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SCHONBRUN: Class-action shakedown

Judicial system pays plaintiff lawyers - win or lose

- The Washington Times - Wednesday, April 4, 2012

Class-action attorneys sued Volkswagen, alleging that car owners seeking to replace lost or damaged car keys were being ripped off. Now it turns out the allegations weren't true, but a judge has agreed to allow the attorneys who wrongly sued the carmaker to walk away with a half-million dollars in fees while the purported victims get nothing.

Specifically, plaintiffs attorneys claimed that VW had not made ignition-key replacement technology available to independent locksmiths and that only VW and Audi dealers had the technology, and they had fixed prices for the replacement keys at artificially high rates. But it turned out that VW hadn't, in fact, done that. That's right. The claim was meritless. Indeed, the parties stipulated that VW (1) had made ignition-key replacement technology available to independent locksmiths and (2) had not fixed prices for the replacement keys, which were competitive with those charged by independent locksmiths.

So the lawsuit was dismissed, right? Wrong. After learning that they were wrong, the class-action attorneys simply amended the complaint, claiming that VW had failed to "adequately disclose" to its customers how and where to get additional ignition keys made. Nice trick. Lawyers sue a company for X, and then, when it comes to light that the company didn't do X, the lawyers sue the company because if the lawyers didn't know that the company didn't do X, then it was not adequately disclosed. VW, not wanting to spend years in court arguing over the legal meaning of "adequately disclosed," agreed to a settlement that provided no money to the class but required it to pay nearly $500,000 in attorneys' fees to the plaintiffs' attorneys.

That's right. Lawyers can make claims against a defendant that are totally untrue, but because of the way the class-action system works, they can force a settlement simply by amending the complaint to embroil the defendant in continuing, expensive litigation.

But that's not the worst of it.

Several class members opposed the settlement, noting the absurdity of the class's attorneys receiving any fees, much less nearly $500,000, for a case in which the original claims of the lawsuit were untrue and class members got nothing. It's just another example, they argued, of a class-action attorney filing a frivolous lawsuit and striking a deal with a rich defendant - a deal that provides the class the questionable "benefit" of unneeded "additional disclosures" just so the attorneys can argue to the judge that because the class got something, they are entitled to an award of attorneys' fees.

In support of their objection that the fee was excessive, the class members pointed out the following abuses:

c The parties' settlement agreement originally stated that the defendant agreed to pay attorneys' fees and costs of $25,000. Plaintiffs' counsel renounced that agreement as a mistake, saying that they had meant to agree to $925,000.

c The dispute over their attorneys' fees ($25,000 versus $925,000) continued for more than two years after the class's claims for financial harm were abandoned.

c Plaintiffs' counsel initially refused to provide time records to justify the $925,000. When the plaintiffs' attorneys finally submitted time records to the court, they showed that in addition to overstaffing and excessive lawyer hourly rates, because of the fee dispute, plaintiffs' counsel's hours nearly doubled from 427 to 836 hours. This was time spent over an issue that had nothing to do with providing relief for their clients and everything to do with increasing their own fees.

The district court overruled these objections and awarded class counsel almost $500,000 in fees. One objector tried to appeal the fee award as too high.

That's where a routine failure of our class-action system - overpaying plaintiffs' attorneys - became a travesty. Class members in a class action are allowed to appeal attorneys' fee awards to their counsel when they have standing. The U.S. Constitution requires that in order to appeal a judicial decision, a person must have standing - that is, must have suffered a harm that a successful appeal will remedy. Normally, in the class-action context, class counsel recovers a fund of money for the class. When attorneys take an oversized piece of the class's pie for their fees, class members have been "injured," and then any reduction in the attorneys' oversized fee increases the class's share of the recovery pie, hence standing. But in this case, there was no fund of money for the class, the allegations were untrue, and the class got no money - only additional information.

A California federal appellate court recently ruled in Glasserv. Volkswagenof AmericaInc. that the class member seeking to appeal the amount of his attorneys' fee lacked standing and dismissed the appeal. The court explained that the class member didn't demand that any reduction in the attorneys' fee be given to the class rather than to the defendant. That is, if the appellate court agreed that the fee was too high and reduced it, the class's recovery would not be increased.

Let's recap: A lawyer's class action is meritless because the lawsuit made allegations about a defendant company that were untrue. A class member who refuses to go along with the scam (i.e., refuses to demand money from the innocent defendant) has no legal standing to challenge the amount of the fee his attorney was awarded. In other words, if class members won't get any money if the fee is reduced, there can be no benefit from a successful appeal and no standing. According to this perverted legal logic, if a plaintiff class member won't also agree to become a co-conspirator in the shakedown, he can't complain about his attorney's shakedown fee from a defendant who did nothing wrong. It sounds more like a street-gang initiation rite than a federal court opinion - sue an innocent defendant, get awarded a big fee by the court, and you're in.

Lawrence W. Schonbrun is the executive director of Class Action Watch.

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