theory, and other presumptions of reliance recognized in securities cases, applied to permit the plaintiff in a consumer fraud case to attempt to prove causation of harm on a class-wide basis without having to prove that each class member suffered injury directly as a result of the alleged fraud. 

The appeal is from a trial court judge’s order decertifying an earlier class certification order authored by another judge.  The second judge had concluded that individualized issues of causation and reliance precluded certification of claims for fraud by omission, finding that whether a policyholder would have made the decision not to buy certain insurance coverage but for the alleged nondisclosures required a case-by-case determination.  The Court of Appeals had relied on the possibility that the plaintiffs might be able to prove liability on a “fraud on the market” theory in holding that the trial court had abused its discretion in decertifying the class.  Under the “fraud on the market” theory, a defendant can be held liable for securities fraud even if each individual shareholder did not rely on the misrepresentation or omission of fact if it can be proven that the fraud had the effect of depressing the overall value of the stock in an efficient market.

The issues for which the Petition for Certiorari was granted are summarized in this ClassActionBlawg entry.

Many of the questions focused on whether there were facts in the record to support the conclusion that proof of causation could be made by class-wide evidence without relying on the “fraud on the market” theory.  Other key questions focused on whether the trial court’s exercise of discretion to decertify the class could be upheld under an abuse of discretion standard even if other courts might have reached the opposite conclusion.  Two concepts not addressed in detail were the impact of the regulated nature of insurance premiums and the fact that premium rates are driven primarily by the actuarial risk assumed by insurers, not by pure market competition.  Both of these facts raise doubts about any assumption that more “fully informed” consumers might have been able to drive down the cost of premiums.

The “fraud on the market” and “price inflation” theories of loss causation appeared to be a growing trend in consumer class actions until earlier this year when the Second Circuit Court of Appeals in the light cigarettes marketing case, McLaughlin v. Philip Morris USA, Inc. et al., No. 06-4666-cv (April 3, 2008).  In McLaughlin, the court held that these types of theories could not be used to justify certification of a consumer class because they were too attenuated and speculative.

Coincidentally, Securities Docket reports today that a method suggested by Michigan law professor Adam Pritchard for companies to avoid or reduce exposure for certain “fraud on the market” securities claims by amending a company’s bylaws has now been proposed by a shareholder of Alaska Air, Inc. to its Chairman and CEO.  That entry also has a link to the proposal itself.

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I didn’t realize that I was getting left behind in the Twitter revolution until recently, but no longer.  ClassActionBlawg is now feeding to Twitter.  (For those of you who have no idea what I’m talking about, you will soon).  I have added a link to my Twitter page, @classaction, as well as the Twitter RSS feed.  For those readers who like the content at ClassActionBlawg but hate the verbosity of its author, the Twitter feed is for you.

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UK legal publication The Lawyer has an interesting article out today for anyone tracking trends in class and collective action reform across the pond.  According to the article, Which?, a consumer organization granted the right to pursue collective redress on behalf of consumers harmed by conduct declared to have violated antitrust laws, isn’t convinced that it would pursue another one after facing several practical barriers in pursuing a case against a sports merchandiser for allegedly selling overpriced replica soccer jerseys.  Among the challenges cited by a lawyer for the group was the fact that few consumers found it worth their while to pursue a claim in light of the relatively modest amounts they stood to gain (£20 per person), the fact that consumers had to provide proof of purchase, and the fact that years had passed by the time the opportunity to make a claim became available. 

The report notes that even after a highly publicized media campaign highlighting the case, only about 500 consumers decided to participate.  The total amount of the settlement payout was around £18,000, plus reasonable litigation costs, as compared to a multi-million dollar penalty imposed against the company for its anti-competitive actions in the first place.   An earlier article by The Lawyervalued those costs at many hundreds of thousands of pounds, dwarfing the amount of the payout.  That article quotes a lawyer for which as saying that the use of an opt-in versus an opt-out system contributed to the discrepancy.

The issue of the cost of litigation versus the actual benefit to victims, however, is one that arises whether the system is opt-in or opt-out.  Even in the U.S., which technically has an opt-out system, actual monetary redress to alleged victims happens as a result of some sort of claim-in process, either as part of a settlement or a distribution of a judgment.  Unclaimed funds are either distributed pro-rata to those class members who do file a claim, returned to the defendant, paid to the government, or distributed to charity as part of a cy pres remedy.  In any event, the system does not in any way guaranty redress to those who don’t have the means to prove their entitlement to relief or who don’t find it worthwhile to pursue a remedy.

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