August 12, 2013

When Lawyers Cut Their Clients Out of the Deal

By ADAM LIPTAK

WASHINGTON — “We always knew this settlement would get a tremendous amount of attention,” Scott A. Kamber told the federal appeals court in San Francisco a couple of years ago.

He was defending a novel bargain he had struck with Facebook on behalf of millions of users whose privacy he said the company had violated. The settlement’s central innovation was to cut Mr. Kamber’s clients out of the deal.

The class members would get nothing. The plaintiffs’ lawyers would get about $2.3 million. Facebook would make a roughly $6.5 million payment — to a new foundation it would partly control.

The appeals court upheld the settlement last year by a 2-to-1 vote, with the majority saying it was “fair, adequate and free from collusion.” Last month, critics of the settlement asked the Supreme Court to hear the case.

The Facebook settlement certainly explores new frontiers in class-action creativity. For starters, consider the plaintiffs.

“They do not get one cent,” Judge Andrew J. Kleinfeld wrote in dissent. “They do not even get an injunction against Facebook doing exactly the same thing to them again.”

In exchange for nothing, the plaintiffs gave up their right to sue Facebook and its partners in a program called Beacon, which automatically, and alarmingly, displayed their purchases and video rentals. The program has been shuttered, but its legal legacy lives on.

“This settlement perverts the class action into a device for depriving victims of remedies for wrongs,” Judge Kleinfeld wrote, “while enriching both the wrongdoers and the lawyers purporting to represent the class.”

The Supreme Court will soon decide whether to hear the case, Marek v. Lane, No. 13-136. The justices have been quite active in restricting other aspects of class actions, and they may decide it is time to consider settlements that critics say leave plaintiffs worse off than when they started.

Class-action lawyers call the diversion of settlement money from victims to other uses “cy pres.” The fancy-sounding term is derived from a French legal expression, “cy pres comme possible,” or “as near as possible.”

Cy pres can make sense in the law of charitable trusts, where executors unable to fulfill a dead person’s wishes precisely are allowed to use the estate’s money for a similar purpose.

Mr. Kamber told the appeals court that the new foundation, financed with Facebook’s money and dedicated to protecting privacy rights, was in the same analytical ballpark. “This is more beneficial to the class,” he said of the foundation, “than a $1.12 check to each member of the class.”

The leading critic of abusive class-action settlements is Ted Frank of the Center for Class Action Fairness, and he is one of the lawyers challenging the Facebook settlement. In testimony in March before a House subcommittee, Mr. Frank said Facebook’s payment to the new charity bordered on a sham.

“That is like a settlement against Microsoft settling for Microsoft giving money to the Gates Foundation,” he said, referring to the foundation created by Microsoft’s chairman, Bill Gates, and his wife, Melinda.

David B. Rivkin Jr., the lead lawyer on the new Supreme Court petition, said he hoped the Supreme Court would consider the dangerous incentives created by these kinds of class-action settlements.

“Cy pres awards only increase the risk of collusion,” he said, “because they facilitate settlements that are cheaper and easier for defendants, still provide high fees for class attorneys, but sell class members down the river.”

Other appeals courts have been more skeptical of creative class-action settlements.

This month, for instance, the federal appeals court in Cincinnati rejected a settlement of a lawsuit that claimed, against the weight of the evidence, that some Pampers diapers had caused severe diaper rash.

The lawyers got $2.73 million — “this in a case where counsel did not take a single deposition, serve a single request for written discovery, or even file a response” to the defendant’s motion to dismiss the case, Judge Raymond M. Kethledge wrote for the majority of a divided three-judge panel of the court.

In return, the company got a comprehensive litigation cease-fire.

And the plaintiffs? The company agreed to make modest changes to its packaging and Web site and to extend a refund program, but only for people who had thought to keep original receipts and part of the box from as long ago as 2008.

“Who does this sort of thing?” Judge Kethledge wrote, suggesting that the settlement would benefit only exceptionally well-organized hoarders.

“The relief that this settlement provides to unnamed class members is illusory,” he wrote. “But one fact about this settlement is concrete and indisputable: $2.73 million is $2.73 million.”

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Last month, I wrote about a commitment Solicitor General Donald B. Verrilli Jr. had made in October in a Supreme Court argument over a secret government surveillance program. He said the plaintiffs in the case had not shown that they had been spied on and so lacked standing to sue.

This did not mean, he added, that no one could ever sue. If the government wanted to use information from the program in a criminal prosecution, he said, it would have to disclose that to the defendant, who would then have standing to challenge the program.

In the months that followed the argument, federal prosecutors disregarded the commitment and argued that they were not required to make the promised disclosures.

On July 30, in a development reported earlier by The Wall Street Journal, the government reversed course. In a court filing in Florida, it disavowed its earlier legal position. On Thursday, prosecutors said similar things to a federal judge in Chicago.

But the filings contained only statements of principle. The government has apparently yet to make a disclosure of the sort Mr. Verrilli described.