A federal judge recently dismissed a class action lawsuit filed on behalf of all New Yorkers who purchased Vizzy Mimosa Hard Seltzer. The lawsuit claimed the drink's labeling misled consumers because the product contained champagne, when in fact mimosas do.
In dismissing the lawsuit, the judge stated the obvious fact that “no reasonable consumer would believe that there is champagne in a Vizy.” Nevertheless, the lawsuit has used up the time of a court system that has exhausted the courts' and the defendants' time and resources. The lawsuit is another example in a growing list of unjustified “ghost” class action lawsuits alleging intangible damages.
Certainly, class actions have legitimate purposes. When a group of people have been similarly harmed and suffered the same damages in situations involving common legal and factual issues, class actions save judicial time and reduce litigation costs. Class actions can also be used appropriately to create fairness in situations where individual litigation would be too costly to serve justice. This is exactly what happened in the famous case that brought an end to desegregation in public schools.
But the basis of a class action lawsuit is that the plaintiff must have suffered a loss. As the Vizzy example shows, some ambitious class action plaintiffs' lawyers have tried to get around this basic requirement. In some cases, they have succeeded in filing class actions on behalf of thousands of people without showing that they have actually suffered a loss.
Some commentators have called this a “harmless” class action. I call it a “ghost” class action, because the damages claimed are illusory.
Many of these lawsuits, like the one involving Vizzy, focus on allegedly misleading food and drink labels. The lawsuits allege that the product labels are inaccurate in minor ways — for example, that “fudge coated” cookies don't contain enough dairy to qualify as “fudge,” or that “vanilla” ice cream doesn't contain pure vanilla — but no one actually buys the products for those reasons.
Fortunately, some (but not all) wise judges have dismissed or refused to certify such claims. When these types of nuisance lawsuits are settled, consumers usually get a minor labeling change that no one notices or cares about, and the lawyers make their money and go on to file similar lawsuits against other companies.
Another area where this plays out is in product liability: rather than proving that a product defect caused someone to be injured, plaintiff's lawyers will argue that a non-defective product was worth less than what people paid for it.
Some of these lawsuits focus on the automotive industry. Plaintiffs' attorneys sometimes wait for a common recall notice or warranty program that proactively addresses the problems with a particular vehicle before filing a lawsuit. In these lawsuits, the “ghost class” typically has not suffered a financial loss because the defect at issue has already been addressed by the warranty or recall at no cost to them. Rather, it is an allegation that the class members paid more for a vehicle than they would have if they had known about the actual (or sometimes potential) problem and the effect it may have on resale value. Such claims are largely hypothetical, since the majority of class members have never experienced a problem with the vehicle.
Participants in these types of ghost class actions often get nothing of value or only car services that would have been provided for free if they had not filed the lawsuit. However, if a ghost class action is certified, there is a lot of money to be made. Once a court certifies a case, it is more likely to settle because, as a practical matter, it is impossible to predict whether a case will go to trial in relation to a product purchased by thousands, or even millions, of people. Lawyers for the settling plaintiffs seek huge litigation fees based on the total settlement amount secured, even if consumers do not seek money or view the settlement as worthless because they were not harmed.
Wise judges have refused to certify ghost class actions, and all judges should do so. Class actions should only be certified if plaintiffs' attorneys can show that all class members actually suffered a common injury. If a class action survives and is settled, plaintiffs' attorneys' fees should be based on the amount their clients actually receive, or the true value of their services in resolving a problem that consumers would not have received otherwise.
Consumers should not receive settlement notices that most people toss in the trash, as is common today.
These simple reforms — requiring class action plaintiffs to prove actual losses and requiring plaintiffs' lawyers to get paid only based on results that bring real benefits to real people — would take the ghost out of class action lawsuits.
Victor Schwartz is co-chair of the public policy group at Shook Hardy & Bacon LLP and a former law professor and dean.
