Litigation: The legal shakedown

The dirty little secret of consumer class actions

The Mafia is well-known for the “shakedown;” threatening to harm small businesses if they don’t pay protection money. A similar practice frequently occurs in consumer class action litigation, albeit in a more subtle and non-violent way, especially in California, which is well-known for having consumer-friendly consumer protection statutes. This article shall refer to this practice as the legal shakedown.

The legal shakedown typically begins when a consumer class action attorney sends a notice letter  to a business, claiming that the business is selling a product or service with false or misleading advertising. The letter demands that the business immediately correct its advertising and refund all consumers who purchased the offending product or service. Otherwise, the lawyer warns the business that it will bring a consumer class action lawsuit on behalf of all those who purchased the product or service.

Sometimes during the pre-litigation period, the business will seek to negotiate a settlement. Other times it will ignore the letter. If the matter cannot be resolved, invariably a class action lawsuit is filed. Negotiations then often ensue. If the dispute is resolved during the early stage of litigation, typically the terms include the business agreeing to run some form of corrective advertising, pay some attorney’s fees, as well as pay as the named class representative a small fee, e.g., $1,000 to $2,000. If the business agrees to these terms, the class action attorney agrees either not to file the lawsuit, or to dismiss the lawsuit if it has been filed.

Like the Mafia’s threat to do harm to a business, the class action attorney threatens to sue the business if it doesn’t pay to buy its peace. The difference, however, between the lawyer and the Mafia is that, with the Mafia, the business can feel confident that if it pays the shakedown fee, it will be protected. In the class action world, by contrast, if the business settles the dispute by paying the legal shakedown fee, it only buys its peace from that lawyer and the class representative. The business is not obtaining class-wide relief, meaning that any other lawyer and any other consumer can still sue, or threaten to sue, that same business.

The business can only buy its peace once and for all by obtaining a class-wide settlement. That, of course, can only occur if a lawsuit is filed, and then only if the business agrees to pay something to the entire class—all consumers of the product or service—rather than just the named class representative. But the cost of a class-wide settlement is significantly higher than an individual settlement. Also, the amount that the consumer class action attorney will demand in a class-wide settlement is far greater—typically 25 percent of what is paid to the class.

This puts the business in the undesirable position of buying its peace from one person, and hoping that no other attorneys sue it for the same alleged conduct; incurring significant expense by agreeing to a class-wide settlement; or rolling the dice and defending the lawsuit, with the aim to either get the case thrown out at the outset or, if that is not a viable option, to defeat class certification. 

Three of the more common grounds upon which to get the case dismissed at the outset are:

1. If no material false or deceptive advertisement is alleged, e.g., the advertised claims are true

2. If the plaintiff does not allege that he/she relied on the false or deceptive advertisement in deciding to purchase the product or service

3. If the advertisement is not likely to deceive the “reasonable consumer” 

If the class is certified, some companies choose to take the case to trial on the merits. But because the financial impact of a loss at trial is so staggering, it is rare for businesses to fight to the end. Rather, more and more businesses are not willing to take that risk, instead choosing to settle. But at that late stage, the cost to settle is much higher, as the consumer class action attorney has considerable leverage if he is able to obtain class certification. Class certification primarily requires that the claims of the class representative are typical of those of the class—e.g., the same alleged false or misleading advertising that the class representative relied on was made to the entire class.

The primary factors that typically influence the decision as to whether and/or when to settle include:

1. The likelihood of being able to get the case dismissed at the outset

2. The exposure the business faces if it ultimately loses, e.g., what revenues are generated from the sale of the product or service in the preceding four years

3. What the opposing counsel is seeking as a legal shakedown fee versus what he would likely seek later if he obtained class certification

4. What the legal fees are likely to be to defend the litigation, even if it ultimately results in defeating class certification or prevailing at trial

5. Whether there is a long-term business interest in having the reputation for fighting rather than settling

It is imperative that business owners and senior executives, many of whom are rightfully angry after receiving a notice letter or class action lawsuit, set their emotions aside when deciding how to respond. They must weigh their options and decide which course of action is in the best interest of the business. Sometimes the best option is to fight, and sometimes it is to buy at least short-term peace and cough up the legal shakedown fee.

Contributing Author

author image

Daniel Silverman

Daniel Silverman is a litigator in the Los Angeles office of Venable LLP. He has a successful track record of litigating a broad spectrum of...

Bio and more articles

Join the Conversation

Advertisement. Closing in 15 seconds.