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Archive for March, 2011

Legal commentator and unabashed crusader for class action reform, Lawrence W. Schonbrun, has a new article on The Huffington Post discussing so-called “professional” objectors in class action lawsuits.  Schonbrun criticizes what he believes is hypocrisy in plaintiffs’ class action lawyers attempting to vilify those who seek to object to class action settlements for profit because, in his view, many class actions themselves are simply vehicles for lawyers’ profit with no other social utility.  Whether you agree with his perspective, Schonbrun’s commentaries are always thought-provoking, and this piece is no exception.

I will leave it to Schonbrun and others to comment on the social value of professional objectors or class actions more generally.  As a defense practitioner, my concern is with the potential practical impact on my clients’ cases.  From a practical perspective, it is important to note that what most practitioners would consider “professional” objectors does not include nonprofit associations and lawyers whose motivation is based on a genuine belief that the settlement is unfair to consumers or that class actions should be reformed.  Nor would it include a lawyer who was retained by a client because of the client’s bona fide objection to the fairness of the settlement.  While it is possible that the motivations of a particular objector’s counsel could be mixed or unclear, most practitioners would agree that the term “professional objector” is susceptible to the same “I know it when  I see it” standard as Justice Potter Stewart’s  standard for identifying obscenity.

There is no doubt that there exists several cottage industries of entrepreneurial lawyers who have found creative ways to profit from class actions filed by other lawyers and their clients.  Professional objectors are but one of at least three groups of what many traditional plaintiffs’ attorneys would consider interlopers who seek to make a cheap buck off of someone else’s class action:

1) “Copy cat” lawyers, who file competing lawsuits in other jurisdictions

2) “Opt out” lawyers, who round up individuals to opt out of class action settlements in order to file mass actions raising the same claims

3) “Professional objectors,” attorneys who solicit members of a class in order to raise objections to a class settlement, in the hopes of being able to extract a portion of the fee or to take over as class counsel. 

From my perspective, the influence of these groups, at least in the consumer class action context, has waned over the past decade.  Five or ten years ago, it was common to expect one or more objections to a large class action settlement filed by attorneys who had an obvious track record of objecting to class actions (and no obvious political or charitable agenda).  Back then, many plaintiffs’ lawyers would simply agree to pay a small portion of the fee to the objector’s lawyer, rather than have the entire settlement held up for months or years while the objectors exhausted their appeals.  These days, by contrast, there are a variety of techniques that have been successful in  reducing the number of objections motivated purely by an outside lawyer’s attempt to profit from the settlement.  The most significant tool has been to file a motion to require the objector or his attorney to post a significant bond, measured by a percentage of the value of the settlement, pending any appeal of the denial of an objection.

The problem of dealing with professional objectors is customarily the role of plaintiffs’ counsel, although after having agreed to a settlement, the defendant has nearly as much of an incentive to overcome objections as the plaintiffs’ lawyers do.  There are several key preventative measures that both parties to a class action settlement can take to ward off professional objectors (or any objectors, for that matter), including:

  • Avoiding the appearance of collusion.  This problem is usually avoided if the settlement is reached after an otherwise contested litigation, but can be a problem if the parties reach a settlement shortly after the complaint has been filed.  In most cases, experienced plaintiffs’ counsel will insist on at least performing some confirmatory discovery before agreeing to a settlement in the first place.
  • Retaining a qualified notice expert to ensure that the notice program follows current best practices and to opine, if necessary, about the fairness, reach, and reasonableness of the settlement notice.  This is important because the most persuasive arguments that can be made by an objector is not that the settlement value is unfair (after all, the settlement is the result of a compromise between the parties) but rather it was procedurally unfair because it did not provide potential claimants with reasonable notice.

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The Wal-Mart v. Dukes argument was held as scheduled today.  Here is a Wal-Mart v. Dukes Oral Argument Transcript.  Some initial observations:

  • The beginning of the defendant’s argument was focused on the proper standard for reviewing whether the plaintiff had sufficiently common evidence of a uniform policy.
  • It was not until later in the defendant’s argument that the questioning turned to the question certified for review: whether a Rule 23(b)(2) class action should be certified in a class action seeking monetary relief in the form of back pay.  Questioning on this issue continued into the plaintiff’s argument, but then returned to questions of what standard should apply more generally in certifying an employment discrimination class action.
  • On balance, the tougher questioning of the defendant’s attorney was from the more liberal faction of the court, and the tougher question of the plaintiff’s attorney was from the more conservative faction of the court. 
  • However, to the extent the questions can be a sign of a potential split in the Court (always a dangerous assumption), it is interesting that Justice Ginsburg seemed particularly troubled by the plaintiff’s position on the applicability of Rule 23(b)(2) to the back pay claims.
  • Overall, the sentiment seemed to be against allowing Rule 23(b)(2) to be used as a vehicle to resolve individual back pay claims (again, recognizing that the nature and tone of oral argument questions is not a very reliable way to predict outcomes).  However, there seemed to be some support among several Justices for the possibility that a case could be certified under Rule 23(b)(2) for injunctive relief only, on the ground that hiring policies are discriminatory because they are excessively subjective.

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The United States Supreme Court will hold oral argument next Tuesday, March 29, 2011, in case of Wal-mart v. Dukes, No. 10-277.  The issue for review, at least so far, according to order granting certiorari, is:

Whether claims for monetary relief can be certified under Federal Rule of Civil Procedure 23(b)(2) – which by its terms is limited to injunctive or corresponding declaratory relief – and, if so, under what circumstances.

Hopefully, questions posed by the justices during the argument will also provide insight into what the Court meant in its somewhat vague directive that the parties brief the issue “Whether the Class Certification ordered under Rule 23(b)(2) was consistent with Rule 23(a).”

Another thing I’ll be looking out for is whether the questions appear to limit the analysis to the employment discrimination context, or whether they portend a more general analysis of Rule 23 that could impact class actions in other subject matter areas.

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Yesterday, Cornerstone Research published its annual report titled Securities Class Action Settlements–2010 Review and Analysis.  Among the findings in this year’s report:

  • The number of approved securities class action settlements was at a 10-year low
  • The total dollar value of settlements decreased 17% from 2009 to 2010,
  • The median settlement amount was up 40%, but the average settlement was down slightly, reportedly a result of a decline in “very large” settlements.
  • The percentage of settled cases with a related SEC settlement was up to 30% in 2010 as compared to 20% in 2009.
  • The participation of institutional investors in class actions continued to increase, continuing a trend since the passage of the Private Securities Litigation Reform Act in 1995.
  • Settlements of cases involving alleged violations of generally accepted accounting principles were up over 2009.

The report on settlements follows a similar report on securities class action filings, published in January.  Both reports are worth a close read.

The links above are to the Cornerstone summaries of the reports.  The reports themselves are available for download here.

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Class arbitration waivers are contract provisions that require disputes be submitted to arbitration but also expressly preclude the arbitration from being conducted on a representative or class basis.  Class arbitration waivers have been a hot topic in class action litigation over the past few years, as some courts have found that in certain contexts that the are unenforceable in violation of public policy.

Yesterday, the Second Circuit Court of Appeals issued its decision on remand from the U.S. Supreme Court in In re American Express Merchants’ Litigation, No. 06-1871-cv.  This is the second decision by the Second Circuit in the case finding that the class arbitration waiver provision at issue was unenforceable.  The first decision, In re American Express Merchants’ Litigation, 554 F.3d 300 (2009), was issued by a panel that included future Supreme Court Justice Sonia Sotomayor.  (See this February 2009 CAB entry discussing the decision).  Last May, the Supreme Court granted certiorari, vacated the decision, and remanded for reconsideration in light of its recent decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).

A 2-judge panel, sans now-Justice Sotomayor, issued the decision on reconsideration yesterday.  The court found that Stolt-Nielsen did not change its conclusion.  The rationale is best summarized in the following excerpt:

Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se enforceable. Indeed, our prior holding focused not on whether the plaintiffs’ contract provides for class arbitration, but on whether the class action waiver is enforceable when it would effectively strip plaintiffs of their ability to prosecute alleged antitrust violations.

Slip op. at 11.

The Court went on to hold that the arbitration provision at issue was not enforceable because, it found, the facts in the record established that having to pursue the antitrust claims at issue in the case would be prohibitively expensive without using the class action device.  Therefore, the court reasoned, the contract provision was void for public policy reasons, as a matter of law.  In rejecting the argument that Stolt-Nielsen prohibits the invalidation of arbitration provisions for public policy reasons, the court stated:

While Stolt-Nielsen plainly rejects using public policy as a means for divining the parties’ intent, nothing in Stolt-Nielsen bars a court from using public policy to find contractual language void. We agree with plaintiffs that “[t]o infer from Stolt-Nielsen’s narrow ruling on contractual construction that the Supreme Court meant to imply that an arbitration is valid and enforceable where, as a demonstrated factual matter, it prevents the effective vindication of federal rights would be to presume that the Stolt-Nielsen court meant to overrule or drastically limit its prior precedent.” (Plaintiffs’ Supp. Brief, p. 7) Following the Stolt-Nielsen decision, our court reached a similar conclusion in considering a different iteration of the issue: whether class action waivers are unconscionable as a matter of state law.

Id. at 21.

The long-term impact of the Second Circuit’s decision is unclear, especially since the Supreme Court’s decision in AT&T Mobility v. Concepcion is expected soon.  (See this November 17, 2010 CAB Entry recapping the oral arguments in AT&T Mobility).  However, AT&T Mobility involves issues of federal preemption and the power of the state courts to find class arbitration waivers unenforceable.  Therefore, even a decision favorable to the defendant in AT&T Mobility may not prevent future federal courts from applying the Second Circuit’s reasoning in invalidating class arbitration waivers.

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The audio feeds for the arguments in three of the four class-action related cases heard today by the Colorado Supreme Court are now available on the court’s website.  Here are some links:

09SC1080 Garcia v. Medved
10SC214 BP America v. Patterson
10SC77 – State Farm v Reyher

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Class Action Watch executive director Lawrence W. Schonbrun has an opinion piece in yesterday’s Huffington Post entitled The Class Action Mess in a Nutshell.  In the article, he questions whether the same “weapons of mass destruction” label that Warren Buffet gave to financial derivatives should apply equally to class action lawsuits.  As an example, he offers a recent lawsuit against a mortgage lender that had to settle a lawsuit for millions rather than face billions in potential liability for statutory penalties under the Fair Credit Reporting Act (FCRA).  The allegation against the company had been that it had sent out a mass solicitation that failed to give a sufficiently “conspicuous” statutorily-required notice about a consumer’s right to prevent certain uses of his or her credit information. 

As noted in this February 14 CAB entry, class actions seeking statutory penalties under FCRA and similar statutes have been a controversial issue over the past few years.  Some say that it is unfair to subject a company (and, by implication its employees and shareholders) to potentially “annihilating” liability for acts that have caused no material injury to the vast majoirty of a class of consumers.  Others say that if class actions are to be prohibited in cases seeking penalties under these statutes, it is up to Congress to say so.

I will leave it up to the reader to decide whether these types of class actions portend an economic nuclear holocaust.

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