 |
Dr. MICHAEL A. S. GUTH |
|
|
Dr. MICHAEL A. S. GUTH |
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 reasons. Instead of rejecting an inadequate
settlement offer, the class counsel might recommend settlement so that he can
be assured of collecting an attorney fee award and so that the claims of his
clients will not become barred by the preclusive effect of a settlement
negotiated in another forum. A trend
has now developed in which the plaintiff class counsel compete with one another
to offer the best and most sweeping settlement terms to defendants, and these
settlements generally contain a global release of all claims in other
fora. Once these global releases are
approved and entered as part of a class action judgment, the releases
effectively extinguish or bar related actions by class members in any other
forum.
An attorney who wishes to conduct his class action
practice in a diligent and ethical manner can be harmed by the unethical
behavior of some class counsel who use claims in other fora as a bargaining
chip to maximize the settlement terms for their own fee award. The resulting settlements may be contrary to
public policy in the sense that (1) injured class members receive little or no
recovery, and (2) viable claims in one forum are extinguished by the claim
preclusive effect of a less than fair settlement and global release of all
claims in another forum.
Unlike ordinary litigation where a defense counsel
must bargain with one plaintiffs' counsel to reach a settlement in a single
jurisdiction, in multiforum class actions defense counsel can shop from forum
to forum to obtain the best settlement terms for their client. The plaintiff class counsel in one forum
actually has an incentive to undercut the claims represented by another class
counsel in another forum: the class
counsel can get a higher settlement, and consequently a higher fee award, if
his settlement includes a release of claims beyond his own forum.
Section I of this article describes the legal and
ethical environment in which attorneys engaged in multiforum litigation must
practice. Section II lists examples of
opportunistic behavior by lawyers within this legal environment. In particular, Section II provides cases to
illustrate reverse auctions, forum shopping,[1]
filing of sham complaints aimed at precluding claims in other fora, meritless
class action suits, race to the courthouse, and other conduct that tends to
cast the judicial system or the legal profession into disrepute.
At present, neither the federal nor any state
judiciary, which are responsible for promulgating rules under which attorneys
practice law, has recognized that multiforum class litigation create a unique
set of ethical dilemmas for attorneys with respect to settlements, the award of
fees, and the law of preclusion. Some
of these ethical dilemmas arise from the current state of the substantive
law. Section III discusses changes
needed in the substantive law of preclusion and rules of civil procedure to
prevent abuses within the legal system.
Section IV focuses upon the ethical risk that some attorneys may elevate
their own self-interests ahead of their clients and recommends that each state
should adopt a new Rule of Professional Responsibility specifically tailored to
multiforum practice. This new ethical
rule should cover attorneys' conduct from the point when they first undertake
to represent a client in a potential class action matter to the time when the
action is concluded. Finally, the
Appendix contains our proposed rule, with a comment that follows the rule.
I. Legal and
Ethical Environment of Modern Multiforum Litigation
Although lawyers typically think of their professional
responsibilities in terms of representing a single party in litigation in one
forum, the class action lawyer faces a different legal and ethical
environment. A class action proceeds on
behalf of all members defined in the class, and all class members similarly
situated will be bound by the terms of any settlement or judgment in the class
action. In this environment, the
attorney representing the plaintiffs in a class action, usually designated the class
counsel, has an ethical duty of loyalty to represent the best interests of
all class members. In particular, the
class counsel cannot ethically favor any one plaintiff or his own self-interest
above those of the absent class members.
A lawyer engaged in mutiforum class action practice
also faces a unique environment for negotiating a settlement. Unlike the settlement of a lawsuit between
two individual parties in which the court will routinely sign a jointly
proposed order by both counsel to settle and thereby dismiss a case, the
settlement of a class action lawsuit requires a judicial determination of the
fairness of the settlement to absent class members.[2] A court's nondelegable duty to approve the
fairness and adequacy of any proposed class action settlement "is not an
act of judicial mediation; it is an act of judicial power."[3] The court must administer class proceedings
in a way that safeguards the rights of absent class members and comports with
the requirements of due process.
Generally, class members will have the legal right to
opt out of any proposed settlement of the class action. Those who choose to opt out of the class
action will then have the freedom to pursue their claims individually against
the defendants. Those who fail to
exercise their opt out rights, either because they want their prorata share of
the proposed settlement consideration or simply because they ignored the court
notification and allowed their opt out rights to lapse, will be bound by any
judgment entered by the court. Such a
judgment in a class action will generally have claim preclusive effect, under
the Full Faith and Credit Act,[4]
on either pending or subsequently filed litigation arising from the same
transaction. This preclusive effect
will extend to any other forum, both state and federal, in which a plaintiff
might file claims against the defendants named in the class action.
Aside from ethical considerations about undercutting
viable claims in another forum, class counsel face no other limitations in
receiving court approval to release claims outside their fora and bind class
members. Federal courts have entered
judgments approving proposed class settlements that released both federal and
state law claims. For example, in Class
Plaintiffs v. City of Seattle, the Ninth Circuit affirmed a federal
district court judgment approving a class settlement and release of federal
securities law claims.[5] Also, In re Corrugated Container Antitrust
Litig., held a federal district court, in approving a class settlement of
federal claims, had jurisdictional competence to extinguish state claims that
were not pleaded, but which it had pendent jurisdiction to adjudicate.[6]
Similarly, state courts have approved class
settlements that released state law, federal law, and even exclusively federal
claims.[7] For example, in Kremer v. Chemical
Constr. Co., the U.S. Supreme Court held that settlement of federal Title
VII employment discrimination claims in a state class proceeding has issue
preclusive effect barring subsequent claims raised in federal court.[8] In Nottingham Partners v. Dana, the
Delaware Supreme Court affirmed the right of Delaware state courts to enter
judgments releasing exclusively federal securities law claims as part of a
state court class action settlement.[9] And in Marrese v. American Academy of
Orthopaedic Surgeons, the U.S. Supreme Court held "a state court
judgment may in some circumstances have preclusive effect in a subsequent
action within the exclusive jurisdiction of the federal courts."[10]
Until the Supreme Court's recent decision in Matsushita
Electrical Industrial Co., Ltd. v. Epstein[11]
[hereinafter "Epstein"], the federal courts had placed only
one modest limitation on the full faith and credit of state court judgments
attempting to release exclusively federal claims: the facts in the underlying state law claims must be identical to
those giving rise to claims released or extinguished by the state court
judgment. As long as the claims giving
jurisdiction to a court arose from the same factual predicate as the
claims covered by a settlement, the state courts would have been able to decide
the issues on their merits.
Consequently, federal courts gave claim preclusive effect to the state
court judgment approving the settlement of the action.[12] For example, in Nottingham Partners v.
Trans-Lux Corp.,[13]
the state class action claims and the released exclusively federal securities
law claims both arose from the failure of a corporation to disclose allegedly
material facts in a proxy statement.
Similarly, the state class claims in Grimes v. Vitalink
Communications Corp.,[14]
shared a common factual gravamen of nondisclosure of material facts with the
federal securities law claims released in the settlement.
Yet the Supreme Court's Epstein decision
eliminated even this modest limitation on one court's power to extinguish and
bar claims in another forum. In Epstein,
the Supreme Court affirmed a Delaware state court's approval of a class action
settlement that had the effect of releasing exclusively federal securities
claims[15]
that differed factually from the breach of fiduciary duty state law
claims before it. Unlike Nottingham
Partners and Grimes, the federal and state law claims in Epstein
stemmed from differing factual bases.[16] The gravamen of the Delaware state class
action was that the directors of a Delaware corporation had breached their
fiduciary duty by failing to (1) implement a market check mechanism to ensure
that shareholders received the maximum value for their shares, and (2) disclose
key terms of a proposed merger such as the compensation packages that the
corporation's top officers would receive.[17]
In contrast, the federal securities law class action
filed in California in Epstein focused on the acquiring corporation's
behavior: whether the Japanese
acquiring firm violated federal securities law by offering either more
consideration for the shares of some shareholders than the tender offer,[18]
or by offering these select shareholders a different form of consideration
than that offered to other shareholders.[19]
By upholding the Delaware class settlement and
reversing the U.S. Court of Appeals for the Ninth Circuit, the Supreme Court
eliminated the same factual predicate test previously used by the U.S. Courts
of Appeal to limit the preclusive effect of class action settlements. The Court instead used the much broader same
transaction test.[20] The Court effectively gave every lower court
─ state or federal ─ the
ability to enter a judgment approving a (dubious) settlement that could prevent
class members from further litigating claims in other fora.
The Supreme Court could have decided Epstein
largely as a matter of forum shopping, which placed state courts in the
precarious position of having to value factually unrelated, exclusively federal
claims.[21] Yet the Court never even addressed the
central forum shopping issue at the heart of Epstein: fair representation to the class. In the aftermath of Epstein, state
and federal court judges seemed to have unfettered discretion to approve class
action settlements subject only to meeting some minimal, poorly defined due
process standards of fairness. Because
the Supreme Court offered no guidance on what due process means for the
approval of class action settlements, we can anticipate that courts will apply
differing levels of scrutiny of settlement terms from forum to forum.[22]
Multiforum class actions thus afford unique
opportunities for forum shopping and questionable settlements unlike any
opportunistic behavior faced by lawyers representing individual clients in
single forum cases. The state Boards of
Professional Responsibility, which administer the rules of conduct for practicing
attorneys, have paid little attention to class action practice. The nature of class actions and recent
decisions on claim preclusion, however, create problems for lawyers who wish to
conduct their class representation in an ethical manner. These lawyers face the dilemma that other
less scrupulous attorneys in other fora can extinguish their cases. Soon the counsel begin to compete to see who
can settle first and thereby bind the class members in other fora. The system creates incentives for lawyers to
join in the frenzy of bargaining away the class members' interests before
counsel in another forum undercuts the claims that form the basis for their own
class representation.
II. Examples of Opportunistic Behavior that
Illustrate the Need for Greater Regulation of Multiforum Litigation
In Section I, we described a general environment that
creates incentives for lawyers engaged in multiforum, class action practice to
exhibit unprofessional behavior. This
section illustrates specific instances of undesirable behavior resulting from
the incentive problems in the modern class action practice. Types of undesirable behavior include
reverse auctions, in which plaintiffs counsel keep trying undercutting the
value of their clients claims in order to propose the winning (and generally
lowest value) settlement to the defendants, forum shopping for unsophisticated
judges, filing nuisance suits, structuring complaints with an eye towards the
preclusive effect on claims in another forum, a race to the courthouse to be
the first class counsel to file suit, courts racing to judgment so that another
court does not extinguish the claims before them, and due process concerns
associated with class member apathy.
A. The Reverse
Auction
The first consequence of the multiforum environment we
shall examine is the reverse auction of plaintiffs' counsel lowering their
settlement bids in an effort to induce defendants to settle in their
forum. In a multiforum class action,
defendants generally have two or more forums in which they have been sued to
find the most favorable settlement terms.
If class counsel in one forum will not accept an offer, both the counsel
and the defendants know that class counsel in another forum may well accept it. The counsel who negotiates the settlement
offer usually collects the lion's share of any payment for plaintiffs' attorney
fees, which gives class counsel in each forum a powerful incentive to offer the
most favorable deal to the defendants.
"Whoever settles first with the defendant wins because any of these
courts can grant a fully preclusive settlement covering all possible claims. .
. . [D]efendants can force rival teams of plaintiffs' attorneys in to a
`reverse auction' under which the defendants will settle with the lowest bidder
among them."[23]
The likely winner in such a reverse auction should be
one of the state class counsel. Counsel
for the state court plaintiffs cannot litigate federal securities claims and
sometimes not even the state law claims of another state in their own
forum. The primary settlement value of
their claims will often lie in their ability to preclude the more ominous
action in some other forum. Defendants
are aware that plaintiffs' counsel in state court are willing to bargain away
exclusively federal claims, which they cannot argue on the merits and for which
they can derive no attorney fee.
The Delaware Chancery Court, which hears a
disproportionate number of class action suits based on the number of
corporations that choose to incorporate in Delaware, acknowledged the potential
for this kind of abuse with class action proceedings: using a settlement in one forum to extinguish the prosecution of
a similar class action in another forum.[24] Yet the defendants' end run around the Epstein
plaintiffs ─ going across the country to Delaware in an effort to
extinguish the federal class action appeal, rather than defending that suit on
its merits in California ─ illustrates a general pattern that is likely to recur
in the current legal and ethical environment for multiforum litigation. We believe the ethical standards imposed on
defense counsel should limit the benefit of employing a divide and conquer
reverse auction strategy, rather than opposing a claim on its merits.[25]
B. Forum Shopping by Plaintiffs' Counsel for a
Judge Who Will Approve a Settlement
Defense counsel are not the only source of forum
shopping in the modern multiforum litigation practice. Plaintiffs' counsel also engage in forum
shopping. In multiforum litigation, the
class counsel's forum shopping is not the usual choice of a state court or
federal court within a given state jurisdiction; that choice of fora remains a
legitimate exercise of the counsel's discretion to maximize his clients'
recovery. Instead, with multiforum
class actions, we see plaintiff class forum shopping for a jurisdiction most
likely to approve any dubious settlement terms that counsel submits. Clearly, selecting a forum based on its
settlement acceptance behavior and its treatment for the award of attorney fees
poses no direct benefit to class members.
To the contrary, that form of forum shopping may exacerbate the
conflicts of interest between the class members and the recovery of a fee award
by their counsel.
Forum shopping by plaintiff class counsel is typified
by the polybutylene plumbing case, which involved a multi-billion dollar
settlement and a defined class of more than six million current homeowners and
additional unknown class members who will own the homes in the future.[26] Plaintiff class counsel first filed a
settlement of that nationwide class action suit in a Texas state court. When the judge refused to approved the
settlement because it was unfair to class members, the class counsel refiled
the class lawsuit in a federal district court in Texas. Again, the settlement was not approved. The plaintiffs' class counsel then moved the
lawsuit to Union City, Tennessee, where he located a Chancellor who ultimately
approved the class action settlement.[27] Obviously, one would not ordinarily expect
the largest property-damage class action suit in America to be resolved in a
small town forum like Union City, Tennessee.[28]
But the legal machinations in the polybutylene
plumbing case did not stop in Tennessee.
It turns out another group of plaintiffs' attorneys had filed a similar
class action suit in an Alabama state court.[29]
For a time, like dueling banjos, the two teams of
plaintiff's attorneys competed for clients, trading accusations of misconduct
and running rival newspaper and TV ads.
The result was both to confuse eligible homeowners and to create a
competition that defendants could exploit.
Eventually, a state court judge in California negotiated a truce between
the warring factions. . . . [T]he revised settlement . . . did little to
improve the benefits for the class.
Rather, it mainly assured both groups of plaintiff's attorneys that they
would receive court-awarded fees.[30]
No ethical rule prevents the plaintiff class counsel
from settling multiforum litigation in locations far removed from the state of
incorporation or the principal place of business of the corporate
defendants. However, when class counsel
deliberately selects a forum to submit his proposed class settlement, based on
on the fact that judges in that forum are less sophisticated in corporate and
class action litigation, the counsel appears to be violating his ethical duty
of diligent representation. The general
public may perceive that plaintiffs' class counsel are taking advantage of less
sophisticated judges in a way they could not with judges more familiar with
class action cases.
C. Filing Cases that are Known to Cost the
Class Plaintiffs Much More Than They Receive
While obtaining judicial approval of a dubious class
action settlement would fail to redress the harm class members have sustained,
other forms of unethical attorney conduct actually harm class members
further. One example of harmful
attorney conduct is filing suits that will reasonably cost class members more
than they could expect to gain. Such
suits only exacerbate the losses of injured class members. The Bank of Boston's January 1994 settlement
of a class action illustrates this point concisely. The class action suit accused the bank of keeping excess amounts
of mortgage customers' funds in non-interest-bearing escrow accounts and
involved a nationwide class of some 750,000 current and former mortgage
holders.[31] The 300,000 current mortgage holders were
charged for the cost of the attorney fee award, which totaled $8.5 million.[32] The terms of the settlement, approved by an
Alabama state court, called for the Bank of Boston to reimburse each class
member's account up to $8.76 as compensation for lost interest "and then
deduct upward of $100 from many of those accounts to pay the [class
representative's] attorney fees."[33]
Dexter Kamilewicz was typical of the Bank of Boston
customers so affected. The bank credited
his account for $2.19 in back interest and deducted $91.33 from his account to
pay the attorney fee award.[34] Like other current mortgage holders,
Kamilewicz lost far more in the class action lawsuit than he gained. Once again, the attorney fees dwarfed the
damages awarded to individual class members.
Ironically, aside from the few dollars in back interest, the recovery
consisted of a refund of the plaintiffs' own money held in escrow, "which
would have been returned sooner or later even without the [class action]
suit."[35] As a result in the fall of 1995, Kamilewicz,
his wife, and a third bank customer filed a new class action lawsuit in federal
district court in Chicago alleging fraud in the terms of the settlement against
the Bank of Boston, its attorneys in Alabama and Chicago, and the Alabama law
firm representing the class plaintiffs.[36]
In the Bank of Boston case, the plaintiff
attorneys should have had an ethical duty to advise their clients that the
costs of litigation would exceed any recovery the class members might
attain. Furthermore, counsel had an
ethical duty to advise class members of these material facts at the outset of
the litigation, and give class members an opportunity to opt out at that
time. Where counsel accumulates
litigation fees per class member that are nearly ten times the recovery for
each individual class member, questions about whether the suit should have been
filed will naturally arise.
At a bare minimum, the Due Process Clause would seem
to require that class members be given the opportunity to opt out of that
settlement. The class counsel is better
able to bear the risk of nonpayment of attorney fees than individual class
members, who have no way of curtailing counsel once it appears he is merely
piling up billable hours without having any tangible effect on recovery for class
members. Moreover, even from the
outset, the Bank of Boston class counsel should have reasonably known
their litigation costs would exceed the likely recovery to class members. The Rules of Professional Conduct should
have prevented the counsel from proceeding with these class action claims on an
hourly fee basis.
D. Structuring Complaints to Maximize the
Preclusive Effect of a Settlement on Claims in Another Forum
Yet another form of unethical, or at least unseemly,
conduct involves drafting (amended) complaints so as to maximize the preclusive
effect of any settlement in that forum on claims in other fora. The pristine example of this phenomenon
concerned the amended complaint and proposed settlement filed in the Delaware
state court in Epstein. The Epstein
plaintiffs tried to persuade the U.S. Supreme Court that the Delaware
settlement was nothing more than a carefully crafted ploy to extinguish their
suit, by calling forth the following facts from the record.[37] The Delaware class counsel filed the amended
complaint just one day after the Epstein class action was filed, and the
amended complaint sought to comprise issues covered in the Epstein securities
fraud action. For example, the amended
complaint contained a bogus, nonexistent state law claim that the board of
directors of MCA, Inc., had violated SEC Rule 14d-10.[38] The Ninth Circuit agreed that the Delaware
class counsel had manipulated the Delaware amended complaint in an effort to
add claims that if settled, would preclude the pending federal class action:
There is, to state the obvious, no cause of action in
Delaware for violating the federal securities laws, and there would thus be no
issue preclusion if these claims were litigated on the merits in Delaware. . .
. The fact that the lawyers for the Delaware plaintiffs inserted such a claim
into their amended complaint (not to mention that they did so the day after the
Epstein action was filed) does little more than make readily apparent the
extent to which the state suit was structured with an eye toward the preclusive
effect it might have on the federal claims pending in the Central District of
California.[39]
The record shows that Delaware class counsel named
Matsushita as a defendant, even though Delaware had no personal jurisdiction
over Matsushita, and Matsushita acquiesced to personal jurisdiction to preserve
settlement opportunities in that forum.[40] The Delaware class counsel stated he had no
evidence to prove the claims in the amended complaint, which immediately raised
ethical questions about why he filed the amended pleading. He further downplayed the importance of the
exclusively federal claims in the California portion of the class action, which
counsel intended to release, as "frivolous, . . . distracting in the main
litigation, and . . . a waste of our time and resources."[41] The Supreme Court's decision in Epstein
will only exacerbate the general problem of attorneys using suits filed in one
forum not as a vehicle for vigorous prosecution of claims, but primarily as a
device to preclude litigation in another forum.
E. Potential
for Collusion in Temporary Settlement Classes
Another feature of class action practice that can spur
unprofessional conduct leading to unfair settlements is the use of the
temporary settlement class procedure.
In 1994, the Delaware Supreme Court expressed its concerns that this
procedure might foster collusion between attorneys for the plaintiff class and
the defendants:
The principle criticism of the temporary settlement
class procedure is that it facilitates premature, inadequate, and perhaps
collusive settlements because plaintiffs' counsel is under strong pressure to
conform to the defendants' wishes at the early stages of the litigation. . . .
These concerns reflect the unique character of class actions, in which the
financial interests of the individual class members are frequently small while
those of the class lawyers are great.
When competition among different sets of plaintiffs' counsel exists, as
it does here, there is the ever present danger that unscrupulous counsel may
`sell out' the class in order to receive a fee.[42]
The temporary class procedure exacerbates the ethical
tensions a class counsel faces to settle out of court, because the class
counsel knows that a court has certified his class and his position as counsel
for that class solely for settlement discussions. If the discussions break down, counsel knows that he may face an
uphill battle to have the class certified to litigate the claims on the merits. Defense counsel in multiforum litigation, by
contrast, know they have the upper hand in the settlement negotiation. If defense counsel informs the court that
the settlement discussions have become fruitless, he may succeed in terminating
both the representative class and that class's representation by the class
counsel. With such unequal bargaining
positions, the class counsel is practically guaranteed to strike a less than
favorable settlement for class members, particularly when compared to the deal
he could negotiate if he had authority to prosecute the claims on the
merit. An ethical class counsel would
not squander the legitimate claims of class members solely for purposes of
strike a deal, any deal, with the defense counsel before his status is
terminated.
F. Race to the
Courthouse
Modern multiforum litigation also fosters a race to
the courthouse mentality among plaintiffs' attorneys viaing for the coveted
position of class counsel. In Epstein,
attorneys raced to the courthouse to file class action suits against MCA, Inc.,
one day after The Wall Street Journal broke a story about the potential
merger with Matsushita. The speed with
which the plaintiffs' attorneys filed their lawsuits, before the corporations
had even reached agreement on the terms of the merger, merely reflects the
attorneys' keen desire to be the first attorney on record to file suit. The plaintiffs' attorneys seem to believe
that being first to file will improve their chances of being named lead counsel
for the plaintiff class.
Yet it is rather unseemly that attorneys would file
suit against MCA and its officers before the terms of the merger were
even negotiated, so that their complaints would have to be repeatedly amended
as the terms of the merger were revealed.
In particular, the MCA shareholder plaintiff class defined at that time
could not have had any federal securities law claims, because these did not
arise until after Matsushita had paid MCA's two top officers for their block of
shares. No doubt due in part to the
haste with which the complaints were written, the Delaware Vice Chancellor
ruled that the state law causes of action were extremely weak. In essence, plaintiffs' counsel rushed to
file meritless (borderline frivolous) lawsuits just to exploit any nuisance
settlement fund that MCA/Matsushita might create.
The Private Securities Litigation Reform Act of 1995[43]
curb some of these abuses, at least as far as claims involving the
federal securities law. The Act contains
a lead plaintiff provision, which presumes that the shareholder who has the
greatest economic stake in the litigation, i.e., owns the most shares in the
company, should generally be named lead plaintiff in federal securities class
action suits.[44] Under the Private Securities Litigation
Reform Act, it would not matter which plaintiff counsel filed suit first, and
that should remove the incentive for racing to the courthouse to file
securities lawsuits.
Under the Act, the lead plaintiff will be reponsible
for selecting an attorney to act as class counsel, and this lead plaintiff
bears responsibility for supervising the counsel and approving any proposed
out-of-court settlements. When a large
institutional holder serves as the class representative and instructs the class
counsel on terms of a potential settlement, it appears less likely that class
members' claims will be sold out in favor of a high fee award to the class
counsel.
Congress intended to eliminate figurehead plaintiffs
who exercised no meaningful supervision of the litigation ─ or even the decision to file suit ─ by attempting to encourage, but not require,
institutional shareholders to supervise this litigation, and to select their
own counsel whom these institutions would monitor and supervise.[45]
The Private Securities Litigation Reform Act only
applies to federal securities law claims.
Thus, the race to the courthouse environment would still exist in cases
such as Epstein, that are based on state law breach of fiduciary duty
claims. Nothing in the Epstein
decision would curtail premature filing of pleadings that often require
multiple amendments as the facts of the case unfold. We are left with the unsatisfactory situation that the ethical
plaintiffs' attorney who waits for the terms of a transaction to be clarified
may be strategically disadvantaged compared to the unethical attorney
who hastily files suit in the hopes of being considered first as class counsel.
G. Race to
Judgment Scenario
Race to the courthouse situations arise in many
contexts in the law, e.g., in the filing of deeds on property, and are not
limited to multiforum class action practice.
But the latter practice area may be unique for fostering a similar race
to judgment behavior among the judges hearing these multiforum cases. Again, we see a pristine example of this
novel racing behavior by judges in the Epstein case.
In Epstein, the Delaware state court faced a race
to judgment with the U.S. Court of Appeals for the Ninth Circuit. In order to issue a judgment that could be
interposed in the Ninth Circuit to preclude further review of the Epstein
case, the Delaware Chancery Court had to enter judgment before the Ninth
Circuit handed down its opinion. Otherwise,
the Ninth Circuit's judgment most likely would have been interposed as a strong
objection to block consideration of the undervalued Delaware class
settlement. The issue of which court
precluded the other all came down to which court handed down its decision
first.
It appears unseemly for a federal and state court to
compete with each other to see which can render a judgment before the
other. We would expect courts to take
as long as necessary to analyze a case.
In modern multiforum litigation, no court can take its time to render an
opinion, unless it is prepared to have its pending decision completely
eradicated by the claim preclusive effect of a settlement of the class action
in another forum. Again, we are left
with an unsatisfactory situation in which unethical attorneys have incentives
to block unfavorable judicial decisions through negotiations in other
fora. To our knowledge, aside from
multiforum litigation, no other practice area permits attorneys to circumvent
appellate and trial judgments this way.
H. Defense
Counsel Tactics in Light of Little Class Member Response
Another institutional feature of the multiforum
litigation environment that gives rise to unfair settlements is the burden
placed on class members to respond to notices.
The courts have placed the burden on class members to sign and return to
the court various documents to preserve their rights. While this procedural posture poses the least amount of work for
the courts, it does little to safeguard the rights of inattentive class
members. The general public has apathy
towards many interests, and the issues at stake in a class action are no
different. Most members of a class will
not respond to any notice that is sent to them. The courts are aware of this apathetic
response. Reasonable minds could differ
on whether principles of due process should require the courts to receive an
affirmative response from class members before they can be bound by out of
court settlements or simply rely on silence as implying consent.
However, reasonable minds cannot disagree that defense
counsel have recognized this pattern of very low response rates from class
members and used this apathy to their advantage. Defense counsel are taking advantage of the opt out provision
plus notice requirement in class actions as a means of getting questionable
settlements approved by the courts.
People rarely respond to these notices, counsel know that, and they are
emboldened by such low response rates to propose even grossly unfair settlement
terms. Furthermore, once the statute of
limitations has passed on a claim ─ and
most litigation drags on for years before a settlement notice is mailed to the
plaintiff class ─ members of that class often have no choice but to
accept the settlement terms, because it is too late for them to file individual
lawsuits.
Finally, the informational costs as well as the actual
costs of hiring an attorney often preclude most class members from pursuing
their individual claims. Class action
litigation represents an area where class member apathy has created an
opportunity for clever defense counsel to terminate the claims of class members
with dubious settlement terms.
III. Changes Needed in Substantive Law to Prevent
Abuses in Settling Multiforum Litigation
The previous section presented examples of
opportunistic behavior by attorneys practicing in the area of multiforum class
action litigation. Recall that some of
the opportunistic behavior, such as forum shopping for a judge who will approve
a settlement or forum shopping for the best settlement terms, are not per se
violations of ethical conduct. Rather
this behavior stems from incentives inherent to the procedures for filing,
prosecuting, and settling a class action lawsuit.
This section focuses on the need for changes in the
substantive law governing the rules of civil procedure and the law of
preclusion. In particular, courts need
to view with heightened scrutiny any proposed settlement of a class action
lawsuits that releases claims in other fora.
The next two changes amount to greater judicial adherence to the
existing requirements of procedural due process. Finally, we echo the call of many commentators that the Federal
Judicial Panel on Multidistrict Litigation be authorized to consolidate state
law and federal law claims in one forum, so as to avoid forum shopping and
related problems.
A. Heightened
Scrutiny of State Court Proceedings That Can Preclude Exclusively Federal
Claims
State courts do not have experience judging the merits
of exclusively federal claims. Whenever
a state court judgment has the effect of releasing exclusively federal claims
in another forum, the state court should employ heightened scrutiny of the
terms of the settlement. The court
should scrutinize whether viable claims in another forum will be extinguished
by the court's entering a judgment approving a settlement. If so, the state court should be loathe to
enter the judgment until the fair value of those claims have been determined by
the reviewing court. In particular, a
state court should not substitute its own valuation of those exclusively
federal claims for the value determined by a U. S. Court of Appeals.
In reviewing proposed settlements that will have claim
preclusive effect on other fora, a court must look for signs that the
litigation in its forum is being used to manipulate the results of and
extinguish the litigation in another forum.
For example, in Epstein, either Matsushita or MCA should have
moved to dismiss the Delaware class action.
Afterall, the Delaware class counsel admitted that he lacked evidence to
substantiate the claims in the amended complaint, and the Vice Chancellor even
characterized these state law claims as weak.[46] Yet rather than moving to dismiss the
Delaware complaint, Matsushita appeared to preserve its opportunity to
negotiate a settlement in a state forum.
Matsushita understood that the Delaware class counsel would collect no
fee if the Delaware class action was dismissed. One might even say knowledge of the Delaware class counsel's
weakened bargaining position with respect prospects for receiving a fee could
be imputed to Matsushita.
What evidence, then, shows when defendants' counsel
has sufficient knowledge to merit imputation to it of plaintiff's counsel's
inadequacy? [Epstein] supplies a
road map of likely warning signals.
They include phantom litigation that lay dormant for more than a year,
until the federal action threatened to result in a judgment; a clearly illusory
settlement that offered the class members only non-pecuniary relief; the
structuring of the state settlement to preclude the federal action, even though
they involved fundamentally different claims; and the curious fact that the
statute of limitations under Rule 10b-5 had run on the state claimants, so that
at the time they settled they were powerless to assert the federal securities
law claims anywhere.[47]
Matsushita's primary goal in negotiating in Delaware
was to obtain a release of the securities law claims in the Epstein
California securities class action, not a release of the meritless Delaware
state law claims. The Delaware class
counsel might have honestly felt that he bargained in good faith to reach a
settlement with Matsushita,[48] but he bargained away the federal securities
law claims for only about two cents a share.[49] In contrast, the Ninth Circuit calculated
that if the Epstein plaintiffs prevailed on just one of their causes of
action, the damages to each tendering MCA shareholder would amount to
$17.80/share:[50] nearly one thousand times the recovery per
share secured by the Delaware counsel.
The Epstein case illustrates an example of a state court
improperly substituting its own misconceptions about the value of exclusively
federal claims for those of a federal appellate court.
This pattern of minimal use of a forum for prosecution
and maximum use for blocking litigation in another forum should automatically
trigger heightened scrutiny prior to any approval of a proposed class
settlement. In particular, to receive
full faith and credit in another forum, the approving court should justify why
the class settlement that seeks to preclude claims in another forum was not
proposed and approved in that forum where the issues could have been
adjudicated on their merits. In the Epstein
case, Matsushita had no reason to justify to a Delaware court why it settled the
case in Delaware, rather than in California where the class plaintiffs had a
much stronger case.
The current state and federal Rules of Civil Procedure
leave open the possibility that attorneys will destroy meritorious claims in
another forum.
[Epstein] is not, however, the typical case
that will arise in the future. While
the state class action there preceded the federal action, the more common
pattern will be for the weaker action - state or federal - to follow well after
the stronger, original action. Often,
the weaker action will be filed as a settlement class action, with the
settlement being struck just as the trial date for the original action is
approaching. In these cases, collusion
will be more difficult to prove because there seldom will be a period of
feigned litigation to reveal the non-adversarial relationship between the
parties.[51]
Judge Friendly reasoned that a court's jurisdiction to
extinguish claims by class settlement should not exceed its jurisdiction to
extinguish claims by adjudication.
Although Epstein has given state courts permission to settle
exclusively federal claims, they would be wise to exercise judicial restraint
and only rarely approve settlements containing issues beyond their subject
matter jurisdiction. By exercising
caution and self-restraint, state courts can limit forum shopping opportunities
for class action defendants and thereby aid the negotiation of fair
settlements.
B. Burden of
Proof on Adequacy of Representation
One of the most troubling aspects of the 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 well
In 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 Litigation
Section 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. Competency
To 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 consentable. In this case, the
class 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 Litigation
A 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.
Attorney
=
s Conduct While Serving as Class Counsel
During 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 multiforum 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 the consequences of
alternative decisions. This duty
basically reiterates the duty a lawyer already has under Model Rule 1.2(a) and
1.2(b). Finally, Section (C)(11) restates the class counsel=s duty of diligent representation, found in Model Rule
1.3, as applied to the multiforum litigation environment.
E. Disclosure
of Settlement Terms to Class Members
Section (D)(1) follows the procedure of Rule 1.8(a) on
review by an independent lawyer of deals or transactions that have a
substantial impact on the lawyer's incentives and motivation to pursue the
class action litigation. Section (D)(2)
imposes the same duty of candor found in Rule 3.3(d) in a class action setting,
where it is recognized that when both the class counsel and defense counsel
jointly propose a settlement to the court, they are acting in a coordinated
manner and certain key elements of objection in the adversarial system may be
missing. At any hearing on the proposed
settlement, the lawyer must disclose adverse facts and case law to the court
that might give the court reason to deny the request for approval of the
settlement. Thus, hearings on the adequacy and fairness of a proposed
settlements more closely resemble ex parte proceedings ─ with all counsel representing one side of the
transaction ─ than hearings between advocates on both sides of an
issue. As such, the procedural posture
of a proposal for class settlement should trigger the same ethical standards of
rigorous disclosure of adverse points of authority and facts under which
attorneys must operate in ex parte proceedings in traditional,
single-forum litigation under Model Rule 3.3(d).
For example, in the Polybutylene Plumbing case,
the court should have required the class counsel to notify class members that
class counsel had previously submitted his proposed settlement to two courts in
Texas, and both of these rejected his proposed settlement as unfair to class
members. To advise class members of the
settlement terms without disclosing material information on the rejection of
those terms by other courts amounts to fraudulent concealment of material
information. Without that material
information, class members cannot be said to have made an informed decision
about whether to opt out of the settlement.
Section (D)(3) requires that the lawyer not seek an
attorney fee award that is grossly disproportionate to the value of the
recovery to each class member. When the
class members are only obtaining monetary damages, the attorney fee sought
should not exceed 10,000 times the prorata recovery to class members. Thus if each class member recovers $10 from
the class settlement, the lawyer's fee for prosecuting the class action should
not exceed $100,000.
Section (D)(5) is intended to address the frequent
criticism that settlement notices contain intelligible legalese designed
to obfuscate the terms of the settlement, rather than clarify them. With the adoption of this proposed Rule,
settlement notices will contain clear and readable language explaining the
terms of the settlement, the consequences of the settlement, and the impact of
the settlement on the attorney's fee to shed light on the attorney's motives
for proposing the settlement.
F. Unique
Features of Multiforum Practice
Proposed new Rule 3.10.1 specifically addresses
concerns associated with multiforum practice, where class counsel in one forum
can compete with class counsel in another forum and extinguish or preclude the
other counsel=s case.
Proposed Rule 3.10.1 would prevent an attorney from filing a class
action for purposes of controlling class action litigation in another forum,
garnering a portion of the attorney fee award, or attempting to create an
alternative forum in which a settlement could be negotiated.
Second, while serving as class counsel, the proposed
Rule 3.10.1 would impose an ethical duty on the lawyer to refrain from
undercutting the claims of class members or the representation of class counsel
in another forum, negotiating a waiver or release of claims filed in another
forum which that counsel lacks the power to litigate on the merits, and
negotiate a settlement for reasons other than the best interest of class
members, such as for the preclusive effect the settlement will have pending
litigation in another forum. The
proposed Rules can be found in the Appendix.
APPENDIX. Proposed Rule 3.10
Lawyer
Representing a Class of Plaintiffs
(A) A lawyer,
employed or retained by a prospective representative for a class, represents
the class acting through its class representative, pursuant to Fed. R. Civ. P.
23 or a similar state rule. This rule
shall apply beginning at such time as the lawyer undertakes to represent an
individual or group of individuals with claims that the lawyer reasonably
believes a court would likely certify as a class action.
(B) A lawyer
may serve as class counsel unless
(1) the lawyer
simultaneously is serving as the class representative, or
(2) the lawyer
reasonably believes that the designated class representative lacks the
independent judgement, commitment, knowledge about the subject matter, and
knowledge about the legal system to supervise the lawyer in the exercise of the
lawyer's duties as class counsel, or
(3) the lawyer
lacks competency in the subject matter of the class action litigation, or
(4) the lawyer
reasonably believes the relief sought or the benefit to each individual class
member would not justify the filing of the class action lawsuit; or
(5) the lawyer reasonably believes that he cannot
fairly and impartially protect the interests of all class members; or
(6) Fed. R.
Civ. P. 23 would prohibit the lawyer from representing the class; or
(7) the lawyer reasonably believes the underlying
claims in the proposed class action are so without merit that a court would
consider the filing of a class action complaint based on those claims as
frivolous; or
(8) the lawyer
has a material and substantial interest in the proposed class action that would
affect his representation, provided however that the lawyer may serve as class
counsel if
(a) the lawyer
discloses his stake in the litigation to a competent supervisory class
representative and obtains that representative's consent to serve as class
counsel, and
(b) the lawyer
notifies the court of his stake in the litigation, so that the court can
monitor the lawyer's performance in relation to that stake, and
(c) the lawyer
advises the members of the class of his stake in the litigation, at the same
time and using the same notice that the lawyer sends to prospective class
members as required by Fed. R. Civ. P. 23(c)(2), or a similar state rule.
(9) the
lawyer's responsiblities to, or relationship with, the class representative
could materially limit the representation of the class, provided however the
lawyer may serve as class counsel if
(a) a
reasonable lawyer would believe that the lawyer's representation of the class
would not be adversely affected; and
(b) the lawyer
obtains approval of the court for the dual representation of the class and,
individually apart from any relation to the class, the class
representative.
(c) the lawyer
notifies the class of his dual representation using the same notice required by
Fed. R. Civ. P. 23(c)(2), or a similar state rule.
(10) the lawyer represents individually a class member, other than the
class representative, in another legal matter, provided however that the lawyer
may serve as class counsel if
(a) the lawyer obtains the consent in writing of the
class representative, and
(b) the lawyer notifies the court of the dual
representation, so that the court may oversee the lawyer's performance of his
duties to the class without favoritism to his individual client, and
(c) the lawyer notifies the class of his dual
representation using the same notice required by Fed. R. Civ. P. 23(c)(2), or a
similar state rule.
(C) While
serving as class counsel, the lawyer shall
(1) advise each class member of the pendency of the
class action and of his representation by notice required under Fed. R. Civ. P.
23(c)(2) or a similar state rule; and
(2) If the class representative instructs the lawyer
to take some action, or refuses to permit the lawyer to act, that clearly
violates the law and will likely result in substantial injury to the class, the
lawyer shall first ask the class representative to reconsider the matter. If the class representative persists in
instructing the lawyer to violate the law, the lawyer shall seek permission
from the court to withdraw as class counsel.
The lawyer is permitted to make a "noisy" withdrawal, by
advising the court that the lawyer no longer supports the truth or accuracy of
the pleadings or the course of conduct advanced by the class representative.
(3) explain
his obligation to the class, in all communications with the class
representative, when it is apparent that the class's interests are adverse to
those of the representative with whom the lawyer is dealing.
(4) discuss
his payment for services in representing the class only with the class
representative and the court; and
(5) act impartially to assist his clients in
accomplishing their common objective; and
(6) as between the class members and other persons,
treat information relating to the class representation as protected by Rule 1.6
and, accordingly, shall not disclose such information to third persons or use
such information to the disadvantage of any class member, unless the lawyer is
permitted or required to do so by Rule 1.6 or is authorized to do so by the
class representative in accordance with the Fed. R. Civ. P. or similar state
rules; and
(7) as between members of the class, treat information
relating to the class representation as information protected by Rule 1.6,
which the lawyer has been authorized by each class member to disclose to the
other class members; and
(8) consult with class representative concerning the
decisions to be made with respect to the litigation and considerations relevant
in making them, so that the class representative can make adequately informed
decisions, and
(9) refrain from submitting any proposed settlement
for court approval that offers only inconsequential and intangible benefit to
class members, or which is proposed in order to justify a settlement with no
real monetary benefit to class members, but which includes a significant
payment for attorney fees; and
(10) refrain from submitting any proposed settlement
for court approval that gives the appearance of collusion between the lawyer
and the defense counsel such as an agreement to exchange a low recovery for a
disproportionately high fee award; and
(11) shall not permit the litigation to lay dormant ─ with no pleadings being filed or discovery taking
place ─ for a period exceeding three months, or otherwise
delay the litigation in such a way that a reasonable lawyer would infer the
lawyer does not intend to prosecute the class action vigorously, or worse yet,
that the lawyer has compromised the litigation by adopting a nonadversarial
relationship with the opposing party.
(D) In the
event the lawyer decides the interests of class members are best served by
settling the lawsuit, the lawyer shall
(1) request the appointment of an independent counsel
for the class to approve the merits of the proposed settlement, if the
settlement terms substantially affect the lawyer's payment for services; and
(2) follow the
duties of candor and disclosure to the court normally applicable with ex
parte proceedings; and
(3) not seek
the award of attorney fees or the approval of a settlement of the class action
lawsuit that would call for payment of attorney fees grossly disproportionate
to the value of the recovery to each class member; and
(4)
simultaneously with the notice of settlement required under Fed. R. Civ.
P. 23(e) or a similar state rule, advise the class members of
(a) any prior settlement that the lawyer proposed for
judicial approval, the outcome of that request, and a short summary of the
reasons given by the court for rejecting or approving that settlement; and
(b) the effect of the proposed settlement on the
lawyer's fee award or payment for services; and
(c) advising
the class members, based on the lawyer's understanding of preclusion law, of
the effect of any release contained in the settlement on any pending or future
claims that the class members might wish to file in that forum or any other
forum; and
(5) utilize plain, simple, and ordinary wording for
the notice to class members that would cause reasonable people, with no legal
training, to read and understand the notices they receive; and
(6) obtain the approval of any class representative in
another forum whose substantially related class action claims will be
extinguished by the claim preclusive effect of a court entering judgment to
approve the proposed settlement.
(E) A lawyer
shall seek permission from the court to withdraw from representing the class of
plaintiffs if
(1) any of the
conditions stated in paragraphs (A) or (B) are no longer satisfied; and
(2) the lawyer shall continue to treat information
related to his prior class representation as protected by Rule 1.6.
(F) Upon
withdrawal from service as class counsel, the lawyer shall:
(1) not represent any class member in a matter
substantially related to the subject of the class action litigation, unless
that class member or members choose to opt out of the class and pursue their
claims individually; and
(2) regard each class member as a former client
entitled to the continued protection of Rules 1.6, 1.8(B), 1.9, and 1.10.
Proposed
Rule 3.10.1
Lawyer
Serving as Class Counsel in Multiforum Litigation
(A) In
addition to meeting all the requirements of Proposed Rule 3.10, a lawyer who
seeks to act as class counsel in litigation involving related claims in another
forum must not:
(1) file a similar class action, which is merely
designed to wrest control of the litigation from the class counsel in another
forum; and
(2) file a similar class action lawsuit for purposes
of garnering a portion of any fee award given to the class counsel; and
(3) file a substantially related Complaint for a
lawsuit with a view towards maximizing the preclusive effect of any settlement
of that lawsuit on claims in other fora, especially when the claims rely on
differing factual predicates.
(B) While
serving as class counsel, the lawyer shall
(1) refrain from acting in a manner that a reasonable
person would interpret as undercutting the claims of class members or
representation of class counsel in another forum; and
(2) refrain from negotiating, as part of a settlement
or any other matter, a release or waiver by class members of claims in any
other forum over which the lawyer lacks the power to litigate on the merits,
including claims for which the statute of limitations has run even if the
lawyer at one time could have represented the class plaintiffs on those claims,
unless the lawyer can offer class members special justification for including a
release of claims outside the lawyer's forum; and
(3) settle with defense counsel, if that action is in
the best interests of class members, based on the value of the claims in the
complaint he filed, not based on the blocking value or preclusive effect of the
settlement on claims in other fora.
Comment
The Class as the Client
A class is a legal entity, but it cannot act except
through it class counsel and class representative, who is a constituent of the
class. Other members of a class are not
deemed constitutents, unlike the way shareholders are deemed constitutents of a
corporate organizational client. The
law of class actions provides no mechanism in which class members can take part
in decisions governing the class. Class
members have the right to opt out of the class, but that opt out right pales in
comparison to the authority vested in shareholders, e.g., to vote to approve a
merger or a fundamental change to the corporate charter. Therefore, for that transaction, the
shareholders are a duly authorized constiuent.
In a limited way, class members can veto a
settlement recommended by their class counsel.
They would veto the settlement by exercising en masse their right
to object to the settlement; however, the law of class actions does not require
that a majority of class members approve a settlement. Indeed, if no class member expresses any
opinion at all on a proposed settlement, that lack of negative response will be
deemed to imply consent.[1]
[1]. Forum
shopping would not be a concern in multiforum litigation if defense counsel
derived no benefit from shopping for settlement terms. However, anytime the plaintiffs' counsel
elevates his own self-interests above those of the class members, then forum
shopping indicates defense counsel are taking advantage of the system to find a
better settlement for their clients. In
fact, some would argue that defense counsel would violate their duty of
diligence if they failed to seek these opportunistic settlements for their
clients. Unfortunately, publicity about
the inequity of many of these class settlements ─ with no class recovery
and a large attorney fee award ─ tends to damage the reputation of
lawyers.
[2]. Individual plaintiffs and defendants may freely
negotiate a settlement as a matter of contract law, and the contractual
settlement may include terms not even mentioned in the pleadings, or claims
outside the jurisdiction of one or more courts. In contrast, class action representatives are limited to
negotiate settlements by the description of the class which they represent. Cf. National Super Spuds v. New York
Mercantile Exch., 660 F.2d 9, 16 (2d Cir. 1981) ("The most fundamental
principles underlying class actions limit the powers of the representative
parties to the claims they possess in common with other members of the
class.") Unlike traditional
litigation, class members generally do not consent to the terms of any
settlement. Instead, class
representatives ─ who derive their authority to represent the class from
a court order ─ give consent to the terms of the settlement on behalf of
absent class members.
Shareholder
derivative actions differ fundamentally from class action. In a derivative action, the plaintiff is
suing on behalf of a corporation. The derivative suit may be viewed as the
consolidation in equity of, on the one hand, a suit by the shareholder against
the directors in their official capacity, seeking an affirmative order that
they sue the alleged wrongdoers, and, on the other, a suit by the corporation
against these wrongdoers.
Daily
Income Fund, Inc. v. Fox, 464 U.S. 523, 529 n.4, 104 S. Ct. 831, 835 n.4 (1984)
(quoting Note, Demand on Directors and Shareholders as a Prerequisite to
Derivative Suits, 73 Harv. L. Rev.
746, 748 (1960)). In a derivative suit settlement, the legal entity whose
unpleaded claims are being released ─ the corporation ─ is a party
to the settlement. "The
corporation has the power to release its claims whether asserted in the
complaint or not." National
Super Spuds, 680 F.2d at 19. A
court may rest assured that the parties in a derivative suit have given their
consent to any release of claims.
[3]. Epstein, 50 F.3d 644, 667 (9th Cir.
1995) rev'd sub nom. Matsushita Electrical Industrial Co., Ltd. v.
Epstein, 116 S. Ct. 873 (1996).
[4]. The Full Faith and Credit Act provides that
"judicial proceedings" of any state "shall have the same full
faith and credit in every court within the United States and its Territories
and Possessions as they have by law or usage in the courts of such State,
Territory or Possession from which they are taken." 28 U.S.C. ' 1738 (1995). In practice, the statute "requires
federal courts to give the same preclusive effect to state court judgments that
those judgments would be given in the courts of the State from which the
judgments emerged." Kremer v.
Chemical Constr. Corp., 456 U.S. 461, 466, 102 S. Ct. 1883, 1889 (1982). A federal court cannot fashion its own rule
to determine the effect of a state court judgment, "but must accept the
rules chosen by the State from which the judgment is taken." Epstein v. Matsushita Electrical Indust.
Co., 116 S. Ct. 873, 877 (quoting Kremer v. Chemical Constr. Corp, 456 U.S.
461, 481-482, 102 S.Ct. 1883, 1898 (1982)) (internal quotations omitted).
[5]. 955 F.2d 1268, 1287-89 (9th Cir.), cert.
denied, ___ U.S. ____, 113 S. Ct. 408 (1992).
[6]. 643 F.2d 195, 221 n.39 (5th Cir.
1981)
[7].
The U.S. Supreme Court has repeatedly said state courts could preclude
federal claims, including pending or new actions in other fora. See Maresse v. American Academy of
Orthopaedic Surgeons, 470 U.S. 373, 385-86, 105 S. Ct. 1327, (state court
judgment may have claim preclusive effect on federal antitrust claims); Migra
v. Warren City Sch. Dist. Bod. of Educ, 465 U.S. 75, 85 (1984) (state court
judgment may have claim preclusive effect on civil rights claims under 42
U.S.C. ' 1983); Kremer v. Chemical Constr. Corp, 456 U.S. 461, 485 (state court
judgment may have issue preclusive effect on Title VII claims); and Allen v.
McCurry, 449 U.S. 90, 97-98 (state court judgment may have issue preclusive
effect on a 42 U.S.C. ' 1983 claim).
[8].
456 U.S. 461 (1982)
[9]. 564 A.2d 1089 (Del. 1989).
[10].
470 U.S. 373, 380, 105 S. Ct. 1327, 1332 (1985).
[11].
116 S. Ct. 873 (1996).
[12].
See TBK Partners, Ltd. v. Western Union Corp, 675 F.2d 456 (2d
Cir. 1982); Grimes v. Vitalink Communications Corp., 17 F.3d 1553 (3d Cir.
1994), cert. denied 513 U.S. ____, 115 S. Ct. 480 (1994); Nottingham
Partners v. Trans-Lux Corp., 925 F.2d 29 (1st Cir. 1991); and Epstein v. MCA,
Inc., 50 F.3d 644 (9th Cir. 1995), rev'd sub nom. Matsushita Electrical
Industrial Co., Ltd. v. Epstein, 116 S. Ct. 873 (1996).
[13].
925 F.2d 29 (1st Cir. 1991).
[14].
17 F.3d 1553 (3d Cir. 1994), cert. denied, 115 S. Ct. 480 (1994).
[15].
Congress vested the federal courts with exclusive jurisdiction to hear
claims arising under the U.S. Securities Exchange Act of 1934, 15 U.S.C. ' 78aa
(1995).
[16].
But see In re MCA, Inc., 598 A.2d 687, 691 (Del. Ch. 1991): "It is not disputed that this Court may
enter a judgment in connection with the settlement of a class action that
results in the release of both state law claims and exclusively federal claims
if the claims arise from the same factual predicate, even if the state
court could not dismiss or adjudicate the federal claims." (emphasis added).
[17].
Epstein, 50 F.3d at 665.
The questions about the omissions of MCA directors to protect and
disclose information to their shareholders are separate and distinct from the
Williams Act claims that Matsushita violated federal law by offering
preferential treatment to Wasserman and others. Id. The amended
complaint in the Delaware class action also incorporated a cause of action that
attempted to parrot the language of SEC Rule 14d-10, but the Delaware Chancery
Court noted that this cause of action had no basis in Delaware law. Id. at 666 n.31. Under Delaware law, a corporate officer
could ordinarily seek a control premium for his or her shares, even during a
tender offer - something prohibited by federal securities laws. Id.
[18].
17 C.F.R. '240.14d-10(a)(2) (1995).
[19].
17 C.F.R. '240.14d-10(c)(1) (1995).
[20].
The Supreme Court's Epstein decision mistakenly inferred that
state courts have routinely approved settlements that release all claims ─
including exclusively federal claims ─ arising out of the same subject
matter or transaction before the state court.
Epstein, 116 S. Ct. at 878.
In fact, the lower state and federal courts had used an identical
factual predicate test in giving full faith and credit to class
settlement judgments, rather than the same transaction test advocated
by Matsushita. Epstein, 116 S.
Ct. at 888 n.4, (Ginsburg, J., dissenting).
Under the Ninth Circuit's test, federal courts would give preclusive
effect to a state court settlement judgment attempting to release exclusively
federal claims when those claims "would have been extinguished by the
issue preclusive effect of an adjudication of the state claims." Epstein, 116 S. Ct. at 877 (quoting Epstein,
50 F.3d at 664). The same factual
predicate test for the preclusive effect of class action settlements was stated
by Judge Friendly in National Super Spuds, Inc. v. New York Mercantile
Exchange, 660 F.2d 9 (2d Cir. 1981).
The impact of Judge Friendly's decision in National Super Spuds
on subsequent cases involving the preclusive effect of class action settlements
can be found in TBK Partners, Ltd. v. Western Union Corp, 675 F.2d 456 (2d Cir.
1982); Grimes v. Vitalink Communications Corp., 17 F.3d 1553 (3d Cir. 1994), cert.
denied 513 U.S. ____, 115 S. Ct. 480 (1994); Nottingham Partners v.
Trans-Lux Corp., 925 F.2d 29 (1st Cir. 1991); and Epstein v. MCA, Inc., 50 F.3d
644 (9th Cir. 1995).
To support
his proposition, Justice Thomas, writing for the majority, cited two Nottingham
Partners v. Trans-Lux Corp., 925 F.2d 29 (1st Cir. 1991), and Grimes v. Vitalink
Communications Corp., 17 F.3d 1553 (3d Cir.), cert. den., 115 S. Ct. 480
(1994). However, as previously noted,
in both those cases the state law claims and the exclusively federal securities
law claims extinguished as part of the class settlement relied on an identical
factual predicate: the directors'
alleged failure to disclose material information.
The
quotation selected by Justice Thomas from Nottingham Partners reads
In order to
achieve a comprehensive settlement that would prevent relitigation of settled questions at the core of a
class action, a court may permit the release of a claim based on the identical factual predicate as
that underlying the claims in the settled
class action even though the claim was not presented and might not have been presentable in the class action.
Epstein, 116 S. Ct. at 879, (internal
quotations omitted) (emphasis added).
It is truly amazing that the seven-member majority could misconstrue
that quotation and the other lower federal court decisions as supporting the
much broader same transaction test, a point duly noted by Justice Ginsburg in
her dissent. Epstein, 116 S. Ct.
at 888 n.4 (Ginsburg, J., dissenting).
[21].
Cf. John C. Coffee, Jr., and Susan P. Koniak, The Latest Class
Action Scam, The Wall Street Journal,
December 27, 1995: "If it is
possible for state courts to settle cases that they cannot hear, the migration
of cases to state court──and the number of doubtful settlements──will
predictably accelerate."
Nevertheless, the U.S. Supreme Court decided Epstein largely upon
precedents from a series of civil rights cases, which raised federal albeit non-exclusively
federal claims. In those cases, the Court consistently upheld the finality of
state court judgments, even though the state courts presumably lack expertise in civil rights and may view state
interests more favorably than a federal court. See, e.g., Kremer v.
Chemical Constr. Corp., 456 U.S. 461, 102 S. Ct. 1883 (1982); Allen v. McCurry,
449 U.S. 90, 103-104, 101 S. Ct. 411, 419-420 (1980) (State court judgments or
decisions give rise to collateral estoppel in federal court actions under Civil
Rights Act of 1871.); Id. (Where state court, acting within its proper
jurisdiction, be it civil or criminal, has given the parties a full and fair
opportunity to litigate federal civil rights claims, the state court will have
protected the parties' federal rights.)
[22].
Ironically, one of the purposes of the Supreme Court of the United
States is to ensure uniform interpretation of federal law. The Court's Epstein decision opened
the door for various state and federal courts to apply their own nonuniform
interpretations of whether a class has been adequately and fairly represented.
[23].
John C. Coffee, Jr., After `Matsushita,' Litigants Should Focus on
the Due Process Limits on a State Court's Authority to Settle Claims over which
it Lacks Jurisdiction, 18 Nat'l L. J.
at B5 (April 15, 1996).
[24].
A counterargument could be raised that extinguishing litigation
in another forum is less dangerous or risky for a court than barring
future suits, because with existing litigation, a court would know what claims
and defenses the parties have raised.
In barring future litigation, the court faces some uncertainty
over how future litigants might frame their issues or claims.
[25].
The analogous situation in traditional litigation would be for defense
counsel to strike up a settlement bargain with one of three plaintiffs'
counsel, and then approach the other two separately to see if they would offer
lower terms from that achieved with the first negotiation. Most attorneys would regard that strategy as
unseemly, if not unethical.
[26].
John C. Coffee, Jr., and Susan P. Koniak, The Latest Class Action
Scam, The Wall Street Journal, December 27, 1995.
[27].
Id. See, Cox v.
Shell Oil Co., Tenn. Chan. Ct. Slip Opinion, 1995 WL 775363, Nov. 17, 1995.
[28].
John C. Coffee, Jr., and Susan P. Koniak, The Latest Class Action
Scam, The Wall Street Journal, December 27, 1995.
[29].
John C. Coffee, Jr., and Susan P. Koniak, The Latest Class Action
Scam, The Wall Street Journal, December 27, 1995. The problem of competing forums for
nationwide class action suits does not arise in federal courts. "In the federal system, a single
judicial body──the Judicial Panel on Multidistrict Litigation──has
the power to consolidate related actions before a single court." Id.
See 28 U.S.C. ' 1407 (1993).
[30].
John C. Coffee, Jr., and Susan P. Koniak, The Latest Class Action
Scam, The Wall Street Journal,
December 27, 1995.
[31].
Lawyers the Only Winners in Class Action Suits, Plaintiffs Sometimes
Spend More Than They Win, N.Y. Times News Service, The Plain Dealer, Cleveland, OH, Dec. 31, 1995.
[32].
Id.
[33].
John C. Coffee, Jr. and Susan P. Koniak, The Latest Class Action Scam,
The Wall Street Journal, Dec. 27,
1995. Alabama is far from the Bank of
Boston's principal place of business, and one might wonder why the bank chose
to settle in an Alabama forum and not, e.g., in Boston. "Recently, federal
courts have shown a great skepticism of . . . settlements that give little
value to the class but award high fees to their attorneys. If a settlement is of doubtful value, the
parties are increasingly apt to present it to a less sophisticated (or as the
plaintiff's attorneys might put it, more `cooperative') state court." Id.
[34].
Lawyers the Only Winners in Class Action Suits, Plaintiffs Sometimes
Spend More Than They Win, N.Y. Times News Service, The Plain Dealer, Cleveland, OH, Dec. 31, 1995.
[35].
Id.
[36].
Id.
[37].
Brief for Respondents at 4-5 (citations omitted).
[38].
Id. Justice Thomas took a
more charitable interpretation of the amended complaint. Writing for the Supreme Court, he said the
complaint was later amended to state additional claims against MCA's directors
for wasting corporate assets by exposing MCA to liability under the federal
securities laws. Epstein, 116 S.
Ct. at 876.
[39].
Epstein, 50 F.3d at 665 n.30.
[40].
Brief for Respondents at 4-5.
[41].
Id.
[42].
Prezant v. De Angelis, 636 A.2d 915, 922 (Del. 1994).
[43].
Pub. L. No. 104-67, ' 102 Stat. 737, (codified at 15 U.S.C. ' 77d et
seq.).
[44].
See Section 27(a)(3) of the Securities Act of 1933 and '
21(D)(a)(3) of the Securities Exchange Act of 1934.
[45].
Harvey L. Pitt and Dixie L. Johnson, Institutional Investors Under
the Securities Litigation Reform Act Should Think Twice about Taking a Back
Seat in Class Actions, 18 Nat'l L.J.
B4 (April 1, 1996). "Many
`defense' law firms previously took the position that they represented only
`business' clients, and usually only as defendants: these firms would not represent a plaintiff class in an action
against a business. Some of those
firms, however, have represented institutional investors and money managers for
decades, and have begun seeking assignments as `counsel of choice' in the event
their clients (or someon else's) should pursue appointment as lead
plaintiff." Id.
[46].
Despite the Delaware Chancery Court's statement that the Delaware claims
lacked merit, Matsushita did not move to dismiss the Delaware class action,
because "[i]t was judgment of counsel that the Delaware [complaint] stated
a claim upon which [relief] could be granted." Transcript of Oral Arguments at 22.
[47].
John C. Coffee, Jr., After `Matsushita,' Litigants Should Focus on
the Due Process Limits on a State Court's Authority to Settle Claims Over Which
It Lacked Jurisdiction, 18 Nat'l L.
J. B5 (April 15, 1996).
[48].
Paul M. Barrett, Investors' Class‑Action Suits Face Day of
Reckoning in High Court,
The Wall Street Journal, November 13, 1995; David Bershad, the Delaware plaintiffs'
lead attorney, explains in an interview
that after "highly intense" pretrial
investigation, "we didn't find we had a strong case." He
contends that under the rejected
agreement, his clients would have benefitted from changes in a takeover‑defense provision of an MCA unit. But
the judge called this value
"illusionary." . . . . The
Delaware judge acknowledged that . . .
"suspicions abound" that Matsushita and MCA cut a deal with
the plaintiffs' lawyers in the state
case as a way of extinguishing the
pending federal litigation in California. Asked about the judge's suspicion, Mr. Bershad replies, "Did
we go in the bag? Absolutely not."
[49].
But Cf. National Super Spuds v. New York Mercantile Exch., 660
F.2d 9, 19 (2d Cir. 1981) ("An advantage to the class, no matter how
great, simply cannot be bought by the uncompensated sacrifice of claims of
members, whether few or many, which were not within the description of claims
assertable by the class"); John C.
Coffee, Jr., and Susan P. Koniak, The Latest Class Action Scam, The Wall Street Journal, December 27,
1995: "If a settlement is of doubtful value, the [class action] parties
are increasingly apt to present it to a less sophisticated (or as the
plaintiff's attorneys might put it, more `cooperative') state court."
[50].
Epstein, 50 F.3d at 669 ("If plaintiffs prevail on their
claim that Matsushita violated Rule 14d-10 by paying Sheinberg a premium of $21
million for his 1,179,635 shares, the damages of each tendering shareholder
would simply be $17.80 per share.")
No wonder that Matsushita alleged to the U.S. Supreme Court that a
failure to overrule the Ninth Circuit could expose it "to a
multibillion-dollar liability."
Paul M. Barrett, Investors' Class‑Action Suits Face Day of
Reckoning in High Court, The Wall
Street Journal, November 13, 1995.
The Epstein
plaintiffs summarized the collusion they perceived in the comparatively low
Delaware settlement award as follows:
[I]n a
proceeding "not being prosecuted in any way" and in which no class
representatives' appointment had been sought or made, Delaware counsel agreed once
again to release the federal rights of third parties. The federal claims were sold at fire sale prices: . . . a payment
of about two to three cents per share from which counsel fees were first to be
deducted. Petitioners understood full
well that only the federal claims had significance. Delaware law permits large shareholders to negotiate [corporate]
control premiums so long as they do not misuse inside information. Implemented by [SEC R]ule 14d-10, federal
law prohibits such a premium in a tender offer. Petitioners' entire interest was in destroying the possibility
that a large federal class action might be certified. For a relatively few dollars, they hoped to have purchased a
plenary indulgence absolving them from the substantial classwide consequences
of their federal law transgressions.
Brief for
Respondents at 6. Even as it approved the settlement,
the Delaware Chancery Court agreed with the Epstein plaintiffs on Matsushita's
motive to extinguish the Epstein class action suit with the Delaware
settlement: "In this litigation,
the defendants' willingness to create the settlement fund seems likely to have
been motivated as much by their concern as to their potential liability under
the federal claims as by their concern for liability under the state law claims
which this Court characterized as `extremely weak.'" In re MCA, Inc., 1993 WL 43024 at *6, 18
Del. J. Corp. L. 1053, 1064 (Del. Ch. 1993).
[51].
John C. Coffee, Jr., After `Matsushita,' Litigants Should Focus on
the Due Process Limits on a State Court's Authority to Settle Claims Over Which
It Lacked Jurisdiction, 18 Nat'l L.
J. B5 (April 15, 1996).
[52].
In re MCA, Inc. Shareholders Litig., 1993 WL 43024 at *5, 18 Del. J.
Corp. L. 1053, 1063 (Del. Ch. 1993).
[53].
Id.
[54].
Id. But Cf. John C.
Coffee, Jr., and Susan P. Koniak, The Latest Class Action Scam, The Wall Street Journal, December 27,
1995: "Collusive class
settlements, in which the class members' interests are subordinated to those of
their attorneys, occur in federal court as well. Individual trial judges simply have inadequate incentives to
resist parties who want to settle and too little information to recognize when
the settlement is collusive."
[55].
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812, 105 S. Ct. 2965,
2974 (1985).
[56].
Prezant, 636 A.2d at 924.
During oral arguments in Epstein before the U.S. Supreme Court,
justices repeatedly asked counsel for Matsushita about the adequacy of the
Delaware class representative. In
particular, the Court elicited the admission that the Delaware court never held
a hearing on the adequacy of the class representation; instead, the Delaware
court gave the objectors to the second settlement an opportunity to voice their
concerns. One justice stated that the
class representative bore the burden of proving his adequacy, rather than the
objectors bearing the burden of proving the representative's inadequacy. See Transcript of Oral Arguments, at
5-8. Yet the Court noted that the
Delaware Chancery Court seemed to place the burden of proof on the other
side. Id. at 10. Another justice indicated that the question
of who bore the burden of proving adequacy of representation had never been
settled before; no case law addressed the point. Id. at 13.
Class
members seldom exercise their opt out rights, perhaps due to a lack of
understanding about the legal process, a lack of resources to pursue the
litigation on their own, or the value of the recovery being too small to
justify the costs of an individual lawsuit.
For example, of the thousands of MCA shareholders, only nineteen opted
out of the Delaware class action, even though federal securities claims worth
more than $20/share were still pending.
For these reasons, the consent implied by the failure of class members
to opt out from a class settlement pales in comparison to the consent given by
individual plaintiffs in settling their own lawsuits.
[57].
Id. at 924 (citing Phillips Petroleum v. Shutts, 472 U.S. 797,
812, 105 S. Ct. 2965, 2974 (1995)).
[58].
Id. at 925.
[59].
Id.
[60].
Id.
[61].
Epstein, 50 F.3d at 667 (quoting National Super Spuds, Inc. v.
New York Mercantile Exchange, 660 F.2d 9, 19 (2d Cir. 1981)).
[62].
See, e.g., Prezant v. De Angelis, 636 A.2d 915 (Del. 1994). See also Manual For Complex Litigation (Second) ' 30.44 (1985)
("In determining whether a class settlement should be approved, the court
must decide whether the interests of the class as a whole are better served if the litigation is resolved by the
settlement rather than pursued. The settlement must be fair, reasonable, and
adequate under the circumstances."); Manual
for Complex Litigation ' 4.70 (5th ed. 1982) ("Special caution must
be exercised when settlement of a class action is proposed .... [T]he court
must assure itself that the proposed settlement is reasonable and fair to all
classes and subclasses involved.") (cited in Stephen E. Morrissey, Note, State
Settlement Class Actions that Release Exclusive Federal Claims: Developing a Framework for
Multijurisdictional Management of Shareholder Litigation, 95 Colum. L. Rev. 1765, 1810 n.14
(1995)). State court judges, who have
no expertise in admiralty, patent law, antitrust, securities, and other
exclusively federal claims, may improperly value the claims released in these
technical areas of the law.
[63].
Phillips Petroleum v. Shutts, 472 U.S. 797, 809, 105 S.Ct. 2965, 2973
(1985).
[64].
Id. But see Joseph
M. McLaughlin, State Court Judgments Releasing Federal Claims, 215 N. Y. L. J. 1 (March 18, 1996) ("Epstein
permits shareholder class action lawyers to pursue relief in state court while
preserving their ability to obtain additional settlement consideration for the
class based on the value of any federal claim that might be asserted on behalf
of the class."). But most
shareholders would prefer their federal securities claims be settled in a forum
where they can be properly valued and prosecuted, not in a state court that
risks undervaluing those claims.
[65].
Id.
[66].
Cf. John C. Coffee, Jr., After `Matsushita,' Litigants Should
Focus on the Due Process Limits on a State Court's Authority to Settle Claims
Over Which It Lacked Jurisdiction, 18 Nat'l
L. J. B5 (April 15, 1996) ("The simplest answer is to extend the
one solution that already works:
Authorize the Judicial Panel on Multidistrict Litigation to stay and
consolidate state cases ─ or at least, state class actions ─ along
with federal suits.").
[67].
Id.
|
|
Dr. MICHAEL A. S. GUTH |