America’s new Class Action Fairness Act seeks to curb frivolous class-action lawsuits against companies in areas such as product liability and labour law, mainly by redirecting more of them to federal courts and so denying lawyers scope to “forum-shop” among biddable state courts.
But before companies declare victory, they should reflect that the law of unintended consequences can sometimes be stronger than the law itself. The Private Securities Litigation Reform Act of 1995 was meant to curb frivolous class-action suits within the field of securities law. But in forcing class-action lawyers to raise their game, it has contributed to a new era of big lawsuits and even bigger settlements.
Total settlements swelled from $145m in 1997 (in 2004 dollars) to $5.5 billion last year, while the number of lawsuits stayed roughly constant, according to Cornerstone Research, an American litigation consultancy. This year will break all records. Institutional Shareholder Services, a research service which tracks class-action suits, says payments “in the pipeline”, agreed under pending and tentative settlements, have quadrupled from $5 billion in January this year to $20 billion in August (see chart).
The America’s Government Printing Office posts the “Private Securities Litigation Reform Act”. The Canadian Imperial Bank of Commerce and Time Warner have had big settlements. Peter Henning is professor at Wayne University in Indiana. See also Cornerstone Research, Institutional Shareholder Services, Lerach Coughlin Stoia Geller Rudman & Robbins and NERA Economic Consulting.
That includes $7.1 billion so far in tentative settlements made by banks and other parties linked to Enron, including a $2.4 billion settlement by the Canadian Imperial Bank of Commerce announced on August 2nd; $6.1 billion in pending settlements by WorldCom and related parties; and a $2.5 billion pending settlement by Time Warner agreed on August 3rd.
It is not hard to see some measure of “headline risk” at work. The fame of Milberg Weiss, and in particular of its former star litigator, William Lerach, now at Lerach Coughlin, may have made them more of a target. The affair is having no impact on the business of Lerach Coughlin, says Mr Coughlin, nor, he thinks, on that of Milberg Weiss. But there must be plenty of American companies hoping that it will.