Thanks to the Center for Class Action Fairness, federal courts are finally enforcing safeguards against the diversion and misuse of class-action lawsuit settlements, which all too often have been used to enrich cronies of trial lawyers and pet projects of the trial judge rather than to benefit the consumers in whose name the class action was brought. In Nachsin v. AOL, Inc., the Ninth Circuit Court of Appeals struck down the diversion of class-action settlement money to local Los Angeles charities unrelated to the class or the claims of a national class-action lawsuit. Ted Frank of the Center for Class Action Fairness represented the successful objecting consumer. The court disapprovingly noted that “While the donations were made on behalf of a nationwide plaintiff class, they were distributed to geographically isolated and substantively unrelated charities.” Among the charities that improperly received money was a charity with ties to the trial judge’s own family, leading to the objector’s argument that “the district court judge should have recused herself given her husband’s position as a director on the board of one of the charity beneficiaries, the Legal Aid Foundation of Los Angeles.”
As the Court of Appeals pointed out, judges have often wrongly used class-action settlements to enrich groups that have nothing to do with consumers’ rights, like the ACLU: “courts have awarded cy pres distributions to myriad charities which, though no doubt pursuing virtuous goals, have little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved,” such as “awarding $2 million from an antitrust class action settlement to fifteen applicants, including the San Jose Museum of Art, the American Jewish Congress, a public television station, and the Roger Baldwin Foundation of the American Civil Liberties Union of Illinois.”
As George Krueger noted in The Wall Street Journal in “Our Class-Action System is Unconstitutional” (August 6, 2008), judges have “been known to order a distribution to some place like their own alma mater or a public interest organization that they happen to favor.” As Adam Liptak of the New York Times noted in 2007, “Lawyers and judges have grown used to controlling these pots of money, and they enjoy distributing them to favored charities, alma maters and the like.” The Ninth Circuit’s ruling puts the brakes on this insidious practice.
I wrote in the Washington Post about how class-action lawsuit “settlements intended to benefit consumers get paid instead to groups that lobby for affirmative action, hate-crimes laws, undocumented immigrants, and public funding for abortions.” (See Hans Bader, “Not Their Money to Give Away,” Washington Post, December 22, 2007, at A16).
The Washington Post’s editorial board similarly lamented how federal judges use such settlements for purposes unrelated to the underlying lawsuit, giving the money to “religious organizations,” “law schools,” and other organizations that “hire lobbyists” to influence judges (See Editorial, “When Judges Get Generous,” Washington Post, December 17, 2007, at A20).
The practice is even more common in state court than federal court. As I noted in 2007, “In California state court, leftover money from a consumer class action settlement is commonly given not to consumer groups, but to groups that have nothing to do with consumers, like the left-wing La Raza Legal Center; the politically correct Employment Law Center of the San Francisco Legal Aid Society (which seeks to curb employers’ First Amendment rights); the ever-litigious Lawyers’ Committee; and groups that specialize in advocating affirmative action, broader definitions of ‘hate crimes’ (at the expense of civil liberties), or expanded access to welfare programs for illegal aliens. This ripoff of consumers is magnified as a result of practices like ‘fluid recovery.’”
Ted Frank and the Center for Class Action Fairness are challenging a settlement in a class-action lawsuit over mishandling of Native American trust accounts that massively enriched some favored claimants while ripping off others. Competitive Enterprise Institute filed an amicus brief in support of that challenge, a brief authored by leading class-action law expert Andrew Trask. In that case, “the class representatives have . . . requested an unprecedented $13 million payment for themselves, raising conflict-of-interest questions,” and provoked objections over the settlement’s peculiar “‘upside-down’ allocation methodology, where class members who have suffered the most mismanagement of their trust accounts will receive less money than equally situated class members whose trust accounts were administered appropriately. The settlement and objection present interesting legal issues of whether Congress can constitutionally abrogate class action certification requirements and whether a mandatory class action for injunctive relief can involuntarily waive class members’ rights to relief already won in court in exchange for one-size-fits-all cash payments. The case is Cobell v. Salazar.”