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Class Action Lawsuits and Unethical Settlements

AN INVITATION FOR CLASS ACTION ATTORNEYS TO ENGAGE IN UNPROFESSIONAL CONDUCT.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.The rest of the article can be found at http://michaelguth.

com/lawnews/classactions.htm. Copyright 2004 by Michael A. S.

Guth. All Rights Reserved. No portion of this article, including this web page, may be copied, retransmitted, reposted, or duplicated in significant portion without the express written permission of Dr. Michael Guth. Users are always welcome to establish links to this web page or to quote from it freely.

.Michael A. S. Guth, Ph.D.

, J.D., is a constitutional law attorney, legal brief writer, and health care researcher based in Oak Ridge, TN.

A web page describing his law practice and other legal writings is available at http://michaelguth.com His current research comprises inefficiencies in health care insurance, pharmaceutical pricing, and best available treatments for Alzheimer's disease, osteoporosis, and high cholesterol. He has developed and/or taught more than twenty on-line courses at more than a dozen educational institutions in the areas of economics, finance, business strategy, business law, health care administration, politics, and criminal justice. Interested students are encouraged to view his web page at http://michaelguth.com/economist.htm and click on some of the papers and articles he has written.

By: Dr. Michael A. S. Guth



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