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

George Smiley is the rotund, perpetually cuckolded, but brilliant spymaster at the heart of many of John Le Carre's finest Cold War spy novels. He's on his way to becoming a cinematic icon, too, having now been played (in separate films) by Rupert Davies, Alex Guinness, Denholm Elliot, and now Gary Oldman (in a performance that rivals Guinness's finest), in the excellent recent release of Tinker, Tailor, Soldier, Spy. 

Without spoiling its plot, I will mention that by the end of Tinker, Tailor, Soldier, Spy, the Circus (the British Secret Service) is in disarray. The mole that George Smiley uncovers, who was run by the Soviet mastermind Karla, had stopped critical missions. None of their information is trustworthy, because they don't knew who or what has been tainted by the mole.

So, at the beginning of the next novel, The Honourable Schoolboy, Smiley decides to take some backbearings.

[Smiley's] premise was, that in briefing [the mole], Karla was exposing the gaps in Moscow Centre's knowledge; that in ordering [the mole] to suppress certain intelligence which came the Circus's way, in ordering him to downgrade or distort it, to deride it, or even to deny it circulation altogether, Karla was indicating the secrets he did not want revealed.

'So we can take the backbearings, can't we darling?' murmured Connie Sachs, whose speed of uptake put her as usual a good length ahead of the rest of the field.

'That's right, Con. That's exactly what we can do,' said Smiley gravely. 'We can take the backbearings.' …

By minutely charting [the mole's] path of destruction--his pugmarks as he called them--by exhaustively recording his selection of files; by reassembling, after aching weeks of research if necessary, the intelligence culled in good faith by Circus outstations, and balancing it, in every detail, against the intelligence distributed by [the mole] to the Circus's customers in the Whitehall marketplace, it would be possible to take backbearings--as Connie so rightly called them--and establish [the mole]'s, and therefore Karla's, point of departure …"

(Identity of mole redacted.)  So, what does this have to do with class-action practice? Well, British spies aren't the only ones who can engage in backbearings. Class action practice is hardly the Cold War, but that doesn't mean that defense counsel can't use discovery requests to inform themselves about plaintiffs' theory of the case (assuming they have a coherent one).

Moreover, when plaintiffs serve overbroad discovery (which they often do), well-crafted objections can help to winnow down the requests into ones that one can take backbearings from.

This is something many lawyers do intuitively. (And I'm sure many plaintiffs' lawyers do, too.) Carefully reading subpoenas, document requests, interrogatories, and deposition questions can help a defendant learn where the plaintiff thinks her case may be the strongest, and where she may think she needs more evidence. Similarly, looking at where a plaintiff chooses to spend her resources (when that spending is visible) helps to give an idea of both the resources a plaintiff has available, and her priorities in the case. (The same operates in reverse, of course.)

Nor is discovery the only place from where one can take backbearings in litigation. As Richard Levick of the Bulletproof Blog wrote just the other day, as plaintiffs try digital recruitment strategies for class actions, corporations get early warnings of where litigation risks may arise. A potential defendant that is current on Twitter, Facebook, and getting regular Google alerts about itself will likely be able to respond more quickly to any actual litigation threats, because it can read the same requests and complaints as anyone else.

The takeaway from this should be pretty simple. Every action taken in litigation, as anywhere, leaks information. So it is always worth paying attention to what your adversary is doing. What they do about their case is often far more important than what they say.

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Regular readers know that I usually average two posts a week here, discussing a case on Tuesday, and offering a think piece on Thursday. But a case came down the other day that justifies switching up the schedule. The case is Creative Montessori Learning Centers v. Ashford Gear LLC, and the issue is under what circumstances a court may find class counsel inadequate to represent a class.

Creative Montessori is a Telephone Consumer Protection Act case; the TCPA prohibits the sending of "junk faxes" or "blast faxes" to recipients without their consent. Because it allows for damages of $500 per fax (which can be trebled), it's a juicy target for some plaintiffs' firms.

One of those plaintiffs' firms was Bock & Hatch LLC. (Bock & Hatch was also the firm that brought the CE Design case.) The firm got hold of a list of possible faxes and recipients from a "blast fax" company (a company that sent out the faxes in batches to numbers it had collected). It had promised the company confidentiality when it obtained the list, but its plan was to use the list to file more than 50 class actions. To get clients, it sent letters (addressed from another involved firm, Anderson + Wanca) to various companies that read:

during our investigation, we have determined that you are likely to be a member of the class. You might not remember receiving the junk faxes, but if the lawsuit is successful, you would receive compensation (up to $1,500) for each junk fax sent. We would like to discuss this issue with you. Please call me [telephone number].

Creative Montessori Learning Centers retained the firm, even though it had no evidence that it had actually received the fax at issue in the case.

During the debate over certification, Ashford Gear argued that the lawyers of Bock & Hatch were not adequate class counsel because of the underhanded means by they obtained their list, and because of the misleading statements they used to recruit clients. The trial court ruled that, while the firm's actions displayed a lack of integrity, the proper remedy was discipline by the Illinois bar. It also ruled that the firm's conduct did not affect its ability to represent a class.

The Seventh Circuit, in an opinion by Judge Posner, disagreed.  Judge Posner began by observing that class counsel have a fiduciary duty to absent class members.

Class counsel owe a fiduciary obligation of particular significance to their clients when the class members are consumers, who ordinarily lack both the monetary stake and the sophistication in legal and commercial matters that would motivate and enable them to monitor the efforts of class counsel on their behalf.

Based on that fiduciary duty, he observed that

When class counsel have demonstrated a lack of integrity, a court can have no confidence that they will act as conscientious fiduciaries of the class.

Finally, he addressed the lower court's treatment of a finding of lack of adequacy as a disciplinary issue rather than a criterion for class certification.

To suggest as the district court did that “only the most egregious misconduct” by class counsel should require denial of class certification on grounds of lack of adequate representation was bad enough. To rule that only the most egregious misconduct “could ever arguably justify denial of class status,” as the court went on to hold, would if taken literally condone, and by condoning invite, unethical conduct. Misconduct by class counsel that creates a serious doubt that counsel will represent the class loyally requires denial of class certification.

(Emphasis added.)  In doing so, Judge Posner acknowledged some prior precedent that had gone easier on class counsel, but pointed out that those cases had been decided before the issue of class counsel misconduct had become "acute."

This is a significant opinion. Usually, defendants are reluctant to proffer--and courts are reluctant to entertain--challenges to the adequacy of counsel. This reluctance stems from an assumption that, while usually implicit, the district court had announced explicitly: that somehow denying class certification operated as a punishment for class counsel. But even if--as many judges (including Posner) have observed--class counsel are the real actors in a class action, they are not supposed to be the primary beneficiaries of the litigation. Instead, the real beneficiaries are supposed to be the absent class members. Judge Posner's opinion here called out that assumption and showed that it can get in the way of the real purpose of class actions, which is compensating absent class members who have been harmed.
 

[Note: This post was edited on 14 December to correct some information, based on a communication from Brett Levin of Stephen J. Schlegel, Ltd., one of the defense firms in the case.]

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Like many health-minded individuals, Norma Rothman has shopped at GNC stores.  And, like many others, she has bought items there with her credit card.  And, like many consumers everywhere, she didn't like it when the cashier allegedly asked her for her ZIP code when she made her purchase.  Unlike many consumers, Ms. Rothman tried to turn this momentary dissatisfaction into a class action, alleging that GNC had violated the Song-Beverly Credit Card Act and California's infamous § 17200.  (Song-Beverly class actions have become very popular in California since its Supreme Court ruled that requesting a ZIP code can violate the Act.)

How unlike other consumers was Ms. Rothman?  Very.  When a trial court for the Central District of California denied her motion for class certification, it found that her class was overboard, lacked numerosity and commonality, and that, since she may have been the only person harmed in the manner she alleged, she was neither a typical nor adequate class representative.  (For those of you keeping score, that means she did not demonstrate any of the Rule 23(a)(4) requirements.)

The case was argued by a colleague of mine, Susie Germaise from McGuire's Los Angeles office, joined by Brad Funari and Laura Lange in Pittsburgh, so I'm not going to linger on commentary.  Instead, I will simply offer my congratulations for an outstanding win, and thank them for making the briefing available for others to read.  (Motion for class certification here, opposition here, reply brief here.)

Have a happy (and nutritious) Thanksgiving, everyone.  And come back Friday for another post.

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Last week, the Sixth Circuit affirmed a trial court's decision striking class allegations where a proposed nationwide class would necessarily invoke the laws of fifty different jurisdictions. (Russell Jackson has an excellent writeup of the opinion here.) There is no question the opinion is a useful one for defendants. And, since it's the first appellate opinion on a motion to strike in decades, it may be time for an overview of where the motion to strike class allegations stands today.

In the past year, a large number of motions to strike have been filed. (I count at least 25 reported opinions on early challenges to the certifiability of classes.) How have those motions turned out?
Ten of those opinions denied the motion to strike outright as premature, without further analysis.

• Clerkin v. Mylife.com, Inc., 2011 U.S. Dist. LEXIS 96735 (N.D. Cal. 2011) ("Defendants fail to identify any authority permitting the use of a motion to dismiss for failure to state a claim to contest the suitability of class certification.").
• Eliason v. Gentek Building Prods., Inc., 2011 U.S. Dist. LEXIS 94032, *7 (N.D. Ohio Aug. 23, 2011) ("While raising possibly valid concerns, Defendants' arguments on class certification are premature. Whether the commonality requirement has been demonstrated cannot be determined until discovery has taken place and choice of law provisions applied.").
• Garcia v Lane Bryant, Inc., 2011 U.S. Dist. LEXIS 125484 (E.D. Cal. Oct. 31, 2011). (Grants motion to dismiss, denies MTS because "Although Defendants' motion is unopposed, dismissal of Plaintiffs' class allegations at this stage of the proceeding is premature. Although class allegations may be wholly insufficient[,] compliance with Rule 23 is not to be tested by a motion to dismiss for failure to state a claim.") (internal quotations omitted).
• Ginardi v. Frontier Gas Servs, LLC, 2011 U.S. Dist. LEXIS 89504, *11-12 (E.D. Ark. Aug. 10, 2011) ("Plaintiffs are correct that it is premature to strike the class action allegation.").
• Kas v. Mercedes-Benz USA, LLC, 2011 U.S. Dist. LEXIS 127581 (C.D. Cal. Oct. 31, 2011) ("Nevertheless, we will defer final decision pending a more robust briefing at the class certification stage.").
• Martin v. Ford Motor Co., 765 F. Supp. 2d 673 (E.D. Pa. 2011) ("Since the Motion to Strike filed by Defendant is premature, the merits of this argument will not be addressed at this stage of the case.").
• P.V. v. School Dist. of Philadelphia, 2011 U.S. Dist. LEXIS 125370 (E.D. Pa. Oct. 31, 2011) ("unless the parties have completed discovery and at least one party has moved for class certification, a court very rarely has the information necessary to conduct the 'rigorous analysis' inherent in the class certification decision.").
• Rivellio v. Penn State Fed. Credit Union, 2011 U.S. Dist. LEXIS 99668 (M.D. Pa. Sep. 6, 2011) ("The Court is not convinced that this case is one of the "rare few where the complaint itself demonstrates that the requirements for maintaining a class action cannot be met."").
• Rogers v. Capital One Servs., LLC, 2011 U.S. Dist. LEXIS 17064 (D. Conn. Feb. 19, 2011) ("a defendant may move to strike class allegations prior to class certification proceedings "if the inquiry would not mirror the class certification inquiry and if resolution of the motion is clear."").
• Vlachos v. Tobyhanna Army Depot Fed. Credit Union, 2011 U.S. Dist. LEXIS 69725 (M.D. Pa. Jun. 29, 2011) ("The Court will not address the merits of the argument because the motion to strike is premature at this stage, as the plaintiff has not yet moved for class certification.").

Three denied motions to strike on their merits, usually because the plaintiff had made sufficient allegations to support a class action.

• Alegations of commonality - NBL Flooring, Inc. v. Trumball Ins. Co., 2011 U.S. Dist. LEXIS 110518 (E.D. Pa. Sep. 27, 2011) ("These allegations speak to a blanket course of conduct that may apply to all insureds.").
• Denies because of plausible allegations - Perrin v. Papa John's Int'l, Inc., 2011 U.S. Dist. LEXIS 22957, *18-19 (E.D. Mo. Mar. 8, 2011) (""Plaintiff may or may not succeed in proving his claims with respect to other drivers, but at this stage of the case he has set forth sufficient facts to support a plausible allegation of an under-reimbursement [*19] large enough to support a claim that Defendants did not reasonably approximate the delivery drivers' expenses."")
• Plaintiff had standing - Ralston v. Mortg. Inv. Group, Inc., 2011 U.S. Dist. LEXIS 102945 (N.D. Cal. Sep. 12, 2011) ("The fact that some class members purchased their loans from originators other than MIG does not deprive Ralston of standing to assert claims on their behalf").

Two denied motions to strike as moot, since the courts granted concurrent motions that disposed of the case.

• Eldee-K Rental Props., LLC v. DirecTV, Inc., 2011 U.S. Dist. LEXIS 132981 (N.D. Cal. Nov. 17, 2011). Court granted concurrent motion to dismiss.
• Ass'n of N.J. Chiropractors v Aetna, Inc., 2011 U.S. Dist. LEXIS 67718 (D.N.J. Jun. 20, 2011). Denies as Court granted concurrent motion to compel arbitration.

And finally, the remainder of the courts have granted motions to strike. And they have done so for various reasons. Among them, they have ruled that

The class was not ascertainable.

• Bradley v. Mason, 2011 U.S. Dist. LEXIS 64877 (N.D. Ohio Jun. 20, 2011) ("First, the existence of the class must be pleaded and the limits of the class must be defined with some specificity.").
• Bauer v. Dean Morris, L.L.P., 2011 U.S. Dist. LEXIS 100399 (E.D. La. Sep. 7, 2011) - struck class allegations where merits-based class definition
• Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011) ("Plaintiffs' proposed class definition is fatally flawed because the Court cannot determine its individual members without reviewing the evidence relative to each KCDC inmates' incarceration, which would amount to a merits-based inquiry of each individual's claim.").

Variations in state law precluded certifiable class.

• Pilgrim v. Universal Health Card, LLC, 2011 U.S. App. LEXIS 22715, *4 (6th Cir. 2011) ("the district court held, because each class member's claim would be governed by the law of the State in which he made the challenged purchase, and the differences between the consumer-protection laws of the many affected States would cast a long shadow over any common issues of fact plaintiffs might establish. That judgment is sound and far from an abuse of discretion …"). 
• Plaisance v. Bayer Corp., 275 F.R.D. 270 (S.D. Ill. 2011) [] ("In the instant case, defendants have identified numerous facial deficiencies in the class allegations; no amount of time or discovery can cure these deficiencies.").

From the pleadings, the class lacked commonality

• *Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011) ("to resolve the legal issue presented the Court must delve into the specific facts of each inmate's incarceration and the medical needs relative to that inmate.")

From the pleadings, the class lacked typicality

• Schilling v. Kenton County, 2011 U.S. Dist. LEXIS 8050 (E.D. Ky. Jan. 27, 2011) ("The Sixth Circuit has held that where the plaintiffs' claims depends on each individual's unique interactions with the defendant, the typicality requirement is lacking. That is certainly the case here.") (internal citation omitted).
• Wright v. Family Dollar, Inc., 2010 U.S. Dist. LEXIS 126643 (N.D. Ill. Nov. 30, 2010) ("These defenses, unique as to plaintiff and any other manager in the putative class, prevent plaintiff from establishing typicality and therefore from showing that she will be able to maintain a class action.").

From the pleadings, the class lacked adequacy.

• Wright v. Family Dollar, Inc., 2010 U.S. Dist. LEXIS 126643 (N.D. Ill. Nov. 30, 2010) ("it is clear from the complaint that the putative class is permeated by conflicts of interest").

From the pleadings, the class lacked predominance.

• Bauer v. Dean Morris, L.L.P., 2011 U.S. Dist. LEXIS 100399 (E.D. La. Sep. 7, 2011) - (struck class allegations where individual issues concerning liability, affirmative defenses, and damages apparent from pleadings).
• Bevrotte v. Caesars Ent. Corp, 2011 U.S. Dist. LEXIS 114463 (E.D. La. Oct. 4, 2011) (individual issues of causation and damages would predominate; class not superior to individual litigation).

So, what can defense counsel take from this? First, the trend on motions to strike is becoming more favorable. More courts are willing to entertain these motions on their merits. (You may notice the majority of the denials come from only a few jurisdictions.) And the first appellate court to decide this issue has (correctly, I would argue) found that if the issue is a purely legal one or can be decided from the pleadings, then there is no reason to rule on it sooner rather than later.

Second, those courts that are granting motions to strike are granting them on various grounds. This is also good news, as it provides defendants with precedent for further motions to strike.

And finally, at least if one credits the opinions in Pilgirm and Plaisance, most plaintiffs don't seem to have any strong counter-arguments to a well-argued motion to strike. The best they can argue is that the motion is premature, and discovery is necessary for a rigorous analysis. And, in certain cases, that will be true. But in many more--like when plaintiffs propose nationwide classes that require applying the laws of fifty different states--there will be no discovery that will change the analysis a court must engage in.

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For most class-action defense lawyers, dealing with the press is, while rare, a necessary evil. Plaintiffs' firms have taken to issuing press releases whenever they file a complaint. However, for defendants, the media is usually a separate front, one that moves much faster than discovery, and one that offers more perils than payoffs. Moreover, outside of expensive PR firms, there are few sources of advice on how to deal with a case that attracts press attention.

Enter Kendall Coffey, a Florida lawyer who has been involved in some of the more high-profile cases of the last few decades, including the negotiations surrounding Elian Gonzalez and the infamous Bush v. Gore. His book, Spinning the Law: Trying Cases in the Court of Public Opinion, discusses how to litigate high-profile cases.

For the most part, Coffey's book is not a perfect fit for civil litigants. The book primarily focuses on high-profile criminal trials, since those tend to receive the most press coverage. And it relies heavily on Coffee's own experience (which he does relay well), and a series of cutesy aphorisms ("Defense attorneys will ruffle feathers to keep their clients from becoming a cooked goose") that don't convey a lot of information.

However, the concluding chapter, A Media Primer for Spinners, offers an excellent introduction to litigating cases that have a press component. Among the lessons Coffey imparts there:

Press coverage can influence judges.

The ears of judges often have a chronic buzzing, particularly because they are not prohibited from following the news coverage of their cases. The law presumes that judges will ignore the media monsoons drenching the courthouse and decide every legal issue as if nary a drop had fallen. If we assume, though, that judges are real people who live in the real world--sometimes a world of judicial elections--it follows that they are acutely aware of community feelings about media-intensive cases.

In other words, the more press coverage of a given legal dispute, the more information outside the pleadings that the judge will likely absorb. And since judges are susceptible to rhetoric and spin just like other people, press coverage likely influences their rulings. This is certainly something that Richard Scruggs relied on in his PR strategy for his Katrina class actions.

Press coverage can generate fact development.

Good press is also a recruitment poster for lawyers, experts, and even fact witnesses. Winnability magnetizes cases. Lawyers and experts may be mercenaries, but even hired guns prefer to be retained by winners. For the top professionals who can pick and choose their cases, many prefer a cause that is acclaimed to one that is being acclaimed to one that is being defamed. Even fact witnesses, the main determinant of most cases, can be more effective if they believe their testimony will be featured in a success story. Just as many prefer to join the team with all the cheerleaders, horrible publicity can impair recruitment efforts

Coffey is not the first to note that press coverage can encourage fact witnesses to step forward. [] But it's a point that bears repeating.  Moreover, press coverage can also help class action defendants develop facts. Once class members begin discussing newsworthy cases, they often provide lawyers with variations that demonstrate that a class may not be appropriate.

Getting press coverage can be as simple as filing reporter-friendly pleadings.

Courthouse files largely immunize their contents from the laws of defamation, so reporters rely overwhelmingly upon court papers and hearings. As a result, press-savvy lawyers craft court papers that not only nourish procedural requirements but also feed the press.

In high-profile cases, or even ones where just a few reporters are clearly paying attention, filing a pleading that's written in plain English, with clear, emotional themes, can pick up press coverage. Plaintiffs often exploit this in complaints, but there is no reason that defendants cannot use the same tactic.

Talking points are not a bad thing.

Some legal strategists anticipate the initiator's huge advantage by preparing their own legal document with their key facts. While the defense will rarely have enough time to fully respond in writing to the just-filed accusatory document, first responders should consider something as basic as a nation for a status conference--a request to discuss general issues about court scheduling--loaded with defendants' best facts.

While Coffey suggests motions for status conferences as a means of getting a theme out to defeat a case relying on publicity, if the facts are strong enough, one can also just buy an ad refuting the allegations, much like Taco Bell did earlier this year.

Lawyers still need to be careful.

[T]he high-profile case is no place for amateurs. Attorneys with minimal media exposure should not handle media relations without true professional help. As a compromise, outside press consultants should strategize regularly, but a client's regular spokesperson or a media-savvy member of the legal team should handle the communication. … Bear in mind, though, that communications with a press specialist may not be privileged from subpoenas, and care should be exercised, particularly when exchanging correspondence and email.

The biggest problem with a campaign of "spinning" is that the lawyer doesn't control the news outlets. Reporters are--for the most part--pretty bright, and conscientious enough to not just take one side of a story. So overtly trying to control a story often backfires. And leaving a paper trail of one's attempts only makes matters worse.

In general, I'd recommend Spinning the Law. While the meat for class-action lawyers comes at the end, he's an engaging writer, which makes the journey fun on its own.

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For fourteen years, from 1970 to 1984, more than 150,000 people bought stock in Petro-Lewis and its limited partnerships. Late in that period, the price of gas declined, and Petro-Lewis had to borrow money to to pay out distributions. In 1984, it announced that it was in severe financial straits, and cut its distributions by half, a move that resulted in a number of lawsuits, including Kirkpatrick v. JC Bradford & Co. 

In that class action, the plaintiffs alleged that JC Bradford had violated the securities laws by misleading investors in Petro-Lewis about its financial condition. At the class certification hearing, JC Bradford argued (1) that individualized issues predominated because the plaintiffs would have to prove reliance, and (2) that the named plaintiffs were not adequate. The trial court denied certification, relying on both of these grounds. The plaintiffs appealed.

The Eleventh Circuit held that denying certification based on predominance was error (mainly because of the same logic that motivated Basic Inc v Levinson).  

And then the court turned to adequacy. It conceded that

As the district court aptly noted, a potential class is entitled to more than "blind reliance upon even competent counsel by uninterested and inexperienced representatives."

(Emphasis added.)  And it observed that

Several district courts thus have properly denied class certification where the class representatives had so little knowledge of and involvement in the class action that they would be unable or unwilling to protect the interests of the class against the possibly competing interests of the attorneys.

(Emphases added.)  But it also argued that that the named plaintiffs did not have to demonstrate "to any particular degree" their vigor in pursuing class claims. Obviously, the court reasoned, a class would "be better served if the named plaintiffs fully participate in the litigation," but realistically class counsel is usually far more motivated to pursue claims than class members are. While it conceded that this created a "potential for abuse," it concluded, that

in securities cases such as these, where the class is represented by competent and zealous counsel, class certification should not be denied simply because of a perceived lack of subjective interest on the part of the named plaintiffs unless their participation is so minimal that they virtually have abdicated to their attorneys the conduct of the case.

Because the adequacy of the named plaintiffs was a mixed question of law and fact, the court did not reverse the trial court's adequacy finding. Instead it just remanded the case so that the trial court could make a finding according to the appropriate standard.

(Incidentally, there is one other feature of Kirkpatrick that is likely to become important. In footnote 6, the court also held that

The presence of arbitration agreements is relevant for another factor in determining the suitability of class treatment on the 10b-5 claims. ... Those purchasers whose 10b-5 claims are subject to arbitration thus could not be considered members of the class. In ruling on the motion for class certification, the district court did not determine whether the potential class members not subject to arbitration would be sufficient to satisfy the numerosity requirement of Rule 23(a)(2). The court should make this determination on remand.

Given the newfound emphasis on arbitration agreements, it is likely that, in a number of cases, classes where many members would be subject to arbitration clauses may lack numerosity.)

Kirkpatrick has a mixed legacy as a case. Defendants quite rightly cite it to demonstrate that one cannot completely abdicate a case to plaintiffs' counsel. And they also cite it to point out that one key feature to adequacy is the ability of the class representative to stand up to her lawyers when their interests diverge. The court did hold that one can largely look to the zeal and vigor of plaintiffs' counsel, instead of the plaintiff, but it specifically limited that holding to securities cases like the one before it.  And, as we know, particularly since the PSLRA was enacted, securities cases involve a much more searching inquiry into the adequacy of plaintiffs' counsel than other class actions.

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My regular Tuesday post will be up tomorrow (Classic Cases - looking at Kirkpatrick v. JC Bradford Co.).  But Russell Jackson has an excellent writeup of a recent Sixth Circuit opinion that affirms a motion to strike class allegations based on state law variations.  

Go.  Read.  

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 I've made no secret about the fact that one of the purposes of this blog is to delve into how the other side thinks.  And I've also emphasized the fact that it's important to keep an open mind when considering one's adversaries in litigation.  So I was pleased to hear that plaintiffs'-lawyer-turned-academic Morris Ratner was working on a piece that would discuss how plaintiffs' firms operate today.

Unfortunately, Ratner's working paper--A New Model of Plaintiffs' Class Action Attorneys--promises a heck of a lot more than he delivers. There is no "new model." Instead, he offers a critique of the old "conventional model," and offers an idea for a new model with no details to make it actually useful.

What do I mean by a useful model? A useful model is one that allows you to make predictions. The conventional model (that plaintiffs' firms are rational and profit-maximizing, which usually--given their economic structure--means fee-maximizing) has lasted a while for several reasons:

• It simplifies a necessarily messy set of facts and social forces into a useful account. (A 1:1 mapwill be very accurate, but don't unfold it while you're driving.)  The conventional account offers this.  While individual cases may vary, assuming that a plaintiff's lawyer is looking to maximize fees explains a great deal of behavior in class action litigation.
• It applies equally well to other parties in litigation. (One can also assume that defense firms will be rational and profit-maximizing. And that defendants will be. And that objectors will be.)
• It matches much (though not necessarily all) of the empirical evidence out there. As of this writing, there are a number of books, papers, and reported cases that show that counsel are often looking to maximize fees.
• Most importantly, it allows one to make falsifiable predictions about plaintiff firms' behavior. (All other things being equal, they go for the fees.) This is important for two reasons. (1) It allows litigators to make guesses about what they're going to face. (2) It allows scholars to make predictions about the effects of policy. And when either of these parties turns out to be wrong, it allows them to calibrate their next set of predictions, or it reveals important new questions for research.

So, how does Ratner's model hold up? Not well, unfortunately. It's more of a critique than a model. And, even as a critique, it's not a very informed one.

Ratner's primary observation is that plaintiffs' firms are bigger now than when Professor Coffee first began writing about the entrepreneurial law firm. From that he infers that assuming that everyone in a plaintiffs' firm is "in it for the money" is incorrect. Or, as he puts it:

Large firms possess internal structural complexity that creates diverse incentives other than law firm profit.

And he's right, as far as he goes. But he really doesn't go very far. The real question is, are those diverse incentives relevant to the firm's behavior? (Either in the market for legal services overall, or in individual litigation.) Morris doesn't really offer an answer to that. He argues that, in a given case, the structure of a firm, and the lead attorney's place within that structure, may matter. And he mentions two alternative motivations to profit: (1) he hints that reputation might be important; (2) he observes (in part from personal experience) that "cause litigation" (like the Holocaust bank litigation) might inspire effort not justified by mere fees. But he doesn't really explain how those would play out in litigation generally. What does litigation look like when it's motivated primarily by reputation? How about "cause litigation"? Ratner has little, if anything, to say about either of these "new" incentives.

Ratner also argues that plaintiffs' firms can't be profit-maximizing because they can't predict what their fees will be from a given case.

However the formula for expected fees is stated, it is too imprecise to carry the weight it has been given in the conventional account of how plaintiffs’ attorneys litigate and settle class actions.

It's hardly a surprise to learn that firms can't predict their fees with certainty. The fact that the outcomes of lawsuits are uncertain is well-documented. That's what economists (who tend to insist on profit-maximizing) call incomplete information.  It turns out, there is lots of legal scholarship on how law firms (including plaintiffs' firms) act rationally under conditions of uncertainty or incomplete information. Ratner, though, doesn't address any of this. Instead he assumes that, if one can't predict fees, one must not be engaging in profit-maximizing behavior.

Moreover, this particular criticism tends to show that Ratner doesn't understand an important part of the rational-actor model. Most economists (and most legal scholars) aren't stupid enough to argue that people or firms are actually rational. They argue that people or firms act as if they are rational. Ratner's critiques of the "conventional model" indicate that he hasn't grasped that distinction.  For example, in describing a potential counterexample, he argues that there was never a moment of actual calibration as suggested by 

At no procedural point in Avery did class counsel calibrate case investment along the lines implied by the conventional account ...

There are strong critiques out there of rational-choice models, including of the "as-if" defense of that model. But the fact that a case in real life did not proceed like an idealized graph is not one of them.

Ratner suggests that one way to gather better data on plaintiffs' incentives is to "ask the lawyers who are involved in class litigation." He admits this isn't scientific. But more importantly, he doesn't address any of the issues with self-reported data, even to explain how he would address them in data collection.

Now, some scholars already ask plaintiffs' counsel about how they conduct their practice. Stephen Meili, for example, relied specifically on interviews with plaintiffs' counsel in his account of lawyer-client interactions (and he explained how he addressed self-reporting bias). Richard Nagareda reported discussions that he had with plaintiffs' counsel in working on his book on settlements and complex litigation.  And Lester Brickman relied on public conflicts between plaintiffs' lawyers for some of his data, on the assumption that they would reflect the lawyers making their best arguments for their fees. But Ratner doesn't address any of these examples where data has already been collected, and he doesn't address the questions that those researchers have raised.

In short, while Ratner claims that his model is more "descriptively accurate," it makes things more complex without adding any insight, it doesn't (in its present stage) match much of the empirical evidence out there, and it doesn't allow for falsifiable predictions.

And it also doesn't work for anything other than plaintiffs' firms. As Ratner himself puts it, class-action plaintiffs' firms are uniquely insulated from Darwinian and other economic pressures:

This is especially true among class action plaintiffs’ attorneys generally, who are a relatively independent and colorful lot, and plaintiffs’ firms that specialize in complex or aggregate litigation in particular, which can, by virtue of the pursuit of very large cases, generate enormous revenues for partners who need not devote much effort to achieving the kind of efficiency that economists deem paramount in other settings.

In other words, plaintiffs' lawyers make so much money doing what they do, they don't have to worry about maximizing profit. If this particular critique is true, it's pretty damning. But it doesn't indict the conventional model of plaintiffs' firms, it indicts the firms themselves. After all, if class actions are so profitable that plaintiffs' firms don't have to act efficiently, who's paying for that extra revenue?

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Today's case, Thatcher v. Hanover Insurance Group (8th Cir. 2011) is another short one that nonetheless raises important issues for class action defendants. Allen Thatcher (or, rather, his attorneys) filed a class-action complaint in Arkansas state court against his insurance company. He alleged that the defendants did not pay insureds properly under the terms of their insurance policies. (The specifics had to do with insurance for general contractors.) And he alleged the standard wide spectrum of claims: unjust enrichment, fraud, constructive fraud, and breach of contract.

It's what happened next that makes the case really interesting.  The defendants removed the case to federal court under CAFA.  And then:

Thatcher sought permission to voluntarily dismiss his case without prejudice [under Rule 41(a)(2)] so that he could refile an amended complaint in state court that would avoid federal jurisdiction. The district court granted Thatcher's voluntary motion to dismiss without prejudice.

Now, it's not surprising that a class-action plaintiff would want to stay in Arkansas state court. Arkansas class action law differs from federal law; most importantly, it does not require a "rigorous analysis" of whether a class action should be certified. What is surprising is that a plaintiff would be so brazen about forum-shopping.  And, since the Eighth Circuit has held that forum-shopping is not a valid reason to dismiss a complaint, it was also surprising that the trial court granted the motion.

Not surprisingly, the defendants appealed. And the Eighth Circuit pretty quickly reversed the voluntary dismissal in reviewing the remand.

In addressing whether a district court should allow voluntary dismissal, we have repeatedly stated that it is inappropriate for a plaintiff to use voluntary dismissal as an avenue for seeking a more favorable forum.

The Eighth Circuit also briefly took the trial court to task for not looking harder at what Thatcher's motives were, in part because his tactic, while good for his attorneys, was not nearly as good for the class he sought to represent:

Thatcher was dismissing so he could return to the more favorable state forum. Thatcher's expressed intent was to amend his complaint in order to avoid federal jurisdiction. ... This reading of Thatcher's purpose is supported by his failure to consider the effects of his actions on the putative class that he purportedly represents. In the original complaint, Thatcher included claims for unjust enrichment, fraud, constructive fraud, and breach of contract. In his motion to dismiss without prejudice, Thatcher set forth his intention to refile this matter in state court as a breach of contract claim only. Thatcher set forth no adequate reason why it would benefit the class to abandon these additional claims.

(Emphasis added.)  In other words, the Eighth Circuit was unimpressed with the fact that Thatcher (or more likely, his attorneys) were willing to jettison a number of causes of action specifically to keep the case out of federal court.

If I were a betting man, I'd say it's unlikely that a plaintiff will specifically ask to refine his claim to avoid federal jurisdiction. (And frankly, it's a little surprising that a plaintiff did this time.)

But more importantly, this opinion offers two important reminders for class action defense counsel. First, it is often worth raising whether the purpose for a plaintiff's tactic is a proper one. It actually does matter in the long run. Second, and as important, no matter how many times it draws comments about foxes and henhouses, it is always worth asking whether the plaintiffs' tactic is good for the proposed class. Too often, they're not. And far too often, the defendant is the only one sticking up for the absent class members.

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Today's piece of "classic" scholarship is by Linda Mullenix, Professor of Law at the University of Texas. Published in 2004, Taking Adequacy Seriously: The Inadequate Assessment of Adequacy in Litigation & Settlement Classes, 57 Vand. L. Rev. 1687 (2004), took an in-depth look at the routine under-enforcement of Rule 23(a)(4)'s adequacy requirement.

To put the case simply, courts pay lip service to the concept of adequate representation but fail to robustly engage in any meaningful inquiry to establish the existence of such adequate representation. For judges, the adequacy inquiry usually is the least-rigorously examined requirement for certification, either for litigation or for settlement classes. Instead, courts routinely wave their blessings over class counsel and proposed class representatives and presumptively make findings of adequacy on nonexistent or scant factual showings.

(Emphases added.)  Mullenix attributes much of this under-enforcement to the fact that many courts focus on whether counsel is adequate rather than the class representative herself.

Because most courts historically and reflexively believe that the most important thing is the presence of competent counsel (the Newberg view), there is a general feeling of apathy toward class representative issues. In short, courts seem perfectly willing to ignore even the most clueless class representatives.

And, as Mullenix points out, that reliance on the adequacy of counsel can be a problem, because the same courts often do not probe into the adequacy of counsel, except in a superficial, check-the-resume way.

In reality, most courts routinely, reflexively, and presumptively certify proposed class counsel as adequate without a sufficiently probing inquiry. In the modern literature, one has to look long and hard to find cases in which class counsel have been deemed inadequate to represent the class.

(Mullenix points out that class counsel often do not face rigorous inquiry into adequacy because both courts and defense lawyers hesitate to call the adequacy of lawyers on the other side into question. And in general, this unwillingness to throw mud at opposing counsel is a feature, not a bug, in our civil litigation system.) There are a few exceptions, like Judge Baer's decision that "adequate counsel" in a securities case should come from diverse firms.  But even there, Judge Baer's order focused on a box to check, rather than the conduct of the firms themselves.

Mullenix offers one primary reform: require cross-examination of the class representative at the certification hearing, so that the court can make an adequate record of its own impressions of the adequacy of the named plaintiff.

While there are a few exceptions to this trend of under-enforcement now, for the most part, it appears to have continued. Many courts simply do not look at the adequacy of the class representative (or, failing that, class counsel) quite as closely as they could. And this is unfortunate, because a more rigorous inquiry into adequacy inquiry would have at least three salutary effects:

(1) It would cut down on lawyer-driven cases where there was no real harm. If class counsel can't find a named plaintiff who is sufficiently motivated to educate herself on what happened and actually communicate with her lawyers, that's a very good sign that the case is about a technical issue unattached to any harm rather than an actual injury that requires compensation. (Betty Dukes would likely pass this test, as would Dora Surowitz.)

(2) It would reinforce the finality of class settlements. Currently, it is possible to challenge a class settlement after the fact by challenging the adequacy of representation. This means that class settlements in jurisdictions that do not pay attention to adequacy are--in the long run--worth less than in jurisdictions that do pay attention to adequacy. But since there is systematic under-enforcement, mostly what it means is that class action defendants cannot trust the finality of the deals they do make.

(3) It would cut down on the kinds of settlements that draw objections. If there is an active named plaintiff involved, it is less likely counsel will be able to get away with coupons, illusory "injunctive relief," or exorbitant attorneys' fees. Of course, this may very well be one of the reasons that adequacy is not enforced that vigorously. When you get right down to it, most parties involved in class-action settlements--including courts--do not want to see a settlement derailed just because the lawyers have asked too much.

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 Today's case, Katz v. Gerardi (10th Cir. 2011), involves a pair of securities class actions that were challenging a merger that had gone through (a currently burgeoning field for securities class action lawyers). The case involved a real estate investment trust (REIT), in which the two plaintiffs (Jack Katz and Infinity Clark Street Operating) were members. The REIT merged with another entity, and, as part of the merger, the two plaintiffs were bought out. Katz received cash for his shares; Infinity took shares in the new entity.

Then each of the plaintiffs sued, alleging that the merger's offer documents were false and misleading. Infinity filed a case in the District of Colorado, alleging breach of contract and fiduciary duty. (All of its claims were dismissed, except one that was stayed pending arbitration.) Katz filed his lawsuit in Illinois state court, claiming violation of securities laws. The defendants removed it to federal court (a story by itself), and the case was transferred to the District of Colorado. Once there, Katz amended his complaint and joined Infinity.

The defendants moved to dismiss, based on two theories. (1) Infinity could not assert federal securities-law claims because, since its previous lawsuit hadn't asserted them, it was splitting its claims; and (2) Katz could not assert federal securities claims because he was not a buyer of stock, but a seller. The district court dismissed the claims, and both plaintiffs appealed.  The Tenth Circuit affirmed.

Infinity had argued that it was not required to assert all of its claims in its first class action because the doctrine prohibiting claim-splitting (which derives from res judicata principles) required a final judgment. The Tenth Circuit disagreed.

Our precedent cannot be clearer: the test for claim splitting is not whether there is finality of judgment, but whether the first suit, assuming it were final, would preclude the second suit. This makes sense, given that the claim-splitting rule exists to allow district courts to manage their docket and dispense with duplicative litigation. If the party challenging a second suit on the basis of claim splitting had to wait until the first suit was final, the rule would be meaningless. The second, duplicative suit would forge ahead until the first suit became final, all the while wasting judicial resources.

(Emphases added.)  Katz's argument involved a more creative question, but one that goes to the heart of merger class actions. Was he a buyer or a seller of the stock? Katz had argued that he was a buyer, because the merger had effected a "fundamental change" in his shares, essentially forcing him to "buy" them before selling them. Judge Easterbrook of the Seventh Circuit (who heard the same argument in the fight over removal) had called this argument "word play designed to overcome the actual text of the securities laws." (Emphasis added.)  And the Tenth Circuit agreed.

The merger did not force him to purchase new securities, but only to sell his A-1 Units for cash or new units. Since Katz's 1933 Act claims only give standing to purchasers of securities, which Katz is not, his claims were properly dismissed.

So, what can defense lawyers use from this case? First and foremost, it provides an excellent definition of claim-splitting, one that applies not only to motions to dismiss, but also to arguments about adequacy and superiority when opposing certification.  And second, it offers a useful reminder that it's always best to argue that words mean what they seem to. If your argument requires claiming that black is white, you're not liable to win your case so much as get yourself killed at the next crosswalk.

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