Recently in Attorneys' Fees and Ethics Category

(This post is co-authored with Adam Schulman of the Center for Class Action Fairness.)

Sullivan v. DB Investments, the Third Circuit en banc decision affirming a class action settlement certification, was troubling, for reasons noted by Andrew Trask last year. Class members who had no cause of action were grouped with class members who did have a cause of action in a single settlement class, and got identical relief. The Third Circuit found no intra-class conflict, despite the obvious wealth transfer. As Judge Scirica's concurrence reads:

[O]bjectors contend some class members do not have a valid cause of action, but these class members with non-repealer state law claims have lost nothing through inclusion in the class. Objectors speculate inclusion of non-repealer state law claims necessarily diminishes the settlement accrued to class members whom they contend have undisputedly valid claims. But they provided no support for their assertion.

Objectors contend they seek to protect absent class members, but fail to explain how absent class members--all of whom claim injury--are harmed by the defendants' willingness to settle all potential claims.

Judge Jordan had the obvious rejoinder:

The problem here is not that some absent class members who deserve compensation are left out by the settlement. The problem is that some class members who deserve nothing are included in the settlement and hence are diluting the recovery of those who are entitled to make claims. That harm is real, and the cause of it, the overbreadth of the class, is akin to the problem in Amchem.

Now, over a year after the decision, checks have been mailed, and, surprise, surprise, class members' claims have been diluted to near nothing: a Consumerist poster, Laura Northrup, notes that a class member with a $3000 claim (which would be trebled under the antitrust laws), received a mere $48. (This is hardly surprising, given that there were 67 million class members splitting about $200 million. If anything, $48 is surprisingly large. Of course, Ms. Northrup's friend might be in the $0 cross-subsidizing subclass, rather than the subclass whose recovery was diluted.) Meanwhile, the attorneys who won this nuisance settlement of pennies on the dollar were compensated more than in full: $73 million.

The DC Circuit rejected a similar challenge in Cobell v. Salazar; cert petitions were rejected in Cobell and voluntarily dismissed in Sullivan, so the Supreme Court has not yet addressed appellate courts' disregard of its precedents and the circuit split, but the issue is likely to arise again in some pending megasettlements.

Every plaintiff's and every defendant's attorney know that, for any given alleged tort, damages determined by a jury are likely to be higher, ceteris paribus, if the defendant is a corporation than if the defendant is a human person. [There are lots of scholarly confirmations of this jury bias: see, for example, Hammitt, Carroll & Relies, Tort Standards and Jury Decisions, 14 J. LEGAL STUD. 751 (1985).] This is in no small part because compensatory damages include "pain and suffering", which have no explicit market evaluation, thus allowing for much subjective leeway against juries, who may well conclude that a "deep-pocketed" corporation will not itself feel "pain" by having to compensate a plaintiff more fully.

The Alabama Supreme Court this week tackled a very interesting ethical issue arising from this commonly held belief in jury bias against corporations. The issue, in a nutshell, was the following: if a plaintiff's attorney sues a human being, but negligently fails to sue a corporation that would have been held jointly and severally liable with that individual, and if as a direct result of this failure the plaintiff receives less money than he otherwise would have received, is the plaintiff's attorney liable (for malpractice) for the difference?

The facts in Hand v. Howell et al. were, in essence, as follows:

-Tommy Hand, driving a truck as part of his own employment, was struck and injured by a vehicle negligently driven by the personal auto of Julie Bennett, who "was on-duty and working within the line and scope of her employment with the Montgomery Advertiser" at the time.

-Hand consulted the Howell law firm, which sued Bennett BUT NOT the Montgomery Advertiser (or its parent, Gannett). By the time Hand fired the Howell firm and hired new attorneys, the statute of limitations had run against the Advertiser.

-Hand suffered severe back injuries. His economic damages alone were about $872,000, and of course he also had "pain and suffering" damages.

-Bennett's personal auto insurance limit was the state minimum $25,000 (and Bennett was manifestly insolvent). However, fortunately for Hand, the Advertiser's $5 Million liability policy actually named Bennett as being insured.

-After complicated proceedings, Hand settled with Bennett for approximately $625,000, of which $25,000 was paid by her personal liability policy and the rest by the Advertiser's insurer.

-But Hand's new attorneys produced evidence that the settlement value of the suit HAD IT BEEN FILED AGAINST THE ADVERTISER would have been between $1 million and $1,200,000. This amount would have recoverable, of course, since the newspaper's liability limit was $5 million

Against this backdrop, the plaintiff sued the Howell law firm for the difference between what he recovered (which was not even enough to pay for his economic costs) and what he would likely have recovered had the employer been sued.

A bare majority of the Alabama Supreme Court approved granting summary judgment to the Howell firm. According to the court, the only reason the settlement value of a suit against the employer was greater than the settlement value of a suit against the negligent employee is jury bias against corporations. But, stated five of eight Justices (this number included one concurring Justice), such bias may not be considered as a matter of law. The three dissenting Justices noted that negligence, causation and damages had been properly alleged and prima facie proven, thus entitling the plaintiff to pursue his legal malpratice case to a jury.

Crucial, of course, was the fact that the newspaper's liability policy personally covered the defendant -- otherwise there would have been damages aplenty as plaintiff would have recovered only $25,000. The dissenting Justices are clearly correct that plaintiff had offered proof of negligence, causation and damages. Only the refusal to acknowledge the truth of jury bias precluded recovery against the negligent law firm.

Should the majority have prevailed? Should plaintiff benefit from anti-corporate jury bias if his case is properly pleaded to a jury, but not benefit from it against his lawyer if the latter negligently failed to avail himself of it? Of course, in the former case no judge ever admits that there is bias -- the judge merely issues a judgment on the jury verdict. In the latter case, for the plaintiff to prevail against his lawyer, a court would have had to officially acknowledge jury bias. That is one thing the Alabama court (and, we think, most courts) would be loathe to do. The emperor remains fully clothed!

Support.com offered a free "checkup" of computer safety; according to plaintiffs who sued, this was a scam that overstated the dangers and computer errors in a system to induce people to buy $29 software or a $4.99/month subscription service. LaGarde v. Support.com quickly settled for $10 a class member. Whatever the claims process was, it didn't impress the class: less than 0.2% of class members made claims. For the same reason that no one brings an individual claim for $29, no one objected to the settlement. After the parties boosted the claim value to $25 (without any notice to class members who might have taken the trouble to ask for $25 when it wasn't worth their time to ask for $10) and throwing in $200,000 to cy pres, the district court rubber-stamped the settlement and fee petition when no one objected. That $700,000 was 1.4 times what was likely an inflated lodestar of $500,000, so the attorneys suffered no consequences for freezing out 99.8% of the class, who got nothing. And Support.com got rid of consumer-fraud claims for the low low price of about $1.25 a class member, the vast majority of which went to attorneys. Consumer Watchdog, an organization that purports to be consumer advocates, seems not to complain that it received $100,000, more than three times as much as the consumers it purports to advocate for.

One of the targets of the Class Action Fairness Act was coupon settlements, the problematic class-action settlement device where the attorneys would receive millions, and the class members would receive coupons of little or no value that were often indistinguishable from what the defendant would use to market itself to non-class members anyway. Under 28 U.S.C § 1712(a), if a court is to value coupons in a coupon settlement, it has to use the value of the "redeemed" coupons, not some hypothetical valuation.

The coupons issued by HP in the HP Inkjet Litigation case were especially appalling: a few dollars only good at HP.com, and not stackable with other coupons. HP looked to make money on the coupons, because they would receive full retail price (minus a few dollars) for things like paper and ink cartridges instead of wholesale price if consumers purchased the goods (often at lower prices) at Staples or Amazon. The Center for Class Action Fairness objected to a settlement that looked to pay the attorneys $2.9 million, but the class only worthless coupons. The district court approved the settlement, while reducing the Rule 23(h) award to $2.1 million, even though class members only claimed about 30% of the coupons available: the $800,000 and remainder of the coupon "fund" reverted to HP. We appealed the district court's failure to follow § 1712(a). As Larry Schonbrun recently complained in the American Thinker, many courts had been evading CAFA's requirement by looking at a provision that permitted the use of lodestar for non-coupon relief.

In a split 2-1 decision that was the first published appellate decision to interpret § 1712, the Ninth Circuit agreed. We were especially pleased by the following language endorsing a principle that has motivated many Center objections:

Of course, one might argue that the fees award in this hypothetical case is "attributable to" the work of class counsel on the action, rather than the coupons. But one would be mistaken. Attorney's fees are never "attributable to" an attorney's work on the action. They are "attributable to" the relief obtained for the class. See Class Plaintiffs v. Jaffe & Schlesinger, P.A., 19 F.3d 1306, 1308 (9th Cir. 1994). An attorney who works incredibly hard, but obtains nothing for the class, is not entitled to fees calculated by any method.
For although class counsel's hard work on an action is presumably a necessary condition to obtaining attorney's
fees, it is never a sufficient condition. Plaintiffs attorneys don't get paid simply for working; they get paid for obtaining results. Because it is the class relief that is both a necessary and a sufficient condition to an award of attorney's fees, it follows that an attorney's fees award can only be "attributable to," or the consequence of, the class relief, not the attorney's hard work.

The dissent, however, which was willing to read the "redeemed" requirement right out of the statute, and affirm a settlement approval where the attorneys recovered more than even the face value of the coupons, shows how difficult it is to legislate reform.

More: Trask; law.com (upgrading me from "gadfly" to "class action titan"); Reuters; Zieve; Jacobson/Monaghan; Bashman; Law360 ($).

A big victory for the Center, its third appellate victory this year. (The Center is not affiliated with the Manhattan Institute.)

CCAF filed an opening brief in October; after many many delays, the reply brief is now on file. The case presents the question whether a district court can rubber-stamp a settlement that pays the attorneys more than four times what the class received without making any reasoned response to the objections. It also presents the question of whether one can assert that injunctive relief that merely continues a customer-service program that preexisted the litigation can be counted as a settlement benefit, and what procedural rights a district court and appellee has in trying to deter appeals through punitive appeal-bond orders. Our objection to the odd claims process—whereby Apple laptop owners were required to download information from the settlement website, print it out and fill out paperwork by hand, and then manually mail it in—designed to deter claims will surely be helped by the Baby Products precedent. (As always, the Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

CCAF has filed an objection on behalf of a class member in the Southwest Drink Voucher coupon settlement, which I discussed here in January, and was covered in Legal Newsline. (CCAF is not affiliated with the Manhattan Institute.)

The Center for Class Action Fairness filed an objection on Sam Kazman's and my behalf yesterday. The settlement would pay attorneys $7.5 million, and give some class members the opportunity to claim up to $10 from a net fund of about $9M to $10M—except the number of claims is likely to be high enough to preclude any class distribution at all. We've objected, inter alia, to the excessive fee request and to the Rule 23(a)(4) problems presented by class certification. We've been talking about this cy pres settlement for a year on Point of Law.

Public Citizen has also objected on overlapping, but different grounds. Amusingly, another objector, represented by an attorney who's been practicing for 25 years, filed a brief cut and paste from a several-year-old CCAF brief, so missed the opportunity to cite some more recent cases.

(CCAF is not affiliated with the Manhattan Institute.)

As in our successful Baby Products objection, the Center for Class Action Fairness recently represented me objecting to two similar settlements where the attorneys' fees were based on the size of the settlement fund rather than the tiny percentage of the settlement fund that would go to the attorneys' putative clients: Bayer and EA Sports Madden. Confronted with our objection in Bayer, the parties suddenly discovered that they could obtain a list of class members and send them checks directly, increasing payout more than 25-fold by millions of dollars. And the court in EA Sports strongly encouraged the parties to increase payouts and issue new notice to ensure money get distributed to the class: a tripling of payouts plus a more-than-doubling in claims rates has again resulted in millions of dollars for class members.

(The Center is not affiliated with the Manhattan Institute.)

Six weeks ago the Virginia Supreme Court issued a very interesting, and in my opinion controversial, decision regarding lawyer advertising. It seems that one Horace Frazier Hunter, who practices criminal defense law in Richmond, authors a trademarked blog called This Week in Richmond Criminal Defense. The blog consists almost entirely of summaries of criminal cases won by Mr. Hunter -- though it also is sprinkled with occasional legal commentary. The summaries contained the real names of Hunter's clients and the crimes they were alleged to have committed.

As a result of Hunter's blog posts, the Virginia State Bar launched an investigation. One of Hunter's former clients complained to the Virginia State Bar that Hunter's publication of his criminal trial was embarrassing or detrimental to him, even though the trial was public, because few knew about the trial while the entire world could read Hunter's blog. [The Virginia Rules of Professional Responsibility, like rules in most states, prohibit the release of "information gained in the professional relationship ... the disclosure of which would be embarrassing or would likely be detrimental to the client unless the client consents after consultation...."]

The State Bar investigated and agreed with the complainant. In addition, the Bar found that the blog was essentially commercial advertising, and was in violation of state rules requiring appropriate disclaimers ["Advertising;" "Your results may vary"; "Each case is unique and these outcomes are not representative;" etc.]. Hunter was admonished by the state bar for violating ethics rules, and appealed its decision. Eventually the case reached Virginia's high court.

The court made two interesting rulings.

1. A 5-2 majority held that Hunter's blog was indeed commercial speech that could constitutionally be regulated by the State Bar to the extent of requiring appropriate disclaimers. [The two dissenters held that the First Amendment prohibits the requirement of disclaimers.] The majority notably rejected Hunter's claim that all legal speech is political speech, while the dissent essentially agreed that information about the criminal justice system inevitably had political implications.

2. A unanimous court held that applying Virginia's confidentiality rules violated Hunter's First Amendment rights, since the trials were over and all information released in the blog was public. The unanimous court rejected the State Bar's assertion that, though journalists could have written about the case, lawyers are restricted from massively publicizing embarrassing information about their clients if that information is technically public but little known.

Hunter has vowed to appeal the disclaimer holding to the United States Supreme Court. I hope the Bar will cross-appeal the confidentiality holding. I had always thought that being someone's lawyer imposed duties toward that client that were greater than those incumbent on a beat reporter.....

A South Carolina class action settlement brought in$16 million for class members and $13.5 million for the attorneys. Bad enough. But the attorneys got another benefit: direction of cy pres of $3.5 million, $2 million of which is going to the alma mater of lead class counsel as a gift in his prominent wife's name. Witness how the press coverage lionizes the husband and wife. Why the attorneys get to benefit from unclaimed class-action funds rather than class members is a huge mystery to me; why this isn't so obviously a conflict-of-interest offense meriting disbarment demonstrates how little legal ethics intervenes when it interferes with the profits of well-to-do attorneys. Needless to say, the donation doesn't comply with other basic principles of cy pres. (As it is it's unclear whether the $3.5 million comes from the $16 million or from a separate fund, and another news story suggests that $10 million of the $16 million went uncollected.)