Alison Frankel

Class actions deliver more money to more people than arbitration: CFPB

Alison Frankel
Dec 12, 2013 21:19 UTC

What a difference a day – and a data source – makes.

Yesterday I told you about a new study of class action outcomes that Mayer Brown conducted at the urging of clients like the U.S. Chamber of Commerce. The law firm looked at 148 consumer and employment class actions filed in federal court in 2009, and found evidence that a grand total of one case – a $1.2 billion settlement of ERISA claims rooted in Bernard Madoff’s Ponzi scheme – delivered meaningful recoveries to class members. Of the five other cases in which claims data was publicly disclosed, Mayer Brown found distressingly minimal participation in settlement funds by class members: 0.000006 percent, 0.33 percent, 1.5 percent, 9.66 percent and 12 percent.

Mayer Brown released its study in anticipation of a report by the Consumer Financial Protection Bureau, which Congress assigned in the Dodd-Frank Act to analyze the impact of mandatory arbitration clauses in consumer contracts for financial products and services like credit cards and checking accounts. Sure enough, CFPB disclosed preliminary findings from its year-long study on Thursday – and they indicate that the U.S. Chamber was right to worry. According to CFPB, exceedingly few consumers actually bring arbitration claims when they have a dispute with their credit card company, bank or payday lender. Tens of millions of consumers are subject to mandatory arbitration for disputes involving financial products and services, CFPB estimated, yet only 1,241 cases involving these products were filed with the American Arbitration Association between 2010 and 2012. Of those, according to CFPB chairman Richard Cordray, about 900 were filed by consumers. (The rest were initiated by banks and lenders.) CFPB offered some caveats, including the lack of data from JAMS Inc, which also hears consumer arbitrations, albeit far fewer than AAA. But the bureau isn’t exactly going out on a limb when it concludes that the evidence shows arbitration doesn’t provide any recovery to the overwhelming majority of consumers of financial products, especially those with small dollar claims. “Plainly, the number of arbitrations was low relative to the total populations using these products,” the report said, in a notable understatement.

So, a vanishingly small percentage of consumers who are bound by mandatory arbitration provisions win recovery from their banks and credit card companies, since hardly any of them arbitrate their claims. Would consumers obtain better results via classwide proceedings (which are explicitly barred in more than 90 percent of the arbitration agreements reviewed by CFPB)? If we were to rely exclusively on Mayer Brown’s report, we’d conclude that they would not. Mayer Brown found that consumer class actions filed in 2009 were either so flimsy that they were dismissed or that they resulted in settlements offering recoveries too small for most class members to even bother claiming.

That’s not at all what CFPB found, however. The bureau set out specifically to compare consumer recoveries in arbitration to those in class actions. Using case databases and other anecdotal reports, CFPB identified eight class action settlements to serve as a basis of comparison. (The criteria: Settlements had to have been approved in the second half of 2009 or later; the contract at issue in the class action must have contained an arbitration clause; and the case must have involved credit cards, checking accounts or payday loans.) CFPB found that more than 13 million class members made claims or received payments through these eight settlements – which delivered more than $350 million in payments and debt relief to consumers.

Those aren’t results to scoff at, especially considering that only 900 consumers attempted to arbitrate similar claims. Thirteen million people received payments through class actions, which is an awful lot more than the 900 who filed for arbitration with AAA, suggesting that consumers are vastly more likely to recover for their grievances through a class action than through litigation. And no matter what you think of class action lawyers, $350 million in payouts is real money.

Class action mystery: Where does the money go post-settlement?

Alison Frankel
Dec 11, 2013 22:00 UTC

I would have been shocked if Mayer Brown‘s new study of 148 federal-court class actions filed in 2009 concluded that the cases are of any real benefit to class members. Mayer Brown Supreme Court litigator Andrew Pincus, remember, is not only frequently counsel to the U.S. Chamber of Commerce, but was also the winner of the U.S. Supreme Court’s landmark 2011 endorsement of mandatory arbitration in AT&T Mobility v. Concepcion. Pincus told me that the firm decided to collect information on the outcome of consumer and employment class actions filed in 2009 at the behest of clients worried about the Consumer Financial Protection Bureau’s study of arbitration agreements. The Chamber and other clients, he said, have been frustrated at CFPB’s refusal to disclose exactly what it’s looking at. So, as the Chamber explained in a Dec. 11 letter to CFPB, Mayer Brown and its clients seized the initiative and compiled empirical evidence to show the agency what will happen if it precludes arbitration and forces consumers to litigate through class actions. “If you’re going to take away arbitration,” Pincus said, “you have to understand the alternative.”

According to the study, the alternative to arbitration is a system that is exceedingly bad at delivering recovery to class members, even as it amply rewards lawyers who bring claims on their behalf. (Like I said, no big surprise there.) Mayer Brown obtained its initial data set of 2009 class actions from case filings mentioned in the BNA Class Action Litigation Reporter and the Mealey’s Litigation Class Action Reporter. The firm screened out securities class actions and class actions asserting claims under the Fair Labor Standards Act, since both of those kinds of cases are litigated under their own unique rules. After accounting for consolidations, the study ended up analyzing outcomes in 148 consumer and employment class actions filed in or removed to federal court.

Only 21 cases (14 percent of the sample) remained unresolved when the study closed on Sept. 1. Of the 127 class actions that reached a resolution, Mayer Brown researchers found, 45 (or 35 percent) were dismissed voluntarily. (One-third of those voluntary dismissals included individual settlements for the name plaintiffs, according to the firm.) Another 41 cases (31 percent) were dismissed by the courts on motions to dismiss or summary judgment motions. Mayer Brown adds up those percentages and trumpets the conclusion that two-thirds of the resolved cases resulted in no relief whatsoever for class members.

FHLB demands DOJ draft complaint: ‘What is JPMorgan trying to hide?’

Alison Frankel
Dec 10, 2013 19:23 UTC

If JPMorgan Chase and the Justice Department thought that all the zeroes at the end of the bank’s multibillion-dollar settlement for mortgage securitization failures would foreclose questions about the bank’s actual wrongdoing, clearly they thought wrong. Days after the much-leaked-about $13 billion deal was finally announced, New York Times columnist Gretchen Morgenson looked at the admissions accompanying the settlement and wondered why it had taken the federal government so long to hold the bank accountable for conduct that’s been in the public domain for years. Morgenson’s column echoed posts at Bloomberg and Slate that also scoffed at JPMorgan “admissions.” On Monday, even a commissioner of the Securities and Exchange Commission piled on. Dan Gallagher, a Republican, criticized the settlement as a penalty on the bank’s current shareholders that’s not justified by JPMorgan’s admitted conduct. “It is not rational,” Gallagher told an audience in Frankfurt at an event organized by the American Chamber of Commerce in Germany.

At the heart of all of this criticism is a nagging suspicion that we don’t really know what the Justice Department had – or didn’t have – on JPMorgan, that the $13 billion settlement was not pegged to the bank’s actual misconduct but to the public relations benefits to both sides from a supposedly record-setting deal. Attorney General Eric Holder has called the size of the settlement a proportionate response to JPMorgan’s wrongdoing, but it’s tough to take that assertion on faith when the statement of facts that accompanied the settlement revealed so little about the government’s evidence.

The Federal Home Loan Bank of Pittsburgh believes that the government knows a lot more about JPMorgan’s securitization practices than it disclosed in the settlement agreement – and the FHLB’s lawyers at Robins, Kaplan, Miller & Ciresi are pretty sure those additional details are contained in a civil complaint against the bank that was drafted by the U.S. Attorney in Sacramento, California. At a closed-door hearing last Friday, Judge Stanton Wettick of the Allegheny County Court of Common Pleas heard Robins Kaplan argue that release of this “rich source of detailed facts about JPMorgan’s conduct” would serve the public’s interest in understanding the basis of the $13 billion settlement. JPMorgan’s lawyers at Sidley Austin, meanwhile, contend that the Justice Department never intended the complaint to be public but used it only as leverage in negotiations with the bank. Turning the document over to FHLB and the public, the bank asserts, would be contrary to Pennsylvania’s interest in promoting settlements, would violate attorney-client privilege and would accomplish nothing because Justice’s allegations are not related to claims by the FHLB. Judge Wettick did not issue a public ruling from the bench Friday and lawyers for JPMorgan and FHLB didn’t respond to my emails requesting comment. But if we’re ever going to find out more about the government’s dirt on JPMorgan, there’s a good chance it will be in the FHLB litigation.

The Supreme Court, moldy washers and the future of consumer class actions

Alison Frankel
Dec 6, 2013 23:11 UTC

Are Sears and Whirlpool trying to hoodwink the justices of the U.S. Supreme Court about cases that could devastate consumer class action litigation?

That’s what purchasers of front-loading Whirlpool washing machines with an (allegedly) unfortunate propensity to develop a musty odor assert in a new brief opposing petitions for certiorari that were filed by Sears and Whirlpool in October. Members of separate class actions certified by the 6th and 7th Circuit Courts of Appeal argue in a brief filed Friday that Sears, Whirlpool and their 12 pro-business friends urging Supreme Court review have engaged in a “fundamental mischaracterization” of the cases. The defendants “totemically” represent the moldy washer classes to be an untenable mishmash of consumers, some of whom own machines supposedly developed the moldy smell and others who have no problems with their machines and have – according to the defendants – suffered no injury. The cases are no such thing, according to the classes’ Supreme Court counsel, New York University professor Samuel Issacharoff.

Instead, the new brief argues, the moldy washer class actions are “hornbook” warranty suits that allege the same cause of action for every member of the classes. When defendants and their amici harp on uninjured claimants, the brief contends, they’re attacking a strawman: Everyone in the certified classes claims the same injury. “These cases allege only a single, uniform defect causing a uniform harm, in which a seller delivered a substandard product that does not perform as warranted and is not fit for its ordinary purpose, and thereby does not satisfy the terms of the bargain,” the brief said. “That is the only liability theory presented, and it applies to all class members.”

Board independence is just cheap way to appease Congress: new paper

Alison Frankel
Dec 5, 2013 21:28 UTC

If there’s one assumption that underlies the shareholder litigation I’ve covered over the years, it’s that truly independent boards serve shareholder interests. Plaintiffs lawyers often don’t agree with defendants about whether particular directors are actually independent, but the corporate governance ideal of a disinterested board is rarely questioned by either side. Changes in the composition of corporate boards seem to reflect that assumption. In 1998, according to a forthcoming article by Emory University School of Law professor Urska Velikonja for the North Carolina Law Review, S&P 500 companies reported that 78 percent of their board members were independent. By 2012 the number was up to 84 percent. Even more dramatic, according to Velikonja, has been the rise of boards with only one insider – the CEO – on the board. As recently as 2000, Velikonja found, these so-called supermajority independent boards represented only 20 percent of public companies. In 2012, by contrast, 59 percent of public company boards had only one non-independent director.

But are supermajority independent boards actually good for shareholders? That turns out to be a complicated question, teased out in Velikonja’s paper. She concludes, as a threshold matter, that it is shareholders who have driven the trend toward increasingly independent boards. “That is what investors want, encouraged by proxy advisors and unopposed by managers resigned to more vigilant shareholders,” the professor writes. Yet her survey of the literature on board independence and shareholder value showed “substantial academic backlash against increasingly independent boards.” As Velikonja explains, once the majority of directors on a board is independent, shareholders experience diminishing marginal returns from replacing insiders with outsiders, and increasing marginal costs because the board receives less inside information about the company. “Empirical studies seem to support the theoretical intuition that majority independent boards are a good development, but supermajority independent ones are not,” Velikonja writes.

So why, she asks, do shareholders – largely through institutional investors – continue to press for increasingly independent boards? As she notes, two theories for the phenomenon have previously been suggested. Sanjai Bhagat of the University of Colorado and Bernard Black of Northwestern hypothesized back in 1999 that unfounded conventional wisdom about a correlation between board independence and corporate performance was driving the move against inside directors. Several years later, Jeffrey Gordon of Columbia argued that board independence is (in Velikonja’s description) “a positive development made possible by better securities disclosure and the rise of shareholder primacy as the goal of corporate governance.”

Detroit judge’s pension ruling is no panacea for beleaguered cities

Alison Frankel
Dec 4, 2013 21:41 UTC

In Tuesday’s ruling that Detroit is eligible for federal bankruptcy protection, U.S. bankruptcy judge Steven Rhodes set crucial precedent on a municipality’s right to cut pension benefits through the Chapter 9 process. Michigan’s state constitution, like those of many other states, specifically protects the pension rights of public employees. Before Detroit even filed for Chapter 9 in July, some of its pensioners went to state court to block the bankruptcy, arguing that it’s a violation of the state constitution to tamper with their benefits. Rhodes squelched that litigation and asserted his federal-court jurisdiction, but retirees and unions continued their challenge to the city’s right to meddle with their pensions, just as California’s vast public pension fund, Calpers, has relentlessly resisted any suggestion that the bankrupt cities of Stockton and San Bernardino might reduce their pension obligations. In a first-ever ruling on the impairment of pension obligations in a Chapter 9 proceeding, Judge Rhodes held Tuesday that neither the Contracts Clause nor the Tenth Amendment of the U.S. Constitution prohibits Detroit from cutting pension benefits, even if those benefits are protected in the state constitution.

“Municipal pension rights are contract rights, and…the impairment of such contract rights in a municipal bankruptcy case is a regular part of the process,” Rhodes concluded, according to a court-issued summary of his findings. “Because the State of Michigan authorized the filing of this case, municipal pension rights in Michigan can be impaired in this bankruptcy case, just like any other contract rights.” (Rhodes read his eligibility ruling from the bench; a written opinion is to follow.)

With that finding, Rhodes gave a definitive answer to a constitutional question that the judges overseeing the Stockton and San Bernardino Chapter 9 cases have skirted: Can insolvent cities legally reduce their pension obligations through the federal bankruptcy process? Rhodes has supplied critical precedent that changes the balance of power in municipal bankruptcies. “Pensions can no longer count on getting 100 cents on the dollar in every municipal bankruptcy due to their recognized super-senior status,” wrote analyst Mark Palmer in a blog post for BTIG. “Now, they may be subject to cuts or to being treated as unsecured creditors in the same claim pool as the bond insurers.”

5th Circuit gives state AGs a new way to evade federal court

Alison Frankel
Dec 3, 2013 19:29 UTC

Last month, the U.S. Supreme Court heard arguments in Hood v. AU Optronics, the case that will determine whether consumer suits by state attorneys general must be litigated in federal court under the Class Action Fairness Act or may be tried in the plaintiffs-friendly confines of state court. I’ve been harping on these AG cases, known as parens patriae suits, because they’re increasingly the most viable way to hold corporations accountable in court to consumers, thanks to the Supreme Court’s predilection for arbitration and skepticism about class actions. An array of pro-business groups seized the opportunity of the AU Optronics case – in which the 5th Circuit Court of Appeals split with several other federal circuits and held that parens patriae suits are removable to federal court under CAFA – to ask the Supreme Court to rein in state AGs, just as the justices last term curbed class action lawyers who tried to stipulate their way out of federal court.

The Supreme Court hasn’t yet decided the AU Optronics case, and the justices’ questions at oral argument didn’t offer a clear indication of which way most of them are leaning. But if the high court determines that AG suits based on alleged harm to state residents are class actions or mass actions in all but name, a new ruling by the 5th Circuit could undermine the significance of that decision. For parens patriae defendants, it turns out, the 5th Circuit giveth but it also taketh away.

Monday’s per curiam opinion, by Judges Priscilla Owen, Jennifer Elrod and Catharina Haynes, said that six parens patriae suits filed by Mississippi Attorney General Jim Hood must be remanded to state court, despite arguments by the bank defendants that under the 5th Circuit’s own AU Optronics precedent, the suits are class or mass actions under CAFA. The AU Optronics precedent, the new opinion said, is based on the premise that state AG suits are actually prosecuted on behalf of hundreds or thousands of consumers, even though the cases are brought in the name of the state. If that premise is correct, the 5th Circuit judges said (noting the Supreme Court will have to decide if it is), then in order to keep a parens patriae case in federal court under CAFA, defendants must satisfy two elements: They must be able to show that the case’s aggregated potential claims exceed $5 million and that at least one plaintiff’s individual claims exceed $75,000.

Apple contests constitutionality of court-appointed monitors

Alison Frankel
Dec 2, 2013 20:37 UTC

Ever heard the old adage that when your only tool is a hammer, every problem looks like a nail? The law firm Gibson, Dunn & Crutcher has no shortage of tools, but among its most powerful is a premier appellate practice that in the last few years has won landmark rulings from the U.S. Supreme Court in Hollingsworth v. Perry, the California same-sex marriage case; Wal-Mart v. Dukes, which raised due process defenses against class certification; and Citizens United v. Federal Election Commission, the infamous corporate free speech case. When your litigators are expert at winning constitutionality arguments, an awful lot of problems seem to have constitutional dimensions.

That has certainly been true in Gibson Dunn’s representation of Apple in the e-books antitrust litigation. On Nov. 17, you may recall, Gibson filed a brief asserting that state attorneys general don’t have constitutional standing to bring claims for antitrust damages via parens patriae suits – an argument with potentially devastating consequences for state AG actions. A mere 10 days later Apple and Gibson Dunn once again hoisted the sledgehammer of constitutionality in the e-books litigation. In a brief filed late Wednesday, Apple objects to the mandate of the independent monitor appointed to police its antitrust compliance, arguing that court-appointed monitors violate the Due Process Clause and the doctrine of separation of powers.

Apple has some sharp differences with its new monitor, Michael Bromwich of The Bromwich Group and Goodwin Procter, and with the federal judge who appointed him, Denise Cote of Manhattan. (Cote, as you’ll recall, oversaw the trial of the Justice Department’s claims that Apple conspired with book publishers to raise e-book prices.) But why just complain about Bromwich’s $1,100-per-hour fees and insistence on purportedly intrusive interviews with Apple’s top officials and board members when you can mount a sweeping challenge the constitutional legitimacy of outside monitors? Apple’s argument is two-pronged: Its due process rights are violated because Bromwich has a financial interest in prolonging his investigation of the company; and Judge Cote’s definition of Bromwich’s mandate, which includes ex parte interviews with Apple witnesses and private reports to the judge, violates the separation of powers doctrine because it makes the monitor a special prosecutor, not a special master conducting court activities.

Why securities lawyers should give thanks to Native Americans

Alison Frankel
Nov 27, 2013 19:16 UTC

On this Thanksgiving Eve, as we recall the generosity of the Wampanoags who helped early Bay Colony settlers learn how to survive in the New World, securities class action lawyers may want to spare a thanks or two for 12 members of the Ute tribe as well. Why? Because if the U.S. Supreme Court ends up eliminating fraud-on-the-market reliance in the Halliburton case to be heard later this term, one of the few remaining avenues for securities class actions is open because of a case those Utes brought to the Supreme Court back in 1971.

The court’s 1972 ruling in Affiliated Ute v. United States established that securities fraud plaintiffs do not have to prove reliance to sustain claims based on a defendant’s failure to disclose material information. The 12 so-called “mixed-blood” Utes who brought the suit alleged that two officials at First Security Bank of Utah deceived them about the true value of their shares in a corporation established to manage tribal assets. The bank was serving as transfer agent for the corporation, and two of its officials had the good fortune to work at a branch office in a Utah town with a large population of Utes. Without telling the sellers about hot demand for the restricted shares in the secondary market, the two bankers snapped up stock for between $300 and $700 (sometimes not even paid for in cash but in goods such as used cars). When they resold the shares to white people, they realized tidy profits. The Utes accused the bankers of defrauding them about the true value of their stock, filing a suit under the fraud provisions of the Exchange Act of 1934.

The 10th Circuit Court of Appeals rejected the Utes’ claims, ruling that they couldn’t show they relied upon the bankers’ misrepresentations when they made decisions to sell their shares. But the Supreme Court, in an opinion by Justice Harry Blackmun, found that no showing of reliance was necessary because the bankers failed in their duty to disclose the vigorous outside market for the Utes’ shares. “It is no answer to urge that, as to some of the petitioners, these defendants may have made no positive representation or recommendation,” the opinion said. “Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.”

D.C. Circuit knows satire when it sees it, tosses ‘birther’ case vs Esquire

Alison Frankel
Nov 26, 2013 21:40 UTC

Satire, according to an opinion Tuesday by the D.C. Circuit Court of Appeals in a defamation suit against Esquire magazine, is hard to define. But like U.S. Supreme Court Justice Potter Stewart contemplating hard-core pornography (in his oft-quoted concurrence in the 1964 case Jacobellis v. State of Ohio), the appeals court knows it when it sees it. A three-judge appellate panel upheld the dismissal of claims by two prominent members of the ‘birther’ movement, ruling that an Esquire blog post reporting the withdrawal of a book purporting to expose the falsity of President Obama’s birth certificate satisfied the elusive criteria for satire, even if some of the blog post’s readers didn’t get the joke.

In fact, according to Judge Judith Rogers, who wrote the court’s opinion, and Senior Judge Stephen Williams, who joined it, one hallmark of satire is that it takes a while to sink in. (The third judge on the panel, Janice Rogers Brown, concurred in the judgment but did not join the opinion.) “Satire is effective as social commentary precisely because it is often grounded in truth,” Rogers wrote. “Esquire’s story conveyed its message by layering fiction upon fact. The test, however, is not whether some actual readers were misled, but whether the hypothetical reasonable reader could be (after time for reflection).” In this case, the court concluded, Esquire’s blog post contained enough satiric clues to warrant First Amendment protection.

So what was the post? Back in May 2011 – about three weeks after President Obama released the long-form version of his American birth certificate – WND Books, a subsidiary of WorldNetDaily.com, published a book called “Where’s the Birth Certificate: The Case that Barack Obama Is Not Eligible to be President,” by Jerome Corsi. Esquire’s Political Blog greeted the release of Corsi’s book with an online post by Mark Warren that was titled, “BREAKING: Jerome Corsi’s Birther Book Pulled from Shelves!” In Drudge Report style, the post was accompanied by an image of a siren. Its first paragraph read, “In a stunning development one day after the release of Where’s the Birth Certificate … World Net Daily Editor and Chief Executive Officer Joseph Farah has announced plans to recall and pulp the entire 200,000 first printing run of the book, as well as announcing an offer to refund the purchase price to anyone who has already bought either a hard copy or electronic download of the book.” The post went on to quote Farah’s comments from “an exclusive interview” in which he renounced the book as factually inaccurate in light of Obama’s release of his birth certificate. It also quoted an anonymous source at WND who said, “We don’t want to look like fucking idiots, you know?”