- A million class members will get nothing but a letter telling them to check the plenum when they go for their 40,000-mile service.
- VW will perform an expensive preventative service action on some, but not all, VWs that might suffer this problem.
- An $8 million settlement fund is set up to pay damages for some, but not all, VWs that have suffered damage
Let's look at #2 for a second. According to the plaintiff's own expert, VW will spend $55 million on that service action. According to the same expert, if VW does not perform the maintenance, those vehicles will suffer $24 million in damage. (The expert then remarkably triple-counts this as a benefit to the class: the $24 million in damage avoided, plus $55 million in VW expenses for the service action, plus another $24 million for the avoided diminution of value of the vehicle that would have occurred if the vehicles suffered damage and then weren't repaired. Thus, according to the expert, this component of the settlement is worth over $103 million.) Spending $55 million to avoid $24 million in damage is the very definition of economic inefficiency.
But consumers lose out. Some of the class members who are getting nothing but a letter—including one of my clients—have suffered actual damage from sunroof leakage. They're not getting paid under this settlement and are being forced to release their claims, which are no less meritorious than the claims that are getting paid.
The only possible reason for plaintiffs' attorneys to insist upon this convoluted remedy is to increase attorneys' fees. By making Volkswagen engage in wasteful spending, they pump up the alleged value of the settlement and then argue that they're entitled to over $23 million in attorneys' fees and costs, to be paid separately by Volkswagen.
It would have been very easy to structure a settlement so that Volkswagen created a $48 million fund to cover repairs to every vehicle that suffered water damage from a sunroof leak. Every VW owner who had the problem in the past or in the future would be able to collect; Volkswagen would be out of pocket $48 million instead of $70-$90 million; the attorneys could have made a plausible claim for $10 million in attorneys' fees and costs from the fund, which would still be close to twice an exaggerated lodestar. Instead, the parties negotiated a settlement that made everyone—consumers and Volkswagen—worse off. Well, everyone except the attorneys, if Judge Patty Shwartz buys the quack economic testimony and awards the full fee request.
Under Rule 23(e), a judge is not to approve a settlement unless it is "fair, adequate, and reasonable." It is hard to see how this settlement is fair or reasonable; and it demonstrates the failure of legal ethics that the class attorneys could structure this settlement and make that fee request without fear of sanction, even as they put their own interests ahead of their clients.
The four-hour fairness hearing, consisting mostly of the economic expert rationalizing his calculation and the attorneys arguing over fees, was last Monday in a Newark federal courtroom. I look forward to seeing how the judge will rule.