Courts Should Stop Approving Unfair Class Action Settlements

Class actions play a vital role in our legal system. These lawsuits are often the only vehicle for injured plaintiffs to receive compensation when a defendant’s wrongs are widely disbursed and it would be impractical for a single individual to sue.

Yet the process of settling these suits is subject to perverse incentives on the part of the lawyers representing the injured parties. Class counsel often will seek the largest portion of the settlement award for themselves—structuring the settlement to maximize attorney fees—at the expense of class members.

Sadly, this sort self-dealing on the part of class counsel is exactly what happened in Blackman v. Gascho. The case centers on a consumer class action filed against Global Fitness Holdings LLC, alleging that the between 2006 and 2012, the company sold gym memberships and incorrectly charged fees pertaining to cancellation, facility maintenance, and personal-training contracts. A group of plaintiffs sued Global Fitness over the fees, and the parties entered into a “claims-made” settlement.

This type of settlement allows the defendant to make a large amount of money “available” to class members, but in order for the members to collect, they must jump through the hoops of correctly filing claims. Because of the low response rate in such settlements, the defendants will end up paying much less than the funds made available. Indeed, of the $8.5 million made available to the class members, Global Fitness only paid $1.6 million—a payout of approximately 10 percent of the settlement funds. Despite this low payout to plaintiffs, class counsel are still paid a certain rate based on the funds that were made available—not the funds that were actually paid out—in some instances giving them attorney fees larger than the class members’ damages award!

The class counsel here were paid $2.4 million, nearly $1 million more than the class members collected. Josh Blackman, also a Cato adjunct scholar, just happened to be one of the class members. He challenged the settlement, arguing that the agreement was giving the class attorneys preferential treatment over the class members who did not collect. The district court approved the settlement, however, and the U.S. Court of Appeals for the Sixth Circuit agreed with the district court by a 2-1 vote.

Cato has now filed an amicus brief urging the Supreme Court to review the case. Federal Rule of Civil Procedure 23(e)(2)—and fundamental tenets of due process—require that a settlement that binds class members be “fair, reasonable, and adequate.” In this case, the Sixth Circuit upheld approval of a settlement that provided zero compensation for over 90 percent of class members, and in the process broke with the Third, Seventh, and Ninth Circuits. 

The Supreme Court will likely decide by the end of the year whether to take up Blackman v. Gascho.

What They Didn’t Tell You on the Saudi Road Show

The Saudis have just completed peddling their new $15bn bond issue (with more to come). One thing that’s been swept under the rug is a smoking gun. A smoking gun because it’s an indication of just how much trouble the Kingdom is in.

The most telling sign of the depth of the Saudi welfare state’s troubles is the fact that they switched from the lunar-based, religious Hijri calendar to the western Gregorian calendar on October 1, 2016. The reason for this radical change is simple economics.

The Gregorian calendar has 10.9 more days than the Hijri calendar, meaning that the public sector can cut costs through the dilution of wages—same pay spread over more working days. In another move that touches on sensitive religious matters, the Kingdom has announced that it will increase visa charges for people completing their religious pilgrimage, the Hajj. Even in the Kingdom of Saudi Arabia, economics has trumped religion.

Infrastructure Investment: A Look at the Data

Hillary Clinton says that “we are dramatically underinvesting” in infrastructure and she promises a large increase in federal spending. Donald Trump is promising to spend twice as much as Clinton. Prominent wonks such as Larry Summers are promoting higher spending as well. But more federal spending is the wrong way to go.

To shed light on the issue, let’s look at some data. There is no hard definition of “infrastructure,” but one broad measure is gross fixed investment in the BEA national accounts. 

The figure below shows data from BEA tables 1.5.5 and 5.9.5 on gross investment in 2015. The first thing to note is that private investment at about $3 trillion was six times larger than combined federal, state, and local government nondefense investment of $472 billion. Private investment in pipelines, broadband, refineries, factories, cell towers, and other items greatly exceeds government investment in schools, highways, prisons, and the like.

One implication is that if policymakers want to boost infrastructure spending, they should reduce barriers to private investment. Cutting the corporate income tax rate, for example, would increase net returns to private infrastructure and spur greater investment across many industries.

The Reuse of Two Military Bases in the Atlanta Area

ATLANTA - Support may be building in Congress for another round of military base consolidation. Some believe that leaders will reach agreement with the incoming administration early next year. It’s overdue. The Pentagon says it will have 22 percent excess capacity by 2019. But, of course, for many communities, base closure is a frightening prospect.

Some communities in and around former bases have begun the process of repurposing these properties. At the Association of Defense Communities’ Installation Reuse meeting here in Atlanta, attendees had a chance to visit two such examples: former Army bases Fort Gillem and Fort McPherson. Both have a pathway toward a successful transition to non-defense use since winding up on the 2005 BRAC commission’s cut list, but they have opted for quite different approaches.

Fort Gillem, an Army logistics hub opened in 1941, is now Gillem Logistics Center. It is already home to a 1-million square foot distribution center for Kroger, the popular food retailer. Proximity to a major highway, Interstate 285, proved a key selling point, and enabled Kroger to consolidate operations from five buildings into one. The new facility includes freezers and cold storage for everything from ice cream to fresh cut flowers, and employs about 1000 people. Kroger invested $243 million in the project, part of a 30-year commitment to the property, and they have room to expand.

Every 25 Seconds: Human Rights Watch and the ACLU Document More Harms from Drug Prohibition

A new report from the ACLU and Human Rights Watch details many of the harms associated with the criminalization of drug possession. The most striking finding from the report is that police in the United States arrest more people for marijuana offenses than for all violent crimes combined. The title of the report, “Every 25 Seconds,” refers to how often police arrest someone for drug possession in this country.

The full report can be found here, but other key findings include:

  • More than one out of every nine state-level arrests are for drug possession, amounting to 1.25 million arrests per year.
  • Nearly half of those arrests for marijuana possession.
  • While drug usage rates are roughly the same across racial lines, black adults are more than two-and-a-half times as likely as white adults to be arrested for possession.
  • More than 99% of drug possession convictions were the result of guilty pleas, rather than trial verdicts. The authors of the report describe this as “rendering the right to a jury trial effectively meaningless.”
  • The average bail amount for drug possession defendants was $24,000, meaning that poor defendants typically remained incarcerated while awaiting trial and had a strong incentive to plead guilty even if they believed they were innocent.
  • Defendants often did not understand the multitude of collateral consequences of a drug conviction.

When it comes to actual policy recommendations, the report urges legislators, judges, prosecutors, and police officers to de-emphasize the policing and prosecution of drug possession crimes, effectively calling for decriminalization of drug possession across the board.

While the authors stop short of recommending full legalization, even the decriminalization recommendation would be a positive step. We know this because in 2000, Portugal decriminalized all drugs. Despite predictions from critics that decriminalizing drug use would lead to massive spikes in addiction and prove a disaster, a 2009 Cato study by Glenn Greenwald put that speculation to rest. Decriminalization in Portugal has been a success, and there is no substantial movement today to return the country to prohibition.

Similarly, state experiments with legalized recreational marijuana in the U.S. are proceeding well. And the tide in favor of ending marijuana prohibition continues to grow. Next month, five more states (Arizona, California, Nevada, Maine, and Massachusetts) will vote on whether to legalize marijuana. Those states would join Alaska, Colorado, Oregon, Washington state, and Washington D.C. as jurisdictions that have renounced prohibition for marijuana.

Last month, a U.S. federal judge declared that the “principle casualty” of the war on drugs has been the U.S. Constitution. The ACLU/HRW report sheds new light on the truth of that declaration. It’s well past time to admit the failure of the drug war, allow the police to focus on actual crimes, ease the mounting tensions in over-policed communities, and restore our individual liberty.

Legal Migration Can Control the Border

I recently wrote a piece about the increase in guest workers and the remarkably consistent level of entries, legal and illegal, of workers and new lawful permanent residents. The main choice the U.S. government faces is whether the migrants who come here are legal or unlawful.  Excluded from my previous blog were J-1 visas for researchers, au pairs, and the like. 

About a third of unauthorized immigrants worked in service jobs in 2012, as well as 28 percent of foreign-born residents who are not naturalized, compared to just 16.7 percent of natives. Au pairs and child care are an important component of these economic sectors so including them is important to understand the shift from unlawful to lawful immigration (Figure 1).  

Figure 1: Guest Worker Visas Issued, Green Cards for New Arrivals, and Gross Illegal Immigrant Inflows


Sources: State Department, Department of Homeland Security, Bureau of Labor Statistics, and Pew.

The biggest decline in unlawful immigration has come from Mexico but the surge in Mexican J-1s by itself cannot possibly explain that. In 1997, 3,633 Mexicans were issued J-1 visas while only 9,044 were issued the same visa in 2015. Regardless, the change in the number of Mexican apprehensions since 1997 explains virtually all of the change in the total number of apprehensions with a correlation coefficient of 0.994. The inclusion of J-1s does not change the conclusion from my previous post. 

Rising wages in Mexican states that sent migrants to the United States, lackluster U.S. economic growth, and increased border security all played a role in shrinking Mexican unauthorized immigration. The increase in border patrol from 1997 to 2015 is closely correlated with the number of new guest worker visas issued to Mexicans and the unemployment rate. The numbers of Mexicans apprehended is negatively correlated with all three—with the number of border patrol agents coming in on top at -0.95, Mexican guest workers at -0.78, and the U.S. unemployment rate at -0.68. The adjusted R-squared for all the variables is 0.86. 

There is an impressive trade-off between the number of Mexican guest workers and apprehensions of them attempting to enter unlawfully (Figure 2). Figure 3 shows the same figures in a more dramatic, less technical graph. Increasing the number of guest workers for Mexicans is also much cheaper than hiring new border patrol agents. 

Figure 2: Guest Worker Visas for Mexicans and Mexican Apprehensions

Sources: State Department and Department of Homeland Security.

Figure 3: Guest Worker Visas for Mexicans and Mexican Apprehensions

Sources: State Department and Department of Homeland Security.

The number of guest worker visas issued to Hondurans, Salvadorans, and Guatemalans has flattened since 2005 while the number of apprehensions of them at the border has more than doubled. Expanding the number of guest worker visas and making more of them available to Central Americans would be a cheap, effective, and economically beneficial way to diminish the flow of unlawful immigrants from those countries and to expand control over the border.  

Guest worker programs do not have to replace every would-be unlawful entrant with a legal work visa. Each visa issued during the Bracero program of the 1950s and 1960s replaced about 3.4 Mexican unauthorized immigrants, on average. Legal migrant workers are preferred by American employers, the migrants themselves, and should be favored by policy makers too. 

The Debate Over Voting: Helping Jim Harper Count for Something

On November 2nd, Cato will host a debate over whether libertarians should vote. On the “no” side will be me and my colleague Aaron Ross Powell. On the losing side will be our colleagues Jim Harper and Michael F. Cannon. You should come, that is, of course, unless you’re sensitive to the sight of public executions.

But Jim wants to start the debate early. Yesterday, he criticized the standard economist’s argument for why people (including libertarians) shouldn’t vote. “Given the exceedingly low likelihood that one person’s vote will sway the outcome,” as Jim describes the argument, “the time and effort spent on voting is pure waste.”

This is true under most circumstances: if you’re voting solely to change an election, then your voting is irrational. If you get no pleasure out of voting, if casting a vote gives you no sense of a duty fulfilled, yet you still wake up, stand in line on a cold November morning, and cast your vote merely because you want to change the outcome of the election, then you are behaving irrationally.

In nearly every circumstance, your vote doesn’t matter. It won’t change things. Every election that you’ve ever voted in or not voted in would have come out exactly the same if you had done the opposite. This is not an opinion, it is an inescapable mathematical truth.

Jim argues that this is only half the story. What the standard, voting-is-irrational model “really fails to account for is the effect that margins of victory have on the many, many political and social actors that will consume vote information after election day.” This is still wrong, and for the same reasons.

At the risk of creating a more difficult debate opponent on November 2nd, I must inform Jim that he’s consistently equating two fundamentally different concepts: 1) the trivially true idea that voting, en masse, matters; and 2) the idea that a single vote matters. Aaron and I will not be arguing that voting, en masse, doesn’t matter in the sense that it affects the world. Of course it does. And we will not be arguing that margins of victory, which are just an emergent phenomenon of en masse voting, don’t matter. That would be silly. But, under most circumstances, a single vote doesn’t meaningfully contribute to either an electoral victory or to the margin of victory. No winning politician has ever said, “well, I won by 4.000006 percent, but if I won by 4.000007 percent, that would have really been a mandate for action.”  

Finally, I told Jim in an email that I could refute him in a single sentence. Here it is:

A single vote’s contribution to a margin of victory is nearly as infinitesimal as its contribution to a victory, and, if margins of victory have consumable value as “vote information,” then so does voter turnout, so you’re better off staying home in order to marginally contribute to that data point.

Maybe that’s all Jim needed to soothe his troubled soul: a reason to not vote that will make him feel he is contributing to the system. Apparently Jim has a deep-seated need to be a part of a percentage, to be counted by some egg-head political data consultant. So stay home Jim, but do it with gusto rather than apathy. Know that you’re making a marginal contribution to the voter turnout numbers. On November 8th, stand up—or sit down, or sleep in—and get counted!

Come to the debate, or watch it online. It’ll be fun.