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

 Brenda Kennedy was hospitalized in 2009 for four days. She had an insurance policy from United American that paid benefits for each day that she spent in the hospital, and she assigned those benefits to the hospital. When she received her hospital bill, she discovered that it had only covered three days, not four. So she bought a class action on behalf of everyone who received benefits from the policy.

United American moved to dismiss the case because Ms. Kennedy had not received benefits herself; she had assigned them to the hospital. The court agreed with the argument, but stayed dismissal to give Ms. Kennedy a chance to either find a new class representative or to get the hospital to ratify her lawsuit. (She did the latter.)

Then she moved to certify a nationwide class. United American opposed certification on a number of grounds, all of which revolved around the fact that Ms. Kennedy had not been the real party in interest in the case. According to United American, that meant that the class she had defined was overbroad (it contained individual with standing and without), individualized issues would predominate over any common issues (particularly the question of who was a real party in interest, and who had assigned their interest elsewhere).

In Kennedy v. United Am. Ins. Co., 2013 U.S. Dist. LEXIS 48197 (E.D. Ark. Apr. 3, 2013), the court denied certification. Its primary reason was that:

Kennedy cannot bypass or ignore the important task of identifying putative class members that qualify as real parties in interest.

In particular, it held that determining who was a real party in interest (and therefore who would belong in the class) would require individualized inquiries, affecting both ascertainability and predominance. As it reasoned:

Under the circumstances, it is difficult to envision a method for identifying proper class members without conducting extensive, individualized inquiries. In determining whether Kennedy qualified as the real party in interest in this case it was necessary to resolve multiple questions--including which state's law governed the issue, whether the language of the assignment contract between Kennedy and NEA evidenced an intention to effect a transfer, and whether the contract language and circumstances evidenced only a partial transfer and an intent that Kennedy retain the right to sue. As demonstrated by the protracted proceedings regarding Kennedy's status, assignments of GSP2 benefits present a myriad of issues that require consideration of individual proof.

(Emphasis added.) But the court went further, pointing out that Ms. Kennedy's situation rendered her an inadequate class representative as well.

"Even if Kennedy were a benefit payee, the Court finds that she does not qualify as an adequate representative, which is perhaps the most important of all prerequisites to certification of a class action. See Bishop v. Committee on Professional Ethics and Conduct, 686 F.2d 1278, 1288 (8th Cir. 1982). Kennedy's entire claim rests on the supposition that the GPS2 Policy requires that United count the day of discharge as a day of confinement during a hospital stay. United notes that Kennedy's proposed interpretation conflicts with the standardized billing practices of hospital class members that she seeks to represent. United also points out that the putative class includes current GSP2 policyholders who have a financial incentive to consider how this litigation will affect the cost of a GSP2 Policy. Kennedy, who is not a policyholder and remains indebted for the hospital charges that underlie her claim for benefits, has no similar interest."

(Emphasis added.)  In other words, Ms. Kennedy's class action not only conflicted with how most policyholders would understand their benefits, it also threatened to make current policyholders' policies more expensive, undermining their interests.

Kennedy the case began with a motion to dismiss that was arguably unsuccessful. (The court agreed with the defendant's arguments, but gave the plaintiff an opportunity to fix the complaint.) The defeat of class certification built directly off of the motion to dismiss. There are two lessons that defendants can draw from this case. First, stay consistent; consistent arguments across several motions can be very persuasive to a judge. Second, don't be afraid to educate the court. Sometimes it takes a loss in an early skirmish to set up the victory where it is needed.

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 Going through bankruptcy is traumatic enough; doing so and still having your credit report still list your discharged debts as "delinquent" is enough to drive some people to litigation. And that's how several credit agencies found themselves on the receiving end of a series of Fair Credit Reporting Act class actions.

In this case, the defendants settled, offering the plaintiffs injunctive relief and some pro-rated monetary relief, as well as paying attorneys fees and some incentive awards for the named plaintiffs.

The settlement drew objections, however. The trial court approved the settlement nonetheless, but on appeal, in Radcliffe v. Experian Info Solutions Inc., the Ninth Circuit Court of Appeals vacated the settlement. The problem, it held, was the incentive award agreement:

On or before October 19, 2009, Proposed 23(b)(3) Settlement Class Counsel shall file an application or applications to the Court for an incentive award, to each of the Named Plaintiffs serving as class representatives in support of the Settlement, and each such award not to exceed $5,000.00.

(Emphasis added.) Based on both the agreement and testimony at the fairness hearing, it was clear that the incentive provision was supposed to encourage the named plaintiffs to support the settlement. That, the court held, was a conflict of interest that rendered the named plaintiffs inadequate as class representatives.

But the court also expressed concern about the disparity in the size of the incentive awards, stating that this alone might be reason enough to disqualify the plaintiffs as inadequate:

There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards. Under the agreement, if the class representatives had concerns about the settlement's fairness, they could either remain silent and accept the $5,000 awards or object to the settlement and risk getting as little as $26 if the district court approved the settlement over their objections. The conditional incentive awards at issue here, like the disproportionately large awards in Staton, fatally alter the calculus for the class representatives, pushing them to be "more concerned with maximizing [their own gain] than with judging the adequacy of the settlement as it applies to class members at large."

(Emphasis added.)

Finally, the court also held that the provision meant that class counsel was not adequate to represent the class, because there were representing conflicting parties: the named plaintiffs who would receive the incentive award and the absent class members who would not.

Radcliffe appears to be part of a growing trend of courts of appeal watching out for the interests of absent class members. And that makes for an important takeaway: if the settling parties don't protect the absent class members, the courts will step in to do so.

NOTE - An earlier version of this post identified the Public Citizen Litigation Group as involved with the case.  While they are listed in the opinion as counsel, I have been informed that the brief they filed was on a collateral issue, not one objecting to the settlement.

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Fordham law professor Howard M. Erichson has a new paper up at SSRN on "The Problem of Settlement Class Actions."  Based on dicta in the Supreme Court's opinion in Amchem Products, Inc. v. Windsor, courts have taken to certifying classes for settlement purposes only without worrying about "manageability," that is, whether the case could actually be tried as a class action.

As a result, settlement class actions have long posed strategic dilemmas for plaintiffs and defendants alike. Among them:

• How much can the defendant concede without compromising its ability to defend the case if the settlement falls through? (Not as much as you think.)
• Can a settlement-only class be too cheap? (Yes.)
• How wide can the parties cast their net in releasing claims? (Not too wide.)

Professor Erichson shares many of these concerns, which is why he advocates abolishing the settlement-only class, and only allowing settlements to proceed if the class has been certified for litigation. As evidence of the need for this shift, he cites two recent--and highly controversial--settlements: In re AIG and Sullivan v. DB Investments. As he puts it

AIG and DeBeers show what happens when courts follow the Supreme Court’s dicta [in Amchem] to its logical conclusion, rather than following the concerns that animated the Court’s decision. Armed with the Supreme Court’s modest permission to treat settlement classes slightly differently than litigation classes, these courts approved settlement class actions notwithstanding issues that go to the heart of class certification – in one case, the fraud-on-the-market doctrine, and in the other, significant variations in state law.

(Emphasis added.) Erichson draws the wrong lesson, though. He thinks questionable settlements like these occur because the plaintiffs lack leverage in negotiations:

By permitting settlement class actions without plenary class certification, the Court invited defendants to use the settlement class tool to resolve widespread liability through negotiation with deleveraged would-be class counsel. Moreover, by modifying the approach endorsed by the Court of Appeals, the Supreme Court opened up the possibility of class resolutions negotiated without even the leverage of future litigation class certification.

(Emphases added.)  That conclusion seems to ignore the facts of each case. In each of these cases, a class that could not have gotten certified for trial was certified for settlement. Think hard about that for a moment. In In re AIG, the plaintiffs brought a class that could not be certified because of individualized reliance issues. It settled for $72 million. In Sullivan, the plaintiffs settled a case on behalf of a class that included many unharmed class members for $295 million. Is the problem in either case that the plaintiffs lacked leverage?

GIven his misdiagnosis of the problem, Professor Erichson's solution misses the mark. Abolishing the settlement class action will not lead to better settlements. It may, in fact, lead to worse ones. The plaintiffs' leverage in settlement negotiations comes not so much from their promise of peace as from their threat of war. Litigating class actions has grown enormously expensive, and defendants will often settle claims that are less than meritorious because the settlement is cheaper than the costs of litigation. DB Investments did not pay $295 million for the preclusion of other cases--it did so because it was facing a default judgment. And AIG likely settled its case--in which it had a very strong argument against certification--because the costs of reaching that victory were simply too high.

The problem with these settlements was not that the plaintiffs lacked the leverage to cut a good deal; indeed, the indirect purchasers in Sullivan and the investors in In re AIG did just fine. The problem is that absent class members--who are not present for the negotiation--are too often sacrificed for these deals.

There is a solution to this particular problem, but it is one that plaintiffs, judges, and academics tend not to advocate. To protect absent class members, courts just need to vigorously enforce the adequacy requirement, and intervene in poor settlements sooner. Some courts are willing to do this. But for too many, this would interfere with many plaintiffs' current business model.  That's a shame. Defendants will manage just fine, but absent class members may not.

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Today's case, Critchfield Physical Therapy, P.C. v. Techhealth, Inc., 2013 U.S. Dist. LEXIS 13440 (E.D. Mo. Feb. 1, 2013), is a short one, but it contains a valuable lesson.

Critchfield filed a class action against Techhealth. The basis of the lawsuit was not important enough for the court to mention in this opinion. What was important was that a mediation conference was scheduled in the case. A representative of Techhealth attended, as did its counsel. But on the plaintiff's side, only plaintiffs' counsel showed up. This is not an unusual arrangement in a class action: I have attended several class mediations over the years where I brought my client along, but plaintiffs' counsel (the real party in interest, as some courts acknowledge) did not.

In this case, however, the defendant demanded that the actual plaintiff show up. (A canny move, given that the plaintiff may well have different ideas of acceptable remedies--and acceptable fees--than its counsel.) When counsel refused, claiming that a representative was available by phone, the defendant shut down the mediation.

Then it moved for sanctions.

The court granted the motion. As it reasoned:

both Local Rule 6.02(B)(1) and the Order referring the case to mediation in this case required that a corporate representative of Plaintiff having authority to settle claims attend the mediation in person, unless otherwise agreed to by the parties or excused by the court. Attendance in person by the parties is not a mere technicality. It is what ensures a meaningful mediation and is the cornerstone of good faith participation. Merely "being available" by phone does not satisfy this requirement. Furthermore, the Court discerns no reason why there should be an exception for a named plaintiff in a putative class action. Such an exception would run contrary to a class representative's obligations as a representative of the class.

(Emphasis added; internal citations and quotations omitted.) The court did, however, reduce the sanctions by 30% because the defendant could have called the court during the mediation to resolve the issue, saving some costs.

So what's the takeaway? Plaintiffs are not optional in class actions, not even in settlement talks. Including the plaintiffs may well reduce costs (and fees) over time.

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I haven't commented much about the Supreme Court's class action docket so far, largely because this year I was more focused on--in my own small way--trying to influence what it would be.  But now that my particular efforts are done, I thought I would focus on each of the cases before the Court this Term.  I don't feel comfortable talking much about Standard Fire Ins. Co. v. Knowles, which addresses plaintiffs' use of stipulations that limit class recovery to less than CAFA's $5 million amount-in-controversy threshold, since I was on a team that assisted Ted Frank of the CCAF in filing its amicus brief.  

However, several law students alerted me to a pair of student notes touch on the issues in the case, and there's no reason I can't share those with you.  

First up, Front-End Fiduciaries: Pre-Certification Duties and Class Conflict by Nick Landsman-Roos of Stanford Law School.  Landsman-Roos provides a good overall discussion of fiduciary duty, with a focus on binding stipulations.  His primary argument: 

When an action potentially prejudices or does prejudice a substantive legal right of ab- sent class members, an attorney should have an opportunity to offer a good faith defense—that the course of conduct was undertaken in a good faith belief that it would maximize the class’s recovery. That defense, in turn, can be evaluated in terms of whether it is legitimate, genuine, or pre-textual.

(Emphasis added.)

Next, An Illusion of Sacrifice: The Incompatibility of Binding Stipulations in CAFA Cases by Ryan S. Killian of Pepperdine Law School.  Killian takes a hard-line stance against binding stipulations:

For reasons theoretical, legal, and practical, the right answer is the most extreme. Judges should impose a per se rule against giving effect to any purported binding stipulations. The theoretical reasons for such a rule have their basis primarily in agency theory. The legal reasons flow naturally from considerations of due process and the obligatory rigorous inquiry into Rule 23(a)(4)’s adequacy requirement. The practical reasons stem from considerations of complex litigation and efficiency.

(Emphasis added.  Internal footnote omitted.)

As good student notes should, these both provide all the background one needs to follow along on the Knowles argument.

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In 1998, the class action plaintiffs' firm Milberg Weiss filed sued Computer Associates for violating the federal securities laws by lying about its revenues in order to increase its stock price. In a perfectly unremarkable development, it was appointed co-lead counsel of the consolidated class. (Various firms had filed a total of eleven complaints.) Over the next four years, the pressure on Computer Associates mounted. Thirteen more complaints were filed, and the US Attorney's office (EDNY) and SEC launched a joint investigation of the firm.

So Computer Associates decided to settle the case. After seven months of mediation with the plaintiffs, it announced a settlement where class members would receive 5.7 million shares of stock in the company, then valued at around $140 million. Counsel's fee was 1.4 million shares, valued at approximately $35 million. (One might ask whether a settlement like this either (1) counts as a coupon settlement, or (2) created problems by diluting current shares, but neither of those was raise by the parties, who were all interested in the settlement going through.) By the end of 2003, the court had approved the settlement; there were no objectors.

Four months later, several Computer Associates executives pled guilty to conspiracy to commit securities fraud and obstruction of justice; the firm admitted that its executives had engaged in a multi-billion dollar fraud and coverup, and it restated an additional $2.2 billion in earnings. In addition, the Wall Street Journal reported that Computer Associates had withheld 23 boxes of documents during class-action discovery.

At this point, several of the class-action plaintiffs asked Milberg Weiss to vacate the certification order under Rule 60(b), because they had been deprived of essential information in the 23 boxes. Milberg Weiss declined to do so. So the plaintiffs proceeded on their own. After three years of litigation and discovery, the court dismissed the Rule 60(b) motion, in part because it wished to protect the "finality which a settlement is intended to produce." (It also noted that these plaintiffs had not objected to the settlement at the time.)

At that point, the disgruntled class members filed a malpractice action against Milberg Weiss and others in New York state court, alleging legal malpractice and breach of fiduciary duty. The lawyer-defendants responded by asking the E.D.N.Y. for an injunction against the malpractice action under the All Writs Act and Anti-Injunction Act, defending the settlement approval and the dismissal of the 60(b) motion. The E.D.N.Y. issued the injunction, and the plaintiffs appealed.

Which brings us to this week's case, Wyly v. Milberg, in which the Second Circuit affirmed the injunction. For those interested in the minutiae of the All Writs Act and Anti-Injunction Act, the court held that it could not uphold the injunction under the "in aid of jurisdiction" prong of the All Writs Act, because the court lacked in personam jurisdiction, and the mere connection with a class action was not enough to invoke any of the known exceptions to that rule:

We have never held that a district court's involvement in complex litigation justifies, without more, issuance of an injunction "in aid of" the court's jurisdiction, and we decline to create such a rule here.

Instead, the Second Circuit turned to the "relitigation" exception to the Anti-Injunction Act, which required it to conduct a preclusion analysis of the malpractice case. After determining that res judicata (claim preclusion) did not apply, it reasoned that

Before applying the elements of issue preclusion to this case, we begin with a preliminary observation about the Appellees' argument. In the course of the federal class action litigation, the District Court did not "actually decide" whether the Appellees committed legal malpractice; that claim was not presented, and therefore the Court had no reason to address malpractice as such. The Appellees' issue-preclusion argument is focused not on whether the District Court previously adjudicated a malpractice claim, however, but on whether the Court resolved one of the elements of a malpractice claim--namely, counsel's deficient performance.

(Emphasis in original.)  And it found that the Settlement Order had in fact established that the attorneys had acted in a reasonable manner, precluding a finding that could establish malpractice.

The Settlement Order held, inter alia, that the global settlement of the 1998 and 2002 class actions was "fair, reasonable[,] and adequate," and that class counsel was entitled to an award of fees that the District Court found to be "fair and reasonable." Whether an award of "fair and reasonable" attorneys' fees necessarily decides the deficient-performance prong of a legal malpractice claim is an issue of first impression in this Circuit. We conclude that the deficient-performance prong of New York's legal malpractice rule is identical to the reasonable-performance issue that the District Court decided as a necessary component of the Settlement Order.

(Internal footnote omitted.)  Since the lower court had found counsel to be adequate, and had also found that its performance merited its requested fee, there was no way another court could find that counsel had committed malpractice.

It is possible that the circumstances that gave rise to this case may come up again sometime. But that's not the reason for defense lawyers to focus on it. (After all, here, the defense had pulled off a coup: settling the case for less than it might be worth after the conclusion of a criminal investigation.) Instead, here are four other reasons this case is important for defense lawyers:

1. The full record is fascinating reading, and offers a lot of between-the-lines looks at how a large securities plaintiff's firm operates.
2. The Second Circuit's "relitigation" reasoning may have application in other cases where plaintiffs seek a second bite at the apple in state court. Defendants are often interested in finality, and this is a case that offers some help in achieving that in litigation.
3. We often talk about how plaintiffs in class actions are only nominal, and it is the attorneys who really run the cases.  This case is a stark example of just what that divorce between plaintiff and attorney can mean in a class action.
4. The case is an important reminder that if you do not challenge adequacy of counsel or the level of attorneys' fees when they first arise, you may be precluded from doing so later, when it really matters.

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 It turns out that Elizabeth Chamblee Burch is not the only law professor currently worried about adequacy in securities class actions. Boston University law professor David H. Webber has an article in the Northwestern University Law Review on The Plight of the Individual Investor in Securities Class Actions.

While Professor Burch was concerned with whether or not institutional investors were adequate representatives on their own, Professor Weber is more concerned with whether they can ever represent individual investors. In particular, he sees three conflicts that may be insurmountable:

1. Derivatives trading. Institutional investors tend to engage in derivatives trading; individual investors less so. Derivatives trading may mean that institutional investors do not suffer the same losses as individual investors, or face the same risks. More importantly, it may subject them to unique defenses, such as a lack of reliance. (Basic, Inc. v. Levinson did not do away with the reliance requirement in securities fraud, it just allowed a court to presume reliance from stock price. If a derivatives trader has not relied on the stock price …)
2. Governance reforms. Webber notes that institutional investors are more likely to seek corporate governance reforms as part of their settlements. And, as he points out, if an investor accepts governance reform as part of a settlement package, it is usually in exchange for less overall money. Institutional investors who are repeat players may very well prefer the governance reform. Individual investors may prefer the cash.
3. Merger class actions. Finally, institutional investors are far more likely to be on both sides of a merger transaction, a situation that may well disqualify them from representing a class challenging the approval of a merger.

Professor Webber's proposed solution is to pair up individual investors with institutional investors. (Which is not too far off from Professor Burch's "plaintiff group" proposal.) But his critique, especially when coupled with Professor Burch's, and with the circularity problem in securities class actions, raises the question of whether securities fraud cases are appropriate for class treatment after all. Meanwhile, however, his specific discussions of the problems with institutional investors can provide defense lawyers with additional ammunition to fight certification in less meritorious cases.

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 Georgia Professor Elizabeth Chamblee Burch has an essay out for the University of Cincinnati's Corporate Law Symposium, in which she argues that institutional investors may have problems serving as adequate class representatives in securities class actions.

As she acknowledges, this is a counter-intuitive position, but that hardly makes it wrong. We have grown used to thinking of institutional investors as "good" class plaintiffs [] ever since the passage of the PSLRA, when Bill Lerach began to recruit them as named plaintiffs in securities class actions. But, as Professor Burch explains,

a divide often exists between institutional and individual investors such that the former, when acting alone, cannot adequately represent the latter. To briefly explain this divide, institutions are more likely than individuals to:
(1) trade in derivatives, which means that the institution may not rigorously pursue the litigation because even though it has a large voting stake in the defendant corporation, it lacks the risk of economic exposure;
(2) continue to own stock in the defendant corporation, which means the institution may exchange corporate-governance reforms for lower monetary settlements, whereas former shareholders would prefer to maximize their compensation;
(3) take litigation risks because less money is at risk vis-a-vis its overall wealth than would an individual who has lost her life savings (the so-called "peanuts effect"); and
(4) think that, because they own heavily diversified portfolios, fraud is just as likely to benefit them as it is to harm them over time and reason that it makes sense to avoid significant time investments and transaction costs in pursuing wrongdoing. 

(Emphases added)  Her solution (which she has advocated before): a lead plaintiff group.

Appointing a lead-plaintiff group solves the problem that Reynolds v. Sims paints starkly in political context: each citizen has a right to participate fully in state government and that right is "unconstitutionally impaired when its weight is in a substantial fashion diluted when compared with votes of citizens living in other parts of the State. . . ." Rule 23 assumes that a representative's self-interest overlaps with the interests of those she represents so that when she pursues her own interests, she benefits the class. Consequently, appointing a diverse, representative group with both individuals and institutions ensures equal access to voice opportunities, adequate representation, and due process in securities classes just as voting rights do in the political context.

As Professor Burch points out, this essay is not particularly new. She has written on these ideas before. But it is a quick, cogent take on one of the larger unaddressed problems in securities class actions. As such, it's well worth a read.

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Today's case, Espenscheid v. DirectSat USA, LLC (7th Cir. 2012) is a little tricky, procedurally. Three plaintiffs filed an FLSA class action (and collective action) against DirectSat USA, LLC. The Northern District of Illinois originally certified a class, but then decertified it, at which point the plaintiffs each settled on an individual basis.

Now, here's the tricky part. Having settled the case, they appealed the decertification.

But wait, you ask. How could they do that? They settled their claims!

The plaintiffs' response: the settlement agreement reserved their right to appeal. Of course, they would still face a standing problem. Since their claims had been settled, they no longer had a stake in the case. So how did they justify their standing?

By pointing to a provision in the settlement agreement that said that they would seek incentive awards if the class were certified.

As Judge Posner describes the incentive awards in his opinion:

It is true that class actions are almost always the brainchild of lawyers who specialize in bringing such actions. But they still have to find someone who is a member of the prospective class to agree to be named as plaintiff, because a suit cannot be brought without a plaintiff. And a class action plaintiff assumes a risk; should the suit fail, he may find himself liable for the defendant's costs or even, if the suit is held to have been frivolous, for the defendant's attorneys' fees. The incentive reward is designed to compensate him for bearing these risk, as well as for as any time he spent sitting for depositions and otherwise participating in the litigation as any plaintiff must do. The plaintiff's duties are not onerous and the risk of incurring liability is small; a defendant is unlikely to seek a judgment against an individual of modest means (and how often are wealthy people the named plaintiffs in class action suits?). The incentive award therefore usually is modest--the median award is only $4,000 per class representative.

(Emphases added, internal citations omitted.) So, would that chance to receive a payment of a few thousand dollars be enough to justify the appeal? According to Judge Posner, yes:

It should have been enough. The prospect of such an award is akin to a damages payment agreed in a settlement to be contingent on the outcome of the appeal; and the prospect of such a payment, though probabilistic rather than certain, suffices to confer standing.

Of course, as he also pointed out, having standing to pursue an appeal and being an adequate representative of a class are two entirely different things.

It's true that having settled he will no longer have a stake in any damages that may be awarded to the class. And that will cast doubt on his adequacy to represent the class members, his interest in the case no longer being perfectly aligned with theirs.

In other words, since the named plaintiffs would only be in the case for their incentive awards, they would really only have an incentive to settle, and only on terms that allowed them their awards. This would align their interests with their lawyers' rather than the class's. And this is the reason why incentive awards can prove so problematic: they tend to align the interests of the named plaintiffs with their lawyers.

So what's the takeaway for defense lawyers? Make sure you check into whether the plaintiff is seeking an incentive award. (Many defense lawyers already ask this in deposition.) If they are, it may provide the basis for an argument about adequacy of representation.

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One of the primary problems that vexes class-action scholars is often referred to as the "agency problem" (or, more recently, the "governance problem"). In other words, how do we ensure that the people in charge of a class action (nominally the named plaintiff, really the class counsel) actually serve the interests of the class, instead of themselves?

The latest entrant into this debate is NYU law professor Samuel Issacharoff, with his paper (to be published in the Washington University Law Review) "Assembling Class Actions." 

As Professor Issacharoff understands it, the central problem in class action jurisprudence is:

the nature of the authority to resolve contested legal claims on behalf of others.

For Professor Issacharoff, that question is unavoidable, because modern society is capable of mass harms--that is, harms that affect a large number of people at once, even if the injury to each person is slight. Issacharoff comes from the perspective that "mass harms require mass solutions," and that the class-action is the best way to level the playing field between plaintiffs who only have one day in court, and defendants who seem to spend much of their time there.

The resulting asymmetry in stakes between the single-shot plaintiff and the repeat-play defendant dooms the small player in litigation, already incapacitated by the frequent problem of the low stakes that any individual claimant may have serving to discourage suit. Hence the oft-repeated observation about how in litigation the haves come out ahead. Repeat play demands greater attention to litigation, justifies greater expenditures on prosecution of the claims, and forces the institutional actor to view even a small lawsuit as a broad threat. Thus the centrality of the class action in the limited stakes, negative value litigation context. The decision to aggregate creates symmetry in the litigation’s stakes, and justifies the cost of prosecution at a level commensurate to that of the defence.

(Emphasis added.)  And he sees the adequacy requirement as one of the largest problems facing that resolution. He recognizes that adequacy is the current doctrine used to ensure that absent class members and defendants receive some measure of due process. But, as he comments:

The critical issue about these cases is that they do not put a court in the uncomfortable position of selecting an agent who is somehow “able enough” to speak on behalf of others and bind them to the effect of an adverse judgment.

(Emphasis added.) Professor Issacharoff's article is a law review article of the classic form. That is, he isn't so much interested in solutions as he is in framing the problem, and seeing whether it explains the latest developments in class-action doctrine, specifically the rulings in Dukes, Bayer, Halliburton, and Concepcion. And, arguable misreading of Eisen aside, he makes a number of good points along the way.

There is no immediate practical application for this article, but it's still worth a read. Why? A number of reasons:

1. Issacharoff is one of the deans of class action scholarship; so he's likely to be very influential in the debate.
2. The "mass harms require mass solutions" argument is a relatively strong rhetorical position, arguably stronger than the "class actions deter" argument so often made.
3. This highlights, once again, that adequacy of representation is a serious problem for many plaintiffs, and a profitable area for defendants to investigate.

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 Ten Cases to Educate You

• In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748 (7th Cir. 2011). 
• Pipefitters Local 636 Ins. Fund v. Blue Cross Blue Shield of Mich., 654 F.3d 618 (6th Cir. 2011).
• Madison v. Chalmette Refining, L.L.C., 637 F.3d 551 (5th Cir. 2011).
• In re Bridgestone/Firestone, Inc. Tires Prods. Liab. Litig., 288 F.3d 1012 (7th Cir. 2002). 
• Gregory v. Finova Capital Corp., 442 F.3d 188 (4th Cir. 2006). 
• Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 259 F.3d 154 (3d Cir. 2001).
• Kamm v. California City Development Co., 509 F.2d 205 (9th Cir. 1975). []
• Katz v. Carte Blanche Corp., 496 F.2d 747 (3d Cir. 1974). []
• Bevrotte v. Caesars Ent. Corp, 2011 U.S. Dist. LEXIS 114463 (E.D. La. Oct. 4, 2011). []
• Pablo v. Servicemaster Global Holdings, Inc., 2011 U.S. Dist. LEXIS 87918 (N.D. Cal. Aug. 9, 2011).

Further Reading:

• Edward F. Sherman, "Abandoned Claims" in Class Actions: Implications for Preclusion and Adequacy of Counsel, 79 Geo. Wash. L. Rev. 483, 503 (2011). 
• Andrea Joy Parker, Dare to Compare: Determining What "Other Available Methods" Can Be Considered Under Federal Rule 23(b)(3)'s Superiority Requirement, 44 Ga. L. Rev. 581 (2010).
• D. Bruce Hofferman, To Certify or Not: A Model Proposal for Evaluating the "Superiority" of a Class Action in the Presence of Government Enforcement, 18 Geo. J. Legal Ethics 1383 (2005).

Questions to Consider:

• Judge Easterbrook authored both In re Aqua Dots and In re Bridgestone/Firestone, Inc.: is it possible to reconcile the two opinions?
• What forms of adjudication are superior to class actions? Are there consistent principles for finding them so?
• How do the four factors under Rule 23(b)(3) play into the typical superiority analysis?
• Several judges and scholars have begun making arguments that imply that there may be a larger overlap between superiority and adequacy than previously thought. What can defense counsel make of these analyses?

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The adequacy requirement tends to be much-analyzed, but--at least from a defense perspective--wildly under-enforced. As Dean Robert Klonoff recently wrote, one reason for this may be that it is so difficult for class counsel to actually identify plaintiffs that can serve as adequate class representatives. But, as a result, there are numerous cases that challenge class actions where the named plaintiffs serve as little more than stand-ins for their counsel, rather than exercising any independent judgment. Adequacy is a particularly important doctrine because it has due process implications, and because it comes up in class settlements and in later fights over the preclusive effects of previous class actions. So don't expect the debate to stop any time soon.

Ten Cases to Educate You

• Surowitz v. Hilton Hotels Corp., 383 US 363 (1966).
• Hansberry v. Lee 311 U.S. 32 (1940).
• Dewey v. Volkswagen Aktiengesellschaft (3d Cir. May 31, 2012).
• In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748, 752 (7th Cir. 2011). 
• CE Design v. King Architectural Metals, 637 F.3d 721 (7th Cir. 2011). 
• In re Literary Works in Electronic Databases Copyright Litigation, 654 F.3d 242 (2d Cir. 2011).
• Culver v. City of Milwaukee, 277 F.3d 908, 913 (7th Cir. 2002). 
• Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998).
• Kirkpatrick v. JC Bradford & Co., 827 F. 2d 718 (11th Cir. 1987). 
• * Buettgen v. Harless, 263 F.R.D. 378 (N.D. Tex. 2009).

Further Reading:

• Linda S. Mullinex, Taking Adequacy Seriously: The Inadequate Assessment of Adequacy in Litigation and Settlement Classes, 57 Vand. L. Rev. 1687 (2004).
• Jay Tidmarsh, Rethinking Adequacy of Representation,87 Tex. L. Rev. 1137, 1151 (2009).
• John Coffee, Class Wars: The Dilemma of the Mass Tort Class Action.

Questions to Consider:

• What conflicts will courts hold are signs of inadequate representation?
• What degree of independence should a plaintiff be able to display? Is there any way to test that without invading the attorney-client privilege?
• If courts are unwilling to enforce the adequacy requirement stringently, what other methods exist for ensuring that class actions are adequately governed?

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 Nobody likes a leaky roof, but few people make a federal case out of it. Several plaintiffs' lawyers did, however, when they sued Volkswagen alleging that the sunroofs on certain vehicles would clog with debris, allowing water to leak in and ruin the interior of the car. The resulting case, Dewey v. Volkswagen Aktiengesellschaft, provides another look at the adequacy doctrine.

In Dewey, two different class actions were consolidated in the District of New Jersey, where they were referred to a magistrate judge. After two years of discovery, the parties entered into a settlement agreement. The basic terms covered three kinds of relief:

1. "Educational preventative maintenance information," available to everyone, which would show them how to prevent leakage.
2. Replacement of sunroof valve for select consumers.
3. An $8 million reimbursement fund, which could be collected by one subclass on a prorated basis, and a second subclass (the "residual" subclass) if there was still money left over.

There were objections, including one filed by the Center for Class Action Fairness.  [Disclosure: I have represented the CCAF pro bono before.] One line of argument from the objectors questioned whether a magistrate judge could actually preside over a classwide settlement, since the absent class members had not consented to the transfer.

The other challenged the adequacy of the named plaintiffs, because they had segmented the class into various groups (including the "residual" subclass).

The District of New Jersey decided that neither of these objections was reason not to certify the settlement class. The objectors appealed the certification.

The Third Circuit quickly affirmed the assignment to the magistrate judge. But it was more concerned with the kind of conflict would disqualify a named plaintiff from representing a class.  It identified the standard:

A conflict is fundamental where it touches the specific issues in controversy. A conflict concerning the allocation of remedies amongst class members with competing interests can be fundamental and can thus render a representative plaintiff inadequate. A conflict that is unduly speculative, however, is generally not fundamental.

(Internal quotations & citations omitted.) In this case, the objectors had identified two conflicts.

First, the objectors argued that, like in Amchem Products v. Windsor, there was a conflict between plaintiffs seeking to recover for past damage and present damage. The Third Circuit found this conflict to be "unduly speculative." But it cottoned to the other conflict that the objectors had identified.

The West Objectors argue that there is an intra-class conflict between plaintiffs in the reimbursement group and plaintiffs in the residual group. Because all representative plaintiffs are in the reimbursement group, the West Objectors argue, they cannot adequately represent class members in the residual group. We agree.

The reimbursement group has priority access to the $8 million fund. Only after their claims are satisfied can the administrator satisfy goodwill claims from the residual group. In order to sort the plaintiffs into these two groups, representative plaintiffs sorted the various car model runs by their claims rates. On this spectrum of claims rates, representative plaintiffs drew a line delineating the boundaries between the two groups. Those model runs with claims rates above the line were placed in the reimbursement group. Those model runs with a claims rate below the line were placed in the residual group. It was this line-drawing exercise that exacerbated the adequacy problem here.

(Emphasis added.) In other words, once the case became about the named plaintiffs deciding between "haves" and "have nots," and placing themselves exclusively with the haves, they had demonstrated that there was an insoluble intra-class conflict.

What can defense lawyers learn from this? Adequacy is about protecting the rights of the absent class members. That means that when challenging a proposed class--or when designing a classwide settlement that will survive scrutiny--the defense must think carefully about how best to protect the interests of the absent class members?

Isn't that supposed to be the plaintiffs' job? Sure. But there are a lot of opinions out there (like this one) that show that they don't reliably do so.

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Robert Klonoff, Dean of the Lewis & Clark Law School, has produced a new article, The Decline of Class Actions (forthcoming from the Washington University Law Review), that provides a much-appreciated overview of recent developments in class action law from a plaintiff's perspective. (Disclosure: Dean Klonoff provided a very nice blurb for the Class Action Playbook.) Regular readers of this blog know that I am actually a big fan of plaintiffs' perspectives: I think understanding them is crucial to a conscientious and seals defense of class action litigation. And while there is much to like in Dean Klonoff's analysis, there is also a fair amount that is lost to the same old pro-plaintiff analysis that many courts have begun to reject.

Unlike a number of his scholarly colleagues, Dean Klonoff doesn't say that the class action is dead, just that courts have made it a lot harder to get a class certified, and that he considers that a problem. He traces that problem to a number of the "new" requirements that courts have imposed on class-action plaintiffs in the last decade. What are those new requirements? Well, they'll look familiar to readers of Rule 23.

Rigorous analysis. Dean Klonoff worries that courts now require too much evidence from plaintiffs at the certification stage. Some of his concerns have some actual foundation (a number of practitioners, both plaintiff and defense, have noted that the increased focus on rigorous analysis has shifted costs toward the beginning of the case for both sides, a result necessarily in tension with the efficiency arguments for class certification). But others betray an ignorance of how lawyers actually litigate cases. For example, he expresses concern that:

While courts have imposed strict new evidentiary burdens on plaintiffs, they have increasingly permitted defendants to seek denial of class certification without submitting to discovery. For instance, in Pilgrim v. Universal Health Card, LLC, the Sixth Circuit upheld the district court’s dismissal of class allegations in a nationwide class action, reasoning that “we cannot see how discovery or for that matter more time would have helped [plaintiffs].” Other courts have taken this approach as well. Case law requiring plaintiffs to put forward exacting evidentiary proof in support of class certification is difficult to square with case law permitting defendants to move to strike class allegations without allowing plaintiffs even minimal discovery.

In fact, it is easy to square these two requirements. The plaintiff bears the burden of providing the court with an adequate basis for certifying a class. LIke with any burden, that means that ties go to the other party (in this case, the defendant). If the plaintiff has pled a class action that can't be certified because of an insurmountable legal defect, there is no reason to engage in discovery that cannot cure that defect. This is the exact same reason that we require a plaintiff both to prove her case by a preponderance of the evidence, but also allow the defendant to file a motion to dismiss.

More importantly, Dean Klonoff does not address the actual new requirement imposed by Rule 23(c)(1)(B), which requires a detailed order from courts certifying a class. Without actual evidence from plaintiffs, courts will find it hard to meet this new requirement.

Interestingly, Dean Klonoff does think that courts should resolve Daubert questions before certification, because they are about the admissibility of evidence, rather than proof of the merits.

Ascertainability. Dean Klonoff also worries about courts' increased focus on the viability of class definitions.

Indeed, the trend of more exacting scrutiny of class definitions has been recognized by one of the nation’s leading class action defense attorneys, John Beisner. In a recent article, Beisner noted that “more and more decisions are turning on the requirement of an ascertainable class definition.” He thus urged class action defense counsel to look for ways to challenge the class definition.

(Internal footnotes omitted.) According to Klonoff, a "more measured" approach would be to allow the plaintiffs to amend their class definition whenever it is challenged. And, in many cases, that is exactly what a court will do. But sometimes amending a class definition is simply futile: if there is no common issue uniting the class, then any definition will be either overbroad or impermissibly merits-based.

Numerosity. Dean Klonoff has identified an important trend here. Prompted by a need for a more rigorous analysis, courts have expanded their analysis of numerosity. In particular, they have begun to question the assumptions plaintiffs make, and to look at the effect that geographic dispersion may have.

Although the case law is conflicting, plaintiffs are nonetheless at risk of losing on class certification if their numerosity argument is based on inference or on appeal to common sense. The strict approach adopted by some courts represents yet another troublesome trend. Indeed, the large number of successful challenges to numerosity—which was once the least demanding requirement of Rule 23(a)—is one of the most dramatic recent developments.

(Emphasis added.)  Both plaintiffs and defense can benefit from a greater understanding of this development.

Commonality. Not surprisingly, given his overall thesis, Dean Klonoff believes that the Supreme Court erred in its holding in Dukes. As he puts it:

The majority decision in Dukes cannot be squared with the text, structure, or history of Rule 23(a)(2). Nothing in the text of Rule 23(a)(2), or in the Advisory Committee Notes thereto, requires that the common question be central to the outcome. Instead of looking at the traditional methods of interpreting Rule 23(a)(2), the majority relied heavily on a law review article by Professor Nagareda.

Dean Klonoff also questions whether Nagareda was really writing about commonality, even though Nagareda makes makes it clear that he is referring to common questions in Rule 23 a number of times (both Rule 23(a)(2) and 23(b)(3) use the same term; it makes sense they would mean the same thing). This begs the question: Why would you want to certify a class where the common question was not central to the outcome of the case?  This, unfortunately, is not a question he answers. (Dean Klonoff does raise another interesting question, which is whether the use of the term "common question" in Rule 23 is the same as in Rules 20 and 42.)

Adequacy. After pointing out that he actually supports a more stringent adequacy requirement in general, Dean Klonoff argues that adequacy should not encompass claim-splitting.

There is, however, a disturbing trend in “adequacy” jurisprudence. That case law focuses not on the ability of class representatives and counsel to vigorously represent the class, but on counsel’s selection of the causes of action to assert. The argument is that, by not bringing all potentially viable claims, the representatives and counsel have (1) impermissibly “split” claims, thereby prohibiting class members (pursuant to res judicata) from later bringing those omitted claims, or (2) subjected class members to the risk that collateral estoppel could essentially nullify their remaining (unfiled) claims.

(Internal footnote omitted.)  Dean Klonoff's solution is simply to have courts state that collateral estoppel shall not apply to claims that could have been raised, but were not for strategic reasons. This is a disturbing suggestion on several levels, not least of which is that it undermines the balance that justifies class aggregation, that of the right to individual trials on the one hand, and the need for global resolution--for plaintiff or defendant--on the other.

Other Issues. Dean Klonoff also worries that plaintiffs cannot use Rule 23(b)(2) strategically to certify money damages classes that would not qualify under Rule 23(b)(3), and that courts have clamped down on fraud and multi-state class actions (the former because reliance is very difficult to prove on a classwide basis, the latter because plaintiffs have not offered any viable methods of certifying a nationwide class). He believes that these constitute "per se" rules against certification.

Klonoff doesn't have much practical advice for lawyers, instead he advocates forum-shopping to find more receptive circuits. (He recommends the Second, Third, and Ninth.) Instead, he largely critiques the holdings, and asks courts to hold differently going forward.

So the good news is that Dean Klonoff has published an actual work of doctrinal scholarship that can help lawyers, something we desperately need more of. The bad news is, it's clearly plaintiff-biased; but that's not really bad news. Dean Klonoff is a smart man who knows class-action law well; reading his analysis of the latest class certification cases will help any conscientious defense lawyer hone his arguments. The real bad news (call it the "ugly") is that these are apparently the best pro-certifictaion arguments. Rather than basing them on the case law as it stands, Klonoff instead questions the legitimacy of recent holdings:

They suggest a suspicion about class actions generally, premised on the assumption that the class action is a blunt instrument to coerce settlement and secure large attorneys’ fee awards.

In fact, as several class-action plaintiffs made clear at the DePaul Law Review Symposium, these are not the only arguments available to plaintiffs. Plaintiffs who actually meet the requirements of Rule 23--by avoiding individualized issues, providing evidence that each of the requirements are met, and engaging in comprehensive legal analysis where appropriate in multistate class actions--are on exceptionally strong footing at certification. When one's arguments all start out by assuming a premise like "courts should not be suspicious," then the battle is won or lost before any argument gets made. Either the judge is suspicious or she isn't, either she agrees that the text of Rule 23 is secondary to deterrence and efficiency, or she does not. At that point, all the arguments of this kind that exist are unlikely to change her mind from where she started.

(Hat tip to Professor Lahav at the Mass Tort Litigation Blog for finding the article.)

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 I've written before about the uses to which defense counsel can put a well-taken named plaintiff deposition. And, once again, an opinion has come along that showcases just how important the named plaintiff deposition is as a weapon to defeat class certification.

The case, Burns v. Bayer Corp., 2012 U.S. Dist. LEXIS 33183 (S.D. Ill. Mar. 13, 2012), is part of the Yaz multi-district litigation (which previously yielded an extremely useful motion to strike opinion). Yaz is an oral contraceptive, and the FDA has also approved it for use in treating acne and premenstrual dysphoric disorder. It has not yet approved the use of Yaz for alleviating less severe premenstrual symptoms (e.g., "that time of the month"), although some doctors have prescribed it for that purpose. The majority of the Yaz MDL cases have alleged that Yaz has some nasty side effects.

Unlike those cases, the Burns case--which was brought only under California law--attacked Yaz's advertising. Ms. Burns sought to represent a class of

All consumers residing in the State of California who were exposed to Defendant's Ads and purchased their prescription for YAZ for the first time, during the period of time between August 20, 2007 and January 26, 2009.

(Emphasis in original.) And her allegations--which included a claim under California's False Advertising Law--accused Bayer of selling Yaz at an unfair premium by marketing it as a PMS palliative for women using contraceptives. Given California's pro-plaintiff consumer laws, I'd guess that plaintiffs thought they had a strong case for class certification. The false advertising law, for example, does not require evidence of reliance, which would significantly reduce the number of individualized issues plaintiffs might face in proving their claims.

Despite these natural advantages to the case as plaintiffs' counsel pled it, the court denied certification. And its reasons relied heavily on the deposition of the named plaintiff.

First, the court decided that the class was not ascertainable, even though plaintiffs offered an "objective" method of determining membership by asking each class member whether she had seen one of the advertisements, and whether she had bought Yaz.

[T]here is no objective way to determine who saw the complained of television advertisements. Instead, class membership would depend on the subjective and often unreliable vagaries of human memory. The record in the instant case exemplifies the problems that would arise in assessing actual exposure. The putative class representative, Frances Burns, initially claimed that prior to obtaining a prescription for YAZ in January 2008, she viewed the "Balloons" and "Not Gonna Take It" television advertisements. However, during her deposition, Ms. Burns testified that she couldn't "recall specifically" which television advertisements she viewed or exactly when she viewed them. Further, Ms. Burns' description of the advertisements she viewed prior to January 2008, indicates that she never saw the "Balloons" advertisement.

(Citations omitted, emphasis added.)

Second, the court found that the named plaintiff's deposition testimony indicated that she was not typical of the class as her counsel had defined it.

Plaintiff's UCL and FAL claims do not require a showing of reliance. Rather, plaintiff must show that the fraudulent conduct was "likely to deceive" a reasonable consumer. This standard is subject to common proof if the actionable conduct was both uniform and material. Thus, materiality is a relevant factor in the Court's class certification analysis. In the instant case, plaintiff claims that she suffered from and sought treatment for premenstrual symptoms. The putative class, however, includes women who did not suffer from PMS or premenstrual symptoms, who did not require treatment for PMS or premenstrual symptoms, and/or who took oral contraceptives for the sole purpose of birth control. For these plaintiffs, the subject of the allegedly fraudulent advertisement campaign would not have been material. Plaintiff's claims are not typical of these putative class members.

(Citations omitted, emphases added.)

And finally, the court looked closely at the Ms. Burns's deposition testimony about how she became involved in the case.

The plaintiff and proposed class representative, Frances Burns, is a citizen of California. Ms. Burns is a "good friend" of and works with Aimee Lambert, the wife of Richard Lambert, one of the class attorneys. Ms. Burns became involved in this litigation after having a conversation with Ms. Lambert. During that conversation, Ms. Lambert told Ms. Burns about this litigation and informed her that her husband was having difficulty locating a suitable class representative.

(Citations omitted, emphasis added.) The court found that this "good" friendship with counsel's wife meant Ms. Burns could not serve as an independent representative of the proposed class.

In the instant case, the disputed relationship does not rise to the level of a familial relationship and Ms. Burns and class counsel are not direct business associates. Nonetheless, the close relationship between Ms. Burns and counsel's wife raises serious concerns as to Ms. Burns's adequacy to represent the instant class. Given that the potential recovery for plaintiffs is minimal compared to the potentially high amount of attorneys' fees that may be awarded, Ms. Burns may be more concerned with helping to maximize the monetary return of her "good friend" and co-worker (counsel's wife) than with her duty to zealously advocate on behalf of the class' interests. This is the type of situation that creates a conflict of interest. Considering this, the Court finds that Ms. Burns is not sufficiently independent of class counsel and does not satisfy the adequacy of representation prong.

(Citations omitted, emphasis added.) 

The court also engaged in a lengthy and thorough analysis of the elements of each California claim to show that individual issues predominated over common ones. However, since it had found that the class was not properly defined, and that the named plaintiff was neither typical nor adequate, these findings were not strictly necessary to its denial. (On the other hand, they do strengthen its opinion, and ensure compliance with Rule 23(c)(1)(B).)

The lesson for defense counsel here is a simple, but very compelling one. Pay close attention to the deposition of the named plaintiff, in particular, what she heard, what she thought, and how she knows class counsel. In this case, the deposition of Ms. Burns was the best evidence Bayer had to defeat certification.

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Todays' classic case asks the question: how close an attorney-client relationship is too close an attorney-client relationship?

In London v. Wal-Mart Stores, Inc. (11th Cir. 2003), the plaintiff, Roger London, sued Wal-Mart and a group of banks, alleging that they had sold insurance without providing the proper disclosures, violating the Truth in Lending Act (TILA) and Florida state law.  

During discovery, it came out that London's lawyer, Robert Ader, had been his close friend since high school. In fact, for a while, London had served as his counsel's stockbroker as well. So there had been both a business and a personal relationship. Once Ader had discovered that London was paying for this insurance (at which point, he was in the hole only 41 cents), he told him to keep doing so so that he could be a plaintiff in a class action.

The defendants opposed class certification, in part because London was not an adequate class representative. Nonetheless, the trial court certified a class action against them. The defendants appealed.

On appeal, the Eleventh Circuit reversed. It began by noting that

adequacy of representation is primarily based on the forthrightness and vigor with which the representative party can be expected to assert and defend the interests of the class and whether plaintiffs have interests antagonistic to those of the rest of the class. In fact, we went on to note that meeting these requirements might still be insufficient if the named plaintiffs do not possess the personal characteristics and integrity necessary to fulfill the fiduciary role of class representative.

(Internal quotations omitted.) The court also noted that

The requirement for a stringent examination of the adequacy of the class representative is especially great when, as in this case, the attorney's fees will far exceed the class representative's recovery. In such circumstances, courts fear that a class representative who is closely associated with the class attorney will allow settlement on terms less favorable to the interests of absent class members.

(Internal quotations omitted, emphasis added.) In this case, a close personal friendship and a business relationship clearly counted as "closely associated."

After reviewing the record, we conclude that the district court abused its discretion by ignoring London and Ader's significant personal and financial ties. The long-standing personal friendship of London and Ader casts doubt on London's ability to place the interests of the class above that of class counsel. The close relationship between London and Ader creates a present conflict of interest — an incentive for London to place the interests of Ader above those of the class. Furthermore, even though London is no longer Ader's stockbroker, nothing prevents his returning to that role after this litigation is concluded. If London plans to do so, London would have an additional incentive to increase Ader's fees at the expense of the class. Thus, combined with their close friendship, the former financial relationship between London and Ader creates a potential conflict of interest.

(Emphasis added.)  London marked an important moment in the continuing development of the adequacy requirement, because it reaffirmed that one of the primary reasons adequacy is so important is that class actions need representatives who can independently direct their counsel. The Eleventh Circuit--like many class-action scholars--recognized that class counsel (who really control the case) do not necessarily have the best interests of absent class members in mind, particularly when attorneys' fees can run into the millions of dollars while relief for the class members may be only pennies. There are several ways of addressing that asymmetry. One is to reduce attorneys' fees, a reform courts have unfortunately been reluctant to implement. The other--which courts do occasionally enforce--is to make sure that the named plaintiff actually has the independence to stand up for the class when counsel opts for the money instead.

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Last month, I received a flurry of email from various people who wanted to point me towards Mark Herrrman's column on Above the Law, "Torpedoing Class Actions." In that column, Herrmann reviewed Martin Redish's 2009 book Wholesale Justice, which argues that class actions are an unconstitutional delegation of state power to private lawyers. He also called class-action defense lawyers "derelict" and asked "Where is the practicing bar?" when it comes to advocating Redish's arguments.

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 I've spent a lot of time over the last two years poking (as best I can) into the head of the entrepreneurial plaintiff's lawyer. That is, the plaintiff's lawyer that treats her lawsuits like business opportunities, keeping a diversified portfolio and working to maximize the profit from each opportunity. But there is another kind of lawyer that brings class actions, one often referred to as the "cause lawyer." Rather than working for profit, this group is motivated by a desire for social change. Cause lawyers are rarer in class action practice, but they're not nonexistent. So, how does the class action defendant deal with a cause lawyer?

Colorado professor Deborah Cantrell has a new article Lawyers, Loyalty and Social Change (Oxford comma omitted in original), which tackles just that question.

According to Professor Cantrell, one can distinguish cause lawyers by their incentives. Cause lawyers are (clearly) not motivated by the money. Instead, they tend to be motivated by the advancement of a single social cause. As Professor Cantrell puts it, it is the

common feature of social change advocacy – that participants, including cause lawyers, identify strongly with their side of the issue and distrust with a similar intensity participants on the other side. In fact, this Article argues that such hyper-loyalty is considered a core condition and baseline requirement of the relationship between cause lawyer and cause client.

(Emphasis added). It is this "hyper-loyalty" that defines the cause lawyer:

In contrast to much for-profit lawyering, cause lawyering brings with it robust notions of solidarity between client and lawyer. The proposition is that there is more solidarity between the cause lawyer and client because both of them understand their work together to be situated within a larger interest in social change. … Independent of their legal relationship, the lawyer and client are loyal to each other because of their shared commitment to their cause (whatever it may be). Their “cause loyalty” is stronger than the typical professional loyalty between lawyer and client. It is hyper- loyalty.

(Emphasis added.) Cantrell traces that hyper-loyalty to a few causes. Since many cause lawyers appear to come from "elite" backgrounds (law school costs a lot of money, and cause lawyering may require some independent income since it pays much less than other legal work), hyper-loyalty may be a compensatory mechanism to assure poorer clients that the lawyer is truly on their side.

Moreover, this hyper-loyalty may also stem from cause lawyers' tendency to the see world as bipolar, divided into a clear "us" and "them."

Additionally, a constitutive part of social change, or cause, work is that cause advocates are pushing against the status quo. In order to mobilize a collective for action, there must be some sense that there is a group pushing for change and a group content with the status quo – in other words, some sense of “us” and “them."

(Emphasis added.) Most lawyers wind up buying into their clients' mindsets to some degree. (It can be hard not to.) But many for-profit lawyers can distance themselves from their clients by noting that every client its day in court, regardless of its views. Cause lawyers, by contrast, may hold a sincere and deep belief that their clients are in the right--why else would the lawyer represent them? In fact, Cantrell notes, some cause lawyers (or cause clients) may have deep suspicion of outside sources of funding, since they may threaten to change a cause into an "industry."

Cantrell identifies two problems with the cause lawyer's hyper-loyalty. First, if the lawyer is hyper-loyal to the cause, she may wind up selling out her individual client:

the worry is that cause lawyers will understand their true loyalty to be to the cause, and thus view their clients as one of several pieces of an advocacy strategy to be deployed. Clients become pawns, not empowered individuals.

On the other hand, if the lawyer is hyper-loyal to the client, not the cause, then she risks a polarized view of the world, in which others are either "friends" or "enemies," with little middle ground, and little room to negotiate. In that case, a cause lawyer may take actions that benefit her individual client, but sacrifice the actual cause. (And, in class action, the cause is likely to include the absent class members.)

So, how does the class-action defense lawyer deal with cause lawyers? Professor Cantrell's analysis suggests a few tactics to keep in mind:

• Focus on non-monetary compensation when negotiating. Courts are often suspicious of non-monetary compensation in class actions. But if one is negotiating with a cause lawyer, actual changes in behavior may be the real relief her client (and the class) seeks. These changes will have to be genuine, of course. Given the tendency for cause lawyers to view "enemies" with heightened suspicion, they're unlikely to be satisfied with lip service, and they have little monetary incentive to accept minor changes so long as there are large fees.
• Focus on the adequacy of the class representative. Given the risk that the lawyer and the client may be too loyal to each other (resulting in, say, demands for outsized incentive payments), it is doubly important that someone--most often the court--is paying attention to the needs of the absent class members.
• Focus on the adequacy of class counsel. If the lawyer is hyper-loyal to the cause, then she may make some moves that show an insufficient regard for her fiduciary duty to either the named plaintiff or to the absent class members (to the extent that they are just another means to support the cause). In those cases, the defense will want to make sure that the Court is paying attention to the needs of the class, as opposed to the lawyer.

It remains a central irony of class action practice that, regardless of whether the plaintiff's lawyer is motivated by money or loyalty to a larger cause, her incentives are not going to line up with her client's much of the time. As a result, it remains the case that the strongest class-action defenses often focus on what is best for the absent class members.

UPDATE - Russell Jackson of Consumer Class Actions & Mass Torts has some additional, less cynical, and of course, well-taken advice on how to deal with cause lawyers (or, as he likes to call them, "true believers").  If you've popped over here from there, welcome!  If not, do check out his take as well. 

(He's also, finally, picked himself up a Twitter feed ...)

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For those unfamiliar with Ronald Coase, he is the 101-year-old Nobel Laureate who laid a number of the foundations for law and economics when he published his Nature of the Firm (which explained why people would use corporate forms instead of just contracts) and Problem of Social Cost (which explained why law should seek to minimize transaction costs).

In 1988, Professor Coase turned his formidable intellect to another question that had vexed legal scholars for some time: why is blackmail illegal? As Professor Coase pointed out, the central paradox of blackmail is that it makes it illegal to threaten to do something (reveal facts that would embarrass or harm someone) that is perfectly legal to actually go out and do. In other words, if I know something embarrassing about, say Russell Jackson, it is perfectly OK for me to reveal those facts on this blog. But it is not OK for me to ask Russell to buy me an expensive dinner in exchange for not revealing those facts. Why is that?

Professor Coase's solution--no surprise--draws on his previous work about minimizing transaction costs. He starts from the principle that:

It is obviously undesirable that resources should be devoted to bargaining which produces a situation no better than it was previously.

Based on that principle, Professor Coase argued that blackmail transactions do not provide any benefit to the victim (since he is in the same state as before), but do impose a cost.

It is not difficult to understand why people feel this way. A blackmailer threatens to do something which will harm his victim unless he is paid a sum of money or receives some other benefit,and by emphasizing the unpleasant consequences for the victim of not meeting his demands (or even inventing them, as in the "Mr. A. Case"), he endeavours to extract as much as he can from him. It may be objected that this is exactly what happens in business negotiations. And this is correct. But the situations are not identical. The demands made by a businessman are constrained by the competition of other businessmen, by the fact that the party threatened is likely to have a good idea of whether the threat has to be taken seriously and by the adverse effects on future business of being difficult in negotiating. ...

Business negotiations (which may also cause anxiety) either lead to a breakdown of the negotiations or they lead to a contract. There is,at any rate, an end. But in the ordinary blackmail case there is no end. The victim, once he succumbs to the blackmailer, remains in his grip for an indefinite period.

(Emphasis added.) In other words, the real problem here is not the threat, it is the fact that there is no way for the blackmail victim to put an end to the threat. Paying once does not guarantee that

The logic of Coase's blackmail argument extends to class action defense. Let's leave aside for the moment the common argument that some class actions are no more than legalized extortion. Here are two other ways in which the argument might apply, both of which will be familiar to readers of this blog.

The Aqua Dots case: A manufacturer comes across a consumer issue. It attempts to solve that issue through voluntary action (sometimes while cooperating with government agencies). Despite its voluntary action, an entrepreneurial plaintiffs' lawyer demands to be cut in for some nominal "improvement" to the relief, plus an attorneys' fee. So the manufacturer faces the choice of paying the counsel a fee to go away, or adding the cost of litigation to the cost of remedying the problem in the first place. (Judge Easterbrook solved this by deciding that a plaintiff who would simply piggyback on a voluntary recall is not an adequate representative of the class.)

The Thorogood case: Plaintiff files a class-action lawsuit on questionable grounds. Defendant defeats it. Plaintiff files again in a new jurisdiction. Plaintiff writes a letter pointing out to the defendant that there are many jurisdictions left to file in, and defending lawsuits is costly. So the defendant faces the choice of paying plaintiff or facing multiple lawsuits until one wins. (The Supreme Court has decided this issue by encouraging courts to follow the practice of judicial comity, respecting other denials of class certification for the same subject matter. It's an open question still how successful this solution will be.)

This is why "blackmail" is a problem. It's a bargain for a promise not to do something. And that's what makes it analytically useful for class actions, because class actions can be viewed as an attempt to extract concessions in exchange for a promise not to sue, or at least a promise not to sue again.

From the defendant's standpoint, that's part of what makes them a bad deal. Signaling a willingness to bargain in that fashion just opens one up to more and more attempts to make similar deals.

Using the rhetoric of blackmail, while attractive, is unlikely to persuade some judges that there is a real problem.  But using the logic behind prohibiting blackmail makes a great deal of sense: most courts can sympathize with the fact that some litigation does not actually promote any public benefit. And, if that is the case, there are real questions as to whether the lawsuit is really worth the court's resources.

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 Today's classic opinion comes from a time that may seem foreign to most modern class-action practitioners. Not only is it pre-Dukes, it is pre-Amchem. And yet it's likely one of the most influential class-action opinions of the last twenty years. In re GM Pick-Up Truck Fuel Tank Products Liability Litigation (3d Cir. 1995) involved an alleged design defect in GM pick-up trucks over a fifteen-year period. The plaintiffs had alleged that GM's side-mounted fuel tanks were likely to catch fire during side-impact accidents.

So far, this sounds like many other hard-fought products-liabilty class actions. But, in this case, GM chose not to fight. Instead, after only four months of consolidated litigation, GM settled with the plaintiffs' lawyers, and agreed to a certified class for settlement purposes only.

The settlement drew out a number of objections, but the trial court approved the classwide settlement anyway. Notably, once it had found the settlement to be fair, reasonable, and adequate, it did not bother to actually conduct a Rule 23 inquiry. Instead, it just certified the class.

So the objectors appealed. And the Third Circuit agreed with them. Its largest central holding (one accepted enough that it is not often debated today) was that a settlement class must still meet the requirements of Rule 23. But, more importantly for today's litigators, it also concluded

that the settlement is not fair and adequate; more precisely, we hold that the district court abused its discretion in determining that it was, primarily because the district court erred in accepting plaintiffs' unreasonably high estimate of the settlement's worth, in over-estimating the risk of maintaining class status and of establishing liability and damages, and in misinterpreting the reaction of the class

The court also identified a particular danger of settlement-only classes, that does not exist (or at least not to the same extent) for litigation classes.

Despite the potential benefits of class actions, there remains an overarching concern-that absentees' interests are being resolved and quite possibly bound by the operation of res judicata even though most of the plaintiffs are not the real parties to the suit. The protection of the absentees' due process rights depends in part on the extent the named plaintiffs are adequately interested to monitor the attorneys (who are, of course, presumed motivated to achieve maximum results by the prospect of substantial fees), and also on the extent that the class representatives have interests that are sufficiently aligned with the absentees to assure that the monitoring serves the interests of the class as a whole. In addition, the court plays the important role of protector of the absentees' interests, in a sort of fiduciary capacity, by approving appropriate representative plaintiffs and class counsel.

And this, the court held, was why adequacy was so important in settlement-only classes.

Without determining that the class actually was adequately represented, the district judge has no real basis for assuming that the negotiations satisfactorily vindicated the interests of all the absentees. The focus on the negotiation process also cannot address the part of the adequacy of representation inquiry intended to detect situations where the named plaintiffs are unsuitable representatives of the absentees' claims. To state that class members were united in the interest of maximizing over-all recovery begs the question. Although that observation might allay some concern about a conflict between the attorney and the class, a judge must focus on the settlement's distribution terms (or those sought) to detect situations where some class members' interests diverge from those of others in the class. For example, a settlement that offers considerably more value to one class of plaintiffs than to another may be trading the claims of the latter group away in order to enrich the former group.

(Emphasis added.) The court in this case found that the class had not been adequately represented, and that the settlement was not fair, reasonable, or adequate. In deciding that the settlement was not appropriate, the court specifically found that :

1. The parties had overstated the likelihood the plaintiffs would lose at a contested certification hearing.
2. The parties had overstated the value of the settlement to the class.
3. The silence of absent class members did not mean consent.
4. The difference in treatment between fleet owners and individual truck owners suggested that the settlement was not fair.
5. The court had not made an adequate finding that counsel's fees were appropriate.

There are three reasons In re GM Pickup is a classic case. One, it's one of the first cases to deal with the problem of the settlement-only class, and as a result, it has been heavily cited since. Two, it's a comprehensive look at the issues involved in class-action settlements. (And it was recognized so at the time. How often do you see a concurrence that calls the main opinion "a truly masterful opinion" and a "a most thorough and scholarly analysis"?) Three, take another look at that list of findings. Each of those is a problem that recurs in class actions, frequently.  In re GM Pick-Ups was a historic opinion. And those who do not learn from history are doomed to repeat it.

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 This was a busy year for class-action jurisprudence. Clearly, most of the Supreme Court cases had some effect on class action practice. But the district and appellate courts also rendered a host of rulings this year that significantly affect class-action practice. Despite what a number of academics and plaintiffs' lawyers have claimed, the class action is not dead.  That said, it's probably true, to quote plaintiff's lawyer Daniel Girard, that while the "death of the class action" is overstated, the "Golden Age of the private attorney-general" is over. There were so many interesting opinions in the past year, with so many implications, that it was hard to identify just ten. Consequently, I've cheated a little. The final two entries actually comprise four cases which, taken as pairs, indicate a couple of new trends to watch out for.

1. Wal-Mart Stores Inc. v. Dukes (S. Ct.) - Whether you think it killed the class action or not, Wal-Mart Stores, Inc. v. Dukes (called "Wal-Mart" by some, "Dukes" by others) was the runaway most important case of the year for class-action practitioners. It clarified an ongoing debate about whether Rule 23(b)(2) could be used for money damages (it can't), it finally provided a standard for Rule 23(a)(2) (a common question must have a common answer), and it finally put to bed a common misreading of Eisen that had justified ignoring inconvenient facts when certifying class actions. Those all make it the most significant decision of the year, even before you get to the press hype.
2. AT&T Mobility v. Concepcion (S. Ct.) - Concepcion is the other case that has been accused of killing the class action (sometimes on its own, sometimes in conjunction with Dukes.) It hasn't managed that feat, but it has sent what one plaintiffs' attorney called "a seismic change" through class-action practice. While we're still feeling the aftershocks it's clear that it is now more difficult to bring "creative" consumer claims that are governed by clear purchase contracts; and certain individualized employment disputes are also finding their way into arbitration rather than class actions. And that's before we get into the Supreme Court's discussion of exactly what due process requires from aggregated litigation.
3. Pilgrim v. Universal Health Card, LLC (6th Cir.) - This case, the first appellate opinion to address the motion to strike class allegations at the pleading stage, has made the tactic truly viable. For years, class-action defendants have faced down multi-state classes that they knew from prior experience could not get certified. And yet, because courts were reluctant to rule on the viability of these class actions before discovery, defendants faced long and expensive discovery just to get to a legal issue that required no additional facts. Pilgrim marks the first time that an appellate court has recognized that determining whether variations in state law predominate over other issues does not require discovery, it just requires an analysis of the laws in question.
4. Klier v. Elf Atochem Inc. (5th Cir.) - Thought that cy pres relief was a no-brainer in your class action settlement? Think again. Joined later in the year by the Ninth Circuit's opinion in Nachsin v. AOL, LLC, Klier finally bridles the runaway use of cy pres relief to dress up less valuable class actions. The fact that it also provided a stark critique of the always-problematic medical-monitoring class action was just a bonus.
5. Smith v. Bayer Corp (S. Ct.) - Significant" does not have to mean "pro-defendant." In Smith, the Supreme Court held (abrogating the Seventh Circuit's Thorogood opinion last year) that a defeat at class certification does not preclude another class member from bringing the same class action somewhere else. It based this decision on the eminently logical reason that, until a case has been certified as a class action, it is just an individual plaintiff's case. (That same logic underlies the Seventh Circuit's recent re-affirmation that one can moot a class action before certification.)
6. Erica John Fund v. Halliburton (S. Ct.) - Similarly, securities defendants were perfectly happy with the Fifth Circuit's requirement that a plaintiff demonstrate loss causation when certifying a securities class under a "fraud on the market" theory, even if that requirement could not be found in the text of Rule 23. The Supreme Court, in a short, well-reasoned, and unanimous opinion, definitively closed off that particular line of argument.
7. In re Bluetooth Headsets Products Liability Litigation (9th Cir.) - The Ninth Circuit's rejection of a problematic class-action settlement (the class got nothing, the attorneys got $850,000) imposed a common-sense "proportionality" requirement on class counsel fees, recognized that segregation of the fee request from the rest of the settlement does not eliminate perverse incentives for class counsel, and required a cross-check for lodestar-based fees.
8. Judge Alsup's Class Settlement Checklist - Judge Alsup has handled a number of class actions in his few years on the bench. And this was the year that he developed a standing order that lays out what he expects from any classwide settlement, before negotiations may even have begun. It's an outstanding idea, and it provides excellent guidance to plaintiffs and defendants about what they can and can't accomplish in a settlement in his court. While I may not agree with all of his analysis, I can't fault his attempt to create certainty in the negotiation process.
9. In re Aqua Dots Products Liability Litigation (7th Cir.) & Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan (6th Cir.) - The Sixth and Seventh Circuits both faced the question of how to handle class actions that, while they might benefit the plaintiff and the plaintiffs' lawyers, would do no one else any good. Judge Easterbrook of the Seventh Circuit pointed out that while it is logical to say that a class action duplicating a voluntary recall is not a good idea, it doesn't exactly fall under the text of superiority. So instead, he held that a plaintiff who brings a redundant class action is inadequate. The Sixth Circuit, faced with a class action that might benefit the class but would in the process hurt other citizens of Michigan, simply held it not superior to other methods of resolving the controversy (including individual lawsuits).
10. CE Design v. King Architectural Metals (7th Cir.) & Creative Montessori Learning Centers v. Ashford Gear LLC (7th Cir.) - In a pair of opinions this year, Judge Posner seemed single-handedly determined to restore integrity to the class action. In CE Design, he held that a named plaintiff who has credibility problems cannot serve as an adequate class representative. In Creative Montessori, he held that class counsel who have engaged in deceptive methods to prosecute their class action are not adequate class counsel. The message behind these two cases seems clear: everyone in a class action is expected to be on the up-and-up, not just the defendants.

In making this list, I had to leave off a number of significant developments in class action practice. Taco Bell tried a risky but successful PR strategy this year. The Second Circuit held that subclasses might require their own counsel. The federal appellate courts have split--even after Dukes--on how to treat expert testimony. 2011 was an interesting time for class actions. Perhaps uniquely so. It will be interesting to see how each of these developments shakes out in 2012.

[Note - edited after publication to fix a formatting error and an unfinished sentence.]

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 Pickett v. Iowa Beef Processors was a lawsuit between cattle producers and a beef processing company. Cattle producers sold their cows in two ways: on the cash market (also known as the "spot market") and using forward contracts. The cash market was riskier, but also potentially more profitable. The forward contracts were safer, but also made less money for the producers. So some of the producers sued Iowa Beef Processors, alleging that their use of forward contracts was a deceptive business practice. (Specifically, they alleged a violation of the Packers & Stockyards Act, an antitrust statute which regulated the meat industry.)

The trial court (in the Middle District of Alabama) originally denied certification, because the plaintiffs had not met the typicality or adequacy requirements. The plaintiffs narrowed their class and sought reconsideration, offering expert testimony that an econometric model could determine most of the liability and damages issues. This time, the court certified the class. At that point, Iowa Beef Processors appealed.

The Eleventh Circuit began by noting that Rule 23(a)(4)'s adequacy requirement exists in part to guard against conflicts within the class.

Thus, a class cannot be certified when its members have opposing interests or when it consists of members who benefit from the same acts alleged to be harmful to other members of the class.

In this case, because the class action sought to prohibit forward contracts, it set up a conflict between those cattle producers who had used the device and those who had relied exclusively on the spot market.

Thus, the class includes those who claim harm from the very same acts from which other members of the class have benefitted. Moreover, in addition to damages, Plaintiffs seek an injunction that would prohibit IBP from using such purchasing arrangements in the future. Such an injunction would impose a significant restriction on the way these producers do business.

(Emphases added.)  So the Eleventh Circuit reversed the certification, because this conflict among the class would preclude any finding of adequacy.

In addition to being an excellent example of an intra-class conflict, Pickett also provides the first glimpse of a line of logic that shows up later in Pipefitters Local 636 Insurance Fund v Blue Cross Blue Shield of Michigan. It's always worth looking at the effects of a potential class action. Here, the proposed class action would have meant long-term harm to the producers. In Pipefitters, the class action would have harmed the elderly of Michigan. Class actions are cases large enough to effect massive and long-term changes. Sometimes those changes are for the best. Often, they have harmful effects on some members of the class, or on third parties.

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This month's piece of classic scholarship comes from the sociology of law. Thirty years ago, William L.F. Felstiner, Richard L. Abel, and Austin Sarat published a piece in the Law & Society Review titled "The Emergence and Transformation of Disputes: Naming, Blaming, Claiming …" 

The authors wanted to trace how experiences transform into legal disputes. And they identified three key steps along the way:

• Naming -- the party recognizes that she's been injured, or, as the authors put it, recognizes an experience as injurious;
• blaming -- she figures out that someone else is responsible for her injury; and
• claiming -- she communicates that conclusion to the faulty party. If the faulty party does nothing about her claim, then it evolves into a dispute.

As the authors point out, one of the interesting things about this process is that not all grievances evolve into lawsuits. They refer to this phenomenon as "grievance apathy."

We know that only a small fraction of injurious experiences ever mature into disputes. Furthermore, we know that most of the attrition occurs at the early stages: experiences are not perceived as injurious; perceptions do not ripen into grievances; grievances are voiced to intimates but not to the person deemed responsible.

In other words, grievance apathy makes the world go 'round. Not every "injurious experience" needs to wind up in a court of law.  And we would not want them all to.  In fact, the authors identified, even at the time, the problem that that lawyers often "'create' at least some of the needs they satisfy."

But they did not predict the extent to which, today, entrepreneurial class action attorneys have turned that social process on its head. In the course of looking for claims on which they can make money, they will identify entities with deep pockets (blaming), and then come up with a reason why they've done some injury (naming). They'll then look for someone who has suffered the pre-identified "injury." And, if that person's resolve wavers (that is, they begin to succumb to "grievance apathy"), they'll do their utmost to keep the plaintiff angry.

The problem is that manufactured conflicts rarely lead to good lawsuits. Those lawsuits tend to be a waste of time and money, for all concerned. They may very well focus on harms that are not really harms.  And they can lead to inordinately complicated "solutions," or duplication of previous solutions (with the added cost of judicial administration and attorneys fees), or cases that--if won--would harm innocent third parties.

Now, despite what some might argue, this does not mean that there is no such thing as a good class action. There are some instances where there will be clear-cut harms that are too small to bring as individual lawsuits, and where the defendant chooses not to offer a remedy. Those instances are why we have Rule 23. But, and this is a large but, Felstiner, et al.'s analysis does suggest that courts have good reason to be suspicious of manufactured lawsuits--in which a lawyer comes up with his case first and his plaintiff as an afterthought. Because, in those cases, there very well might be a reason that "grievance apathy" took hold.

TAGS - 

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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 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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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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 Dora Surowitz, a seamstress and a widow, was a Polish immigrant with very little English. In 1957, she bought about $2,000 of Hilton stock, on the advice of her son-in-law, Mr. Brilliant. (Yes, his real name. Phi Beta Kappa from Columbia, Harvard Law School. But really, with that name, could he have done anything else?) In fact, Hilton bought the stock for her, using her money, and bought some for himself and his family using his own money.

Five years later, Mrs. Surowitz got a notice from Hilton that it was buying back its own stock. Because she wanted to understand the notice, she took it to Mr. Brilliant. Something in the notice disturbed him, and he began investigating. He was joined by Mr. Rockler, who had been his colleague at the Nuremburg war crimes trials. (Did we mention Mr. Brilliant worked at Nuremburg?) Their investigation--which included a meeting with Hilton's lawyers--uncovered a complicated fraud at the corporation. Mr. Brilliant went home, explained the fraud to his mother-in-law, and asked her to sign a letter to Hilton protesting the conduct, which she did.

Later that year, Hilton refused to send out a dividend. Mrs. Surowitz went to her son-in-law for an explanation, and he told her more about the fraud, and asked if she would be willing to sue Hilton. She was. Mr. Rockler served as her lawyer.

Hilton's lawyers--like any good class-action defense team--took Mrs. Surowitz's deposition. At that point, it became clear that she spoke next to no English, understood very little about the fraud itself, and really had just relied on Mr. Brilliant for her understanding of the case. Hilton moved to dismiss, claiming the complaint was a sham because Mrs. Surowitz's verification of the complaint (in compliance with then-Rule 23) was false. Mrs. Surowitz appealed, and the appellate court affirmed. She appealed again, and the Surpreme Court granted certiorari and then reversed the dismissal. As Justice Black's opinion put it:

Rule 23 (b) was not written in order to bar derivative suits. Unquestionably it was originally adopted and has served since in part as a means to discourage "strike suits" by people who might be interested in getting quick dollars by making charges without regard to their truth so as to coerce corporate managers to settle worthless claims in order to get rid of them. On the other hand, however, derivative suits have played a rather important role in protecting shareholders of corporations from the designing schemes and wiles of insiders who are willing to betray their company's interests in order to enrich themselves. And it is not easy to conceive of anyone more in need of protection against such schemes than little investors like Mrs. Surowitz.

So why call this case a classic? Particularly in a blog called Class Acton Countermeasures? Two reasons.

First, Surowitz v. Hilton Hotels Corp. is the original source of the oft-cited proposition that a named plaintiff's ignorance of the case does not make her inadequate. And there is no denying the influence of the line of cases that held so since. After all, many courts have reasoned, if a Polish seamstress with little English and little understanding of a complex fraud can bring a derivative suit, who are we to say that this named plaintiff cannot be an adequate class representative?

But second, and more important, the actual case shows just how far afield courts have taken the original holding. Here are some things to consider about the Supreme Court's holding in Surowitz:

• Surowitz was not a holding about adequacy. Leaving aside the fact that this case predated the 1966 Amendments that made Rule 23 what it is today, Hilton's lawyers did not challenge Mrs. Surowitz's adequacy to represent a class as we understand that today. They challenged her right to bring a lawsuit at all. The Supreme Court was reviewing a motion to dismiss, not a motion for class certification.
• Mrs. Surowitz was not recruited by plaintiffs' counsel. One of the primary concerns in Surowitz was whether the case was a strike suit. And the question there was whether Mrs. Surowitz was just a stand-in for her attorney. The Court found that, on the facts, she wasn't. And those facts were not related to her knowledge of the suit. Instead, they were related to the fact that she had held the stock for years, had approached her son-in-law, who had then found her an attorney. Those facts today would raise eyebrows only because they tend to be so rare. These days, it is well-acknowledged that class-action attorneys recruit plaintiffs. (And that is why, today, ignorance is a greater concern.)
• There was no concern that the attorneys would sell out the shareholders. In fact, Hilton conceded that the attorneys were working in good faith, and that they were not simply holding the company up for a quick settlement. It argued that those facts were irrelevant. But, in the intervening forty-five years, those have become the relevant facts. Today, we ask whether a named plaintiff is adequate to represent a class because we know that there will be times in the litigation (such as settlement) when the attorneys will face overwhelming temptation to act in their own interests rather than those of the class.  And we want the named plaintiff to be able to stand up to the attorney when that happens. On the record in Surowitz, there was little concern that Mrs. Surowitz would not do so. If she relied on anyone, it was her son-in-law, who was not her attorney. And she had discovered the problem and taken the first steps to investigate it. Do we have the same confidence in a named plaintiff who has been recruited by an attorney and knows only what her attorney has told her?

So yes, Surowitz is a classic case, but it's a misunderstood classic. While plaintiffs and courts often cite it as holding that an ignorant plaintiff can be an adequate class representative, what it really held was that an ignorant plaintiff, relying on lawyers who had demonstrably acted in good faith, was entitled to bring a complaint under Rule 23. In the intervening forty-five years, however, the facts about class-action litigation have changed. And it is worth pointing out those changes to courts when plaintiffs' counsel argue that their hand-picked, pliable named plaintiffs are adequate class representatives.

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It's no secret that most class action plaintiffs and defendants usually view each other with great suspicion from across a great divide. (I can't say all; I have a few good friends among the plaintiffs' bar, and I think quite highly of several plaintiffs' lawyers regardless of any substantive disagreements.) What may be surprising, though, is research that shows that this mutual distrust not just a paycheck-induced mental state, but a smart choice for both clients and the lawyers themselves.

At least, that's what a recent set of experiments conducted by several business professors suggests. Authored by Professors Sandy Jap, Diana Robertson, and Ryan Hamilton (this one, not this one), The Dark Side of Rapport describes two possible pitfalls for lawyers who develop rapport with the opposing side.

First, lawyers who develop rapport may be more likely to compromise their clients' interests. This is not necessarily all that surprising. Depending on the client, the lawyers may have longer-term relationships with each other. And a lawyer may justify compromising his client's interest in all kinds of ways, such as telling himself that the long-term relationship with opposing counsel will benefit future clients, or that the compromise is the only way to get the client at least some of what she wants.

Second, lawyers who develop rapport with each other may be more likely to deceive each other. At first glance, this may seem counterintuitive. If you have a rapport with someone, aren't you more likely to try to keep their trust?  Aren't we more inclined to deceive the jerk than the guy with whom we can see eye-to-eye? As it turns out, negotiators will often hide or downplay bad news in order to maintain the rapport that they have.

How did he researchers discover these issues? The experiments were built around a negotiation exercise known as the Bullard Houses case. Bullard Houses is designed for negotiation training. It pits a property seller (who absolutely does not want the property used for commercial purposes) against a hotel developer (who is trying to keep a low profile about its preferred locations). So Bullard Houses is designed to create an impasse; unless, of course, someone either lies or compromises her client's interests. The authors tweaked the conditions of the exercise in various ways to encourage rapport. (Specifically, they encouraged one group to negotiate face to face instead of by instant-messaging; they had another group engage in team-building exercises; and they "primed" a third group by having them think happy thoughts.) They then looked at how many members of each group resolved the impasse in some way. In general, conditions that encouraged rapport encouraged resolution. (The researchers also tried to prime one group with reminders about duty, ethics, and reputation. It didn't help.)

So what does this suggest for class action lawyers? The primary lesson may be to maintain a cordial distance from the other side. There's no reason to unnecessarily provoke opposing counsel, but a conscientious lawyer may remember not to get too chummy, either.

Another implication--peculiar to class actions--is that courts (and defense counsel) may need to be careful of rapport between plaintiffs' attorneys and clients. After all, rapport works both ways. And there is already some evidence that, where possible, class-action attorneys select plaintiffs that are easier to manipulate.  In a legal sense, the client's job is to represent the interests of the proposed class. But if the client is more interested in maintaining a rapport with her attorney (either because of the emotional satisfaction, or because that may be the best way to get the attorney to fight for an incentive payment), then the plaintiff may have a strong incentive to compromise the interests of class members she has never met for the interests of the attorney with whom she works.

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Mass torts have long been a problem for the American judicial system. Today, it's Vioxx, the BP oil spill, and Chinese drywall. Fifteen years ago, it was asbestos, Agent Orange, and silicone gel breast implants. Back in the 1980s and 1990s, when mass torts first threatened to overwhelm crowded dockets in various jurisdictions, the courts carefully considered whether to use class actions as a means of resolving thousands of similar tort claims.

And, at that time, Columbia University law professor (and recent Daily Show guest) John Coffee wrote an in-depth examination of the various problems and conflicts of interest that arose when courts tried to use Rule 23 to solve the mass tort problem: Class Wars: The Dilemma of the Mass Tort Class Action.

Professor Coffee began by providing an excellent working definition of a mass tort:

Mass tort litigation is characterized by several unique features: (1) a predictable evolutionary cycle during which the value and volume of individual claims starts low and then spirals upward; (2) high case interdependency so that litigated outcomes in any mass tort area quickly impact on the settlement value of other pending cases in that same field; (3) a highly concentrated plaintiffs' bar, in which individual practitioners control exceptionally large inventories of cases, sometimes totaling in the tens of thousands; and (4) a capacity to place logistical pressure on individual courts that is simply unequalled by any other form of civil litigation.

Over time, courts have progressively held that mass torts are not well-suited for class-action treatment, particularly not in the form of "settlement classes" (that is, class actions filed specifically to enforce a pre-existing settlement agreement between plaintiffs and defendants). And Professor Coffee spends much of the article discussing the difficulties that arise from doing so. The portions of his discussion that remain most relevant have to do with the conflicts of interest that arise from aggregated settlements.

On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs. Not only have the interests of these subclasses clearly conflicted, but the class counsel has explicitly traded off the interests of subclasses against each other, obtaining substantial compensation for one subclass in return for a waiver of cash compensation by anoth- er. In such multiparty negotiations between the defendants and different subclasses of plaintiffs, even the well-meaning plaintiffs' attorney shifts inevitably from the role of an advocate and adviser for clients to the role of a philosopher king, dispensing largess among his client subjects.

While the specific cases may have changed, the fundamental dilemma remains the same, however, whether it is a class action or just a series of consolidated tort cases. Any resolution of mass torts has to accommodate (1) the plaintiffs' desire for redress of some kind, (2) the defendant's desire for global peace, and (3) the plaintiffs' attorneys' desire for fees.

And Professor Coffee discusses a number of issues that still resonate. While the explicit development of "settlement classes" has waned, defendants will still take advantage of filed class actions to try to achieve releases of larger issues through a classwide settlement. And Coffee's descriptions of inventory settlements and settling future claims are both still relevant today.

So what can modern defendants take from this article? The most useful portions have to do with objection-proofing possible settlements:

• Negotiate down attorneys' fees. It makes sense to negotiate on fees more closely than defendants have done in the past. While it doesn't matter as much to the defendant who gets paid (from a fiscal, not emotional, standpoint), courts care. And courts are beginning to eye "clear-sailing" and quick-pay provisions with greater suspicion.
• Try to give the class some cash benefit. Courts have long been suspicious of non-monetary benefits. And they're expressing their concerns more openly.
• Make sure subgroups are separately represented. In a discussion that seems especially prescient today, Professor Coffee notes that "On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs." A defendant interested in a global settlement of certain complaints could do worse than to insist that subclasses receive separate counsel. (Among other advantages, counsel who are both zealous and ethical can help the defendant reduce payments for true nuisance claims.)

Be advised, the advice to be gleaned from Professor Coffee's article, particularly in light of current settlement case law, doesn't make for easy or cheap class settlements. But as I've said for some time now, for defendants, settling on the cheap can get really expensive.

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[Note: Many thanks to the folks at the WLF Legal Pulse for asking me to write this entry. It's cross-posted there.]

Given the stakes of class actions, which transform small-dollar claims into bet-the-company litigation, settlements are hardly unusual. And given the minuscule recoveries most class members receive compared to their lawyers' multi-million paydays, neither are objections to those settlements. What is unusual is for a court to reject a settlement because of these objections. And what’s even more unusual is for the court to put a small doctrinal booby trap into its rejection. But last week, the Second Circuit did just that.

The class action in question, In re Literary Works in Electronic Databases Copyright Litigation, involved a copyright challenge. The plaintiffs were freelance authors; the defendants were large publishers with electronic databases. The plaintiffs accused the defendants of "publishing" their articles in various electronic databases (like LEXIS/NEXIS) without their permission and without paying them. Back in 2001, the Supreme Court endorsed their theory in a parallel case, N.Y. Times Co. v. Tasini.

In the years since, the plaintiffs' claims were consolidated before the Southern District of New York, and underwent extensive mediation in front of mediation guru Kenneth Feinberg. By 2005, the parties had reached a classwide settlement that the district court approved. The settlement compensated three different categories of class members:

• Category A included works registered with the US Copyright Office in time to be eligible for statutory damages under the Copyright Act.
• Category B included works registered with the Copyright Office by 2002, but not in time to qualify for statutory damages.
• Category C--which comprised more than 99% of the claims--included later- and unregistered works.

Many authors held claims that fell into more than one category. As structured, the settlement would pay (on average) around $1,000 for each Category A claim, $150 for each Category B claim, and $60 for each Category C claim. The settlement was capped at $18 million. If the freelancers submitted more than $18 million in claims, a provision known as the "C reduction" kicked in. The "C reduction" did just what it said on the label; it reduced the payments to Category C claimants until the $18 million cap was reached. If it exhausted the C claims, it reduced A and B claims on a pro rata basis.

The settlement drew a number of objections, primarily from authors in Category C. By the time they appealed the order approving settlement, the objectors had identified three major problems: (1) the release was too broad (it released all future claims, which gave the publishers a free pass to republish any articles they had already wrongfully published); (2) the class representatives had sold out the Category C claimants with the "C reduction"; and (3) the settlement process had been unfair.

The majority (the panel split, 2-1) was unconcerned about the breadth of the release. In fact, it specifically noted that in most classwide settlements, if one did not release all future claims, the defendant had no real incentive to settle. It also found the process challenge to be moot.

But the majority was concerned with the adequacy of the class representatives under Rule 23(a)(4). One key measurement of adequacy is whether there are any conflicts of interest in the class. Here, the majority found that the "C reduction" showed that "[t]he selling out of one category of claim for another is not improbable ..." And it saw only one solution:

Only the creation of subclasses, and the advocacy of an attorney representing each subclass, can ensure that the interests of that particular subgroup are in fact adequately represented.

That's right. Each subclass would require its own independent attorney.

The rationale is simple: how can the value of any subgroup of claims be properly assessed without independent counsel pressing its most compelling case?

(Emphasis added.) But while the rationale may be simple, the execution is likely to be anything but. Class-action lawyers are a notoriously competitive lot. Many of them find it extremely difficult to work with each other, in part because they find it hard to trust each other. So finding a separate lawyer (presumably from a separate firm) for each subclass who will "press its most compelling case" will be extraordinarily difficult for them. This is good news for defendants, who often watch class actions rife with conflicts of interest get certified. Of course, class-action lawyers are also notably inventive; it will be interesting to see what they come up with to get around this requirement.

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I don't often rush to post news of a new opinion, but when I open my inbox to find multiple emails telling me something new and big has happened, that's a different story. And yesterday, I had a number of people telling me about a new opinion out of the Seventh Circuit: In re Aqua Dots Products Liability Litigation.

Russell Jackson wrote about this case last year, when the district court issued its opinion. The case concerned a child's toy called Aqua Dots, which was basically colored beads that, when you added water, would fuse together into whatever design you had arranged. The problem was, Aqua Dots looked a lot like candy. So much so that some kids swallowed them, and were put into brief comas. As soon as Aqua Dots found out, they recalled the product. But, sure as Thanksgiving is followed by Christmas shopping, the recall was followed by a class action.

The District Court had a hard time understanding how a class action would be superior to the recall, so it declined to certify the proposed class on superiority grounds. The plaintiffs appealed. The Seventh Circuit affirmed the result in an opinion by Judge Easterbrook. As he put it:

It is hard to quarrel with the district court’s objective. The lower the transactions costs of dealing with a defective product, the better. The transactions costs of a class action include not only lawyers’ fees but also giving notice under Rule 23(c)(2)(B). Notice may well cost more, per kit, than the kits’ retail price—and could be ineffectual at any price, since most purchases were anonymous. The court can’t send each buyer a letter. Notice would be by publication, yet the recall was widely publicized. Why bear these costs a second time? The Consumer Products Safety Commission has not expressed dissatisfaction with the recall campaign or its results, and the record does not contain any evidence of injury to children after the recall was announced. Spin Master believes that most of the 400,000 kits not returned in the recall were used before the recall began and that few, if any, defective kits remain in consumers’ hands. Consumers whose children used their kits are not members of the proposed class, so a public notice of a class action could be expensive yet pointless.

(Emphasis added.) Despite Judge Easterbrook's initial sympathy, he took issue with the fact that the trial court had departed from the text of Rule 23. (While the judge had held that the class action was not superior, he had not identified what kind of adjudication it would be superior to. Judge Easterbrook held that the voluntary recall of Aqua Dots was a resolution, but not an adjudication.) And, as Judge Easterbrook pointed out, the Supreme Court has made it clear that the text of Rule 23 controls over any individual policy preferences:

A district court is no more entitled to depart from Rule 23 than it would be to depart from one of the Supreme Court’s decisions after deeming the Court’s doctrine counterproductive. Rule 23 establishes a national policy for the Judicial Branch; individual district judges are not free to prefer their own policies. The Court made this point twice in its most recent Term. See Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011); Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011).

(Emphasis added.)  Here's where the opinion gets really interesting. Because while Judge Easterbrook held that the trial court could not depart from the text of Rule 23, he found another textual source for the court's holding.

Instead of departing from the text of Rule 23(b)(3), the district court should have relied on the text of Rule 23(a)(4), which says that a court may certify a class action only if “the representative parties will fairly and adequately protect the interests of the class.” Plaintiffs want relief that duplicates a remedy that most buyers already have received, and that remains available to all members of the putative class. A representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests.

(Emphases added.)  In other words, when a plaintiff files a class action that basically duplicates a voluntary action that the defendant has already taken, she may not have come up with an inferior method, but she is an inadequate representative of the class, in part because she appears to be prizing her attorneys' best interests over those of the class.

I'd usually close up by asking how a defendant can use an opinion like this, but in this case I don't think I really need to add anything.

(Hat tip to Ted Frank and David Appelbaum.)

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 Culver v. City of Milwaukee dealt with allegations of race discrimination--specifically, a white man who claimed he had been denied a job application at the Milwaukee police department because it was not accepting white males the year he applied. The trial court certified his proposed class (which consisted both of white men who had allegedly been denied applications and white men who might have been passed over because of changes in exam scoring to favor minorities). A year later, Culver got a different job, with which he was content, thus mooting his claim. Five years after that, a different trial judge decertified the class because Culver was not an adequate class representative. Culver appealed.

Judge Posner began his opinion by noting that

The class action is an awkward device, requiring careful judicial supervision, because the fate of the class members is to a considerable extent in the hands of a single plaintiff (or handful of plaintiffs, when, as is not the case here, there is more than one class representative) whom the other members of the class may not know and who may not be able or willing to be an adequate fiduciary of their interests. Often the class representative has a merely nominal stake (Culver has no stake), and the real plaintiff in interest is then the lawyer for the class, who may have interests that diverge from those of the class members. The lawyer for the class is not hired by the members of the class and his fee will be determined by the court rather than by contract with paying clients. The cases have remarked the danger that the lawyer will sell out the class in exchange for the defendant's tacit agreement not to challenge the lawyer's fee request.

He then stated that Rule 23

tries to minimize the potential abuses of the class action device in two principal ways, first by insisting that the class be reasonably homogeneous, and second by insisting that the class representative be shown to be an adequate representative of the class.

In this case, the largest problem was that the two classes Culver sought to certify were mutually exclusive. White men who had received no job application at all would offer very different proof than those who had sat for an entrance exam, and then had their test scores changed after the fact. Oddly, Culver's counsel, rather than finding a representative of the second proposed class, insisted that both classes be represented by the same person. (This might have been, as Posner noted, because "no member of the class has any interest beyond that of a curious onlooker in pursuing this litigation.")

At this point, Posner became extremely candid:

For purposes of determining whether the class representative is an adequate representative of the members of the class, the performance of the class lawyer is inseparable from that of the class rep- resentative. This is so because even when the class representative has some stake (unlike Culver), it is usually very small in relation to the stakes of the class as a whole, magnifying the role of the class lawyer and making him (or in this case her) realistically a principal. Indeed the principal. When we said earlier in this opinion that “Culver has done nothing to move the case forward except to file a flurry of frivolous motions” and remarked “the lack of energy with which he [Culver] has performed his function of class representative” and that the courts and Congress had refused as yet to rule that “the requirement that a class action, like any other suit, have a plaintiff is to be dropped and the class lawyer recognized as the true plaintiff,” realists reading this opinion no doubt sniggered. All Culver's moves in this suit were almost certainly the lawyer's. Realistically, functionally, practically, she is the class representative, not he.

(Italicized emphasis in original.)  The Culver opinion has proven long-lived precisely because of this candor. In addition to providing a typically lucid explanation of why the adequacy requirement is so important (a fact that is often overlooked in the rush to certify classes or approve settlements), Judge Posner also explained, in simple terms, how class actions really operate. He unmasks the fiction that the named plaintiff is in any way in charge of a class-action lawsuit as just that--a fiction. A number of scholars, judges, and legal reformers have continually wondered what can be done to solve the so-called "agency problem" in class actions. In many ways, the Culver opinion reinforces that there is a simple, easily-enacted solution: enforce the adequacy requirement. If the named plaintiff is truly an adequate representative of the class, then we should not have to worry about whether or not he can stand up to his lawyer when her interests diverge from the class's.

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Greg Mortenson turned a passion for mountain-climbing and an interest in helping the women of Central Asia into a multimillion dollar charitable foundation and a bestselling book. The book, Three Cups of Tea, tells the story of how his failed attempt to scale K2 (considered one of the hardest peaks in the world) led to his founding a charity to build schools in Central Asia.

But since the time that Mortenson's book hit the bestseller list, a number of people (including former supporter John Krakauer) have raised serious questions about whether Mortenson was telling the truth in Three Cups of Tea, and whether he has conducted his charity work properly. Last month, the CBS newsmagazine 60 Minutes aired a less-than-flattering segment on the controversy. Soon after that, a pair of Montana state lawmakers filed a class action against Mortenson and his charity, the Central Asia Institute. 

The complaint asserts claims for fraud, deceit, RICO violations, breach of contract, and unjust enrichment. Many of these claims are hard to certify. In particular, fraud-based claims (here, fraud, deceit, and RICO) will require individual proof of reliance for each class member.

What do I mean by "individual proof of reliance"? In this case, all one needs to do is look at the comments to the 60 Minutes article:

"I just started reading Three Cups of Tea a few weeks ago. None of what 60 Minutes is saying seems particularly shocking or surprising to me. For example, it probably does cost that much more to promote a book in the U.S. than it does to build 100 schools in Pakistan. I found the story to be engaging and inspiring, but also suspected all along that some of the facts were distorted to make the story flow better."

"After reading the book I was impressed that someone would have the courage and faith to do what he claims to have accomplished, even if only some of it is true, it was a remarkable acheivement. "

"While I had some caveats while reading Mr. Mortenson's book (3 Cups), I nevertheless am essentially disgusted by the assumptions and arrogance of outside entities (going in well after the fact) that expect all transactions and processes in places like mountainous Pakistan and Afghanistan to have proceeded along idealistic and unreal American "standards" - which don't exist, anyway. Who do they think they're kidding?"

"I'll reserve judgment on Greg Mortensen, at least for now. Success isn't permanent. Failure is not fatal. I'll continue to recommend his books for the lessons learned, and I'll wait to see how Greg Mortensen's legacy plays out."

Assuming each of these commenters bought the book they read, each one is a member of the proposed class. And none of these class members believe they were deceived. There are many reasons to buy a non-fiction book; some may be looking for the most truthful account possible of a story, but some may in fact buy a book knowing it's likely to contain bias or even outright falsehood. Whoever Mortenson's attorney is, she could spend some quality time harvesting comments like these to show that proving liability will require different evidence for each putative class member.

Moreover, the fact that this lawsuit was filed by a pair of Montana lawmakers implies that this lawsuit may be more about scoring political points than about repairing any particular damage. (Legislators have many, varied reasons for filing lawsuits, not all of which will line up with consumers' interests.)

It may be that the plaintiffs' lawyers here are not looking to certify a full class. Given the severity of the negative publicity that has attached to Mortenson, they're likely banking on turning the lawsuit into a quick settlement. Authors and publishing houses rely heavily on publicity for their marketing, which means that they're unlikely to want to risk too much bad publicity.

No matter how this lawsuit turns out, however, it forms the latest example of the literary class action--and we can certainly expect to see more of these in the future.

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I've talked before about the problem of circularity in securities class actions. Briefly put:

[A] securities class action takes money from the firm, and pays it to the shareholders, minus costs and attorneys' fees. The hitch is that the firm is owned by the shareholders, which means that the attorneys have just taken money from the shareholders' property and handed it to them directly, while taking a one-third cut for themselves.

At the time, I pointed out that while the circularity critique may suggest that securities class-acton plaintiffs are inadequate the moment they bring a lawsuit, courts were unlikely to give that argument much credit. Villanova professor Richard Booth, however, has authored a working paper that refines the argument, and shows why securities class actions may actually cause adequacy problems in language most courts will understand. Booth notes that there are two kinds of investors: diversified investors that actively manage their portfolios in some way, and more passive "buy-and-hold" investors. diversified investors are far less likely to buy and hold investments. Instead, they tend to be "actively managed," trading investments based on a number of factors in an attempt to beat the returns the market offers. Most importantly, even a diversified investor with a stable strategy will buy and sell individual stocks as it rebalances its portfolio. As a result, a diversified investor--and many, if not most, investors are diversified--is just as likely to gain from a securities fraud (selling the stock when its value is still inflated) as it is to lose. Under those circumstances, as Booth describes it, securities class actions operate as a redundant insurance policy.

Moreover, because the diversified investor has shielded itself from any large individual loss that comes from a buy-and-hold strategy, they are more likely to prefer derivative lawsuits to class actions. Why? Because in a derivative class action, the vast majority of the money recovered goes back into the corporation, rather than out to the original buyers of the stock. Booth also points out that attorney fees tend to be lower in derivative actions, effectively reducing the "lawyer tax" on any recovery. Or, as Booth himself puts it:

Undiversified investors are likely to favor class actions. Diversified investors are likely to oppose class actions and favor derivative actions. Although undiversified investors would not object to a derivative action in principle, they might object because the derivative recovery would reduce the class recovery. In other words, each group opposes what the other favors. Investors who stand to gain more from a class action will want their representative plaintiff (and lawyer) to maximize their claim by downplaying or indeed ignoring any evidence of derivative claims. The remainder of investors will want a zealous derivative plaintiff (and lawyer) to maximize derivative claims.

(Emphasis added)  Booth's working paper suggests three strategies for the lawyer defending a securities class action:

• Aim discovery at the plaintiff's investment strategy. If the plaintiff in a securities class action actively manages its assets, then it is far less likely to have suffered a significant loss. If it pursued a buy-and-hold strategy for the stock, it may not be an adequate or typical representative of those investors who more actively manage their assets. (Many defense lawyers already ask about investment strategy as a matter of course, but a reminder never hurts.)
• Argue derivative actions are superior to class actions. I've discussed superiority in securities class actions before, but Booth's analysis reinforces the point: a securities class action may not be the best way of recovering investment losses. In fact, a derivative lawsuit--because it generates less in fees and puts the money back into the corporation itself--offers natural advantages over a class action.
• Argue adequacy. One of the strongest strands of adequacy doctrine is the discussion of intra-class conflict. If the defendant can generate evidence that shows that the named plaintiff does not actually represent the investment strategies of a significant percentage of the class--and in fact may be actively undermining others' investment strategies--that is strong evidence that an irreconcilable class conflict exists.

These tactics are hardly radical; in fact, they're based on common sense about how people actually invest. Unfortunately, as the circularity critique highlights, common sense is not always so common in the realm of securities class actions.

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 Last year, I discussed Northwestern professor Martin Redish's argument that class actions are unconstitutional. Redish had predicted--and I largely agreed--that the argument would fall on deaf ears. It turns out we were both wrong. Leaving aside those defense lawyers who adopted his arguments about the Rules Enabling Act, Alexandra Lahav of the University of Connecticut has now reviewed his book Wholesale Justice.

Lahav praises the book, but largely disagrees with its conclusions. Specifically, she takes issue with Redish's argument that class actions violate separation of powers, and that they lack democratic accountability.

In arguing against Redish's separation-of-powers critique, Lahav observes that this separation is most often enforced through the use of "checks and balances"; and those, she says, are sufficient in their current form. As she points out, when abuses of class actions have grown especially prevalent, the legislature has stepped in to address the problem. In particular, it has done so when it enacted the PSLRA and CAFA. Lahav also claims that class actions are constitutional in a larger sense because they are--contrary to Redish's argument--subject to democratic accountability. As she puts it:

Not only are class actions salient on a national level, but individuals also have access to class actions, in the sense that many of us have been members of class actions. We have received notices in the mail and gathered that while we will only obtain a very small recovery, the lawyers managing these cases will get millions. Class members are entitled to call the lawyers in charge of the case and there is often a toll free number available for that purpose. Class members are also entitled to write to the court as well as to appear at a fairness hearing about the settlement.
The problem is that the class actions to which citizens have access— class actions of which they are actually a member—lack salience. This is either because class action notices are indeed mind numbing or because the amounts at stake are simply too small to bother over. Most people do not call that toll free number, protest the settlement in person or in writing, or even respond to the notice. Opt-out rates are low.

(Internal footnote omitted)

However, aside from a throwaway mention, Lahav's discussion of accountability leaves out perhaps the most important group to questions about class actions: class-action lawyers. Courts that regularly hear class actions have noted that, in most cases, the plaintiffs have little to no influence. Instead, they are "cats paws" for lawyers that even she points out stand to get millions for a case. (The cats-paw relationship has gone so far, in some cases experienced lawyers name plaintiffs without consulting them first.)

It's unfortunate that Lahav largely avoids this discussion, because it's where the real meat of the debate over the legitimacy of class actions lies. Those who worry about litigation-enforced "blackmail" are not worried about the plaintiffs looking to enforce their two-dollar claims. They're worried about more interested parties--the lawyers with the skewed incentives and the actual control over the lawsuit.

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Many defense lawyers get particularly impassioned about adequacy in class actions; and I'm no exception. After all, adequacy ensures (or at least it is supposed to ensure) that a real plaintiff with a real injury--as opposed to lawyer with a LEXIS/NEXIS account and a hunger for fees--is bringing the case. In a recent article for the George Washington Law Review Texas Law Professor Patrick Woolley takes a look at adequacy from a different angle. He argues that when a court examines adequacy in a proposed class action, it should be looking at whether it has personal jurisdiction over the absent class members.

[W]hile considerations of efficiency and efficacy may play a role at the margins, personal jurisdiction is not about the efficiency and efficacy of litigation. Rather, as I discuss below, the law of personal jurisdiction imposes serious external constraints on the law of class actions to safeguard important legal values quite apart from the efficiency and efficacy of class litigation.

(Internal footnotes omitted) Professor Woolley's proposed reform is a stark one:

Absent class members should be deemed to waive their adequacy objections by failing to raise them in the class proceeding only if the class court (1) has authority to require absent class members to appear for the purpose of litigating their adequacy objections and (2) exercises that authority. Critics of collateral attack have often assumed that a class court with jurisdiction to hear the class claims has jurisdiction to bind absent class members on the adequacy of class representation. But as I explain in detail below, the class court has authority to require an absent class member to raise adequacy objections in the class proceeding on pain of waiver only if the class member has minimum contacts with the forum sovereign and has received process-like notice requiring an appearance. In the absence of these standard jurisdictional requisites, a class court has only "limited and conditional" jurisdiction over absent class members. In other words, "the court has power to enter a judgment against an absent class member on the basis of adequate representation, but no power to compel an absent class member to appear in the forum to contest adequate representation or anything else."

(Emphasis added, internal quotations and footnotes omitted.) Professor Woolley argues that a close reading of the Supreme Court's opinion in Phillips Petroleum Co. v. Shutts--the opinion that established that courts may exert jurisdiction over out-of-state class members if it affords them the right to opt out of a class--"makes clear that the Court never suggested that a failure to opt out is sufficient to establish jurisdiction."

This is not an abstract debate; if a class member was not adequately represented, she may bring a new lawsuit based on the same allegations. In effect, Professor Woolley is arguing for making class actions opt-in instead of opt-out. And adequacy plays a very important role in determining the preclusive effect of a class action. (In fact, when you get down to it, this is what many preclusion debates are about: was the opt-out procedure good enough in a given case?)

But while, in general, Professor Woolley's argument makes some intuitive sense, it leaves open too many questions about specifics. For example, what is "process-like notice"? And does Rule 23 really require "persuasive evidence" of consent to each class action? If class actions required consensus, they'd be next to useless for resolving large-scale judicial debates.

As a defense lawyer, I'm obviously sympathetic to the idea that absent class members should have a real role in class-action litigation: allowing for a more active role helps prevent the filing of class actions that exist only for lawyers to extract settlements from defendants. But if a court certifies a class, it specifically considers the adequacy of the class representatives, and it does so in its role as a fiduciary to the class. Beefing up the adequacy requirement at certification makes a great deal of sense. Doing so only on the back end means compromising the finality that that provides defendants with some benefit from the device.

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 Most professional objectors are fee-seekers (or, as one court called them, "remoras"). But not all; some, like the Public Citizen Litigation Group and the Center for Class Action Fairness, are non-profits that seek to keep class settlements for the benefit of class members instead of class counsel.

Alan B. Morrison, one of the founders of the Public Citizen Litigation Group and a member of the American Law Institute, has long experience in objecting to class actions. As he has put it:

What we found was that all the lawyers in every case, as well as virtually every district court judge, were very unhappy to see us and not at all pleased with the substance of our objections. To say that we were considered the proverbial skunk at the garden party would be about as politely as it could be put, even though the Rules clearly gave class members the right to appear and object.

In a recent article in the George Washington Law Review, he explains--from a nonprofit objector's point of view--the effect of the "little changes" in the ALI Principles of Aggregated Litigation. Among them:

• Shifting focus from the predominant relief to the kind of relief in approving settlements. This gets to a problem that has been hotly discussed lately: can a court certify a class seeking monetary relief under Rule 23(b)(2)? The ALI prescribes looking at the kind of relief (money, injunction) rather than which relief "predominates." It seems primarily concerned with allowing class members to opt out when money is at stake; an option available under Rule 23(b)(3) but not Rule 23(b)(2).
• Requiring courts to look for structural conflicts in the class.  As Morrison summarizes: "The ALI now more broadly forbids the certification of a class when there are structural conflicts that may result in one group of claimants being short-changed to the benefit of another, and it included a special provision dealing with the problem of future claims."
• Blessing the lodestar cross-check. In other words, the ALI has approved courts calculating what counsel's hourly fees would have looked like, and using that figure as a benchmark for determining whether the contingency fee is outsized.
• Making the results of the claims procedure public. Doing so keeps objectors informed, and may provide incentives to keep attorneys fees in line with actual relief to the class.

So what can defense lawyers learn from Morrison's review of the ALI? Be transparent in the settlement process. It's a simple--though hardly an easy--lesson. The temptation for most defense lawyers is to make a strong showing of serving the client's interest by selling class counsel on a settlement with large fees, quick-pay or clear sailing provisions, and relief that appears valuable but doesn't cost much. But if the settlement appears to be the result of collusion, then it will invite objections, or rejection by the court. As I've pointed out before, settling on the cheap can often prove extremely expensive. The ALI's Principles of Aggregate Litigation only reinforce that lesson.

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It's a situation familiar to many class-action defendants: a plaintiff files a complaint with, say, ten causes of action. But, by the time the case reaches the certification stage, she's voluntarily dismissed nine of them--including the ones that actually address the alleged harm--in favor of an attenuated theory that she thinks stands the best chance of getting certified. (For example, a case that's clearly about fraud somehow morphs into a breach-of-contract case; or a tort case about an alleged safety defect becomes a breach-of-express-warranty case specifically disclaiming any future physical injuries.) No individual plaintiff in her right mind would assert this claim in an individual lawsuit; among other things, doing so would preclude her from later asserting her stronger claim. But this is, of course, not an individual lawsuit, it is a proposed class action.

Usually, defendants sigh and begin researching the caselaw on adequacy, preparing to argue that any plaintiff who would abandon perfectly logical (but not certifiable) claims in favor of a riskier streamlined claim is not doing her absent class members any favors. In fact, she is selling the potentially valid claims of her fiduciaries (the absent class members) in exchange for a chance at certification.

Now, Professor Edward F. Sherman of the Tulane Law School has proposed an alternative argument in his article in the George Washington Law Review, "Abandoned Claims” in Class Actions: Implications for Preclusion and Adequacy of Counsel.

Like many academic articles, this one isn't afraid of taking the long way around to get to its point. So it provides brief discussions of the Supreme Court's ruling in Cooper v. Federal Reserve Bank of Richmond, the Fifth Circuit's recent ruling in McClain v. Lufkin Industries, Inc., and a line of Texas state-law cases on preclusion. But, toward the end of the article, Professor Sherman begins to make some interesting points about preclusion and abandoned claims. Most notably, he recommends:

a court should make a determination as to whether the omitted claims are likely to be of importance to the class and whether the risk of preclusion is high enough to refuse certification. The practice of some plaintiffs' attorneys of shotgunning all possible claims into a complaint should not establish that none of those claims can ever be omitted or else there would be inadequate representation. Multiple causes of action can be repetitious and overlapping, and class counsel should have some leeway in structuring a class action to be the most efficient and effective vehicle to serve the interests of the class. In the cases that find that abandoning claims is inadequate representation, there are hints that courts are particularly concerned with strategic abandonment no matter how important those claims might be to some class members. Paring down a class action so that it can be certified should not in itself be considered inadequate representation. It is often in the interests of the class members to do just that, particularly where there is little likelihood, in the absence of a class action, that class members can and will pursue the claims in individual suits. In (b)(3) class actions, a certifying court is required to find that "a class action is superior to other available methods for the fair and efficient adjudication of the controversy," which includes whether the class members are interested "in individually controlling the prosecution or defense of separate actions." A similar determination that there is little likelihood that class members will want to sue individually on omitted claims might be required should class certification be opposed on the basis of abandoning claims.

(Emphasis added, internal footnotes omitted.) This reasoning suggests that perhaps defendants should try opposing plaintiffs who abandon claims on superiority, as well as adequacy, grounds. After all, if class members can do better by asserting individual lawsuits, then that's what they should be doing, rather than waiting for a class representative without an actual theory to recover on their behalf.
 

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 Last week, while the legal world was abuzz over the Supreme Court argument on Wal-Mart v. Dukes, Judge Posner was quietly putting the finishing touches on Randall v. Rolls Royce, which provides his own take on some of the same issues.

As in Dukes, the plaintiffs sought to represent a class of women who alleged gender discrimination under Title VII. As in Dukes, they alleged that, because they were women, they had received less money for comparable work, and were passed over for promotions within the company. As in Dukes, they sought certification under Rule 23(b)(2), while seeking monetary relief in the form of "back pay." However, unlike the Dukes plaintiffs, the Randall plaintiffs only sought to represent 500 women, so this was hardly "too big to certify." 

The lower court denied certification, holding that the plaintiffs had not demonstrated commonality, typicality, or adequacy (there were conflicts within the class), and that certification of a class seeking monetary relief was not appropriate under Rule 23(b)(2). So the plaintiffs appealed under Rule 23(f).

Judge Posner began his opinion by noting one of the strategic quirks about this Rule 23(f) appeal. Rolls Royce had solid defenses to most of plaintiffs' claims; so it would behoove it not to oppose certification, because in the very likely event a certified class lost, it would never face another gender discrimination claim from the class members for any conduct through 2011. Judge Posner also spent a paragraph on the plaintiffs' conflict of interest (one also present in the Dukes class): since some class members were in management they'd be defendants in other class members' claims.

Having dealt with those issues, Judge Posner turned to Rule 23(b)(2). As he noted:

Class action lawyers like to sue under that provision because it is less demanding, in a variety of ways, than Rule 23(b)(3) suits, which usually are the only available alternative.

So, like in Dukes, the question became whether the plaintiffs could seek certification under Rule 23(b)(2) when they were also seeking back pay. According to Judge Posner, they could not.

To read “injunctive” in the rule to mean “equitable” is to become mired in sticky questions of differentiating between “legal” and “equitable” actions—and such questions abound. See, e.g., Medtronic, Inc. v. Intermedics, Inc. We can avoid the mire by recognizing that Rule 23(b)(2) class actions are limited to cases in which “final injunctive relief or corresponding declaratory relief” is appropriate, rather than extending to all cases in which any kind of equitable relief is sought.

...

As this case illustrates: calculating the amount of back pay to which the members of the class would be entitled if the plaintiffs prevailed would require 500 separate hearings. The monetary tail would be wagging the injunction dog.

...

The proper approach in this case would thus have been for the plaintiffs to seek class certification under Rule 23(b)(3)—which requires full notice so that class members can opt out if they want to bring an independent suit for damages or other monetary relief—but to ask for injunctive as well as monetary relief.

The plaintiffs also argued, in the alternative, that they should be allowed to substitute new class representatives (using intervention under Fed. R. Civ. P. 24) should the court find the originals inadequate. But Judge Posner held that, in this case, that would not be an option.

It would go too far to suggest that unless substitution for the original named plaintiffs is sought as soon as a substantial challenge to certification is made, the district judge is justified in denying it. Such a rule might involve constant interruptions of the proceeding—procedural hiccups—as nervous class action counsel tried to add new class representatives every time the defendants raised an objection to certification. But it was obvious from the outset that these named plaintiffs faced a serious chal- lenge to their status as class representatives. And with the entire class in one location (a single plant in Indiana), class counsel had ample opportunity to sift through potential named plaintiffs before deciding on Randall and Pepmeier. Intervention shouldn’t be allowed just to give class action lawyers multiple bites at the certification apple, when they have chosen, as should have been obvious from the start, patently inappropriate candidates to be the class representatives.

With the exception of the substitution question, this case provides a possible road map for the Supreme Court's decision in Wal-Mart v. Dukes. Wal-Mart raised the same adequacy issues in its brief, and the same Rule 23(b)(2) arguments. Size of the class aside, the facts of the case are remarkably similar to the Dukes class. Whether the Supreme Court will follow that road map, of course, remains to be seen.

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 As I've written before, guessing at the motives and methods of plaintiffs' lawyers in class actions can be much like old-style Kremlinology. But every once in a while, we get a little more information. The most recent comes from University of Minnesota Law School professor Stephen Meili, who just published his article Collective Justice and Personal Gain? An Empirical Analysis of Consumer Class Action Lawyers and Named Plaintiffs in the Akron Law Review.

Professor Meili's methodology is not ideal: he basically just sent a series of open-ended questions to class-action plaintiffs and their attorneys, asking them about their perceptions of how a given case proceeded, and how fair the process was. As he admits, that means that no one talks about unsuccessful cases. Moreover, the self-reporting means that the plaintiffs' lawyers may try to make themselves sound more noble than they are otherwise. (For example, only 5 of 33 lawyers mentioned making money. There may be that many noble plaintiffs' attorneys, but they seem to disappear around the time they make fee requests.)

Nonetheless, because of its open-ended nature, Professor Meili's survey elicited some revealing statements from the plaintiffs attorneys, and he does not shy away from the implications of what those attorneys told him. Among them:

Unlike conventional plaintiffs' lawyers, class-action lawyers inflate the expectations of their clients.

[C]onsumer class action lawyers often deliberately inflate the expectations of their clients, encouraging them to look beyond individual monetary compensation and focus instead on relief for the entire class, which sometimes includes non-monetary awards. In this way, class action lawyers do more than merely manage their client's expectations, a well-documented process in individual litigation. Instead, they consciously urge their clients to expand those expectations. If their clients refuse to be so encouraged, the lawyers opt not to include them as named plaintiffs.

Class-action lawyers prefer ignorant clients because they are easier to control.

[I]t appears that in choosing a suitable class representative, consumer class action lawyers seek someone willing to represent large numbers of persons but who was unaware of such willingness before they talked to the lawyer. The lawyers find it easier to keep such named plaintiffs focused throughout the typically long class action process.

Class-action lawyers don't communicate with their clients.

This awareness of named plaintiff motivation is particularly noteworthy because most of the lawyers in the study said that they spend less time communicating with named plaintiffs than they do with their clients in individual cases.

What does these findings mean for defendants? They do confirm some of defense lawyers' suspicions. Class actions are usually manufactured cases, and it is really the lawyer driving the case, not the client. But the most disturbing conclusion is not that the lawyers are in the drivers' seat. After all, for many defense lawyers and judges, that is hardly news.   Instead, it is the finding that many class-action lawyers deliberately screen for the most ignorant and malleable clients, so that they'll be easier to control. In the day-to-day conduct of the litigation, this may not mean much. But should the parties try to reach a settlement, this means that the named plaintiff is more likely to serve the plaintiff attorneys' interests than those of the class. And that is exactly what courts try to guard against.

It also means that plaintiffs' counsel continue to treat the adequacy of their clients as a hurdle, rather than a requirement. As a result, as both zealous advocates and officers of the court, it is critical that defense lawyers probe the adequacy of the proposed class representative. In particular, defense attorneys should be asking:

• Was it the client's idea to bring the case as a class action?
• Was the client recruited to the case?
• How often does the client communicate with her lawyer?
• What were the client's expectations at the beginning of the litigation?

Defense counsel have long argued that ignorant plaintiffs are inadequate plaintiffs, often with little success. Professor Meili's study shows that, once again, defendants should not focus on the ignorance itself, but its effects. The reason ignorant plaintiffs are inadequate is not because they are ignorant, but because they lack the independence to stand up to their lawyers.

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King Architectural Metals manufactured metal building components, which it needed to sell. It made the mistake of faxing an advertisement to CE Design. It probably seemed like a good idea at the time. CE Design was a small, Chicago-area civil engineering firm, and it had checked a box in the Blue Book of Building and Construction (a directory of building-industry firms) that indicated it was OK to contact it with advertisements. But it also had a sideline in Telephone Consumer Protection Act class actions. It filed at least 150 of them, and its president had testified in at least 20 of those.

In the course of his deposition in the case, the company president (John Pezl) testified that he had not authorized King to contact CE Design; hard to believe given the Blue Book listing. So King opposed class certification on the grounds that CE Design was not typical of class members who had not consented, and that the discrepancy in Pezl's testimony made him an inadequate class member.

The district court certified the class anyway, so King appealed to the Seventh Circuit, which reversed. Judge Posner wrote the opinion. In doing so, he focused in on one requirement that does not get much attention--typicality--and one that does--adequacy. And he explained the importance of enforcing the typicality requirement:

A class is disserved if its representative's claim is not typical of the claims of the class members, for then if his claim fails, though claims of other class members may be valid, the suit will at the least be delayed by the scramble to find a new class representative. Alternatively, a class representative's atypical claim may prevail on grounds unavailable to the other class members, leaving them in the lurch.

He also explained why credibility is important to a named plaintiff's adequacy.

A named plaintiff who has serious credibility problems or who is likely to devote too much attention to rebutting an individual defense may not be an adequate class representative.

CE Design's Blue Book listing made it atypical of class members who had not consented to communication by fax. And Pezl's inconsistent testimony compounded the problem, ensuring that any classwide trial would focus on his credibility rather than the claims of the class.

While the opinion is helpful for challenging adequacy and typicality, Judge Posner did end the opinion with a warning note for defendants.

We don't want to be misunderstood, however, as extending an invitation to defendants to try to derail legitimate class actions by conjuring up trivial credibility problems or insubstantial defenses unique to the class representative. Serious challenges to typicality and adequacy must be distinguished from petty issues manufactured by defendants to distract the judge from his or her proper focus under Rules 23(a)(3) and (4) on the interests of the class, as emphasized in Dubin v. Miller, 132 F.R.D. 269, 272 (D. Colo. 1990), where the judge, while decertifying the class, remarked that "few plaintiffs come to court with halos above their heads; fewer still escape with those halos untarnished. For an assault on the class representative's credibility to succeed, the party mounting the assault must demonstrate that there exists admissible evidence so severely undermining plaintiff's credibility that a fact finder might reasonably focus on plaintiff's credibility, to the detriment of the absent class members' claims."

Warning aside, the opinion is still useful for defendants.  It provides clear explanations of the typicality requirement and the "unique defense" aspect of both typicality and adequacy.  This is why the deposition of the named plaintiff is so important: it allows the defendant to determine whether it's worth taking the risk to challenge the named plaintiff's credibility.  

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I don't usually say whether I think a class-action opinion is good or not.  For one thing, this blog has been about strategy rather than policy.  For another, I'm a practicing attorney, and I'd rather not try to second-guess judges who have to sort through layers of contentious briefing in order to decide issues in class actions.

But I'm going to make an exception for an opinion I just ran across by Judge Alsup of the Northern District of California.  This is a good settlement opinion; moreso for the fact that it has been issued before the parties have made a settlement proposal.  To highlight just three of the areas Judge Alsup warns both parties about before they've entered negotiations:

On adequacy of representation:

Is the plaintiff an adequate representative with standing? Is plaintiff motivated to and qualified to act on behalf of those he or she seeks to represent? Are there shortcomings in the plaintiff that would be advanced to defeat a class certification motion? What is the litigation history, criminal history, and relationship to plaintiff's counsel? In an employment case, how long did the plaintiff work for the employer? The opinion of the lead plaintiff as to the fairness of the settlement to absent class members must be provided to the Court, along with an opinion by counsel. Adequacy of counsel is not a substitute for adequacy of the representative.

On expansion of the class:

Typically, defendants vigorously oppose class certification and/or argue for a narrow class. In settling, however, defendants often seek to expand the class, either geographically (i.e., nationwide) or claim-wise (including claims not in the complaint) or person-wise (e.g., multiple new categories). Such expansions will be viewed with suspicion. If an expansion is to occur it must come with an adequate plaintiff and one with standing to represent the add-on scope and with an amended complaint, not to mention due diligence as to the expanded scope. The settlement dollars must be sufficient to cover the old scope plus the new scope. Personal and subject-matter jurisdiction over the new individuals to be compromised by the class judgment must be shown.

On incentive payments to class members:

If the proposed settlement by itself is not good enough for the named plaintiff, why should it be good enough for absent class members similarly situated? Class litigation proceeded well for many decades before the advent of requests for "incentive payments," which too often are simply ways to make a collusive or poor settlement palatable to the named plaintiff. A request for an incentive payment is a red flag.

What makes this such a good opinion?  It's clearly written, and provides real guidance on thorny issues that actually come up in settlement negotiations.  But most importantly, it shows that Judge Alsup thinks hard and clearly about the strategic incentives both plaintiffs and defendants face when settling a class action.  For all of the appellate opinions out there discussing the various factors that can spring from Rule 23(e)'s requirement that settlements be "fair, reasonable, and adequate," this may be the single best opinion I have read on classwide settlement.   I usually hope my clients don't have to end up in court litigating a class action, but if they do, they could do a lot worse than Judge Alsup.

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 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.

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Florida State law professor Elizabeth Chamblee Burch is the latest to weigh in on the problem of how to make sure class actions are adequately governed.  In an forthcoming article from the Vanderbilt Law Review, she asks what makes an optimal lead plaintiff in a securities class action.

Burch focuses on the the difficulties raised by what she refers to as plaintiffs' law firms "courting process," particularly the use of "pay to play" practices and investment monitoring agreements.  Her discussion of these issues is worth quoting at length:

After the PSLRA, plaintiffs’ law firms sought to maintain their competitive advantage by courting large institutions, developing repeat relationships with them, and encouraging them to serve as lead plaintiff. Law firms’ courting process may involve “pay-to-play” practices where plaintiffs’ law firms contribute to the political campaigns of those selecting counsel for public or labor pension funds and lobbying the officials who control public pension funds. Lobbyists encourage pension funds to serve as lead plaintiff and to then select the lobbyist’s law-firm employer as lead counsel. These practices forge repeat relationships and inhibit competition in ways that lack merit and transparency. And because other eligible institutions like banks, mutual funds, and insurance companies maintain commercial relationships with the defendants or defendants’ customers, public and union pension funds are the institutions that typically take on the lead-plaintiff role.

Law firms’ courting process also involves “portfolio monitoring,” where the law firm keeps abreast of the institution’s holdings and notifies it whenever it suffers a significant enough loss that it could serve as the lead plaintiff in a related class action. Portfolio monitoring is a preexisting contractual relationship between the lead plaintiff and class counsel. Preexisting relationships typically give courts pause, particularly when counsel has no relationship with other class members and no subclassing exists. But most courts find free portfolio monitoring in exchange for retaining the law firm unproblematic; they look for something more, like long-term friendships or familial relationships.Although courts have been slow to recognize it, portfolio monitoring is both widespread and troubling. The few courts who agree reason that the practice “creates a clear incentive for [the law firm] to discover ‘fraud’ in the investments it monitors” and thereby “fosters the very tendencies toward lawyer-driver litigation that the PSLRA was designed to curtail.” Plus, regularly depending on the same law firm makes it unlikely that institutions will bargain for lower attorneys’ fees or monitor trusted counsel. To be fair, some pension funds, such as MissPERS, use plaintiffs’ firms for free investment monitoring, but rely on multiple law firms and guarantee none that it will be selected as lead counsel. On one hand, portfolio monitoring is commendable—it encourages institutional investors to get involved, enforces substantive rights, and may uncover and deter fraud. But on the other, ongoing business relationships between the lead plaintiff and counsel appear improper, may cause counsel to maximize the institutional lead plaintiff’s return to the class’s detriment, and may encourage counsel to litigate in ways that establish favorable precedent for the institution.

(Emphases added.)  Burch has several suggestions for addressing these issues. Her most interesting is to recommend that securities class actions should be headed by plaintiff groups rather than lone plaintiffs, so long as the group reflects the diversity of the class.

Ideally, group members represent the class’s diverse interests such that when each member pursues her own self-interest, the group resembles a microcosm of the whole class.

Burch is not blind to the problems that plaintiffs' groups can pose. Nor is she a lone voice advocating for diversity. That said, she tends to be optimistic about how diverse stakeholders may interact in overseeing a class action. 

Put simply, class counsel should consult and take direction from the lead-plaintiff group on matters that implicate members’ values and litigation objectives or affect the case’s merits in much the same way that an attorney consults with her client in individual litigation. In short, if lead plaintiffs are to adequately represent class members’ interests, monitor the lawyers, and minimize agency costs, then, consistent with the PSLRA’s goal of increasing client control, they should have more decision-making authority.

While it would be helpful to know whether Burch is advocating a doctrinal or legislative reform (in other words, should courts just start enforcing this proposal, or does Congress need to amend the PSLRA?), the policy arguments she raises can prove useful for securities defense lawyers. At the very least, they exemplify a trend of continued concern about the adequacy of securities lead plaintiffs, and provide several examples of why one should not assume that institutional investors are always adequate lead plaintiffs.

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Two cases in the past few years involved a similar issue, but opposite outcomes. In the first, Murray v. GMAC Corp., the defendant argued that a family that had brought fifty Fair Credit Reporting Act lawsuits were "professional plaintiffs," and therefore inadequate to represent a class.  The Seventh Circuit, in an opinion by Judge Easterbrook, held that that the plaintiffs' "professional" status did not disqualify them from being adequate class plaintiffs. By contrast, in Gordon v. Virtumondo, Inc., the Ninth Circuit held that an individual plaintiff who set up an email account in order to collect emails that violated the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act of 2003 was a professional plaintiff who lacked standing to sue even on his own behalf.

What's the difference between these two cases? Law student Brandon Murrill has an explanation, which he lays out in his Note The Business of Suing: Determining When a Professional Plaintiff Should Have Standing to Bring a Private Enforcement Action. As he puts it:

Despite superficial differences, professional plaintiffs like Gordon are members of a species of litigant—a species with a few defining characteristics. First, and most importantly, professional plaintiffs are professional, meaning that they are in the business of bringing lawsuits with the primary aim of winning large sums of money. They and their lawyers may claim to have other goals, such as fighting for the underrepresented “little guy” against powerful interests, but these goals remain secondary considerations to the ultimate goal of collecting damages.

Second, professional plaintiffs often play a role in bringing about the injuries that serve as the foundation for their lawsuits, al- though some play a more active role than others. One example is the professional plaintiff with a disability suing under the ADA who actively scours local businesses for obscure, technical violations to serve as the basis for a cause of action.

Murrill suggests that the best solution to the professional plaintiff problem is legislative: he recommends that states should adopt stricter standing requirements. But his Note also suggests a way for defense counsel to counter professional plaintiffs.  According to Murrill, the key difference between an acceptable and unacceptable plaintiff is the presence of a self-inflicted injury. It's one thing to be litigious, and another to have a business interest in bringing lawsuits. In one case, the plaintiff is experienced (and likely unpleasant). In the other, the plaintiff has a close business relationship with his attorney, one that leads him to expose himself to harm and likely compromises his ability to adequately represent a class. If the defense focuses on the professional's relationship with his attorney and the lengths he will go to further that relationship, it should be able to demonstrate that he lacks the independence to stand up to his business partner on behalf of a class of amateurs.

TAGS - adequacy FCRA

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Last March, dean of class action scholarship John Coffee Jr. published an article in the Columbia Law Review titled "Litigation Governance: Taking Accountability Seriously." Coffee's argument is that, from a corporate governance perspective, there are two ways to keep an organization's leaders accountable: "exit" and "voice." In other words, judges and legislators can make it easier for shareholders to leave an organization, or they can give them a greater voice in governing it. He then tries to apply those principles to class actions and other forms of collective redress. Specifically, he worries about how the current class-action regime may not really hold plaintiffs' counsel accountable during the course of a lawsuit:

Perhaps more importantly, an intense, low visibility competition has arisen for the coveted position of class counsel because the winner of this competition stands to capture significant rents. This competition has been the underlying cause of recent scandals within the plaintiffs' bar. Although the nature of this competition has recently changed, its latest manifestation - pay-to-play contributions by plaintiffs' law firms to public pension funds - may enable some competitors to undercut the very reforms that Congress established to control class action abuses. The vulnerability of these reforms, it will be argued, flows directly from the class action's special governance rules and reveals the dangers of relying primarily on "voice," rather than "exit."

(Internal footnote omitted.)  Coffee focuses on the "exit" method (which he identifies as opt-outs under Rule 23(b)(3)).  As a result, he spends much of his time analyzing the European model of certifying "opt-in" actions or--as they're sometimes called across the Atlantic--"collective redress." He notes that allowing for opt-in litigation (much like the FLSA collective action) usually does a better job of aligning counsel's interests with their clients', and that technology has made opting in more feasible in large-scale class actions. Given that many class actions generally have very low participation rates, encouraging opt-in classes would, at the very least, reduce exorbitant fees and remove the need for using the increasingly controversial

However, in the process, he also provides a good policy argument for defendants who seek to oppose certification. It's difficult to regulate exit, but courts already have a way to regulate voice that Coffee does not consider: enforcing the adequacy requirement. If courts were stricter about policing the adequacy of the named plaintiff--specifically, her ability to independently oversee her counsel--the plaintiff could potentially do a better job of policing counsel herself. How could courts do this?

• Allow discovery into the nature of plaintiff's relationship with her lawyer. Courts have already deemed family members and close friends to be inadequate class plaintiffs, but they have also allowed a number of close business and personal relationships to go unchallenged.
• Consider whether the lawsuit originated with the lawyer or the plaintiff. Courts frown on lawyers who craft a complaint and then recruit the plaintiff in individual lawsuits. There is little reason to assume that a recruited plaintiff has the independence to oversee her counsel when their interests might conflict with the class's.
• Examine what the plaintiff has done her homework. Courts are clear that plaintiffs do not need to be experts in the subject matter of the lawsuit to be adequate, which makes some sense. A plaintiff in an ERISA suit, for example, need not know the ins and outs of the statute like her lawyers should. But if the plaintiff has not read the complaint, does not keep tabs on the case with counsel, or offers an understanding of the case that contradicts her counsel's, the court has strong evidence that the plaintiff cannot independently oversee counsel.

I'm realistic. I don't expect a revolution in enforcing adequacy. Courts have long known the "open secret" that lawyers make the decisions about class actions instead of their clients.  And the prevalence of pay-to-play practices with large institutional clients in securities actions suggests that some plaintiffs' counsel are determined to co-opt their clients.  Nonetheless many courts gloss over adequacy when the defense raises it. Some of this may be inertia: why upset a system that may provide some rough justice. But some of this is also framing. When challenging adequacy, defense counsel should consider couching their arguments in terms of the ability to oversee counsel, rather than stressing more stringent, hard-to-meet standards like expertise.
 

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 A number of courts have held that Rule 23(a)(4)'s adequacy requirement mandates two inquiries:

(1) whether there are irreconcilable conflicts of interest between the class representative and the absent class members, and
(2) willingness and ability of the representative to take an active role in and control the litigation and to protect the interests of absentees.

The law on what constitutes a conflict of interest is well-developed. But what does "willingness and ability" mean? The Eighth Circuit recently shed some light on the question in the course of deciding an appeal in a civil-rights lawsuit, Rattray v. Woodbury County.

In 2006, Maureen Rattray was arrested for misdemeanor driving under the influence. While processing her after arrest, Woodbury County officials subjected her to strip and cavity searches. Rattray sued, and, eight months after filing her original complaint, she requested leave to amend her complaint to add class allegations because discovery had revealed Woodbury County had a policy of subjecting arrestees to strip searches. Six months later, Rattray filed a motion for class certification.

Woodbury County opposed the motion. As one might expect, it argued that individualized issues predominated over common issues. But it also argued that she was an inadequate class representative. Specifically, it

challenged Rattray's assertion that she did not move for class certification earlier because she did not learn of the blanket strip search policy until discovery. Paragraph 40 of Rattray's initial complaint, according to the County, showed that Rattray was aware of the policy when she filed the complaint. While not questioning the capabilities of Rattray's counsel, the County argued that the delay in moving for class certification suggested that Rattray did not meet Rule 23(a)(4)'s requirement that the class representative would "fairly and adequately protect the interests of the class."

The district court accepted the County's argument, noting that the six-month delay between the filing of the amended complaint and the motion to certify indicated that Rattray lacked the necessary zeal to represent a class, and her counsel lacked the necessary experience.

Rattray appealed, arguing that the "many depositions" and "hundreds of pages of documents" her discovery efforts had unearthed indicated that she was willing and able to pursue a class action. But the Eighth Circuit was unconvinced. As it put it:

Rattray's failure to move to certify with alacrity undermines confidence in the zeal with which she would represent the interests of absent class members. A failure of the putative class representative to assure the court that it will vigorously pursue the interests of class members is a sufficient basis to deny certification.

So what can we learn from this case? In some cases, adequacy requires timely action. If a plaintiff drags her heels in prosecuting a class action, that may serve as evidence that she is not an adequate class representative.

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National Economic Research Associates, Inc. (NERA), an excellent source for statistics on litigation, has released a report on the recently-implemented class-action law in Italy: Italian Class Actions Eight Months In: The Driving Forces. 

The report describes (for those of us in the US) the law governing class actions in Italy. Class actions are opt-in, not opt-out like in the US. And they are limited to contractual claims, products-liability claims, anti-competitive claims, and "unfair commercial practices" claims. Classes are deemed "admissible" (roughly equivalent to certified) unless the claim is "manifestly unfounded," there is a conflict of interest, the rights at issue "are not homogenous" or the lead plaintiff cannot adequately represent the interests of the class. In addition, the lead plaintiff must be a consumer, and must have "an interest" in the suit.

In addition, the Italian law provides that there can be no more than one class action for a given matter (which implies some kind of automatic consolidation of additional lawsuits), and conforms to general Italian civil practice in that there is no pretrial discovery. (That's not a misprint: no pretrial discovery.)

The authors also observe that nonprofit consumer associations, rather than plaintiffs lawyers, are the primary drivers behind class-action litigation. As a result, they anticipate that these plaintiffs may push more for reform of business practices than for large damages awards. Specifically:

Consumer associations may aim to send a signal to the overall industry and push for changes in current business practices; they are thus less likely to be enticed to settle by monetary offers alone. An example is the Intesa case: Codacons [a consumer association] sought monetary damages but also sought to change the way in which the bank operated in charging fees and interest on lines of credit. During mediation, Codacons was willing to forsake its claim of €1,250 per account holder in exchange for a settlement of €1 per account holder and a change in the bank’s contract renouncing the challenged fees for all account holders.

Concurrently, consumer associations also have (maybe only implicitly) the goal of increasing the clout of the association. Thus, consumer associations may aim to increase their own visibility. This is a further reason why they are less likely to be enticed to settle by monetary offers alone. They may aim to increase their own visibility because part of consumer associations’ power comes from their reputation and the widening of their association base; thus, publicity is likely to be more important to them than to US plaintiff law firms. Consequently, the reputational damage suffered by defendants could be larger in the current Italian situation than it would be with US-like plaintiff law firms.

(Internal footnotes omitted.) This leads to what I consider the most interesting part of the paper, which is NERA's description of the effects of the law. In eight months, consumer-association plaintiffs have filed six actions, only one of which (the Intensa case, mentioned above) reached the admissibility stage. (The court denied admissibility because the lead plaintiff had not personally been charged the fees challenged in the lawsuit.)  From these six cases (and another fifteen that have been "announced" but not filed), the authors infer that

Consumer associations seem to be adopting different strategies with respect to class action. Some, like Codacons, have been filing a comparatively high number of class actions and announcing claims for billions of Euros; others, like Unione Nazionale Consumatori, have filed fewer and financially less ambitious class actions, promoting themselves as more realistic in their aims. Unione Nazionale Consumatori’s Secretary General stated that the class action law needs to be used with moderation, intelligence, and practicality. He vowed to follow these principles by choosing the suits that could be brought to a conclusion in a short time and maybe choosing those defendants that would be more prone to settle. He has not spared criticism towards those consumer associations following the strategy of filing many claims and issuing loud proclamations. Indeed, he compared some of the announcements of claims for billions of Euros to a farce.

(Internal footnotes omitted.)

What can we learn from the Italian case so far? Not much, with only eight months of experience on which to draw. But it does suggest that reducing the monetary incentive to file a class action could reduce the number of actions filed per capita. And it also suggests that even when one removes that incentive, finding good plaintiffs remains difficult. Which is unfortunate, because, as I've mentioned before, I might be willing to switch sides to bring cases in Florence.

(Photo from Wikimedia Commons, used under GNU license.) 

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 Depositions are one of the most important parts of class discovery. (And for many lawyers, they're also the most fun.) Since so few class actions go to trial, a deposition of a named plaintiff is when the defense lawyer finally gets to act like a lawyer on TV, confronting the named plaintiff with evidence, poking holes in poorly-constructed stories or arguments. But how much of the named plaintiff deposition is mere theatrics and how much is useful for actually defeating certification? For an excellent example of well-deployed depositions, let's look at a recent FLSA case: Lugo v. Farmer's Pride, Inc., 2010 U.S. Dist. LEXIS 88139 (E.D. Pa. Aug. 25, 2010).

The substantive allegations in the case involve "doffing and donning" (a nickname for FLSA cases alleging that plaintiffs were not paid for time spent putting on and taking off work clothes. In this case, Farmer's Pride owned a chicken-processing plant in Pennsylvania. In order to work in various departments of the plant, workers had to wear various items of protective clothing, including smocks, hair and beard nets, safety glasses, hearing protection, and protective sleeves. (Failure to do so could result in disciplinary action.)

Farmer's Pride moved to decertify the collective action, arguing that "donning and doffing" practices varied by department within its plant, by individual worker's routines, and by compensation scheme (there were two different compensation schemes, one in place until 2007, one in place afterward). The plaintiffs argued that Farmer's Pride had overstated the differences.

But, because Farmer's Pride had relied heavily on deposition testimony from the named plaintiffs and other plant employees, the plaintiffs had a hard time convincing the court that these differences were inconsequential. How did Farmer's Pride use the depositions?

• It used them to question the plaintiffs' ability to testify on others' behalf (typicality). "Defendant also questions the ability of Marco or Caba to speak to the practices and experiences of other hourly production workers, identifying statements in prior deposition testimony by Marco that she did not have knowledge of these facts ( and noting Caba's admission at the evidentiary hearing that she was "not paying attention to what other people [were] doing." (Internal citations omitted.)
• It used them to question the named plaintiffs' credibility (adequacy). "Defendant contends that the inconsistencies present in Marco and Caba's testimony are indicative of a more pervasive problem in the testimony that both named and opt-in plaintiffs have offered over the course of this litigation. In support, defendant points to multiple instances where named or opt-in plaintiffs have provided inconsistent testimony or have admitted to inaccuracies in prior testimony or discovery responses." (Internal citations omitted.)
• And it used them to question plaintiffs' counsel's credibility (adequacy of counsel). "Defendant also offers the testimony of Hasaan Hargett, a former plaintiff in this lawsuit and current hourly production worker at defendant's plant, who detailed at the evidentiary hearing how the facts in the interrogatory response submitted on his behalf were inaccurate, despite the fact that he brought these inaccuracies to the attention of plaintiffs' counsel prior to submission. According to defendant, these numerous contradictions betray an attempt by plaintiffs to manufacture a level of similarity that is not in fact present, and undermine any notion that their testimony can be considered representative in this case."" (Internal citations omitted.)

The defendant's strategy worked; the Court found that the inconsistencies among the testimony of various class member meant that the named plaintiffs' testimony could not stand in for the testimony of other class (or collective action) members.  In its words:

[T]hough plaintiffs tout the testimony of these plaintiffs as representative, neither Marco nor Caba provided a reliable basis which would warrant the Court's acceptance of their own personal facts as applying to others; rather, the Court finds that the record as a whole does not support the conclusion that their particular experiences were shared by all plaintiffs, or reflected a common practice or policy of defendant. Lastly, as defendant has effectively demonstrated, the testimony offered by plaintiffs in general is plagued by inconsistencies that diminish its reliability and show the importance of cross-examination of each plaintiff.

(Internal quotations omitted, emphasis added.) What's the lesson we can learn from this case? No matter how redundant it may seem, be thorough in asking about each class member's experience. The more specifically class members testify about their own individual experiences, the more evident it will become that a class may not be appropriate.

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 Adequacy can be a difficult concept to get one's head around. And, as a result, courts and parties have found a number of different ways to frame the question of whether a named plaintiff is an adequate class representative. They can look at whether the named plaintiff knows enough about the case to oversee her counsel (although some courts are sometimes reluctant to disqualify a plaintiff on these grounds). Courts can also ask whether the plaintiff has enough independence from counsel to oversee them when their interests may diverge from the class's.   And sometimes courts can just look at the personal character of the named plaintiff. 
Another way of framing the issue is to look at whether the named plaintiff is committed to protecting the interests of the class. What do I mean by "committed"? Take the case of Buettgen v. Harless, 263 F.R.D. 378 (N.D. Tex. 2009). Buettgen was a securities case, involving allegations that the defendants had, through various misrepresentations, artificially inflated the stock price of phone directory company Idearc, Inc. A number of different plaintiffs filed class actions against Idearc and its officers, including a group of individual investors calling themselves the "Buettgen Group," another group of individual investors calling themselves the "Lyman Group," and two institutional funds, one Swiss and one American.

Each of these four plaintiffs filed a motion to be considered as lead plaintiff for the consolidated class actions, a position that carries with it control of the litigation, and a larger share of fees for plaintiffs' counsel. The court, in deciding the motions, pointed out that the Private Securities Litigation Reform Act (PSLRA):

"requires a court to presume that the most adequate plaintiff is the person or group of persons that:
(1) filed the complaint or a motion in response to a notice;
(2) has the largest financial interest in the relief sought by the class; and
(3) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.
Id. § 78u-4(a)(3)(B)(iii)(I).

This presumption can be rebutted only by proof offered by a class member that the presumptively most adequate plaintiff:
(aa) will not fairly and adequately protect the interests of the class; or
(bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.
Id. § 78u-4(a)(3)(B)(iii)(II)."

In this case, all four plaintiffs had filed the appropriate motions. The court ranked the plaintiffs by the size of their losses (the Buettgen Group had sustained the largest loss, followed by the Swiss fund, the Lyman Group, and the American fund). But when the court looked at each plaintiff's adequacy, the analysis got more difficult. The Swiss fund was vulnerable to unique defenses, and therefore not adequate. But the Court also expressed reservations about the two investor groups, because neither was cohesive enough to represent the class. (Why would cohesiveness matter? Because if a group is not cohesive, then it is likely that it was put together by plaintiffs' counsel to meet the "largest financial interest" prong of the PSLRA, implying that the counsel controlled the plaintiffs.) As the court observed:

"[T]he Buettgen Group fails to present evidence that the members of the group have ever communicated in a meaningful way. For example, instead of explaining how they are prepared to work together to manage this litigation on behalf of the proposed class, the Buettgen Group submitted essentially boilerplate certifications discussing their stock purchases and alleged losses. ... Additionally, the Buettgen Group's motion is undermined by the group's invitation to the Court to hand-pick one of its constituents to serve as lead plaintiff if the Court deems the Buettgen Group inappropriate. Buettgen Group Such a willingness to abandon the group only suggests how loosely it was put together. ...
Likewise, the Lyman Group suffers from the same grouping issues that apply to the Buettgen Group. The Lyman Group consists of two individuals that provided similar boilerplate certifications as the Buettgen Group. Also, the Lyman Group states, "if the Court is inclined to appoint only one Lead Plaintiff, each of the Movants moves in the alternative for appointment individually as Lead Plaintiff." As stated above, when a group shows willingness to abandon the group the Court is lead to believe the group was only loosely put together. "

(Internal quotations and citations omitted, emphasis added.)

What does this ruling mean for defendants? It provides another way of looking at adequacy of named plaintiffs. If the named plaintiffs are not sufficiently committed to the litigation to talk to each other, then it is unlikely that they can oversee their counsel independently. And that is a good reason to find them to be inadequate class representatives.

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 Brian Fitzpatrick (of "Objector Blackmail" fame) has published another article in the University of Pennsylvania Law Review asking the provocative question: are class-action lawyers paid too little? His provocative answer: yes they are. According to Fitzpatrick, in small-stakes class actions, lawyers should collect a 100% contingency fee. What's his justification? An argument he refers to as "insurance-deterrence theory." Fitzpatrick assumes that any money that goes to class-action lawyers serves a deterrence function, because not only does it cost the defendant money, it also funds further opposition to corporate wrongdoing. (Fitzpatrick is not the only person to make this kind of argument; many plaintiffs' lawyers and academics argue that class actions primarily serve as a public deterrent to corporate wrongdoing.) He also assumes that, if a harm is too small for a class member to reasonably buy insurance to prevent, then that money is better spent on the "deterrence" of paying the class lawyer than the "insurance" of compensating the class member.

Fitzpatrick dismisses most arguments to cap fees (for example, that class actions exist to compensate class members rather than enrich lawyers, or that giving plaintiffs' lawyers further incentives to file questionable cases might lead to further abuse) as "political." However, even leaving aside these arguments, Fitzpatrick's argument runs afoul of the basic structure of Rule 23.

• 100% fees make inadequate settlements. Rule 23(e) requires a settlement to be "fair, reasonable, and adequate."  One way the court measures these criteria is by determining whether a proposed settlement represents good value to the proposed class.  A class settlement that provided the members with nothing, and the lawyers with everything would be unlikely to pass this test. (It also would not pass the settlement-approval requirements of the Class Action Fairness Act. If courts are legally required to scrutinize settlements that give class members only coupons, then they certainly can't rubber-stamp settlements that give the lawyers everything and the class nothing.)
• 100% fees require inadequate class representatives. Fitzpatrick's proposal is also flawed because there is no reasonable class member that would willingly agree to forgo any possibility of recovery so that her counsel could be paid more. In essence, Fitzpatricks proposal relies on a class representative that would be willing to say "I understand I was defrauded for $100, but instead of getting that money back, I'd rather you just gave it all to my lawyer. And I'm confident everyone else like me will feel the same way." For many courts, that kind of statement would serve as evidence that the class representative was not sufficiently independent of her counsel. 
• 100% fees indicate inadequate class counsel. Under Rule 23(g), "Class counsel must fairly and adequately represent the interests of the class." That means that they must watch out for the class's best interest, not their own. From that standpoint, a 100% fee clearly does not look out for the best interests of the proposed class instead of the lawyers.

One has to admire Fitzpatrick's chutzpah; agree or not, he's made a bold proposal. But he's completely ignored the existing Rule 23 requirements to get there. As it turns out, Fitzpatrick's proposal is inadequate, in every sense of the word.

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Commonality is rarely the subject of much discussion in class certification. The plaintiff often treats it as a perfunctory hurdle, subsumed into the more difficult questions of predominance (under Rule 23(b)(3)) or cohesiveness (under Rule 23(b)(2)).  But, much like numerosity, commonality is a requirement that may reward careful scrutiny when a defendant opposes class certification.

In Gaston v. Exelon Corp., 247 F.R.D. 75 (E.D. Pa. 2007), a group of African-American employees sued their employer for engaging in various policies (including its promotion and compensation decisions) that they claimed violated Title VII. They sought to represent a class of employees

who have been or may be subjected to Exelon's challenged policies and practices that deny Black exempt employees equal opportunity …

Exelon filed a motion to strike class allegations, which the court granted in part, ruling that no 23(b)(2) class was possible. When the plaintiffs later moved to certify a Rule 23(b)(3) class, the court actually found a number of problems with plaintiffs' class proposal. The class definition was not ascertainable. The named plaintiffs were subject to unique defenses, making them inadequate and atypical representatives. But the fundamental problem the court found was that the proposed common issues were not common.

In fact, the court took a Goldilocks-like approach to commonality (that is, if Goldilocks hadn't liked the baby bear's stuff either). It found that the proposed common issues were either too broad, too narrow or just plain irrelevant. What do I mean by too broad? As the court put it:

[P]laintiffs' first proposed question is “whether PECO's performance evaluation policy or practices negatively impact Class members.” Id. Were a question of this sort suitable to demonstrate commonality, that requirement would become a puff of smoke. Plaintiffs could simply propose the ques- tion “has employer discriminated against class mem- bers” and always meet the commonality requirement. Obviously, something more is necessary.

As for too narrow:

Other supposedly common questions that plaintiffs identify apply only to a small fraction of the proposed class. The question “whether Class members are less likely to be promoted into intermediate- or high-level salary grades than are otherwise-similar White employees,” for example, only applies to class members who were eligible for a promotion into those grades.

And finally, the court found that the remaining common questions had no bearing on the case itself.

Other questions, such as “whether Class members are less likely to be in high-level salary grades,” are simply irrelevant to a Title VII suit. As we discussed above, it is not sufficient for plaintiffs merely to identify a disparity in the representation of black employees in higher salary grades. They must also identify a pattern or practice of employment decisions during the class period that has resulted in this disparity.

What does this analysis mean for defendants? Despite the traditional view that commonality is a low hurdle for the plaintiff to clear, it is still worth challenging when the only common questions have nothing to do with the heart of the case.

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Time is the ultimate budget constraint. Even the best of us only gets 24 hours a day. And sometimes, strategic decisions get made without perfect amounts of time. For class-action lawyers, this constraint is particularly clear in “rocket dockets” like the Eastern District of Virginia where deadlines are foreshortened and discovery can be massive.

But while we all have an intuitive feel for how time is a scarce resource for litigators, what does that actually mean when litigating? For one answer, we can look at Ortiz v. Fibreboard Corp., 527 U.S. 815, 863 (1999).

Issued more than a decade ago, Ortiz decided how parties could invoke Rule 23(b)(1)(B) (which governs class actions involving limited funds) in settling a mass tort action. The judges were explicitly considering when one can certify a settlement class when there may be a limited amount of money at stake. Strategically, though, it was the limits on time – not money – that made a difference in the case.

The procedural history is convoluted, but it culminated in the following situation: Fibreboard, an asbestos manufacturer, faced a steady influx of lawsuits; it was also embroiled in a prolonged fight with its insurer over who should pay for those lawsuits. As part of its strategy to limit liability, Fibreboard started talking about a global class settlement with selected plaintiffs’ attorneys. As the Supreme Court described the critical moment:

The settlement negotiations came to a head in August 1993, just as a California state appeals court was poised to decide the validity of the insurance policies. This fact meant speed was important, for the California court could well decide that the policies were worth nothing.

If the policies were worth nothing, then Fibreboard would have no insurance to cover its settlement costs. As a result, the plaintiffs, Fibreboard, and its insurance company hashed out the settlement details at a coffee shop near the courthouse in order to complete it by a midnight deadline.

The trial court, eager for a way to resolve this complex litigation, preliminarily approved the settlement. But once notice was issued, the settlement drew a host of objections – focusing on the use of Rule 23(b)(1) to certify the class (since there was no actual limited fund), and the finding that—despite clear conflicts among subclasses—the settlement passed muster under Rule 23(a). Nonetheless, the trial court gave final approval, and the Fifth Circuit affirmed.

The Supreme Court, however, decided that the clear requirements of Rule 23 took precedence over the realities of settling the case before it became unresolvable.

"the dissent argues that conflicts both within this certified class and between the class as certified and those excluded from it may be mitigated because separate counsel were simply not to be had in the short time that a settlement agreement was possible before the argument (or likely decision) in the coverage case. But this is to say that when the clock is about to strike midnight, a court considering class certification may lower the structural requirements of Rule 23(a) as declared in Amchem, and the parallel equity requirements necessary to justify mandatory class treatment on a limited fund theory.

In other words: somewhere, a clock is always ticking. What's most interesting about this case is not the final decision that a court should not pay attention to a ticking clock, but that both the majority and the dissent recognized that ticking clocks matter to the parties. Because they do. Briefs have deadlines. So do settlements. There is always a ticking clock, and that clock may very well limit the options available to a party, and force some decisions that, had they but world enough and time, the parties would make differently.
 

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Debra Lynn Bassett recently published a discussion of the preclusive effect of class actions in the Brigham Young University Law Review. Her thesis is aimed at the theoretical justifications for allowing class actions to have preclusive effect, most of which she finds severely wanting. In general, her discussion does not have much practical use; it’s aimed instead at reforming class-action policy.

However, Lynn Bassett does highlight one important issuefor practitioners.

Despite the Court's insistence on "adequate representation" as a prerequisite, the actual meaning and scope of the term remains surprisingly elusive. Although it is clear that adequate representation may be challenged at any stage of a class action, and that adequate representation is a prerequisite both for class certification and for a binding judgment, the meaning of the term itself is unclear. Perhaps necessarily, most of the Supreme Court's guidance on adequate representation addresses failure-what is insufficient to constitute adequate representation. The Court has found adequate representation lacking in situations involving intraclass conflicts of interest, as illustrated in Hansberry, Amchem, and Ortiz. And the Court has found adequate representation lacking when courts have not rigorously scrutinized class actions to ensure that the protections of Rule 23 have been satisfied.

(Internal footnotes omitted.)

When a defendant first challenges a class action, there is a strong temptation to challenge adequacy of the named plaintiff. However, a class action can only have preclusive effect (either on the merits or in denying certification) if the class was adequately represented. Given Ms. Lynn Bassett’s analysis and recent opinions, it is clear that the defendant should be careful about challenging adequacy if it hopes to enjoy the preclusive effect of any later decisions in the case. In particular, should the defendant defeat certification in federal court, that decision is binding unless it depends on the plaintiffs’ lack of adequacy.

There are still strong reasons to challenge the adequacy of a named plaintiff in a particular case. (The strongest is that the named plaintiff would not serve as an adequate class representative, a particularly important problem if the defendant is considering settling.) However, it is important for the defendant to think through whether it plans on settling or fighting a class action as early as possible – doing so may dictate the specific responses the defendant makes in responding to a motion for certification.
 

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For the defendant, lead-plaintiff motions in class actions can often seem like a small sideshow to the real litigation. (Indeed, in many kinds of class actions, where only a single firm or consortium has brought a lawsuit, the lead-plaintiff motion may only be pro forma.) For plaintiffs however – particularly securities plaintiffs – lead-plaintiff motions lie somewhere between corporate merger and bloodsport. The consequences to winning or losing these motions can have effects for years, and the efforts to win have landed more than one attorney in ethical trouble, and sometimes prison.

But how important is the lead-plaintiff motion really? NYU Professor Stephen Choi offers one look (based on a survey of lead-plaintiff motions between 2003 and 2005) in a working paper entitled Motions for Lead Plaintiff in Securities Class Actions. His conclusion? Getting appointed lead plaintiff is still critically important to plaintiffs’ attorneys, primarily because it allows them to command higher fees.

Professor Choi also found that plaintiffs’ counsel – particularly experienced attorneys with lots of repeat interactions with co-counsel – will enter into side deals to determine who will be lead plaintiff, and with it, lead plaintiffs’ counsel. As a result, the plaintiffs with the largest losses are not always appointed lead plaintiff, and their attorneys are often able to command higher fees for fewer hours worked.

What use is Professor Choi’s study to the securities class-action defendant? The paper does provide valuable intelligence on how plaintiffs' counsel operate, something that defendants always need more of.  But, more importantly, Professor Choi’s data suggests a possible argument at class certification. His data on fees and hours worked can operate as a rough proxy for client supervision. If there is evidence that plaintiffs’ counsel cut a side deal to determine who would be lead plaintiff (for example, if an investor with larger losses stepped aside to allow another investor represented by a larger firm to be lead plaintiff), that may indicate that the lead plaintiff does not have the independence to adequately oversee its attorneys. In that case, the defendant may argue that the named plaintiff is not an adequate representative of the class.

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Antitrust class actions can be tough cases for defendants. By their nature, cases against alleged monopolists lend themselves well to David-versus-Goliath rhetoric. But, just as difficult, a number of the fundamental questions in antitrust class actions can only be decided after a “battle of the experts” that costs a great deal of money and may alienate judges who – like many lawyers – went to law school because they didn’t like math. So how can defendants rein in meritless antitrust class actions?

Kelly Bozanic, a fellow at Penn State’s Dickinson School of Law, has written a working paper that offers one solution. Her main argument, which is not of much help to practitioners, is that the court should “rigorously consider” antitrust standing at the class-certification stage. Of course, a court already must rigorously consider all Rule 23(a) requirements before certifying a class. And it would seem clear that a plaintiff who lacks antitrust standing would be either an atypical or inadequate class representative. At minimum, she will be subject to the “unique defense” of lack of antitrust standing. (In fact, one would expect to see a number of pre-certification summary judgment motions on the issue of antitrust standing.)

But Bozanic’s argument suggests a more interesting point: a wrongful certification of an antitrust class (or even just certification of an overbroad class) could lead to overenforcement, which would chill otherwise competitive conduct. To the extent that is true (and demonstrable), a defendant may argue that the class action against it is not superior because it would chill legitimately competitive conduct. (There’s a related argument also worth making – where a government agency like the Department of Justice Antitrust Division or Federal Trade Commission has investigated possible antitrust violations, certifying a class on top of that enforcement may also be considered overdeterrence.) Of course, to make that argument clearly to the court, the defendant may need the help of one of those high-priced experts.
 

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Last month, when the Florida SBA held its “beauty contest,” a number of plaintiffs’ firms put their internal workings on display in the hopes of securing its business. At the time, I noted that many of these firms offered investment monitoring services to their clients. In return for this free “investment monitoring,” the investor presumably would make the plaintiff’s firm its counsel in any securities-fraud suits it ended up filing.

Described that way, the monitoring agreement sounds like a win-win. The institutional investor gets a watchdog, and the plaintiff’s firm gets a potential lead plaintiff. The Southern District of New York (no stranger to securities class actions) saw it differently.

In Iron Workers Local No. 25 Pension Fund v. Credit-Based Asset Servicing & Securitization, LLC, plaintiffs represented by two different firms – Bernstein Litowitz and Coughlin Stoia – competed to be named lead plaintiffs for a securities class action. During the course of determining which fund should be lead plaintiff,

the Court was made aware of an arrangement between the Iron Workers Fund and its counsel, Coughlin Stoia Geller Rudman & Robbins LLP ("Coughlin Stoia"), that cast in doubt the adequacy of the Fund to serve as lead plaintiff in any event. … As Dennis Kramer, the Fund's administrator, testified:

Q. [by the Court] ... what you've chosen to enter into, as I understand it, is a contract where the monitoring counsel will also be the counsel who represents you if a lawsuit is brought, is that right?
A. [by Mr. Kramer] Yes, that's true.
Q. And the only way they get paid is if they bring such a lawsuit and recover, is that right?
A. Correct.

Going far beyond any traditional contingency arrangement of which the Court is aware, this practice, on its face, creates a clear incentive for Coughlin Stoia to discover "fraud" in the investments it monitors and to recommend to the Fund's non-lawyer administrator (and, through him, to the trustees) that the Fund, at no cost to itself, bring a class action lawsuit. In other words, the practice fosters the very tendencies toward lawyer-driver litigation that the PSLRA was designed to curtail.

(Internal citation omitted, emphasis added.) The court invited further briefing on adequacy, as well as on the ethical implications of the agreement. While the briefing cited several cases in which courts had commented favorably on the monitoring agreements (and an affidavit condoning the practice by ethics guru Geoffrey Hazard), the court remained unconvinced, and awarded lead plaintiff status to Bernstein Litowitz’s client. (The court noted that Bernstein Litowitz also offered investment monitoring, but did so without the same explicit quid pro quo.)

Investment monitoring agreements are still common. And most plaintiffs’ firms prize their reputations for integrity as critical for winning lead counsel slots, so they’re likely to try to avoid the appearance of conflict. But, that said, the S.D.N.Y.’s unease suggests that defense counsel may find ammunition for opposing class certification if they probe further into the nature of the monitoring agreement in each case.

 

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In a class action, the named plaintiff is supposed to be an adequate representative of the proposed class. While a number of courts have pointed out that the idea that the named plaintiff drives the litigation is largely a legal fiction, it remains a fiction integral to Rule 23. So, given what does it take to disqualify the named plaintiff from serving as an adequate class representative?

One answer is lack of credibility. In Davidson v. Citizens Gas & Coke Utility, 238 F.R.D. 229 (S.D. Ind. 2006), the named plaintiffs alleged that the defendant required all candidates for promotion to take a test known as the Work Competency Assessment, and that the test was biased against African Americans. Plaintiffs’ counsel made a last-minute addition of two plaintiffs to represent a proposed subclass of job applicants (as opposed to just promotion applicants).

When plaintiffs moved for class certification, the defendants challenged their adequacy because, in deposition testimony, each of the two newly-added named plaintiffs admitted to having felony records that included convictions for theft or burglary (both crimes related to honesty). In addition, one of the two new plaintiffs had lied about his felony record on his application. The defendant argued that the named plaintiffs’ lack of credibility made them inadequate class representatives. The court agreed, stating

personal characteristics, such as the credibility and integrity of a putative class representative, have a direct bearing on their ability to adequately represent absent members of the class. Problems of credibility, when sufficiently serious, can prevent a named plaintiff from being certified as a class representative. While we acknowledge that functionally the plaintiffs' attorney is most often the true driving force behind the representation of the class, the named representatives are still required to be more than window dressing or puppets for class counsel. A putative class representative's lack of credibility should not be allowed to significantly detract from the case. A representative must, at the very least, be trustworthy enough to protect the interests of the class by working to pursue a remedy which benefits the class as much as it does counsel.

(Internal quotations, citations, and footnotes omitted, emphasis added.)

Many defense counsel, when taking depositions of the named plaintiffs, treat the questions about personal background as perfunctory. It is worth remembering that the named plaintiff’s character may actually have a bearing on whether he can adequately represent the proposed class.

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 Despite the amount of time defense counsel spend handling class actions, one aspect often continues to frustrate analysis – plaintiffs’ counsel. Studying how plaintiffs’ counsel operate in class actions (which is, of course, essential to opposing them in individual litigation) can sometimes feel like Kremlinology, or reading tea leaves. Since plaintiffs’ counsel have a strong interest in presenting their best possible face to the world – and defendants often feel strong distrust of plaintiffs’ PR – defense counsel risk predicting the moves of a caricature, rather than a fully-fleshed opponent.

Fortunately, a number of academics have begun to examine the ways in which plaintiffs’ counsel interact, find clients, and build their cases. One of the more prolific scholars of class-action practice, Stephen Choi, has teamed with longtime co-author A.C. Pritchard and judicial clerk Drew T. Johnson-Skinner to perform an analysis of “pay to play” practices among plaintiffs’ counsel and state pension funds. 

As Choi and company describe it, since the passage of the Private Securities Litigation Reform Act (which heavily favors institutional investors over individual investors as class representatives, on the theory that they are more likely to be independent of class counsel):

Most of the institutional investors that have agreed to serve as lead plaintiffs have been government-sponsored pension funds. Many of these funds are managed directly by politicians, such as state comptrollers, who must campaign to retain their current positions, or may have designs on higher offices. Alternatively, these funds are managed by political appointees, who typically owe their position to the state’s governor. The presence of political influence over these funds naturally raises the question of whether law firms are making political contributions to the politicians who wield that influence in order to enhance their chances of being selected to represent the pension funds. Simply put, are law firms buying lead counsel status with campaign contributions, i.e., do class action lawyers pay to play?

(Emphasis added.) Their conclusion? Yes. Class-action lawyers do. And firms that appear to win their work as a result of “pay to play” practices generally receive higher attorneys’ fees than those that don’t.

So what are the strategic implications of this finding? For defendants, Choi and company’s analysis implies that it's worth serving discovery exploring the various relationships plaintiffs’ counsel may have had, even with larger institutional investors. Commentators (and courts) had previously presumed that institutional investors would be more adequate than smaller clients because they had the incentive to oversee counsel (because they had a larger stake in the litigation), and the investing knowledge required to do it effectively. However, Choi and company's analysis implies that pension funds that accept “pay to play” contributions may lack the financial independence to oversee class counsel. If they lack that independence, they may not be adequate fiduciaries of the interests of the class. And that's a powerful argument against certifying a class.

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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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