Matthew Geise bought his wife a new Kindle e-book reader as a gift for Valentine’s Day this year: an expensive present at $469, but that’s the sort of money you spend on your wife as a wealthy software developer in suburban Seattle.
As avid readers and travellers, the Geises were excited by the prospect of being able to carry hundreds of books with them, wherever they went. Amazon.com, the manufacturers of the Kindle, also sold a plastic travel cover to go with the Kindle to prevent damage to the device’s sensitive screen. A thoughtful husband, Mr Geise bought one of those too; and that’s where his troubles began.
After three months, the Kindle protector cracked the screen of the Kindle reader, rendering the expensive device useless. Geise called Amazon for a refund. A customer service supervisor at Amazon acknowledged that such cracking was a “common problem” but said that it wouldn’t be covered by the device’s warranty. Amazon’s solution was that Geise should pay $200 for a replacement Kindle.
Outraged, Geise recently filed a class action lawsuit against Amazon, stating: “Because of the relatively small size of the typical damages, and the modest resources of most consumers, it is unlikely that most Class Members could afford to seek recovery against Amazon on their own. A class action is therefore the only viable, economical and rational means for members of the Class to recover from Amazon for the damages it has caused.”
That paragraph could have been written as a summary conclusion to the December 2008 Civil Justice Commission report, Improving Access to Justice through Collective Actions, which proposed introducing a series of reforms to group actions in the UK legal system – one of which was the introduction of American-style class actions. The Ministry of Justice considered the recommendations of the report for almost a year, and then rejected the report in August 2009. So, why do British consumers deserve less protection than American consumers?
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When asked specifically about the legal position of UK citizens regarding the faulty Kindle cover, a representative of UK Trading Standards said, “The Sale of Goods Act requires all goods be sold fit for purpose. The Kindle cover’s failings are an obvious breach of contract, and would be actionable as such.” But that comes to the heart of the problem: no rational person would launch an expensive individual legal case for the replacement of a £200 product.
Under the present Group Litigation Order arrangements, a hugely complex and difficult process would be required for plaintiffs to ‘opt-in’ to any class action. Essentially, each individual plaintiff must establish similar causation of loss, then actively seek out the action, and convince a court that they can join it. This frequently leads to plaintiffs missing the action.
The report states that group litigation inevitably suffers from a low rate of participation of group members, with most GLO actions having opt-in rates of less than 30% of eligible plaintiffs. UK law firms questioned for the report complained that the sheer task of identifying all group members at the outset was unduly burdensome and that the GLO limitation period created barriers to litigation that some group members never overcame in time. In consumer cases, even when the item involved was expensive, the very low recovery rate per group member put claimants off coming forward, especially when a substantial cost was involved to even participate in an action.
The solution that the report identified was the ‘opt-out’ model. The ‘opt-out’ option, as the name suggests, means that every potential claimant is automatically a party to the action, and claimants must actively divorce themselves from the class if they do not wish to be considered.
Instead of listening to the academic and professional calls for a revised system, the government has rejected the introduction of an ‘opt-out’ class action system for the UK. The government’s preferred way forward, explained by a spokesman for the Ministry of Justice, is to address reform “only where there is a clear evidence of need.” This will be done “on a sector by sector basis” when “relevant sector policy makers” have satisfied themselves that “access to justice can be achieved more cost-effectively and proportionately by collective court-based litigation, rather than through individual claims or by other options, such as enhanced regulatory powers.”
This essentially means that a British Mr Geise would be faced with either acceding to Amazon’s fait accompli (and buying another expensive device), begging for help from Trading Standards or launching a quixotic legal action of indeterminate length and cost. The thousands of other purchasers of the defective cover would have to seek out the UK Geise’s lawsuit, then pay substantial costs to prove to a court that the cover caused the damages to their e-books, before any UK Kindle case even reached the UK courts.
David Greene, a partner at Edwin Coe who regularly deals with GLO cases, explains that while UK lawyers don’t want a full adoption of the American system, “which lacks any rigour of cost,” the current system of UK provision for class-based cases is “clearly inadequate.”
In rejecting the report, the government placed considerable weight on the concerns about a full opt-out model in mass tort claims where the claims are factually complex and with different areas of causation. However, as the Kindle e-books and JJB Sports examples show (see boxout), most group action cases are relatively simple in causation terms. Equally, the option presented in the report was for a hybrid model, with opt-out for simple consumer cases like defective e-books, and an opt-in model for complex mass tort cases, such as the Hillsborough disaster.
Just in case you are reading this article on a defective e-book reader, fear not, for there is a potential, if unorthodox solution. You can participate in the Geise class action in the Washington state courts thanks to the activities of US lawyer Michael Hausfeld.
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When you speak to Michael Hausfeld, you can’t fail to be impressed by a unique quality: he possesses a crusading zeal rare in commercial lawyers. “I believe global wrongs – mass wrongs – require global rights” was one of Hausfeld’s opening gambits during his interview with Client Report. In fact, that’s the motto of Hausfeld LLP.
Despite being synonymous with class action lawsuits, Hausfeld doesn’t like the term. He feels that “class action has a negative connotation, especially in Europe. I actually prefer the term ‘collective redress’.” Still, Hausfeld has made his name from class actions, and says that actions of this type are an “effective means of access to justice on behalf of the collective body of victims.”
Hausfeld has led the way in establishing ‘collective redress’ rights for European plaintiffs in US courts. On the specific issue of British consumer rights, Hausfeld has done more than just talk. His firm, Hausfeld LLP, was instrumental in the landmark decision against the BA/Virgin fuel surcharge cartel. Essentially, it establishes a precedent that UK consumers and other tort plaintiffs can join US class actions and recover damages in US courts, regardless of the jurisdiction they were under when the damage to them occurred.
On the BA case, and the jurisdictional issues involved, Hausfeld is typically bold. “Regardless of where claimants are based, they deserve this collective redress. British Airways and Virgin made £150,000,000 from illegal cartelisation. Why shouldn’t every participant in the market be able to recover?” It’s clear that without Hausfeld, while US claimants would have received redress, the bulk of UK and other European plaintiffs probably would not have. The point applies as much to consumer cases as it does to the cartel-breaking that went on in the BA/Virgin case. The argument is obvious: as the sign on Hausfeld’s door says, global wrongs need global rights.
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Hausfeld is, to be sure, a divisive figure. He is the most frequently mentioned individual on the campaigning blog Overlawyered.com, which has identified Hausfeld as an example of the worst sort of lawyer, and class actions as the kind of lawsuit most open to abuse. Overlawyered’s Stuart Taylor Jnr said that class action lawsuits in particular “benefit and enrich only the lawyers” and exist to “provide ideological power trips” for crusading Americans. “They do victims of wrongdoing little or no good and penalize no human being who has done anything wrong.”
Even within the legal community, Hausfeld is a controversial individual. He was, in his own words, “expelled” from his name partnership in the firm Cohen, Milstein, Sellers, Hausfeld and Toll, for undisclosed reasons. Following his departure, he decamped with a large number of former Cohen Milstein lawyers, cases and clients and used them to establish his own successful boutique practice, Hausfeld LLP.
Equally, not everyone agrees that US-style class actions are a good thing. The combination has made Hausfeld quite the hate figure for many, as a totem of what is seen as a massively arrogant US assault on European jurisprudence. Many feel that a US lawyer using a typically American form of action to impose US cultural and business norms in the UK, Europe and around the world amounts to American imperialism.
Group actions are, in themselves, uncontroversial. The ability to group together large numbers of claims relating to a single issue or company provides an efficient and cost-effective way of settling an issue that would otherwise threaten to clog up the courts for years. But in the United States, where ‘opt-out’, contingency fee-based class actions have been a feature of the legal landscape for decades, such actions have been hailed by some, but blamed by others for fuelling a multibillion-dollar litigation industry.
Critics, notably Overlawyered, have described the class action process in the United States as a ‘toxic cocktail’, in which several elements combine to make litigation risky to defend for companies. As a result, it is argued, many choose to settle class actions, paying out millions of dollars, even if they have little merit.
However, the CJC report was not calling for a full, wholesale adoption of the US model. Several of the elements that exist in the USA to make class actions the ‘toxic cocktail’ simply don’t exist in the UK and Europe. “There are not jury trials for that kind of action, there are not contingency fees, there are no punitive damages,” says Guy Pendell, a partner in the dispute resolution group at Cameron McKenna.
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In rejecting the report, it seems that the UK government has been swayed by the Overlawyered ‘toxic cocktail’ view of class actions. The only concession that the government made as to the report’s conclusions was a bland acknowledgment of the inherent failings of the current system.
However, there is no suggestion in the rejection of the CJC report that the government plans to do anything about introducing any new form of class action, or even reforming the GLO system, which it admits is clunky and unworkable. Thus, the government has acknowledged the problems with the current system while rejecting the solution.
Official spokesmen at the Ministry of Justice were unwilling to go into more depth about the nature of the decision-making process that led to the rejection of the report. However, sources close to the Ministry told Client Report, “We’re within a year of a general election – the fallout from accepting the report could be immense.”
However, there are of course sound business reasons for rejecting US-style class actions. When questioned on this issue, the CBI said, “Our members are very concerned about any moves to import any elements of the US regime which would lead to significant increases in litigation and costs to business.”
In particular, the burden of any new form of class action lawsuit would initially fall on the insurance business, as the defendants of class action suits flocked to their insurers. Inevitably, this would have a knock-on effect on the cost of business insurance, in particular on the cost of D&O insurance, which would trickle down to the consumer. A source for Royal & SunAlliance said: “If the CJC report had been accepted, practically every listed company in the UK would have been under-insured. Our premiums get eye-wateringly high even in European jurisdictions with full class action systems, let alone in the US.”
The CBI directed Client Report to figures it published in response to similar proposals by the Office of Fair Trading in 2007. In the USA, private enforcement of consumer and antitrust cases via class action amounted to 95% of the enforcement activity – in Europe the positions were reversed.
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Those opposed argue that the role of ensuring mass compensation lies with regulators. Our source at the Office of Fair Trading encapsulated this view: “We feel consumers in the UK receive adequate protection from the framework of rights set out in the Sale of Goods Act. Equally, we see the role of private enforcement as to provide compensation for loss, not to punish. Sanctions are the function of the public authority.”
Europe’s regulators, ombudsmen and other public authorities, who cover most areas of consumer commerce and whose task is to take action when there is a breach of regulation, have the opportunity to use their influence to encourage the wrongdoer to make voluntary restitution to third parties. If they do so, the company should earn a lighter sanction from the regulator.
But Hausfeld says none of the firms found guilty of cartel behaviour by the European Commission that he has dealt with have volunteered to compensate their victims. “Their response was ‘if you want me to pay then make me’. That was supposedly the negotiating culture.” This also remains Amazon’s position in the Geise case: if UK consumers want restitution, they are going to have to sue for it.
When asked to respond to the criticisms over the cost to business, Hausfeld responds by pointing out the benefits of class actions to the individual consumer. “Everyone who suffered damage from the cartel had the opportunity to recover damages. Transatlantic air travel has been made cheaper for every individual.” There’s a populist tone to his rhetoric. “Illegal cartels cost European taxpayers around $5 billion a year. It’s like a tax corporations levy on individuals. It’s nothing but theft.” If what Hausfeld is saying is true, then perhaps the threat of class actions should induce firms to compete properly and deal with consumers more fairly, balancing the increased insurance and litigation premiums.
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And it isn’t just Hausfeld who agrees that global wrongs need, if not global rights, some kind of access to justice. David Greene at Edwin Coe, who is advising the British victims of the Madoff fraud in their class actions against everyone from the US regulators to UK high-street banks, explains: “We are left in a situation where we as UK practitioners are advising clients to seek to join class actions in the US courts, as that is the only realistic way to obtain redress. It’s hardly a satisfactory solution.”
Thus, the UK government’s refusal to adopt a sensible, limited, proven system has left UK firms and UK consumers lacking access to domestic justice. The rejection of the CJC report has left UK citizens who are the victims of cartels or faulty consumer goods with only one workable class action system: joining actions through the US courts, an avenue which exists only thanks to the work of Michael Hausfeld. If the government saw problems in the class action model, then the failure to adopt a workable alternative has exposed the UK to all of the negatives it sought to prevent.
The CJC Report
English group actions are currently ‘opt-in’, requiring that claimants must take positive steps in order to participate in the litigation. The CJC recommended that collective claims ought to be able to be brought on either an opt-out (claimants all being part of the legislation unless they choose not to be) or an opt-in basis (where claimants would have to take active steps to participate), but subject to consideration by the court as to which would be the most suitable – this is a model which has been successfully applied in other common law jurisdictions, notably Australia.
The advantage of ‘opt-out’ cases is that they affect the broadest range of plaintiffs. The current ‘opt-in’ model often means plaintiffs fail to materialise, even when a broad class is established. For example, in the recent litigation against JJB Sports, brought by Which? Magazine, JJB Sports were found to have operated a pricefixing cartel, which affected tens of thousands of consumers. JJB agreed to pay compensation to anyone who bought overpriced replica football shirts between 2000 and 2001.
However, despite an intensive media campaign by Which? – including a frontpage splash in The Sun newspaper – take-up for the compensation was low, and the action named just 500 individuals, out of an estimated 50,000 plaintiffs. With the price fixing estimated to have made JJB a million pounds (by selling football shirts overpriced by £20 each) the meagre total amount that they paid in compensation (£18,000) could be seen by some as almost an inducement to cartelise.