Are Settled Class Action Suits Scams?

Have you ever been a member of a settlement class in a settled class action suit? Did the award satisfy you or did you find it to be grossly inadequate? Did it make you suspicious of such suits?

In 1996, Epson America announced a settlement of a class action suit over its practice of engineering its printers to monitor ink levels and incorrectly read cartridges as empty and therefore unusable even though there is still ink in the cartridge. It provided a $45 credit for eligible American customers for each purchased and registered printer. But the credit could be used only at Epson's online store, where prices are considerably higher than in most discount stores such as Wal-Mart. The settlement did not require Epson to modify cartridge software and technology so that ink cartridge readings reflect the true level of ink in a cartridge, so Epson could continue the deceptive practice. Epson also agreed to pay the Plaintiff's Attorney's fees, usually one third of the amount awarded. I doubt that many owners of Epson printers took advantage of this credit. I didn't! Instead, I junked my two Epson printers and vowed never again to buy anything manufactured by Epson.

My wife was a member of the settlement class in a settled class action suit that awarded her two dollars and some cents. Unfortunately, I lost this suit's details. But I do remember that to receive the award, she had to download, fill out, and mail a form to the suit's administrator. The expense of doing that would have reduced the award's value to less than a dollar. I remember telling her to forget it.

Recently I was a member of the settlement class in an ERISA suit against ACS. ACS was accused of violations of its fiduciary responsibilities in its 401(k) program. Three law firms ended up representing the plaintiffs (the Belek Law Firm of Houston, TX, Giney & McKenna of NY, and Stull, Stull, and Brody of NY). These firms settled this suit for $1,500,000. $566,482.99 went to the attorneys for expenses and fees; $933,517.01 was awarded to members of the settlement class. But the settlement class consisted of 24,777 members, so that if the award had been distributed equally, it would have been a mere $44.60, hardly anything to get excited about. (The similarity of this number to the credit offered by Epson is interesting. Do these law firms know something about what companies are usually willing to settle for in the same way that those in marketing know that people are more likely to buy something if it is priced under $20?)

But the award wasn't distributed equally. The distribution was based on a negotiated formula that calculated the actual losses in ACS stock ownership over the defined period. The result was that 32% received distributions of approximately 26% of their losses, 29% received a minimal award of $20, and 39% got nothing at all.

I found this to be curious. If ACS violated its fiduciary responsibilities in accordance with ERISA, it did so in to ways: it paid matching contributions in ACS stock, which encouraged employees to put all of their eggs in one basket, and it always employed firms that charged high transaction fees to manage its 401(k) accounts. During the period of time involved (7/1/2001 to 12/20/2007), ACS stock rose steadily until January, 2006, when began to fall. At the end of 2007, the stock price was still slightly higher than it was on July 1, 2001. So whether or not the class members made or lost money depended entirely on how they managed their holdings. ACS' practices had nothing to do with it. Wiser members who sold their holdings when the stock was up made money while those who neglected to manage their accounts effectively lost money. But ACS' practices affected all of the members of the class. In fact, it is likely that those who managed their holdings effectively lost more than those who actually experienced losses. A department of Labor study compared two 401(k) plans with starting balances of $25,000 earning 7 percent over 35 years without additional contributions. A plan with fees and expenses of 0.5 percent annually compared to a plan with fees and expenses of 1.5 percent yields $64,000 or 28% more. So the people who were selling stock when the price was up more likely than not had to pay more transaction fees than those who neglected their holding. So astute attorneys should have known that the formula negotiated to calculate the amounts to be awarded should have been based on transaction fees rather than profits.

The question is why didn't they do that? Why did they settle this suit for such a meager amount? And why did a federal judge (Barbara G. Lynn) approve this settlement? Why do attorneys negotiate any of these meager settlements and why do judges routinely approve them?

Well, the answer is apparent. Attorneys take on class action suits on a contingent fee basis. If the case goes to trial and the defendant prevails, the attorneys don't get paid and lose the resources they have expended in pursuing the suit. So the incentive is for them to settle. Defendant companies know this, and offer meager settlement terms. Accepting these terms is an easy way for the plaintiff attorneys to make one-third of the award without ever having put anything at risk. The three firms involved in the ACS ERISA suit netted a cool half million dollars just for filling out some papers and negotiating with ACS' attorney; most members of the settlement class got pocket change. And oddly enough, it took three firms to negotiate this settlement. Sound suspicious?

Why judges approve these settlements is a mystery. Perhaps is just because the law does not exist for you and me. (Most members of our corrupt Congress are also lawyers.)

So if any reader is thinking about filing a class action suit, find an attorney who understands that if s/he is unable to negotiate a substantial award for each member of the settlement class, that you will insist that the suit be taken to trial. And before you settle on a lawyer, analyze the settlements s/he has negotiated. Make sure that his/her settlements amply award all the members of the settlement class; otherwise, you are merely involving yourself in a lawyerly boondoggle in which the lawyers will use your misery to enrich themselves. If your lawyer isn't going to get you and your colleagues substantial awards, at least make sure that s/he doesn't get any either.

The legal profession in the Western world has never had an honorable reputation. As early as the fifteenth century, Erasmus wrote, "Lawyers are jackals." Shakespeare in Henry VI wrote, "The first thing we do, let's kill all the lawyers." And even Benjamin Franklin wrote, "A countryman between two lawyers is like a fish between two cats." Lawyerly jokes are almost as prevalent as dumb blonde jokes. One of my favorites is this: A man says, "Boy was it cold today." His friend asks, "How cold was it?" The man says, "It was so cold, lawyers were seen coming out of the Court House with their hands in their own pockets."

American courtrooms often have statues of the Roman Goddess Iustitia in them. She is always blindfolded. The reason, contrary to what people are led to believe, is that she must be prevented from seeing what goes on in them.

©2009 John Kozy