Class Conflict

When clients serve lawyers

I did not realize I had sued Citibank until I received my latest Visa bill. The statement includes a credit of 73 cents labeled "SCHWARTZ SETTLEMENT REFUND."

It turns out the money is my share of the $18 million that Citibank put up to settle a class action lawsuit arguing that the bank had violated the Truth in Lending Act by counting its customers' payments as late if they arrived after 10 a.m. on the due date. In theory, the 73 cents I got compensates for late fees I should not have been charged.

But Citibank says calculating each customer's overpayment was impractical, so it must have used some sort of guesstimate. In any event, the typical refund was less than a dollar. The lawyers got $9 million, later reduced to a mere $7.2 million.

Since there's nothing obviously fraudulent about requiring payments by 10 a.m. rather than 1 p.m. (the new deadline Citibank agreed to under the settlement), this looks to me like another shakedown in which a company pays off lawyers to avoid the expense and risk of a trial. Even if there was merit to the complaint about Citibank's late fees, it's hard to see the utility in an arrangement that lets lawyers pocket $7.2 million while giving plaintiffs essentially nothing.

That sort of deal is all too common in class action lawsuits. The attorneys who file them can walk away with huge rewards while their ostensible clients get coupons worth a few bucks or checks so small they're not worth cashing.

A few years ago, the Blockbuster video chain settled a class action that accused it of charging inappropriate late fees. Each customer who signed up got free movie rentals and discount coupons worth $18 at most; the lawyers got $9.3 million. In a 2002 settlement of two lawsuits challenging its shipping and handling charges, the Columbia House record club agreed to give each class member a discount voucher for one CD and pay lawyers more than $5 million.

Despite such perverse outcomes, the Association of Trial Lawyers of America (ATLA) insists there is nothing wrong with class actions that needs fixing. ATLA President David S. Casey Jr. claims a new study shows "the system is working correctly."

Not quite. The study, which appears in the premiere issue of the Journal of Empirical Legal Studies, examines fees and client recoveries in 370 class actions recorded in court decisions from 1993 to 2002. "Contrary to popular belief," write the authors, Cornell law professor Theodore Eisenberg and NYU law professor Geoffrey P. Miller, "we find no robust evidence that either recoveries for plaintiffs or fees for their attorneys as a percentage of the class recovery increased."

One weakness of the study is that settlements and fees are more likely to be reported in federal class actions. If, as tort reformers argue, state courts are more prone to excessive settlements, an upward trend might not be apparent in the available data.

Even if inflation-adjusted settlements and fees have not risen on average during the last decade, the total cost of class actions is going up because more are being filed. The number of federal class actions doubled between 1997 and 2002, and Federalist Society surveys of corporations indicate that the number of state class actions also has risen dramatically in recent years.

Another limitation of Eisenberg and Miller's study is that averaging results across states tends to conceal problems with particular jurisdictions. One of the most notorious is Madison County, Illinois, which sees more class actions per capita than any other county in the U.S. and had a record number in 2003. Madison County made news last year with a $10.1 billion award in a tobacco class action, accompanied by lawyers' fees of $1.8 billion.

Eisenberg and Miller found that "the amount of client recovery is overwhelmingly the most important determinant of the attorneys' fee award." That may seem fair, but it's not when damages are absurdly high, or when a settlement is a payoff to make the lawsuit go away rather than appropriate compensation for real injuries. Basing fees on the total "client recovery" is also unreasonable when the settlement is overvalued (as it probably will be when it consists of coupons that might not be used) or when the amount received by each plaintiff is negligible.

I'm not sure whether fee regulation is the right solution, but I thought I might as well put in my 73 cents' worth.