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

E-discovery: a term that has evolved from an interesting sidenote to something that can strike fear into the hearts of the most hardened defense lawyers. The Wall Street Journal Law Blog covered this issue a few weeks ago, pointing to a recent study by several King & Spalding lawyers published in the Duke Law Journal: Sanctions for E-discovery Violations: By the Numbers. The article is an excellent source for cases involving e-discovery sanctions. While it doesn't specifically mention class actions, there is no question it applies to this field of litigation. Discovery is often a one-sided affair in class actions, and e-discovery sanctions give plaintiffs lawyers additional leverage in "litigating the litigation."

In particular, four of the study's findings have special relevance to class-action lawyers.

E-discovery sanctions disproportionately affect defendants.

Defendants are sanctioned for e-discovery violations nearly three times more often than plaintiffs. In our survey, defendants were sanctioned 175 times, plaintiffs were sanctioned fifty-three times, and third parties were sanctioned twice. The three-to-one ratio of defendant sanctions to plaintiff sanctions has generally held steady over the last ten years, even as the number of sanction cases and sanction awards has greatly increased.

This is not a surprising result. As Judge Posner recently noted, discovery (at least in class actions) tends to disproportionately affect defendants.

E-discovery sanctions are increasing.

[T]he number of e-discovery sanction cases and the number of e-discovery sanction awards more than tripled between 2003 and 2004, from nine to twenty-nine sanction cases, and from six to twenty-one sanction awards. The numbers continue to rise. Our analysis of pre-2010 cases indicates that there were more e-discovery sanction cases (ninety-seven) and more e-discovery sanction awards (forty-six) in 2009 than in any prior year. In fact, there were more e-discovery sanction cases in 2009 than in all years prior to 2005 combined.

One might have expected e-discovery sanctions to plateau at a certain point, once defendants learned enough about preservation and production to avoid possible sanctions. This result offers two possible inferences: either defendants are not done with their learning curve (avoiding sanctions), or plaintiffs are continuing to make progress on theirs (using e-discovery to litigate the litigation).

Courts are particularly concerned with intentional conduct.

No cases resulted in dismissal when the court characterized the misconduct as mere negligence. In two of the thirty-six dismissal cases, the court characterized the conduct as gross negligence.79 The remainder of the thirty-four cases involved some sort of willful conduct, with twenty involving bad faith.

(Internal footnotes omitted.)

The primary offense is a failure to preserve evidence.

The cases in which adverse jury instructions were issued included forty-three cases involving failure to preserve, four cases involving failure to produce, and five cases involving both. The defendant was sanctioned with an adverse jury instruction in forty-four cases, while the plaintiff was so sanctioned in only eight cases.

(Internal footnotes omitted)

Obviously, this study sounds a cautionary note for class-action defense lawyers. Given the propensity for courts to sanction defendants for not preserving evidence, defense lawyers need to exercise particular care at the beginning of class-action litigation to make sure their clients issue litigation holds, and have been complying with their records-retention policies.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Plaintiffs in securities class actions often use "confidential witnesses" in their complaints to substantiate various allegations. The practice makes some sense at the complaint stage: it allows the plaintiff to plead fraud and loss causation with the specificity required by the PSLRA, without exposing potential witnesses to backlash from their employer should the case never proceed past the motion-to-dismiss stage. But once the motion to dismiss has been decided, is there any need for a plaintiff to keep confidential witnesses confidential?

In In re Netbank Securities Litigation, 259 F.R.D. 656 (N.D. Ga. 2009), the plaintiff alleged that Netbank had deceived some of its shareholders. The plaintiff survived a motion to dismiss, and the court certified a securities-fraud class. (It held that there was an efficient market in the securities traded, so the class was entitled to a presumption of reliance on the alleged misrepresentations.) But the really interesting part of this opinion is in its discussion of the motion to compel. The plaintiff had relied heavily on seven "confidential witnesses" in his complaint. So, in discovery, the defendants served interrogatories asking for their identities. And the plaintiff refused to reveal them. Once the defendants moved to compel, the court held that plaintiff had to provide the identities:

Mr. Brown first responds to Defendants' Motion to Compel by arguing it is without merit, as the list of 130 individuals he provided contains the confidential witnesses whose identification Defendants now seek. However, this argument is not persuasive. It is clearly established that Defendants may discover the facts upon which Plaintiffs base their allegations and such facts include names of witnesses from whom counsel obtained their information. The Reform Act, 15 U.S.C. § 78u-4(b)(1), dictates that in securities fraud cases, plaintiffs shoulder "the burden of identifying the sources for allegations pled on information and belief." Id. (citing 15 U.S.C. § 78u-4(b)(1)). That Mr. Brown has provided Defendants with a list of 130 individuals, arguing that Defendants can "conduct their own investigation[]" to determine the identities of the seven confidential witnesses among them, smacks of a needle-in-haystack search: time-consuming, wasteful and expensive.

(Emphasis added, internal citations and quotations omitted.) Nor did the court cotton to plaintiff's argument that public policy required shielding the identities of the confidential witnesses. As it pointed out, the discovery rules are liberal, and the plaintiff's argument that he had provided the identities among 123 other names undermined his argument against specifying further.

So what can defense lawyers learn from this case? In securities class actions with confidential witnesses, it is worth spending an interrogatory to learn their identities.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On Tuesday, the Supreme Court heard argument in Smith v. Bayer Corp. The argument featured very active participation by the justices. The argument  featured several very interesting moments:

Plaintiffs' argument focused primarily on whether a collateral estoppel ruling on class certification deprives putative class members of due process.

JUSTICE SOTOMAYOR: [Y]ou're really arguing that due process requires the same treatment, essentially, of notice and an opportunity to be heard that we are giving to a substantive decision that blocks a future member from pursuing his or her claim, correct?
MR. MONAHAN: Yes, very similar, Your Honor. I mean, in this circumstance -- I mean, these rights are provided. These procedural rights, once they are created, are being provided, and they can't be taken away without due process.

Justice Sotomayor exhibited some realism about the stakes of the case.

MR. MONAHAN: Well, this particular procedural right is very closely connected -- I mean, one of the main purposes of a class action is to level the economic playing field and to enable people with small individual claims to aggregate them in order to seek justice. Without those --
JUSTICE SOTOMAYOR: Actually not true. The 16 plaintiff here received the same thing. The issue is how much money the lawyers are going to receive, really, because plaintiff gets their attorney's fees, gets a statutory violation amount, which is going to be the same whether it's in a class action or an individual action, so it's really not the plaintiff who stands to win.

The defendant drew a smart distinction between individualized liability and individualized damages.

JUSTICE KAGAN: If you look at Rezulin, if you compare to it some Eighth Circuit cases, there seems to be a difference in at least tone, shall we say, about the extent to which a finding is required that common issues predominate.
MR. BECK: I think that, actually, Judge Davis took into account the difference in tone, and he 8looked very carefully at Rezulin, and he said that what Rezulin was focusing on was individual questions of damages, which defendants often argue is enough so that individual questions predominate, individual questions of reliance, which we also often argue mean that individual questions predominate. But he said this is different, because this is, in order to prove liability, they've got to establish individual injury, which means, on a person-by-person basis, either that they were harmed by the drug or that the drug didn't work to lower their cholesterol as -- as it was supposed to, and they have to show that whatever the violation of the Consumer Fraud Act was is causally linked there.

Plaintiffs often try to characterize questions of liability as questions of damages, so that they may invoke precedent that says individualized damages questions don'y necessarily preclude certification. Defense counsel provides a textbook response to this common tactic.

Justice Kagan posed an interesting question about whether the Anti-Injunction Act should apply to class certification decisions.

JUSTICE KAGAN: Mr. Beck, the relitigation exception of the Anti-Injunction Act speaks in terms of judgments. Why is the denial of class certification a judgment?

In Baycol, the order denying class certification also granted summary judgment, so this question was not an issue. But this may be a question in other cases. There are arguments on both sides. An order denying certification does not technically end the case, but it may effectively do so.

As several commentators have already noted, it's very difficult to predict how the Court will rule in a given case, although the question rule would predict a decision for Bayer.  The opinion will be out later this term.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 I hope everyone had a good Martin Luther King Day. Given the holiday, it seemed appropriate to highlight another classic case: Hansberry v. Lee. 

Oddly, given its importance to class actions litigation, Hansberry is not a class action itself. The case arose out of a restrictive covenant barring African-Americans from buying land in certain areas of Chicago. The Hansberries, an African-America family (which included future Raisin in the Sun playwright Lorraine Hansberry) moved into a neighborhood governed by the covenant. The Lees sued, arguing that 95% of the homeowners in the neighborhood had signed the restrictive covenant. The Hansberries challenged the 95% number. When the Lees argued that the fact was res judicata from another suit (Burke v. Kleiman, 277 Ill. App. 519.), the Hansberries replied that they had not been parties to that lawsuit. The Illinois Supreme Court held that the Burke case was a class action, and so the Hansberries should be bound by its ruling. The Hansberries appealed to the US Supreme Court.

The Supreme Court began its opinion by reasoning that

It is a principle of general application in Anglo-American jurisprudence that one is not bound by a judgment in personam in a litigation in which he is not designated as a party or to which he has not been made a party by service of process. A judgment rendered in such circumstances is not entitled to the full faith and credit which the Constitution and statute of the United States, and judicial action enforcing it against the person or property of the absent party is not that due process which the Fifth and Fourteenth Amendments require.

(Internal citations omitted.) The only exception the Court identified was the emerging equitable doctrine allowing for class lawsuits. And, since the Illinois Supreme Court had called Burke a class action, the Court asked just what makes a class action binding on subsequent parties.

It is familiar doctrine of the federal courts that members of a class not present as parties to the litigation may be bound by the judgment where they are in fact adequately represented by parties who are present, or where they actually participate in the conduct of the litigation in which members of the class are present as parties, or where the interest of the members of the class, some of whom are present as parties, is joint, or where for any other reason the relationship between the parties present and those who are absent is such as legally to entitle the former to stand in judgment for the latter.

(Internal citations omitted.) Given those criteria, the Court held that Burke did not constitute a class for litigation purposes.

It is one thing to say that some members of a class may represent other members in a litigation where the sole and common interest of the class in the litigation, is either to assert a common right or to challenge an asserted obligation. It is quite another to hold that all those who are free alternatively either to assert rights or to challenge them are of a single class, so that any group, merely because it is of the class so constituted, may be deemed adequately to represent any others of the class in litigating their interests in either alternative. Such a selection of representatives for purposes of litigation, whose substantial interests are not necessarily or even probably the same as those whom they are deemed to represent, does not afford that protection to absent parties which due process requires.

(Emphasis added, internal citations omitted.) So what can class action defense lawyers take from this case? The purpose of the adequacy requirement is to ensure that the class has been represented well enough that it may be bound by the judgment. Plaintiffs' lawyers--and plaintiffs--often lose sight of that purpose; instead they argue that adequacy is satisfied so long as there are no glaring conflicts. But that's not the case. Adequacy requires a searching inquiry because that is the best way to protect the interests of the class.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 Twenty-two years ago, political scientist Robert D. Putnam published an article in the journal International Organization. Titled "Diplomacy and domestic politics: the logic of two-level games," it argued that international trade negotiators have a more complicated job than most believe. Not only must they convince the negotiators across the table of the mutual benefits of their particular requests, they must also persuade their constituents back home ("behind the table") to accept the deal they ultimately work out.

Since Putnam published his article, this insight--that negotiators on behalf of organizations must negotiate both "across the table" and "behind the table"--has been cited so often it feels like just common sense. But Putnam did not limit himself to just identifying this two-level game. He also explored just how it affected the conduct of the negotiations themselves. And some of his conclusions can certainly inform how class-action lawyers negotiate class-action settlements.

For example, Putnam found that

the lower the cost of "no-agreement" to constituents, the smaller the win-set. [Ed. note: "win-set" refers to the set of agreements that could be ratified.] Recall that ratification pits the proposed agreement, not against an array of other (possibly attractive) alternatives, but only against 'no-agreement.' No-agreement often represents the status quo, although in some cases no-agreement may in fact lead to a worsening situation; that might be a reasonable description of the failed ratification of the Versailles Treaty.

(Emphasis in original.) This insight reflects one that negotiation scholars have known for a while: the better one's alternative to an agreement with the other side (sometimes referred to with the unwieldy phrase BATNA, or "Best Alternative to Negotiated Agreement"), the less likely a negotiation will succeed. Putnam also explained that

In this sense, some constituents may offer either generic opposition to, or generic support for, Level I agreements, more or less independently of the specific content of the agreement, although naturally other constituents' decisions about ratification will be closely conditioned on the specifics. The size of the win-set (and thus the negotiating room of the Level I negotiator) depends on the relative size of the "isolationist" ,forces (who oppose international cooperation in general) and the "internationalists" (who offer "all-purpose" support). All-purpose support for international agreements is probably greater in smaller, more dependent countries with more open economies, as compared to more self-sufficient countries, like the United States, for most of whose citizens the costs of no- agreement are generally lower. Ceteris paribus, more self-sufficient states with smaller win-sets should make fewer international agreements and drive harder bargains in those that they do make.

There are, of course, some important differences between trade negotiators and class-action lawyers. Class-action defense lawyers are legal agents of their clients, which means they may have less room to deviate from instructions than trade negotiators. And class-action plaintiffs' lawyers often have clients that lack the power to direct the litigation. In fact, in a class action, thethe class members often don't have a preference between "no agreement" and any agreement, because most of them aren't aware of the litigation at all. So the plaintiffs' counsel can cut whatever deal they see fit.

This is an important justification for fairness hearings on settlement. And it helps to explain why objectors have played such an important role in the development of caselaw on class-action settlements is that they have the incentive to act like an interested constituent of the plaintiffs' lawyers, rejecting deals that are no better than "no agreement" on behalf of the class.

So what can class-action defense lawyers take from this article? For those looking to ensure a lower-cost settlement process, it is worth considering not just what the plaintiffs' counsel will agree to, but what objections may get raised at the fairness hearing.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Last Friday, the Supreme Court granted certiorari in Archdiocese of Milwaukee Supporting Fund, Inc. v Halliburton Co. This is the fourth certiorari grant this term for a class action.

So what's the issue in this case? Loss causation. In securities cases, plaintiffs are often allowed to rely on a theory called "fraud on the market," which requires the court to presume that shareholders relied on any false information that was introduced to an efficient securities market. The "fraud on the market" theory is a powerful tool for class action plaintiffs. When applied, it makes certification of a class much easier than otherwise.

Since certification changes the litigation (making it far more likely that a defendant will settle a meritless claim), the Fifth Circuit has held that a plaintiff must prove "loss causation" (that the alleged falsehoods, once revealed, actually caused the stock price to fall) by a preponderance of the evidence before a court may certify a class. (The Fifth Circuit has not gone rogue on this issue: the Supreme Court has issued several opinions on loss causation over the last five years.) On its face, it's a reasonable doctrine. Loss causation forms the basis of many strong securities class actions. (Indeed, former plaintiffs' lawyer Bill Lerach had boiled the theory down to a chart he would pull out in settlement discussions.)

In Archdiocese of Milwaukee Supporting Fund, Inc., the Fifth Circuit was faced with a securities case against energy conglomerate Halliburton. The plaintiffs had alleged that a number of misrepresentations -- including an understatement of asbestos litigation liability and an overstatement of the benefits of a merger -- had artificially inflated the price of Halliburton's stock; once they were revealed, the plaintiff shareholders lost money.

In the district court, Halliburton had opposed certification (and won) by arguing that the plaintiffs had not met their burden of proving loss causation, because Halliburton had disclosed a number of negative news items at the same time as it revealed that it had misrepresented the information the plaintiffs had pointed to. As a result, the plaintiffs could not prove that the misrepresentations had caused the stock to drop.

The plaintiffs appealed, arguing that they should not have to prove fraud at certification, but the Fifth Circuit affirmed the trial court.

Plaintiff argues that the district court misapplied our precedent, how ever, because it incorrectly required Plaintiff to prove actual fraud at the class certification stage. Plaintiff asserts that this requirement runs afoul of our recent decision in Flowserve. We do not agree with the Plaintiff's reading of Flowserve or its characterization of the district court's opinion.

...

Even if it were possible to say that the prior statements were more than erroneous expectations, both the October 4, 1999 announcement and the analyst reports contained multiple pieces of negative news. This required Plaintiff to "demonstrate that there is a reasonable likelihood that the cause of the decline in price is due to the revelation of the truth and not the release of the unrelated negative information." This showing of loss causation is a "rigorous process" and requires both expert testimony and analytical research or an event study that demonstrates a linkage between the culpable disclosure and the stock-price movement." That's what plaintiffs didn't do.

(Internal footnotes omitted.)  

At this stage, before the parties have briefed the issues, predicting what the Court will do is next to impossible. But it's worth noting that the "loss causation" doctrine has drawn fire from a number of academics as requiring a decision on the merits at certification. And the degree to which a court may inquire into the merits of a class action at certification has proven controversial over the last decade. Given the Court's interest in this issue, however it chooses to clarify the standard, it will have a large effect on securities class actions. Stay tuned.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 When the Supreme Court granted certioriari in Dukes v. Wal-Mart Inc., the Vanderbilt Law Review grabbed a number of law professors who study mass torts and asked them to contribute essays to its En Banc feature. One of these--Richard Nagareda's Common Answers for Class Certification--was one of the most interesting articles published in 2010. Several of the other contributions also posed some interesting questions, among them Alexandra Lahav's The Curse of Bigness: The Optimal Size of Class Actions. 

Lahav doesn't really address the question she asks in the title; she offers no verdict on the optimal size of a class action (unless the answer is "as big as you can make them"). For the most part, she focuses on how courts could use the promise of probabilistic evidence to justify certifying classes for litigation. But the introduction to her essay poses an interesting rhetorical issue: when arguing about class actions, does the size of the lawsuit matter?

There's no question that many press outlets, when covering Dukes, focused on the fact that it was the largest civil-rights lawsuit to be certified.  After all, the size of the lawsuit is something the average reader understands immediately. And there is no question that courts often call attention to the size of class actions, both when granting certification and when denying it.

As Lahav correctly points out, there is no doctrinal limit on how large a class action may grow. (Rule 23(a)(1)--the numerosity requirement--does establish on how small one may shrink.) Instead, most lawyers use size as a proxy for one of the other Rule 23 requirements. Plaintiffs use the size of the class to bolster their arguments that a class action is superior to other forms of resolving a given dispute. For example, as the the Fifth Circuit put it in Jenkins v. Raymark Industries, when a class is large enough, it may be

superior to the alternative of repeating, hundreds of times over, the litigation of the state of the art issues with, as that experienced judge says, ‘days of the same witnesses, exhibits and issues from trial to trial.’

Defendants, on the other hand, often use size as a shorthand for heterogeneity (as they did in Dukes). As Lahav puts it:

The statements about the size of this class action appeal to an intuition that the court’s ability to provide individualized justice is inversely proportional to the size of the class action.

And, to the extent that a larger class is more likely to encompass various different kinds of claimants, that rhetoric can be useful. Defendants also may point out that the larger a class is, the more likely that it may pressure defendants into settling claims that have no merit, just to avoid the possibility of ruinous liability.

So does the size of a class matter? It depends on why the party is invoking it.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 For plaintiffs' counsel, one of the most important questions in a class-action settlement is how they will get paid. In McDaniel v. County of Schenectady, the Second Circuit explicitly compared the various methods of determining attorneys' fees in class actions. McDaniel was a civil-rights case challenging strip-search policies for pretrial detainees. Approves settlement of the class action. The lower court approved the settlement, but awarded less in fees than the plaintiffs would have wanted. The analysis provides a good discussion of the advantages and disadvantages of both lodestar and percentage fees.

The case took three years of "vigorous" litigation, and approximately 1000 hours of plaintiff time. (Does this seem like a lot? It's six months of billing for a single defense associate, but for many smaller-firm practitioners, it may be close to an uninterrupted year of work.) At that point, the parties were ready to settle. The district court approved the settlement, but used a lodestar method to calculate attorneys' fees instead of a percentage of the common fund. The plaintiffs appealed.

The Second Circuit began by noting that

Although we have acknowledged that "the trend in this Circuit is toward the percentage method," it remains the law in this Circuit that courts "may award attorneys' fees in common fund cases under either the 'lodestar' method or the 'percentage of the fund' method."

So it looked at the differences between lodestar and percentage of fund.

The lodestar method is not perfect. It creates an incentive for attorneys to bill as many hours as possible, to do unnecessary work, and for these reasons also can create a disincentive to early settlement. Under certain conditions, moreover, lodestar awards can create the near opposite incentive, encouraging attorneys to settle before trial even when it is not in their clients' best interest. While under the lodestar method lawyers share the "downside" risk of trial (i.e., the possibility of an adverse judgment, and hence no fee), they do not share in the potential economic "upside" (i.e., fees as a percentage of a large common fund), especially since trial requires comparatively fewer hours than the process of trial preparation.

(Emphasis added, internal citations omitted.) That said, the court also found problems with awarding a percentage fund:

As we indicated in Goldberger, this Circuit's adoption of the lodestar method was precipitated by the perception that percentage fees "tended to yield too little for the client-class, and an unjustified 'golden harvest of fees' for the lawyer." Particularly in cases that result in a very large monetary award, the percentage method holds the potential to result in attorneys' fees many times greater than those that would have been earned under the lodestar of hourly rate multiplied by hours worked. The principal analytical flaw in Appellants' argument for a presumptive percentage award as a "benchmark" in common fund cases lies in the assumption that there is substantial contingency risk in every common fund case that would justify such a multiplier.

Moreover, although the percentage method has the advantage of aligning the interests of plaintiffs and their attorneys more fully by allowing the latter to share in both the upside and downside risk of litigation, it can create perverse incentives of its own, potentially encouraging counsel to settle a case prematurely once their opportunity costs begin to rise.

(Emphasis added, internal citations and quotations omitted.) It's interesting that neither fee award seems to align the interests of the class with the interests of the lawyers. While some might argue that aligning those interests shouldn't matter, others view this inability to align incentives as one of the central struggles in class-action practice. 

Ultimately, the Second Circuit affirmed the district court's use of the lodestar method. So how is this case useful for defense counsel? Aside from providing a balanced critique of percentage-of-fund fees (which can be more expensive for defendants), it lays out very clearly the advantages and disadvantages of the different methods of calculating attorneys' fees in class-action settlements.

• Email This
• Print
• Comments
• Trackbacks
• Share Link