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Class Action Lawsuits and Unethical Settlements



No portion of this article, including this web page, may be copied, retransmitted, reposted, or duplicated in significant portion without the express written permission of Dr. Michael Guth. Users are always welcome to establish links to this web page or to quote from it freely. Modern multiforum litigation creates a conflict of interest environment in which attorneys representing class plaintiffs may be tempted to settle class action lawsuits for the wrong

¬†Epstein case history is that members of the plaintiff class did not merely remain silent and thereby acquiesce to the paultry settlement negotiated by the Delaware class counsel. Instead, objectors actually appeared in person before the Delaware state court. The objectors characterized the Delaware class action settlement as “a cut deal” and the product of collusion between Matsushita and the Delaware class counsel to extinguish valid claims pending in California. [52] The Delaware Chancery Court even went so far as to say that “suspicions abound” when “the settling parties have previously proposed a patently inadequate settlement in which the class would receive no monetary benefit but the attorneys would have received $1 million in fees. “[53] The Delaware Chancery Court nevertheless concluded that “[s]uspicion . . . is not enough and the Objectors have offered no evidence of any collusion. “[54] In short, the Delaware state court completely misapplied the law on which party bore the burden of demonstrating adequacy of representation.

Contrary to the Delaware Chancery Court’s holding, the objectors had no legal duty to provide evidence of collusion. The objectors argued that the Delaware class counsel was inadequate and that the Delaware class representative had never proved the adequacy of its proposed class counsel. The Delaware Chancery court improperly shifted the burden of proof onto the objectors to show that the class counsel was inadequate. In fact, Fed. R. Civ. Pro. 23 requires the class plaintiff to prove the adequacy of its selected counsel. As a general matter, a proposal to settle a class action with practically no relief for class members but a disproportionately high attorney fee would seem to be prima facie evidence of collusion. Therefore, one urgent need for change in the substantive law is for judges to adhere to the requirements of Fed. R. Civ. Pro. 23, and the overwhelming majority of state class action civil procedure rules patterned after it.


Judges must place the burden of proving adequacy of representation on the plaintiff class representative and his counsel, not on objectors or dissenting class members. C. Court’s Duty to Ensure Adequacy of Representation Even when the plaintiff class representative meets its initial burden of proving the adequacy of counsel, the court has an ongoing constitutional duty to monitor the counsel’s behavior.


For class action litigation, the Due Process Clause requires “that the named plaintiff at all times adequately represent the interests of the absent class members. “[55] In particular, notice to class members and the ability to opt out cannot substitute for inadequate class representation. [56]Notice is no substitute for extensive document examination, depositions of adverse witnesses, securing expert advice on complicated issues, and aggressive negotiation at arms-length.

The same holds true for opt-out rights, which are infrequently utilized and usually economically impracticable. Due process requires notice, the opportunity to be heard and to participate in the litigation, the right to opt-out, and adequate representation before an absent class member can be bound by a settlement in a class action predominantly for money damages. [57]Nor can heightened judicial scrutiny of the merits of a proposed settlement substitute for inadequate class representation.

[58] A court will evaluate the merits of a proposed settlement based on the record in a case. The record comprises pleadings and other papers filed by the class counsel, and an inadequate representative would generate a poor or suspect record. This suspect nature follows because “an adequate representative, vigorously prosecuting an action without conflict and bargaining at arms-length, may present different facts and a different settlement proposal to the court than would an inadequate representative. “[59] If the record before the court is suspect, then the court would have an improper foundation on which to judge the fairness of any settlement offer. In fact, the entire settlement process may be compromised.


[60]Class action settlements pose the danger “that representative plaintiffs and their lawyers will `endeavor to obtain a better settlement by sacrificing the claims of others at no cost to themselves. ‘”[61] To guard against settlements with large payments for attorney fees and little or no recovery for the class, courts must ensure that the class representative adequately protects the interests of absent class members and must review the fairness of any proposed settlement. [62] The court protects these interests by playing a far more active role in class action litigation than it would in traditional lawsuits.


In essence, a class action suit resembles an individual lawsuit less than it does “a quasi-administrative proceeding, conducted by the judge. “[63]A court will exercise its duty to ensure the adequacy of class representation when it denies a class counsel with weak underlying claims to use the forum as a means of precluding or extinguishing stronger claims in another forum. At a bare minimum, the court should require counsel to explain why that forum was selected for settlement. [64] In particular,when the state courts cannot hear the federal claims, and when these claims both have value and will be precluded by the state court settlement, this is the suspicious context in which courts must examine the adequacy of the plaintiffs’ representation with greater skepticism.


The rationale for this closer scrutiny should be that adequate representation requires a representative who can assert – and indeed, has asserted – the strongest claims available to the class members; a representative who must litigate with one arm tied behind his or her back is by definition not an adequate representative. [65]D.


Authorize the Federal Judicial Panel on Multidistrict Litigation to Consolidate Competing State or State-Federal Class Actions as wellIn addition to changes in heightened scrutiny of any proposed multiforum settlement and safeguarding the constitutional protections of procedural due process, the substantive law should be amended to permit greater authority for the federal Judicial Panel on Multidistrict Litigation to consolidate combined state and federal cases. At present, the panel can consolidate similar actions filed in separate federal district courts. If multiple class actions covering the same or similar claims are filed in federal courts, the Judicial Panel on Multidistrict Litigation would consolidate the actions in one forum.


This consolidation prevents the defendants from pursuing a divide-and-conquer strategy with competing class counsel in different fora. The panel’s authority to consolidate cases should extend to multiforum state class actions as well as those combining state and federal forums. [66] Otherwise plaintiffs’ attorneys will be reluctant to prosecute any class action claim in federal court, or at least pursue it to trial, “if it is possible for the defendants, at the 11th hour, to reach a low-cost settlement in a state court. “[67]IV.


Changes in the Rules of Professional Responsibility to Address the Ethical Environment of Multiforum LitigationSection III described changes in the substantive law required to prevent some opportunistic behavior attributed to multiforum class action practice. However, changing the substantive law will not address problems associated with the class counsel selling out the interests of class members during settlement negotiations in order to garner a larger fee award. To address this latter problem, the state and federal judiciaries should adopt a new Rule of Professional Responsibility specifically tailored to the ethical environment of multiforum class action practice.


An example of the proposed new rule [hereinafter Athe Rule@] can be found in the Appendix. This section will highlight the important features of the new rule. Like Model Rule 1. 1, the Rule commences at the time a lawyer undertakes to represent an individual or group of individuals with a matter that the lawyer reasonably believes could lead to class action representation. Section (B) of the Rule imposes a number of limitations on a lawyer=s ability to represent a class. These limitations generally relate to the lawyer=s competency, conflicts of interests, and merits of the class action.

A. CompetencyTo satisfy the requirements of B(3), the lawyer must have the legal knowledge, skill, thoroughness, and preparation reasonably necessary to prosecute or defend against the underlying claims in the class action. Section B(3) is intended to capture the competency standard of Model Rule 1. 1. The lawyer is not required to have prosecuted a class action lawsuit previously. A knowledgeable lawyer in the law and issues surrounding the underlying claims is clearly more desirable than a “class action specialist” attorney, who lacks any substantive specialty that might assist class members in their cause of action.


Unlike any provision of the Model Rules, which apply more appropriately to nonclass litigation, the Rule also contains a provision [Section (B)(2)] requiring the lawyer to assess the class representative=s competency to manage the lawyer and other aspects of the litigation. Ordinarily, an attorney is not required to assess the qualifications and independence of a potential client. But class actions, which have the ability to affect the rights of others beyond the lawyer=s immediate client, require an active participatory role for the class representative. In essence, a lawyer undertaking class representation must not only be competent but also have a competent client who can serve as class representative. B.


Potential or Actual Conflicts of Interest Limiting Representation Under Subpart (B)(8), class members must be informed of a lawyer’s significant stake in the class action litigation, but class members need not approve of the selection of the lawyer to serve as class counsel. In general, class members are never polled, and class members do not vote on procedural matters affecting the class. A lawyer’s significant stake in a class action would include the interests of the lawyer’s spouse and family.


The standards that would trigger application of this rule include shareholder class actions in which the lawyer or his family own at least five percent of the outstanding shares of a corporation that is a party to the class action lawsuit. Section B(8) includes, but is not limited to, situations where the lawyer serves on the board of a corporate class representative, the lawyer owns a significant amount of stock in a corporate class representative, or the lawyer or his firm has served as long-standing counsel to a corporate class representative.


Section B(8) also includes situations in which the lawyer, along with other members of the class, are shareholders of a defendant corporation. notice required by Fed. R. Civ. P. 23(c)(2), or a similar state rule. A class counsel cannot simultaneously serve as the class representative [Section (B)(1)]. The class representative must supervise and guide the activities of the class counsel. If a class counsel also served as class representative, he would be in the position of supervising himself.


However, the class counsel may be a member of the class, because a separate class representative could then supervise the class counsel and make substantive decisions concerning the lawsuit. If the lawyer has other duties and responsibilities to one or more class members — aside from his common representation to all class members — and these duties and responsibilities would not adversely affect his representation of the class, then the lawyer’s dual role or dual representation is generally consent able. In this case, theclass representative is capable of giving consent to the lawyer=s dual representation.

This portion of the Rule [(B)(10)] is patterned after the consent provisions of Model Rule 1. 7. If the lawyer has a special relationship with the class representative, then the class representative cannot consent on behalf of the rest of the class to the dual representation; the class representative could have a bias in favor of retaining his own attorney to serve as class counsel. Accordingly, in this instance, consent for the dual representation on behalf of the class must come from the court, not the class representative. The lawyer must also notify the class members of his dual representation.


Due process requires that the class members participate in the class based on a knowing and informed decision, which includes accepting the class representative=s lawyer as the class counsel. By including the notice of dual representation with the notice required by Fed. R. Civ. P 23(c)(2), this Rule should impose a minimal cost or burden of compliance on the lawyer. When the lawyer has a relationship with or represents individually one or more class members, other than the class representative, Section (B)(10) permits the class representative to consent to the dual representation on behalf of the class.


Section (B)(10) assumes that the class representative has the knowledge of the subject matter, legal system, and relationship of counsel to the class member(s) to determine fairly if the lawyer can exercise impartially his duties as class counsel. The class representative must be strong and qualified to give consent for this dual representation. A class representative who exercises no independent judgement from the proposed class counsel cannot give the requisite neutral, disinterested consent for the dual representation.


If the class representative does not approve the dual representation, then the lawyer may not serve as class counsel. In that sense, the class representative has veto power over the dual representation under Section B(9). Although the class representative can give his personal consent for the lawyer’s dual representation under Section B(9)(b), the lawyer still has an ethical duty to notify class members of the dual representation. Two other provisions of the Rule could prevent an attorney from undertaking to represent a class. Section (B)(6) prohibits the lawyer from undertaking the class representation if his service would conflict with Fed. R. Civ. P. 23, and Section (B)(5) imposes a limitation if the lawyer does not reasonably believe he can fairly and impartially protect the interest of class members.


C. Merits of the Proposed Class Action LitigationA lawyer may not ethically participate in class action litigation if the claims are frivolous [Section (B)(7)] or even borderline frivolous [(B)(4)]. Indeed, Section (B)(4) imposes a requirement that the lawyer who seeks to undertake class action representation must first assess whether the relief sought – both pecuniary and equitable – is enough to justify the filing of the class action lawsuit. If this Rule had been adopted in Delaware and Alabama, then no attorney could have ethically filed the Bank of Boston case or the Delaware class action portion of Epstein.


The former case would have failed to meet the expected value of relief calculation; from the outset, reasonable attorneys would have calculated that the prorata cost of prosecuting the case would exceed any relief individual class members might receive. The ethical standards would have prevented the Delaware class action lawsuit in Epstein, because the class counsel admitted that his own claims were weak, and he had no evidence to prove the allegations.


A lawyer cannot ethically proceed with a class action that the lawyer reasonably believes might result in any likelihood that the lawyer’s fees in the action, as measured prorata by the number of class members, will exceed the recovery to each class member. In that instance, the lawyer must bear the costs of his own time invested in the class action, rather than shift that risk of payment and potential net negative benefit onto absent class members.


Section (B)(4) anticipates that no rational and competent class representative would authorize a lawyer to file an action on behalf of class members in which those members might incur a financial liability greater than their financial gain from the class action. Such lawsuits should never arise in an environment in which a lawyer adheres to the ethical standards required by this rule. Section (B)(4) is specifically aimed at lawyers who previously filed patently unmeritorious class action lawsuits, in which prospective class members had little or no realistic recovery expectation, solely for purposes of obtaining a nuisance payment from the defendants to settle the litigation.


Class actions are intended to serve the interests of injured class members. Where the harm to class members is so slight that they would likely receive no recovery or equitable relief, then any minimal harm they may have sustained is part of the ordinary wear and tear of life and should foster no class action litigation. Under no circumstances should the lawyer’s prospects for garnering a fee as class counsel be considered in evaluating the merits of filing the prospective class action lawsuit. Section (B)(4) uses the phrase “relief sought” and “benefit” to recognize that some class actions are brought for declaratory or injunctive relief, rather than for monetary recovery. In such instances, the value and benefit to class members could be significant, even though their monetary damages are minimal.


However, a class action that offers members no equitable relief and little or no monetary relief should not be filed. Such a case might arise where class members have suffered a trivial injury, which should be considered part of the ordinary wear and tear of life, not a cause of action for a class action lawsuit. As a general rule, if class members only obtain monetary benefit, then a class action that offers members a maximum recovery of $5/person or less, should not be brought.


Section (B)(8) pertains to even further egregious cases where the class members have not sustained a cognizable legal injury, and any complaint allegeding such injury would be frivolous. In essence, Section (B)(8) states that the Rule 3. 1 ethical prohibition against frivolous court documents applies in the class action setting as well.



Attorneys Conduct While Serving as Class CounselDuring the course of the class action, the class counsel must comply with the notice requirements of Fed. R. Civ. P. 23(c)(2) or a similar state rule. [Section (C)(1)]. If the class representative asks the lawyer to take some action that either violates the law or harms the interests of the class, then the lawyer should ask the class representative to reconsider the matter. If the class representative persists with his instructions, then the lawyer may ask the court for permission to withdraw as class counsel. Furthermore, the lawyer may make a Anoisy withdrawal,@ as defined in Model Rule 1. 16.

Section (C)(2) follows the process of Model Rule 1. 13, in which an officer of an organization asks the attorney representing the organization to act unlawfully or in a manner inconsistent with the best interests of the organization. In the case of class representation, the class counsel will receive instructions exclusively from the class representative; the class counsel has no higher authority to whom he can appeal adverse instructions. The class counsel=s only recourse is to request permission to withdraw from the court.


Under Model Rule 1. 13, a lawyer representing an organizational client must explain to any constituent of the organization, at any time when the constituent=s interests are adverse to those of the organization, that the lawyer represents the organizational client and not the constituent. Section (C)(3) establishes a corresponding duty for the class counsel with respect to any interest of the class representative that may be adverse to those of the class as a whole. Section (C)(4) prohibits the lawyer from discussing his fee with anyone except the class representative and the court.


This section is a key to the entire new proposed ethical rule, because the crux of the problem with multiform class action representation has been lawyers bargaining away the claims of class members in exchange for an attorney fee award as part of any proposed settlement. In the context of ordinary, single-party litigation, the suggestion that plaintiff=s counsel would discuss with the defendants a Adeal@ that includes his payment for services seems unethical and collusive. Yet this practice has prevailed in class action litigation for years.


This section of the proposed new rule is intended to eliminate the potential for class counsel to enter into award fee negotiations with the defendants, or their counsel, that might influence his recommendation to settle the class action. Similar provisions in Section (C)(9) and (C)(10) prevent the class counsel from submitting to the court a proposed settlement, which offers class members little or no relief, but which includes a significant or disproportionately high payment of attorney fees.

Section (C)(5) imposes an ethical duty for the class counsel to act impartially in actions concerning the class members. Sections (C)(6) and (C)(7) discuss the lawyer=s duty to keep information confidential and is patterned after Model Rule 1. 6. Section (C)(8) requires the lawyer to consult with the class representative on decisions that affect the litigation and advise him on theMichael A. S. Guth, Ph. D. , J. D. , is a constitutional law attorney, legal brief writer, and health care researcher based in Oak Ridge, TN.

A web page describing his law practice and other legal writings is available at biz His current research comprises inefficiencies in health care insurance, pharmaceutical pricing, and best available treatments for Alzheimer? disease, osteoporosis, and high cholesterol. He has developed and/or taug ht more than twenty on-line courses at more than a dozen educational institutions in the areas of economics, finance, business strategy, business law, health care administration, politics, a

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