Wendy McElroy: Class Action Lawsuits Are Out of Control

Wendy McElroy, an HNN blogger, in the Independent Institute (June 30, 2004):

Wal-Mart is facing the largest class action lawsuit ever been brought against a private company. As many as 1.6 million women may join the suit and the possible payout could exceed $1 billion dollars. What are class action lawsuits, and why have they become so prominent in the news?

Class action lawsuits are an aspect of tort law, which addresses harm or loss that is caused either deliberately or through carelessness by the actions of another. A class action suit is brought by one or more plaintiffs on behalf of a larger group that has a common interest, a common harm. For example, if a product is defective and injures a consumer, that consumer can bring suit against the producer on behalf of all consumers similarly injured. After attorneys’ fees, any settlement or court award is divided among those participating in the suit.

In the Wal-Mart case, six women filed the original action in June 2001, claiming that the giant retailer discriminated against women in salaries and promotions. Approximately 1.6 million women who have worked for Wal-Mart since 1998 are eligible to join the suit.

There are several reasons why class action lawsuits have proliferated over the last few decades. Changes in legal procedure have favored the growth.

A comprehensive study from the Rand Institute for Justice entitled “Class Action Dilemmas, Pursuing Public Goals for Private Gains” explains one such change. “[T]he current controversy over class action roared to life in 1966 when Rule 23, the procedural rule that provides for class actions in federal courts, was significantly revised. . . . Whereas previously, all individuals seeking money damages with a class action lawsuit needed to sign on affirmatively (‘opt in’), now those whom the plaintiffs claimed to represent would be deemed part of the lawsuit unless they explicitly withdrew (‘opted out’).”

In an instant, the scope of lawsuits and the financial liability of defendants “multiplied many times over.” (Rule 23 has been subsequently amended, largely to increase the role of judges in every aspect of class action suits.)

In short, class action suits became tremendously more profitable, especially for lawyers whose contingency fees sometimes exceeded the money paid out to successful plaintiffs. Contingency fees are commonly viewed as a necessary device by which poor plaintiffs can access the court system. In 1971, the Florida Supreme Court stated, “It is irrefutable that the poor and the least fortunate in our society enjoy access to our courts, in part, because of the existence of the contingency fee.”

But the excesses of contingency fees have become infamous, leading critics to label class action suits as “jackpot justice” for lawyers. One critic is Supreme Court Justice Sandra Day O’Connor who has spoken out against “out-of-control class action lawsuits and outrageous contingency fees, which have turned some lawyers into ‘overnight millionaires.’”