Bruce Kaufman | Bloomberg Law’s Product Safety & Liability Reporter
Business groups are ratcheting up the pressure to improve their legal defenses in New Jersey in anticipation of a wave of new plaintiffs who may be encouraged to sue in the Garden State after a recent U.S. Supreme Court ruling.
On Friday, the Justice Department filed a statement of interest opposing final court approval of a proposed consumer class action settlement in federal court in Camden, New Jersey. I’ll tell you below about the substance of the government’s qualms with the settlement, which resolves allegations that a website called Wines ‘Til Sold Out misrepresented the original prices of wines it sold at a purported discount. But the significance of DOJ’s filing isn’t the particular flaws it highlights in the proposed deal. It’s that the Justice Department is exercising its authority to oppose a private class action settlement – and that, based on comments from departing Justice Department official Rachel Brand, the Wines ‘Til Sold Out filing is likely to be just the first in a series from the Trump DOJ.
In recent years, one bright spot in an otherwise lackluster market for packaged foods, beverages and consumer products has been merchandise promoted as “natural.” Consumers, increasingly wary of products that are overly processed or full of manufactured chemicals, are paying premium prices for natural goods, from fruit juices and cereals to shampoos and baby wipes. But as a spate of lawsuits and consumer advocacy efforts show, one person’s “natural” is another person’s methylisothiazolinone.
New Jersey is an outlier. Though nearly 40 states and the federal court system have adopted similar rules governing the admissibility of expert evidence, New Jersey has stuck with an older rule. Continue reading →
DeNittis Osefchen Prince P.C. of Evesham was expected to share in a $520,000 payment by the restaurant chain, a sum intended to settle a class-action lawsuit over the actual length of Subway’s six- and 12-inch sandwiches.
But a federal appeals court in Chicago has rejected the deal, saying it would have enriched attorneys while doing nothing for most Subway customers.
In a sometimes-sharply worded decision, the three-judge panel described the settlement as “no better than a racket.”
The Race to the Courthouse
The suit filed by the attorneys at DeNittis Osefchen Prince, was the first of eight similar lawsuits that were filed after a photo showing a sandwich measuring only 11 inches went viral. All the suits were eventually consolidated as multi-district litigation in the Eastern District of Wisconsin.
Plaintiff counsel soon realized their claim for damages had no merit since Subway’s 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.
Frank appealed, and a Seventh Circuit panel 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.”
This is Happening Too Often
The race to be first to the courthouse to file even meritless lawsuits 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.
The attorneys in the footlong case plainly believe they did nothing wrong. In the Courier-Post article, attorney Stephen DeNittis disputes claims that the settlement was “a windfall for the attorneys at the expense of the class” He said, “Such was clearly not the case. There were 10 law firms involved in the 3 1/2-year-long action who devoted well over 2,000 hours in time in litigating the matter.”
Unfortunately for them, work put into a worthless project doesn’t turn a sow’s ear into a silk purse.
A Bright Line Rule
The New Jersey Civil Justice Institute supports Frank’s effort to create a bright line rule that will discourage class action abuse and inspire courts to toss sham settlements. Businesses should only be forced to pay out when they have done something wrong, not be punished for having deep pockets.
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.