America, the land of pioneers, has become known for its innovation. When Thomas Edison invented the light bulb and Neil Armstrong walked on the moon, the spirit of America’s ingenuity changed the world. But, there are a few American ideas that other countries would rather quarantine to our borders – among them, America’s failed experiment with class action lawsuits.

Indeed, the body of evidence against America’s class action lawsuit system is vast, which is why it is so troubling that, today, Europe seems on the verge of adopting a very similar system. In recent months, two Directorates General in the European Commission have forwarded proposals to create a class action system vulnerable to the same type of abuse we face in the U.S.

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The class action lawsuit was created in the 1960s, as the U.S. federal courts attempted to make the American legal system more accessible and less expensive for consumers by creating a legal mechanism that allowed many plaintiffs with similar claims to file one collective lawsuit.

Class action lawsuits held great promise of benefit for the broad society. For business, it seemed practical to address identical cases at one time, saving years and millions in added legal costs. Consumers would have access to high quality legal counsel in a collective manner without up-front costs. And the plaintiffs’ lawyers would get paid a share of the winnings on contingency fee if they prevailed in the case.

But, in the ensuing forty years, America’s experiment with the class action lawsuit has belly flopped. Of the three parties involved, trial lawyers have benefitted substantially, while consumers and businesses pay the price for frequent abuse of the system.

Instead of creating efficiencies in the lawsuit process, class actions have increasingly been used as a weapon to extract mega settlements from businesses that often must decide between the risky “bet the company” path of a trial with a possible crippling jury award or agreeing to settle for a certain—and certainly large—amount.

Consumers also have not reaped the benefits first envisioned in class action lawsuits either. In fact, 74 percent of Americans believed the class action system drives up prices and should be restrained (Penn, Schoen & Berland Associates). We see the impact of those costs not only in American bank accounts but on a macroeconomic scale as well. Class actions are one of the primary reasons tort costs amount to 1.9 percent of the GDP in the United States as compared to 0.5-0.7 percent in other OECD countries.

Lawyers, however, make out very well. They receive much of the money consumers pour into the class action system. Often, plaintiffs’ lawyers arrange settlements that provide for millions of dollars in lawyers’ fees and leave the plaintiffs themselves with relatively small awards, or in some cases, coupons for products or future services from the very company by which they were supposedly wronged.

For example, a class action suit was filed against the manufacturers of BlueTooth headsets, alleging that they should have warned that high volume could result in hearing loss. The plaintiffs’ lawyers negotiated a settlement in February 2009 by which the defendant companies have to pay $1.2 million to issue warnings about hearing loss, $100,000 to the charities of the plaintiffs’ lawyers’ choice, and up to $850,000 to the plaintiffs’ lawyers themselves. However, the consumers, on whose behalf the suit was filed in the first place, got nothing at all. Continued...