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The Case Against Class Actions, Kind Of

Publication Date: 
January 09, 2014
Source: 
Business Week - Bloomberg
Author: 
Dimitra Kessenides

Professor Deborah Hensler comments on arguments for ending class-action lawsuits in BusinessWeek.

For years, the U.S. Chamber of Commerce and other business groups have tried to slow the proliferation of class actions. The reason seems obvious enough: Corporations don’t relish the prospect of being ordered to pay huge settlements to thousands of customers who band together and sue over faulty products or bad behavior. Yet the chamber argues the real reason class actions should be curbed is that they’re ineffective: Many of the cases are dropped or get thrown out by the judge. And even when the plaintiffs win money—like in 2011, when Bank of America (BAC) agreed to pay $410 million to settle complaints about its overdraft fees—a lot of the money goes into the pockets of plaintiffs’ lawyers, not regular Joes. In the BofA case, attorneys came away with $123 million.

It’s hard to say whether this is true in most cases, in part because the courts don’t keep records on how class actions are resolved. So last year, the chamber hired attorneys at Mayer Brown to conduct a detailed study tallying up the winners and losers. A major firm that represents the chamber and big companies including Medtronic (MDT) and NestlĂ© (NESN:VX), Mayer Brown isn’t exactly an impartial arbiter. Still, the report’s conclusions, released in December, are illuminating—for reasons its authors might not have anticipated.

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The way the system is set up, there’s little incentive to share details. Corporations don’t want to reveal what they’ve had to pay out, and plaintiffs’ lawyers don’t want their fees to make headlines. Until that information is made public, “we don’t have the data that would enable a policymaker who really cares about the facts to make a wise decision,” says Deborah Hensler, a class-action scholar at Stanford Law School. She argues that, for all their flaws, class actions are an effective deterrent to corporate misbehavior.

It wouldn’t be difficult to unearth the numbers, says Hensler: “There’s no reason why a judge can’t order lawyers to submit a report to the court at the end of a case, detailing how much money was actually claimed by class members, how many of them came forward, how much money was collected—and more.”