Jacob Sullum

I did not realize I had sued Citibank until I received my latest Visa bill. The statement includes a credit of 73 cents labeled "SCHWARTZ SETTLEMENT REFUND."

It turns out the money is my share of the $18 million that Citibank put up to settle a class action lawsuit arguing that the bank had violated the Truth in Lending Act by counting its customers' payments as late if they arrived after 10 a.m. on the due date. In theory, the 73 cents I got compensates for late fees I should not have been charged.

But Citibank says calculating each customer's overpayment was impractical, so it must have used some sort of guesstimate. In any event, the typical refund was less than a dollar. The lawyers got $9 million, later reduced to a mere $7.2 million.

Since there's nothing obviously fraudulent about requiring payments by 10 a.m. rather than 1 p.m. (the new deadline Citibank agreed to under the settlement), this looks to me like another shakedown in which a company pays off lawyers to avoid the expense and risk of a trial.

Even if there was merit to the complaint about Citibank's late fees, it's hard to see the utility in an arrangement that lets lawyers pocket $7.2 million while giving plaintiffs essentially nothing.

That sort of deal is all too common in class action lawsuits. The attorneys who file them can walk away with huge rewards while their ostensible clients get coupons worth a few bucks or checks so small they're not worth cashing.

A few years ago, the Blockbuster video chain settled a class action that accused it of charging inappropriate late fees. Each customer who signed up got free movie rentals and discount coupons worth $18 at most; the lawyers got $9.3 million. In a 2002 settlement of two lawsuits challenging its shipping and handling charges, the Columbia House record club agreed to give each class member a discount voucher for one CD and pay lawyers more than $5 million.

Despite such perverse outcomes, the Association of Trial Lawyers of America (ATLA) insists there is nothing wrong with class actions that needs fixing. ATLA President David S. Casey Jr. claims a new study shows "the system is working correctly."

Not quite. The study, which appears in the premiere issue of the Journal of Empirical Legal Studies, examines fees and client recoveries in 370 class actions recorded in court decisions from 1993 to 2002. "Contrary to popular belief," write the authors, Cornell law professor Theodore Eisenberg and NYU law professor Geoffrey P. Miller, "we find no robust evidence that either recoveries for plaintiffs or fees for their attorneys as a percentage of the class recovery increased."

Jacob Sullum

Jacob Sullum is a senior editor at Reason magazine and a contributing columnist on Townhall.com.
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