Why tort lawyers usually win without going to trial

Mass torts are sprawling cases in which it is often difficult to establish a single set of fact patterns and a defined class. Traditional class-action suits usually involve a more easily defined group. They often focus on allegations of defective products, discrimination, or price fixing.

Pharmaceutical giant Merck faces more than 28,000 lawsuits over its arthritis drug, Vioxx.

Merck pulled Vioxx from the market after studies showed it increased the risk of heart attacks and strokes. Legal battles over “class” status in a potential $15 billion Vioxx case are under way in New Jersey.

Another big class-action case is Dukes v. Wal-Mart. In 2001, class-action lawyers launched a discrimination suit against Wal-Mart on behalf of Betty Dukes, a company employee, and five former female employees. The suit claimed Dukes and the others were denied opportunities for advancement because they are women.

Because the suit covers current and former employees, the “class” could be as many as 2 million women, with billions of dollars at stake.

The Wal-Mart case shows three key elements in a class-action lawsuit. One, lead plaintiffs — in this case, Betty Dukes and the former employees; technically, the case is brought by the lead plaintiffs on behalf of the class. Two, a definable class: female Wal-Mart employees. And three, certification of the class by a judge. In February, class certification was granted in the case. Barring a reversal, the case is headed for trial.

Or is it?

In fact, most cases are settled before trial. Once firmly in the crosshairs of a skilled class-action law firm, the stakes quickly escalate for business leaders.

The discovery process begins. This legal phase allows class-action lawyers to comb through company files for evidence and interview corporate executives.

The discovery phase can be lengthy, wide-ranging, highly invasive and costly. Bad publicity takes a toll on stock price, morale, and innovation. Many corporations decide to settle, bitterly complaining of a shakedown.

“These are not just legal wars,” class-action super-lawyer Richard “Dickie” Scruggs recently told the New York Times. “They are public relations and political wars.”

The king of class-action law firms, Milberg Weiss, specializes in the highly lucrative field of securities suits. Last May, a federal grand jury in Los Angeles indicted Milberg Weiss and two of its partners on fraud charges in connection with an alleged decadeslong conspiracy to funnel $11 million in “secret kickback payments” to bogus lead plaintiffs in securities suits.

Milberg founder Melvyn Weiss and former partner William Lerach were not indicted. Lerach left the firm in 2004. The firm and the two indicted partners vigorously deny the charges.

In a securities class-action suit, trial lawyers sue publicly traded companies on behalf of a shareholder class. The suits usually allege financial misstatements, reporting omissions or other actions that trigger declines in stock prices.

“Securities cases are often frivolous,” says Philip K. Howard, the author of several books about lawsuits and founder of the advocacy group Common Good. “Claims are filed not based on any knowledge of wrongdoing — the company just didn’t do well. But you have a whole industry of lawyers who, when something goes wrong at a company, decide they want to cash in.”

For trial lawyers, the winning payouts are staggering. According to a recent study by Institutional Shareholder Services, securities class-action settlements topped $18 billion in 2006. Lerach’s new firm, Lerach Coughlin, earned more than $7 billion in securities settlements in 2006. Milberg Weiss came in fourth in the survey, with $1.6 billion.

Weiss and Lerach pioneered the class-action tactics adopted by a generation of trial lawyers. Whether it’s mass torts, traditional class-action suits or securities suits, the aim is the same: pressure the company into a settlement without going to trial.

In an article for the San Jose Mercury News, Cypress Semiconductor CEO T. J. Rodgers described what it’s like to be the target of a suit. Following an earnings revision and a drop in Cypress stock, class-action lawyers sued the company for fraud. During discovery, “we spent two years and $1 million providing 750,000 pages of memoranda for the other side,” Rodgers wrote.

The trial lawyers offered to settle. All Cypress had to do was fork over $120 million. Rodgers refused. A judge later dismissed the case, saying “no reasonable jury could find that any of Cypress’ statements were false or misleading.”

Despite such occasional defeats, the class-action bar shows no signs of backing away from its lucrative practices.

Prospects for legislative reform are dim.

The tort bar quickly found its way around the last two major pieces of reform legislation, the 1995 Private Securities Litigation Reform Act, aimed at giving judges more power in securities cases, and the 2005 Class Action Fairness Act, designed to prevent “forum shopping” of class actions to jurisdictions known for awarding huge payouts.

But pending actions in criminal courts could spell trouble for the tort bar. In the Milberg Weiss fraud trial, scheduled to begin next January in Los Angeles, testimony is likely to focus public attention on exorbitant fees, fraudulent practices and payoffs to bogus plaintiffs.

And in Kentucky, a federal grand jury is probing allegation of fraud by class-action lawyers in grabbing millions in settlement funds intended for plaintiffs.

Uniting the Milberg Weiss and Kentucky cases: suspicion among critics that the alleged criminal practices are widespread. If prosecutors prove those suspicions true, the class-action bar is facing a drubbing in the court of public opinion — and possible legal and legislative consequences.