Judges should put an end to 'ghost class actions'

A federal judge recently dismissed a proposed class action on behalf of all New Yorkers who purchased Vizzy Mimosa Hard Seltzer. The lawsuit alleged that the beverage's labeling misled consumers, because the product doesn’t contain champagne, as an actual mimosa would. 

In dismissing the case, the judge stated the obvious, namely that “reasonable consumers would not have believed that Vizzy contained champagne.” Still, the action was permitted to go through exhaust the court system's time and resources of the court and the defendant. The case is another example in an ever-increasing list of abusive “ghost” class actions that claim an invisible injury.

To be sure, class actions can have a legitimate purpose. If a group of people sustains the same harm with the same damage in a situation involving common questions of law and fact, class actions save the judiciary's time and reduce legal costs. They also can be properly employed to produce equity in situations where individual claims may be too costly to render justice. This is precisely what occurred in the famous cases that helped put an end to desegregation in public schools. 

A fundamental of a class action, however, is that the plaintiffs must be injured. But as the Vizzy example shows, some enterprising class action plaintiffs’ lawyers have sought to circumvent this basic requirement. In some cases, they have been successful in bringing class actions on behalf of thousands without showing that any class members have actually been injured.

Some commentators call these “no-injury” class actions. I label them “ghost” class actions, because the purported injury is an apparition.

Many of these lawsuits, like the one involving Vizzy, have focused on allegedly misleading food and beverage labels. They claim a product’s label is inaccurate in some trivial way — say, a “fudge-covered” cookie lacks the dairy ingredients needed to qualify as “fudge,” or “vanilla” ice cream is not made with pure vanilla — even though no one actually bought the product for those reasons.

Fortunately, some (but not all) wise judges have dismissed or refused to certify such claims. When these types of nuisance cases settle, consumer typically get a minor labeling change that no one will notice or care about, while the lawyer banks fees and moves on to file similar lawsuits against other businesses.

Another area where this has played out is product liability. Instead of showing that a product defect injured someone, a plaintiff's lawyers will argue that a non-defective product is somehow worth less than what people paid.

Some of these cases have focused on the automobile industry. Plaintiffs’ lawyers will sometimes wait for a common recall notice or warranty program that proactively resolves a concern with a specific car, then sue over it. In these cases, the "ghost class" typically has not lost any money, because the defect in question has already been addressed for free through a warranty or recall. Rather, the claim is that class members paid more for the car than they would have, had they known of the real (or in some cases just potential) problem and its possible effect on the resale value. The vast majority of members of the class never experience any issue with their car, meaning such claims are largely hypothetical.

Members of these types of ghost class actions often get nothing of value, or perhaps just service on their car that would have been provided at no cost without a lawsuit. Big money does come in, though, when a ghost class action is certified. When a court certifies a case, as a practical matter, it is likely to settle because of the unpredictability of going to trial related to a product purchased by thousands or potentially millions of people. The settling plaintiffs’ lawyers will then claim huge legal fees based on the total settlement money set aside, even if consumers never ask for the money because they were not injured or view the settlement as worthless.

Wise judges have, and all judges should, deny certification of ghost class actions. Class actions should only be certified if plaintiffs’ lawyers can show that all class members sustained an actual common injury. If a class action survives and settles, the plaintiffs’ lawyers’ fees should be based on money their clients actually receive or the true value of services to remedy the problem that consumers would not have otherwise received.

Consumers should not, as now commonly occurs, get a settlement notice that most toss in the wastebasket.

These simple reforms — requiring that plaintiffs in class actions show an actual loss and that plaintiffs’ lawyers receive fees based only on results that provide real benefits to real people — will make the ghosts vanish from class actions.

Victor Schwartz is co-chair of the public policy group at Shook Hardy & Bacon LLP and a former law professor and dean.