Ted Frank, the founder and director of the Competitive Enterprise Institute’s Center for Class Action Fairness, has won several landmark appeals and tens of millions of dollars for consumers and other plaintiffs through his class action work. Adam Liptak of The New York Times calls Frank “the leading critic of abusive class action settlements” and the American Lawyer Litigation Daily referred to him as “the indefatigable scourge of underwhelming class action settlements.” Frank joined NJCJI to discuss the Subway “Footlong” settlement, explaining why class action settlements are so prone to abuse, and why consumers are better off when class action abuse is curbed.

Although prompted by a photo posted on Facebook by a teenager in Australia, the Subway sandwich litigation began when the first purposed class action was filed in New Jersey. Similar claims were filed in several other jurisdictions, and all suits were eventually consolidated as mutli-district litigation in the Eastern District of Wisconsin.

Plaintiff counsel soon realized their claim for damages had no merit. Bread dough is apportioned by weight, and standardized fillings means no consumer was deprived of any food. So, they shifted from a claim for damages to a claim for injunctive relief, and Subway agreed to a settlement, promising to implement the same quality control measures that were already in place, and to pay class counsel $520,000.

Ted Frank objected to the settlement, arguing that the class had received nothing and their attorneys were the only beneficiaries of the deal. The district judge nevertheless approved settlement.

The case represented a sort of perfect storm for Frank. The case had already garnered significant press coverage and been widely ridiculed as an example of frivolous litigation. And an appeal would be heard in the Seventh Circuit, where his previous objections have contributed to a significant body of case law on class action settlements.

The Seventh Circuit panel hearing Frank’s appeal rejected the settlement unanimously. Judge Sykes wrote the decision and condemned the settlement in scathing terms. Citing precedent from a previous Ted Frank objection, she wrote that “no class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.”

Although the underlying claim in the case lacked merit, Subway was behaving like many corporate defendants – they wanted to minimize their risk, and faced entrepreneurial attorneys seeking to extort a settlement with the threat of litigation and public relations expenses.

Frank concedes that short-term incentives favor illusory injunctions that pay off attorneys, but argues that calculus must be about more than just the ex post decision to settle. Corporate defendants must also consider the ex ante decision by lawyers to bring lawsuits in first place.

The race to be first to the courthouse exists because there is no penalty for being incorrect – the Subway suit demonstrates that even when that claim turns out to be meritless, the attorneys will still walk away with good chunk of money, absent an objection. Frank argues that the solution to that incentive problem lies in a clear standard that bars certification of zero-value settlements.

If courts will not approve settlements that give nothing to the class, and instead require attorneys to share their extortionate settlements with class members, Frank says, there would no longer be a viable business model for frivolous class actions. Although some defense lawyers argue that they need the ability to settle meritless claims on the cheap, Frank notes that every time he has been involved in having a meritless lawsuit thrown out, plaintiff attorneys do in fact slink away, rather than redo the settlement so that the class shares in the money.

To extent there is any data on that, Frank points to the category of merger strike suits, following In re Walgreen Co. Stockholder Litig., which was the result of his challenge to a Walgreens settlement. In 2015, 97% of merger acquisitions requiring shareholder approval faced lawsuits – not because boards of directors were breaching their fiduciary duty, but because it was a good opportunity for extortionate lawsuits. Such litigation has since declined by 30% since the Walgreens decision came down, and Frank argues that the only reason we aren’t seeing even fewer suits is because plaintiffs are seeking out jurisdictions that don’t follow the precedent.

Frank says that there are two competing models for class actions: they can be understood as a substantive device for attorneys to function as private attorneys general, or as a procedural joinder device for aggregating individual claims for greater efficiency. The Supreme Court has been largely unanimous that it is a procedural device. Frank agrees, but contends that even if you believe more in the deterrence model of class actions, approving settlements of frivolous claims undermines the deterrent effect, because it punishes corporations for being deep pockets rather than for doing something wrong. If we really care about deterrence, we should want to get rid of the bad settlements.

The New Jersey Civil Justice Institute supports Frank’s effort to create a bright line rule that will discourage class action abuse. We appreciate his willingness to speak to our members about this issue.