Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

In their article “Robbing Peter to Pay Paul: The Conflict of Interest Problem in Sibling Class Action”, 21 Georgetown Journal of Legal Ethics 1195 (2008), Richard Stuhan and Sean Costello have come up with a novel argument against multi-front class actions. Recognizing that plaintiffs' counsel will often file multiple, single-state class actions in different states, the authors argue that doing so presents a conflict of interest. They call this the “Sibling Class Action” problem. Like parents, they claim, plaintiffs’ counsel shouldn’t favor one sibling class over another. As a result, they argue, counsel representing more than one class in different courts must be inadequate counsel to at least one of those classes.

Most plaintiffs would argue that individual plaintiffs are entitled to choose their counsel. But, Stuhan and Costello argue, counsel are only human:

The rub, however, is that the class lawyer will always have a favorite, whether she admits it or not, and one class will be treated better than the others, whether it is obvious or not.

That rub, they argue, translates into a real class conflict:

[s]imply stated, a lawyer who pursues sibling class actions cannot maximize the benefit to one class without reducing the benefit to another of the sibling classes. The class action lawyer in such circumstances is “robbing Peter to pay Paul.”

Even worse, they argue, that conflict is insurmountable

By bringing multiple sibling class actions, the class action lawyer has created a structural conflict that cannot be surmounted or cured. The conflict arising from the sibling rivalry presumptively renders the lawyer inadequate by putting her in a situation where she must trade off the interests of one class against those of another class.

It’s a powerful argument, but it’s not likely to get much use. From a strategic standpoint, then, plaintiffs have a simple workaround, one many have used in coordinated state-only class actions. Basically, class counsel join a "consortium" of counsel. Each law office heads up the class action in their state. The others are on the complaint as "of counsel." At that point, each class has separate "lead counsel," which presumably is allowed its "favorite child," and there is no apparent conflict.

Does that mean that there's no real conflict?

No -- it may still very well be that only one firm is in charge of the consortium, and that firm may favor one lawsuit over another. But a defendant will have a hard time proving that in court.
 

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One reason that class actions are notable is that the discovery is particularly one-sided.  The plaintiff likely has few documents, and little to say in deposition about her claims. So the defense spends much of its time in discovery – there’s no better way to say it – playing defense: making sure that it has adequate strategies to address the vulnerabilities in any information it produces.

Plaintiffs’ lawyers consider the 30(b)(6) deposition one of their primary offensive tools. As a result, many defense lawyers treat the 30(b)(6) representative like the goalie in a hockey game: if he can prevent the other side from scoring any points, he’s done his job. But, under certain circumstances, the 30(b)(6) representative can play offense as well as defense. Since the defendant possesses most of the information, it has firsthand knowledge as to why a class action may not be the appropriate vehicle for a lawsuit. And the 30(b)(6) corporate representative deposition allows the corporation to select a corporate spokesperson to make the argument against certification.

How important is the 30(b)(6) deposition to the case against class certification? Potentially, it can be a game-changer. For example, in a 2008 opinion, the Southern District of Florida denied certification based on the testimony in several 30(b)(6) depositions. In Pop’s Pancakes, Inc. v. NuCO2, Inc., 251 F.R.D. 677, 686-87 (S.D. Fla. 2008), a class action filed by two restaurants against an equipment lessor claiming that it improperly hid fees in its beverage-equipment contracts, the district court found that the plaintiffs could not demonstrate that there were any common issues of law or fact justifying certification. What was the basis for this decision? The testimony of one of the corporate representatives, who said in his deposition that:

while there are generally four different contracts customers have with the Defendant, two of which are subject to the assessment of property taxes, that every month some customers switch from a contract where no equipment is leased, and thus, no property tax assessed to one where the customer leases the equipment from NUCO, [and] that there were various administrative processing fees charged based upon individual negotiations with the various customers, which can only be determined by reviewing the individual customer's agreement.

The lesson here is a simple one. The 30(b)(6) deponent is not just a goalie. Prepared properly, with the right facts behind him, he can score points, too. 

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Earlier this week, the AmLaw Litigation Daily reported on what was almost a groundbreaking moment in class-action settlement. Back in August, a judge in the Eastern District of New York had agreed to allow the parties in a class-action to explore securitizing a large class-action settlement. (In other words, they’d finance the settlement by carving it up and selling pieces of it as financial instruments, effectively getting a loan from the market to pay the settlement.) The deal wasn’t to be, however, the parties backed off of it; and the defendants decided to pay the class in a series of lump-sum payments.

I’ll leave it to those better-versed in finance and economics to say whether securitized settlement debt is a good policy choice, or a sound investment. I’m more interested in how defendants will approach it strategically.

Any behavior unavoidably sends a signal to those who are watching. And since no one has tried this particular innovation yet, the largest question looming is: what will taking on securitized settlement debt signal to other parties? There are three potential audiences a defendant will have to consider:

1. The Market. Companies sell off debt all the time. But most of that debt is from loans, which may very well signal healthy efforts at growth. Selling off liabilities incurred in litigation may well signal that a company needs a cash infusion to cover the consequences of its bad conduct. That’s the kind of signal that could drive down a stock’s price, making shareholders very unhappy. (The court-appointed expert believed that investors would also be suspicious of novel securitizations given the economic downturn.)
2. The Public. Yes, PR matters. And while one might think that the average newspaper reader may find this topic drier than the latest celebrity happenings, popular media has begun equating some securitization practices with corporate malfeasance. Companies may think twice about compounding the bad press from their alleged illegal conduct with the bad press that might result from engaging in unpopular financial tactics.
3. Other plaintiffs. Class-action plaintiffs’ counsel have made it their business to pay close attention to corporate behavior. If a corporate defendant agrees to securitize its settlement debt in one instance, that may signal to other plaintiffs that the company is a relatively easy mark, or that it may anticipate having to fund other class-action settlements in the future. And that may raise the question of whether the company currently anticipates very specific future settlements.

None of these considerations means that securitizing class settlements can’t work, but lawyers (particularly defense lawyers) tend to be risk-averse.  That will make many defense attorneys (and their clients) hard sells for this tactic, particularly if they think the practice sends out all the wrong signals.

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It's no secret that discovery in class actions can be abused to serve goals that have nothing to do with the merits of the case. In some cases, plaintiffs will use the threat of extensive discovery to leverage settlements. In others, plaintiffs may use their proto-class status as excuse for a fishing expedition for new clients or causes of action. It may seem like there’s not much a defendant can do to combat these abuses, but a 30-year-old case – Oppenheimer Fund v. Sanders – offers one possible solution.

In Oppenheimer, the named plaintiffs sued Oppenheimer Fund for failing to disclose that it had invested in a set of overvalued “restricted” securities that had artificially inflated its earnings, and resulted in investment losses for the proposed class. As part of their discovery, the plaintiffs demanded a list of all class members, to be used as a starting point for the notice they would eventually have to send. The trial court originally ruled that Oppenheimer would have to pay 90% of the costs of compiling the class list.

At the same time as plaintiffs moved to certify a class, the Second Circuit reversed the trial court. So the plaintiffs deposed several of Oppenheimer’s employees, and then moved to redefine the class to include only those people who still held shares in the Oppenheimer Fund. Then, they proposed that notice be included in one of Oppenheimer’s regular mailings to its shareholders.

The procedural issues in the case grew even more complex, and eventually reached the Supreme Court. For our purposes, the Court made several statements worth remembering. First, it ruled that any orders compelling a defendant to assist in compiling information for class notice are governed by Rule 23(d), not the federal rules governing discovery. Second, it stated that while discovery under the federal rules is necessarily broad, it

like all matters of procedure, has ultimate and necessary boundaries.

More importantly, once it examined the conduct of discovery in the case, the Court also held that

Respondents’ attempt to obtain the class members’ named and addresses cannot be forced into the concept of “relevancy” described above.

(Emphasis added.) How is that useful for class-action defendants? Oppenheimer objections can be used to block plaintiffs’ attempts to use discovery to accomplish goals unrelated to the merits of the litigation. For example, plaintiffs do not have the right to:

• sidestep the burden of assembling notice; or
• get themselves a list of possible new clients

through discovery. And objections based on Oppenheimer can help protect the defendant from this particular abuse of the discovery process.
 

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Vanderbilt law professor Brian Fitzpatrick’s year-old paper “The End of Objector Blackmail” has received a fair amount of attention from various lawyer-bloggers and lawyer-tweeters in the last week.  The chatter stems from the attention he draws to a practice known as quick-pay provisions – provisions to pay plaintiffs’ counsel immediately when settling a case, even before the class has received any relief.

The logic behind these provisions is that, if plaintiffs’ counsel were paid up front, they wouldn’t have to bribe objectors to drop their objections to the proposed settlement, which would reduce the amount of litigation over the “fairness, reasonableness, and adequacy” of the settlement. The paper is an interesting read: it exposes a little-discussed tactic already in use by a number of lawyers, and mounts a compelling defense of the quick-pay provision (even though Fitzpatrick ultimately suggests a more sweeping reform to “fix” the professional objector problem). But Fitzpatrick’s paean to quick-pay glosses over a number of its drawbacks for lawyers in the trenches:

1. Quick-pay provisions will be a tough sell for some defendants. This will come as no shock, but many defendants will hesitate to pay plaintiff’s counsel early in the settlement process. Even though a plaintiff’s and defendant’s incentives align for much of the class settlement process, each party retains a healthy skepticism of the other side. Obviously, this skepticism can be overcome, or Fitzpatrick would have no paper. But the success of these provisions in securities-fraud class actions does not guarantee their acceptance elsewhere.
    
2. Quick-pay provisions do not insulate against “principled” objectors. Some objectors – like state attorneys-general or advocacy groups do not object for the money. Instead, they represent the public interest, specific ideological agendas, or even both. These objectors will proceed whether or not they can hold up the settlement, because delaying settlement until they’re paid is not their goal.
    
3. Quick-pay provisions may themselves become the basis for objections. Observers tend to be very suspicious of settlements in which plaintiff’s lawyers make out significantly better than class members. That’s one of the reasons for the strong opposition to coupon settlements.  A provision where plaintiff’s counsel gets paid long before (and likely far more than) the class – as Fitzpatrick concedes – smells strongly of self-dealing. Since the provision has yet to be tested in an adversarial process, it’s very possible that courts could find that quick-pay provisions render the settlement unfair to the absent class members.

Am I saying that quick-pay provisions are never useful? Not at all. There are professional objectors (or, as one court called them “remoras”) who object only for the fees, and quick-pay provisions may very well deter them. However, indiscriminate use of quick-pay provisions (and when have lawyers in the aggregate not employed new tactics indiscriminately?) could throw the tactic into disrepute, which would blunt their effectiveness just when the parties need them most.

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Class actions don't necessarily look like emotional contests from afar, but they can be. Plaintiffs' counsel is risking work and capital with no certain return on their investment. The defendant has been placed in high-stakes litigation based on what appear (to it) to be baseless allegations. As a result, it can be hard for each side not to take things personally. But how hard should a defendant hit back against unscrupulous plaintiffs' counsel? Especially if – from the defendant's standpoint – they all look unscrupulous?

I can't think of another question that begs so much for the answer "it depends." But there is at least one clear set of circumstances out there.

In Hamm v. TBC Corp., the defendant sought sanctions against plaintiff’s counsel for soliciting plaintiff’s counsel for a collective action under the Fair Labor Standards Act. (The FLSA, 29 U.S.C. § 216(b), authorizes “collective actions.” They’re similar to Rule 23 class actions, but plaintiffs opt in instead of opting out, and the process favors certification more than Rule 23.)

According to the Magistrate Judge’s summary of the sanctions hearing, an employee of a tire company got a call on his cell phone. The woman on the other end of the line identified herself as working for plaintiff’s counsel, said she got his number from another employee, and explained that her firm was suing the tire company for unpaid overtime earned when employees worked through their lunch breaks, and asked if he’d like to join the lawsuit. The employee declined the offer. (According to the court, he said the allegations were “bull****.”)

That was when the defendant filed its motion for sanctions. The court took the charges seriously enough to hold two hearings, one of which included live testimony from a number of witnesses. The defendants put on four employees, each of whom claimed he was called by the same woman, who turned out to be a paralegal at the plaintiff’s firm. Plaintiffs tried to explain the calls away as a misunderstanding. They assured the court that they had a strict no-solicitation policy, and said that the calls were really just their attempt to investigate the class claims before filing.

The court believed the defendants. It pointed out several inconsistencies in testimony, and noted that the Southern District of Florida accounted for 28.7% of all FLSA cases, which it considered powerful circumstantial evidence that the volume was attorney-driven. As a result, it ordered sanctions against the plaintiff’s firm.

Despite its success, this is not a tactic every defendant should try. The defendant here was fighting on extremely favorable terrain. Florida has a strict no-solicitation rule. Plaintiff’s counsel made some serious tactical blunders when briefing the case. And there was compelling circumstantial evidence that plaintiff’s counsel had violated this rule before.

So what's the lesson here?

1. If you're going to attack opposing counsel, make sure you are flawless on the law and the facts
2. If you are flawless on the law and the facts -- don't shy away from holding your opponent to the rules of the game

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Martin Redish, joined by Peter Julian and Samantha Zyontz, is coming out with a new article, "Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis." It's well-researched, and well-written, but I want to address the strategic implications of some of their arguments.

Cy pres relief (from the old Norman, roughly meaning "next best") is a form of relief courts use when they cannot distribute damages to the entire class, either because some class members cannot be found, or because some won’t bother to collect. The defendant sets aside the total amount it will pay, and anything left over after distribution gets donated to an appropriate non-profit that would approximate relief to the class. Cy pres relief has been controversial. Supporters argue that it can enhance deterrence by increasing the defendant's payout, can provide social good by funding organizations with noble goals, and can help parties agree on larger settlement amounts. Critics argue that cy pres relief is often used to inflate plaintiffs' attorneys' fees (which increase with the size of the settlement), and that the "charities" often don’t help the class -- they're frequently law schools or even nonprofits that benefit the defendants.

For defendants, cy pres relief is a mixed blessing. It’s useful in crafting settlements, but plaintiffs in contested class actions may invoke it as a way of persuading a court to certify a procedurally problematic class.

Redish and Co. side squarely with the critics. "In a variety of ways, use of cy pres threatens to create or foster ‘pathologies’ of the modern class action." (By "pathologies," they mean ways in which class actions exceed the legal limitations imposed by the Constitution and the Rules Enabling Act.) Their primary criticism is that class actions are procedural, not substantive devices (a familiar argument for defense counsel). As a result, they argue, cy pres relief shouldn't be available to class plaintiffs any more than it would be to an individual plaintiff.

It’s an interesting argument doctrinally. But from a pragmatic standpoint, it's difficult to see who would make it. While plaintiffs have argued for cy pres relief when seeking to certify a class for litigation, they usually invoke it when the parties are settling. At that point, both plaintiffs and defendants have aligned interests (finalizing the settlement), so presumably they’ve both agreed to include cy pres relief.

That leaves objectors. However, most objectors tend to be members of the class action plaintiffs' bar. (Usually, they're either plaintiffs from competing class actions, or plaintiffs' counsel who have a sideline in objecting to class settlements for cash.) In either case, they're unlikely to raise an argument that might be used against them in the future. There are some tort-reform groups that, for ideological reasons, object to some settlements that include cy pres relief. But, for the most part, Redish's argument is an intriguing one that practitioners are unlikely to encounter.
 

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One of the peculiar frustrations of class-action defense is that one occasionally encounters a case that, while it might survive a motion to dismiss, could never be certified as a class. Other times, the defendant discovers evidence early in a case that supports the same conclusion. In those cases, what can the lawyer do but grit her teeth and start in on (or keep pushing through) the long expensive process of discovery?

Well, she could file a motion to deny certification. In an appellate opinion handed down in July, the Ninth Circuit expressly held that a defendant can start the class certification briefing process instead of the plaintiff.

The case, Vinole v. Countrywide Home Loans, Inc., involved a wage-and-hour class action filed against Countrywide. The plaintiffs sought to represent a class of "External Home Loan Consultants" (semi-independent salespeople paid by commission), alleging they had been wrongfully denied the opportunity to earn overtime.

However, declarations from a number of Consultants showed that the time they spent working -- both in and out of the office -- varied greatly.  Armed with this strong evidence against certification, Countrywide decided to take the offensive. Three months before discovery closed, it filed a motion to deny certification.

The plaintiffs responded with an argument that has strong intuitive appeal. The question wasn't ripe yet; in fact, the motion was procedurally improper because they hadn't moved to certify a class. Turning the certification process on its head, plaintiffs argued, would lead litigants into "troubling new territory." (The plaintiffs weren't reckless. They also presented some evidence they would have used in their certification motion, although the court noted that they made a "strategic choice" to limit that evidence.)

While the plaintiffs' argument may have had strong intuitive appeal it ran up against the text of Rule 23.  The trial court held -- and the Ninth Circuit affirmed -- that:

Nothing in the plain language of Rule 23(c)(1)(A) either vests plaintiffs with the exclusive right to put the class certification issue before the district court or prohibits a defendant from seeking early resolution of the class certification question. The only requirement is that the certification question be resolved '[a]t an early practicable time.' The plain language of Rule 23(c)(1)(A) alone defeats Plaintiffs' argument that there is some sort of 'per se rule' that precludes defense motions to deny certification[.]

The Ninth Circuit also pointed out that while a motion to deny was unusual it was hardly new; cases stretching back to 1972 showed defendants moving either to strike class allegations, or deny certification. Having established the propriety of the motion to deny, the Ninth Circuit went on to affirm the denial of certification, based largely on those declarations.

What's the lesson we can learn from this case? In class actions, like in boxing, sometimes the best defense is a good offense.

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Class-action defense guru John Beisner has published a new study on third-party litigation financing: “Selling Lawsuits, Buying Trouble: Third-Party Litigation Funding in the United States” (US Chamber Institute for Legal Reform, October 2009). Since it’s published by the US Chamber of Commerce, this is an advocacy piece, and one aimed more at policymakers than courts. (Beisner reaches one empirical conclusion: that allowing widespread third-party funding in Australia led to an increase in class-action filings there.)

While the policy arguments are certainly not dull, I’m more interested in the strategic implications of the piece for class-action lawyers.

And here’s the real question third-party financing raises: if plaintiff’s counsel (or the plaintiff) receives third-party litigation funding, have they compromised their adequacy as class representatives? Courts have held that a named plaintiff owes a fiduciary duty to the class; and so does the class counsel.  If either the named plaintiff or counsel is beholden to a third party who is underwriting the action, they may have compromised their ability to represent the class in an unbiased fashion.

In addition, class plaintiffs have long portrayed themselves as the underdog, a David taking on a corporate Goliath who needs judicial (rather than divine) intervention to prevail. If the plaintiff is backed by a large hedge fund, the fight is no longer David-versus-Goliath, but a clash of the titans, where neither side naturally requires sympathy.

This suggests a discovery tactic: why not spend an interrogatory asking about the plaintiff’s source of funding in class actions? Granted, the Federal rules make interrogatories a limited resource. And diving into a possible battle over work-product or the attorney-client privilege (colorable, but likely unsuccessful arguments the plaintiffs might assert) may appeal only to more combative defendants. But exposing a potential conflict of interest and nullifying plaintiffs’ traditional David-versus-Goliath rhetoric may be well worth the effort.

[Disclosure: I used to work with Beisner and his co-author Jessica Miller at O’Melveny & Myers LLP, and, on occasion, helped them research previous articles.]

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Figueroa v. Sharper Image (S.D. Fla. 2007) provides a case study in how a rushed class settlement can go wrong. The settlement drew objections almost immediately, invited interference from lawyers pursuing competing class actions, witnessed intervention from various state Attorneys General, and even earned a judicial rebuke. What happened?

First, some background. The plaintiffs had all bought ionizing air purifiers from Sharper Image. After Consumer Reports announced there was no evidence that the purifiers did any purifying, several plaintiffs' firms filed class actions. The Figueroa plaintiffs were later filers, so Sharper Image filed a Motion to Stay and Abate, arguing the suit was a copycat that could wait until the other cases were finished. The court denied the motion after the plaintiffs added new causes of action and another defendant, so the parties conducted class-related discovery and briefed class certification.

Right before the certification hearing, the parties informed the court they had agreed to a settlement. Part of what was driving the settlement, they said, was that Sharper Image was close to bankruptcy, and could not afford a protracted trial or massive damages. The proposed settlement provided:

1. a $19 coupon,
2. a chance to buy a new purifying attachment for $7
3. some modifications to Sharper Image's advertising

It also contained an extremely broad release and a non-disparagement provision.

The court expressed misgivings, but set a date for a preliminary fairness hearing, which, remarkably, drew several objectors. (Objectors usually appear at the final fairness hearing.) The court rejected this first agreement, but preliminarily approved one that limited the release and dropped the non-disparagement provision.

Once notice went out, objectors appeared in droves. Most notably, 36 state Attorneys General – all notified pursuant to the Class Action Fairness Act – protested that the coupons did not provide real relief to the class. In response, on the last day for objections, the parties filed an amended settlement that addressed some concerns, but kept the coupons. (This eleventh-hour amendment drew further objections.)

The parties then submitted a third agreement that made the coupons transferable, and added a provision for cy pres relief. But objectors still complained that the settlement was a "reverse auction" -- where defense attorneys pick the most compliant plaintiffs' lawyers from competing class actions, and settle on unduly favorable terms, precluding the other class actions. The court rejected the settlement. While it found no evidence of collusion, it agreed that Sharper Image had conducted a reverse auction:

Sharper Image selected counsel confronted with a most precarious position, insisted upon amendments to the pleading to broaden the scope of this litigation to obtain a global peace, and then proceeded to . . . convince Class Counsel to accept highly undesirable terms to settle the case.

As a result, the settlement was “not the product of informed, arms-length negotiations between effective Class Counsel and the Defendant." The court was sending a clear message: settlements resulting from reverse auctions would not be tolerated. From a strategic standpoint, the lesson is broader: in class actions, trying too hard to settle on the cheap can get very expensive.

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