Class Act

Congress takes a vote on reforming class-action litigation procedures.
Magazine Contributor
3 min read

This story appears in the October 2002 issue of Entrepreneur. Subscribe »

Business advocates hope the U.S. Senate follows the lead of the House and passes a bill restricting class-action litigation. That would be good news for small businesses, which can get sucked into lawsuits just because they're located where lawyers expect to find a sympathetic court.

For some lawyers, filing and trying class-action lawsuits has become a lucrative business. After identifying some consumer problem, typically in an industry that does business nationwide, they shop for a sympathetic venue before sending out notices to people who might have been affected. A class-action lawsuit is easier to win in some states than others, and some counties are known for judges and juries with a penchant for multimillion-dollar judgments. The Manhattan Institute, a conservative think tank based in , recently reported that the Madison County courthouse in Edwardsville, , sees more class-action lawsuits than any other except Los Angeles and Chicago. The county had two filed in 1998, 43 last year, and, if the trend continues, will have 78 this year.

So if the problem is a shampoo that makes heads itch, the lawyers assembling a class-action lawsuit might find a pharmacy in the sympathetic county that sells the shampoo, then scout out a customer who's experienced the itching to become the lead plaintiff. The lawsuit names the local pharmacy as a defendant along with the manufacturer. Once it's too late to move the case, the local pharmacy is dropped from the lawsuit, but by then its owner may have endured a year or more of legal wrangling.

H.R. 2341, passed in March as the Class Action Fairness Act, would make it much easier to move class-action lawsuits. If any of the defendants in an interstate class-action suit live in a different state from any member of the plaintiff group, the suit could be removed to the federal courts. This would discourage venue-shopping and increase the chances that the defendant is the company responsible for the problem, rather than a convenient local retailer

The would also limit how much of a jury award lawyers could claim. Typically, the lawyers end up with millions of dollars, while each consumer in the suit gets a few dollars or some coupons. For instance, in a recent class-action lawsuit against Blockbuster Video over excessive late fees, eligible customers received certificates worth $9 to $20 in free rentals or nonfood items. The trial lawyers got $9.25 million.

The new law would order that all settlement notices be written in plain English, call for greater court scrutiny of noncash settlements, prohibit settlements that result in a net loss for members of the plaintiff group, and guarantee that all members of the class receive reasonable and proportional payments.

The bill faces a steeper challenge in the Senate, now narrowly controlled by Democrats. But to the extent that class-action lawsuits are being used less to address real problems and more to generate revenue for a few overzealous lawyers, it's time to rein them in.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.


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