The Case of the Rise in Consumer Class-Action Suits, and What It Means

Trend Reveals More About the Legal Economy Than Nation's Ad Industry

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Consumer class-action litigation has exploded. Every month, dozens of new cases are filed -- most of them in California. The cases allege widespread false advertising by some of the most prominent companies in America. Why is this happening? Are consumer-products marketers more dishonest than in the past? Unfortunately, the trend reveals more about the legal economy than our nation's advertising industry.

In 1965, when Ralph Nader released his watershed book, "Unsafe at Any Speed," class actions were rare. Nader, who initially sought to expose design defects in the Chevy Corvair and other cars, and later launched a war against what he felt was widespread corporate malfeasance, triggered an era of mass-tort litigation.

In the early cases, lawyers served as vicarious avengers of the public good, protecting people from sometimes-shocking corporate wrongdoing when government had failed to act. Some of the landmark cases of that time were brought by lawyers who had handled as many defense cases as plaintiffs' cases. The 1970s, "80s and "90s witnessed successful mass litigation directed at asbestos, lead, dangerous drugs and tobacco.

But once those cases began to wind down, left underemployed was a large class of full-time plaintiff lawyers, which set its sights on other profitable targets, including securities fraud, mass employment litigation and, more recently, consumer-fraud class-action litigation.

Contributing to this redirection of the plaintiff focus toward consumer fraud has been a sustained push-back by business against the legal excesses of the product-liability, securities and employment cases.

Through litigation, legislation and public relations, corporate interests have gradually pared back some of the worst excesses of the plaintiffs' bar.

For example, some states have passed tort-reform laws that cap the damages that individuals can obtain, weakening incentives for plaintiffs' lawyers to bring insignificant cases, as most of them work on contingency. A body-of -case law on junk science and pleading standards have emerged, making it somewhat harder for the frivolous case to make it to a jury.

Plaintiff-lawyer ranks have also been swelled by a "lost" generation of young attorneys who graduated law school during our recent dismal economy. These young lawyers are deep in student-loan debt, and many can't find jobs at major law firms. Indeed, legions of lawyers who were laid off from huge firms have started boutiques, handling a mix of plaintiff and defense cases. It's also not unusual for even "name-brand" firms to handle some large contingency cases as they attempt to replace the income that was lost when corporate legal departments trimmed their budgets.

It doesn't help matters that consumer-fraud class actions are relatively easy to file. There is a great repository of information in the public realm from which one can generate ideas for cases. The internet provides many opportunities for consumers to vent and to join communities of the similarly disgruntled. Every time the Federal Trade Commission releases a new complaint or consent decree, plaintiffs' lawyers pick it up and within days file class actions mimicking the allegations. Seemingly every published opinion in a private false-advertising case in federal court results in a class action. And ominously, plaintiffs' lawyers now appear to be scanning National Advertising Division case reports for opportunities.

Plaintiffs' lawyers can find plaintiffs easily (millions of people eat snack food every day, for example). The cases are cheap and easy to file, but plaintiffs know they can be expensive to defend.

We have yet to see many plaintiffs recovering big money through these cases. Most are settled quietly, with plaintiffs' lawyers obtaining a payout and prospective class members receiving nothing.

Last year, the U.S. Supreme Court decided in the landmark case, AT&T Mobility LLC v. Concepcion, that mobile-phone customers could be required to honor their contract and arbitrate their disputes rather than pursue them through class actions. No plaintiffs' lawyer working on contingency wants to arbitrate, as it means investing time in an individual action having a top payout of a few hundred dollars. Thus, arbitration provisions have been a killer for many such suits. However, until cereal makers figure out a way to package their products with shrink-wrapped customer agreements, this strategy won't help them.

As we have seen with the other class-action trends, the consumer-fraud rage will most likely pass. Businesses can help hasten its demise through coordinated efforts to enact legislation that makes it tougher for weak cases to survive.

They might even consider working with the FDA and other agencies to define commonly used marketing terms, such as "natural," that have generated dozens of cases. Until then, marketers will have to buckle up and persevere through this risky territory.

Chris Cole is a partner in Manatt Phelps & Phillips' Washington office.
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