By all accounts, consumer class action filings have dramatically increased over the past few years. And for every class action that gets filed, there are dozens, if not hundreds, of threatened claims. Most threatened claims are confidentially settled individually on an out-of-court basis, with little regard to the strength or weakness of the claims being asserted. The increased number of demand letters and lawsuits, coupled with an increasing reluctance of companies to defend them, has resulted in settlement inflation. Claims of dubious validity often receive individual settlements in amounts that likely would have raised eyebrows several years ago.
The sheer number of early settlements has created a feeding frenzy among the plaintiff’s bar. Individual lawyers are peeling away from their existing law firms to form new firms to capitalize on relatively easy and often plum financial paydays. The proliferation of aggressive plaintiff attorneys increases the number of demands and suits, further increasing the number and size of settlements, and around and around we go.
With so many new—and often inexperienced—plaintiff lawyers involved in the action and with only so many viable legal claims to go around, we have also seen a significant increase in the number of legal demands and filed lawsuits that may be characterized as frivolous, baseless, or pursued in bad faith. Baseless claims are those asserted without adequate due diligence or pursued in the absence of sufficient legal or factual support. Baseless claims rely on the leverage of defense costs—that is, the tradeoff between settling a weak claim rather than incurring costs to defeat it.
While settling a baseless claim may allow a targeted company to avoid nuisance and defense costs, such settlements contribute to the current environment of settlement inflation. Moreover, because such cases are almost always settled individually, there is no general release as to products or practices impacting individuals other than the one represented by the plaintiff’s counsel de jour. Tail liability remains until products are off store shelves and lengthy statutes of limitations expire. Some companies that have paid individual settlements have found themselves soon facing the same claims from an entirely different plaintiff’s law firm. And word can travel, potentially giving the company a reputation as an easy mark.
Aggressively defending against baseless claims can send a different message—namely, that there is no easy money to be had and, if a plaintiff files suit, there is no easy offramp for settlement. A plaintiff and her counsel will have to think twice about threatening or filing weak claims against a company with a reputation for fighting, as the plaintiff and her counsel will have to be prepared to litigate and fund the case for the long haul. A lawyer may balk when faced with the prospect of working hundreds of hours and incurring hundreds of thousands of dollars in expert fees to pursue a case they know they are unlikely to win.
Of course, individual settlements are an important option—and an aggressive defense may not always be the right approach—but when it is time to fight, a defendant is not without options. Let’s take a look at some of the tools available.
Malicious Prosecution
A malicious prosecution claim is a proverbial sledgehammer in the toolchest of a company that has already successfully defeated a baseless claim. It can be a blunt, heavy, but reliable tool. While the law may vary among states, an action for malicious prosecution generally has four elements: 1) the underlying action was pursued without objective justification, 2) the claim was pursued with subjective malice, 3) the underlying action was resolved in the defendant’s favor, and 4) the defendant suffered damages as a result, usually in the form of the fees and costs defending the action. Liability for malicious prosecution can extend not only to the plaintiff but also to his or her lawyer.
Often a threshold determination as to the viability of a malicious prosecution claim is whether the underlying action was resolved in the underlying defendant’s favor. A favorable termination requires a favorable resolution of the lawsuit in its entirety, not just a single claim in the lawsuit. If the underlying plaintiff succeeds on any of his claims, the malicious prosecution action cannot be maintained. Nor does a favorable termination occur simply because a defendant prevailed in an underlying action. If the termination does not relate to the merits, it may not support a subsequent action for malicious prosecution.
In a well-publicized case, a well-known energy drink company successfully pursued a malicious prosecution claim when, in successfully defeating the underlying suit, it uncovered that the named plaintiff had been recruited by her cousin, who worked for a law firm with close connections to her counsel, she purchased the product specifically to file a lawsuit, and she had backdated her retainer agreement with her counsel to try and cover the timing and nature of her engagement, product purchase, and motivations to file suit. The malicious prosecution claim ultimately resulted in the entry of a favorable judgment and included an award of fees incurred by the company successfully defending the underlying case.
Of course, one downside to a claim for malicious prosecution is the need to defend—and defeat—the underlying claim through termination and in its entirety. This could entail years of litigation fees and costs. On the other hand, successfully defeating a baseless claim in the underlying matter will likely result in a highly developed record, with extensive discovery, documents and legal research to support a follow-up suit for malicious prosecution. Evidence supporting a malicious prosecution claim might include company declarations demonstrating that the underlying suit was premised on demonstrably false factual allegations, that the plaintiff’s lawyers failed to adequately vet the claims and the plaintiff, and expert testimony. At the end of the day, it will be up to the plaintiff in the malicious prosecution suit to convince a jury that it is more likely than not the case that the defendant maliciously pursued an unfounded case.
F.R.C.P. Rule 11
The baselessness of some complaints, motions, or other papers filed in court is readily apparent. In such situations, it hardly seems reasonable, justified or fair to require a party to fully adjudicate the entire underlying case to conclusion and only then file a malicious prosecution action to make themselves whole. Enter Rule 11 of the Federal Rules of Civil Procedure: If a malicious prosecution claim is a proverbial sledgehammer in the baseless claim toolchest, Rule 11 may be the utility knife. Rule 11 can be a handy and effective tool, though for the reasons below, it is best tailored for specific tasks and may not be the best choice for heavy duty.
Rule 11 requires every pleading, motion, and paper filed with the court to be signed by the attorney who is presenting it. In signing the documents, the attorney is attesting that the document is not being presented for any improper purpose, such as to harass, delay or needlessly increase the cost of litigation.
Rule 11 does not require that the entire complaint be baseless to support an award of sanctions. Every paper or pleading signed by an attorney and presented to the court is subject to Rule 11. While this would certainly include an entire complaint (and any claim or allegation in the complaint), it could also encompass a frivolous motion, argument or declaration filed in court. Nor does Rule 11 require a favorable termination prior to bringing a Rule 11 sanctions motion. The court can find a Rule 11 violation at any stage of a case. Rule 11 mandates that courts “shall impose” an “appropriate sanction” for violations of Rule 11. The court may impose sanctions on a party, an individual attorney, or a law firm. Sanctions can range from striking the offending court filing, referring the matter to disciplinary authorities, such as the state bar, imposing fines or penalties, or an award of attorneys’ fees and expenses to the other side.
While Rule 11 has several advantages to a malicious prosecution claim, there are also several drawbacks. First, Rule 11 awards are generally in an amount only to deter improper conduct, not to make a wronged party whole. Thus, unlike a malicious prosecution action where a victory would likely result in an award of all damages flowing from the defense of the underlying suit, a Rule 11 sanction could be orders of magnitude smaller than the actual financial harm caused. Second, a Rule 11 motion must be prepared and filed “separately from any other motion” and “describe the specific conduct” in detail that violates the Rule. Before filing a Rule 11 motion, the filing party must serve the detailed motion on the challenged party and provide 21 days to correct or withdraw the challenged claim. If the challenged claim is withdrawn, no remedy will lie. In short, Rule 11 requires a prosecuting party to put together the entirety of the Rule 11 motion and serve it on the other side, and if the other side withdraws the claim within 21 days, the motion is mooted.
RICO
Consumer class action lawsuits are often “attorney-driven;” an attorney comes up with a theory about how a consumer product is allegedly mislabeled and then goes looking for someone to be the plaintiff. For example, an attorney may send dozens of packaged goods to an analytical laboratory to test whether the products actually meet all the “specs” in the Nutrition Facts panel. If the lab finds a deficiency, the attorney then needs to find someone who not only purchased the product but is willing to serve as the plaintiff.
Finding adequate and willing plaintiffs can slow down the lucrative business of firing off dozens or hundreds of settlement demand letters to companies. Unfortunately, this may tempt certain attorneys to cut corners. For example, rather than hunt for a legitimate plaintiff who had previously purchased the product, an unscrupulous attorney may be tempted to manufacture a lawsuit by directing someone to go buy the targeted product or by using a “client” who never actually purchased the product at all.
The Racketeer Influenced and Corrupt Organizations Act—better known as RICO—has been used to dismantle this type of unscrupulous “litigation mill.” RICO makes it illegal for any person to conduct or participate in the affairs of any enterprise through a pattern of racketeering activity. Using the wires (electronic transmission or communications) or U.S. mail to defraud someone is a form of racketeering activity. If an unscrupulous attorney is running a litigation mill through the use of trumped-up, fake “victims,” the attorney is almost certainly engaging in wire fraud or mail fraud—i.e., using the wires or mail in a scheme to obtain payouts on false pretenses.
For example, in one recent case, a jury found a law firm liable under RICO for operating a scheme that involved sending thousands of letters to small retail stores claiming that the stores were unlawfully selling certain male sexual enhancement pills. The letters typically threatened to sue for more than $100,000 if the store did not pay a settlement of around $10,000-$15,000. At trial, an insider witness testified that a partner at the law firm had come up with the idea of creating a new sexual enhancement company and product so that the new company could serve as the “victim” in the thousands of demand letters to the small retail stores (claiming that the stores were competing unlawfully with the “victim” company). The jury found that the law firm had violated RICO and ordered the law firm to pay the plaintiffs more than $900,000 in damages and attorneys’ fees. The case is on appeal.
While a RICO counterclaim may be the “nuclear” option, if a company learns it is the target of a fraudulent litigation mill, it should consult with counsel as to whether there is sufficient evidence to bring a RICO claim against the plaintiff or his or her attorney, or whether such evidence can be uncovered in discovery while defending against the lawsuit. RICO provides for the award of treble damages (triple the amount of actual damages) and recovery of attorneys’ fees.
In sum, faced with an onslaught of baseless—or perhaps even outright fraudulent claims—companies don’t just have to “take it.” There are tools available for aggressive defense. Knowing the tools exist is the first step in deciding when—or when not—to pick them up. NIE
William Cole, partner, Amin Wasserman Gurnani, a skilled trial attorney and former federal prosecutor, brings more than 25 years of experience to the table. William’s practice spans consumer class actions, intellectual property, business litigation, white collar and FTC matters. For individuals and companies of all sizes, he is a results-driven, trusted advocate for their most important cases. Cole’s outstanding results for clients are a testament to his expertise. He successfully defended at trial a high-profile, false advertising class action against a leading dietary supplement company; the plaintiff received nothing at trial. Contact him at [email protected]. Matthew Orr, partner, Amin Wasserman Gurnani, a highly sought-after, seasoned litigator, has a proven track record of success defending many of the nation’s leading retailers and manufacturers of food, beverage, dietary supplement, and cosmetic products. Widely known for his extensive experience in consumer class actions, Orr has successfully defended clients in matters arising under California’s Unfair Competition Law (UCL), Proposition 65, the Consumer Legal Remedies Act (CLRA), the False Advertising Act, Wire Tapping Statutes, Slack-Fill statutes, the Unruh Act, the Americans with Disabilities Act (ADA), California’s Gift Card Laws, and the Song-Beverly Credit Card Act, among others. Contact him at [email protected].
