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Bad Cases Make Bad Law



The August issue of The Federal Lawyer ran a piece by Spencer Garrett Scharff on streamlining mass tort litigation, a happy event that will only be accomplished, Scharff seems to think, when LEXECON is overturned.

Personally, I suspect it would be better to distinguished LEXECON away and render it prudentially harmless than to overturn it outright. If the decision made bad law it was because it was a "bad case," an unrepresentative fact pattern.

For non-initiates, Lexecon was a defamation case that arose out of a mass tort, the infamous Savings-and-Loan industry collapse of the 1980s. The plaintiff, Lexecon, was a defendants' consultant firm, which came into many cases on the opposite side of the famous plaintiffs' attorneys Milberg Weiss.

A typical Milberg Weiss case in those days -- the heyday of Bill Lerach, pictured above -- might start with these facts: the CEO of XYZ Industries made certain statements on January 15th. Those statements were false, and presented an excessively optimistic view of the value of XYZ stock. The stock price rose thereafter. On June 15th, the truth contradictory to the CEO statements became widely known. From June through October, the stock lost the value it had gained early in the year.  Thus, Milberg Weiss would bring a lawsuit on behalf of the class of people who had bought stock when it was at its peak, relying (implicitly) on the word of the CEO. The measure of damages would be the loss they had suffered when the truth became known.

Lexecon would enter such cases on the other side, the side of the CEO, the company, and various co-defendants. It was a consultancy, not a law firm, but it would typically work with the defense attorneys to make a factual case that there were other reasons for the stock movements involved, that the CEOs puffing had nothing to do with them, Thus, no actual injury and no recovery.

Unsurprisingly, bad blood developed between Lexecon and Milberg Weiss. The blood was especially bad in the matter of those S&Ls, where Lexecon worked with lawyers representing Lincoln Savings Bank, the infamous bank run by Charles Keating, befriended by the "Keating Five." At any rate: Milberg Weiss principals apparently crossed some lines in their attacks on  Lexecon and a principal thereof, leading to the (ultimately successful) defamation suit by the former.

But first there was the procedural issue to be resolved: was the defamation suit to be bundled into the multi-district litigation about the S&L industry collapse? The intuitively appealing position is that it should not have been: it was a very different sort of case. That position prevailed, but only at the expense of a precedent that now, as noted above, limits the amount of streamlining that can be done for mass torts in general.

My own conclusion: see the headline again.  

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