Just weeks after a federal judge agreed to settle a multimillion-dollar lawsuit against Toyota Motor Company, Larry Schonbrun, aka “The Spoiler,” showed up. The Berkeley lawyer butted in at the last minute to make sure that the attorneys who sued the carmaker didn’t walk away with all the money the judge had just awarded them.
Schonbrun has fashioned a successful legal career out of spoiling settlements just like this one. As he sees it, the lawyers who live off these massive class-action suits are like sophisticated con artists who rip off consumers and corporations at the same time, all in the name of fighting for the common man. The lawyers whose fees he challenges look at him as they might look at an annoying homeless man whom you have to pay to make go away. Only in Schonbrun’s case, he shows up in a tailored suit.
He first became a serial objector to the legal spoils of class-action lawsuits in the early 1990s, when multiparty lawsuits against corporate America became as popular as Starbucks lattes. As such litigation spread, the legal fees in large cases swelled too, and now often exceed $1 million, even when consumers walk away with only coupons, discounts, or paltry payouts. Occasionally, legal bills have grown to tens or even hundreds of million of dollars. To date, Schonbrun has convinced judges to reduce such fees by more than $100 million.
In the Toyota case, the carmaker and its dealers had been accused of colluding to fix certain prices on its new cars. The judge’s settlement awarded thousands of past car buyers $150 coupons toward the purchase of a new Toyota, which amounted to $1.2 million for consumers in the case. But what sickened Schonbrun and his client, Yolanda Luna, was that the judge awarded the four attorneys who sued the carmaker $4.25 million — three and a half times more money than consumers received.
As sometimes happens in such cases, Schonbrun’s foes struck back — hard. The four lawyers whose fees he was contesting investigated his client’s right to participate in the case. They concluded that Schonbrun had falsely claimed he’d represented Luna since 1994, two years earlier than she herself had testified. They also accused him of altering his client’s testimony after the fact, so that he would have legal standing to participate in the class action. Pissed-off plaintiffs’ attorneys petitioned the judge and sought to get Schonbrun sanctioned and barred from objecting in the case.
If Schonbrun’s mission were judged by the number of enemies he’s made, he’d have to be considered enormously successful. Judges call him names and threaten to sanction him. Lawyers petition judges to have him ejected from the proceedings and dream of getting him disbarred. In most courtrooms around the country, he is as welcome as a drunk at a preschool.
Judges are used to extreme deference from the attorneys who come before them. They don’t get that from Schonbrun. Although he’s polite and respectful, the heart of what he does is profoundly disrespectful. He tells judges they are wrong. He urges them to rethink the amount of money they fork over to plaintiffs’ attorneys in settlement agreements and give the extra cash to the wronged consumers. And of course, he then insists that because he represented the real interests of the class members, he too should be paid for the time he spent on the case.
Class-action attorneys, one of the most powerful groups of lawyers in the country, see Schonbrun as a parasitic interloper who disguises himself as a do-gooder. Not only does he routinely downplay their hard work and accuse them of overbilling, he audaciously demands a cut of their legal fees for objecting — a sickening and unethical way to make a living as far as they’re concerned.
“I believe he extorts class counsel,” says San Francisco attorney Francis Scarpulla, one of Schonbrun’s four foes on the Toyota case. “He has no risk, no clients, no cost, and people will pay him money to go away.”
Scarpulla and his colleagues got to tattle on their courtroom nemesis in their 1996 complaint in the Toyota case. “Mr. Schonbrun, who clothes himself in the garb of the class protector, is anything but the Don Quixote he claims to be,” they sniped. “Rather than acting in the best interests of the class, Mr. Schonbrun insinuates himself into settled class actions in an attempt to generate fees for himself based on the labor of other lawyers. Far from being the defender of helpless class members, Mr. Schonbrun is the wolf in sheep’s clothing.”
In response to that complaint, US District Judge Marilyn Hall Patel wrote that a review of the perjury allegations raised “serious concerns about the conduct of attorney Schonbrun.” She ordered him to appear before another judge to explain “why disciplinary action should not be taken.” In court, Judge Patel verbally reprimanded Schonbrun, and said his changes to his client’s testimony raised “serious questions of ethical breaches.”
Schonbrun denied that he had done anything wrong, and said he simply refreshed Luna’s memory with proof that they had discussed the case much earlier than she had recalled. The matter dragged on for weeks, but a judge ultimately chalked the controversy up to a misunderstanding, and cleared Schonbrun of any wrongdoing. US District Court Judge Charles Legge, who investigated the allegations at Patel’s request, said the matter would “go into the record books as an unfortunate event.”
Although exonerated, Schonbrun failed to convince Judge Patel to thin out the legal fees in the Toyota case by one cent. But he says he learned a valuable lesson. “What I learned from this is these guys are really ruthless,” he recalls nowadays, in a measured voice that betrays the anger he obviously still feels. “These guys knew what they were doing was perpetrating a falsehood, but getting rid of me was more important.”
Scarpulla remains completely unapologetic for his actions, and notes that while one judge found Schonbrun innocent of contempt of court, the other found him guilty. Scarpulla is convinced that it’s just a matter of time before Schonbrun’s hypocrisy does him in, and that day can’t come soon enough for him and many other attorneys.
In the meantime, Scarpulla notes with glee, “Schonbrun has not reduced my fee by one cent, and he’s objected to ten or fifteen of my cases.”
From the way he carries himself, Schonbrun seems like someone who has spent too much time engaged in adversarial pursuits. He is not a comfortable man to be around when you first meet him. He is tense, reserved, and as humorless as a feminist at Hooters. He relaxes after a couple of interviews, but even then seems to be holding back, as if he expects you to turn on him. When he speaks, he does so slowly, as if evaluating each sentence before uttering it. This is perhaps not surprising given the way he’s spent the last twelve years of his life.
Being a staunch conservative in ultraleftist Berkeley may explain some of Schonbrun’s caution. But even among conservatives, the 57-year-old is an outsider. He came out to California from New York City in the 1960s to work with Vista, a domestic Peace Corps for lawyers who aimed to help the poor. From there, he moved to the San Francisco Neighborhood Legal Assistance Foundation, another organization that provided him experience not typically found on most Republican legal résumés. He’s a former civil rights activist who likes a lot of what Pat Buchanan has to say, a crusader for the common man who happens to drive a Jaguar and live in the Berkeley Hills.
Schonbrun eventually started his own law practice and became a generalist with no specialty. Then in the early 1990s, he established his willingness to take on the legal establishment, penning an article in the January 1991 issue of California Lawyer magazine entitled “The Clock Is Running.” The article’s subhead made his mission clear: “With no standards to guide them, law firms seem to make up their billing practices as they go along.” As warning shots go, it was hardly subtle.
“It is ironic,” he wrote, “that in a profession based on orderly process through written rules, there is no generally accepted definition of ‘billable time.'” He later added, “No firm I looked into even requires attorneys to use a clock in figuring the number of hours spent on a case.” The piece focused on an important issue that Schonbrun found disturbing: the fuzzy ways that lawyers billed their clients. Schonbrun said he interviewed sixty corporate managers whose job it was to shop for legal services, and another forty managing partners from the state’s largest law firms. Although it wasn’t directly spelled out, the article’s subtext was clear: Attorneys who represented some of California’s largest corporations charged whatever the hell they wanted to, with no real standards to guide them and no effective way to evaluate their work.
Schonbrun concluded his article with a call to action: “Whether it be the State Bar or some more limited group, ‘someone’ should review billing practices in an effort to establish guidelines on attorney responsibilities and client rights.”
That someone turned out to be Larry Schonbrun. Soon after his article ran, he received a letter from a fan of his story who urged him to scrutinize the billing practices of lawyers in a specific case. It was a piece of mail that changed the course of his life.
The notice he received was for a class-action lawsuit alleging that Founders Title Company had overcharged its customers with homeowners’ insurance policies. Under the terms of the settlement, class members received rebates of $15 to $25 and attorneys were paid close to $1 million in fees. Despite Schonbrun’s objections, the judge refused to lower the attorneys’ fees. He also denied Schonbrun’s own fee request. Nonetheless, the case whet Schonbrun’s appetite and convinced him that class members in such suits desperately needed an advocate who could separate their interests from those of their attorneys.
The second time around, Schonbrun was more successful. He persuaded a San Diego judge to reduce legal fees in a case against a utility company alleged to have squandered its assets in bad financial deals. Attorneys had asked for fees that amounted to one-third of the $33 million settlement, or $11 million. He convinced the judge to reduce these fees by $500,000, and to slash the attorneys’ expenses by another $400,000. Schonbrun himself was paid $2,300 for his work in the case — $210 an hour — and a class-action warrior was born.
From his years in the trenches, Schonbrun has developed a philosophy about the nation’s civil courts. He believes rampant, out-of-control litigation is the great American malady, and that class-action lawyers are behind much of it. As he sees it, they have developed a lucrative shakedown racket. They scour the country for evidence of corporate malfeasance no matter how trivial, file class-action suits, and then force companies into settling cases for exorbitant amounts of money because litigating to the bitter end is risky and very costly. Much of the money, he says, goes to the lawyers themselves, who charge whatever they can get away with. Yet because so many of the companies that face these suits are publicly traded, Schonbrun says it’s consumers who ultimately pay.
“It’s the shareholders who are hurt in these cases,” he says. “You find me one case where the CEO of some corporation got his salary reduced by one of these lawsuits. If anything, their salary is increased. … Who loses? The shareholders. Who are the shareholders? These are workers who are being bamboozled.”
Schonbrun loves regaling people with stories of what he perceives as class-action abuses. There’s certainly a lot to regale about. Take the Chicago Tribune‘s account of a settlement against a mortgage bank that yielded a $91 debit to class members’ escrow accounts, but earned $8.5 million for the attorneys on the case. Or consider the Blockbuster Video settlement over late-fee overcharges, in which customers received $1 coupons and attorneys walked away with $9.25 million in fees. Some attorneys who’ve sued tobacco companies have earned in excess of $150,000 an hour, according to published reports.
Typically, Schonbrun says he objects to about ten class-action settlements a year and succeeds in trimming the fees in about half. He’s had some stunning victories, in which judges admonished his targets for their greed and then turned around and handed him a hefty fee for his work.
In 1996, he convinced a Santa Clara judge to reduce the legal fees in a case filed against Intel over flaws in its Pentium chip. The company had agreed to replace its defective computer processors and offer consumers small rebates toward the purchase of new ones. Only 120 people eventually used the coupons, but attorneys in the case were initially awarded $6 million. After Schonbrun objected, legal fees were reduced to $4.2 million. The judge ordered Intel and the class-action law firms of Milberg Weiss Bershad Hynes & Lerach and Lieff Cabraser Heimann & Bernstein to share the $14,000 bill for Schonbrun’s work at $250 an hour. As a result of the lawyer’s intervention, Intel got to keep the $1.8 million in reduced legal fees.
In 1997, Schonbrun convinced a federal judge in San Jose to reduce legal fees in a securities class-action settlement by more than $6 million. The suit was against the Emeryville-based biotech firm Chiron Corporation, and involved allegations that it favored its own employees over nonemployee shareholders when it sold stock to Ciba-Geigy Ltd. Although Schonbrun succeeded in his objection, the judge did not award him a fee.
In 1998, Schonbrun persuaded a Southern California judge to reduce legal fees in a suit against Occidental Petroleum by nearly $2 million. The 1998 case involved accusations that the company committed securities fraud when it cut dividends after promising shareholders they would not be reduced. Lawyers in the suit billed for their time at $495 an hour, enraging US District Judge James Ideman, who wrote: “Even if the greats of legal history were to awaken from the dead and form their own mythical law practice, a senior partner at the firm Lincoln, Darrow, Holmes, Marshall & Blackstone would not be worth such an eye-popping hourly rate.”
The judge reduced the hourly legal fee to $375 — a rate most people might still consider eye-popping — and awarded Schonbrun $48,000 for his work, or about $250 an hour. The company got to keep the rest of the $2 million.
Just a few weeks ago, Schonbrun objected to a massive class-action settlement in New York in which lawyers were awarded the largest legal fees in the history of American class-action jurisprudence, an astonishing $609 million. The case involves allegations that the credit card companies Visa and MasterCard overcharged business customers on their debit-card transactions with clients. Schonbrun says one attorney in the case has billed for several hours at $7,500 an hour. In late September, the judge listened to Schonbrun’s objections and took his pleadings under submission. Schonbrun asked the judge to appoint a guardian to represent class members along with a fee expert and auditor to review the legal bills. He has not yet petitioned the court for any fee for himself and will wait to see the outcome of objection before doing so.
Schonbrun takes his message about the legal undoing of America to anyone who will listen. He went on 60 Minutes a few years back to argue that General Chemical’s 1993 release of a giant sulfuric acid cloud in and around Richmond was a “disaster that wasn’t.” The release resulted in a $150 million class-action settlement for 65,000 people, of which nearly $50 million went to lawyers. Schonbrun told a reporter from The American Lawyer that the settlement belonged in the “hall of shame,” and called the entire suit “a legal scam.”
One of the attorneys who prevailed in the suit practically spewed toxic chemicals when reminded recently of Schonbrun’s comments. “The community was covered with a sulfuric acid cloud!” says William Bernstein, a San Francisco attorney from the nationally known class-action firm of Lieff, Cabraser, Heimann & Bernstein. “People were paid based on the amount of exposure they had.” Bernstein acknowledges that the injuries were “short-term,” but says they were serious nonetheless and adds that people were paid for the fear and disruption the toxic spill caused to their lives.
“I don’t think Larry has the class members’ interests at heart,” he says. “I think he’s really trying to protect the corporate wrongdoers. He’s aligned with forces that want to protect corporations at the expense of citizens of this country.”
Just when class-action lawsuits first began is a matter of debate. One camp believes they date back to seventeenth-century England, when lawmakers allowed multiple plaintiffs or defendants to resolve common questions in a single legal action. Other academics say this type of litigation arose hundreds of years earlier, when groups of people began bringing complaints about communal harm to government institutions.
In the United States, collective litigation began in the 19th century. But it wasn’t until the 1960s, during the height of the civil rights era, that the current class-action litigation system was born. Well-intentioned law professors began to promote the idea that lawyers and judges could play an important role in eliminating racial injustices. The academics believed that class-action suits could help reform prisons, achieve school desegregation, or establish welfare rights. Together, the professors argued, these individuals could seek a legal remedy for various injustices and wield some power as a group.
An advisory panel convened to help the US Supreme Court look at the issue, and justices eventually upended the old system in favor of what we have today. Although the court issued many changes to the procedures governing class- action suits, one particular revision revolutionized the landscape of American jurisprudence.
In 1966, the US Supreme Court decided that parties in a class-action case no longer had to choose to be included in the suit, and were now automatically included unless they opted out. Plaintiffs’ lawyers were suddenly in the driver’s seat, and corporate America started to quiver. Lawyers could now sue on behalf of hundreds, thousands, even millions of people, merely by filing a case with the backing of a single individual.
In many ways, it was a marvelous turn of events when corporate America began to worry about the power of ordinary people. Up to that point, the vast majority of consumers acting alone never had the means to challenge corporate and governmental institutions. But now they had a powerful mechanism to take on wrongdoers. Since the financial stakes were great, high-powered attorneys were drawn to represent plaintiffs in these suits, and regular consumers got access to the kind of legal talent that only large corporations once possessed.
Consumers have since used class-action lawsuits to compensate employees who were forced to work overtime without pay. They’ve been used against insurance companies that sold policies with deceptive sales practices, and against lending institutions that misled customers about interest rates on loans. They’ve been used to end the practice of making black and white workers use separate bathrooms.
But it wasn’t until the 1980s that class-action litigation really began to take off and, as Schonbrun puts it, “Americans replaced the fear of God with the fear of being sued.” By the early 1990s, the number of class-action filings around the country had risen exponentially.
As the cases got bigger and the number of plaintiffs rose, so too did the legal fees, which now regularly exceed $1 million. Class-action lawyers typically charge a percentage of the total amount of the settlement, much like the one-third contingency fee allowed in cases with individual plaintiffs. While the percentages for lawyers in class-action cases can go as high as one-third of the total settlement, Schonbrun believes they typically should be between 6 and 15 percent and diminish as the overall settlement grows. He would like to see more rigorous scrutiny of legal fees through court-appointed auditors.
Plaintiffs’ attorneys, of course, disagree. They say they deserve substantial fees in such cases, because filing complex lawsuits against large corporations involves an immense amount of risk and expense. The larger the settlement, the bigger the fee should be, they argue. “I don’t think Larry appreciates the amount of money we spend just to stay in business for our rent, our personnel, our libraries, electronic equipment,” says Bernstein of Lieff Cabraser. “I don’t think he appreciates how hard it is for the small guy to level the playing field against corporate giants and their well-heeled firms. The small guy should have access to the same kind of legal talent the corporations have.”
Alongside the sheer size of the settlement, fees in class-action cases grow in other ways. Often, dozens of firms work on a case, and all of them bill for their time, sometimes at several hundred dollars an hour. Lawyers can ask the court to substantially increase what they are paid by the hour if a case is particularly difficult, results in the loss of other business, involves large financial risk, or results in a high-quality settlement. As a result, class-action attorneys can make several thousand dollars an hour for work put into a big, time-consuming suit — up to ten times their standard hourly rate.
When Schonbrun takes on a case, he prepares documentation for his client, reads and analyzes the settlement notice, and files an objection. He currently bills for his time at $325 an hour. But sometimes, he concedes, he too asks the court to let him double or even triple his hourly rate because of the risks involved in him filing a case. This practice can raise his own legal fee to a startling $975 for every sixty minutes he puts into a case. In defense of this practice, he notes, judges are often unreceptive, and sometimes they reduce legal fees and still don’t award him a dime.
Not surprisingly, Schonbrun’s critics say his billing practices are stunningly hypocritical. “He’s developed a cottage industry for himself,” Scarpulla points out. “Let’s not bullshit each other here.”
Schonbrun says he doesn’t think his own conduct should reflect on the merits of the problem he is trying to get remedied. “I don’t hold myself out as any kind of saintlike figure,” he says. “I am trying to focus attention on a problem.”
As to whether his courtroom opponents themselves are performing a public service by combating greedy corporations, Schonbrun says in disgust, “If these are the guardians of public good, we’re in trouble.”
Schonbrun’s own contributions to the debate over class-action abuse are hard to assess. His supporters from within the legal-reform community believe that he has single-handedly highlighted the problem of exorbitant legal fees. “He’s really the only guy out there policing these class actions,” says Mike Hotra, legislative director for the American Tort Reform Association, a DC-based lobbying group that hopes to curb the size and scope of class-action lawsuits. “Larry acts as a watchdog on behalf of the actual class members.”
Walter Olson, a senior fellow at the Manhattan Institute, a fiscally conservative think tank, applauds Schonbrun for taking on the legal infrastructure that he calls the fourth branch of government. “I find it frustrating in some ways that so much rides on his shoulders,” he says. “There ought to be more institutional ways of watching the watchdogs.”
Schonbrun himself is oddly modest about his own accomplishments. “I would say I am responsible for making the issue of attorney fees something people are concerned about,” he says. “When I started this practice, the headline in the paper would be ‘Such and such a company settles for $30 million.’ You would never read about attorney fees at all. Now, as a result of my effort and these huge fees, they’re an issue.”
But Schonbrun has some theories about why his concerns haven’t yielded any reforms. He believes that plaintiffs’ lawyers dissuade the judiciary from taking on the issue of class-action abuse by spreading largesse around in the form of contributions to the campaigns of politicians and state court judges. “They’re not just the fourth branch of government, it’s that they control the other three branches,” he quips. Schonbrun points out that when jurists retire, they often become arbitrators hired by those same law firms. Even corporate lawyers come in for a stinging rebuke in his analysis. “It’s not in their financial interest to make this a cause célèbre,” he says. “Their interest is in making class-action cases more manageable.”
In response to the criticism that his interests are aligned with those of corporate wrongdoers, Schonbrun insists that he has no ties to corporate America and simply is disgusted by the sight of class-action attorneys enriching themselves while pretending to stick up for the common man.
He concedes that he would like to see class-action rules rolled back to the way they were prior to 1966, so that people could only become part of a lawsuit by affirmatively signing up. This, he argues, would dramatically cut down on the filing of frivolous lawsuits that yield almost nothing for the plaintiffs themselves. And yet it would simultaneously be a giant boon for corporate America.
“Class-action litigation today is a total disaster, and until the economy totally falls apart, this problem is never going to be corrected, if it is ever going to be corrected at all,” he says. “The reason is, everyone in a position of power has something to gain from this process and the only people that are losing are the general public who, for the most part, everyone in society is trying to rip off in one way or the other.”
Boston University law professor Susan Koniak doesn’t believe that greatly rolling back the scope of class-action lawsuits would serve the interests of consumers. Koniak says the legal system needs the class-action mechanism as an important tool to fight corporate greed. “Corporate fraud is the real problem,” she says. “You need class actions, otherwise there’s no deterrent to petty fraud, which to a giant company can mean millions or billions of dollars.”
In Koniak’s analysis, the problem with class-action lawsuits is not exorbitant legal fees but how corporate defendants can escape massive legal liability in one huge settlement. Although plaintiffs in class-action cases often suffer different kinds of injuries, some more serious than others, the current system binds them all together and allows the serious ones to be brushed aside when a settlement deal is inked. “The system is set up so that if you really do something wrong, you can pay off a lawyer to settle for nothing and the judge doesn’t know any better,” she says. “Injured class members get lumped together with those who haven’t been injured at the defendants’ request.”
Koniak knows of Schonbrun’s work, but does not believe the lawyer has done much to advance the debate. “Running around the country getting fees reduced, I don’t think it’s a good thing,” she says. “That’s not a remedy. Most of these objectors are bottom-feeders. The whole system is so corrupt it’s disgusting.”
But Schonbrun is nothing less than a suit-wearing hero to Walter Kaufmann, a Berkeley psychotherapist whom the lawyer has represented in several class-action cases. “He is doing a fabulous and important job,” Kaufmann says. “What Larry is accomplishing is he is trying to set a limit on these unconscionable fees, because in the long run these fees come out of corporate treasuries and the people who are hurt are the large and small shareholders.”
Dining recently with a friend in a Berkeley restaurant, Schonbrun was introduced to another lawyer. Schonbrun says the lawyer looked at him and said, “Are you still alive? They haven’t taken out a contract on you yet?”
Schonbrun doesn’t worry about his safety because he knows his opponents have more lawyerly ways of operating. “The lawyer does you in by smearing your reputation, alienating you, turning you into a pariah,” he says. “They’ve made me out to be someone who manufactures clients, that I suborn perjury, that I should be arrested by marshals and taken out of the courtroom.”
In truth, there probably aren’t too many things that would make his adversaries happier.