Floppy discretion

by The SE Texas Record |
Nov. 27, 2009, 1:43am

The details of class-action settlements rarely are publicized. Maybe that's because the logic of them might escape us.

A settlement is supposed to compensate legitimate class members for actual damages. It is not supposed to be a windfall for indiscriminate bystanders or a nest egg for a slush-fund foundation. In practice, however, such things can happen.

A classic example occurred 10 years ago in Jefferson County, when Toshiba America Information Systems Inc. and NEC Electronics agreed to a $2.1 billion settlement in a class action suit over allegedly defective floppy diskette controllers in their computers. Reporter Kelly Holleran recently revisited the landmark settlement for The Record.

Toshiba executives authorized the huge payout to avoid a potentially higher jury award that could have destroyed their company.

According to the terms of the settlement, class members could claim a cash payment of up to $443.21 per defective unit, a software solution to correct the malfunction, and a $225 coupon toward the purchase of other Toshiba products.

Here's where the settlement got soupy. To pay class members' claims, Toshiba established a cash fund of $597.5 million and agreed that unclaimed funds would go to the newly created "Beaumont Foundation of America," established to purchase and "charitably" distribute Toshiba laptops and desktops.

In other words, the new foundation would claim the unclaimed funds. But shouldn't unclaimed funds revert to the defendant? If class members don't claim them, they effectively disavow their claims, right? How does anyone outside the class have a claim on the abrogated claims?

Ah, but it was for a good cause.

U.S. District Judge Thad Heartfield praised both sides for "dedicating any unclaimed funds that remain at the end of the case to an important and worthwhile social purpose."

Said funds came to $358 million, well over half of the set-aside. The Beaumont Foundation of America has since rededicated those funds to purposes other than those stipulated in the settlement.

The four plaintiffs' attorneys who brought the Toshiba suit, sons of Texas all, walked away with $147.5 million in fees. Not a bad day at the office. But it is a bad day for consumers who face paying higher product prices to cover the cost of multi-million dollar fees.

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