A look at consumer class actions shows that in many cases, plaintiff lawyers make more than their clients

As published on Legal Newsline:

WASHINGTON, April 8, 2020 – A detailed examination of eight years of consumer class actions in federal court found that consumers received only a tiny fraction of the money awarded in those cases while plaintiff lawyers frequently claimed a bigger share of the settlement than their clients.

At the median of cases studied – meaning half were higher, and half were lower – lawyers representing the class were paid more than the class itself.

The analysis by Jones Day attorneys confirms what several other studies have found: Consumer class actions tend to benefit the lawyers who bring them, at the expense of the consumers they claim to represent. Other studies have found that companies pass on most of the cost of class actions to customers “in the form of higher prices, lower product quality and reduced innovation,” in the words of an Emory Law School professor who authored a 2016 study on consumer class actions.

For this latest study, Jones Day partners Darren Cottriel and Craig Stewart and associate Robert N. Stander looked only at class actions alleging economic loss from false advertising or other forms of consumer fraud. Such cases are particularly prone to abuse, since there is no reliable way of determining who belongs to the class and claims rates tend to be extremely low.

Plaintiff lawyers typically recruit lead plaintiffs to represent class members, and when subjected to deposition those plaintiffs sometimes display a lack of knowledge about the case or claimed injuries.

In one lawsuit cited by the lawyers over the phrase “No Added Sugar,” the lead plaintiff denied she was injured by the supposed deception because she always understood what “No Added Sugar” meant. In another case involving “all natural” chips, the lead plaintiff undercut claims he was injured by admitting he bought the chips because “they taste good.”

Defendants nevertheless settle nearly every case that survives a motion to dismiss — and many more before they even get to that stage — simply to avoid the cost and distraction of litigation.

The Jones Day lawyers started with 110 federal cases settled between 2010 and 2018, which they reduced to less than 50 after excluding cases in which there wasn’t enough publicly available data to determine how many class members participated. (Plaintiff lawyers know these numbers, but rarely offer to make them public because of the extremely low participation rates.)

The remaining cases reflect one of the longest time periods studied and show remarkably consistent results. The average rate of participation was 6.99% but even that was skewed upward by four cases with take rates above 15%. Excluding those, the average take rate was 4.36% and the median was 3%. In so-called “general notice” cases in which class members weren’t contacted directly, the median take rate fell to 2.28%.

Some examples were egregious: In a case over Kaba Simplex locks involving an estimated 1 million class members, 99 claims were submitted. The lawyers got $1.6 million in fees and expenses.

Plaintiff lawyers could increase claims rates by insisting on direct notice to class members, but they rarely do so. Class size also has a large impact on the percentage of the proceeds that wind up in consumers’ hands. In one settlement included in the study involving jewelry, the entire class was 182 customers. Sixty-seven of them submitted claim forms, probably because the settlement awarded them as much as $1,200 each.

The study authors, who defend corporations in class actions, conclude low participation rates are the result of poor notice requirements and possibly because “class members are simply uninterested because the minuscule award is not worth the effort to submit a claim.”

Regardless of how their clients fare, plaintiff lawyers make lots of money on these cases. The average fee for class counsel was $1.96 million, compared with an average of $3.39 million paid to class members. But the median fee was $966,250, while the median payout to class members was less at $842,500, meaning in half the cases clients got less than their lawyers. And that includes one outlier case involving identity theft in which class members got $68 million via a separate Federal Trade Commission fund.

Removing that case from the data set, the average payout to class members was $1.9 million, while their lawyers got $1.76 million. The median payout of $840,539 was significantly below the median fee of $950,000.

Consumer class actions benefit another group entirely disconnected from the litigation: Nonprofit organizations that receive money through cy pres awards. This practice has crept into class action law as a method for distributing money when actual class members can’t be found, but critics point out that the nonprofits have no legal claim to the money and often have ties to parties in the litigation.

The Jones Day lawyers found 15 cases with cy pres distributions, with the payment to unrelated cy pres recipients averaging $1.55 million while class members only got $900,000. Plaintiff lawyers got an average of $2.2 million in fees, double what they obtained for their clients.

Lawyers even made money in cases in which their clients got zero. In the eight settlements in which plaintiff lawyers negotiated coupons, warranty extensions and other practically worthless agreements, judges awarded them an average of $1 million in fees.

Amendments to Rule 23 of the Federal Rules of Civil Procedure in 2018 might improve transparency and claims rates, the authors note. Those changes allow potentially more effective methods for notifying class members and requires judges to make a slightly more searching analysis of proposed settlements before approving them.

Categories: Class actions