Monday, May 21, 2007

WSJ Editorial On Shell Gasoline Class Action, and Some Ruminations in Response

Editorial in the Wall Street Journal -- A Tort Riot.  Here's an excerpt:

The depredations of the trial bar are legion. But sometimes a case is so exquisite in revealing the character of the modern tort industry that its details deserve national distribution. Such is the case of the 79 lawyers fighting like a hyena pack over the spoils of a $10 million Shell Oil settlement in New Orleans.

Back in 2004, Shell sold misformulated gasoline to tens of thousands of customers, fouling their fuel gauges and creating a class-action bonanza for four-score plaintiffs lawyers. Our readers won't be surprised to learn that most of the $10 million that Shell coughed up went to the lawyers. The plaintiffs got "a new fuel gauge and a 100 bucks," says Dane Ciolino, a law professor at Loyola University in New Orleans who's now involved in the case.

The lawyers, on the other hand got -- well, no one really knows exactly what they got, except for the judge and the handful of lawyers who divvied up the pot. The total amount that Shell agreed to pay the lawyers was about $6.9 million, but the rest of the details are under seal. The 79 lawyers who shared in that windfall are barred from discussing their take with anyone, according to a January gag order.

While the editorial does a fine job of pointing to problems with regard to division of the plaintiffs' counsel fees, I would disagree with one point: the Wall Street Journal suggests that all 79 lawyers "really didn't do anything for the common benefit."  By the Journal's own account, Shell's "misformulated" fuel "foul[ed] ... fuel gauges."  The new fuel gauges that were part of the settlement therefore seem important compensation.  Moreover, Shell was was deterred from future misconduct because it had to pay $10 million for misformulating its fuel and bothering consumers with broken fuel gauges. 

At base, however, the Journal as well as much of the public misunderstand the notion of the small-claims/negative-value class action.  When defendants harm many people in small amounts -- say a few dollars a piece -- traditional one-on-one litigation is not workable because the cost of each lawsuit exceeds the possible recovery.  No plaintiff's lawyer would accept such a small case on a contingency fee because the plaintiff's lawyer would spend more money trying the suit than the lawyer could recover -- hence the suit would produce "negative value."  Class actions offer one solution to this problem: by aggregating many individuals' claims together in one single proceeding, the total value at stake justifies the cost of bringing suit.  The small-claims class action thus provides one route to satisfying tort goals of deterrence, corrective justice, and compensation that would be abandoned if defendants who harmed in small amounts could simply continue on without fear of any lawsuits.

In such small-claims class actions, the attorneys fees are always going to loom large --  "You mean my lawyers got $3 million, when I got $3!"  But if lawyers didn't get paid, no one would have brought the lawsuit, no class member would have received anything, and liable defendants would have harmed without class members without any penalty.  Is that better?  While there may be many troubling aspects of class actions, the notion that plaintiffs' counsel fees greatly exceed each individual class member's recovery in a small-claims class action, or even the entire recovery of the class, is not a problem, as long as the fees themselves are reasonable given plaintiff's counsel's work (which is what court scrutiny of fees is intended to ensure).

Of course, it remains bothersome that there is no real market for class members' claims.  Ideally, each client should agree to the fees being charged by the lawyers.  Class members face three problems  First, notice of the class action and opt-out rights likely doesn't reach many class members.  Second, even those class members who receive notice may not understand it or meaningfully pay attention -- yet they will be included in the class if they fail to act affirmatively to opt out.  And third, those class members who pay attention to a class notice will likely only see a provision that a court will approve counsel fees when it's all over.  How can class members evaluate the benefit of the service against its cost, when they are not given clear information about how much it will cost? 

These ruminations lead to some tentative reform proposals to jumpstart a market in small-claims class actions.  First, provide more detailed information about fees to putative class members -- such as hourly rates (including any multiplier) or percentage of the fund.  Second, require that class members affirmatively show their agreement to the bargain by having them opt-in to the class.  One could foresee multiple plaintiffs' counsel competing against each other on price, and class members evaluating price against the perceived competence and experience of a particular law firm.  There's a free-market solution the Wall Street Journal should support.

BGS

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