My wife recently received a letter in the mail that she is "entitled" to a part of a class action settlement reached in the case of
Strugano et al v. Nextel Communications. In her case, Ms. Strugano alleged that Nextel unlawfully and without her consent changed the terms of her agreement by adding a $1.15 monthly fee and rounding the billing on her calls to the next minute instead of to the next second. Rather than litigate the case and risk the vagaries of an obscene jury award, Nextel agreed to settle the case. Nextel paid out up to $55 million to settle, from which Ms. Strugano received $5,000 as lead plaintiff; her attorneys received $2.5 million for their troubles; and my wife received a $10 phone card.
Cases such as these are becoming all too common in the American legal landscape. The tort system now awards more than
$240 billion a year, most of which ends up with the lawyers who litigate the cases. The extremely large legal payoffs are not only a consequence of these suits, increasingly they are also the motive.
In May 2006, the law firm Milberg Weiss was indicted on charges of fraud in connection with 150 suspect cases. These cases, in which two of its partners, Steven Schulman and David Bershad allegedly orchestrated "
a long running scheme to pay off the named lead plaintiffs in the shareholder lawsuits the firm has built its reputation in pursuing," earned the pair over $200 million in legal fees between 1991 and 2005. The indictment alleges that the firm paid these "claimants," such as Seymour Lazar, over $11 million in illegal kickbacks in order to bring claims to the firm against such well known companies as British Petroleum, Genentech, Krispy Kreme, and others.
In effect, the law firm was literally orchestrating which firms to go after and paying potential plaintiffs to file suit and retain the firm on their behalf. While the settlements of these cases netted over $45 billion in the 10 year period ending in 2005, Milberg Weiss earned $1.7 billion in legal fees and costs. In fact, almost half of the securities class action settlements awarded during this period were brought by this law firm. Far from being a vehicle of justice for wronged plaintiffs, these class action law suits are an industry in which these types of law firms excel.
Of course class action law suits are far from the only legal vehicle rife with exploitation among trial lawyers. In 2003, three California trial lawyers were forced to resign from the state bar after having been found to have violated the bar's ethics codes. According to The Press Enterprise (Riverside, Calif.)
the Trevor Law Group and a one-man, for-profit enterprise named "California Watch Enforcement Corp." sued the owner of a motorcycle shop in Riverside for abbreviating the words "on approved credit" (O.A.C.) in a print advertisement. According to the owner, he got a letter from the Trevor lawyers saying they'd accept $5,000 to settle the matter out of court. In 2002, the Trevor firm filed more than 2,000 law suits against auto-repair shops in California for alleged "unfair business practices," usually based on minor technical violations of the Automotive Repair Act that appears on the Bureau of Automotive Repair's website. Most of these cases where then settled with the Trevor Law Group for small sums that the firm later acknowledged made up the vast majority of their income.
Originally designed to allow a degree of legal protection against companies whose deep pockets would otherwise make them untouchable by the average consumer, the civil legal system is now being used to extort firms and their shareholders for large payoffs. The attempt to level the playing field between consumers and corporations has created a lucrative industry for lawyers well versed in these public shake-downs. The Federal Class-Action Fairness law of 2005 attempted to correct the problem somewhat by making it significantly easier to "remove" class action law suits from more easily manipulated state courts to more conservative Federal courts. While certainly a good start, the bill does very little to provide any real disincentive to the law firms extorting millions from American industry.
Those same millions have often flowed generously to political campaigns to ensure that little is done to stem the flow of legal largess. If our politicians were willing to take a stand against some of these corrupt trial lawyers, there is quite a bit that could be done to make it more difficult for dishonest firms to exploit the system. First the system of "loser pays," in use in Britain and many other European countries could be put into place. This would ensure that the tougher Federal courts would make it very expensive for some of these firms if the merits of their cases are questionable. At the very least it would make many firms think twice about filing long expensive cases if they thought there were a possibility that at the end of the day they'd have to pay their quarry's legal fees as well as swallowing their own. Furthermore, the barriers to certification of a "class" could be set higher so that it would be more difficult for a firm to file a lawsuit on behalf of potentially millions of unnamed claimants. Lastly, if we really want to get serious about the problem, we could change the jury system for civil cases so that a professional panel of judges hears these cases instead of much more easily manipulated juries.
Much can be done to slow the rapid growth in legal abuse in the United States. Already the massive legal cost of these cases is straining the profits and in some cases the very business of many major American firms. Most of the companies are public firms owned by shareholders whose values are eroded by the huge judgments, settlements, and even threats of pending litigation. Small businesses, the heart of our economy, can rarely withstand the high price of fighting this kind of litigation. It is important to maintain the ability of consumers and individuals to seek redress for the abuses of industry, however it is also important to defend industry from the extortion and legal blackmail of lawyers who make this practice a living.
It is time to demand responsible tort reform from our politicians. To continue closing our eyes to this abuse could mean losing our jobs and having our salaries paid out instead to some unscrupulous law firm in exchange for a $10 phone card.