Have you ever received a notice of a class action lawsuit, or seen an announcement about one that might apply to you? If so, then you will identify with my story…
Classify this as a personal interest piece. On one level, it’s fluff. But in the process of telling a short story, we review the mechanisms of a class action lawsuit—at least from the perspective of a solicited class-member litigant. At least as it seems to a Wild Duck.
Who Joins Class Actions?
I respond to about ⅓ of class actions to which I am potentially eligible. Generally, I fill out paperwork only if an action is related to individual stocks that I purchased as an investment. For about 10% of companies in which I have had equity, someone down the line discovers a reason that we investors have been wronged. Perhaps it was something that the stock broker did–or perhaps it was something that the company failed to do. Either way, when a lawyer comes knocking at your door, informing you that you have been wronged, why argue?
Of course, a large settlement fund is a motivator, but what about the paperwork—isn’t it time consuming and complex? Yes, but ironically, that burden might provide further incentive to sign on, when you consider that that it often eliminates more than half of the prospective class participants. More about the qualification barrier later. 
At one time, I was a frequent stock trader. Looking back on that phase of my life, I believe that the volume of my trades reflected investment immaturity. I have participated in lawsuits regarding brief equity positions in MediaVision, DoubleClick and Lernout & Hauspie. I collected over $100,000 on the Lernout and Hauspie action, much more than my investment—and despite the fact that I made good money on that investment. 
But I rarely participate in a consumer action regarding a retail purchase or one that is promoted in a TV commercial or newspaper ad: Did your doctor give you a bad drug? Do you wake up with ringing in your ears. Did your bank finance a house even though you probably should never have applied for a mortgage?… Why not sue them?!
It’s not that I am disquieted by the new model for drumming up victim-clients (although I am!). And it’s not that I feel guilty about failing to accept personal responsibility—weighing risk & benefit and accepting the consequences of my action. (In most cases, this is precisely the cause of product liability litigation rather than negligence on the part of a vendor or manufacturer)… It’s just that I doubt that the burden of joining and the hassle of follow-up will yield a meaningful payout.
But five years ago, I broke that rule of thumb and acted on a PSA published in The Wall Street Journal and elsewhere. It sought members for a class action against De Beers, the global diamond cartel and others associated with the wholesale diamond industry. They were accused of colluding for the purpose of manipulating the retail market. The announcement offered class status to anyone who had a receipt from a diamond merchant or retailer related to a purchase over the course of two decades.
I have purchased only one gem in my life; a diamond to soften my girl’s heart and seal our engagement. That was 16 years ago.
When I read about the class action, it seemed likely that I would meet the criteria. But could it be worth the time and effort to participate? The announcement boasted of large settlement to which the diamond importers had already agreed. It just needed court approval. But, the eventual payout to individual class members depends on many other factors, and so I did a quick calculation based on assumptions and estimates:
- How many people bought diamonds during the class period and know where to find a receipt?
- How many would actually qualify or even bother to complete the paperwork?
- How many will be turned away or discouraged by the ludicrous trip wires? 
- How does the cost of my diamond compare with the mean cost of other claimants?
- How much would lawyers take as their cut in cooking up this scheme?
My first assessment suggested that participating in a settlement hardly seemed worthwhile. But upon consideration, I decided that a meaningful payout was unlikely, but the effort to make a claim might be negligible:
- I had a receipt for my purchase
- It was a big purchase
- The qualification routine appeared to be simple and quick
In fact, this was an unusual case. The paperwork, at least initially, was trivial. I filled out a one page form and attached my receipt. The rules required a record of the GIA certification. I still had it. In fact, I kept it with the receipt. Altogether, I spent 3 minutes complying with the submission criteria and another 2 to address and post an envelope.
Although the registration process was quick and easy, I expected a deluge of further mailings asking for more information or explaining the grounds of disqualification. Instead, I received nothing for years. Not even an email. I forgot about the whole thing. Even if it were successful, the class could include tens of millions of consumers. I figured that the settlement would amount to the value of a postage stamp at best.
Now, after 5 years (and 16 years since my diamond purchase), and without any interim communication, I have received a letter and settlement payout: “Dear Ellery: Your claim was reviewed and approved. Your settlement check is enclosed: $187.54.”
It certainly won’t pay the mortgage, but still, it is nice to receive a 1.5% rebate after 16 years! If I had invested the cash at 6% rather than purchasing a diamond, I would have doubled my money. But perhaps it is better to have a diamond, a wife and $187.54.
More About Class Actions
It is not necessary to hire an attorney nor even meet with one to be a member of a class action and to collect from the settlement kitty. In fact, typically, the only individuals who hire a lawyer (those who are both eligible and who suffered injury or injustice), are the few people who wish to go it alone. That is, they don’t feel that the class will pay enough for their particular situation and so they risk launching their own pursuit of compensatory damages.
Class actions are rarely initiated by aggrieved individuals. More often, they are the brain child of law firms who hire legions of paralegals to comb the media, fishing for a cause. Once they identify a “Should have known” situation perpetrated by an evil doer with deep pockets, they drum up clients, often going to great lengths to find them.
Some would argue that this model serves a noble purpose, because the potential for punishment and settlements discourages manufacturers and vendors from misrepresentation, or cutting corners especially as it relates to safety. That argument has merit, and it is not my intent to dispute it. But the lawyers still manage to approach these matters with ambulance-chasing methods for which they are often despised.
Perhaps one of the most despicable aspects of a class action is that training and funds are rarely directed at client qualification and communication. These roles are relegated to a call center. The individuals who apply rules that were blessed by a judge somewhere, have no access to an empowered and concerned administrator. They also have little guidance from the court, the bank or the company paying damages. So they typically turn down the application of every class participant at least once.
 As a member and student of many class actions, I have learned a something about the game of ‘member substantiation’. It is my experience that class attorney’s always turn down an applicant’s proof of class membership on the first few submissions. I have a hunch that it is just to pump up the value of a split between a smaller group.
For example, in the case of Lernout & Hasupie, a spectacular collapse in equity value after it was alleged that the founders lied about massive sales in Asia, I succeeded in collecting a very large settlement (much larger than my investment). Yet, my father, my brother and even the founders of a company acquired by L&H were all turned down. For one reason or another, they were told that they failed to qualify—even though their status was the same as mine. I pushed hard to prove my qualifications, and it paid off.
 I did not lie to receive more than my total investment. Rather, the grossly disproportionate payout was the result of a ridiculous formula for awarding payouts and an abominable inspection/arbitration protocol which eliminated almost all other investors, often for inexplicable reasons.
 I did not sign on for class actions against the phone company or the airlines. They were expected to yield a very small coupon and it would be difficult to demonstrate eligibility. Perhaps more importantly, I didn’t feel wronged. (OK, so I am a hypocrite).
Ellery Davies blogs on law & public policy. He is co-chair of The Cryptocurrency Standards Association,
CEO of Vanquish Labs, host & MC at The Bitcoin Event, and inventor of Blind Signaling and Response.