BEWARE

PLAINTIFFS’ CLASS ACTION COUNSEL ARE USING
INDIVIDUAL STATE COURT SUITS AS A SPRINGBOARD
FOR CLASS ACTION LITIGATION

In consumer class actions, including the large number of such cases now directed at servicers, plaintiffs’ class action counsel are employing a new, innovative technique for obtaining the information necessary to successfully prosecute such a suit. Plaintiffs’ counsel, in short, use discovery obtained in previously filed individual suits to prove the necessary allegations to support a later filed class-wide suit. They attempt to take advantage of the natural tendency of defendants and their counsel to subject the small-dollar, individual suit to less scrutiny than a class action case with the prospect of multimillion dollar damages. This recent development, unfortunately, requires servicers to treat each and every individual lawsuit as if it may later be brought on behalf of a class of plaintiffs in the same circumstances.

Federal Rule of Civil Procedure 23 is the starting point and the foundation for class action practice in the United States. The procedures it provides for have been adopted by most states to govern class actions filed in state courts. It is designed to permit representative parties and their counsel to prosecute civil actions to redress a wrong purportedly suffered by numerous persons similarly situated.

Class action proponents see the rule as "a panacea for a myriad of social ills," whereas opponents see the rule as "a form of legalized blackmail." Arthur R. Miller, Of Frankenstein Monsters and Shining Knights: Myths, Reality, and the "Class Action Problem," 92 Harv.L.Rev. 664 (1979).

Consumer spokesmen have argued for years that an increased use of class actions is a solution to one of the primary problems confronting consumers. They contend that consumers generally cannot afford to take their complaints to court on an individual case-by-case basis because of the high cost of litigation. It is argued that the use of the class action, which spreads the cost of litigation among all members of the class, will make litigation practicable even though the recovery by any individual member of the class may be small.

It is indeed true that the costs of going to court may often exceed any amount the consumer could hope to recover through litigation. Because monetary claims for relief by consumers are oftentimes relatively small on a single-claim basis, the consumer may not be able to justify the expense of initiating suit. In addition, since absent statute or contract American courts do not require the loser in a lawsuit to pay the winner’s attorneys’ fees, the successful litigant may be worse off than he would have been if he had simply absorbed his loss and not gone to court. In short, economic realities may dissuade the individual consumer from going to court to recover his or her losses.

Those in favor of consumer class actions also argue that the procedure helps deter improper business practices without new government regulation, more bureaucracy, and increased public spending. Because individual suits are impractical, those in favor of class actions contend there is no effective deterrent against illegal business practices absent use of the procedure. It is further argued that an effective class action remedy deters those who are attempting to employ deceptive practices, thus protecting legitimate businesses from future unfair competition.

Opponents, on the other hand, maintain that the prospect of recovery from the most flagrant violators of current consumer regulations is often remote. For example, the defendant most responsible for the complained of improper practice may no longer be in business. Even when the most responsible party is still in business, a judgment may be impossible to collect. Other plaintiffs may have won the race to the courthouse.

Therefore, a lawyer seeking the substantial attorneys’ fees that result from successful class action settlements will select defendants on the basis of their liquidity, not their culpability. For that reason, those opposed to the class action maintain that such suits are employed as harassment or as frivolous "strike suits." Class actions are so extremely expensive to defend, and the potential amount of an adverse judgment is so great (such lawsuits are sometimes referred to as "bet your company cases"), that however slight the risk, a settlement may be entered into even though unwarranted by the facts.

Not only are larger established businesses the most attractive defendants in terms of their ability to pay a sizeable judgment, plaintiffs’ counsel reason that such businesses can ill afford the adverse publicity, and will be forced to settle. Respectable, well-known companies can be severely damaged by the mere filing of a class action, whether it presents valid claims or not. Businesses fear a class action brought against them, even if unjustified, will be widely reported, and serve as negative advertising, destroying the goodwill a company has built up over many years, and drying up potential new business.

Critics also contend class actions do not provide consumers with relief because the proceedings are expensive and time consuming. They note the cost of defending and paying settlements is passed on to consumers. In addition, the class action does not provide consumers with a speedy resolution of their claim. On average, class actions take two to three times as long to litigate, from filing to disposition, as do civil non-class actions. Thomas E. Willging, Laural L. Harper & Robert J. Niemic, Empirical Study of Class Actions in Four Federal District Courts, Final Report to the Advisory Committee on Civil Rules, at 7 (Federal Judicial Center 1996).

The consumer class action also gives the lawyer for the class the opportunity and incentive to promote his own interest in the suit. A large, amorphous group of unnamed plaintiffs allows the lawyer to control the decision making. Each consumer may have only a few dollars at stake in the suit, but the attorneys’ fees may run into the millions of dollars. It is obvious that in such a case it is the attorneys, certainly not the absent class members, who are the true beneficiaries. But more importantly, it is plaintiffs’ class action counsel, not the class representative, and certainly not the unnamed class members, that "call the shots."

The most important event in the life of a class action is certification; that is a decision by the court that the suit may proceed as a class action. Absent certification, a suit labeled a class action at the time of filing is really only a potential class action. And absent class certification, the suit may proceed only on behalf of the person or persons named as class representatives. In that event, the huge attorneys’ fees awarded class action counsel are unavailable. Given the relatively small dollar value of the individual consumer claim, there is no incentive for counsel to proceed with an individual suit. It will most likely quietly disappear from the court’s docket. Therefore, it is simply imperative that plaintiffs’ counsel ensure class certification.

Rule 23 requires the court to decide as soon as practicable after commencement of a class suit whether the case may appropriately proceed as a class action. To be maintained as a class action, a plaintiff must establish the four prerequisites of numerosity, commonality, typicality and adequacy of representation. Rule 23(a) provides, in pertinent part:

"One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class."

In addition, Rule 23(b)(3) requires the court to determine that common questions predominate and that the class action is the best available method for adjudicating the controversy, taking into account the problems likely to be encountered in management of the particular putative class action.

The United States Supreme Court in General Telephone Co. v. Falcon, 457 U.S. 147, 161 (1982) has held that class actions may only be certified if the trial court has undertaken a "rigorous analysis" to determine if the class action prerequisites have been met. "As consumer class actions become more prevalent, the courts increasingly are addressing whether a class properly can be certified particularly where, as often is the case in this context, there is a significant question as to the predominance of factual and/or legal issues." Julia B. Strickland, Recent Developments In Consumer Class Action Litigation, at 1 (Practicing Law Institute, April-May 1999). The procedure may not be available at all as most consumer claims arise from different, individual circumstances, not from a uniform deception perpetrated by design on a large number of consumers. The existence of common questions of law or fact often makes or breaks the class action case.

As noted in the pre-eminent treatise on class actions, "Most class action consumer litigation has emerged from [Truth in Lending Act] suits." 4 H. Newberg & A. Conte, Newberg On Class Actions, §21.01, at 21-9 n. 17 (3d ed. 1992). Congress passed TILA in 1968 to promote uniformity in the disclosure of credit terms.

"[C]ommon questions of law or fact in Truth in Lending Act (TILA) class actions include:

1. Whether forms used in connection with consumer credit purchases did not make the required disclosures
2. Whether monthly billing statements failed to disclose the annual percentage rate of finance charges
3. Whether particular disclosures are in fact required
4. What are the effects of certain standardized conduct of the defendant"

4 Newberg On Class Actions, § 21.03 at 21-11.

Because the search for such common questions of law or fact is of critical importance, plaintiffs’ class action counsel have begun using discovery taken in individual state court suits to demonstrate a certain defendant makes it a practice of failing, for example, to meet a technical TILA requirement. Despite the impressive arsenal of weapons that can be aimed at anyone who violates the Act, a servicer faced with an individual suit alleging a technical TILA violation will not put the same resources into its defense of an individual suit as it would if faced with a claim by that same individual, but on behalf of hundreds, if not thousands, of absent unnamed class members. In effect, plaintiffs’ counsel take advantage of the lack of attention brought to bear on the defense of the individual suit, to gain discovery, including admissions, for use in a later class action.

Therefore, each and every suit in which a servicer is named, including multi-party suits where the servicer may believe it is a peripheral, non-target, defendant, requires careful supervision. Each such case must be vigorously defended, no matter how trivial it may appear initially. Counsel should review written responses to discovery to ensure there are no admissions of class-wide significance. For example, the servicer must avoid any admission that the form used in the specific individual suit, is used in all cases. The tendency to defend on the basis of "this can’t be a problem, we always do it this way" must be resisted at all costs.

The Real Estate Settlement Procedures Act of 1974 ("RESPA") is another popular basis for suit by plaintiffs’ class action counsel. It was passed by Congress to require advance disclosure to home buyers and sellers of closing costs, to prohibit kickbacks and referral fees, and to reduce excessive contributions to tax and insurance escrow reserve accounts. The authors of the American Law Report, 142 A.L.R. Fed. 511, Construction and Application of RESPA §2b (Practice Pointers) (1999) note that plaintiffs’ counsel may be motivated not only by their desire to ensure common issues of law or fact predominate, but also by a desire to avoid sanctions:

"After being retained by a borrower to pursue an apparent Real Estate Settlement Practices [sic] Act of 1974 violation, counsel may be tempted to institute a class action on the assumption that the lending institution or other defendant has engaged in such behavior routinely, thus victimizing numbers of borrowers. Before filing a class action, however, counsel should conduct a factual inquiry to ascertain whether the violation of the law was an isolated incident. Failure to do so can result in the imposition of sanctions under Rule 11 of the Federal Rules of Civil Procedure. Rule 11 requires all parties filing a complaint in federal court to make sure ‘that to the best of the signer’s knowledge, information, and belief formed after reasonable inquiry [the complaint] is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law . . . .’"

The authors of the American Law Reports article point to Durr v. Intercounty Title Co., 14 F.3d 1183 (7th Cir. 1994), rehearing en banc denied (7th Cir.) cert. denied, 513 U.S. 811, as an example of what plaintiffs’ counsel should not do if they wish to avoid Rule 11 sanctions. In Durr the federal appellate court upheld the trial court’s imposition of Rule 11 sanctions against an attorney who filed a class action without first determining whether the matter complained of was an isolated incident and who inflated the damages claim in an attempt to turn a "petty dispute into a big-ticket lawsuit."

Where class action plaintiffs’ counsel have previously filed a state court action, they are later in a position to demonstrate to a federal court judge that their class action allegations were "formed after reasonable inquiry" and are "well grounded in fact." This then is an ancillary benefit of having developed the basis for a class suit in a prior state court suit directed at various claims that lend themselves, under the right circumstances, to class treatment.

In summary, plaintiffs’ class action counsel have developed a method of ensuring that when they bring an expensive class action, subject to media and court scrutiny, alleging a violation of one or more of the consumer friendly regulations, they indeed have a basis for class certification, and as a result, for settlement on a class-wide basis, with the attendant class-wide attorneys’ fees. It is a method of taking the risk out of the process, to the extent possible, for plaintiffs’ counsel. But it has the unavoidable and intended result of exponentially increasing the risk faced by the servicer, facing what it believes is a minor matter, and not suspecting that what it says or does may be turned against it in a suit on behalf of all "consumers" of its services.

Mark Flynn
The Wolf Firm
A Law Corporation
18 Corporate Plaza Drive
Newport Beach, CA.
Tel: (949) 720-9200.
Fax: (949) 720-9250