Tuesday, January 1, 2013
Toyota Settling Lost-Resale-Value Lawsuits: Why It’s Insane and Why Everybody Loses (Except the Lawyers)
Lawsuits have created a warning-label culture, but where are the warning labels on the lawsuits themselves? For the cover of a 237-page settlement proposal that Toyota filed yesterday, we’d propose “Beware: Contains Idiocy and Greed.” Pending approval from a federal judge, Toyota will buy its way out of a class-action lawsuit that claims perfectly functional cars depreciated in value after the Sudden Unintended Acceleration Circus of 2009 and 2010. (The DOT ultimately ruled in 2011 that the vast majority of instances were the result of driver error.) Why spend time and money going to court and potentially losing? Most civil lawsuits end with settlements for these very reasons. Following logic from The Price Is Right, the total package value is over $1.3 billion. Then again, a toaster costs $159.99 on The Price is Right. Here’s why each of the parts of the settlement are insane and/or stupid—plus we name the actual winners.
What The Lawsuit Is Supposedly About
Despite being an extraordinarily complex lawsuit, which ended up with a single federal court managing over 200 cases from courts around the country, the case is fairly simply explained. As we wrote when the suit picked up steam earlier this year, the plaintiffs argued that “because Toyota’s cars were involved in this phenomenon, every example of each model in question is now worth less on the used market. Toyota, the plaintiffs say, owes its customers the difference between what the cars were worth before people started crashing them and what they’re worth now.”
These claims fit into a controversial legal category called “Economic Loss.” People usually can’t sue if they haven’t suffered an “injury,” whether that’s physical or economic. The plaintiffs might have had to prove cars did accelerate unintentionally and that Toyota was to blame—this would be almost impossible. You can read more about why this was so unusual our original article.
This sounds like a lot of money. It’s not. Depending on the model, its age, mileage, and other bookkeeping stats, the estimated payout spread among potentially millions of sellers is “in the range of hundreds of dollars to over a thousand dollars.”
Actual Winner(s): Big used-car dealerships, which may have sold hundreds of Toyotas and Lexuses during that time.
These systems, which are common in many new cars, essentially lock out the gas pedal when the brake pedal is depressed. Toyota will pay to have these installed on eligible cars—most of its non-hybrid lineup from 2005 to 2010, estimated to be roughly three million vehicles. Take a moment and think about what Toyota is doing here: It’s paying to buy parts and to have Toyota dealers install them. In other words, Toyota is pumping a giant load of cash into its suppliers and dealers’ service departments. What are the odds that all of these vehicles will come down off the lifts without the discovery of additional parts needing replacement or service?
Actual Winner(s): Toyota dealerships, Toyota’s suppliers, and—somewhat indirectly—Toyota.
Some of the vehicles on the master list cannot, for mechanical and electronic reasons, be fitted with a Brake Override System. The current owners of these vehicles will receive a cash payout, determined by the model, its age, mileage, and other factors. Compensation will range from $37.50 to $125 per car.
Actual Winner(s): Nobody, really.
Toyota will give approximately $800,000 to a major university, which the settlement says is likely be the University of Iowa’s Public Policy Center, to conduct a study “focusing on identifying critical gaps in awareness and practice regarding defensive driving skills.” If that’s not passive-aggressive enough, among those “specific driver behaviors” to be studied: “issues relating to driver pedal misapplication.” Toyota will then spend up to $14.2 million dollars on a public safety campaign to raise awareness about the issues it discovered in the study. Translation: This is how we think you crashed our cars, and this is how you can avoid doing that again.
The other $15 million (maximum) will go to fund university research into safety technology.
Actual Winners: The University of Iowa, other universities, billboard owners.
Weighing in at some 85 attorneys spread over 25 firms, the grand prize winners are: the law firms. Toyota’s settlement proposal agrees to pay up to $200 million in fees to the plaintiffs’ lawyers, with an additional maximum of $27 million allocated to cover their expenses. (It’s distributed proportionately to how much work the firms put into the suit.)
Officially, the millions of members of the “class” in this class-action lawsuit—the owners and sellers—are the ones suing and negotiating with Toyota, and ultimately the class members and the federal court have to approve the attorneys’ fees. (Although it happens as frequently as a friendly Michigan-Ohio State game, class members do occasionally revolt and even sue their lawyers.) But in reality, this is and was an attorneys’ show all along. These folks were, after all, the ones who made this monstrosity of a class-action lawsuit possible. Law firms took the initiative to bundle together individual clients, to manage the litigation, to spend their time working without income on the expectation that they’d win a settlement or judgment against Toyota. And, in a sense, nobody actually hired them—they work with a few representative plaintiffs, post updates on their websites, and generally communicate with any potential class members who want to do so. But once involved, the firms really run the operation.
The lawyers who sued Merck for selling the anti-inflammatory drug Vioxx took home $315 million in fees. In their cases, people had actually died. This class action against Toyota specifically excludes anyone who was physically injured or killed in a collision.
Even though Toyota admits nothing—and very likely would have won this lawsuit eventually—this big settlement shows that (1) the economic-loss category of lawsuits has legs, which means the classes in class-action lawsuits can potentially be much bigger in the future, and (2) car companies are still willing to make blockbuster payouts.
Hyundai is now facing a class-action lawsuit for misstating its vehicles’ fuel-economy ratings, even though the company already offered to compensate owners. (The firm pursuing this case is the same one that quarterbacked this Toyota suit.) Ford is dealing with a similar lawsuit in California regarding its mileage claims for the C-Max hybrid.
Warning: The next few years are going to be messy.