Vanderbilt University Law School professor Brian Fitzpatrick’s new book, The Conservative Case for Class Actions, has a provocative title. It’s not shocking that the book’s arguments — against freedom of contract to agree to arbitration clauses, for distorting the free market through unanswerable self-appointed plaintiffs’ lawyers engaging in regulation by litigation — are not particularly “conservative.” (Full disclosure: Fitzpatrick critiques my work in his book and has testified as an expert against my clients’ objections to abusive fee requests several times.) What’s more surprising is that the book is not really a case for class actions.
Fitzpatrick’s main argument is built on false premises. Fitzpatrick says meritless litigation isn’t a problem because class-action attorneys get paid only on contingency. Thus, their incentives are to bring winning cases where their clients get relief; the more relief, the more payment for the clients. Corporate defendants are thus deterred from wrongdoing by the payments to class members and attorneys in these cases, a social benefit.
But all too often, courts pay attorneys based on the illusion of relief: cy pres payments to the attorneys’ and defendants’ favorite charities; phony-baloney injunctions that do no good for the class; coupons or other claims processes where over 90 to 99 percent of the class gets nothing, but courts pay attorneys a percentage of the fictional 100 percent recovery “made available.” And everyone has the incentive to make that happen: The defendant wants to get out of the case as cheaply as possible; the plaintiffs’ attorneys want to maximize their fees. Because courts largely let them get away with it, plaintiffs’ attorneys would cost themselves millions if they didn’t try to use these gimmicks to benefit themselves at the expense of their clients. (The word “fiduciary” never appears in the book.) The Tenth Circuit recently affirmed approval of a $0 settlement where attorneys received $20 million — relying on a faulty judicial opinion that relied on a Fitzpatrick law-review article to justify the disparity.
But when attorneys profit even when their clients get next to nothing or less, it becomes a viable business model to bring and settle meritless class actions. Because the cost of defense is so high — even if a business could be promised that a trial wouldn’t result in an erroneous judgment — defendants find it cheaper to pay attorneys to go away than to fight. But punishing innocent corporations with millions in litigation taxes is the opposite of the deterrence that Fitzpatrick trumpets as class actions’ benefit. It’s odd that a book whose argument is so reliant on the idea of incentives largely ignores the perverse incentives that affect every class-action settlement. But it is by misnaming this government-created rent-seeking mechanism — whereby above-market windfall fees for attorneys are set without competitive bidding — “the free market” that Fitzpatrick asserts class actions are “conservative.” Yet if the system were working the way Fitzpatrick’s model assumes, my organization wouldn’t have been able to win so many federal appeals and hundreds of millions of dollars for consumers by challenging abusive settlement practices.
Even the case Fitzpatrick is proudest of — a national case against banks over debit-card overdraft fee assessments set by contract — is less than persuasive. Consumers received less than 7 percent of their overdraft fee payments as refunds (a rare settlement where class members were paid directly); the attorneys received over $123 million with the help of Fitzpatrick’s expert testimony. If banks did something “illegal” by charging overdraft fees in the manner their customers agreed to, then they paid a small tax on billions of ill-gotten gains and got to unjustly keep the lion’s share. But if banks did nothing wrong, and spent hundreds of millions to insure against the risk of an erroneous multibillion-dollar judgment after the judge refused to quickly dismiss the case, then that is also an obvious injustice. (Ironically, the court used that huge risk of plaintiffs’ losing as grounds to award an above-average fee. Talk about perverse incentives!) Either way, deterrent value is minimal or even counterproductive. And the case demonstrates that the entrepreneurial incentives of attorneys are less to rectify wrongdoing than to find deep pockets whom they can falsely accuse of wrongdoing.
Meanwhile, banks compensated for the settlement’s required change in overdraft practices by adding monthly debit-card fees that affect consumers who never had an overdraft. Countless lower-income consumers are forced to go unbanked when they would have preferred what the lawyers stopped. That undemocratic deadweight loss and regulation-by-litigation restricting freedom of contract is something, but it isn’t conservative.
Toward the end of the book, Fitzpatrick acknowledges criticisms and proposes a number of reforms. Yes, merger litigation is “rightly criticize[d],” as are class actions that threaten billions in statutory damages. Yes, make it easier to quickly dismiss meritless cases before defendants run up substantial litigation costs, including allowing interlocutory appeals, and require plaintiffs to share defendant’s discovery expenses. These, and others, are all interesting academic ideas, though ones unlikely ever to win bipartisan political support, given the billions they’d cost the trial bar. But a case that recognizes the need for such dramatic reforms is a case for something other than the American class action as it exists in 2019.
Ted Frank is a Washington, D.C., attorney and director of the Center for Class Action Fairness at the Hamilton Lincoln Law Institute.