In 2009, the notorious securities litigation firm Robbins Geller brought a shareholder lawsuit against the Boeing Co., accusing its management of illegal misrepresentations based on the word of a confidential witness inside the company.
It was the sort of case that routinely costs companies millions of dollars in cash and stock value. Most companies settle such cases to make them go away, but Boeing did not. Its attorneys eventually deposed the confidential witness, only to discover that he was actually just a contractor in a job unrelated to the case who hadn't even worked for Boeing until months after the period in question. The witness “repudiated each of the allegations” in the Robbins Geller complaint, according to court papers.
The Wall Street Journal recently highlighted the case because this firm, formed by the now-disbarred and once-imprisoned William Lerach (who reaped billions from similar lawsuits) had rare Rule 11 sanctions imposed upon it two weeks ago and must now pay Boeing's legal costs. In his Aug. 21 sanctions order, U.S. District Judge Ruben Castillo wrote that the firm had committed “repeated misconduct throughout this litigation.”
The case demonstrates how class-action investor litigation is often used as a form of legal extortion: “Settle now and we'll go away.” According to a recent study by the U.S. Chamber Institute for Legal Reform, such cases on aggregate cost shareholders more than six times as much wealth as they generate for plaintiffs.
It is appropriate to see the losing law firm pay here, but such sanctions are unfortunately rare. A broader loser-pays system could help curb abusive class-action investor lawsuits and protect shareholder wealth. In May, Delaware's Supreme Court issued an opinion that corporations, many of which are based in that state, can protect themselves from abusive lawsuits by writing loser-pays rules into their corporate bylaws. Democrats failed in their first attempt to overturn this legislatively. In the meantime, the ruling provides the best opportunity to curb abusive lawsuits because it obviates the need for congressional action.
"Loser pays" is not a panacea. Where it has been tried in the United States, judges have applied it unevenly, letting plaintiffs off the hook but imposing it consistently on losing defendants. Moreover, many plaintiffs simply cannot pay if they lose. Several states have adopted laws that make losers pay only when a court determines such suits to be frivolous.
But if "loser-pays" can work anywhere, it can work as a requirement on fellow owners of a company. A broader alternative might be the Lawsuit Abuse Reduction Act, now filed in the House, which would make Rule 11 sanctions like the ones in the Boeing case much more common. Among other things, it would prevent attorneys from avoiding punishment by simply withdrawing their case after their bluff is called.
But with Congress unlikely to act for now, corporate loser-pays rules might be a good step toward preventing abusive lawsuits and protecting Americans' retirement savings from unscrupulous trial lawyers like the ones at Robbins Geller.