Policy —

A look at class-action lawsuits


It feels so good to be in class

There's no denying it: class-action lawsuits feel good. After all, individual consumers have little power over manufacturers, and it's all too easy to see these companies as firms who value only the almighty dollar. Ganging up on, say, the record labels feels pretty good because it gives power to a group of people who otherwise would wield little of it. It balances the asymmetrical power relationship between corporations and consumers.

James Copland of the Manhattan Institute points out that class-action lawsuits become truly useful when three conditions are met:

  1. The number of class members is large
  2. The loss sustained by each member is small, and
  3. The administrative costs of individual suits are high.

You might sue a firm, for instance, that accidentally contaminated your private pond with arsenic, but you're unlikely to go after a company who shafted you for five bucks.

This is particularly true in the technology world, where many common products sell for less than a few hundred dollars (iPods, CDs, cell phones, etc.). It's not worth the time and money that justice in the court system requires, and this is where class-action suits shine. Judging by the number that have been filed against tech companies in the last few years, they're gaining in popularity, too. Across the nation, class-action lawsuits have increased by 1,000 percent in state courts over the last 10 years.

Let's review a few of the more famous technology cases from the last decade together, paying special attention to the details of the settlements. At the end, we'll talk a little about who exactly is benefiting from all these lawsuits, and the steps that Congress has taken to reform the system. But first, let's remember why you paid so much for CDs in the 1990s.

CD price-fixing

If you live in the US and didn't cash in on this one, your bank account is US$13 poorer than it might have been. This class-action suit opened the door for anyone who had purchased CDs to collect a check from the music labels due to alleged collusion in the industry—and millions did so. Unlike most suits, which require class members to prove that they purchased a product or sustained an injury, the CD price fixing case affected so many people (most of whom were unlikely to have any receipts) that the US$67 million payout was simply split between all those who filled out a simple online form.

What happened was this: the major record labels (Bertelsmann, EMI, WEA, Sony, and Universal) and select retailers (Tower Records, Musicland) were sued in 2000 over alleged CD price fixing. The scheme was designed to halt the rise of discount music at places like Best Buy and Target, which threatened to both lower overall CD prices and put the specialty music retailers like Tower out of business.

"Minimum advertised pricing" was the shell game here, as labels would only offer discounts to retailers who agreed not to sell albums below the MAP. The scheme kept prices artificially high, and consumers paid the price. Unfortunately, the case was never completed (and the defendants therefore admitted no guilt) because a settlement was reached in which the defendants would cough up US$67,375,000 in cash and another US$75,500,000 worth of discs to schools and libraries.

The case had tremendous popular appeal, due in large part to music lovers' conviction that they had been getting the short end of the stick for years (and because no one wanted to go back to the bad old days of US$16.99 Nirvana albums). The money only went far enough to buy everyone in the class a couple of hamburgers and a case of Staropramen, but still, you can't argue with a free check in the mailbox.

The best part about the whole saga was that the labels were forced to change their ways, and some class-action lawyers didn't get filthy rich in the process. Because the suits were brought by various state attorneys general, the legal fees went back into the public coffers.

iPod battery

Who would have thought that the little white music player was such a lawsuit magnet? The iPod is on our list twice, in this case due to allegations about defective batteries in early versions of the device. A class-action lawsuit was filed against Apple in 2003 and alleged that the first three generations of iPods had battery issues that were not adequately disclosed by Apple. Owners of the early iPods will no doubt remember the controversy that raged when it was discovered that some of these batteries lasted only a year before losing much of their charge and needing a replacement—at customer expense.

Apple settled the case and agreed to provide customers who had experienced battery failure with credit at the Apple Store. Owners of 3G iPods got an extra year of warranty coverage. Filing a claim was complicated by the fact that the claim form required original documentation of the purchase, something that many users throw away the moment they get home.

Lawyers in the case received a US$2,768,000 payout from Apple, and the eight class representatives got US$1,500 for their trouble.

Netflix throttling

DVD-by-mail service Netflix found itself on the receiving end of a class-action suit when California resident Frank Chavez discovered that, despite valiant efforts, he was unable to get truly unlimited monthly rentals. Chavez had stumbled onto the practice of "throttling," whereby users who watch more than a certain amount of movies each month find themselves waiting longer for new discs to arrive in the mail. This, depending on your perspective, is simply A) good business or B) nefarious attempt to screw the consumer.

Chavez picked option B and helped to kick start a lawsuit against the company in 2004. Netflix turned over 100,000 pages of documentation during the discovery process, only to go ahead and settle out of court last year. Case closed, right? Well, not exactly.

The seemingly routine process of getting the preliminary settlement approved by a judge hit an FTC-shaped roadblock. The agency objected to the proposed terms of the settlement, which would give Netflix users either a free month of service or a one month service upgrade. The catch was that these plans would then roll over into paid plans the next month unless the customer took some action to cancel their account. This "negative option" led the FTC to charge (PDF) that the settlement was basically a marketing opportunity for Netflix, and that it was only in the best interests of the lawyers on the case, who stood to collect US$2,528,000 (Chavez himself, as the class representative, would be given US$2,000).

The settlement terms were amended to placate the FTC, and the new agreement was taken before Judge Thomas Mellon, Jr., who unexpectedly threatened to cut the amount of the lawyers' fees, in large part because so few people had signed up to be part of the class. "The participation number is going into my calculations," he told lawyers.

Nothing is likely to be resolved before next year, but if you were (or are) a Netflix subscriber, you may have some free DVD rentals coming your way. Go to the settlement website at www.netflixsettlement.com, and while there, try not to think about the US$2.5 million the lawyers are getting.

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Channel Ars Technica