01/25/2012 04:16 pm ET Updated Mar 26, 2012

"Occupy" Your Local Courthouse?

The Wall Street Malaise has Seeped Into Our Halls of Justice

In the past we have commented about the dysfunctional class action system and how class members, the victims of alleged corporate misconduct, end up paying for their own victimization. We pointed to a U.S. District Court judge's decision in a class action against Bank of America where, for the first time, a judge acknowledged that a securities class action settlement was unjust and immoral. He refused to approve the $33 million settlement, calling it

not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality. [T]he settlement] [he said] proposes that the shareholders who were the victims of the bank's alleged misconduct now pay the penalty for that misconduct.

And, if "unjust and immoral" were not bad enough, the same judge subsequently approved a revised settlement that increased the payment to $150 million! So it was wrong to have the victims pay $33 million, but it was all right to have to have them pay more than four times that amount? This is what passes for class action justice in our nation's courtrooms.

Now we have a recent U.S. appellate court decision in California that provides yet another example of how defendants (and ultimately all of us) become victims of the class action system.

Class action lawyers sued the foreign car company, Volkswagen (VW), alleging that VW (1) had not made replacement ignition key technology available to independent locksmiths; and (2) had fixed at artificially high prices replacement ignition keys purchased from VW and Audi dealers.

But the allegations turned out to be false. The parties stipulated in the settlement that VW (1) had, in fact, made replacement ignition key technology available to competitors; and (2) had not fixed prices for the keys, which prices were competitive with those charged by locksmiths.

That's right. The complaint's allegations were completely and utterly untrue! So the lawsuit was dismissed right? Wrong. Even though plaintiff's lawyers were wrong in their allegations, they wound up settling with the defendant and received close to $500,000 in attorney's fees. How could this happen you might ask? The lawyers simply amended their complaint, claiming instead that VW had failed to "adequately disclose" how and where to get ignition key copies made. Under the settlement, VW agreed to make additional disclosures regarding the cost and availability of replacement ignition keys, and class counsel got paid nearly $500,000 to dismiss the lawsuit -- the class received no monetary relief whatsoever.

Class action lawyers can file lawsuits making completely erroneous allegations against a company. Then when those allegations are shown to be untrue, they can simply claim that since they weren't aware of the truth, the defendant failed to adequately disclose the information. For their own mistake, they were awarded nearly half a million dollars!

Several class members unsuccessfully objected to the fee award. They argued that since the class didn't get anything, class counsel should not be getting $500,000 for making false allegations against VW. It's just another example, they argued, of class action lawyers filing a frivolous lawsuit and striking a deal with the defendant that provides class members unnecessary relief. Such "relief," (called "window dressing" in the trade) allows the plaintiff's lawyers to go before the judge and argue that they obtained a benefit for the class and are entitled to an attorney's fee pay-off. The court, however, overruled the objections and awarded the full fee requested. One of the class members appealed, but the appeal was thrown out. We'll have more to say about that in a follow-up article.

Let's recap. The class members lose because they got nothing. The defendants lose because they had to pay hundreds of thousands of dollars to plaintiff's lawyers (plus their own lawyers' fees) even though they did nothing wrong. The public loses because the defendant will likely pass along the expense of the litigation to consumers as another cost of doing business. The only winners are the plaintiff's lawyers who get huge fees for filing unmeritorious claims against deep-pocket defendants.

Plunder is a more accurate description of what goes on in our legal system these days, and the judiciary is sadly compliant, complacent, complicit (take your pick) in this shakedown. What can we citizens do? How about "occupy" your local courthouse?