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November 28, 2006

If They Both Lost, We’d Win

Class action extortion or lack of telecom competition:  which hurts America more? That’s a toughie.  Both are under some attack in this morning’s news and the stories are interlocked.

According to The Wall Street Journal Online, the Supreme Court just heard arguments in a case which alleges that the Baby Bells (which now include at&t) violated the Sherman antitrust act by conspiring “…to restrict entry into their territories of competitors in local telephone and Internet service.” There’s no question that the United States trails much of the developing world in the availability, quality, and price of broadband access and that lack of competition is a significant contributing factor.  However, that’s not evidence of collusion.

Interestingly, the case as brought by the plaintiffs doesn’t provide any evidence of collusion either. They base their claim on “…circumstantial indicators of anticompetitive behavior, such as the parallel conduct of the Baby Bells in declining to compete in each other's territory and allegedly impeding other carriers from connecting to their networks.”  If the Supremes allow the suit to proceed, the plaintiffs will be entitled to discovery – essentially to paw through the records of the defendants – in search of evidence which might support their circumstantial claim.

Who are these plaintiffs?  Well, this is a class action law suit brought allegedly on behalf of all of us.  The lead lawyers whom you may not remember having selected to represent you are the most famous of class action law firms: Milberg Weiss Bershad & Schulman LLP.

Over at the NY Times this morning we read: “The trial of the prominent class-action securities law firm Milberg Weiss Bershad & Schulman and two of its named partners has been scheduled for January 2008… The law firm and the partners are accused of making $11.3 million in secret payments to entice people to serve as plaintiffs in more than 150 lawsuits.”

Back in my days as a CEO, Milberg Weiss was the bogeyman whose name your corporate council whispered in your ear when it came time to justify her raise.  Didn’t matter if your conscience was absolutely clear.  If they sue you, you have the significant expense and time sink of providing them with all kinds of records through which they can search for something else to sue you for.  Many companies, under this kind of attack, settled, admitted nothing, but rewarded the lawyers a lot and the class the lawyers allege to represent almost nothing.  How many coupons have you gotten as your share of a class action settlement?  You can be confident “your” lawyers didn’t get paid in coupons.

Again according to the WSJ, the Second U.S. Circuit Court of Appeals “acknowledged that the ease of filing lawsuits imposed on defendants the "sometimes colossal expense of undergoing discovery" and could thereby encourage unjustified settlements to avoid trial.” But the Circuit Court let the case go forward on the grounds that this is indeed what the law allows and it is up to Congress, not the Courts to change the law. It is this question which is being appealed to the Supreme Court.

Yet one more story in the WSJ this morning is about the effect on American competitiveness of Sarbanes-Oxley.  The facts are clear; not as many foreign companies are electing to list on American stock exchanges and the value of an American listing seems to have gone down in terms of a premium in stock price for a dual-listed stock.  However, when I was in London, whose stock exchange has benefited greatly from these trends, companies interviewed there cited the danger and expense of class action suits in America as often as they cited the excesses of Sarbanes-Oxley as a factor in their decision to skip listing here.

Hard to tell whether a plague of litigation or poor broadband costs us more as an economy.  I’d bet the latter but it’s close.

Nevertheless, the ends don’t justify the means. There should be some evidence required in order to bring a serious charge like collusion in restraint of trade. With or without collusion, past regulatory policy and continued pro-Bell regulation on behalf of the FCC and many state PUCs bought us to the current uncompetitive position.  That needs to be corrected.  Obviously any cases of collusion for which there is evidence should be pursued but the current case doesn’t offer any evidence.

I agree with The Circuit Court, too.  If the law does allow this kind of fishing expedition without any preliminary evidence of wrong doing, then the law needs to be changed by Congress. Don’t hold your breath, though.  Whatever you may have liked about the last election, it also made the world a little safer for the plaintiff’s bar.

At least there’ll be the trial of Millberg Weiss to watch; hope it’ll be on YouTube.

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