Soft Firm

Too often, the S.F. law firm of Lieff, Cabraser, Heimann & Bernstein strikes settlements that give the firm millions of dollars in legal fees -- and its class action clients too little

As manager of a Tehama County home for people with Prader-Willi Syndrome, a gene flaw that renders patients terminally hungry, Caroline Cannon has made a career of attending to the insatiable. Prader-Willi sufferers will do almost anything to get their food fixes. "They're always hungry," notes Cannon. "They're very aggressive at times."

But even though she's spent 15 years counseling people afflicted with this disorder, Cannon hadn't witnessed truly ravenous aggression until she recently came into contact with a San Francisco law firm that seems to have an appetite gone awry. Not long ago, Cannon had a personal crisis that kept her from making ends meet. She closed the gap with credit cards. And the credit card companies began to prey, charging late fees, even when she paid bills on time, tacking sky-high interest onto the fees, and using the resulting debt to slap on more fees. Cannon says her $4,000 bill swiftly became $11,000; her phone rang late into the night with credit-card bill collectors. She appeared to be a victim of consumer fraud.

According to lawsuit complaints, Internet bulletin boards, consumer groups, and newspaper articles, Cannon wasn't alone in having problems with Direct Merchants Credit Card Bank of Minnesota. Direct Merchants appeared to be exhibiting the tendency toward consumer abuse that not long ago earned San Francisco credit card company Providian Financial a large measure of national notoriety.

Enter Lieff, Cabraser, Heimann & Bernstein, L.L.P., a law firm that has repeatedly filed class action lawsuits, and then cut settlement deals that seem to give metaphorical peanuts to victims, but millions of dollars to Lieff, Cabraser attorneys. In the credit card case, if a judge approves a proposed settlement at the end of this month, victims such as Cannon will gain the right to receive a book of discount coupons with a supposed retail value of $19.95, to have $8 donated in their names to Boys and Girls Clubs of America, to apply for a 9.9 percent interest credit card, and to join a promotional travel discount club. They will each also have the potential to get between $10 and $70 in reparations. Direct Merchants Credit Card Bank, meanwhile, agreed to end unethical practices that had been the subject of the initial lawsuit.

Victims will lose the right to sue Direct Merchants for something resembling reasonable damages for the carnage that firm has wreaked.

And the lawyers will get $5.6 million in fees.

Kelly Dermody, Lieff, Cabraser's lead partner on the Direct Merchants case, says her settlement is a good deal for consumers, who would get nothing if the case went to trial and lost. "If you're making a broad statement about class actions, this is the wrong case to do it," Dermody says. "I think this was a great settlement. It provides change to practices; it provides relief to the class up to $70. That's an enormous benefit. We had class members call to say thank you for taking on this big company."

Dermody sent me a copy of a report by a court-appointed mediator, who called the settlement "outstanding" and said it wasn't the result of collusion.

It's entirely possible that Dermody went into negotiations with a weak case, then settled, out of common sense, for coupon packs and other concessions of disputable value.

But legal scholars, other plaintiff attorneys, legislators, and consumer advocates all decry what appears to be a growing body of defendant-friendly, fee-heavy class action settlements. And they mention Lieff, Cabraser as part of a trend in which the interests of the victims in class action cases sometimes appear to be subverted.

Few of the kind of dubious-seeming class action settlement I've been describing catch the public eye; these agreements are usually too complex to make a good, direct, sordid daily newspaper headline. But one such case appeared so egregious it recently made the general news.

Late last year, San Francisco attorney Eugene Crew believed himself in a wonderful position for a plaintiff lawyer to inhabit. He had been named the exclusive settlement representative for California consumers in a lawsuit against Microsoft Corp.; he felt damages in the case could go as high as $8 billion. Crew's suit was a California counterpart to a federal lawsuit alleging that Microsoft had harmed consumers by using its software monopoly to charge high prices, while limiting competition and innovation. Crew's negotiating position was especially favorable because California law is kinder to plaintiffs than federal law regarding this type of complaint.

But then, without Crew realizing it at first, things began to fall apart.

Microsoft's attorney called Crew, asking him to include Lieff, Cabraser in negotiations, Crew was quoted as saying in articles in The American Lawyer and The Recorder, a Bay Area legal newspaper. Lieff, Cabraser proceeded to maneuver to include the California case in a pending case in federal court, and then to negotiate a settlement that Crew saw as Microsoft-friendly. The final "settlement" would have had Microsoft give software to low-income schools as penance for having used its monopoly to rip off consumers.

A judge eventually rejected the settlement, saying the deal might actually have improved Microsoft's market position in the educational software market.

Crew asked Lieff, Cabraser to resign from the plaintiffs' executive committee on the California Microsoft case. He's now seeking a damage award of approximately $6 billion from Microsoft -- but he's doing it sans Lieff, Cabraser.

"We asked them to resign because of their conflict of interest as reported in The American Lawyer article," says Crew. "They acceded to our request."

Lieff, Cabraser partner Robert Lieff wrote a letter to The American Lawyer disputing the gist of the article, writing that "the Microsoft litigation is not an example of 'slippery practices.'" The writer of that article, Susan Beck, subsequently published a similar story in The Recorder, reporting on Crew's claim that Lieff, Cabraser had manipulated legal representation of plaintiffs to Microsoft's advantage.

Just the same, in an interview for this column, Lieff, Cabraser partner Bill Bernstein rejected the notion that his firm's settlement would have shortchanged consumers, or that it was a result of a conflict of interest.

"It was a billion dollars' worth of value to the public schools throughout the country, and I don't think you could say that wasn't of significant value to the defendants," Bernstein said, adding that he believes Lieff, Cabraser critics have suspect motives.

"You're talking to people who are jealous of the success we've had, and they're opinionated based on a lack of understanding of what goes on in our cases."

Perhaps they are all jealous, opinionated, and ignorant, but there certainly is no dearth of people -- including more than a few attorneys and journalists -- who've questioned Lieff, Cabraser settlements.

Back in 1995, when Louisiana-Pacific Corp. faced a deluge of lawsuits over allegedly defective exterior siding that reportedly caused consumers' houses to fall apart, the company launched a pre-emptive strike, calling in law firms that hadn't yet filed suit, according to a Wall Street Journal story. Within weeks, a settlement had been struck that gave L-P a new lease on life and provided attorneys with $26 million in fees. But homeowners, the Journal said, apparently got seriously shortchanged.

Chief among the outside attorneys that L-P brought into the settlement: Lieff, Cabraser.

Then there was the Lieff, Cabraser settlement of a class action suit that alleged the BASS and Ticketron services had colluded to jack up prices. The settlement of the case sent $1.5 million worth of event tickets to charity and $750,000 to attorneys' wallets. Consumers got nothing, according to a story in the San Francisco Chronicle.

Lieff, Cabraser partner Bill Bernstein says his firm's attorneys always act in the interest of plaintiffs they represent, and that their fees are fair considering the amount of awards settlements generate.

Lieff, Cabraser attorneys faxed me hundreds of pages describing lawsuits where the firm helped generate large settlements for plaintiffs. And I went to Lieff's offices to speak with partner Robert Nelson and review several pages of cases in which Lieff had won, or helped win, millions of dollars in settlements for plaintiffs. Many of the settlements Nelson showed as among his firm's greatest hits no doubt represented significant victories. Some of the settlements, however, had received criticism that revolved around seemingly high attorneys' fees and apparently insufficient benefits to plaintiffs.

"I can assure you that of the handful of cases that you perceive as being soft on defendants, there have been many more cases in which courts have commented on the extensive achievements we have made on behalf of our classes," Nelson said.

"They're [these suits are] certainly not brought and settled as fee generators," Bernstein says. "They are brought on behalf of people who cannot afford to bring those cases themselves. And the fees are always in proportion to the benefit that is conferred upon the class."

In the Louisiana-Pacific case specifically, Bernstein says, the settlement eventually paid more money to plaintiffs than critics contended. "The company paid far in excess of what the critics thought they would pay," Bernstein says.

But James P. Murphy, a Washington state attorney who represented commercial building owners opting out of the Lieff, Cabraser/L-P settlement, told me he saw that case as a perversion of the class action mechanism, which was originally intended to give the little guy leverage in the courts.

In a class action suit, a wrongdoer, usually a large corporation, will be sued by an attorney representing a group of victims hurt by a particular type of abuse. In this way, tens of thousands of incidents of -- for example -- consumer fraud that may have amounted to no more than a few hundred dollars in damages per victim can be lumped into a single lawsuit that seeks millions of dollars. This consolidation of common claims allows courts to avoid repeated trials of the same issues. As initially conceived, such suits would deter corporate wrongdoing and repay victims.

"Since then, it's evolved as not as much a tool to preserve the rights of individuals," Murphy said. "Instead, it's utilized by a large business that finds itself sued by a large group of people. They use it as a shield, or a method to stem the tide of these lawsuits. I don't know if that was the original purpose of the class suit tool, and it's unfortunate now because you get these situations where it's not all that clear, when you look at the face of the settlement, whether [victims'] rights are really being looked out for."

Even when the firm's arguments to the contrary are taken into account, some Lieff, Cabraser cases seem, to me, to have greed as a primary element.

In one recent case, Lieff, Cabraser received a fierce scolding from a federal judge who ruled that the firm had used the class action mechanism to undermine its own client.

In 1999, owners of the company that bottled now-defunct Cobb Mountain Spring Water hired Lieff, Cabraser to sue competitors Crystal Geyser and Great Springs Water on the grounds that they allegedly drove Cobb Mountain out of business by selling cheap "spring water" that actually came from a well. Lieff, Cabraser proceeded to recruit a former employee of its own law firm to stand in as a "class member," and then filed a separate class action lawsuit against Crystal Geyser and Great Springs, with the lawyers eventually pocketing $2 million in settlement fees. The Cobb Mountain owners at one point stood to get $4.8 million, the judge wrote. Thanks to Lieff's allegedly conflicted handling of the case, the clients got just $245,000.

"In this case, the law firms themselves concocted the class action and created the dual representation out of greed," wrote Judge Jaroslovsky, who ordered Lieff, Cabraser to forfeit the Cobb Mountain fees in a January ruling. "These lawyers clearly placed their desire for class action fees above their loyalty to their client, and deceived the court in the process."

Not true, says Bernstein, who was counsel of record on the water case.

"We think the judge is wrong," Bernstein says. "It's just not supported by the facts, or the evidence, or the record."

In December, Massachusetts Attorney General Tom Reilly described Lieff, Cabraser and a Boston law firm as "absolutely disgraceful" after they jointly sued the state government in hopes of adding $527 million to $333 million in tobacco-settlement attorneys' fees they were already due, according to the Associated Press. In Illinois, meanwhile, lawmakers have passed legislation aimed at keeping Lieff, Cabraser and three other firms from adding $780 million to the $121 million they have already been awarded in that state's tobacco litigation, according to the Chicago Daily Law Bulletin.

Once again, Bernstein urged me to focus on the awards Lieff, Cabraser won for plaintiffs.

"I was wondering if you were going to mention the $209 billion tobacco settlements we won for plaintiffs," Bernstein says.

As for the nationwide criticism Lieff, Cabraser has received for its high tobacco-settlement attorneys' fees, Bernstein has this to say: "That's very interesting, because they wouldn't risk a single dollar of taxpayer money to pursue those cases. They contracted with us to do it, and then, when we succeeded beyond their wildest dreams, complained about the contracts they entered into."

Please don't mistake my criticisms of Lieff, Cabraser for the sort of Republican-driven program of "tort reform" that would stifle citizens' ability to gain redress from corporate abusers. Actually, I'm complaining about a corporations-and-attorneys-first approach to litigation that needs to be stopped before it undermines the ability of the American legal system to fight for the little guy.

When they enter into the type of settlement I've described, large corporate defendants create the appearance that they've been cowed into paying for their wrongdoing -- but they actually are getting off cheap. The settlements grant companies expansive protection from real lawsuits. They benefit lawyers by generating fees gladly paid by defendants to dispose, with finality, of troublesome claims. But they leave consumers, employees, shareholders, and other class action plaintiffs with the moral equivalent of small-potatoes coupons.

Dane S. Ciolino, a law professor at Loyola University in New Orleans, believes this sort of abuse reverberates well beyond the courtroom. "Harm from these class action fees is diffuse," he says. "But even though it's diffuse, it really is harmful, because of the damage it does to the legal profession. Somebody, somewhere, is paying people -- whether it's consumers, injured class members, shareholders at companies with stock in 401Ks -- somebody's paying. And when you've got lawyers walking away with hundreds of millions of dollars in fees, and clients walking away with coupons in their pockets, someone's paying."

These settlements too often let powerful interests cooperate in complicated, mutually beneficial ways, while leaving ordinary people unprotected.

Judges -- who are theoretically required to act as surrogates for victimized class members by rejecting bogus class action settlements -- routinely sign off on softie deals between attorneys and corporations. In many of these cases judges are harried, or aren't accustomed to considering class action settlements, or erroneously believe that, if both sides agree, a settlement must be fair. Perhaps more important, judges, attorneys all, don't necessarily share the layman's view that lawyer profiteering is a form of social malaise.

State bar associations, meanwhile, fail to sanction law firms that specialize in coupon-heavy settlements, even when plaintiff attorneys act against their clients' interests. Bar associations are, after all, lawyers' guilds; they receive little public attention and limited government oversight.

Politicians, for their part, have consistently failed to pass laws that would limit class action abuse.

Legal experts say a simple procedural change would greatly reduce the probability of class action settlement abuse. As it is, millions of people are automatically made class members in class action lawsuits, unless they specifically "opt out" by mailing in a letter saying they wish to be excluded. As a result, attorneys negotiate on behalf of classes of clients who don't know, and may not care, what the lawyers are doing on their behalf. These clients don't protest when they're sold down the river in cozy settlement deals, and they don't mind when their lawyers bill exorbitant fees.

"Opt-in" legislation would change these rules so a victim's right to sue couldn't be bargained away unless that victim had specifically chosen to enter a lawsuit. But opt-in class action standards have been dead in the water for years, in no small part thanks to millions of dollars in plaintiff-lawyer campaign contributions to state and federal legislators.

Case by case, settlement by settlement, "soft" plaintiff attorneys and their corporate allies are harming the American system of tort law, a wonderful institution unique in the world in its capacity to hand power to the little guy. As ideally practiced, little-guy lawsuits, class action and otherwise, have the potential to turn citizens into the equivalent of assistant attorneys general fighting to save the environment, protect consumers, and stop malfeasant corporations in their tracks.

Manufacturers, insurance companies, and their conservative allies have long hoped to neuter the civil court system via so-called tort-reform legislation. Bogus class action settlements are advancing that conservative agenda, but in a way that's disguised as aid to the underdog. Nowadays, to ensure that egregious corporate misconduct will have few significant consequences, it seems to me that a company need only make sure one of the Lieff, Cabrasers of the world is on the job, and a printer of discount coupons is available for contract.

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