The Ethics of Class Actions

Transcription

1 CLASS ACTIONS Navigating the Complex Landscape The Ethics of Class Actions By Agnieszka McPeak and Jessica V. Currie Class actions, by their very nature, turn many traditional ethics principles on their head; how to proceed isn t always clear. Attorneys must take care, watch for developments, and understand the law in their jurisdictions. Agnieszka McPeak joined the University of Toledo College of Law faculty in the fall of 2014 and teaches Torts, Ethics, Data Security & Privacy Law and Social Media Discovery. Her research interests involve the effect of new technology, such as social media, on civil procedure, ethics, and privacy law. Jessica V. Currie is an attorney with Bush Seyferth & Paige PLLC, where she focuses on appellate, class action, and commercial litigation. She prides herself on her writing and advocacy talent, which has led to many successes in high-stakes matters through dispositive motions and on appeal. Ms. Currie is a member of the DRI Young Lawyers Committee. 12 For The Defense November DRI. All rights reserved.

2 Class action litigants encounter a variety of ethical issues. These issues may arise when communicating with the putative class, opposing class certification, or structuring a settlement. Navigating through this landscape is no easy task because class actions, by their very nature, turn many traditional ethics principles such as identifying the client and obtaining informed consent on their head. Here, we set the stage with some basics, address three common scenarios in the class action context having ethical implications, and explore what may lie ahead through legislative reform. Ethics Overview In taking on any representation, lawyers assume six fiduciary duties: (1) to identify the client; (2) to exercise competence; (3) to share and exercise control appropriately; (4) to communicate; (5) to maintain confidentiality; and (6) to resolve conflicts of interest. See Restatement (Third) of the Law Governing Lawyers 16. Client Identification The client is often easily identified as the person who you have expressly agreed to represent. But clients may also be corporate entities, in which case you must determine who is empowered by the entity to direct your services. See Model Rules of Prof l Conduct R And it is important to clarify whether you represent more than one client, including any affiliated entity. It will sometimes be necessary to make explicit who you do not represent, as when interviewing employees for the purpose of providing legal advice to a corporate client. Upjohn Co. v. United States, 449 U.S. 383 (1981). Attorneys must also look out for prospective clients and any changes in the client s identity due to reorganization, death, or disability. See Restatement (Third) of the Law Governing Lawyers 15. Competence Attorneys must exercise reasonable competence in their rendering of legal services. See Model Rules of Prof l Conduct R Violating ethics rules, such as proceeding with a representation despite a disqualifying conflict of interest, may evidence a lapse in the required standard of care. Dabbling outside your area of practice may also breach this duty. Attorneys seeking to provide representation in a novel field may be able to satisfy the competency requirement through study or by associating with an experienced lawyer. Control Authority in the client attorney relationship is allocated into three categories. See Model Rules of Prof l Conduct R Clients have sole authority to determine the objectives of the representation, including whether to settle or to appeal. Lawyers have sole authority to take actions required by law before tribunals and must refuse to engage in unlawful conduct. Clients and lawyers share authority over the means by which the client s objectives are to be reached and may agree to limit the scope of representation. Communication Lawyers must keep their clients reasonably informed about the status of their matters, consult with them about the means to accomplish their objectives, and respond to reasonable requests for information. See Model Rules of Prof l Conduct R Obtaining informed consent, as may be required to fulfill other fiduciary duties, requires you to communicate all options and associated risks for your client to evaluate. See Model Rules of Prof l Conduct R. 1.0(e). Lawyers generally may not communicate about the subject of a representation with a person who is represented by another lawyer in the same matter. See Model Rules of Prof l Conduct R Confidentiality The duty of confidentiality promotes full and frank communications between client and lawyer, recognizing that sound legal advice depends on the lawyer being fully informed. See Model Rules of Prof l Conduct R This duty, with limited exceptions, prevents an attorney from revealing infor- For The Defense November

3 CLASS ACTIONS mation relating to the representation without the client s informed consent. When appearing before a tribunal, evidentiary rules may be invoked to shield from disclosure confidential communications between attorney and client made for the purpose of obtaining legal advice, as well as material prepared in anticipation of litigation. The class client is also murky in the class action context. Before certification, a formal attorney client relationship does not exist between class counsel and absent class members, but counsel must still act in their best interests. Conflicts of Interest Lawyers must act in the best interest of their clients. Conflicts may result from a lawyer s own personal interests or from the interests of concurrent clients, former clients, or third parties. See Model Rules of Prof l Conduct R. 1.7(a). Conflicts may arise as a representation evolves, so the lawyer must remain vigilant throughout the representation. In many instances, representation may continue despite a conflict if it is disclosed and the client provides informed consent. See Model Rules of Prof l Conduct R. 1.7(b). Class Actions Overview The class action is a procedural device that allows one or more plaintiffs to bring a lawsuit on behalf of a larger group, or class, consisting of individuals who have suffered harm from essentially identical conduct. Common harm may result, for example, from standardized corporate practice, mass production of a product, or violation of consumer protection laws. From a financial standpoint, these types of actions 14 For The Defense November 2017 are often impractical to litigate separately, and redundant claims pose obvious inefficiencies for our judiciary. Nevertheless, the class action is not always a proper mechanism for pursing relief. To proceed as a class action, four prerequisites to certification must be met. See Fed. R. Civ. P. 23(a). The first prerequisite, numerosity, is met if the class members are so numerous that joinder is impractical. The commonality prerequisite is met if there are questions of law or fact common to the class. The typicality requirement is met if the claims and the defenses of the class representatives are typical of the claims and the defenses of the class. And the adequacy requirement is met if class representatives and class counsel are capable of fairly and adequately representing the absent class members. For putative class actions seeking money damages, the court must also find that common questions predominate over individual ones and that the class action is superior to other methods of adjudication, known as the predominance and superiority requirements. See Fed. R. Civ. P. 23(b). Finally, courts recognize an implicit requirement of ascertainability, meaning that a proposed class must be defined in objective terms, and an administratively feasible method must exist for identifying individual class members. See, e.g., Bussy v. Macon Cnty. Greyhound Park, Inc., 562 F. App x 782, 787 (11th Cir. 2014). If any requirement is not satisfied, the class cannot be certified, and only individual claims of the named plaintiffs can proceed. If a class is certified, settling the class action requires judicial approval. See Fed. R. Civ. P. 23(e). Once a settlement has been reached, the court will hold a hearing to determine whether the settlement is fair to all class members, who will receive notice of the proposed settlement and have an opportunity to object. Settlements and judgments bind all class members, provided that the requirements for maintaining a class are met. Whether the case settles or a jury awards damages, the judge will have the final say on how to distribute fees, costs, and damages. Inherent Ethical Issues in the Class Action Context From their very inception, class actions are at odds with traditional ethics rules because class actions are almost always the brainchild of lawyers who specialize in bringing such actions. Espenscheid v. DirectSat USA, LLC, 688 F.3d 872, 876 (7th Cir. 2012). The result is litigation that is largely attorney driven, rather than client driven, and counsel often proceeds in a way that would ordinarily be inconsistent with the duties of control and communication. See Eubank v. Pella Corp., 753 F.3d 718, (7th Cir. 2014) (observing that counsel have no incentive to pick class representatives who are capable or desirous of monitoring [their] conduct ). The class client is also murky in the class action context. Before certification, a formal attorney client relationship does not exist between class counsel and absent class members, but counsel must still act in their best interests. See Newberg on Class Actions 19:2 (5th ed.). After certification, an attorney client relationship between class counsel and absent class members exists for most purposes. As the exception, class members are not clients for purposes of Model Rule 1.7, which means that class counsel can be adverse to absent class members in other matters unrelated to the class action. See Model Rules of Prof l Conduct R. 1.7 cmt. 25. This exception is born out of practical necessity: It is somewhat inevitable that among the throng of absent class members in a class action are individuals or entities to whom class counsel might be adverse in another matter. Newberg on Class Actions 19:21 (5th ed.). Conflicts of interest pose perhaps the biggest ethical problem in class representations. See Mirfasihi v. Fleet Mortg. Corp., 551 F.3d 682, 686 (7th Cir. 2008) (observing that the typical pathology of class action litigation is riven with conflicts of interest ). Conflicts may exist between class members due to individual differences in their circumstances in that pursing a given legal strategy may favor some class members but harm others. Conflicts may also exist between class counsel and class members, particularly when it comes to settlement. As one court has explained: The class members are interested in relief for the class but the lawyers are interested in their fees, and the class members stakes in the litigation are too small to motivate them to supervise the

4 lawyers in an effort to make sure that the lawyers will act in their best interests. The defendants in class actions are interested in minimizing the sum of the damages and so they are willing to trade small damages for high attorneys fees[.] Thorogood v. Sears, Roebuck & Co., 547 F.3d 742, (7th Cir. 2008). In ordinary litigation, conflicts can be cured with informed consent. See Model Rules of Prof l Conduct R. 1.7 & R. 1.8(g). But obtaining informed consent from class members is all but impossible. See Geoffrey P. Miller, Conflicts of Interest in Class Action Litigation, An Inquiry into the Appropriate Standard, 2013 U. Chi. Legal F. 581 (2003). Even if the notice sent to the class explains the risks of multiple representation and covers other topics needed for informed consent (though it rarely will), the bigger problem is that class members generally do not have to opt-in. Instead, [t]he class action client must take affirmative steps to opt out; if she does nothing, she will remain in the class and will be bound by any settlement or judgment. Id. at 586. Given these inherent ethical issues, the question becomes how to manage class actions in a way that curbs the abuses that the traditional ethics rules are designed to prevent. As discussed below, the answer for now appears to be vigilant policing by the judiciary. Whether judicial oversight is sufficient or whether legislative reform is needed is the subject of ongoing debate. Precertification Communications As explained above, attorneys may not communicate about a legal matter with individuals who are represented by another attorney in the same matter. See Model Rules of Prof l Conduct R. 4.2 In class actions, an important question is at what point are the absent class members represented by class counsel, which would prevent defense counsel from communicating with them? Does representation begin upon the filing of the class action complaint? Or does it begin only after the class is certified? The answer is critical for defense attorneys who wish to gather information for their cases or negotiate individual settlements. The prevailing view is that [a] clientlawyer relationship with a potential member of the class does not begin until the class has been certified and the time for opting out by a potential member of the class has expired. In re Katrina Canal Breaches Consol. Litig., 2008 WL , at *3 (E.D. La. Sept. 22, 2008). Accordingly, defense counsel is generally free to communicate directly with absent class members and negotiate individual settlements before certification. See, e.g., Christiansen v. Kiewit- Murdock Inv. Corp., 815 F.2d 206, (2d Cir. 1987); Duhaime v. John Hancock Mut. Life Ins. Co., 183 F.3d 1, 4 (1st Cir. 1999). A small minority view is that the mere initiation of a class action prohibits defense counsel from communicating with absent class members. Dondore v. NGK Metals Corp., 152 F. Supp. 2d 662, 665 (E.D. Pa. 2001). But several courts have declined to follow Dondre, reasoning that the weight of authority had not adopted it. See, e.g., Talamantes v. PPG Industries, Inc., 2014 WL , at *6 (N.D. Cal. Aug. 21, 2014); Bobryk v. Durand Glass Mfg. Co., Inc., 2013 WL , at *9 (D.N.J. Oct. 9, 2013) (same). While precertification communications between defense counsel and putative class members are generally permitted, courts still have the authority to control abuses. See Gulf Oil Co. v. Bernard, 452 U.S. 89, 102 (1981). In particular, defense counsel must be careful not to mislead, deceive, coerce, or otherwise communicate in bad faith. The analysis is highly fact driven, and courts are not uniform in their approaches, as the following cases illustrate. In Camp v. Alexander, 300 F.R.D. 617 (N.D. Cal. 2014), involving a putative wage-and-hour class action, the defendant sent its employees, who were also putative class members, a letter explaining its position in the litigation and providing an opt-out declaration. In finding the letter coercive, the court pointed out that communications between employer and employee are prone to coercion, and here, the letter was one sided, omitted the contact information for plaintiffs counsel, and told employees that the defendant would face closure if the lawsuit succeeded, leaving the employees without jobs. The court also held that seeking optout declarations ex parte before certification was improper. As a remedy, the court ordered a curative notice that described the circumstances of the lawsuit in more neutral terms and invalidated the optout declarations. In Slavinski v. Columbia Ass n, Inc., 2011 WL (D. Md. Mar. 30, 2011), defense counsel acted with more care in communicating with absent class members. At the beginning of each interview, defense counsel disclosed that she represented the defendant, stated that she wanted to discuss the lawsuit, provided a copy of the complaint, summarized its allegations, and explained the consequences of opting out before asking whether employees would sign declarations. The court seemed to endorse a more lenient approach, reasoning that the inherently coercive nature of the employeeemployer relationship, without more, did not render the interviews improper, and it refused to find ex parte opt-out solicitations invalid as a matter of law. Finding no evidence that defense counsel had misrepresented any facts or discouraged participation in the lawsuit, the court concluded that the communications were proper. In short, defense counsel engaging in precertification communications must tread carefully. Depending on the law in your jurisdiction, it may be prudent to disclose the case number, provide a copy of the complaint, identify yourself as counsel for the defendant, provide an impartial summary of the allegations in the action, supply contact information for plaintiffs counsel, and explain in simple terms the consequences of any action that you are requesting. Ex parte opt-out solicitations may or may not be permitted. Opposing Certification Federal Rule of Civil Procedure 23 s requirement that named plaintiffs adequately represent the class serves as an ethical check before certification. One purpose of the adequacy requirement is to uncover conflicts of interest between named parties and the class they seek to represent. Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 625 (1997). To bar certification, the conflict must be fundamental and go to the heart of the litigation. Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, (4th Cir. 2003) (internal quotation marks omitted). Evaluating adequacy will often involve a typicality analysis. This is because a For The Defense November

5 CLASS ACTIONS Ethics come into play because incentive awards can act to destroy the alignment of interests between named plaintiffs and the class that they represent, and this can jeopardize classwide settlement. 16 For The Defense November 2017 named plaintiff cannot adequately represent the interests of absent class members whose claims and defenses are not typical of the named plaintiff s. See Wooden v. Bd. of Regents of Univ. Sys. of Georgia, 247 F.3d 1262, 1287 (11th Cir. 2001). In Gresser v. Wells Fargo Bank, N.A., 2014 WL (D. Md. Mar. 31, 2014), the court identified two disqualifying conflicts of interest. The first arose because the named plaintiffs theory of liability threatened to bar the claims of some class members altogether. Specifically, the named plaintiffs alleged that Wells Fargo waited too long to declare an event of default, yet some class members had made statements or signed waivers seeking to prevent Wells Fargo from making the very same declaration until later. If the action proceeded under the named plaintiffs theory, then class members who had sought to delay Wells Fargo from taking action would face waiver and estoppel defenses that could completely bar their recovery. Id. at *4. The second conflict arose because Gresser, one of the named plaintiffs, lacked the required documentation for her note, which called into question her ability to recover. With a fixed pool of damages, each class member stood to collect more if the class shrunk. So whereas Gresser had an interest in defining the class broadly to include all noteholders, other class members had an interest in limiting that definition to those with required documentation. This, too, created a fundamental conflict that precluded certification. The sources of conflicts are seemingly endless. In product liability cases, for example, classes can divide on issues such as whether class members purchased outside the statute of limitations, whether class members purchased as is, and whether class members knew, or had reason to know, about the defect at the time of purchase. Defendants should also be on the lookout for when the claims of some class members are waived to satisfy Federal Rule of Civil Procedure 23 s commonality requirement. This is because waived claims may be forever barred under res judicata, and this preclusive effect may not be in the best interest of the affected class members. Because conflicts have the power to foreclose certification, identifying them should be part of any defense strategy. Incentive Awards Courts in recent years have been closely scrutinizing class action settlements. One hot-button issue is incentive awards, which are fairly common in class actions, for practical reasons: [A class action] cannot be brought without a plaintiff. And a class action plaintiff assumes a risk; should the suit fail, he may find himself liable for the defendant s costs or even, if the suit is held to have been frivolous, for the defendant s attorneys fees. The incentive reward is designed to compensate him for bearing these risks, as well as for as any time he spent sitting for depositions and otherwise participating in the litigation as any plaintiff must do. The plaintiff s duties are not onerous and the risk of incurring liability is small; a defendant is unlikely to seek a judgment against an individual of modest means (and how often are wealthy people the named plaintiffs in class action suits?). The incentive award therefore usually is modest the median award is only $4,000 per class representative Espenscheid, 688 F.3d at (internal citations omitted). Ethics come into play because incentive awards can act to destroy the alignment of interests between named plaintiffs and the class that they represent, and this can jeopardize classwide settlement. For example, when incentive awards have been offered only to named plaintiffs who support the settlement, named plaintiffs will be inclined to accept the settlement even if it is not in the best interests of the class. As another example, an incentive award may be so large in relation to the settlement that it significantly diminishes the amount available to the class. If the conflict is fundamental and prevents the named plaintiffs from serving as adequate representatives, then the classwide settlement cannot be approved. See, e.g., Eubank, 753 F.3d at 723; Radcliffe v. Experian Info. Solutions, Inc., 715 F.3d 1157, 1164 (9th Cir. 2013). The Ninth Circuit s decisions in Rodriguez v. W. Publ g Corp. (Rodriguez I), 563 F.3d 948, and Rodriguez v. Disner (Rodriguez II), 688 F.3d 645 (9th Cir. 2012), have drawn significant attention. At issue was the settlement of an antitrust class action in which the defendants, providers of bar review courses, agreed to pay $49 million into a settlement fund. Retainer agreements with five of the seven named plaintiffs obligated class counsel to seek incentive awards from that fund in an amount that corresponded to the settlement value. Under this incentive agreement, if the amount were greater than or equal to $500,000, class counsel would seek a $10,000 award for each of them; if it were $1.5 million or more, counsel would seek a $25,000 award; if it were $5 million or more, counsel would seek $50,000; and if it were $10 million or more, counsel would seek $75,000. Rodriguez I, 563 F.3d at 957. The district court held a fairness hearing, and among other rulings, the court denied the motion for incentive awards as unreasonable in amount and held that the incentive agreements created actual conflicts of interest in violation of public policy. Id. at 958. As the court explained, while incentive awards are themselves typical in class actions, the incentive agreements here were tied to the ultimate recovery amount and thus put class counsel and the named representatives in conflict from day one. Id. at 959. In particular, the incentive agreements broke the alignment of interests between the named plaintiffs and the class because

6 once the threshold cash settlement was met, the agreements created a disincentive to go to trial; going to trial would put their $75,000 at risk in return for only a marginal individual gain even if the verdict were significantly greater than the settlement. Id. at The court also noted that the incentive agreements should have been disclosed at the class certification stage and would have been relevant to whether the named plaintiffs could adequately represent the class. Id. at 959. Nonetheless, the district court approved the settlement. On appeal, the Ninth Circuit expressed its disapproval of the incentive agreements but agreed with the district court that rejecting the settlement was not required. The class was adequately represented by the two named plaintiffs who had not entered into the incentive agreements, and only one representative need be adequate for certification purposes. Id. at 961. Nonetheless, the Ninth Circuit found that the district court had overlooked the effect of the incentive agreements on class counsel s entitlement to an award of attorney s fees, and it ordered consideration of that issue on remand. Id. at 967. On remand, the district court concluded that the incentive agreements created a conflict in violation of California s ethics rules, and consequently, the violation forfeited counsel s entitlement to fees. Rodriguez II, 688 F.3d at 652. That decision was also appealed. On review for the second time, the Ninth Circuit affirmed, noting that the district court has broad discretion to deny fees to an attorney who commits an ethical violation, that representation of clients with conflicting interests without informed consent is a particularly egregious ethical violation, and that the district court has a special obligation in common fund class action cases, given the district court s fiduciary duty to protect absent class members. Id. at The two Rodriguez decisions expose the truly serious implications that incentive agreements may have. For defense counsel in particular, the decisions highlight the need to seek incentive agreements in discovery, and if it is appropriate, use those agreements to attack the adequacy of both the named plaintiffs and class counsel at the certification stage. Proposed Legislative Reform Recent proposed legislative reform, the Fairness in Class Action Litigation Act of 2017, H.R. 985, includes among its proposed changes several measures that would curtail ethical abuses. The bill has passed the House and awaits consideration by the Senate. Conflicts The act would require class counsel to disclose whether the named plaintiff is a relative, a former or current employee, or a former or current client (apart from the subject litigation), and it would require a court to deny certification if the named plaintiff falls within any of those categories. Typicality The Fairness in Class Action Litigation Act would heighten the typicality standard, requiring that every class member suffer the same type and scope of injury as the named plaintiff. This would prevent a class from being defined to include uninjured individuals. Attorney Fees The Fairness in Class Action Litigation Act would prohibit the distribution of fees until after allocating class relief and would limit fee awards to a reasonable percentage of payments actually distributed to the class. And for cases involving injunctive relief, fees would have to correspond to the value of the injunctive relief. These and other changes proposed in the act are expected to be the subject of contentious debate before the Senate, and the bill has already received opposition from civil rights groups, consumer advocacy groups, and the American Bar Association, among others. While it is difficult to predict its fate, if it is passed, the bill would be the most comprehensive reform since the 2005 Class Action Fairness Act (CAFA). Conclusion These are only a few of the ethical issues that you may encounter in class action litigation; how best to resolve those issues may not always be clear. Courts faced with developing this area of the law have had to consider a confluence of competing policies, often striking different balances with varying results. Attorneys must therefore proceed with care, be on alert for developments, and understand the law in the jurisdictions in which they practice. For The Defense November