Products Liability Class Actions – Placing the Power in the Wrong Hands

-- By JoshLerner - 17 Apr 2010

Each class action is its own natural monopoly. The class action plaintiffs firms have banned together to create an additional barrier to entry in the larger market and that leads to harmful results for consumers. The current system has judicial regulation, which has proven largely ineffective and like other natural monopolies it would be better suited to legislative regulation or complete government control.

Product Liability Class Actions are Natural Monopolies

Product liability class actions each operate as a natural monopoly. Instead of individuals each filing their own lawsuit they join together and reduce the average cost of litigation. There is a high initial cost to litigating a products liability claim, but virtually no cost in adding in additional parties, making one large suit the efficient outcome.

We should turn the litigation process over to government regulation like we do with many natural monopolies. The water, electric and subway systems have all been subject to strict legislative regulation, negotiation or being run by the government. The products liability class action market should similarly be regulated or taken complete control over. If we allow natural monopolies to run unregulated they can charge excessive prices and prove sub-standard services, which is what many products liability class action firms do.

Two Barriers to Entry

The first barrier is to a specific litigation. Once a case is filed and class counsel appointed by the judge that counsel then has control of the litigation. They are given a monopoly over that specific litigation (like being given a contract to supply water to a city).

A slight exception to note is that there may be multiple cases with the same claims in different courts (generally different state courts since federal claims can be transferred and consolidated). In these instances there is no competition to compete for the approval of consumers, but rather a perverse incentive to participate in reverse auctions with product manufacturers and settle for cheap.

The second barrier is to entering the larger market of firms supplying products liability lawyer services. In large products liability cases many individual actions will be transferred and consolidated into one district as an MDL. Once consolidated the first procedure is for firms to each file lead counsel papers. The judge will then select a leadership structure.

Firms negotiate among themselves to decide who will be lead counsel or on an executive committee. Often times these negotiations even incorporate other pending cases (“I’ll support you for lead counsel in X if you support me for lead counsel in Y”). The products liability plaintiff’s bar is a group all too familiar with one another.

If a new firm should try to enter they will generally be excluded by the other members unless they participate in the group’s pricing scheme and play by the group’s rules. When a judge is faced with 10 experienced law firms working together and one independent, inexperienced firm trying to become lead counsel on their own, the choice for the judge is easy. Through this procedure the plaintiff’s products liability bar has been able to create a cohesive group that by themselves handle virtually all of the large products liability cases in the United States.

Harmful Results

The results of the current system are that class action law firms take advantage of their monopoly power and gouge the clients they are supposed to represent. Lawyers bill up to $1,000/hour and their fees are usually a portion of the settlement even if that number is many multiples of their lodestar. They frequently negotiate settlements that do little for their clients, but benefit the firms.

Going to trial is often against the interests of the class action firms who will spend thousands if not millions of dollars litigating. They are often eager to settle as early as possible and will take settlements not in the best interest of their clients. This is supplying sub-standard services, like a water company providing dirty water because you have no alternative to turn to for your water supply once they have been selected as the city’s supplier. Of course there are firms that conduct themselves with altruistic goals and many non-profits organizations have taken up suits, but these remain the exception rather than the trend.

(Note: opt-outs and objections of course exist, but imperfect information and lack of individual incentive lead to them rarely being used)

Judicial Regulation

The only check on the current system is that judge’s must approve class counsel and must approve all class settlements. The judicial branch is not appropriate for performing the regulation of a natural monopoly because it has conflicts of interest and it does not have sufficient power to appropriately regulate or assume control of the market.

Judges are faced with the difficult task of both ruling on the appropriateness of settlements and making decisions that affect the value of the settlement. Imagine a judge throwing out a settlement as unfair to a class of consumers and the following week granting summary judgment in favor of the defendant product manufacturer. These decisions should be made independently by separate actors. Judges are also often too anxious to get large cumbersome MDLs off of their dockets and a settlement presents a great opportunity to do that. The conflicts created make judicial regulation inappropriate.

The judiciary also lacks the power to negotiate settlements on behalf of consumers or to litigate on their behalf. They can only approve or disapprove. While judges do have expansive authority in setting legal fees, they can’t take over control of litigation, seek out outside counsel or do anything substantive on the consumer’s behalf. The judiciary must be neutral in the litigation process and a pro-consumer bias is required for someone to appropriately represent their interests.

Conclusion

Products liability class actions require government regulation or ownership in order to prevent plaintiff’s class action law firms from taking advantage of their market powers to take advantage of consumers.