The Seventh Circuit Court of Appeals today issued an emphatic ruling rejecting a class action over Subway’s “footlong” sandwiches that, amazingly enough, sometimes come up short. In so doing, the influential Chicago court put the judges in its district, and hopefully elsewhere, on notice that so-called “settlement-only” classes that deliver fees to the lawyers but nothing for their clients won’t fly. The court also reiterated the importance of objectors like Ted Frank’s Center for Class Action Fairness in policing collusive settlements. These settlements can’t happen without judges like U.S. District Judge Lynn Adelman of Wisconsin, who the Seventh Circuit says should have dismissed the case instead of letting it drag on and end in a worthless settlement that paid the lawyers $520,000 in fees.

The case — or cases; seven class actions were consolidated in the Eastern District of Wisconsin — were ridiculous from the start and the Seventh Circuit said as much. After an Australian kid posted a picture of a footlong Subway grinder in front of a ruler showing it was 11 inches and it went viral, the class action lawyers dived in. This is instinctive for them: Whenever a big news story reveals a potential lawsuit, no matter how silly, some plaintiff attorney is going to gin up a lawsuit and others will launch copycat suits in terror of missing out on fees. They sued over James Frey’s “A Million Little Pieces” when the “memoir” turned out to be less than factual; they sued over Pirate’s Booty snacks after somebody decided they weren’t “all natural.”

In the Subway case, the evidence rapidly revealed the lawyers had a nothingburger of a case. As the Seventh Circuit panel explained, baking bread is hardly an exercise in precision. While every piece of footlong dough weighs the same, the oven hasn’t been built that will make each loaf come out the same length. Fortunately for the customers, they get the same amount of meat and cheese and they can pile on extra toppings if they want. All of which was obvious to the lawyers who filed this. I’ll name them since they should be proud of their work: Zimmerman Law Offices, Denittis Osefchen, Todd M. Friedman, Edelman Combs Latturner & Goodwin, Agruss Law Firm, Ademi & O’Reilly, Faruqi & Faruqi, Evans Law Firm, Hirsch Law Firm and Marks & Klein. Faruqi & Faruqi has a particularly bad habit of getting involved in questionable class actions: As I reported a few years ago, a judge tossed their fee grab in a lawsuit against Verizon as a “misuse of corporate assets.”

In this case, the lawyers changed course when it was obvious they couldn’t claim their clients had been ripped off. Instead of dropping the suit — how could they? there was money on the table! — they retooled around a Rule 23(b)(2) injunctive class action. In plain English, they kept the case alive by negotiating a settlement under which Subway didn’t admit it was ripping off consumers but promised it would measure its sandwiches very carefully and warn them — lawyers are entranced by written warnings, despite overwhelming evidence consumers don’t read them — that their next footlong might be a quarter-inch short.

There’s two sides to every bargain, of course, and in this case Subway got closure. Because class action lawyers possess the same miraculous powers as medieval priests: If they can get a Judge Adelman to go along, they can offer the company they sue a blanket release from any future claims based on the same facts. It’s the tool class action lawyers use to earn billions of dollars in fees, which of course are paid by the consumers they purport to represent since companies pass it all through as a cost of doing business.

It’s not too harsh to call this a racket. In fact, the judges of the Seventh Circuit said exactly that:

We have remarked on the tendency of class settlements to yield benefits for stakeholders other than the class: Class counsel “support the settlement to get fees; the defendants support it to evade liability; the court can’t vindicate the class’s rights because the friendly presentation means that it lacks essential information.” We put the point more bluntly in another appeal by Frank as the objector: A class settlement that results in fees for class counsel but yields no meaningful relief for the class “is no better than a racket.”

There’s no reason for these cases to persist, and maybe more appeals courts will recognize the collusion inherent in class-action settlements and reverse judges like Adelman who let them pass through. Settlement-only classes are particularly troublesome: As Northwestern University Law School professor Martin Redish has written, there’s no “case or controversy” left after the parties agree to a settlement, so how can a federal judge claim jurisdiction to approve a class?

None of this would be an issue if judges were more aggressive in awarding fees to the winning side in cases like this. Class-action lawyers like to say they are taking a risk when they bring risky cases but that’s a canard. They are entrepreneurial as hell and hardly stupid, assembling portfolios of cases so the winners outweigh the losers. And their never-say-die-until-the-judge-puts-a-fork-in-it attitude is good for business. Faced with the choice of paying them a nuisance fee to go away or paying their own lawyers multiples of that to defend the case, most businesses settle. If class-action lawyers faced a meaningful risk of being ordered to pay the other side’s costs, they might be more careful in picking whom to sue.

In the end, the real problem is with the judges. They have the power to make like difficult for collusive settlement artists, if only they’d use it.




Categories: Class actions