Congratulations. You’ve just joined the board of Amalgamated Industries, a leading manufacturer of household cleaning products. Unfortunately, at your first meeting you learn that the company has been hit with a class action over a privacy law that provides $1,000 in statutory damages each time an employee’s fingerprints are scanned without their written consent. You use fingerprint scanners at all 10 of your manufacturing facilities, where 15,000 employees pass through security each day.
You face a very big problem. At $1,000 per violation, 15,000 scans a day for an entire year equals about $5.5 billion in potential damages. And you’ve been using the scanners for a decade. What to do?
Bad practices
Here’s what you don’t do: Get mad at the plaintiff lawyers who have threatened your company with bankruptcy, call them opportunistic sleazebags and tell your lawyers you refuse to pay a penny to settle this case.
Take it from Jay Edelson, a plaintiffs’ lawyer who sued Facebook for violating an Illinois biometric privacy law and ultimately negotiated a $650 million settlement. Class-action attorneys don’t care what you think about them; for them, litigation is a business, and they’re in business to settle cases and collect big fees.
“Corporations can rant all they want, they can say, ‘This is a bad statute,’ but they should put that behind them and do what’s best for the company,” says Edelson, who shared a $100 million fee pot in the Facebook case.
Exactly what’s best for the company, of course, can be hard for a non-lawyer executive or director to figure out. Settle at any cost? You might be throwing shareholder money away. Dig in your heels? Sometimes that’s the right strategy, but it also might be a way for your own attorneys to earn more fees.
Edelson says he started his career at a corporate defense firm that made “an insane amount of money” defending class actions. “But that’s if they don’t settle cases, that’s if they fight the cases,” he says he quickly learned from older partners.
Saving with Settlements
The same economic incentives apply to plaintiff firms. Many class-action lawyers are stretched for cash and will use the power the law gives them—to settle a lawsuit once and for all, on behalf of anyone with a claim—to negotiate deals that reward them with fees but provide little for their ostensible clients. All they have to do is convince a judge the settlement is fair and reasonable.
“Really bad settlements help two stakeholders: companies and sleazy plaintiff attorneys,” says Edelson, a vocal critic of what he considers to be collusive settlements. In such cases, the lawyers may think: “What’s the weakest settlement we can put together that the court will approve?”
The trick with class actions, then, is figuring out the incentives of the lawyers on both sides of the table, as well as the real threat the litigation presents. Few people thought Edelson had a chance suing Facebook over its use of facial-recognition technology, but he exploited a broadly written Illinois law with a $1,000 penalty for each violation. Facing millions of potential violations that it could have avoided if it treated the Illinois law more seriously, Facebook wrote a very big check to make the problem go away.
Of plaintiff lawyers in such bet-the-company cases, Edelson says: “I don’t know if corporations should view them as scumbags, but rather as helpful actors getting them toward a settlement.”
