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A Class-Action Win

In 1966, the U.S. Supreme Court approved changes to the federal rules of civil procedure that created what has become a multibillion-dollar business for lawyers and a major irritant for corporate defendants: the class-action lawsuit.

In September of this year, a federal appeals court in Atlanta dealt a potentially serious blow to the entire class-action industry by ruling plaintiff lawyers can no longer pay “incentive awards” for people to serve as representatives in those class actions. And to justify the ruling, the appeals court cited Supreme Court decisions dating back to the 1880s, long before the modern class action even sprang into existence.

To understand how Supreme Court precedent from the 19th century could substantially alter how lawsuits are conducted in the 21st century, we must start with the inherent conflict embedded in every class action. Mass litigation that emerged after the Industrial Revolution made it possible for a single company to defraud or injure thousands or millions of people at a time. It gave courts a way to resolve all those claims at once, by abandoning the idea of requiring every individual plaintiff to hire his own lawyer. One lawyer representing a single named plaintiff could claim to represent everybody with a similar claim.

In practice, the class action quickly became a money-making racket, since plaintiff lawyers could threaten companies with astronomical damages simply by claiming to represent a group of “clients” who typically had no idea they were suing anybody. William Lerach and Melvyn Weiss of Milberg Weiss, a leading securities class-action firm in the 1990s, went to jail on charges they paid millions of dollars in kickbacks to plaintiffs in exchange for serving as representatives for their cases. The conflict between the lawyers and the people they claimed to represent became glaring.

Enter Trustees v. Greenough and Central Railroad v. Pettus. These two cases from the 1880s involve what is known as a “common fund,” where lawyers pull their fees from a single pot of money they win for multiple clients. In both cases, the Supreme Court ruled that while it was OK to cover a representative plaintiff’s legal costs lawyers couldn’t pay incidental expenses or anything like a salary.

The question came before the 11th Circuit Court of Appeals after a class member objected to an utterly commonplace settlement of a Telephone Consumer Protection Act lawsuit against a medical-debt collector. As usually happens in these cases, the defendant agreed to settle all claims for $1.4 million, including $429,000 in legal fees and $6,000 for the class representative.

The objector—represented by Eric Alan Isaacson, a former Milberg Weiss lawyer— dredged up the old Supreme Court cases, and a three-judge panel led by Judge Kevin Newsome took the bait. In a ruling that undoubtedly will be appealed to the Supreme Court, Newsome said he didn’t fault the lower court for rubber-stamping this settlement, with its incentive fee. Courts around the country have done the same thing for decades, ever since the rules of civil procedure changed in 1966.

“But, so far as we can tell, that state of affairs is a product of inertia and inattention, not adherence to law,” Newsome wrote.

The decision hardly dooms the class action, but it will make it harder for lawyers to pay one or two of their clients to approve a settlement that offers little to the rest of the class, Isaacson says, especially in consumer cases where settlements often recover next to nothing for individual class members.

“It’s clear these payments are made to induce class representatives to agree to a settlement they would never approve if they were treated like other members of the class,” he says. “It was wrong for my former colleagues at Milberg Weiss and it’s wrong today.”

Have old cases doomed the new?

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