Red flags are being raised over Toyota’s $1.6 billion settlement of a class action lawsuit alleging that the company covered up defects in its electronic throttle control system.
The Toyota vehicles in question have been plagued with sudden acceleration problems that have led to numerous deaths and injuries.
The settlement ostensibly addresses the loss of economic value to 22 million Toyota vehicle owners.
But objectors had to hammer away at both class action and Toyota counsel who at first wanted to direct what could be more than $100 million in unclaimed funds to a research and education fund that would have focused on driver error instead of defects in the electronic control systems.
Clarence Ditlow of the Center for Auto Safety objected strenuously to that aspect of the settlement.
“The lawsuit relates to defective electronic control systems and Toyota’s cover up of the defects by blaming driver error,” Ditlow said. “To provide funding for driver education legitimizes Toyota’s cover up. Driver education programs have been dismal flops in improving vehicle safety starting with the $100 million seat belt use campaigns that had no success until mandatory use laws were passed. Research to find and correct defects in electronic throttle control systems works because the driver does not have to be trained for the emergency unintended acceleration event because it doesn’t occur.”
Because of objections raised by Ditlow and other parties, the estimated more than $100 million in unclaimed funds were redirected to the various states through escheatment.
“At one point in the settlement, before escheatment was the sole mechanism for the leftover money, left over money was going to be designated for a fund that would be used for driver education programs of some sort related to these vehicles,” Brian Wolfman of Georgetown University Law Center told Corporate Crime Reporter in an interview last week. “The concern, and I think a valid one from Clarence’s point of view, was that funding of driver education programs would suggest that the problem in these Toyota vehicles was driver error and that learning some sort of driving techniques would somehow abate or diminish the problem with unintended acceleration. The concern was that this would be an abuse of the class action process. It would be an attempt to vindicate Toyota’s position in this litigation that the problem was driver error and not a defect in the vehicle in the electronic throttling system which causes unintended acceleration.”
But sending the money to the states did not please Ditlow either.
Ditlow proposed that instead of sending the estimated more than $100 million to the states, the money be sent to a cy pres to research the causes of sudden acceleration.
When the objectors’ attorney dropped out of the case at a key point of the case last year, Ditlow tried to get public interest attorneys to pick the case up, but couldn’t find one.
“Some public interest organizations are reluctant to get involved in litigation where they have close ties to attorneys on the other side,” Ditlow said.
Ditlow says that he faced a similar situation a couple of years ago with the Ford Explorer rollover class action settlement.
“I was turned down by a half dozen public interest attorneys and groups in that case,” Ditlow said.
Ditlow eventually got two law professors — John Sims and Richard Zitrin – to take the case and object to the proposed settlement.
Ditlow says that in that case, the class lawyers got $20 million in fees for what they claimed was a $100 million case against Ford. In fact, only 148 customers cashed coupons worth about $50,000, Ditlow said.
Consumer advocate Harvey Rosenfield, founder of the California public interest group Consumer Watchdog, said public interest groups have to be willing to take a stand in such cases.
“Any public interest group that accepts money from any source has to be willing to take a stand against the interest of that source when the public interest requires it,” Rosenfield said.
In the Toyota case, the escheatment provision stayed in the settlement agreement.
Ditlow did secure $1.5 million in funding for auto safety research in a separate side deal with class action counsel, with $750,000 going to the Automotive Safety Research Institute and $750,000 going to the Center for Advanced Life Cycle Engineering at the University of Maryland.
Wolfman says that directing the unclaimed funds to the Ditlow created fund would have been a more appropriate use of the money.
“This money, because it is not tied with any strings, not tied to Toyota’s desire the pin the problem on drivers, can be used to do research into problems with unintended acceleration in the electronic throttling systems, to do the research, to determine the problems and come up with solutions to those problems,” Wolfman said.
“I don’t think there is any question that what Clarence Ditlow negotiated privately with class counsel takes a form that is superior to the public relations proposal originally put forth by Toyota and class counsel,” Wolfman said.
Shouldn’t the bigger number — the $100 million — have gone to the Ditlow fund instead of to escheatment?
“That’s correct if at the end of the day, there is a substantial amount that remains because the individuals have not cashed their checks,” Wolfman said. “It is likely, but it remains to be seen. But the amount of this fund could have been a lot larger.”
“It’s possible that Toyota might not have agreed to it. If you are never going to get agreement by one of the parties to the case, the only alternative is trying the case.”
Directing unclaimed money to cy pres funds is better than having it revert to the companies and better than escheatment, Wolfman says.
The term cy pres is from the French term “cy pres comme possible.”
“It means as near as possible.,” Wolfman explains. “When there is money left over, or it is just not practical to get the money to the class members, the idea is to use the money for something that is as near as possible for the purposes of the class action.”
“An example might be, if there were a class action concerning employment discrimination, and there is money left over. The money might be used to fund an education fund at the plant for supervisors to assure that they don’t discriminate in the future.”
Wolfman’s nutshell reform proposals?
“Cy pres is the preference when you can’t put money in the class members hands,” Wolfman said. “Never have reverters (money going back to the company) which fail to induce compliance with the law.”
“Ensure that attorneys fees are related to actual benefits that flow to the class members. We have long argued that instead of calculating attorneys fees as a percentage of the overall pie in the sky fund for example, 20 percent of $300 million it should be 20 percent of the actual benefits that flow to the class members. Why do you do that? That more than anything else lights a fire under the feet of the class action lawyers to establish procedures that are likely to put money in the hands of the class members.”
“If you tie the attorneys fees to the actual number of class member checks cashed, you would never get a situation where you had to file claims. So the rule should be percentage of total amount of checks cashed equals attorneys fees.”
What about transparency?
“Another aspect of the Toyota settlement that we have been pushing for a couple of decades now is full transparency in the claims procedure in the class action,” Wolfman said. “As the class action is processed, as the claims are paid out, as the checks are cashed, the aggregate numbers are made publicly available and filed with the court. How many checks cashed? For what amount of money? How many class members? With that transparency, we will have a way in the future of measuring the effectiveness of different claiming procedures, different notice procedures, different methods for allowing the cashing of checks and following up on check cashing. That’s critically important. It should be done in every class action.”
“Far too frequently a class action is settled for an aggregate amount of money with a claims procedure, but we never learn of the actual results of the class action. You might have a pie in the sky figure of $100 million, but in fact only $15 million or $10 million went to the class members, because of very poor claim rates, very poor check cashing rates. And that sends a signal that the methodology used in that case was not very good.”
Is that type of transparency unusual in class action settlements?
“It is unusual,” Wolfman said. “It’s very hard to track down the actual results in class actions. Some academics have dug a little to try and find out. But as a general matter, you cannot go to the file in federal court in a settled class action and find out the actual results in the case. You can find out what the settlement agreement says, but you can’t get the actual results in most cases.”
[For the complete q/a transcript of the Interview with Brian Wolfman see 28 Corporate Crime Reporter 1, January 6, 2014, print edition only.]