Who Profits From Class Actions Suits? Not You

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Class action suitCredit: Leo Ateiman

The number of class actions in Israel has been rising ever since a law governing them was passed in 2006, yet a recent study demonstrates that the main beneficiaries are the lawyers and lead plaintiffs, not consumers at large. The mechanism, meanwhile, eats up judicial resources, say the study’s authors. They say there is a vast gap between the perception of class actions, including among lawyers, and reality.

The figures say it all. The average claim is 435 million shekels, but most suits fizzle out and the average judgment for the few that do not is 3.8 million shekels.

The study examined the execution of the Class Actions Law from its inception in 2006 until year-end 2012. The study was led by Prof. Alon Klement, an expert on class actions and supervisor for the legal clinic at the Interdisciplinary Center, Herzliya, together with Keren Weinshall-Margal, formerly head of the Justice Authority research division and now a lecturer at the Hebrew University of Jerusalem.

During the period under review more than 2,000 class actions were filed, 800 of them in 2012. There was no overall increase in the number of other civil cases filed during this period, the researchers say. More than 60% of the class actions sought compensation for the represented group; the claimed sums are astronomical compared with other civil suits, which could be an artifact of the absence of filing fees for class actions.

Of the 2,000-plus actions filed, only 171 even reached the stage of a court deciding whether to allow them to proceed. Of those, 122 were rejected outright and 49 (29%) were accepted.

Interestingly, in nearly half the rejected cases, the cause was that the lead plaintiff had no personal cause for complaint.

Of the ones approved for court discussion, 0.8% ended in a ruling — in nine cases for the plaintiff and in only one against the plaintiff. The study concludes that the win rate is higher than in other civil cases, but says that is probably because the court throws out class action motions with low chances.

In 57% of the cases not approved as class action motions, the plaintiff elected to withdraw the suit, usually after realizing the case was not a good one or was unlikely to win, without revoking the right to submit a future claim.

It is more common for plaintiffs to abandon the case in class actions than in other ordinary civil claims, at 74% and 60% of the total claims, respectively.

The study found that settlements are almost always reached out of court even before the court rules on whether the class action can go ahead. In only four cases were out-of-court settlements reached after approval of the motion.

Everyone wins

The most common type of award, when any is ordered, is for the general public: The average contribution to the general good was 300,000 shekels ($76,000). The idea behind it is that it’s too hard to track down all the people who deserve compensation. But compensation through coupons or discounts is a problem, especially if the injured parties must actively request the award. Only in a third of cases, though, did the court order the defendant to monitor the number of coupons that were actually used in order to determine whether the award was collected.

Klement says class actions have become a vehicle to transfer contributions to the public, yet that is not their purpose. Moreover, it is the general public that benefits, not the specific group that suffered damage, which isn’t supposed to be the idea, he stresses.

The most interesting finding of the study is how common it is, in cases where the claim is withdrawn, for the lead plaintiff and his lawyer to get payment while the claimant group gets nothing. In these cases, the average compensation for the lead plaintiff is 14,000 shekels (median: 5,000 shekels). The lawyer’s average is 43,000 shekels (median: 25,000 shekels) — the public, zero.

Klement feels this is one of the most important findings of the study. “The average fee in settlements before the court approved the claim as a class action is higher than the fee given in compromises and after approval of the petition as a class action.” It’s also lower than the average lawyer fee given handed down by the court in verdicts, Klement says.

In short, lawyers and plaintiffs are motivated not to pursue the case for the general good, but to end it in compromise as fast as possible, he says.

“I’d like to see broader use of special mechanisms that already exist in law, to contend with frivolous claims,” says Klement. One mechanism that’s underused in his opinion is the involvement of the attorney general in compromises and withdrawals; another is registration in the registry of class actions; yet another is to impose costs in cases of withdrawal due to lack of cause, he explains.

A field for experts

Class actions are the fief of experts. The study found that 710 law firms represented the 2,056 cases it checked, but 10 of the firms got 30% of the work. When it came to defending against class actions, the companies were represented by 690 law firms, but again 10 firms got 30% of the work.

Generally, the study found that firms representing claimants were smaller and less well known than the firms representing the defendants.

When the plaintiffs won a financial award, the law firms got about 27% of the amount in fees, though the standard deviation is very large; the lead plaintiffs got 17% of the money on average. On average, the lead plaintiffs received 32,300 shekels (the median was 10,000 shekels), while the average lawyer fee was 102,500 shekels (median: 40,000 shekels).

Some plaintiffs are especially frisky. The study found at least 150 people who had filed more than one class action; 32 who had filed three and 20 who had filed between four and 10. One holds the record with 17 motions to recognize his suit as a class action.

Looking at who gets sued (private and public companies), the study found that 21% are service companies such as gas stations, transportation companies, electricity utilities and vehicle leasing agency. Another 20% are telecommunication and media companies, including Internet service providers, multichannel television providers, the press, film and information distribution companies. The mobile operators have been particularly targeted, with each of the three big companies hit with 40 class action motions and more.

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