June 9, 2014

Kevin Gourlay

I wrote not long ago about an Ontario judge refusing to approve a class action settlement against legal publisher Thomson Reuters. In that matter, class counsel would be paid $825,000 while the class itself would fork over its intellectual property rights, receiving only a $350,000 fund for public interest litigation in return.

Earlier this week, Richard Posner, the well known jurist and scholar, currently of the Seventh Circuit Court of Appeals in Chicago, rejected what appears to have been an even more egregious example of class counsel making out like bandits while the class itself sees little of the proceeds. The judgment is available here.

The case was against Pella, a window manufacturer.  For 15 years they sold allegedly defective windows that allowed water to enter and cause damage.  This was said to violate the product liability and consumer protection laws of a number of states.  Class actions were certified and a settlement reached in 2011.

The original class plaintiff, Saltzman, was the father-in-law of lead counsel, Weiss.  Posner noted that the “impropriety of allowing Saltzman to serve as class representative as long as his son-in-law was lead class counsel was palpable.”  That was presumably made more so when, shortly before the appeal, Weiss was suspended from practice for 30 months for repeated misconduct, namely sexual harassment.

The settlement was purportedly for $90M to the class, plus $11M in attorneys’ fees to class counsel, primarily Mr. Weiss.  The $11M fee included a $2M advance payment to Mr. Weiss, prior to notice of the settlement even being sent to members of the class.  While the $90M : $11M ratio does not seem offensive at first glass, Judge Posner deconstructs the settlement and concludes that the class “could not expect to receive more than $8.5 million from the settlement, given all the obstacles that the terms of the settlement strewed in the path of the class members.  And even that figure seems too high.”

In reversing the lower court’s settlement approval, Judge Posner concluded: “This is a case in which ‘the lawyers 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.”

The class action is a strange beast.  As Justice Posner notes at the start of his decision, it is an ingenious procedural innovation that allows people who have been wronged to pursue the same defendant or defendants as a class.  It can be especially important when each claim is too small to justify the expense on its own but, with thousands of plaintiffs and in some cases hundreds of thousands of plaintiffs, the class action can provide a vehicle to effectively remedy the wrong.  With tens of millions of dollars at issue, the incentives for class counsel can also be high (often justifiably so as they are often taking on tremendous risk in pursuing the claim).

However, there is an inherent conflict when class counsel negotiate their fees separately with the defendant, placing counsel at odds with their own client.  Unlike a personal injury contingency fee where plaintiff counsel’s interests are aligned with their client to simply maximize the client’s payout, an unscrupulous lawyer can negotiate a result that is favorable to himself at the expense of the class.  Settlements require court approval but the court is generally only hearing from the lawyers for both sides who have already agreed on the settlement rather than the class, most of whom have no idea what is being done in their name.  Surely there is some room for some fine tuning to the process.

[I should note that I do not practice in class actions and have only superficial knowledge of class action procedure in Canada.]


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