GUEST BLOGGER: Sergei Lemberg from lemonjustice.com on the "Loser Pays" system and why it hurts consumers

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THE COMPLEX LITIGATOR:  As a new feature of this blog, I am hoping to provide regular visitors with some added variety through guest authors that cover topics related to, but outside the scope of, this blog. 

Sergei Lemberg, an attorney who practices lemon law and blogs at www.lemonjustice.com is sitting in the guest blogger’s chair today.

“Loser Pays” and Its Impact on Consumers

Every state has a Lemon Law, which requires a manufacturer to give you a refund or a replacement vehicle if they can’t fix a new car’s defect within a certain number of attempts. As we all know, car manufacturers will try to do whatever they can to get out of compensating a consumer who has a lemon. So, when a manufacturer refuses, it’s up to the consumer to file a Lemon Law claim.

A number of states require that the consumer enter an arbitration program run by either the manufacturer or the state. The rationale is that, if the two parties’ differences can be smoothed out, it won’t burden the court system. In practice, however, car manufacturers have legal teams that fight Lemon Law claims – whether in arbitration or in the court system. It’s much more likely that consumers will have positive outcomes and get the compensation they deserve when they hire a Lemon Law attorney. This is because most state laws say that, if the consumer wins the case, the manufacturer has to pay the consumer’s attorney’s fees. Therefore, manufacturers need to weigh the cost of fighting the claim (that is, the cost of their legal team plus the consumer’s lawyer) against agreeing to a buyback or replacement vehicle. If the consumer has a lawyer and a good case, chances are that the manufacturer will back down and pay up.

England and many other European countries have what’s termed a “loser pays” policy, whereby whomever is on the losing side of a legal action has to pay the legal fees of the prevailing party. While this might seem fair on the face of it, loser pays undermines the foundation of Lemon Laws and other laws that include what’s termed “fee-shifting.” Think about it. The average consumer simply doesn’t have the resources to risk filing a Lemon Law claim and having to pay GM’s or Chrysler’s legal bills. No one in their right mind would take a car manufacturer to court – even if they had a solid case.

Lemon Laws certainly don’t provide consumers with an unfair advantage; if anything, they make it difficult to get relief by imposing stringent requirements on consumers. Awarding attorneys’ fees in a successful Lemon Law claim puts the onus where it belongs: squarely on the shoulders of the car manufacturer who made and sold a defective product.

It goes without saying, however, that there are two sides to every story. There are some who think that attorney’s fees are causing the legal system to run amok, and who propose reforms that would make it harder for wronged consumers to fight back.

The problem with this position is twofold. First, consumers are regularly abused by big car companies, who have bottomless pockets with which to fight claims against them. Second, because Lemon Law claims result in relatively low dollar amount settlements (thousands of dollars instead of hundreds of thousands or millions of dollars) it’s impossible for attorneys to bring cases without also being awarded fees.

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In Vasquez v. State of California Supreme Court declines to impose a pre-filing resolution requirement to all 1021.5 fee requests, but...

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Greatsealcal100This morning the California Supreme Court issued an opinion that examined the limits on its attorney fee opinion in Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 560 (Graham). "  In Vasquez v. State of California (November 20, 2008), the Supreme Court was asked to extend Graham, a catalyst theory case, to all Code of Civil Procedure section 1021.5 requests for fees resulting from a public benefit.  The summary of the holding neatly encapsulates the Supreme Court's "no, and yes" answer to that invitation: 

“Today we revisit one of the “limitations on the catalyst theory” adopted in Graham, supra, 34 Cal.4th 553, 575 — specifically, the rule that the plaintiff in a “catalyst case,” to recover attorney fees under section 1021.5, “must have engaged in a reasonable attempt to settle its dispute with the defendant prior to litigation” (Graham, at p. 561). While this is not a catalyst case (see post, at p. 19), defendant argues the rule just mentioned should apply whenever fees are sought under section 1021.5. We hold that no such categorical rule applies in noncatalyst cases. In all cases, however, section 1021.5 requires the court to determine that “the necessity and financial burden of private enforcement . . . are such as to make the award appropriate . . . .” (Ibid., italics added.) In making this determination, one that implicates the court’s equitable discretion concerning attorney fees, the court properly considers all circumstances bearing on the question whether private enforcement was necessary, including whether the party seeking fees attempted to resolve the matter before resorting to litigation.

(Slip op., at pp. 2-3.)  So you don't have to attempt to resolve a matter before litigation to claim sectin 1021.5 fees, but the Court can consider whether you did as a factor when deciding if it will award fees under section 1021.5.  I suppose this means that the reasonability of the defendant and its counsel and the inclinations of the particular judge hearing the case will now have a lot more to do with whether a plaintiff is successful in recovering fees under 1021.5.  An intractable defendant with obstructive counsel will have a hard time convincing a court that it would have cooperated without the need for litigation had the plaintiff but asked.  On the other hand, a very cooperative defendant could save itself fees under this section by demonstrating its willingness to change practices and correct problems.

I wonder if this mixed set of incentives will change any behaviors on either side of the bar.

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A consumer must tender the purchase price for goods or services in order to have standing to sue for discriminatory practices (Surrey v. Truebeginnings)

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Greatsealcal100California has tended to be on the flexible side when it comes to the issue of standing.  While arguing before one trial court judge in a complex litigation department, I mentioned the lenient standing requirements in California, and the judge interrupted and said, roughly, "I'd go further.  I'd say that California essentially has no concept of standing in most instances."  Thus, when a Court of Appeal defines standing parameters for a consumer-oriented statute, it is noteworthy.

In addition, there are decision that, though not directly conerning class actions, resolve issues that affect the potential for future class actions.  Decisions that define standing are one such category of cases.  In Surrey v. Truebeginnings, et al. (November 18, 2008), the Court of Appeal (Fourth Appellate District, Division One) defined standing to sue for violations of the Unruh Civil Rights Act (Civ. Code, § 51, et seq.) and the Gender Tax Repeal Act of 1995 (Civ. Code, § 51.6):

“The critical issue in this appeal is whether someone who presents him or herself to a business with the intent of purchasing its services or products, but becomes aware of that business's practice of charging different amounts for such services or products based on gender and thereafter does not purchase those services or products, is aggrieved by that practice so as to have standing to sue for violations of the Unruh Civil Rights Act (Civ. Code, § 51 et seq. (the Unruh Act)) and the Gender Tax Repeal Act of 1995 (Civ. Code, § 51.6 (the Gender Tax Repeal Act)). (All further statutory references are to the Civil Code.) In a case of first impression in California, we answer this question in the negative and adopt a bright-line rule that a person must tender the purchase price for a business's services or products in order to have standing to sue it for alleged discriminatory practices relating thereto.

(Slip op., at p. 2.)  The core facts were easily summarized by the Court of Appeal:

“In November 2003, TrueBeginnings, LLC, began operating an online matchmaking service, True.com (referred to collectively with TrueBeginnings, LLC and its parent company, HDVE, LLC, herein as TrueBeginnings). The service was very successful, but it had a disproportionately high percentage of male patrons; in November 2004, TrueBeginnings sought to rectify this imbalance by offering certain free services to women who joined. In early May 2005, Surrey visited TrueBeginnings' website with the intent of utilizing its services; after discovering the discrepancy in its charges, he did not, however, subscribe to or pay for its services.

(Slip op., at p. 2.)

While I am inclined to agree with the Court's overall reasoning, it pains me to do so in this case.  I happen to believe that online dating services deserve tremendous scrutiny as an industry that has the ability (whether exercised or not) to get away with deceptive activities not tolerated in any other business.  The unwillingness of people to bring their customary skepticism into the world of online dating services leaves them open to all manner of deception schemes, including the potential for padded profile roles, computer-generated contacts, imposter members and other frauds difficult to detect or prove without unfettered access to the inner workings of the service's computer system.  If there is an industry where caveat emptor applies, online dating is it.

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ABA Journal wants feedback from lawyers about job market and economy

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The ABA Journal is surveying lawyers about the job market and the current state of the economy.  Your participation will help improve the quality of information reflected in surey results, which will be published in the January ABA Journal.

Visit the survey here:  ABA Journal survey. (NOTE: survey conducted through www.surveymonkey.com)

For my part, I'm always curious to learn more about the state of the job market, especially when it appears to be tightening, so I consider this to be a valuable endeavor by the ABA Journal.  It never hurts to know your options.  In fact, given some of the major firm failures, it's short-sighted not to carefully consider every legitimate option that comes your way.

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A Flurry of iPhone Class Actions

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This blog reported in September that Apple and AT&T were facing a flurry of proposed class action lawsuits regarding the performance of the iPhone 3G on AT&T's higher speed network.  On November 12, 2008, another class action suit joined the ranks of those complaining about the iPhone 3G's ability to function correctly on AT&T's 3G network, but this lawsuit also complained that the casings on the iPhone 3G are defective and prone to cracking.  (Slash Lane, Apple sued over hairline cracks in iPhone 3G casings (November 14, 2008) www.appleinsider.com.)

Once again, who knows what will come of the casing complaint.  Apple was reportedly replacing any phone that showed evidence of hairline fractures.  My iPhone 3G is still looking sharp, but I don't (1) drop it, (2) drop it, (3) drop it, (4) put it in my pocket and sit on it, (5) drop it, (6) put it in my backpack and crush it with books, (7) drop it, or (8) catch it with my foot when I drop it and try to keep it from hitting the ground, resulting in it flying through the air and slamming into a brick wall and then falling to the ground.  But that's just how I am with gadgets - overly cautious.

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NebuAd and ISPs named in class action suit over "Deep Packet Inspection"

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Combine class actions and cutting-edge technology (two topics of interest to me in different ways) and you have what I consider to be the ideal subject matter for blog pontification.  On November 10, 2008, 15 consumers filed a putative class action lawsuit against NebuAd, Inc. and certain Internet Service Providers (ISPs) over the use of NebuAd's "Deep Packet Inspection" (DPI) technology.  (Sam Diaz, NebuAd, ISPs, named in class action lawsuit (November 11, 2008) blogs.zdnet.com.)  A copy of the suit is hosted here.

Perhaps you don't know much about computers on a technical leval and are wondering why this should interest you.  Perhaps you know that you can connect to the Internet but don't know much about what happens after electrons fly out of your home over a DSL line or a Cable line or (please, no) a dial-up internet connection.  If you take nothing else away from this post, know that Deep Packet Inspection is evil.  Be horrified by it.  If you hear of such a program coming to an ISP near to you, protest like your life depends on it.

In basic terms, computers find each other on the internet with numerical IP addresses.  You type in the name of a website.  Behind the scenes, your computer asks a Domain Name Server to translate "thecomplexlitigator.com", for example, into a numerical IP address.  Your computer then requests something from that address such as a website homepage.  The request is passed from router to router, out of your ISP's network and into other networks until it finds the server with the numerical address your computer requested.  That server then delivers the packets of data that comprise the reponse to your request.  Each packet has your delivery address in it.  Each packet makes its way to your computer on its own.  Your computer receives the response packets and reassembles the response, be it a webpage or a file download or something else, by putting the various packets back together in the correct order (they are sequentially numbered).

Your ISP knows that you have requested something from a particular site, but it doesn't know the details of what is passing back and forth between your computer and some server somewhere else on the Internet.  DPI, however, is a method by which NebuAd (or other companies) can peek inside packets and examine the contents of your communications in detail.  This gives far more information about your online activities than merely knowing the IP addresses that your computer visits.  "Having an IP address might tell the system what sites you visit on a regular basis, but for sites like Amazon.com, this is less than helpful. DPI gear can see exactly what pages on the site are being accessed, though, and it can scan those pages for keywords to use in building its profile."  (Nate Anderson, Charter "enhances" Internet service with targeted ads (May 13, 2008) arstechnica.com.)

Phorm, another company providing DPI services, has been given the green light to proceed in the United Kingdom.  While the technology is beyond the scope of this blog, Phorm's DPI technology is even worse than NebuAd because it essentially impersonates you on the Internet in a manner that is undetectable to you and the site you are visiting.  Where provided access by ISPs, Phorm will read the URLs visited, the search terms used by every user, and the content of every page visited. The resulting profiles are then sold to advertisers who are salivating at the thought of this highly specific targeting.  ISPs will share in the revenue with Phorm.

Imagine someone following you around a mall, noting every product that caught your eye, even for a moment, and then selling that information to every store in every mall you visit.  Then imagine walking into a different mall and realizing that every store already knew this information about you and actively solicited you to purchase competitors' products that are similar to what you viewed.  Don't let it happen to you!

[UPDATE:  Thanks to the reader who occasionally catches my typos.  I often have limited free time for posting, and proofreading is the first thing that gets sacrificed.]

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In Kullar v. Foot Locker Retail, Inc., Court of Appeal sides with objector to class action settlement

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Greatsealcal100Objectors to class action settlements have limited prospects for success.  I haven't seen any data, but the success rate of objectors looks to be exceedingly low.  So it is of some note when a published opinion accepts an objector's contention that a class action settlement is "fair, reasonable and adequate."  In Kullar v. Foot Locker Retail, Inc. (Echeverria as Objector and Appellant) (November 7, 2008), the Court of Appeal (First Appellate District, Division Three) did just that.

Echeverria contended that the trial court erred in finding a settlement "fair, reasonable and adequate without any evidence of the amount to which class members would be entitled if they prevailed in the litigation...." (Slip op., at p. 1.) The Court of Appeal agreed that the trial court was obligated to consider the potential range of possible recoveries before concluding that a settlement meets that standard:

“More fundamentally, neither Dunk, 7-Eleven, nor any other case suggests that the court may determine the adequacy of a class action settlement without independently satisfying itself that the consideration being received for the release of the class members’ claims is reasonable in light of the strengths and weaknesses of the claims and the risks of the particular litigation. The court undoubtedly should give considerable weight to the competency and integrity of counsel and the involvement of a neutral mediator in assuring itself that a settlement agreement represents an arm’s length transaction entered without self-dealing or other potential misconduct. While an agreement reached under these circumstances presumably will be fair to all concerned, particularly when few of the affected class members express objections, in the final analysis it is the court that bears the responsibility to ensure that the recovery represents a reasonable compromise, given the magnitude and apparent merit of the claims being released, discounted by the risks and expenses of attempting to establish and collect on those claims by pursuing the litigation. “The court has a fiduciary responsibility as guardians of the rights of the absentee class members when deciding whether to approve a settlement agreement.” (4 Newberg on Class Actions, supra, § 11.41 at p. 118; 7-Eleven, supra, 85 Cal.App.4th at p. 1151.) “The courts are supposed to be the guardians of the class.” (Dickerson, Class Actions: The Law of 50 States (2008 ed.) § 9.02[2], p. 9-6.)

(Slip op., at pp. 13-14.)  The Court of Appeal acknowledged the factual circumstances that guided the trial court but ultimately dismissed those circumstances (a possible mediation privilege) as a basis for presuming the fairness of a settlement without testing it against the range of potential recoveries: 

“Here, the trial court acknowledged that “in logic” it would have been preferable for it to have been presented with data permitting it to review class counsel’s evaluation of the sufficiency of the settlement, but felt that this was precluded because the supporting information was exchanged in the course of mediation. We disagree with this conclusion for two reasons. First, the fact that the settlement was reached during mediation to which Evidence Code section 1119 applies does not eliminate the court’s obligation to evaluate the terms of the settlement and to ensure that they are fair, adequate and reasonable. If some relevant information is subject to a privilege that the court must respect, other data must be provided that will enable the court to make an independent assessment of the adequacy of the settlement terms. Secondly, the fact that communications were made during the mediation and writings prepared for use in the mediation that are inadmissible and not subject to compulsory production does not mean that the underlying data, not otherwise privileged, is also immune from production. (Evid. Code, § 1120 [“Evidence otherwise admissible or subject to discovery outside of a mediation . . . shall not be or become inadmissible or protected from disclosure solely by reason of its introduction or use in a mediation . . .]; Rojas v. Superior Court (2004) 33 Cal.4th 407, 417; Wimsatt v. Superior Court (2007) 152 Cal.App.4th 137, 157-158.) Foot Locker’s payroll records, for example, if relevant to the quantification of the claims being settled, are subject to discovery and may be introduced in opposition to the settlement even if they were disclosed to class counsel during the mediation, and even if class counsel was shown only a summary or analysis of those records that is not itself subject to production because prepared for use in the mediation.

(Slip op., at pp. 16-17.)

Easy moral:  Give the trial court something to hang its hat on when seeking approval of a settlement.  Sample calculations for claimants would be a good start, coupled with a discussion of how risk impacts a claim calculated at any particular recovery level.

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Petition for Review filed in Johnson v. Glaxosmithkline, Inc.

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Greatsealcal100This blog briefly reported on a new opinion in Johnson v. Glaxosmithkline, Inc. (September 19, 2008).  You can read that post here.  A Petition for Rehearing was filed on October 7, 2008.  It was denied the day it was filed.  On October 14, 2008, the Court of Appeal modified its opinion, without changing the judgment.  In a later post, I guessed (not a stretch) that a Petition for Review was coming.  Last week the expected Petition was filed with the Supreme Court.

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Attending CAOC Committee Meetings and first Board Meeting

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I'm in San Francisco today to attend CAOC's Class Action Committee section meeting and my first CAOC Board of Governor's meeting after becoming a Board member-elect.  It's eye-opening to talk with other class action practitioners from around California and hear about their concerns and experiences.

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Brinker redux in Brinkley v. Public Storage, Inc.

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Greatsealcal100On October 22, 2008, the Supreme Court has GRANTED the Petition for Review in Brinker Restaurant Corporation, et al. v. Superior Court (Hohnbaum).  See this blog's coverage here and here for more information. The calm didn't last long though, as another Division of the Court of Appeal has re-asserted portions of the Brinker holding that were rendered uncitable with the grant of review.

In Brinkley v. Public Storage, Inc. (October 28, 2008), the Court of Appeal (Second Appellate District, Division Three), relying on the same federal court decision used by the Court of Appeal in Brinker, determined that employers need only "provide" meal breaks, not "ensure" that they are taken:

“In fact, the obligation to affirmatively ensure that workers are relieved of all duty is consistent with the rule requiring employers to provide a meal break. (White v. Starbucks Corp. (N.D.Cal. 2007) 497 F.Supp.2d 1080, 1089 (White) [interpreting Cicairos].) In White, the court rejected the plaintiff’s argument under sections 226.7 and 512 that employers “must affirmatively enforce the meal break requirements.” (White, at p. 1088.) The court noted that it would be impossible for employers with large work forces to enforce such meal breaks. (Ibid.) It further stated that “employees would be able to manipulate the process and manufacture claims by skipping breaks or taking breaks of fewer than 30 minutes, entitling them to compensation of one hour of pay for each violation. This cannot have been the intent of the California Legislature, and the court declines to find a rule that would create such perverse and incoherent incentives.” (Id. at p. 1089.) We agree with this analysis.

(Slip op., at pp. 10-11.)  The California Courts website has been difficult to access today, so have patience if you are looking for the full opinion there.

I authored a column, published in the Daily Journal, where I discussed the weakness in the Brinker/White economic analysis of employer and employee incentives.  (A Bad Meal Deal: 'Brinker' Gets the Incentive Question Wrong, Daily Journal (Los Angeles), August 6, 2008.)  The same criticisms apply with equal force.  Here is a brief excerpt of that column:

“The fundamental flaw in Brinker's analysis is that it is premised on false assumptions. The idea that it is "impossible" to control breaks is inconsistent with the observable fact that employers of all sizes control employees in a variety of ways every day. In fact, since S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), "[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired." As one example of such control, employers habitually set hours of work for their employees. Under the analysis supplied by White and adopted by Brinker, a large employer should find it impossible to control when its employees arrive and depart each day. And yet somehow, they do. The primary manner in which they do so is through a combination of positive and negative incentives. An employee who is punctual and performs well will receive favorable reviews, earn raises or qualify for promotions. A habitually tardy employee may ultimately face termination. For most employees, these combined incentives control their behavior. An employer's failure to modify a recalcitrant employee's behavior is the fault of the employer, not evidence of the impossibility of employee control.

As a result of accepting the White conclusions, Brinker misses many obvious incentives that could overwhelm the financial incentive on an employee to work during a meal break. The potential loss of employment is a larger financial incentive on an employee than an additional hour of pay. Rational employees, working for an employer that enforces its meal break policy, will respond to the larger financial incentive of job retention. Similarly, an employer faces an economic incentive to affirmatively relieve all employees of work duties for 30 minutes during shifts of sufficient length. The employer must then determine whether enforcement of policy is the preferred course to paying meal break premiums. In addition, the employer faces the additional, strong incentive to avoid meal break litigation by employees seeking to recover meal break premium payments. These incentives on employers and employees seem sufficient to overwhelm the singular incentive mentioned in Brown and accepted by Brinker.

(A Bad Meal Deal: 'Brinker' Gets the Incentive Question Wrong, Daily Journal (Los Angeles), August 6, 2008.)  If Courts are considering a discussion of economics as a supporting basis for an opinion's analysis, such Courts would be well advised to either offer a complete discussion of the economic forces at work or avoid the topic entirely.  An incomplete economic analysis in Brinker, and now Brinkley, results in conclusions that don't stand up to scrutiny.

It's very disappointing to see the law premised upon a suspect rationale that individuals without an economics background might not notice.  It creates the appearance, whether accurate or not, of outcome-driven decisions.  The integrity of our legal systems requires our citizens to believe that the law is dispassionately interpreted without a pre-determined outcome in mind.  I don't perceive that to be the case here.

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