Thursday, February 2, 2012

Class action stupidity

My wife is currently a party to a class action lawsuit against a mutual fund that she owned once in her 401k. Such lawsuits began appearing and proliferating around 2003. Many of them are based on allegations that these various mutual funds were not properly managing risk, in comparison to how they were being marketed. And there's a lot of truth here, I think.

Most of these lawsuits have been settled; few are still being argued. And the mutual fund companies have been forced to shell out some big bucks. But here's the thing: the classes are huge. A $10 million settlement sound like a great thing, until you take into account that it has to be split 100,000 ways, or more. That's an average of $100 per person. Well, it would be if there weren't lawyers to pay. Shave 30% of the top and that's an average of $70 per person. But since the settlement money is divvied up according to shares held, if the people with huge numbers of shares are factored out, the average payout is far less.

My wife's settlement money (we're eagerly awaiting the check) is going to be about $30. Maybe we'll go to the movies...without the kids. Many people are probably looking at $3 dollars or even less.

Over the years, other class action lawsuits that I've been a party to--mostly because I just signed off on them, thinking "what the hell"--have returned such colossal dividends as $1.47, $12.50 and a coupon. But I have to be honest, I never felt wronged by the companies being sued. And I have to ask, how many people who join on to these class action lawsuits do actually feel wronged, did actual suffer an identifiable and meaningful loss of some sort?

The coupon one particularly irks me. A coupon really? Here's a question: does anyone think the lawyers behind that lawsuit took their payment in coupons? No, of course not. And yes, I'm take aim at members of the legal profession in this piece.

Not all of them, though. And I'm not condemning class action lawsuits as a whole. They can be a necessary thing and a good thing, no doubt about it. A class action suit--for instance--again an airline for a crash resulting in negligence can be used to force the airline to really do the right thing, so to speak. With many individual suits, it could low-ball the naive. But maybe we ought to think about limiting class sizes for these lawsuits. Because it seems to me that if the class action lawsuit works effectively to the detriment of the class members, something is seriously wrong.

Consider the class action lawsuit filed against Honda on behalf of people that bought its Civic hybrid model (2003-2008). The issue at stake was gas mileage: Honda advertised around 50 mpg, many owners--at least the ones that started the lawsuit--barely got 30 mpg. Well, a settlement has been proposed by Honda. But before looking at it, consider what the difference in mpg means. Assuming an average of 5 miles a day in the car (hardly outrageous) and gas at $2.50 per gallon, one could expect to need 36 gallons of gas for a year at 50 mpg, 61 gallons of gas at 30 mpg. That's an additional $62.50 a year in gas. Over eight years--a good standard for car ownership, if low--that's $500.

And that's a seriously low estimate. Many  people drive far more than 1800 miles a year. So, what would a fair settlement really be for Honda? Misleading advertising allows punitive damages, as well. People didn't get what they paid for. Here's how Honda plans to make good:
Honda's proposed class-action settlement would give aggrieved owners $100 to $200 each and a $1,000 credit toward the purchase of a new car.
That sounds a lot more like a marketing campaign than a settlement for a lawsuit. Not everyone unhappy with their Civic hybrid's gas mileage signed on to this action, however. Heather Peters filed her own lawsuit against Honda in California and won. $9,867. Big difference. Big difference.

Clearly, this class action lawsuit did not benefit the class members; it wasn't used as a lever to get more from an entity (Honda, in this case) that had behaved badly, it was used to create a huge total settlement amount. Plaintives were not just accepted, they were actively sought. It didn't even matter if they felt wronged by Honda, they just needed to own the right car during the right time period. The take for the lawyers who made the case? Around $8 million dollars. And for what? Getting their clients $100 and a coupon.

That is just wrong.

Cheers, all.

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