How to end pointless class actions, redux

November 7, 2013

In April 2012, a California shampoo purchaser named Nancie Ligon filed a class action in federal court in San Francisco on behalf of all buyers of certain L’Oreal products that are labeled “salon-only.” Ligon’s counsel at The Mehdi Firm and Halunen & Associates claimed that L’Oreal products’ labels were misleading because they were actually sold not just at salons but also at mass-market retailers such as Target and K-Mart.

Early meetings between Ligon’s lawyers and L’Oreal’s defense counsel at Patterson Belknap Webb & Tyler revealed some big problems with the theory of the class action. L’Oreal, for one thing, doesn’t actually sell any of the supposedly offending products directly to mass market retailers. In fact, it doesn’t want anyone except for salons to sell its pricey lines, and it has an entire corporate division dedicated to stopping distributors from diverting salon-only products to other sorts of stores. And though L’Oreal suggests retail prices for its hair-care products, stores are free to set their own prices. It turned out that prices for the “salon-only” shampoos and conditioners ranged all over the place, without a clear pattern distinguishing salon prices from mass-market prices. That meant class counsel couldn’t come up with a legitimate formula for evaluating the harm to consumers from the supposedly misleading labeling. By their own admission, class lawyers determined after their meetings with L’Oreal that “it would be challenging, if not impossible, to determine classwide monetary damages.”

So did Ligon’s lawyers dismiss the case and write off their time and expenses as a lesson learned? They did not. Instead, with their classwide monetary damages theory demolished, they engaged in mediation with L’Oreal last December. In just one day, they and L’Oreal reached an agreement to settle the case as an injunction-only class. L’Oreal said it would remove the supposedly misleading “salon-only” language from product labels in exchange for a release of all classwide monetary damages claims. It took the plaintiffs’ lawyers and L’Oreal longer to negotiate fees, but eventually L’Oreal agreed that if the class counsel requested $950,000 in fees and expenses, it would not oppose the request.

Mehdi and Halunen refiled the nationwide class action with five additional name plaintiffs in federal court in Washington last April. A couple of weeks later, they moved for approval of the injunction-only settlement. After the deal received preliminary approval from U.S. District Judge John Bates, they filed a motion for $950,000 in fees and expenses, emphasizing the value of the injunction they obtained for class members. “There need not be class-wide monetary damage for there to be harm to consumers,” the motion said. “There was significant harm alleged here in the deception perpetrated by the salon-only language. That harm has been eliminated.” As promised, L’Oreal did not oppose the fee request.

The Center for Class Action Fairness did object, however, both to the fees and to the classwide settlement. On Wednesday, Bates sided with the objectors. He denied approval of the settlement, finding that it unfairly released class claims for monetary damages. There’s some interesting discussion in the opinion about public policy and standing for name plaintiffs in injunction-only cases and about the consequences of no opt-out injunction settlements. Bates also pointed out an obvious intra-class conflict between consumers who bought the L’Oreal hair products in a salon and those who made purchases from mass-market retailers. (“Whether mass-market purchasers were harmed at all is questionable, considering the self-evident nature of the ‘salon-only’ misrepresentation when the products were purchased outside of salons,” Bates wrote.)

But as I was reading the judge’s careful analysis, I kept thinking: This is all silly. Nancie Ligon, the original plaintiff, bought Matrix shampoo at K-Mart. Yes, she also bought Matrix products at a salon. But was she really tricked into overpaying by L’Oreal’s labeling? Was anyone? Even if they were, is L’Oreal to blame, considering that the company is spending a lot of money to stop its top-line products from being sold outside of salons? And what’s the value – if anything – of L’Oreal’s agreement to remove the salon-only labeling when the class, according to its own motion for approval of the settlement, doesn’t know how those supposedly deceptive words affected L’Oreal’s suggested manufacturer’s price for the products or consumers’ decisions to buy the shampoos and conditioners? In other words, what is the point of this litigation?

If the only point of a class action is the removal of words consumers weren’t really deceived by – and fees for plaintiffs’ lawyers – then it’s no wonder that pro-business groups have found such eager listeners to their incessant anti-class-action refrain. I’m not among those listeners. I believe that class actions are an invaluable means to right egregious wrongs and hold defendants accountable. I also believe, however, that pointless class actions endanger the entire system. Settlements that bring no value to class members should not be encouraged.

Defendants like L’Oreal, of course, are usually not worrying about the systemic consequences of their litigation decisions. It’s obvious why the company and its lawyers at Patterson Belknap agreed to settle this case. The salon-only labeling it agreed to remove doesn’t appear (based on the L’Oreal evidence cited by the plaintiffs) to be linked directly to sales or prices, and $950,000 is probably not much more than it would have cost the company to hire experts to defend the case. And meanwhile, L’Oreal would have obtained a release from all classwide claims for money damages if the judge had approved the deal. Settling was certainly a rational course for the company. (L’Oreal lawyer Frederick Warder of Patterson didn’t return my call.)

Yet as I’ve argued before, and I’m now arguing again, if defendants truly want to end silly class actions, their best course is to stop giving plaintiffs’ lawyers an incentive to file them. What would have happened to this case if L’Oreal had said (as an increasing number of defendants in California class actions are) that it would oppose the plaintiffs’ fee request? Would class counsel still have agreed to a settlement? And if not, would they have continued litigating a case with a damages theory they considered essentially unwinnable? Four lawyers at the Mehdi and Halunen firms didn’t respond to my email posing these questions, but contingency-fee lawyers can’t sustain their businesses by investing time and money in a case without a clear path to recovery. If L’Oreal had told class counsel that it was prepared to spend a million bucks defending this case rather than agreeing to hand over a million bucks to them, I wonder if the plaintiffs’ lawyers would have dropped the case.

The contingency of class action fees is supposed to serve a quality control function. If plaintiffs’ lawyers can’t make money from a case, they won’t bring it, and, in theory, if it turns out to be meritless somewhere along the way, they’ll drop it. But defendants corrupt the quality control system when they agree to pay class counsel fees that don’t reflect the value of the class’s recovery. The message from such settlements isn’t that plaintiffs’ lawyers should do more careful pre-filing investigation and only bring claims based on quantifiable harm to class members. It’s that class counsel can make a living from meaningless cases.

Class actions are under siege. It could be that defendants don’t even have to take a systemic view because the U.S. Supreme Court will eliminate consumer and privacy class actions – those most likely to feature disproportionate fees – altogether. Unless and until that happens, though, defendants should do more than talk about frivolous class actions. They should eliminate the incentive to bring them.

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