Blawgletter®

Law v. Fact: A Tale of Three Cases

The ebb and flow of law fascinates Blawgletter.  Every week brings new surprises. 

We hold special fondness for the hard and messy work of presiding over trials.  We admire even more the jurors who recreate democracy with each verdict they render.

And yet every day we see court of appeals decisions that uphold shortcuts and hindrances.  Sometimes -- often -- we marvel at the rarity of opinions that consider the justness of trial outcomes.  The courts so frequently dwell on preliminary and procedural matters that we wonder how cases get to trial at all.

The three decisions we feature today all concern pretrial matters.  We don't mean that as criticism.  We instead intend to illustrate what a fetish we now make of exactitude in the service of a legalistic and bloodless conception of civil justice.

Our first example comes from the Ninth Circuit.  In Delaware Valley Surgical Supply Inc. v. Johnson & Johnson, No. 08-55105 (9th Cir. Apr. 30, 2008), the court considered the question of who qualifies as a "direct purchaser" of products under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).  Illinois Brick limited the class of people who may sue for price fixing under federal antitrust law to those who purchased directly from a member of the price-fixing conspiracy.  A plaintiff in Delaware Valley sought an exception to the Illinois Brick rule, arguing that their privity of contract with the manufacturer, Johnson & Johnson, conferred direct purchaser status on them.  The district court and the Ninth Circuit disagreed.  The plaintiff's contract with J&J did assure the customer certain advantages, but still the plaintiff bought the J&J products from an independent distributor.  The court thus affirmed dismissal for lack of standing.

Our second example from this week concerns defining the "relevant geographic market" for purposes of another variety of antitrust claim -- the "tying" of one product to another.  The plaintiffs alleged that 20 cemetery operators and the Michigan Cemetery Association unlawfully tied the purchase of burial plots -- the "tying" product -- to the buying of monuments and memorials -- the "tied" product.  On a motion to dismiss, the district court concluded that the complaint too narrowly defined the geographic market as consisting of grave sites in particular cemeteries.  Affirming, the Sixth Circuit held that the complaint failed to exclude the possiblity that the market for burial plots extended beyond the cemeteries in question and instead included all locations that competed for customers seeking a place of interment.  Michigan Division - Monument Builders of N. Am. v. Michigan Cemetery Ass'n, No. 06-2524 (6th Cir. May 1, 2008).

The third and final case deals with conflicting jurisdiction over the subject matter of a class action.  The district court in Negrete v. Allianz Life Ins. Co. of N. Am., No. 07-55505 (9th Cir. Apr. 29, 2008), signed an order that prohibited the defendant from settling claims at issue in the case without permission of class counsel and the court.  The Ninth Circuit held the ruling to constitute an injunction and concluded that it contravened the federal All Writs Act and the Anti-Injunction Act.  The outcome might have differed, the court noted, if the defendant seemed close to striking a low-ball settlement with another plaintiff or group of plaintiffs.

Our triumvirate of cases doesn't allow us to reach any firm hypothesis about why lawsuits so seldom go to trial anymore.  And yet each fits with the notion that perfection, or near-perfection, has become the do-or-die criterion for judging the trial-worthiness of serious claims.  Would juries have decided Delaware Valley and Michigan Division differently?  Does the outcome of Negrete advance the cause of seeking an efficient and just result?

Without questioning the correctness of the rulings, we must say no to both questions.  We'll say more about why another time.  But, for now, let's just affirm our belief in erring on the side of more decisions on the merits -- by the trier of fact.

If our feed had a hammer, it would hammer in the morning, it would hammer in the evening, all over this land.

F/k/a Attacks!

Blawgletter had the pleasure yesterday of alerting our gentle readers (Uniform Rates -- Bah!) to a blog we hadn't seen before -- the inimitable f/k/a, by David Giacalone.  The post, relating to the tort reform credentials of Barack Obama, reminded f/k/a fans of a four-part essay Mr. Giacalone wrote (sometime before June 2006) "on the ethics and economics of contingency fees."  It also noted a belief that lawyers "charg[e] virtually every personal injury client the same percentage fee regardless of how risky or easy the case might be" and that the practice "consistently extracts excessive fees from clients."

We mentioned the post to highlight our doubt that "market failure" explains why personal injury lawyers tend to charge the same percentage in contingent fee arrangements.  We linked to an academic study, from January 2008, that found evidence of a "sorting" process that assigns cases to lawyers according to the lawyers' relative ability to maximize the personal injury plaintiff's recovery.  Conclusion:  the market works.

F/k/a's response appears, in full, below:

aside (April 30, 2008): If you’d like to see a good example of defensiveness and self-interest trumping facts, reason and legal-ethics, check out Barry Barnett’s response to my brief mention of standard contingency fees, in his posting today “Uniform Rates — Bah!” at his Blawgletter. Let’s hope his readers have the good sense to at least read f/k/a’s essay on the ethics and economics of contingent fees before coming to their own conclusions.

We didn't mean to affront our colleague at f/k/a, only to highlight research that offers an alternative explanation.  How that became "defensiveness and self-interest trumping facts, reason and legal-ethics" we can only guess. 

And our point wasn't to praise high contingent fees but to draw attention to the genuine differences between personal injury cases and commercial litigation.  Things like typical clients' relative sophistication, knowledge, resources, and options as well as the large variability of contingent fees in business lawsuits.

F/k/a and Blawgletter will part as friends.  For we heartily join with f/k/a in urging our readers to "read f/k/a’s essay on the ethics and economics of contingent fees before coming to their own conclusions."  But we suggest that you examine the study as well.

Happy May Day!  But our feed still says bah!

Uniform Rates -- Bah!

Google this.  Blawgletter gets as-they-happen Google Alerts by email.  You might consider it too.  Don't cost nothin'.

Our Alerts include items that mention "contingent fee" (or its yokely doppelganger, "contingency fee").  Most reference ads for personal injury lawyers, especially ones handling (still!) "mesothelioma" cases. 

A claim of sameness.  A more interesting one caught our eye yesterday.  The item appeared on David Giacalone's f/k/a blog under the lower-case title obama's tort reform creds?  On the way to finding Barack Obama neither fish nor fowl in tort reform terms, the post notes (with emphasis ours) that f/k/a has "written extensively on the topic of the standard contingency fee (charging virtually every personal injury client the same percentage fee regardless of how risky or easy the case might be), which we believe consistently extracts excessive fees from clients."  And it refers the reader to "our four-part essay on the ethics and economics of contingency fees."

The "same percentage fee" and "excessive fees" got our attention.  Specifically they provoked, how you say, dubiositousness.  While we don't practice in the p.i. arena, we do recall that in January we saw a study that attributed the uniformity of contingent fee percentages in personal injury matters to some kind of "sorting" process.  Cases sort themselves into a rough order of strength:  The strongest cases go to the best lawyers, middling ones attract the not-so-greats, and the weakest end up with the pikers.  The clients don't mind paying one-third because a 33.3 percentage assures that each gets the highest quality his or her individual case can attract.

Take a for instance.  Say you have a great case -- hard damages of $10 million, a solvent defendant, and good liability facts.  A hack lawyer would positively salivate at landing you as a client.  He might even discount the usual one-third to keep you from going elsewhere.  But will you hire him?  Or will you go with the best personal injury trial lawyer in the state?  You know -- the courtroom dynamo who doesn't need your case because she has so many other terrific ones to work on?

Commercial angle.  We must say that we find the "sorting" conclusion appealing.  We also expect that, if accurate, it applies with even greater force in the context of commercial -- business v. business -- litigation.

Why?  In the first place, commercial litigants know more.  They may not have served as president of the Harvard Law Review, but they do have contacts in the business and legal communities as well as the resources and savvy to evaluate credentials, look at success rates, and judge other signs of competence.  So you'd expect businesspeople to do an even better job of finding the best contingent fee lawyer for their cases.

You'd also anticipate that companies and business owners grasp how to turn competition to their advantage.  They know to shop their cases to compare offers.  They understand that a "standard" contingent fee represents a starting point for negotiation.  They or their regular counsel can haggle over terms -- not only the contingent percentage but also who pays expenses, whether expenses come out before computing the fee, and under what circumstances the lawyer can withdraw.  Fee terms thus vary widely in commercial contingent fee litigation.

Businesses with money also enjoy more options.  Law firms that will work on a contingent fee basis usually will offer also to take cases on an hourly basis, for a periodic flat fee, or under an arrangement that blends hourly with contingent.  The business client chooses.

Bottom line.  We favor contingent fees because they shift downside risk to the lawyer, better aligning the interests of client and lawyer.  Clients appreciate them too.  The study concluded, in fact, that clients so like the idea of shedding some of the risk of loss that they'll gladly agree to pay a contingent fee 2.5 times as big as the fees they'd expect to pay to an hourly lawyer.  What does that tell you?

We said bah! and we mean bah!

Mythical Easy Money

Yesterday, Blawgletter rhapsodized on The Value of Class Actions to consumers.  Today we speak of their riskiness to class counsel.  The Fifth Circuit will help us illustrate the point.

Last Friday, the court affirmed summary judgment against a class of pension plan participants and beneficiaries.  In Kirschbaum v. Reliant Energy, Inc., No. 06-20157 (5th Cir. Apr. 25, 2008), the plaintiffs alleged that Reliant Energy, as sponsor of a pension plan for employees, shouldn't have allowed investments in Reliant stock.  Shenanigans in Reliant's accounting department inflated the price of the stock by more than 65 percent, making it an imprudent investment.  Evental exposure of the shenanigans popped the bubble, and the stock price tumbled, wiping out 40 percent of the value of the plan's stock holdings.  The plaintiffs claimed that Reliant and other plan fiduciaries violated their duties under the Employee Retirement Income Security Act.

The district court, after certifying the case as a class action, granted summary judgment to the defendants.  The Fifth Circuit, per Chief Judge Edith H. Jones, affirmed.  The documents that governed the ERISA plan, the court noted, required a company stock fund as an available investment and mandated that the fund invest almost exclusively in the stock.  The plan's terms thus compelled a presumption that the fiduciaries acted prudently in allowing the fund to continue holding and investing in Reliant stock.  And the plaintiffs failed to rebut the presumption, the court held.

The decision means that the Reliant plaintiffs take nothing on their ERISA claims and will recoup none of their losses.  Class counsel will share in their clients' misfortune.  They likely spent several million dollars in time and expenses on litigating the case.

Kirschbaum thus illustrates the plaintiff-side perils of class litigation.  A huge investment and years of effort may come to naught. 

Our advice:  If you want sure bets and easy money, try another line of work.

Our feed works hard for its money.  So hard for it, honey.

The Value of Class Actions

A question of leverage.  Chief Justice John G. Roberts volunteered the other day, at a moot court competition, that "a class action is a dramatic departure from the normal rules of litigation." He went on to suggest that the device serves merely to increase plaintiffs' leverage in settlement talks.

Hmmm. True, aggregating small claims of thousands (or millions) into one class case does increase the plaintiffs' bargaining power relative to the defendants'. True also that almost every civil case settles. But does the Chief Justice see aggregation -- a "dramatic departure from the normal rules of litigation" -- as a bad thing?

His Honor's remarks do suggest that he tends to see more downside than upside. Why else would he call a 42 year-old procedure that originated in old equity practice "a dramatic departure"? Why else would he stress its plaintiff-side leverage-enhancing properties?

Consumer friendly.  A counterpoint to the Chief Justice's skepticism about class actions came last Friday in the form of a Second Circuit decision.  In Ross v. Bank of America, N.A. (USA), No. 06-4755 (2d Cir. Apr. 25, 2008), the plaintiffs, representing a putative class of credit cardholders, sued 20 of the largest issuing banks under section 1 of the Sherman Act for conspiring to use arbitration clauses that prohibit class actions.  They alleged:

After preliminary meetings and communications, the banks formed an "Arbitration Coalition" to recruit other credit card issuers into using mandatory arbitration clauses. Over the next four years, the Arbitration Coalition held more meetings, shared plans for the adoption of arbitration clauses, and spun off additional working groups. Ultimately, "Defendants jointly forced unwilling and unaware cardholders to accept arbitration clauses and class action prohibitions on a 'take-it-or-leave-it basis' through the joint exercise of immense market power."

Ross, slip op. at 4-5.

So what?  Why shouldn't corporations get together on a strategy to fight a common enemy -- the class action lawyer?  As the Second Circuit explained, class action lawyers protect consumers:

[B]ecause the banks conspired not to offer cards permitting class actions, the cardholders will be forced to expend time and legal fees to monitor the legality of the banks’ behavior, whereas if the cardholders had access to a card that permitted class actions, they would have the option of relying on motivated class action attorneys to perform this function. If the cardholders chose not to monitor the banks – which would perhaps be more likely because, as the Complaint observes, actions that result in significant aggregate revenue to the banks (concerning, e.g., late fees, overlimit fees, foreign transaction fees, APR, etc.) generally harm individual consumers in only small amounts – they would still lose the services of class action attorneys. Either way, the cardholders would have been forced to accept a less valuable card as a result of the banks’ alleged collusion.

Id. at 10-11.  Ah -- the banks conspired to deprive customers of "the services of class action attorneys" in "monitor[ing] the legality of the banks' behavior".  You won't see that passage in a U.S. Chamber of Commerce ad anytime soon!

Reconciliation.  Can we reconcile the Chief Justice's dourness about class actions with the Second Circuit's focus on their utility? 

We think so.  Class actions work precisely because the aggregation of many small claims makes the claims economic to pursue.  The whole point is to increase plaintiff-side leverage -- from zero to something approximating a fair fight.

Chief Justice Roberts doesn't believe corporate wrongdoers should go free.  He just seems to worry more about the potential for abuse than about effective enforcement of consumers' rights. 

Suspension of disbelief.  But where does that worry come from?  As we've said before, judges who ought to know better commonly assert that class certification allows plaintiffs to "extort" settlements.  They say that the threat of "ruinous" liability terrifies defendants into raising the green flag of surrender.  They in effect take judicial notice of a "fact" that makes no economic sense. 

How much, for example, should a defendant facing a 10 percent chance of losing at trial pay to eliminate the risk of getting hit with a judgment for $100 million?  Did you say $10 million (.10 x $100 million)?  You are correct. 

That's a lot of money, but it's not extortionate.  It's economic rationality.  And it's no reason at all to cast asparagus on class actions.

Our feed likes asparagus -- and casting it.