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

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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Earlier this week, the Seventh Circuit, in an opinion by Judge Richard Posner, granted an injunction to Sears under the All Writs Act to block a class action that had been filed in federal court in California. The opinion, Thorogood v. Sears, Roebuck & Co., is noteworthy for a couple of reasons. First, it extends relief under the All Writs Act to defendants facing copycat class actions in other jurisdictions. Second, it does so in response to a plaintiff's attempt to leverage a settlement using the threat of class-action discovery.

Steven Thorogood, the nominal plaintiff here, filed a class action against Sears after he bought a Kenmore stainless-steel dryer, which, as it turned out, was not 100% stainless steel. Instead,

part of the front of the drum—a part the user would see only if he craned his head inside the drum—is made of a ceramic-coated “mild” steel, which is not stainless steel because it doesn’t contain chromium. Thorogood alleged that the “mild” steel in the drum rusted, and stained his clothes.

His lawyer, Clinton Krislov (who just ran for Illinois comptroller) convinced an Illinois federal trial court to certify a consumer-fraud class, but the Seventh Circuit reversed it on a Rule 23(f) appeal, finding that there were no common issues justifying certification. It later affirmed the denial of attorneys' fees after Sears made an offer of judgment to Thorogood personally. 

Undeterred, Krislov filed a copycat class action in California federal court (Murray). The California court originally ruled that it was barred by collateral estoppel, but after a few amendments to the complaint, it reversed its ruling and allowed discovery to begin. At that point, Krislov's co-counsel sent a letter to Sears telling it:

that discovery is proceeding and “will involve Plaintiff’s counsel delving into the full extent of Defendants’ alleged wrongdoing” in order to justify not only equitable relief but also punitive damages—which are potentially very large given the size of the class and the possible preclusive use of any judgments favorable to the plaintiffs in suits brought in other states. The letter continues: “as we progress through the various stages of this litigation, the cost of settlement will necessarily increase . . . . At this point, we may want to consider whether an appropriate olive branch for resolution can be mutually created on a class wide basis commensurate with the status of the case. If interested, please pick up the telephone and call me. In the meantime, Plaintiff will continue to diligently and timely prosecute this case to an appropriate result.” In other words, unless Sears settles now (implicitly for modest relief for the class and an agreement with class counsel to recommend to the judge generous fees for Krislov and Boling), it will incur the considerable cost of responding to class counsel’s distended project of “delving” and assume the risk of a very large adverse judgment.

(Emphasis added.)  Faced with the prospect of plaintiffs' counsel commencing invasive and expensive discovery to leverage a settlement, Sears requested an injunction from the Seventh Circuit. The court, in an opinion by Judge Richard Posner, granted the request. After noting the in terrorem effect of plaintiff's discovery threat, he observed that:

quite apart from the green light that such a ruling would give to extortionate class action practice, a denial of relief would make no sense in a case like this, in which the class (Thorogood’s) was certified, albeit later decertified at our direction. Class counsel had and took the opportunity to litigate the certification issue fully—so that to say that a ruling against certification could not be the basis of an injunction would be inconsistent with the doctrine of collateral estoppel itself. There is no denying that a final ruling against certification has collateral estoppel effect. And the basis of the injunction sought in this case is simply the need for enforcing collateral estoppel more effectively than by forcing the defendant to plead it as a defense in case after case.

This is not the first time the Seventh Circuit has granted relief to a class-action defendant under the All Writs Act. But this opinion is noteworthy for the strong language Judge Posner uses in criticizing plaintiff's conduct, and the plain language he uses in describing the dilemma Sears faced.  It's also noteworthy for its explicit suggestion that a class-action defendant may seek an injunction before it has to assert collateral estoppel in a new case.  

(Also noteworthy, at least for this blog, is that the court cited the Class Acton Playbook in its discussion of plaintiff's strategic use of discovery.)

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