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Posts Tagged ‘fee splitting’

A recent article by Ann Woolner of Bloomberg offers an interesting profile of class action pioneer William Lerach, who has been traveling the world and relaxing in his seaside mansion since his release from prison last year.  Lerach was convicted in 2007 for his part in a kick-back scheme in which lawyers agreed to split fees with clients in order to convince them to participate as representatives in class actions.   Whatever you might think about Lerach, it’s hard to deny his influence on the development of modern U.S. class actions.  However, the hubristic conduct that led Lerach to prison, his public lack of remorse for his actions, and the idea that he is now left to live happily ever after, will continue to make him a poster child for those who argue that our U.S.  system of class actions is in need of drastic reform.

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Third party litigation funding has become intriguing development in the expansion of global class and collective action litigation over the past several years, particularly in Australia.  (For various previous CAB articles addressing third party litigation funding, click here).  The concept of third party litigation funding generally refers to financing of litigation by a private party or corporation that is not a party to the dispute, in exchange for a right to a portion of the recovery if the litigation is successful. 

In the U.S., the ethical rules prohibiting fee-splitting with nonlawyers made most types of third party litigation funding improper (see Model Rules of Prof’l Conduct, R. 5.4(a)), while the existence of law firm funding through contingent fee arrangements (Model Rules of Prof’l Conduct, R. 1.5(c)) made nonlawyer sources of funding unnecessary for the development of class action litigation.

However, in other parts of the world, where contingent fees are prohibited, third party litigation funding has developed as an alternative to provide a means for plaintiffs to pay for class action litigation and to avoid the risks associated with the English rule, or “loser-pays” rule, which requires the loser of a case to pay the other side’s costs and attorneys’ fees.

Sue Lannin, financial reporter for ABC (Australia Broadcasting Corporation) News, published this article on Wednesday discussing the impact that private litigation funding may be having on class action litigation in Australia.  The article quotes one Australian attorney who believes that private litigation funding is responsible for a recent increase in shareholder class actions and will likely continue to generate an explosion of class action litigation in that country.  However, the article also quotes an attorney with a contrary view, that the recent increase in shareholder class actions is simply the result of the financial crisis in the latter part of the last decade.

The combination of deep pockets and the legal ability to pursue class action litigation for profit would appear to be a good recipe for expanding class action litigation anywhere, but whether litigation funding in Australia actually creates a “US-style litigation culture with unregulated legal financiers shopping around for cases” remains to be seen.

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AP writer Greg Risling reported today on the sentencing of former Milberg Weiss partners Steven Schulman and David Bershad for their roles in a scheme involving the payment of kickbacks to plaintiffs in securities class actions.  Both lawyers were sentenced to six month prison terms.  The scandal involved paying class representatives a portion of the oftentimes multi-million dollar legal fee awards obtained as part of large class action settlements.  In this way, the conspirators were able to provide a significantly greater incentive for a plaintiff to pursue the case than if he or she were limited to recovering an amount necessary to compensate them for their injury.  However, fee-splitting with non-lawyers is considered unethical under long-standing rules of professional conduct.  According to the article, available at Newsweek.com:

In a letter submitted to Federal District Court Judge John Walter, Bershad apologized for the deception.

“I now recognize that our behavior grievously injured the judicial process,” he wrote. “I will live out my days with the painful knowledge that our acts tarnished all of the good work we did.”

Co-conspirator William Lerach published an essay in Portfolio.com earlier this year entitled “I am Guilty,” in which he unapologetically blamed his conviction on zealous prosecutors, the bar associations, big business, and just about everyone other than himself.  Lerach’s diatribe makes the quote from Bershad’s letter seem downright contrite, until you look more closely at his word choice: “I now recognize.”  Though subtle, either the introductory clause reflects a lingering defiance, being code for “I know I need to say this but I don’t really mean it,” or Bershad was commenting on the difficulty of seeing anything wrong with his behavior in the first place: “how could I possibly have known that what I was doing was illegal?”  Either way, his failure to state simply that “Our behavior grievously injured the judicial process” reflects the warped sense of morality that underlies the actions of the lawyers involved in the scandal.

Bershad’s apology fails to recognize that his illegal acts didn’t just tarnish “all the good work” he believes he did, they took the “good” of the work entirely.

Essentially, the argument is that fee-splitting with clients, while concededly unethical and illegal, was a morally necessary tactic to level the playing field in taking on powerful interests.  “Whistleblowers” just needed an extra push to convince them to help the white knights seek justice against evil corporations.  Lerach’s essay even goes so far as to compare his crusade to that of the lawyers who brought the landmark civil rights decision Brown v. Board of Education, though his essay glosses over the small detail that those lawyers did not need kickbacks to persuade a plaintiff to help them do justice.

The “end justifies the means” argument does not work here.  Taking on wrongs in the name of public interest is what attorneys general and other regulators are for.  If public prosecution is not enough, and if there is a true problem in incentivizing victims to pursue a civil remedy without having to bribe them, then we should have a debate about how to change the system.  The kind of private vigilante justice that Lerach and his counterparts championed, where the rule of law is abandoned in the name of the common good, can only lead to exploitation and greed.  It can in no way be considered “good work.”

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Here are some blog entries from the week that was that might be of interest to class action practitioners:

Class Action Decisions

The UCL Practitioner quotes a recent California Court of Appeal decision reversing a trial court’s order denying class certification on the ground that the court had not allowed pre-certification discovery of the identity of possible replacement class representatives under Pioneer Electronics v. Superior Court, 40 Cal. 4th 360 (2007) (link to opinion provided by Class Action Defense Blog):

http://www.uclpractitioner.com/2008/09/new-class-certi.html

CAFA Law Blog provides a synopsis of a Louisiana federal court decision addressing the time for removal under CAFA and the non-applicability under CAFA of the “first-served” rule, which provided that all defendants had to join in a removal petition within 30 days from the date that the first defendant was served with process:

http://www.cafalawblog.com/-case-summaries-eastern-district-of-louisiana-says-no-go-noto-refusing-to-remand-cafa-case-back-to-state-court-on-timeliness-issue.html

Class Action Defense Blog summarizes a California opinion upholding the dismissal of a claim for attorneys fees under a fee sharing agreement that was not disclosed prior to another court’s ruling on a fee award in an underlying class action settlement:

http://classactiondefense.jmbm.com/2008/09/attorney_fees_class_action_def_1.html

Delaware Corporate and Commercial Litigation Blog discusses a Delaware Chancery Court decision allowing objectors limited discovery in evaluating the fairness of a class action settlement:

http://www.delawarelitigation.com/2008/09/articles/chancery-court-updates/limited-discovery-allowed-for-objectors-to-class-action-settlement/

Class Action News

Jurist reports on a class action lawsuit filed against the NSA, President Bush, Vice President Chaney, and other government officials for actions in connection with their warrantless surveillance program to gather consumer information from telecommunications companies:

http://jurist.law.pitt.edu/paperchase/2008/09/class-action-lawsuit-filed-over-us.php

Tribune Company issues a press release regarding an ERISA class action filed by various reporters, editors, and other employees of the LA Times, a case covered in various blog entries last week.  (See last week’s CABWR)…

http://www.tribune.com/pressroom/releases/2008/09172008.html

… and more on the case from Southern California Public Radio:

http://www.publicradio.org/columns/kpcc/kpccnewsinbrief/2008/09/la-times-employees-file-class.html

Point of Law reports on the settlement of long-standing litigation against the New York City’s homeless programs by consolidating all pending litigation into a single class action settlement:

http://www.pointoflaw.com/archives/2008/09/nyc-settles-maj.php

Class Action Commentary

A Seattle Supersonics fan provides an insider’s view of a heated battle over a subpoena issued by the defendant to a founder of the fan-organized lobbying group, Save our Sonics, in a putative class action for alleged deceptive marketing practices filed on behalf of Sonics ticketholders against the ownership group that recently moved the team to Oklahoma City, from Seattle Center Arena Reboot:

http://seattlecenterarenareboot.blogspot.com/2008/09/dispatches-from-tenth-circle-sonics-fan.html

The Complex Litigator offers commentary on developments in California case law regarding the preclusive effect of a denial of class certification:

http://www.thecomplexlitigator.com/2008/09/johnson-v-gla-1.html

Spam Notes comments on a recent class action settlement involving alleged text messaging spam and addresses the issue whether text messaging spam falls within the purview of the Telephone Consumer Protection Act of 1991 (TCPA):

http://spamnotes.com/2008/09/23/do-text-messgaes-fall-within-the-tcpa.aspx?ref=rss

Practice Tips

Drug and Device Law Blog offers a “Multidistrict Litigation Compendium,” which includes a clarification of the distinction between the MDL process and class certification:

http://druganddevicelaw.blogspot.com/2008/09/multidistrict-litigation-compendium.html

Class Action Trends 

Mass Tort Litigation Blog offers a link to an ABA Litigation News Section Report discussing a trend in courts ordering a full evidentiary Daubert hearing to assess the admissibility of expert testimony at the class certification stage of a class action:

http://lawprofessors.typepad.com/mass_tort_litigation/2008/09/daubert-hearing.html

The D&O Diary discusses the “dark new phase” of litigation spawned from the subprime economic crisis:

http://www.dandodiary.com/2008/09/articles/subprime-litigation/litigation-wave-inflection-point/

… and for loads of content on various other legal issues implicated by the financial crisis and proposed bailout, see http://www.theracetothebottom.org/.

Real Lawyers Have Blogs updates a previous story about a plaintiffs’ class action law firm that hired a PR firm to post a message on the social networking website Twitter seeking potential class representatives.  The update reports that the PR firm retracted the post following media and public reaction, but defended its use of Twitter to generate publicity about a potential class action as in the public interest…

http://kevin.lexblog.com/2008/09/articles/social-networking-1/pr-firm-retracts-twitter-post-looking-for-class-action-plaintiffs/

… and another brief commentary on the story from Overlawyered:

http://overlawyered.com/2008/09/using-twitter-to-scare-up-class-action-plaintiffs/

International Class Action Law

Securities Docket and Bankruptcy Information Centre discuss issues facing two British pension funds in pursuing securities class action claims against the now bankrupt Lehman Bros. investment bank:

http://www.securitiesdocket.com/2008/09/22/uk-pension-funds-in-lehman-bros-securities-class-action-weighing-options/

http://bankruptcy.org.uk/bankruptcy-news/pension-funds-review-status-of-lehman-class-action-ipecom/ (quoting article from IPE.com)

Legal Pad LA discusses a class action for life insurance benefits filed on behalf of a putative class of descendants of victims of the Armenian genocide of World War I against a foreign insurer in federal court in California:

http://www.lalegalpad.com/2008/09/descendants-of.html

ElectEcon takes issue with a Canadian usury law that formed the basis of a Ontario court’s decision holding a Canadian Satellite TV company’s late fees illegal in a class action decision impacting millions of customers: 

http://www.eclectecon.net/2008/09/consumer-protec.html

Remember the Midwest comments on an article in Australian newspaper The Age discussing a possible trend in securities class actions arising out of a company’s failure to disclose facts concerning its carbon emissions.  (for a ClassActionBlawg entry discussing the same article, click here):

http://rememberthemidwest.blogspot.com/2008/09/class-action-climate.html

Multinational Corporations links to a Business Day South Africa article reporting on developments in a case filed under the Alien Tort Claims Act against several multinational corporations for their alleged complicity in the former apartheid policy of the South African government:

http://www.multinationalcorporations.info/blog/9675/apartheid-class-action-group-in-us-court-again%C2%A0-business-day-south-africa/

Class Action Politics

Primary Monitor Blog provides a list of issues on which Presidential candidates Barack Obama and John McCain agree, including their support of the Class Action Fairness Act (CAFA):

http://199.125.75.56/primaryblog/voting_records_where_mccain_obama_have_agreed

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