The cure for the common coupon: Missouri lawyers weigh in on class action concerns [Missouri Lawyers Media]

U.S. District Judge Greg Kays did something this month that advocates for better class action settlements wish judges would do more often: He turned one down.

Kays liked that an automatic pro rata payment would go to 73 percent of plaintiffs in the lawsuit that claimed Coventry Health Care of Kansas Inc. charged too much for prescription copayments. But the settlement of $2.45 million would undervalue a case where excess copayments of more than $13 million are in dispute, Kays said in a Dec. 13 order. It also troubled him that both sides asked the court to set aside a finding that a state regulation on copayment caps applies to prescription drugs.

Kays encouraged the two sides to negotiate a new settlement. In the meantime, they should prepare for trial, he said.

How rare is a class action trial?

Even veteran class action plaintiffs' attorneys can count on one hand the number of cases they've argued in front of a jury. Veteran class action attorney Michael Waldeck has only tried five class action cases in the past 30 years.

That is part of the problem. More trials and closer scrutiny from judges could cure what ails class actions, said a class action settlement objector, an insurance company corporate attorney and Waldeck.

Class actions are filed against companies that allegedly defrauded investors or consumers or made products that hurt consumers. Some similar problems afflict the worst class action settlements: Plaintiffs get coupons or assurances while their attorneys get large amounts of cash. The coupons depend on consumers going back to the business that allegedly ripped them off in the first place. Few plaintiffs bother to claim them.

The objector and attorneys make their cases for good settlements in a variety of ways. Ted Frank, who heads the Washington, D.C.- based nonprofit Center for Class Action Fairness, tours the country objecting to the terms of class action settlements. David Butsch, whose St. Louis firm Butsch Simeri Fields handled a Missouri class action that ended with awards of hundreds of dollars for each of the plaintiffs, won't take coupons in a settlement. Waldeck, an Overland Park, Kan., plaintiffs' attorney, won't take a case that doesn't have the potential to go to trial.

"A lot more of these should be tried, and that would enhance the benefit to both sides," Waldeck said.

Waldeck worked for almost nine years on a class action that yielded a verdict ultimately worth nearly $33 million.

Defense attorneys also should be willing and able to go to trial to be sure that plaintiffs' attorneys don't have an unfair advantage, said Mike Early, assistant general counsel of Chicago Underwriting Group Inc. The insurer's focus on directors and officers coverage means it mostly handles large securities class actions. Directors and officers coverage comes into play when a company's leaders or board members are individually sued over how they ran the company or handled a merger or acquisition.

Large securities actions virtually never go to trial, Early said.

"The settlement value is based not on the value of the case, but what are other cases, just as frivolous, settling for?" Early said.

Judges need to be involved as well, Butsch said. Trial court judges act as gatekeepers and should insist on renegotiation of settlements that don't pass the "sniff test," he said.

"The onus is not only on plaintiffs' counsel to make sure plaintiffs are protected," Butsch said.

Professional objectors

More trials and judge oversight may be the prescription for improved settlements, but it's hard medicine to give or take.

The U.S. Congress administered a dose in 2005 with the passage of the Class Action Fairness Act. The act requires judicial scrutiny of coupon or other non-cash settlements; forces most class actions with plaintiffs in more than one state to be filed in federal court; and sets a threshold of $5 million for federal class actions.

But in securities class actions, companies whose deals could be held up are more inclined to settle than to duke it out in court, Early said. It's not uncommon even when there is a large block of insurance money for it to be used up in expensive discovery, he said. Plaintiffs' attorneys worried about the company having enough money to pay beyond insurance limits also are motivated to settle, he said.

Judges also don't have a lot of incentives to send a settlement back to the drawing board, Frank said.

"If no objectors show up, they can approve the settlement," Frank said. "[The litigation] is going to go away, and nobody's ever going to complain."

U.S. District Judge Ortie Smith said few class action settlements have given him pause. Smith, of the Western District of Missouri, said he has seen a large number of class action cases lately. In April, he signed off on a settlement valued at $260,000 against Mid- Missouri Bank, despite his misgivings about the fact that only two people out of a possible class of 34,000 submitted claims forms.

Smith spoke generally about class actions; he declined to comment about the Mid-Missouri Bank case beyond what he said in the order approving the settlement.

"Plaintiffs have problems in litigation. Defendants have problems," Smith said. "If they negotiate at arm's length with the assistance of a mediator, they know, frankly, more than any judge would. If they've worked it out to their relative satisfaction, the chance of my not approving it is relatively small."

That's where Frank comes in. He left the conservative think tank American Enterprise Institute to start the Center for Class Action Fairness in 2009. The center represents for free class members who object to settlements.

While there are other attorneys who represent objectors to settlements, the lawyers often are interested in holding up the settlement long enough to get a cut of the plaintiffs' attorneys' fees, not in breaking up the settlement, Frank said. Frank set up the center as a nonprofit, so he can't do that, he said. The center, which is funded by charitable foundation Donors Trust Inc., can't take on cases for profit, but it can ask for attorneys' fees if it wins a case.

"I saw a need, and I didn't see anyone in the space doing it the way it had to be done," Frank said. "We have a role to play because of the incentives for everyone else...There are far too many [settlements] out there that benefit attorneys and don't benefit class members."

Frank's wins include a 9th U.S. Circuit Court of Appeals ruling that tossed a settlement of a case against Bluetooth headset manufacturers who allegedly didn't give prominent enough warnings about hearing loss. Consumers would have gotten no cash, and plaintiffs' attorneys would have gotten $850,000.

He lost on his objections to the settlement of a Missouri lawsuit alleging former brokerage A.G. Edwards accepted kickbacks from mutual fund companies, however.

Plaintiffs' attorneys are getting $21 million of the $26 million cash portion of the settlement. Frank argued in a state appeals court that plaintiffs' attorneys shouldn't get paid before the plaintiffs who were current customers of the brokerage, now part of Wells Fargo, redeemed the vouchers they received. Plaintiffs' attorneys should gradually receive a percentage of the actual amount class members receive, Frank said.

Court of Appeals Eastern District Judge Patricia Cohen referred to that method as "piecemeal" and "unwieldy" during oral arguments, and the court later upheld the settlement. The Missouri Supreme Court declined to take the case.

Settlement vouchers for current customers and checks for previous customers automatically began rolling out a few weeks ago, said Christopher Bauman, a plaintiffs' attorney with Blitz, Bardgett & Deutsch.

Current customers can use the vouchers for a discount off the fees they normally pay for any kind of service, Bauman said.

"That's the reason why the appeals had absolutely no traction," Bauman said. "It just proceeds from a false premise."

For policy reasons, there are "quick pay" provisions for attorneys' fees, Bauman said.

"It dramatically chills professional objectors who hold the class hostage to get a premium for themselves," Bauman said. "We didn't have those in our case in part because of the quick pay provisions."

Making claims

The best way to make sure most class members participate in a settlement is to insist on cash, Butsch said. His firm, Butsch Simeri Fields, settled a case alleging Fairway Independent Mortgage Corp. promised customers it would disclose to them additional compensation it was getting from lenders it sent their loans to, but then failed to do so. Butsch estimated the more than 800 class members would get average payments of either $500 or $1,155, depending on the loan they took out.

A lot of people will participate in monetary settlements if the amounts are $75 or more, Butsch said. His firm won't settle unless there's cash for plaintiffs.

"The reason I don't do coupon settlements is I find the people I represented don't want to continue to do business with a person that's wronged them," Butsch said. "They feel cheated."

Coupon settlements are "problematic," said Judge Smith, who added he has to look at them on a case-by-case basis.

"It shouldn't trouble people too much that an attorney is paid in cash," Smith said. "It's simply impracticable for a law firm to receive payment in coupons, and the effect would be to deny many small claimants."

One Los Angeles state court judge, Brett Klein, disagreed. In 2009, while substituting for a judge who had handled a retail consumer class action to that point, he ordered that plaintiffs' attorneys be paid with the same coupons paid to the class members, according to an account of the case in a continuing legal education presentation by John Toothman and Susan Woods. Toothman is president of The Devil's Advocate, a legal fee management firm in Great Falls, Va.

Klein was admonished for his handling of the case in February 2010, after his retirement, by the California Commission on Judicial Performance.

The settlement, in a case over a retailer allegedly illegally requiring that customers present a California driver's license to get a credit card, would give customers $10 coupons, and plaintiffs' attorneys more than $100,000, Toothman said.

The judge was told he wasn't honoring the deal, "which begs the question of who was looking out for class members," Toothman said.

When a settlement is reached, the dynamic shifts, and plaintiffs' and defense attorneys no longer are on opposite sides. Most judges don't feel they have the resources to do much beyond taking "a spin through the bills" and maybe taking a little off the top of fees, Toothman said. In class action cases, there isn't anyone who would hire a firm like The Devil's Advocate, Toothman said, so he tries to get the word out on bad settlements through CLEs and on a blog, The Civilian's Guide to Lawyers.

"We recognize the problem, but we don't get hired very often," Toothman said. "We blow the whistle and point out to people when it's not working out."