Opinion

Alison Frankel

Can market competitors police false ads better than class actions?

Alison Frankel
Jun 13, 2014 21:32 UTC

Companies should not mislead consumers about their products. Some do anyway. Those companies should be held accountable for their deception, not only because they lied but also to deter other companies from lying.

No one can seriously dispute any of these points, but what is the most effective way to stop businesses from deceiving consumers? We have state and federal regulatory agencies, of course, but regulators would be the first people to tell you that they can’t police every advertisement, label and package put out by businesses selling products to American buyers. That’s why state consumer protection laws give customers the rights to bring their own cases — except that, as a practical matter, individual consumers don’t really drive litigation against corporations that supposedly deceived them. Class action lawyers do, because they can represent buyers whose individual claims wouldn’t otherwise be worth pursuing.

Consumer class actions over deceptively advertised low-cost items are a remarkably inefficient vehicle for assuring the integrity of the consumer marketplace. Here, again, there’s really no legitimate argument to the contrary. I don’t mean to impugn the intentions of class action lawyers. Most (though not all) of them are prosecuting legitimate cases on behalf of consumers they truly believe to have been deceived by false corporate advertising. They force defendants to change misleading labels, ads or packaging and to agree not to use the deceptive material again. They also sometimes deliver money unclaimed by class members to charities, usually ones involved in righting the alleged wrongs in the case.

On the other hand, plaintiffs lawyers are awarded fees based on the size of the settlement they obtain, which is an incentive to sue deep-pocketed companies, but not necessarily the most egregious offenders. Class actions are procedurally complex, so they eat up a lot of judicial time. And in the end, an infinitesimal number of consumers end up with cash compensation for being snookered. There’s scant empirical data on claims rates in class actions over low-cost items, but in a recent declaration in a suit involving false advertising allegations against Duracell, a claims administrator said that the median claims rate across hundreds of cases in which purchasers received indirect notice — which is how consumers find out about most settlements involving low-cost items — was .023 percent. That means that for every 4,350 purchasers of an allegedly deceptively advertised product, one person actually filed a claim for compensation.

Proponents of consumer class actions argue that their most important benefit is something that can’t be calculated: They scare corporations straight. No business wants to spend money paying its own lawyers to defend a class action, and then paying lawyers for the class through a settlement. That’s a good argument, especially because it’s impossible to refute. We’ll never know how many companies thought better of a misleading label because it was worried about defending a class action.

New class action: Real victims of Samsung infringement are consumers

Alison Frankel
Feb 10, 2014 19:55 UTC

Once again, we are reminded that defendants underestimate the creativity of the class action bar at their own peril.

Last week, the firms Reese Richman and Halunen & Associates filed quite an interesting class action complaint in federal court in San Francisco. The case asserts that Samsung’s infringement of various Apple patents in its mobile devices – as established in a jury trial in federal court and in a proceeding at the U.S. International Trade Commission – has injured unwitting Samsung mobile device buyers who believed they were purchasing non-infringing products. According to the complaint, the resale market for Samsung devices has been hard-hit by infringement findings against the company; the suit claims that Samsung owners are actually in danger of violating the Tariff Act of 1930 if they attempt to resell infringing tablets and smartphones.

As you may recall, Samsung is on the hook to Apple for more than $900 million in damages after a partial damages retrial in November of its first round of patent infringement claims against Samsung in San Francisco federal court. The purported nationwide consumer class action actually claims far more than that on behalf of Samsung device purchasers. Under one of the suit’s causes of action, the class wants Samsung to repay the entire cost of the infringing mobile devices to the consumers who bought them – or at least the lost value consumers have realized as a result of Samsung’s infringement. Under another theory, class members assert that Samsung must disgorge to them all of its profits from selling infringing devices. That’s a lot of money: According to Apple, Samsung took in $3.5 billion in revenue from the sale of almost 11 million infringing devices.

How Facebook IPO class action lawyers changed judge’s mind

Alison Frankel
Dec 20, 2013 20:37 UTC

The first paragraph of Facebook’s motion to dismiss a securities class action that raised allegations about disclosures in its initial public offering was a no-brainer. Last February, U.S. District Judge Robert Sweet of Manhattan tossed four shareholder derivative suits based on the same underlying facts, concluding in a voluminous opinion that Facebook had “repeatedly made express and extensive warnings” about potential weaknesses in its revenue model as users shifted from desktop computers to mobile devices. So in May, when Facebook’s lawyers at Kirkland & Ellis and Willkie Farr & Gallagher moved to dismiss the parallel securities class action, which is also before Judge Sweet, they quoted the judge’s own words right back to him, not just in the first paragraph but seven more times in the dismissal brief.

To no avail, as it happened.

Sweet ruled earlier this week that Facebook IPO investors may proceed with their class action, holding that their consolidated complaint made out a sufficient case that the company failed to disclose material information about the impact of mobile usage on Facebook revenues and that the company materially misrepresented its knowledge of that impact. The judge noted twice – once in a footnote and once deep in the ruling in his discussion of materiality – that his new decision might seem to be at odds with his dismissal of the derivative suits. But after a long quote from the previous ruling that included his prior words about Facebook’s “express and extensive warnings,” Sweet called the language “dicta (that) does not change the analysis here.”

So how does a judge move from his finding that a company has told investors all they need to know in advance of its IPO to a holding that (based on untested shareholder allegations, to be sure) those same disclosures and representations are materially deficient? Sweet gave two explanations: The derivative claims were based on an alleged breach of duty, which has a higher evidentiary standard, and class counsel from Bernstein Litowitz Berger & Grossmann and Labaton Sucharow managed to tweak shareholders’ allegations to distinguish their arguments from those in the derivative suit.

Intellectual Ventures hit Hynix, Elpida with second IP suit

Alison Frankel
Jul 12, 2011 13:54 UTC

Last December, when Nathan Myhrvold’s ginormous patent-aggregator Intellectual Ventures filed its first three patent infringement suits, it seemed as though a dam had broken. Between the time IV was founded in 2000 until last December, the company had spent hundreds of millions of dollars to acquire some 30,000 patents — but it had never filed a suit to enforce them. IV instead relied on the leverage of its vast portfolio to make licensing deals. The tech world wondered whether the December infringement suits were the first trickles of what would become a river of litigation.

They weren’t. IV quietly went back to business as usual. But on Monday Intellectual Ventures struck again, filing a new patent infringement complaint in Seattle federal court, as well as a complaint at the U.S. International Trade Commission. The new suits name Hynix and Elpida, the computer memory manufacturers, as well as computer makers that use their products (including Acer, Dell, Hewlett-Packard, and Logitech) and stores that sell them (Wal-Mart and Best Buy). IV accuses Hynix and Elpida of infringing five of its patents and inducing the other defendants to infringe. The five patents in the Seattle case do not overlap with the seven patents IV asserted against Hynix and Elpida in Delaware.

IV has added a new firm to its roster of outside counsel: The Seattle suit will be handled by Irell & Manella, as well as Seattle counsel from Black Lowe & Graham. Weil, Gotshal & Manges represents IV in its Delaware suit against Hynix and Elpida; in the other two Delaware cases, Susman Godrey and Desmarais LLP represent IV.

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