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Policy: Law

Examiner Editorial: Time to put some limits on class-action frequent filers

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Opinion,Editorial,Campaign Finance,Waste and Fraud,Class-action lawsuits,Law,Washington Examiner,Magazine

Combine the prospect of making a fortune with an insidious mix of political influence and campaign finance, and the results too often are abuses of the federal and state court systems that are much too common in class-action securities litigation. A new study from the U.S. Chamber Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, on “frequent filers” shines much-needed light on a serious problem that cheats plaintiffs of just compensation while enriching trial lawyers and encouraging excessive and unnecessary litigation.

Frequent filers are trial lawyers who repeatedly file class-action securities lawsuits, often against Fortune 500 corporations, knowing that the mere threat of extended litigation and negative public relations is frequently sufficient to generate out-of-court settlements, including extremely lucrative legal fees. At the federal level, these lawsuits are often filed on behalf of public employee and union pension and retirement funds seeking to stay ahead of exploding benefit obligations. At the state level, the litigation more often arises from merger and acquisitions and shareholder derivative issues.

The problem is especially acute at the state level, according to ILR, because "states typically do not limit the number of lawsuits that individual plaintiffs are allowed to file. As a result, plaintiffs’ lawyers can call upon the same individuals time and again as plaintiffs in their lawsuits. Some individuals have filed 30, 40, or even 50 shareholder lawsuits. Other plaintiffs’ lawyers have themselves served as repeat plaintiffs or named close family members as plaintiffs.”

The ILR study looked at two states — Mississippi and Louisiana — in which the problem has been especially serious, thanks to the lack of filing limits and because campaign contributions to officials can generate new business for a politically active plaintiffs' firm. “This pay-to-play culture gives those attorneys an advantage in being selected as counsel in the biggest and highest profile cases,” according to the ILR. Such cases are usually where the largest legal fees are awarded.

The ILR study emphasized two key problems associated with frequent filers. In the first, plaintiffs are encouraged to keep a close eye on trial lawyers representing them because they “often collect substantial contingency fees that come directly out of the recovery to shareholders. If the named plaintiffs do not carefully oversee fees, the ultimate recovery to shareholders is reduced.”

Second, the incentive to file lawsuits in the expectation of an out-of-court settlement is an ever-present factor whenever “class action attorneys are given free rein to bring extortionate suits which corporations feel compelled to settle for nuisance value,” ILR said. Shareholders and consumers always end up bearing the ultimate costs.

Reforms recommended by ILR include disclosure of all campaign contributions by named counsel to officials connected with the plaintiffs. Taxpayers should know, for example, when an attorney general selects a large donor’s law firm to represent the state employee pension system in class-action litigation. Plaintiffs should also be required to meet a significant ownership threshold in securities cases, and officials should impose reasonable annual caps on frequent filers.

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