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Washington Examiner: Court ruling shows need for class-action reform

Published: February 25, 2013

WHAT do you call a plaintiffs' attorney who negotiates a settlement that secures $3 million for his clients — and pays him $14 million for his services? Plenty of words come to mind, but none suitable for publication.

Happily, the federal Third Circuit Court of Appeals shares our dismay. Last week the court threw out the settlement, which all told came to $35.5 million. The $18 million remaining after disbursements to the clients and attorneys was to have been paid out as a “cy pres” award — settlement money that is distributed to charities that serve a purpose vaguely related to the plaintiffs' claims.

The rejected settlement stems from an antitrust case first filed in 2006 against Toys “R” Us and Babies “R” Us. The two companies stood accused of collusion in price-fixing that allegedly let them overcharge customers by an estimated 18 percent for certain items.

Three years later, the lawsuit was consolidated with others into a class-action case with thousands of potential claimants. In January 2011, a federal district court in Pennsylvania signed off on the $35.5 million settlement, in which the typical customer would receive about $5 after supposedly being overcharged by as much as $50 for items costing $300. In short, the main effect of the settlement would have been to make a handful of attorneys very wealthy.

“In this case,” the Third Circuit found, “class counsel, and not their client, may be the foremost beneficiaries of the settlement.” Judge Thomas Ambro, a Clinton appointee, went on to note that in class-action cases in which the relief sought is very small, “there is a concern that those actions are brought primarily to benefit class counsel, and awarding disproportionate class counsel fees only incentivizes that behavior. Cy pres awards — by ensuring that a settlement fund is sufficiently large to command a substantial attorneys' fee — can exacerbate this problem.”

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