How greedy can you get?
[excerpt on class actions from The Litigation Explosion]
By Walter Olson
Across the Board, July, 1991
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The brief Associated Press item seemed like just another routine business-litigation story. It reported that the management of CBS, while admitting no wrongdoing, had agreed to pay $ 6 million to settle a claim by a disgruntled stockholder named Roger Minkoff, a resident of the U.S. Virgin Islands. Minkoff had sued the giant broadcaster, charging that its management had harmed stockholders' interests by repelling a 1985 takeover bid from the cable magnate Ted Turner and by paying too much for some of the magazine operations of the Ziff-Davis group in the same year.
Routine, yes, but just below the surface of the story were some odd angles. In the first place, rank-and-file CBS stockholders wouldn't be getting any checks in the mail; the bulk of the settlement, $ 4.5 million, was going into the CBS corporate treasury rather than, as one might expect, coming out of it. (In fact, the settlement was being paid by an insurance policy, not by the corporation itself.) The next surprise was that the aggrieved shareholder was not, as one might expect, an investor with enough of his own money in CBS stock to make such a fight worth pursuing. Minkoff actually owned a mere 15 shares, hardly enough to pay the postage in a lawsuit like this. As recompense for having gone to the trouble of suing, he was to receive $ 15,000 from the settlement, not bad for a holder of 15 shares (valued at $ 184 each) but only a sliver of the $ 6 million that was changing hands.
What happened to the other $ 1.5 million? Why, that went to Minkoff's lawyer, Richard Greenfield of Haverford, Pennsylvania, as legal fees per the terms of the settlement. And that explained everything. Greenfield is very, very well known in America's boardrooms. His firm has turned up as attorney of record in scores of other suits against American corporations whose common feature was that the legal fees billed vastly exceeded the sums recovered for the named clients.
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For a long time people tended to see lawsuits as private quarrels between private parties for private gain. To the extent that the wider public had an interest in them, it was mostly in laying them to rest by clarifying responsibilities, so that the disturbance of the peace might end and life get back to normal.
This point of view was not very conductive to the emergence of an industry devoted to stirring up lawsuits for profit. But a new and much more suitable ideology now arose. Lawsuits (it now began to be urged) should be seen not just as ways to clarify the bounds between two private rights that might have come into conflict, but as campaigns to liberate people whose rights had been insolently trod on. In fact, even more important than to liberate existing victims was to deter future treadings-on of rights. The enforcing of good conduct through fear of being caught and punished was an acknowledged aim of the publicly enforced criminal law. Why not the privately enforced civil law as well?
You might call it the invisible-fist theory. In Adam Smith's famous account, the butcher and baker are led in their self-seeking as if by an invisible hand to further the general welfare: Private striving leads to public benefit. The bold new twist was the idea that private quarrels also lead to public benefit; the more fights you get into, the better a place you make the world for everyone else.
All this provided a sorely needed moral basis for the sue-for-profit industry, a basis that was to prove amazingly powerful in overcoming all sorts of nagging misgivings and lingering doubts legal entrepreneurs might feel about intensifying their efforts. If to litigate was to do the world a favor, then late-night lawyering ads were not at all in the same league as crass come-ons for vocational schools or wrinkle creams, but were more like public service announcements that broadcasters should probably be running for free. Direct solicitation? An even more commendable outreach program, providing door-to-door service. Just the same, the demand for litigation services still fell a long way short of what farsighted promoters knew it could be. No matter how well the persuasive apparatus might be honed, most persons with gripes still declined to fight, for the same varied reasons that people decline to fight with their fists: scruples, continuing relations with the designated adversary, disdain for the sport itself, or lack of stomach for its grueling ordeal. If the cannon fodder was not volunteering in the desired numbers, one option was to offer sign-up pay.
The contingency fee had already promised to take care of the client's major financial risk here, by assuring him that the biggest expense of a lawsuit, the lawyer's time, was nothing he had to worry about paying out of pocket. ("No fee unless successful.") Officially, clients are still responsible for the other miscellaneous expenses of a losing lawsuit. But all sides understand that in many of today's suits the lawyer is covertly gambling the expenses, as he is openly gambling the fee.
The next logical step is to pay the client cash on the barrel to sue or keep a suit going. Like so many promising promotional strategies in the litigation business, this one has been illegal under English common law: Furnishing money in exchange for all or part of someone's right to sue was a criminal offense called "champerty." The law sometimes permitted outsiders to buy and enforce an obligation where the obligated party had consented in advance to make it assignable. But experience with that process tended to confirm the mistrust. Dunning agencies that buy up overdue accounts and try to collect them are widely seen as several notches less scrupulous than the in-house billing departments of established merchants with good will to protect. There was little enthusiasm for extending the assignability idea to, say, divorce, libel, child-support, or car-crash claims.
And yet the logic of legal entrepreneurship points in that direction. Once lawyers feel comfortable taking a one-third share in a suit in exchange for forgiving their fee, why should they stick at taking a two-thirds share purchased by way of a direct payment to the client? After all, such a payment might enable the client to resist the otherwise seductive settlement offers of the opponent. Champerty has not yet been made lawful, but anecdotal evidence suggests that it is widespread.
Comparatively routine are fee-splitting arrangements in which the law firm that lands a client sells him to a second firm for a share of the eventual fee. This allows a division of labor between lawyers who are good at inciting litigation and those who are good at waging it. More creative financial techniques are on the horizon, as speculative legal practices find ways to secure outside financing for their inventory of grievance. A Los Angeles bank has joined with the local trial lawyers' association to offer a "client cost acount program" to fund the costs of lawsuits. The line of credit is nominally taken out in the client's name but the lawyer is the one who guarantees it; in exchange for fronting the money, the bank gets a lien against any recovery.
West Coast entrepreneurs have also been pioneering something called the syndicated lawsuit, in which venture capitalists chip in to build a war chest for a lawsuit in exchange for shares of any recovery. Such syndicates have spread especially fast in the world of patents, where they appear only a slight novelty: If it is proper to buy the full rights to an invention, why not buy just the right to sue people for selling allegedly patent-infringing products?
The syndication format is adaptable to many other types of lawsuit. Its most spectacular success thus far has come in a commercial suit. A syndicate bought a promissory note that the ComputerLand Corporation had issued in its start-up days and sued the company on the theory that the note was really intended to be convertible to vastly more valuable ComputerLand common stock. It convinced a jury of this theory and won a $ 125 million jackpot as well as a big equity stake in the successful retailer. Shares in the syndicate that had been offered originally at $ 10,000 skyrocketed to a trading value of $ 750,000. The organizing lawyer, rather like a Viking clambering aboard a rich merchant ship, even got to join ComputerLand's board of directors.
These trends have a logical culmination: unlimited public trading of lawsuit shares. Although a New York Verdict Exchange has not yet been set up to handle this new type of commerce, it may be closer than we think. For a while, investors who bought shares in Pennzoil were mostly buying a legal claim against Texaco to which a collection of refineries and miscellaneous assets happened to attach.
A stroke of legal innovation in the 1960s promised to go yet further in dislodging many inhibited claims.
The old law had long recognized an obscure type of lawsuit known as a bill of peace. It could be used when many persons had been harmed in the same way by the same offender. One of the earliest English cases, which perfectly illustrates the principle, was allowed against a shipowner accused of cheating a returning crew of its wages. The law could have handled the charges by holding a hundred (or however many) trials, and if the owner had lost the first cases he might not have fought to the bitter end. But why hold so many trials when the underlying issue was the same each time?
By the time the bill of peace had evolved into what we now know as the class action, it had some peculiar attractions for the aspiring drummer-up of litigation. Class actions permit recruitment and solicitation not just by ones and twos, but by carloads and counties. A client with some smallish complaint walks in, having seen the lawyer's flashing sign or matchbook cover; he turns out to be a human Klondike, because his injury is the same as that of a host of others with whom he can be joined in a class. But the rules made it hard to organize class actions. And so the rules had to be changed. A 1966 round of Federal reforms made it easier to organize actions involving very large groups. In 1974 the Supreme Court did away with a rule that had required the organizing lawyer to show a significant chance of winning on the merits. Group suits began to burgeon in the antitrust, employment, environmental, and welfare-benefits fields.
The American class-action lawyer can represent thousands or millions of people who have never seen or dealt with him, or one another, in any way: All the soldiers who fought in an overseas war, all the buyers of a certain car, all the consumers who might not have bought Perrier water had they known it contained infinitesimal traces of benzene, and so forth.
Under modern rules, members of a class are given a chance to opt out of the suit in their name by sending in a postcard, in the sort of "negative check-off" familiar to members of book and record clubs. Unlike other club members, however, members of the suit-of-the-month club do not save any money by opting out of the latest selection, and not many usually do so, especially since their own withdrawal would do nothing to prevent the suit from going forward in the name of everyone else. Like voters in one-party states, a few scratch the designated name off the ballot, and the rest get counted as client/supporters for no better reason than inertia.
The class-action lawyer does not of course have to pick as a client the first member of the outraged collectivity who happens along. In the age of legal solicitation, he can search out just the right one. Of the many class members, at least one may turn out to be the wonderfully obliging sort of client who leaves the case's management entirely in the lawyer's hands. It might be a cousin, an old college chum, or a colleague on the class-action circuit for whom the lawyer once did a similar service. The client may also have the grace to be qualified to sue in the state of judicial district that the lawyer considers most favorable to this kind of suit or hostile to this defendant. And through the miracle of the class action a million complainants who have never set foot in that sympathetic state or court district can also be brought in to benefit from its brand of justice.
Most notable was the class action's treatment of lawyers' fees. If the suit makes good, the lawyer can't very well (so the theory goes) negotiate with a hundred sailors or a thousand shareholders for his fee. Instead, he asks the court to deduct an appropriate sum from the total award or settlement before it gets distributed among the plaintiffs.
Judges are not as well situated to watch meters as paying clients, and when the fee request is presented to them at the end of the suit many feel uneasy about trying to reconstruct, without benefit of adversary process, how much lawyering should have been done in a case that may have lasted for years and has gone on mostly outside the courtroom. Once lawyers figure out what a court will tolerate, they somehow tend to pitch their fee requests around that level, and the effective contingency fee is complete. A substantial literature in the law reviews urges courts to move to an open percentage or bounty system.
Like many innovations making it easier to sue, class actions were recommended as a way to cut court costs. They soon grew monstrously expensive and complicated. As plaintiff groups got bigger they got more motley, and it got harder to pretend that the members had the same interest at all. Some lawyers began collecting on cases where thousands of claimants had only a few dollars at stake apiece, and law school visionaries began working on techniques to lump into a viable action nationwide claims of a penny or two per person. The reductio ad absurdum was reached when a court allowed a lawsuit against a labor union to go forward as a class action although every single member of the class except the named plaintiff objected to it.
Under the old taxi-hire conception, where the point of litigation was to protect the legitimate interests of the named client, outright disloyalty to that client's interests was a high sin. As lawyers increasingly became the real players in class and batch litigation, as clients came to seem a bothersome obstruction, a new ideology was needed to justify what was going on. The invisible-fist theory fit the bill perfectly by shifting the focus to the need to chastise the opponent and deter future misbehavior by those in a similar position. A defendant who ponied up a stiff settlement, after all, was just as effectively chastised and deterred whether or not the named client ever saw much of the money. Litigation where the lawyer or his friends kept much or all of the proceeds could thus be idealistically reconceived as a new and higher form of litigation, on behalf of the interests of future victims in general rather than any one past victim.
Before long it was being argued that the legal entrepreneur was really a new kind of public servant, the "private attorney general," who represented the interests of the citizenry at large (without being subject to any actual public account or control, of course) and who should thus be free, like the elected or appointed public prosecutor, to file his civil charges without the prompting or perhaps even the permission of injured persons. Not all charges would pan out, but even a losing suit had its virtues; it showed a sort of police presence in a doubtful area, and the act of stopping and frisking this defendant showed others that they were being watched.
Walter Olson, senior fellow at the Manhattan Institute, is the author of The Litigation Explosion, from which this is excerpted.
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