July 29, 2013 Top Story

Ethical Breach by Class Counsel Does Not Defeat Certification

Court focuses on prejudice to class members or compromising integrity of the lawsuit

John W. Joyce

An ethical breach by class counsel does not automatically render counsel inadequate under Federal Rule of Civil Procedure 23(g)(1)(B). To preclude certification, class counsel's misconduct must either prejudice the class or undermine the integrity of the judicial proceedings, according to the U.S. Court of Appeals for the Seventh Circuit. Reliable Money Order, Inc. v. McKnight Sales Co.

The Original Class Actions

A law firm filed four class actions alleging violations of the Telephone Consumer Protection Act, as amended by the Junk Fax Prevention Act of 2005, 47 U.S.C. § 227. Plaintiffs were recipients of unsolicited fax advertisements; defendants were the companies advertised on the faxes.

During discovery in the class actions, plaintiffs’ counsel subpoenaed the records of Business to Business Solutions (B2B), the marketing company that sent the faxes on behalf of the class action defendants. B2B's initial document production contained a list of recipients of the advertisements commissioned by the original four class action defendants.

Plaintiffs’ counsel subsequently sought all B2B transmission data, representing that it would only view data related to the original four class actions. In connection with the discovery negotiations, counsel sent B2B a copy of the protective order from one of the class actions, the terms of which prohibited disclosure to third parties.

Eventually, B2B produced all transmission data at a deposition. Although plaintiffs’ counsel had previously compensated B2B’s principal for deposition time and document retrieval, plaintiffs’ counsel sent B2B’s counsel a second check for $5,000 after the broader data was produced. B2B’s counsel voided and returned the second check.

The B2B production contained two important sets of data: fax recipients (i.e., potential new plaintiffs) and other companies that advertised through B2B (i.e., potential new defendants). Using the newly acquired information, plaintiffs’ counsel sent solicitation letters to the fax recipients. The letters were not registered with the Wisconsin bar as required by Wisconsin Supreme Court Rule 20.7.3 [PDF].

Plaintiffs’ counsel ultimately filed more than 100 putative class actions based on the data received from B2B. One of those actions was filed against McKnight Sales Company by proposed class plaintiff Reliable Money Order.

The Class Certification Challenge

In the U.S. District Court for the Eastern District of Wisconsin, defense counsel for McKnight opposed class certification, contending that class counsel was inadequate under Federal Rule of Civil Procedure 23(g)(1)(B) because the firm breached its promise to keep information confidential and sent misleading solicitation letters.

The district court denied defendant's motion and certified the class even though it noted that class counsel’s conduct was "not entirely on the up and up." The court reasoned that Rule 23's adequacy requirement was designed to protect absent class members, observed that the firm did not breach a promise to a client, putative class member, or class member, and thus did not offend the purpose of the rule.

The “Serious Doubt” Standard

Defendants sought interlocutory review under Federal Rule of Civil Procedure 23(f). The Seventh Circuit exercised its discretion and permitted the appeal because "[a]ttorney misconduct requiring denial of class certification has received little treatment in the circuit courts."

The court analyzed the district court's decision for abuse of discretion, applying the standard set out in Creative Montessori Learning Centers v. Ashford Gear, LLC. There, considering the same misconduct, the court held that "[m]isconduct by class counsel that creates a serious doubt that counsel will represent the class loyally requires denial of certification."

Under that standard, misconduct that prejudices or creates a direct conflict between counsel and the class defeats certification. Other serious or major violations that do not prejudice the class may also require decertification when "the violation prejudices one of the parties or undermines the court's ability to resolve the case justly."

Though class counsel’s conduct gave the court "serious pause," the court reasoned that the firm’s misconduct neither prejudiced the class nor undermined the court's ability to determine the outcome of the case. Though the propriety of the $5,000 payment was not before the appellate court, the court briefly addressed defendant’s suggestion that the payment was intended to influence deposition testimony and observed that the record contained no evidence of an improper payment. That said, the court noted that an improper witness payment would render class counsel inadequate.

While the decision focused on harm to the class, "the standard of review also comes into play—abuse of discretion," notes Austin V. Schwing, San Francisco, cochair of the Consumer Law Subcommittee of the ABA Section of Litigation's Class Actions and Derivative Suits Committee. "My sense is that the Seventh Circuit also would have affirmed had the trial court come to the opposite conclusion," says Schwing.

"Importantly, the court recognized that the serious doubt standard it previously adopted—requiring class denial when misconduct creates a serious doubt that counsel will represent the class loyally—can encompass any demonstrated lack of integrity that is sufficiently serious, such as bribery or failing to correct false testimony," says Margaret I. Lyle, Dallas, programs chair of the Section of Litigation's Class Action and Derivative Suits Committee.

Not the Model to Follow

Though the class survived, Section leaders caution that the conduct alleged does not provide the model to follow in litigating such cases. "The allegations of misconduct in this case were extraordinary, but the record failed to establish the most serious ones," says Lyle. The court could have gone a long way toward deterring conduct like that alleged in this case had it held that the lawyers engaging in such conduct could not serve as class counsel," says Schwing. "It missed an opportunity."

John W. Joyce is an associate editor for Litigation News.

Keywords: class action, class certification, ethics

Related Resources

  • Reliable Money Order, Inc. v. McKnight Sales Co., Inc., 704 F.3d 489 (7th Cir. 2013).
  • Creative Montessori Learning Ctrs. v. Ashford Gear, LLC, 662 F.3d 913 (7th Cir. 2011).

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