TESTIMONY IN OPPOSITION TO HOUSE BILL 427 BEFORE THE COMMITTEE ON CIVIL AND COMMERCIAL LAW OHIO HOUSE OF REPRESENTATIVES MAY 18, 2010 Geoffrey J. Ritts My name is Geoffrey J. Ritts. I have been invited to appear at today’s hearing by the Ohio Alliance for Civil Justice. I am a partner in the Cleveland office of the Jones Day law firm, and an adjunct professor of law at the Case Western Reserve University School of Law, where I have taught courses on class actions since 2003. My legal practice focuses on class-action litigation, and I have been involved in more than 100 class-action lawsuits in state and federal courts across the nation, in such areas as securities law, corporate governance, employee benefits, products liability, mergers and acquisitions, and banking. I have also published and spoken widely on topics related to class-action litigation, and I am a co-author of a leading treatise on aggregated litigation in the state courts ( Statewide Coordinated Proceedings: State Court Analogues to the Federal MDL Process , West Publishing, 1 st and 2 nd eds.). My testimony today is in my personal capacity and not as a representative of my law firm or any client. I am speaking solely as someone knowledgeable about class actions from having practiced, published, taught and spoken in the field, and as someone with a deep and abiding interest in class action law and procedure. PROBLEMS WITH HOUSE BILL 427 House Bill 427 is a deeply flawed piece of legislation that, if adopted, would undermine the fairness of the judicial process in class actions, open the door to significant ethical abuses, prejudice the rights of class members on behalf of whom class actions are brought, and damage Ohio’s business climate. The cy pres device has been subject to widespread abuse in class actions. Enacting this bill – which lacks any protections whatsoever against abuses – would invite misconduct and even corruption into the class-action litigation process. A fair and neutral judicial system is of paramount importance to all Ohio citizens and businesses, and the Legislature should not adopt any measure that would tend to undermine the impartial treatment of litigants in our courts. Because this bill would have that effect, it should not be adopted. What follows are what I believe are the main flaws in the bill:
1. House Bill 427 Invites Corruption And Abuse. Nothing is more important to our judicial system than its honesty and impartiality, in both appearance and fact. House Bill 427 would imperil that. The cy pres device already has been subject to significant abuse in class actions in Ohio and elsewhere, and legislation enshrining it as the public policy of this state would likely increase the incidence of those abuses. House Bill 427 has no mechanisms or protections whatsoever to guard against conflicts of interest. There is nothing in the bill to prevent cy pres distributions that directly or indirectly benefit plaintiffs’ counsel or the presiding judge, and there is nothing in the bill requiring that a cy pres distribution have even the slightest relationship to the claims being asserted in the action or to the class on whose behalf the lawsuit is being brought. For example, there is nothing in the bill to prevent a court from distributing cy pres funds to people who have business, political or family connections to the judge or plaintiffs’ counsel. There is nothing to keep cy pres funds from being directed to a judge’s (or plaintiffs’ counsel’s) law school or college alma mater. There is nothing to stop cy pres money from being directed to a non-profit that is run by a relative of the plaintiffs’ counsel or the judge. There is nothing to stop cy pres funds from going to a non-profit whose board includes political supporters of the judge, or even the judge himself. These sorts of cy pres distributions would raise the specter of corruption of the class-action process, and, in a world in which appearance is very often reality, undermine public confidence in the impartiality of the civil justice system. Unfortunately, these are not theoretical dangers. There are many real-world examples of questionable uses of the cy pres device, in Ohio and elsewhere. Here are a few, from just the last few years: • In a case in Ohio, a cy pres distribution of almost a half-million dollars was directed to a non-profit whose purpose was to buy “historically appropriate” furniture and accessories for the courthouse in which the presiding judge sat. • In cases in Ohio and elsewhere, cy pres distributions have been directed to non-profits that included sitting judges or their spouses on their boards of directors. • In a case in Ohio, a cy pres distribution went to a plaintiffs’ bar organization dedicated to underwriting and promoting class-action employment-law cases against employers. The Southern District of New York federal court has observed that “many cy pres distributions are channeled to organizations that support the work done by plaintiffs’ attorneys, thus indirectly benefiting the plaintiffs’ attorneys.” 1 • In an extreme case in Kentucky, millions of dollars were directed to a charity on whose board of directors sat the presiding judge and three plaintiffs’ attorneys, each 1 SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402, 415 (S.D.N.Y. 2009).
of whom was paid several thousand dollars for their “service.” The same settlement resulted in a distribution of $1 million to the alma mater of one of the plaintiffs’ attorneys, which then hired the lawyer for $100,000 a year to do nothing. The judge eventually was removed from office and the lawyers were indicted. • In a case in the District of Columbia, a cy pres distribution of over $5 million went to the law school attended by the lead plaintiffs’ counsel. In a case in Tennessee, a cy pres distribution of almost $3 million went to the law school from which plaintiffs’ counsel graduated. In a Florida case, a cy pres distribution went to the plaintiffs’ counsel’s law school alma mater. • In a West Virginia case, an $8 million cy pres award was directed to the law school attended by the presiding judge. Nothing in House Bill 427 would impede any of these kinds of abuses. Indeed, under the bill’s terms, all of these cy pres distributions would be permissible, as long as the receiving organization was tax-exempt. As these examples highlight, the cy pres device is susceptible to misuse, and potential misuses are insulated from scrutiny by the notion that cy pres distributions merely “help charity.” Professor Samuel Issacharoff of the New York University Law School – who frequently represents or testifies on behalf of plaintiffs in class actions – has called cy pres “an invitation to wild corruption of the judicial process.” The American Law Institute, in its recently adopted Principles of the Law of Aggregate Litigation, has taken the position that cy pres distributions never should be permitted if “the court or any party has any significant prior affiliation with the intended recipient.” 2 Rather than providing additional opportunities for corruption and abuse, we should be asking how we can protect and enhance the impartiality and integrity of our civil justice system. Instead of expanding the use of cy pres in class actions, we should consider how it can be restricted to put an end to its abuse. House Bill 427 is a step in the wrong direction. A further point: on a topic with such clear implications for judicial administration, judicial ethics and legal ethics, shouldn’t the input of the Supreme Court of Ohio and the Office of Disciplinary Counsel on this proposal be sought? To our knowledge, it has not been sought. 3 2 American Law Institute, Principles of the Law of Aggregate Litigation § 3.07 cmt. b (2010). 3 A former federal judge who is now dean of the Duke University School of Law has said that the distribution of cy pres funds “is not a true judicial function and can lead to abuses . . . . It made me more than a little uncomfortable that groups would solicit me for consideration as recipients of cy pres awards. I know that other judges felt that there was something unseemly about this system.” Adam Liptak, “Doling Out Other People’s Money,” New York Times (Nov. 26, 2007) (quoting Dean David F. Levi).
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