Oversight is lax in class action-spawned foundations, legal observer says

By Kelly Holleran | Nov 17, 2009


In the 10 years since Toshiba settled a class action lawsuit for $2.1 billion, class action litigation against high tech industries has become increasingly rare, experts say.

Although attorneys filed four new lawsuits against computer makers Hewlett-Packard Co., Compaq, NEC Packard-Bell and e-Machines Inc. within days after the settlement was announced, it has since proved difficult for lawyers to win cases of the same magnitude.

"I've seen nothing on that scale," Michael Greve, director of the federalism project at the American Enterprise Institute and a John G. Searle scholar, said of the settlement.

And he doesn't think he will anytime soon, either, in part due to the relative difficulty it takes to win a case.

"For one thing, unless you do damage calculations as crazily as the judge (in the Toshiba case) did, there's not much in it for attorneys," Greve said. "Usually computer companies are happy to replace the defective computer component, and that's the end of it."

In addition, laws have been passed protecting high tech industries. The laws in a state such as Texas are quick to protect huge employers such as Dell, Greve said.

"Financial industries are very worried (about class action litigation)," Greve said. "But the computer industry, not so much."

W. Frank Newton, executive director of the Beaumont Foundation of America, the charitable organization created with the millions of dollars left unclaimed by plaintiffs in the Toshiba settlement, agrees with Greve, saying recent laws favor big businesses now more than before.

"We certainly came to a time period at the end of the century where the laws favored consumers," he said. "We (the Beaumont Foundation of America) came in at the tail end of that era. Now the laws protect big business more than they did in the past. We may have gone a little too far. We're not able to help individuals as much as we were able to. This is just a localized example of what has been going on in the business for the last three years."

However, unlike Greve, Newton argues class action lawsuits as a whole have seen a decrease, not only those complaints filed against high tech industries.

He attributes the shrinking number to a federal law passed that removed many class action complaints from state courts to federal courts. In addition, states have made it more difficult to sue as a class.

"The law urges people to sue as an individual; don't sue as a class," he said. "If you were harmed by a $400 loss of a computer, it's hardly worth spending the money to hire a lawyer for recovery. That has substantially reduced the number of cases where consumers and purchasers have been able to recover damages."

As a result, Newton says the number of charitable organizations founded with unclaimed proceeds from class action lawsuits has also shrunk.

"Remember that how this money comes about is that there are financial sums of dollars available to purchasers who didn't ask for their money back," he said. "Now the fact that there are fewer consumers that are offered that money, there are less opportunities for charitable organizations to be formed."

The Beaumont Foundation of America was formed with $358 million of unclaimed Toshiba settlement funds.

Under the terms of the settlement, the foundation used $68 million to purchase 28,000 laptops and additional technology that were distributed to schools, churches, non-profit organizations, libraries, hospitals throughout the United States.

Since then, the foundation has shifted its goals.

One example of the foundation's change is the Lamar University Southeast Texas Legends Scholarships, which began providing endowments for first generation college students in 2006. The scholarship provides four new Texas students each year the opportunity to attend Lamar University in Beaumont by providing all fees, tuitions and book costs for the students.

The "Legends" for whom each scholarship is named are, for the most part, big names in the legal profession in Southeast Texas.

For example, one is named for the "father of asbestos litigation," Orange attorney Ward Stephenson. In 1966, Stephenson filed his lawsuit in Southeast Texas on behalf of asbestos insulation worker Claude Tomplait -- subsequently spawning a multi-billion dollar industry.

The suit faulted 11 manufacturers, including Johns-Manville and Owens Corning, for inflicting his client with asbestosis, or chronic inflammation of the lungs.

Other Legends Scholarships have honored former state senator and plaintiff's attorney Carl A. Parker, former Democratic U.S. Rep. Jack Brooks, Beaumont attorney Hubert Oxford III, former appellate Judge Don Burgess, family law attorney Everett Lord and Major T. Bell, a founding partner of the Orgain, Bell & Tucker law firm in Beaumont.

Another Legend recognized was the late Joe Tonahill, who gained national attention when he assisted in the defense of Jack Ruby, the Dallas man who shot Lee Harvey Oswald days after Oswald's arrest as the suspected assassin of President John F. Kennedy. Tonahill was also an early member of the American Trial Lawyers Association and co-founder and president of the Texas Trial Lawyers Association.

Newton said the program's first class will be graduating from college this year.

Since shifting its focus, the Beaumont Foundation of America has spent about $40 million on social services, Newton said. Combined with the initial $68 million, the foundation has allocated about $108 million to various projects.

Keeping track of how similarly formed foundations spend their money is a tough, if not impossible, task, Greve said.

And while Greve believes the number of foundations have increased in recent years, he says there is no way to know for certain.

"You're staring at a black hole in class action litigation," he said. "Nobody knows exactly what these class actions do. Nobody knows."

The attorney general is supposed to monitor the foundations and make sure they are spending money in the way promised to plaintiffs. However, half the time, the attorneys general and their cronies are responsible for setting up the foundations, Greve said.

"(Attorneys general say) I have five friends and they all want to run a charitable organization," he said. "Let's start it with these damages. That's like the fox guarding the henhouse."

Greve does not believe the foundations help plaintiffs as promised.

"I look at these (the foundations) with a very jaundiced eye," he said.

However, U.S. District Judge Thad Heartfield praised the formation of the Beaumont Foundation of America, saying it would not only help children, but would also have a positive impact on businesses that were class members.

"In this Court's judgment, it is difficult to think of a better way of using any funds that may remain after all claims are processed," the findings of fact state. "This Court applauds and congratulates Class Counsel and Toshiba for dedicating any unclaimed funds that remain at the end of the case to an important and worthwhile social purpose that has the potential to benefit a large segment of the class."

Although not every judge praises the formation of similar foundations, it is extremely rare for a judge to reject the idea.

"It comes too late in the game," Greve said. "By that time, the parties have already both said, 'Why don't you sign this, judge?' It would take an extraordinarily courageous judge to refuse to sign. The oversight is so lax. What's in it for the judge?"

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