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Important Class Action Decisions Looming
A trio of cases on the Supreme Court schedule could have a far-reaching effect on class action law, explains Daniel Fisher in Forbes. If decided in the defendants’ favor, the cases (Comcast v. Behrend, The Standard Fire Insurance vs. Knowles, and Amgen vs. Conn. Retirement Plans) could “lay waste to the class-action bar” writes Fisher, but he notes that the court decided two of three class action cases last year in the plaintiffs' favor.
Kiobel Case Before the Supreme Court
The closely watched case will decide whether corporations can be sued under the Alien Tort Statute for alleged violation that happened overseas. “Plenty of human-rights violations around the world deserve attention and remedy,” says a Wall Street Journal editorial. “But American courts are not the right place to seek redress.”
Philadelphia Courts Overwhelmed by Out-of-State Plaintiffs
The Wall Street Journal reports that an effort by Philadelphia courts to “take business away from other courts” has backfired, flooding the already busy system with out-of-state asbestos and pharmaceutical claims. Citing ILR’s lawsuit climate survey, the story points to Philadelphia being named the fifth worst jurisdiction in the nation for legal fairness, along with rules that allow for forum shopping, as evidence of the problem in Philadelphia’s courts.
Pennsylvania’s Poor Lawsuit Climate Puts Keystone State at Crossroads
The problem is not going unnoticed. For a decade now, my organization, the U.S. Chamber Institute for Legal Reform, has been measuring how businesses view the litigation climates in the fifty states. In the latest survey, conducted by Harris Interactive, a leading global polling firm, Pennsylvania is ranked 40th out of 50, a six-place drop from 2010 and a record low for the Commonwealth. And most of the blame for this decline can be laid at the doorstep of Philadelphia’s courts, which are ranked as the fifth worst in the entire country.
The biggest problems in the Philadelphia court relate to lawsuits brought by out-of-state plaintiffs. It’s a general principle of the civil justice system that cases should be tried in the jurisdiction where the injury occurred or where the plaintiff or defendant resides. Yet in today’s Philadelphia courts, lawsuits are routinely filed by plaintiffs who have little or no connection to the city against defendants with only a tangential presence.
In fact, a few years ago, some Philadelphia judges publicly encouraged out-of-state plaintiffs to file in Philadelphia. As a result, in 2011, nearly half of all asbestos cases and more than 80% of pharmaceutical cases filed in Philadelphia were from out-of-state plaintiffs.
The contrast could not be more dramatic from the courts just a short drive away in Delaware. For the ninth straight time, Delaware’s lawsuit climate was ranked as the nation’s best in the Harris survey. The state’s courts received high marks in many areas, including overall fairness and enforcing venue requirements.
At the opposite end of the spectrum is another state bordering Pennsylvania, West Virginia. That state, ranked dead last in our past four surveys, has been plagued by a legal system that features massive verdicts and no meaningful appellate review for civil cases.
So Pennsylvania has the unique distinction of bordering both the highest and lowest ranked states in the survey. Unfortunately, because of the problems in the Philadelphia court, the Commonwealth’s legal climate has more similarities to last-ranked West Virginia than top-ranked Delaware.
A bad lawsuit environment has real costs for states trying to grow their economies and create jobs. Seventy percent of those questioned in this year’s survey said their companies look at a state’s legal environment as one of the factors when deciding where to locate or expand their business, the highest percentage in five years.
Luckily, there are many ways for Pennsylvania to improve its legal climate. Already, the new leadership of the Philadelphia court has taken initial steps to limit out-of-state cases, though much more needs to be done. In addition, the Pennsylvania legislature is considering a variety of legal reforms that could lead to a fairer legal system.
A better legal environment could produce a real dividend for Pennsylvania. According to a study conducted last year by NERA Economic Consulting, improving Pennsylvania’s legal climate to the level of Delaware could reduce tort costs by up to $1.7 billion per year, translating to as many as 90,000 new jobs.
Those benefits are real and substantial. But they will not be realized unless Pennsylvania takes action to improve its legal environment. Only then will the birthplace of the American republic have a justice system that would make the Founders proud.
Agencies say AG misused settlement money
The Charleston Daily Mail reports that the long-running legal saga over West Virginia Attorney General Darrell McGraw’s controversial use of settlement funds could be winding down. Since 2007, the AG’s office has been fighting with three state agencies and the U.S. Center for Medicare and Medicaid Services over the proper use of $10 million received from a pharmaceutical company. The agencies argue they should be reimbursed for inappropriately prescribed medicines, but the AG used the money to build a pharmacy school and to fund other community programs.
Judge slashed Bluetooth fees that 'no reasonable' client would pay
A federal judge has lowered the fees for the lawyers that sued Motorola for not including warning labels of potential hearing loss on Bluetooth headsets, cutting it to $283,000 from $800,000. The judge wrote that “no reasonable client” would pay that amount given that class received no money, only a promise to include stronger warning labels on packaging and a $100,000 cy pres payment in charitable contributions, reports the National Law Journal.
U.S. courts must put an end to ‘tort tourism’
Innovative plaintiffs’ lawyers are looking to win big paydays in foreign courts, warns U.S. Chamber of Commerce president and CEO Tom Donhoue in the Investor’s Business Daily. “Tort tourism” – filing lawsuits overseas in the hopes of collecting in American courts – has reached its apex in a case against Chevron, with lawyers looking to enforce an $18 billion Ecuadorian verdict that has been dogged by allegations of fraud. Suits like this creative massive uncertainty and discourage investment and hiring, not to mention generating huge legal bills, Donohue adds.
Objectors fight settlement that would give millions to lawyers & no cash to plaintiffs
A proposed class action settlement that would pay $16.5 million to plaintiffs’ attorneys while offering coupons to class members has run into opposition, reports the National Law Journal. “There is very much a disproportionate aspect of what the attorneys are getting in this case versus the relief experienced by the class member,” ILR senior vice president Matthew Webb said of the suit, which alleges Ticketmaster inflated fees for processing ticket orders.
NH’s early offer med-mal law could be a model for others
In the New York Post, Walter Olson encourages doctors to “look northeast” for a way to improve the medical malpractice process. New Hampshire recently adopted a voluntary early offer system for claims that could be faster and easier that litigation. “Nothing like it has been tried anywhere,” writes Olson, “but if it works, imitators are sure to follow.”
Why Are Hedge Funds Allowed to Invest in Litigation?
When we think of our system of justice, we might envision the heroic small town lawyer, Atticus Finch, in To Kill a Mockingbird. Or the jury deliberations in 12 Angry Men. Or the countless other movies, TV series, and high school civics textbooks that depict the U.S. justice system as a uniquely virtuous pillar of American society.
Unfortunately, that glorified image of the U.S. justice system is at odds with today's reality. In far too many instances, today's civil justice system is utilized not as a means for delivering justice but as a potential profit center -- in other words, less Atticus Finch and more Gordon Gekko, the rapacious investor in Oliver Stone's Wall Street.
We see this play out in some class action lawsuits, where the class members receive token awards while their lawyers walk away with millions. It is also visible in the millions of dollars spent every year by the plaintiffs' bar on advertising, a practice once prohibited for lawyers.
And this troubling trend could be accelerated by a new development: the spread of third-party litigation financing, or TPLF.
You probably haven't heard of TPLF. It's a fairly recent creation, originating in Australia and now landing on the shores of the U.S. In essence, TPLF is the practice of hedge funds and other investment firms providing funds to plaintiffs' lawyers in order to conduct litigation. If the case is won in court or settled, the investor is repaid out of the proceeds of the lawsuit, usually with an extremely high rate of return. The investors, therefore, have a direct stake in the outcome of the case.
Proponents of TPLF say that providing this new funding stream increases access to the courts. But U.S. courts are already widely accessible. For instance, a plaintiff can hire an attorney on a contingency fee basis, a practice that is prohibited in most other developed countries.
While TPLF is not necessary to increase access to U.S. courts, it does create a whole new set of problems and conflicts of interest for litigants, their attorneys, and society at large.
Let's start with the litigants. TPLF supporters allege that the practice is risk-free for plaintiffs, since, if they lose, they typically don't have to repay the investor. But more than 95 percent of U.S. civil cases end in settlements rather than going to trial. And a closer look at one recent case demonstrates major dangers for plaintiffs if they accept a settlement that's less than that demanded by the investor.
In this case, a Texas-based security company, DeepNines, obtained an $8 million loan from a TPLF firm to fund patent litigation against a competitor. In the end, DeepNines received a $25 million settlement. However, because of the terms of the TPLF contract, the investor received $10.1 million of the settlement, while DeepNines, after paying attorneys' fees, netted less than $800,000 -- only about 3 percent of the total settlement amount.
To add insult to injury, the investor then turned around and sued DeepNines for settling for an amount below what the investor's financial models suggested they could receive. The case was eventually resolved through a confidential settlement.
Like Gordon Gekko's insider trading machinations, the DeepNines example shows that many TPLF contracts are rigged in favor of investors. For instance, the contracts often provide for "waterfall" payouts -- meaning that the TPLF investors take a higher percentage of the first dollars of settlement, while the plaintiff's share only rises as the total settlement figure reaches an amount pre-set by the investors. Thus, plaintiffs are pressured to hold out for settlements or judgments far above what they would have accepted otherwise in order to satisfy their investors. And defendants suffer as well, since they are forced to contend with longer and costlier litigation. This scenario stands the justice system on its head by putting the investor in the driver's seat while hurting the primary parties in the case.
In the DeepNines case, the plaintiff still had substantial control of the lawsuit. But when it comes to class actions and other multi-plaintiff lawsuits, it is the investment firms, not the plaintiffs, that often appear to be in control.
For example, a leading TPLF firm invested $4 million in a high-profile, controversial lawsuit brought by Ecuadoran plaintiffs against the Chevron Corporation. The firm's contract stipulated that it would have veto power over the choice of attorneys and also receive precedence over the plaintiffs in the disbursement of any settlement or judgment funds. In all, the firm stood to earn tens of millions of dollars in the event of a successful settlement or judgment.
As for the Ecuadoran plaintiffs, their contract specified that they would receive the balance of any settlement or judgment only after eight different tiers of funders, attorneys, and "advisers" were paid first. It is unclear whether they knew what they were signing up for; according to Fortune magazine, several plaintiffs acknowledged their approval of the 75-page TPLF contract with merely a fingerprint.
Late last year, the funder announced it was ending its involvement in the Chevron case. This occurred months after a U.S. District Court judge in New York issued an opinion finding ample evidence of fraud by the plaintiffs' attorneys in the case.
All this suggests that the Chevron Ecuador case is being primarily driven by funders and plaintiffs' attorneys, not the actual plaintiffs. As with the DeepNines case, this situation makes a mockery of our system of justice by placing the profiteering of outside investors ahead of the interests of the parties in court.
TPLF also creates significant problems for lawyers. Lawyer Ethics 101 states that lawyers have a fiduciary duty to their clients. But this fundamental relationship is jeopardized when a third-party funder enters the picture. For one thing, when TPLF investors get involved in a case, they often front the plaintiffs' attorneys' fees. So when an attorney is managing a case, will they act in the best interests of their client, as they are supposed to do, or in the interests of the third-party funder paying their salary?
In addition, at least one court has determined that attorney-client privilege doesn't apply to communications between third-party investors and attorneys. So if an investor asks an attorney for sensitive information about a case it is funding, that information could be subpoenaed by the opposing party and used against the plaintiff.
So we've seen how TPLF benefits funders and hurt litigants. But the biggest loser from TPLF might be society at large. This is because we all rely on an impartial civil justice system to resolve disputes in a fair and expeditious manner. When TPLF debases that system by putting investor profits ahead of justice, society is the loser.
It's time for policymakers to step up to the plate and curtail this practice, particularly in the context of class action litigation. While by no means a cure-all for the problems facing the U.S. justice system, it can help nudge the system away from the values of Gordon Gekko and back toward those of Atticus Finch. Because when it comes to the delivery of justice, greed is not good.
This op-ed was originally published by TheAtlantic.com on July 3, 2012 as part of its “America the Fixable” series in partnership with Common Good.
