Antitrust

Gold Bugs

Class action lawyers discover Silicon Valley.

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In October the Toshiba Corporation shocked many observers by announcing it had agreed to pay an estimated $1 billion to $2 billion to settle a hitherto obscure class action lawsuit involving its popular laptop computers. The suit had charged that a defect in the machines might cause users to lose data while saving files to their floppy drives.

Many long-term Toshiba owners professed themselves unfamiliar with any such glitch, but plaintiff's lawyers had showed it could happen if someone set up one of the machines just so. Under the terms of the settlement, the company agreed that it would post on the Web a software fix that it said remedied the problem; make available coupons or rebates valued at $100-$300 to the owners of an estimated 5.5 million laptops; and donate some older equipment to charity. And one thing more: The settlement included $147 million in legal fees for Reaud, Morgan & Quinn, a very successful plaintiff's firm best known for asbestos and tobacco work, which had filed the action in its hometown of Beaumont, Texas.

Talk about free money falling into one's lap! "And the beauty of it is," commented National Journal legal columnist Stuart Taylor, "that my Toshiba works just fine! …So remote is the possibility that our laptop will ever seriously malfunction that I may not get around to downloading the free software `patch' that Toshiba has provided as part of the settlement."

Indeed, many laptop owners these days never use their floppy drives at all, relying instead on downloads of data through modems or ports in combination with preloaded software. As for the rest, Toshiba said it managed to re-create the problem in the lab only under rather artificial conditions, as when its experimenters tried to save files "while simultaneously doing one or two other intensive tasks, such as playing a game or watching a video." In fact, the Los Angeles Times reported, "no consumer ever complained of losing data as a result of the glitch."

The Toshiba settlement was followed within days by the filing of similar law-suits against other PC makers, including Hewlett-Packard, Compaq, NEC Packard-Bell, and e-Machines Inc. Compaq, for its part, said it could not be liable because its particular design had avoided the Toshiba glitch. In any case, within days the laptop suits had been overtaken in the headlines by another and far bigger legal pile-on: the mass filing of class action antitrust suits against the Microsoft Corporation by private attorneys tagging along after federal judge Thomas Penfield Jackson's Redmond-arraigning "findings of fact." These suits, reported The Washington Post, aim to make Bill Gates' enterprise "the next Philip Morris," pinned down for years to come in courtrooms around the country; indeed, they've attracted the participation of lawyers who grew rich in the previous binge of expropriation, the "tobacco round." Collectively they're expected to demand what will amount to stupendous sums of money, mounting at least into the many tens of billions.

Together these events signal a development that was bound to arrive sooner or later: America's high-tech industry is now officially under assault from America's other most successful industry, the litigation business. If we're lucky, Silicon Valley will now realize that it's in the same boat with conventional businesses that have come under courtroom attack–and perhaps begin to think about how best to unite in resistance.

To see how Toshiba could be waylaid on the dark legal streets of Beaumont, we need to retrace a bit of history. For a very long time, the common law of England and America mostly disallowed the sort of device we now know as the class action. To be sure, there were some limited procedures, originating in the courts of equity, by which aggrieved litigants could join together to pursue a lawsuit. But the restrictions were many and stringent: The claimants had to have suffered an essentially identical injury, each had a right to be individually notified of what was going on in his name, and so forth.

In recent decades, with America taking the lead, the class action device has been turned into something far different. One prominent advance was the "opt-out" model, in which everyone in a class would be enlisted as a litigant unless he went to the trouble of asking not to sue–much better, everyone agreed, than the old "opt-in" model, where individual clients were expected to decide affirmatively to take part. Notification rules fell by the wayside as well, so that millions of consumers might never even realize that suits were being filed in their name. Requirements of uniformity of situation were relaxed, so that customers who'd been seriously vexed by some business practice could be roped into a single class with others who may not have minded it at all.

As requirements of "ripeness" and "actual injury" began to erode, it became possible to sue on behalf of some classes to whom nothing bad had happened, on the grounds that they risked having something bad happen to them in the future. In 1974 the U.S. Supreme Court did away with a rule that had required the organizing lawyers in many federal class actions to show a significant preliminary chance of winning on the merits. And increasingly, it came to be seen as perfectly acceptable for the action to be managed by and at the convenience of the lawyers, with clients serving as little more than pieces for them to move about on a chessboard.

At the same time, the class action (and litigation more generally) was being invested with a powerful ideological mission, that of bringing the business class to heel. Lawsuits could serve as a new and powerful method of extending the reach of regulation, with no need to get bogged down in the tedious schedules and obstructive procedures involved in prevailing on actual legislatures or regulatory agencies to adopt new measures. ("You don't need a legislative majority to file a lawsuit," boasts lawyer Elisa Barnes, who scored a big victory against gun makers in the now-famous Brooklyn case of Hamilton v. Accu-Tek.) At the same time, very much like a progressive tax system, litigation could redistribute vast sums of money toward undoubtedly deserving plaintiffs, a goodly share of which would of course have to be set aside for the lawyers' own accounts to lubricate the process and finance its continual expansion.

For its prescience in laying out the agenda of what was to come, it's worth digging up a copy of an old essay titled "Class Actions: Let the People In," published in the 1973 collection Verdicts on Lawyers, edited by Ralph Nader and Mark Green. The authors of the essay–Beverly C. Moore Jr., described as "a public interest lawyer in Washington, D.C.," and former Sen. Fred Harris, a populist who made a run for president and also served as chairman of the Democratic National Committee–drew a remarkably ambitious blueprint for using the class action to pursue a wide range of complaints against business.

Moore and Harris compiled a list of no fewer than 24 different industries and categories of business they considered ripe for class action suits. Cigarette makers were on the list; so were makers of alcoholic beverages and producers of fatty and sugary foods. Companies committing antitrust violations and unfair trade practices (that would cover Microsoft) were prominent targets too, along with industries allegedly responsible for occupational illness, which might nowadays include keyboard makers chargeable with the costs of carpal tunnel syndrome. And on and on: Developers would get sued for the costs of "sprawl"; pharmaceutical makers for the costs of adverse reactions to medicines, whether or not due to anyone's negligence; and automakers for the costs of all highway accidents of whatever origin. On the list, too, were class actions over consumer durables that did not perform as reliably as they might–a category that would eventually include those 5.5 million Toshiba laptops.

In the quarter century since Moore and Harris unrolled their blueprint, the class action bar has gathered into its hands a remarkable degree of power to set the national agenda, taking on issues such as gun control, race relations at big companies, and World War II reparations. The announcement this fall of a big class action offensive against HMOs destroyed $12 billion worth of stock value in a single day, and it's now widely assumed that the lawyers will have a place at the table in negotiating any future revamp of the rules governing health care.

"If I don't bring the entire lead paint industry to its knees within three years, I will give them my [120-foot] boat," tobacco billionaire Ron Motley recently told the Dallas Morning News. Auto insurers learned that they might have to disgorge billions following an October verdict in which lawyers convinced an Illinois jury that it was improper for the insurers to have bought generic (as opposed to brand-name) replacement parts in repairing their policyholders' crashed cars, notwithstanding endorsements of that practice by state insurance commissioners and leading consumer groups.

Lots of money is undeniably changing hands; but are consumers actually benefiting? That's a harder question to answer. Some policyholders win, but others lose, when an insurance company is obliged to pay higher prices to buy genuine GM parts and then translates those higher outlays into a rate hike at renewal time. Other class action settlements result in the distribution of coupons with a high face value (thus allowing the lawyers to claim high fees) but not much real value, for the same reasons that a Sunday paper filled with $50 in coupons is not really worth $50.

In plenty of cases it's obvious that the lawyers' interest is in fact at odds with the expressed wishes or interests of their purported clients. For example, various current suits seeking class action status charge companies with unlawfully having promoted or facilitated gambling; some of these have been filed on behalf of customers who've run up debts at offshore Internet casinos and say credit card companies were wrong to advance them the money to do so. Should they prevail, they may obtain some transient "relief," such as forgiveness of interest or principal, but the wider effect will be to force the credit card companies to withhold credit from many other willing borrowers in the class. If that counts as legal representation, what would legal opposition look like?

Which brings us to the question of who really gains and who loses should courts begin handing out damages liberally over computer failures. Very few high-tech products–hardware, software, Web applications, you name it–are immune to glitches and crashes, particularly not in the versions provided to early adopters before the bugs are worked out. If crashes are eventually seen as compensable, users naturally will tend to arrive at a high valuation of what they think their crashes have cost them. Even glitches whose only cost is lost time and annoyance add up fast as sources of potential compensation. Who hasn't wasted at least a couple of hours struggling with the infelicities of the typical $60 software program?

In fact, it wouldn't require invoking an exaggerated valuation of the cost of time to imagine a typical user as experiencing the aggregate impact of bugs and klutzy design in a $60 program as an implicit cost far in excess of the original $60 outlay. If silicon-economy providers are indeed to be forced to insure their customers against that risk, they'd better take care to build a premium for such insurance into the price of the product–which means charging a good deal more than $60 in the future. Maybe they'd better charge $250, in fact, and set aside the surplus as an escrow against future claims. With tempting settlements like Toshiba's now on the table, you can bet teams of clever lawyers are sifting through bug reports in search of the next likely targets.

There is one legal principle that stands between Silicon Valley and the series of unpleasant effects that would result from an extension of liability, ranging from steep price hikes on techie components to slower (i.e., more "careful") introduction of new products and applications. That legal principle is the good old one known as "freedom of contract."

Indeed, makers of computer products have long tried to protect themselves from litigation by way of "shrink-wrap" disclaimers through which customers agree, as a condition of using the product, not to pursue open-ended liability claims later (lately updated to "first-screen" disclaimers in which they click "OK" to an agreement not to sue before being given access to the product).

Trouble is, the plaintiff's bar has never conceded the validity of shrink-wrap disclaimers; in fact, it vigorously disputes them. It points out (correctly) that such disclaimers would be viewed as virtually unthinkable in the case of many older industries: Imagine if Chrysler tried to shrink-wrap a minivan, requiring buyers to promise not to sue for unlimited damages over later discontent with the vehicle. Why, it would be…it would be a return to the days of laissez faire!

On the strength of a barrier as thin as cellophane may depend the difference between the relatively unlitigious Silicon Valley of today and an overcautious, overlawyered version that might replace it a decade from now. If we're to avoid that prospect, someone from the Valley is going to have to stand up for the principle of freedom of contract, as a principle. Any nominees?