Monday, December 12, 2011

Class Action Lawsuits

People like to say impressive-sounding things, like "we should file a class-action lawsuit!" - but few of them know what it even means, or what it entails, or even whether it will net them anything.  Usually, it does not.

Chances are, you've gotten these class-action settlement things in the mail.  You were a customer of XYZ corporation from January 3, 2006 to January 8, 2010, and as such as part of a designated class.  If you fill out three pages of a form, dig up some cancelled checks from several years ago, you may be entitled to $1.98 and a coupon good for a free car wash.  The Attorneys, of course, will get $5.6 million.

What are these suits all about and should you worry about participating in them?

To begin with, class action lawsuits have been the subject of abuse for many years.  Clever lawyers can bring these suits in friendly jurisdictions (one Illinois district is home to a staggering number of them, only because the judges there are friendly to certifying classes) and shake down corporations for millions of dollars.

Have the corporations done real harm?  In some cases, yes.  A company misrepresents a product or service, or tries to pull a fast one on consumers by insisting on "cancellation fees" or other, arguably fraudulent charges.  Or a company sells a product that is widely defective.  Or a medication causes people to become ill.

The theory behind the class-action suit is that individually, these claims may be so small that it is not worthwhile to sue.  By taking a group of people, as a class (willingly or not) you can create a pool of damages worth suing over.  And in this way, the people entitled to compensation are compensated.

But like most lawsuits, the lawyers win - taking home the lion's share of the money.  There is a reason lawyers advertise on billboards, fishing for your personal injury business.  They make a lot of money this way - and you often end up with less than if you had taken an insurance company's initial offer.

Class action suits work the same way.  Collectively, a class might have hundreds of millions of dollars in damages, and as a result, attorneys fees of only tens of millions seem "reasonable".

And since the companies want to settle these cases for cheap, they are willing to sign off on a deal that pays the claimants bubkis, but pays the attorneys a lot.  In other words, many of these cases devolve into a shakedown, where the defendant merely pays off the attorney to make it all go away.

I recently received a check from Vonage for $40 as settlement in a class-action case.  In this case, at least, I got back exactly what I was owed.  When I stopped using Vonage (because I moved, and had satellite service, which won't work with Vonage), I sold my Vonage router on eBay.  The guy who bought it from me was chagrined to see that a $40 "termination fee" was due before he could use the box.  Of course, I paid the fee.  But it was the first I had heard of it.   A few months later, I get this class-action documentation in the mail, and it turns out the "termination fee" was improper.

I was fortunate in that I had all the documentation still sitting on my desk.  In this instance, I got ALL of my money back.  In most cases, though, you get only a token amount back, if anything at all.  In many cases, the hassles of the paperwork aren't justified by the payoff - mere pennies or a few dollars, or some coupon for a discount.

That is what happened in the GM "Sidesaddle" gas tank case.  In the 1970's  GM put gas tanks on the outside of the frame members of its pickups.  A convenient, cheap design, until you got hit broadside, in which case the car would likely catch fire.  A class action suit was brought and, well, the attorneys made a lot of money and the "claimants" got a coupon worth $500 off a new GM car.

Given the profit margins on cars - and in particular trucks, offering $500 off didn't cost them much.  And as one might expect, many people never used the coupons - as they might not have been in the market for a new car.

How do you start a class-action suit?  You need to find a lawyer, and there are a number of class-action firms out there who handle these cases.  Usually, they are in it for the money, and they find a token member of the "class" to be the nominee and then file the suit.  I talked with one such attorney, and he indicated that in order to have a good class action suit you need a number of things:

1.  An easily attachable deep pocket

2.  A large class of people

3.  A big pile of damages

That's about it.  But even these three simple things make bringing a suit hard to do.  For example, an inventor who was ripped off by an invention broker asked me why someone couldn't bring a class-action suit.  And that was when I talked to the class-action lawyer.

The problem is, these invention broker shops open and close with regularity.  They are not listed on the stock exchange and have no real assets to attach or speak of.  The money comes in, and then goes into the pockets of the owners, who have ways of protecting it from attachment through trusts, homesteading, offshore accounts, and the like.  Attaching the assets of an individual is hard to do (ask the folks suing O.J.!).

So, as a mechanism for "righting every wrong" the class-action suit is flawed.  In fact, it rarely ends up doing that - but does make a lot of class-action lawyers very, very wealthy.

Companies like General Motors, on the other hand, are nice fat targets, as they have physical assets to attach.  So class-action suits have a huge flaw in that con artists cannot be attacked by them - or at least not easily.  And lawyers like to go after the low-hanging fruit.  It is a lot less risky and a lot more profitable.

Pharmaceutical companies are favorite targets.  Find some drug that people took that a few people had an adverse reaction to, and BAM!   You've got great class-action material.

Or some telcom company that does something funny with its billing.  Deep pocket, large class, big pile of damages - Voila!

Other claims are perhaps less attractive, though.  For example, there was a class-action suit against BMW for the Continuously Variable Transmission (CVTs) put in some BMW Minis.  CVTs are one of those "great ideas that never quite worked right" - like the tilt-rotor airplane.  And not surprisingly, a lot of them failed, right out of warranty.  It may be safe to say that all of them failed - or most, anyway.  And replacing or rebuilding a bad transmission design really doesn't fix the problem.  It will come back in 50,000 miles or so.  You can't fix a Vega, you can only junk it.

But other complaints, that are common, but not universal, are harder to prove and harder to collect on.  Many BMWs have window clips that snap off.  An annoying break, but one that can be repaired under warranty.  But whether the clips snap off depends largely on use - and if you have kids who slam the car doors, they snap off a lot more often.  So far, I am not aware of any class-action suit filed in that case - or in a whole number of cases where angry folks post angry messages threatening to "file a class action suit!" when they don't know what they are talking about.

The CVT suit against BMW worked as the problem was nearly universal for that car, and the damages were potentially huge (thousands of dollars per car).   A broken window-regulator suit, on the other hand, is less likely to succeed, as it is harder to prove the damages, the problem is not universal, and the costs involved are in the hundreds, not thousands, of dollars per incident.  And that explains right there why no class-action suit has been file - after more than a decade - regarding window regulators on BMWs.  (A suit has been filed against Chrysler for broken window regulators in Jeeps.  I suspect that is because more Jeeps are sold than BMWs, and as a result, the potential damages are HUGE.   Class-action attorneys want to see huge damages, as they mean huge attorney's fees.  End of story).

Are these class action suits a good thing, or just an excuse to make some attorneys rich?  A little of both, perhaps more of the latter.  The threat of a class-action lawsuit, some argue, is a good thing, as it prevents corporations from committing acts of malfeasance that might escape criminal inquiry.  Playing games with someone's cell phone bill might seem like a neat way to score a few dollars, until you realize the back-end could be expensive, if a class-action suit is filed.

Recently, however, some legislation has been enacted making it harder to certify these suits and the boom days of "hit and run" class action suits has died down a lot.

Should you participate in such a suit?  It depends.  When you get this stuff in the mail, read it.  Usually there is a way to sign up, online, to become a member of the class.  If you don't have specific documentation, you may be entitled to a lesser amount.  Usually, I don't have such documentation.  In the Vonage case, I was able to download my credit card statement and attach it to the form.  But in most cases, chasing down documentation for a $1.93 credit isn't worth it.

In other cases, you can sign on as a member of the class, without documentation, merely by certifying you are a member of the class, on their form, and get a standard amount.  And it appears they don't check too hard on these things.  I suppose someone could (and I bet some folks DO) fill out these forms fraudulently, and collect these $10 and $20 checks from various suits.  The entire process is ripe for fraud, in my opinion.

In other cases, I suspect the people handling the suit don't want you to file a claim.  They make the paperwork requirements so onerous than no one returns them.  And perhaps that is their goal.

Are you required to participate in these suits?  No, you can opt-out, if you feel your damages are unique.  But often this means taking a positive step toward opting out.  If you were actually damaged by a side-saddle gas tank fire, and burned horribly, perhaps you are entitled to more than a $500 off coupon for a new truck.

And that right there should put your problems into perspective.   People get all outraged because their car broke down and say "We'll file a class-action lawsuit!" as if they were burned horribly in a Pinto wreck.   It really isn't on the same level of injury and outrage.

And note also, if you expect to get any hidden warranty repair work done, threatening legal action is the surefire way to "shut down" the process.   Most companies will try to accommodate a consumer if they have a real grievance and are willing to take the time to document their problem and work with the company for a reasonable solution.  People who scream "I'll sue!" on the other hand, are just ignored as the blowhards that that are.

So please, do me a favor.  Every time life hands you lemons, please don't blather on about how you are going to "file a class action lawsuit!" if you really have no idea what it entails or what it is all about.  You are just blowing smoke and being a blowhard.  While it would be nice if we could all be "made whole" for every injury in the world, sometimes we just have to caulk things up to "shit happens" and let it go at that.

Not every wrong in the world needs to be righted - nor should they all be.