Consumer fraud reaches the Supreme Court

OPINION:

Trump administration spokeswoman Kellyanne Conway recently defended false statements about inauguration crowd size as “alternative facts,” provoking a great kerfuffle. But in the class-action world, trial lawyers have been making millions on alternative facts for decades. And, astonishingly, courts disagree over whether it’s permissible for lawyers to use alternative facts to cheat their consumer clients.

But this month, the Supreme Court has a chance to protect consumers from alternative facts, as it considers a casefull of fake facts and an unfair lawyer windfall. It’s a challenge to this scheme by wunderkind law professor Josh Blackman, who stumbled into class membership and the way class-action lawyers cheat consumers when he joined a Kentucky gym during his judicial clerkship.

The too-common scam goes like this. Trial lawyers bring a class action against a business, alleging unfair charges or false advertising and seeking to recover a few dollars each for thousands or millions of its customers. It’s okay if the case is weak, because the defendant still finds it cheaper to settle the lawsuit for a small percentage of the total losses alleged than to fight on.

Duracell, for example, is willing to settle a suit over battery advertising for $6 million. But the trial lawyers won’t get rich if most of that money actually goes to consumers. Solution: the parties structure a settlement to make class members jump through hoops to get $6 refunds, like publishing a notice in the back of a newspaper about the need to mail in a claim form instead of obtaining customer addresses from retailer databases and mailing them checks. This ensures that over 99 percent of the class gets nothing, Duracell pays out only $344,000 to consumers, and the lawyers nab $5.7 million for themselves.

But class-action settlements can only happen with judicial approval. So why would a judge ever agree to such a rip-off? Alternative facts to the rescue. Over eight million class members in the Duracell case could have, hypothetically, asked for $6 refunds. Thus, the trial lawyers insist, it’s really a $50 million settlement, which makes a $5.7 million fee seem reasonable. Press accounts then parrot the $50 million figure, staving off much public criticism.

But if courts accede to this swindle without looking out for the consumer, and trial lawyers get paid even when their clients don’t, lawyers have zero incentive to fight for a settlement that actually compensates people who allegedly suffered harm. In fact, lawyers have the opposite incentive, because getting money to consumers leaves less for fees.

Alternative-facts settlements might be laughable if they weren’t depressing. In one ongoing case, the lawyers are set to get $9 million compared to $225,000 for the class. The court justified this gross disparity based on the millions of $20 coupons given to class members for future flower deliveries. Never mind that the coupons expire in a year. And are not good for the weeks before Christmas. Or Mother’s Day. Or Valentine’s Day.

In the 2014 case Pearson v. NBTY, Judge Richard Posner of the Seventh Circuit U.S. Court of Appeals, spoke out against this sort of class-action fiction. A settlement over nutritional supplements that paid $865,000 to twelve million class members was worth $865,000 — not the $20 million claimed by class lawyers. That made the lawyers’ request for $4.5 million in fees downright “selfish,” said Posner.

And, wouldn’t you know it, telling trial lawyers they only get paid when their clients do can have the uncanny effect of refocusing their priorities. After the case was sent back to the lower court to reconsider, a new settlement paid the class over $3 million more than before, with the attorneys getting more proportionate fees.

But the battle has now moved to the Supreme Court, and much is at stake for the future of class action fairness.

In Blackman v. Gascho, a 2-1 decision of the Sixth Circuit Court of Appeals rejected Judge Posner’s logical and fair reasoning, instead upholding a district court decision that bought the lawyers’ alternative facts — that a settlement over gym membership fees paying the class $1.6 million somehow amounted to an $8.5 million settlement — and awarded a fee 150 percent of what the consumers actually got.

That’s why 17 state attorneys general joined Blackman’s petition to the Supreme Court seeking review of this decision, sharing our concern for the countless Americans bilked by class-action lawyers.

Uniformity from our courts is important. Otherwise, trial lawyers can dodge the courts that balk at alternative facts and instead file settlements in courts willing to turn a blind eye to millions being siphoned from consumers to wealthy lawyers. The Supreme Court can right this wrong and ensure some much-needed consumer protections in America’s class-action system.

• Theodore H. Frank heads the Competitive Enterprise Institute’s Center for Class Action Fairness, which has won over $100 million for consumers and shareholders.