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Tech Industry Pushes Class-Action Reform
by Maureen Sirhal
Members of the high-tech community are pushing Congress to reform the process of class-action lawsuits, saying such a move would aid their sluggish sector and help boost the economy.
A host of firms have joined a national effort spearheaded by the U.S. Chamber of Commerce to take up this cause. Under declining economic conditions and a hefty list of potential liability areas such as privacy and product security, many in the tech community are hoping to head off what has been tagged as one of the biggest problems in the legal system.
While class-action suits permeate all industries, many tech industry members see their field as particularly vulnerable. Observers and industry members say that is because issues brought to the forefront of policy debates by the proliferation of technology use make these companies prominent targets.
Impact Drains Economy, Consumers
The tech industry has long frowned at the surging growth of large multi-state class-action suits brought before state courts. It is keeping close watch on these courts that the tech industry says may favor trial lawyers who bring frivolous class action suits, compelling firms to negotiate large settlements rather than expend resources fighting long, perhaps very public, court battles.
Class-action abuses "are seriously injuring our economy, and worse yet, they are seriously injuring the consumers class actions are supposed to benefit," John Beisner, head of the class action practice group at O'Melveny and Myers in Washington, told the House Judiciary Committee last week. He argued that the proliferation of class actions in certain states bolstered the notion that class-action attorneys search for courts and judges likely to favor their cases. The practice is known as "forum shopping," something that at least two bills in the U.S. Congress, H.R. 2341, and S. 1712, seek to halt.
Beisner oversaw a study to be published in the Harvard Journal of Law and Policy that found that between 1998 and 2000, class-action cases increased on average more than 100 percent in three counties in Illinois, Texas and Florida. Beisner told lawmakers that "state courts are federalizing class actions" by interpreting the laws of other states in multi-state class action litigation.
The problem begins with something called "complete diversity," said Peter Detkin, Intel's vice president and assistant general counsel. "Right now, the way they're keeping things in state courts, if there is one plaintiff and one defendant in the same state, you can't file in a federal court."
Current law mandates that for a federal court to assert jurisdiction in a class-action claim, the defendants and plaintiff must be residents of different states. Additionally, a plaintiff's claims must be valued at $75,000 or more.
For technology firms, class-action suits can involve the same claims made in multiple jurisdictions, which can push a company to expend resources defining themselves across the country. Intel faced 13 class actions filed in state and federal courts for a flaw found in its Pentium-processor chip. The firm initially offered a "lifetime replacement policy" for the defective products. However, attorneys for consumers still alleged consumer harm and sought punitive damages. But when the cases were settled, the plaintiffs only received Intel's commitment to continue its efforts to replace faulty products and provide technical support. Intel had offered that same commitment -- before the suits were engaged, Detkin noted.
Techies Are Ripe Targets
Most industries have a deep interest in class-action reform, but some observers say that technology firms are particularly pressing for an overhaul of the suits that can drain resources and even force a firm into bankruptcy. That's because the new arena of technology brings many new, uncharted issues to the table.
"Privacy is a key area," said Detkin. "I think that will be the next wave of lawsuits in the country."
Other legal experts point to the growing issue of the security of technology products that could be linked to consumer harm.
Peter Angelos, the trial attorney who successfully pursued national class-action litigation against the tobacco industry, for example, has filed suits seeking to compel cellular telephone makers to provide headsets for their technology. Angeles charged that cell phones without such devices contribute to the growth of cancer, although there is wide disagreement over the research to support such a claim.
"The real problem is that the tech community is in the business of making new stuff and making money. That's going to make them attractive defendants for a long time," said Stewart Baker, head of the technology practice for Steptoe and Johnson in Washington. He cited privacy and computer security as two areas he sees as future seed ground for class-action cases. "I am sure that sooner or later they will bring class action," he said.
More than 85 technology firms -- including Compaq, eBay, Handspring, Intel and Siemens-- and trade and lobbying groups -- including the Electronics Industry Association and the Semiconductor Industry Association -- sent a letter to Congress urging pasage of H.R. 2341, citing privacy and product liability concerns. Separately, TechNet also has urged lawmakers to act.
"These suits invariably are brought as actions because the injury is trivial, speculative or entirely non-existent. The vast majority of them are frivolous and are initiated in multiple states forums around the country simply to force deep-pocket defendants into settlements," Beisner said last week.
Congress Offers A Solution
Several lawmakers are hoping to rally support behind the two companion measures that would revise the standards for the ability of federal courts to hear class-action cases. Virginia Reps. Rick Boucher and Democrats, Bob Goodlatte, a Republican, and House Judiciary Committee Chairman James Sensenbrenner, R-Wis., have sponsored H.R. 2341. Senate Judiciary Antitrust Subcommittee Chairman Herb Kohl, D-Wis., Judiciary ranking Republican Orrin Hatch of Utah, and Finance Committee ranking Republican Charles Grassley of Iowa sponsored S. 1712.
The measures seek to curb meritless cases and push multiple claim, interstate cases into the federal courts, where they can be consolidated and plaintiff's remedies are assigned equally. H.R. 2341 for example, would change the "complete diversity" requirement to "minimal" diversity, and decrease the minimum dollar value of plaintiff claims so that more class actions would qualify for federal court.
The measures also would instruct judges to give special scrutiny to non-monetary settlements awarded in class-action cases. The provisions' aim is to stop settlements where consumers walk away with low-value coupons or free services from the company that initially harmed them while lawyers collect huge monetary windfalls.
However, in the wake of energy firm Enron and similar bankruptcies in the telecom and technology arenas, critics are calling the measures poorly timed and an assault on consumers' rights.
The Association of Trial Lawyers of America (ATLA) oppose the bills, calling them a license for companies to "engage in Enron-like behavior." ATLA has said class-action reform is unnecessary, adding that it would result in further clogging of federal courts and would further reduce the rights of injured consumers.
But lawmakers and supporters defend the measures, arguing that they solidify consumers' rights by forcing class action notices be written in "plain English."
Companies and organizations across a variety of sectors have backed the bipartisan legislation. The American Insurance Association, International Franchise Association, National Association of Independent Insurers, National Association of Manufacturers, National Retail Federation, and the Association for Manufacturing Technology have joined the Chamber effort.
Joe Rubin, director of congressional and public affairs at the Chamber, said there is growing support in the House and Senate. The Chamber and its partners are working with lawmakers on both sides of the aisle on the issue, and are devoting more resources this year to passing the legislation, he said.
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