Last week, ProPublica.org, the online investigative journal, published an article about a current class action lawsuit filed against Lowe's for allegedly selling defective drywall originally manufactured in China.

What caught my eye is the article's headline, "Proposed Lowe's Drywall Settlement Offers Small Payouts to Victims, Big Fees for Attorneys."

This article has been circulated on Twitter, with one person commenting, "This is why people hate lawyers. And understandably so."

Lawyers certainly do have a bad reputation, especially for being greedy. So this seems like a good chance to delve into the world of class action law suits and see whether the Lowe's cases is a good example of attorney greed in action.

The Case In Question

According to the ProPublica story, Lowe's has agreed to tentatively settle the law suit and pay customers $6.5 million, while the lawyers will collect $2.1 million.

The $6.5 million settlement would pay relatively small amounts to individuals who had the tainted drywall in their homes. But the handful of attorneys who quietly negotiated the deal will receive a separate payment of $2.1 million. Victims will be compensated mostly in Lowe’s gift cards, offered in the amounts of $50, $250 or $2,000, depending on the level of documentation they can provide. Those who can prove they’ve suffered more than $2,000 in damages may also receive up to $2,500 in cash.

Customers would not necessarily receive full refunds for the defective product they purchased. For example, someone who spent $10,000 on drywall would still only qualify for a maximum of $4,500 in cash and gift cards.

Not only will purchasers not be fully compensated, some plaintiffs may receive as little as $50, paid in Lowe's gift certificates.

Under the proposed Georgia settlement, people who bought defective drywall from Lowe’s are eligible for three levels of compensation, depending on their record keeping and proof of damage to their home or health.

To receive the maximum amount —a $2,000 gift card plus $2,500 in cash — they need a receipt or a credit card statement showing that they bought drywall at Lowe’s. They must also prove through an independent third party that they have more than $2,000 of damage to their home or more than $2,000 in medical bills.

It is not clear what qualifies as “independent” proof. It’s also unclear whether they must already have spent money on remediation or doctor’s bills, or if they can show they’ll need to spend it in the future to remedy the problem.

Customers who have a receipt but can’t supply independent proof of damages are eligible for a maximum of $250 in Lowe’s gift cards.

Those who have neither proof of damages nor proof of purchase, but claim their drywall was bought at Lowe’s, are eligible for a $50 gift card if a settlement administrator hired by the plaintiffs determines that those claims are valid.

There does seem to be something disproportionate about lawyers walking away with $2.1 million and some of their clients getting only $50. If this was all there is to this story, I would be hating the lawyers too. But there is a whole lot more going on. 

The Class Action Lawsuit

The Lowe's case seems like a very appropriate and typical use of a class action lawsuit. Lawsuits work best when there is an identifiable victim who suffered a great-enough loss to warrant suing the person or entity that is alleged to have caused the loss. 

But what do you do when a company makes millions of dollars by doing a relatively small amount of harm to a large number of people? For example, what do you when a credit card company miscalculates interest on thousands of card holders, or a publicly-held corporation misstates a key financial term, causing thousands of stockholders to lose a small percentage of their investment? The alleged wrongdoer can make millions knowing that the individual victims are extremely unlikely to go through the trouble and expense of trying to recover a few hundreds or thousands of dollars.

What do you do? You allow all the victims to be represented together or in groups. That's what class actions are designed to do.

Class actions lawsuits are in many ways similar to personal injury cases that are handled on a percentage or contingency basis. The client doesn't pay the lawyers anything unless the lawyer gets some money in a settlement or by winning in a trial. The lawyer bears the risk of losing and pays all the expenses of taking the cases to trial.

These expenses can easily reach five figures, especially if the lawyer needs to retain experts to help prove the case. Expert witnesses don't work for free; they get paid by the hour and lawyers have to pay those fees whether or not they get a dime from a case. In exchange for taking this risk, lawyers will generally take between 25 percent and 40 percent of the total amount recovered. When dealing with an individual client, the exact percentage is negotiated at the beginning of the representation between the attorney and client. Most states require that this percentage be stated in writing as part of the initial contract between the lawyer and the client.

In class action cases, the attorney's percentage is handled differently.  There may not be an individual contract between each lawyer and all of their clients. Even if there is, the judge presiding over the case must approve the lawyer's compensation.  Here, the judge will need to decide whether it's appropriate for the lawyers to receive a bit less than a quarter of the total amounts paid by Lowe's ($2.1 million of $8.6 million).

So are the lawyers being greedy? Are they fleecing the people who were potentially fleeced by Lowe's?

The answer in large part depends on the strength of the case against Lowe's. And the ProPublico article suggests that, for at least some of the people suing Lowe's, they have a very weak case. Generally speaking, if you want to sue someone and succeed, you need to prove that they caused your injury—basically, that they harmed you. You also need to show to a reasonable certainty the amount of harm you suffered. Thus, if you were hurt in a car accident, you need to be able to identify the other car. You would have a hard time winning if you could only identify the other car as a blue Chevrolet.

But that is the kind of claim some of the plaintiffs in the Lowe's case are making. The lawsuit seems to allege that drywall causes medical issues, but the lawyer for the people suing Lowe's admits that his lead client can't establish who manufactured the drywall.

Barrett, [the attorney for the plaintiffs] said the drywall that the lead plaintiff in his case bought from Lowe’s has no markings to signify its origin. 

In other words, the lawyer representing the folks suing Lowe's says that he doesn't know and can't prove where the drywall came from. Lowe's denies that any of its suppliers bought tainted Chinese drywall, and it appears that plaintiff's lawyer has no evidence to the contrary.

This is, to say the least, not a very strong case to take to a jury. This may be why Barrett may be willing to settle for less than he otherwise might want to. It's also possible that some of the confusion in the Lowe's case is the result of the competition for clients between different law firms. The article describes more than one lawsuit. And I wouldn't at all be surprised if Lowe's was trying to settle some of the weakest cases in an effort to undermine some of the others.

In addition, there seem to be other problems with at least some of the cases against Lowe's. Specifically, some of the people who are suing Lowe's dont have very good evidence that they even bought drywall at Lowe's. For people who have no such evidence—no receipt, no nothing, just their claim that they bought drywall at Lowe's—they get $50. In other words, as a courtesy Lowe's is willing to send them a $50 gift card even though it's not at all clear that they bought drywall at Lowe's. For people who clearly did by drywall from Lowe's, their payment will depend on how much they bought and whether they can how at least $2,000 in damage caused by the drywall.

Is $4,500 too low of a limit? Should people be able to get more than that given that replacing drywall can be very expensive? Perhaps. That's one of the things that judge needs to decide when determining whether this settlement is fair. 

I don't know enough details about this case to evaluate the $4,500 figure. But I do know that the settlement amount has to be less, perhaps a lot less than what people would get if they had to prove their case to a jury. After all, this settlement just requires people to show that they bought the drywall from Lowes. They don't need to go through the time and expense to prove at trial that the specific drywall they purchased was defective. And the settlement allows them to avoid having to show where their drywall was manufactured.  

Are Attorney's Fees Excessive

This brings us to the question of the attorney's fees.  Are they excessive?  Again, this is for the judge to determine. My experience as a lawyer was that most judges could have done a much better job of scrutinizing attorney's fees in class action cases.  Judges tend to mechanically treat these cases as if they were individual contingency fee cases. Too often, the unspoken rationale for judges seems to be that, if a 25% share is fair in a contingency fee case for one client, that's also a fair percentage for representing 100 clients. Thirty years ago this view may have been justifiable, but not today.

In an Internet age, it's much easier and cheaper for a lawyer handling a class action case to sign up one additional client. Likewise, technology has dramatically decreased the lawyer's costs for signing up one additional client. Thus, it's almost as easy for a lawyer to represent 80 clients as 90 or 100 or more.  The are of course some additional costs associated with representing larger numbers of clients, but those additional costs are much less than the additional fees approved by most judges. Those additional costs generally don't approach the 25% attorney fee that has been tentatively negotiated. I am therefore inclined to believe that here a $2.1 million attorneys' fees award would be excessive.

What does this mean for you when you are notified that you may be a part of a class action law suit? if you are likely to receive only a small payment, it's much easier for you to just join the class and wait to see how much, if anything, you will get. It probably will be a small sum. But if you think you may be able to get more because you were harmed more than most people, you should strongly consider opting out of the class action law suit and filing one of your own.

Posted by Gideon on 08/15 at 11:06 AM
Categories: Attorney Fees | Categories: Class Action Cases | Permalink