TCS Daily

Wal-Mart's Classless Act

By James K. Glassman - May 31, 2002 12:00 AM

On average, every two hours of every day of every year, Wal-Mart Stores, Inc., the world's largest retailer, gets sued. At last count, more than 9,000 cases were pending, including some that can only be called weird - like a 450-pound Louisiana woman who wanted restitution after she was impaled on an exercise bike or a half-dozen women who claimed they were injured in a rush for Furby dolls during the 1998 holiday season. According to Forbes, a court last year ordered Wal-Mart to pay $51.5 million after the company required "a vendor whose contract had ended to remove its vending equipment from stores." Most cases involve customers slipping on floors or parking lots of its 4,455 stores, but others are serious class-action suits, including one on behalf of 700,000 past and present Wal-Mart female employees who claimed discrimination. In another case, described on the website, the company is being sued by a lawyer proposing a class of 20,000 workers who allegedly were forced to work through meal and rest breaks.

It's hardly a surprise that Wal-Mart, whose 1.3 million employees serve 100 million customers weekly, is the most-sued company in America. What's alarming and puzzling, however, is that Wal-Mart is the lead plaintiff in a suit which, if successful, will make it easier for others to file massive class-action suits against deep-pocketed targets, including Wal-Mart, and to inflict serious harm on the economy as a whole - not a small consideration for the world's largest retailer, whose revenues last year were $217 billion, or about 2 percent of U.S. gross domestic product.

The suit, filed originally in 1996 by Wal-Mart and a few other large chains, has been quietly moving through the legal system, becoming what scholars believe is the biggest class-action suit in American history. The case pits practically every retailer in the country against practically every bank. The four million plaintiffs want damages that an appeals court judge says could top $100 billion. But the ultimate bill could be much greater. If the Supreme Court refuses to accept the case (in a decision that could come soon), then class-action suits - already a virus spreading through the U.S. economy - could become an uncontrollable plague. Gigantic industry-vs.-industry suits, packaged and promoted by trial lawyers, will multiply, and shareholders, businesses and consumers will be the victims.

At issue is whether Visa and MasterCard, the dominant bank-card associations, can pursue a policy called "honor all cards." Currently, for example, if a retailer accepts Visa credit cards, Visa can make it accept Visa debit cards. The retailers, who especially object to fees for certain debit transactions (purchases using "Visa Check" or "MasterMoney"), consider this an illegal tying arrangement, in violation of the Sherman Act. (The U.S. government later sued Visa and MasterCard in a different antitrust case.)

It's a thorny issue, but what's at stake is something much bigger - the ability to create a "class" for a lawsuit. Wal-Mart, Sears and the other chains could have brought the case strictly on their own, but instead they asked a federal district court in Brooklyn to certify a class of "all persons and business entities who have accepted Visa and/or MasterCard credit cards" over a 10-year period. That comes to four million retailers - who, in the destructive tradition of class-actions, become part of the suit whether they ever had an urge to complain or not. The district court certified the class without ruling on the merits of the case. The card companies appealed but lost last October in the 2nd Circuit Court of Appeals on a 2-1 decision. Next stop, the U.S. Supreme Court.

The reason this case - called In re VISA Check/MasterMoney Antitrust Litigation -- is so critical is that the standard set by the 2nd Circuit for class certification is minimalist. Essentially, says George Priest, professor of law at Yale University and a consultant to Visa, the appeals court will accept almost any plausible argument in favor of forming a class unless it is "fatally flawed." So, says Priest, "all you have to do is hire a smart expert." The result will be even more class-actions, which, unlike normal lawsuits, have enormous potential for pressuring wholly innocent defendants into settlement.

Class-action suits bear the same relationship to one-on-one suits as a nuclear weapon does to a slingshot. Once a class is certified, few defendants are willing to go to trail and put the survival of their businesses in the hands of wildly unpredictable juries that award $3 million for making coffee too hot. An article in the current Duke Law Journal by Robert G. Bone and David S. Evans argues for abolishing "the Eisen rule" - a 1974 Supreme Court decision that "held that judges should not conduct a preliminary inquiry into the merits of a suit as part of a decision whether to certify a class." In other words, under Eisen, the issue of whether a group of plaintiffs constitute a class and whether they have a decent case have to be treated as separate matters.

But, even if you accept the principle of separation, classes should not be certified without rigor. Consider another 2nd Circuit decision, Caridad v. Metro-North Commuter Railroad, in which lawyers proposed a class consisting of all African-American employees of Metro-North between 1983 and 1996. "The district court examined the plaintiffs' statistical evidence with some care," wrote Bone and Evans, and rejected the class certification. But the appeals court reversed the decision, saying that "it was enough that plaintiffs had advanced statistical evidence that appeared on its face to support certification" - whether the evidence was likely to stand up to scrutiny or not. Metro-North, facing "claims for many millions of dollars in compensatory and punitive damages plus attorneys' fees," decided to settle since the railroad couldn't accept a roll of the dice in court. Perhaps because of decisions like Caridad, the lawyers for 35 million proposed class-action plaintiffs seeking reparations for slavery chose Brooklyn (the 2nd Circuit covers New York, Connecticut and Vermont) - far from the plantations of the Old South - to file their case.

In the Wal-Mart suit, the only dissenting 2nd Circuit judge, Dennis G. Jacobs, called class certification a "brutally coercive" means of forcing a settlement. "Even a defendant who is innocent and holy may rationally choose" to settle, faced with such gigantic liabilities, he wrote. A ruling against class certification in another case cited "inordinate or hydraulic pressure on defendants to settle, avoiding the risk, however small, of potentially ruinous liability." In their article, Bone and Evans point to a 1995 federal study that found that "the vast majority of certified class actions settle, most soon after certification." With so much on the line, Jacobs argued, the standards for certifying a class can't be as trivial as the court has made them.

What's at stake? MasterCard alone processes 15 million transactions a day in 210 countries. Visa has one billion cards outstanding, which, in 2001, accounted for $2 trillion in purchases. Each association is owned by about 20,000 banks, which could bear the brunt of a settlement. In fact, if the Supreme Court rejects the case, these banks may immediately have to take write-offs against potential losses.

The suit could throw into turmoil - or completely destroy -- the system that most American families now use to finance their purchases. That, at any rate, is the prediction of a cocksure lawyer named Lloyd Constantine, who represents the plaintiffs. In a remarkable speech last month in Brussels, Constantine predicted that, if the case goes to trial, Visa and MasterCard are doomed. "Their coffins will be nearly nailed shut," he told the audience. "They will have both feet in their graves. They will be on life support, or in extremis for the Latin scholars out there. You can pick your own death metaphor." Constantine, speaking as though he had tapped the Justices' chambers, also predicted that the defendants "have about once chance in 20 of getting the Supreme Court to even hear their appeal and their overall chance of getting the class reversed is about 2 percent - and that is a very generous estimate."

Nasty stuff, but perhaps not too shocking from a plaintiffs' lawyer. What continues to surprise, however, is the self-destructive conduct of Wal-Mart, a company whose size, swagger and aggressive cost-cutting practices with suppliers make it an attractive target. Earlier this month, Wal-Mart confirmed that it was seeking regulatory approval to acquire Franklin Bank of California, perhaps to acquire a banking license that will make it easier to process debit-card transactions or even (though Wal-Mart now denies it) to enter retail banking. This approach appears to be a more productive, competitive way to challenge Visa and MasterCard than spearheading a gigantic class-action suit that could force bank capital to shrink and trigger a cascade of new suits, battering stock prices and damaging the U.S. economy as a whole.

Wal-Mart would do the country - and its own shareholders - a favor by dropping out of the suit. Even then, the Supreme Court needs to set more reasonable standards for approving class-actions.

A shorter version of this article first appeared in the Wall Street Journal.

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