Saturday, January 26, 2013

FYI: 7th Cir Rules "Serious Doubt" Standard for Adequacy of Class Counsel Not Met, Despite Alleged Unethical Conduct

The U.S. Court of Appeals for the Seventh Circuit recently ruled that under the so-called "serious doubt" standard, misconduct on the part of plaintiff's counsel in a class-action lawsuit requires denial of class certification only where the alleged misconduct unfairly prejudices the putative class, creates a conflict of interest between the putative class and plaintiff's counsel, or undermines the court's ability to resolve the case, such as where counsel attempts to bribe witnesses or fails to correct false testimony. 
Under this standard here, the Court concluded that putative class counsel's alleged breach of a promise of confidentiality, failure to register a solicitation letter as required by Wisconsin's rules of ethics, and attempted payment of money to a third party's attorney, did not require denial of class certification.  A copy of the opinion is attached.
Allegedly in investigating a number of putative class action lawsuits under the Telephone Consumer Protection Act, 47 U.S.C. § 227(b)(1)(C), (b)(3) ("TCPA), a Chicago-area law firm ("Plaintiffs Law Firm") that specializes in representing plaintiffs in TCPA class action lawsuits contacted a third party, the owner ("Business Owner") of a so-called "fax-blasting" business ("Fax Business"), partly in order to identify the recipients of unsolicited advertisements in the putative class actions for purposes of obtaining class certification.  The Business Owner ultimately provided to Plaintiffs Law Firm information and documentation listing the recipients of the unsolicited advertisements.  Armed with this information, Plaintiffs Law Firm had proof of an identifiable class and was thus able to obtain class certification in those cases.  
Nevertheless, Plaintiffs Law Firm continued to seek additional information from Business Owner in order to obtain the names of potential clients for other putative class action lawsuits under the TCPA.  To that end and supposedly promising Business Owner that the information provided would be protected as confidential under a protective order in one of the pending class actions, Plaintiffs Law Firm was able to procure from the Fax Business additional information revealing the names of potential class-action plaintiffs and defendants.  
Based on this new information, Plaintiffs Law Firm sent out solicitation letters to the newly-identified recipients of unsolicited faxed advertisements, and was subsequently able to file over one hundred putative class action as a result.  Varying slightly in wording according to different putative plaintiffs, the solicitation letters generally read in part:  "we have determined that you are likely to be a class member in one or more cases we are pursuing. . . ."    The letters were stamped "advertising material" but were not registered with the Wisconsin Office of Lawyer Regulation, as required by state law.  See Wis. Sup. Ct. R.  20:7.3(c).  The recipient of one of the solicitation letters forwarded the letter to the party which eventually became the named plaintiff in this case ("Named Plaintiff").   
Finally, Plaintiffs Law Firm allegedly sent to Fax Business's attorney a check for $5,000 bearing a notation reading "document retrieval."  Fax Business's attorney voided and returned the check. 
The defendants in the various lawsuits arising from the data provided by Fax Business began challenging the propriety of class certification in those cases on grounds that Plaintiffs Law Firm had engaged in misconduct that disqualified Plaintiffs Law Firm as adequate class counsel.  As did the defendants in those cases, in this specific case, defendant argued that:  (1) Plaintiffs Law Firm breached a promise of confidentiality by using Fax Business's data to identify targets of additional lawsuits; (2) Plaintiffs Law Firm sent misleading solicitation letters; and (3) the $5,000 check to Fax Business's attorney was intended to influence the content of testimony.
Although agreeing that the behavior of plaintiff's counsel with respect to the breached promise of confidentiality, the solicitation letter, and the $5,000 payment "was not entirely on the up and up," the lower court certified the class, ultimately concluding that the "behavior does not create 'serious doubt' that class counsel will represent the class loyally."   Defendant petitioned for interlocutory review of the class certification order, which the Seventh circuit granted.  Named Plaintiff moved to dismiss the appeal, arguing that the need for interlocutory review no longer existed. 
Noting that the information provided to Plaintiffs Law Firm by Fax Business spawned over 100 lawsuits, many of which are still pending, the Seventh Circuit denied Named Plaintiff's motion to dismiss, citing in part the need for guidance in the application of the "serious doubt" standard to attorney misconduct within the context of class certification and the risk of inconsistent opinions in pending cases.   The Court of Appeals also affirmed the lower court's certification of the class.
As you may recall, the TCPA authorizes $500 in statutory damages for faxing unsolicited advertisement.  47 U.S.C. § 277(b)(1)(C), (b)(3).  The TCPA may be enforced by way of class actions, provides for treble damages in instances of willfulness, and each transmission is a separate violation.  Id. 
In addition, among other things, a court, in appointing class counsel as part of certifying a class, "may consider any other matter pertinent to counsel's ability to fairly and adequately represent the interests of the class."  Fed. R. Civ. P. 23(g)1)(B).
Reviewing prior opinions discussing the identical ethical issues presented in this case and similarly stemming from the information provided by Fax Business, the Seventh Circuit ultimately concluded that the alleged misconduct on the part of Law Firm in this case did not render Law Firm inadequate to represent the class.  In so doing, the Seventh Circuit applied the same "serious doubt" test it applied previously to conclude that Law Firm's conduct did not require denial of class certification.  See Creative Montessori Learning Ctrs. v. Ashford Gear, LLC, 662 F.3d 913, 919 (7th Cir. 2011)(concluding that "[m]isconduct by class counsel that creates a serious doubt that counsel will represent the class loyally requires denial of class certification.").  
In recognizing that class counsel serves as a fiduciary for unnamed plaintiffs, and that class actions present strong incentives for counsel "to sell out the class by agreeing with the defendant to recommend that the judge approve settlement involving a meager recovery for the class but generous compensation for the lawyers," the Court noted that in the various putative class action lawsuits involving Plaintiffs Law Firm, the district courts all agreed that Plaintiffs Law Firm's conduct did not require denial of class certification, because Plaintiffs Law Firm's conduct did not prejudice the class or create a direct conflict with the class.  The Court further pointed out that the defendant did not identify any conflict of interest or prejudice to the putative class arising from the alleged misconduct in this case.
Nevertheless, rejecting Named Plaintiff's assertion that only misconduct directly harmful to the class is relevant to the class certification decision, the Court stressed that even "serious" or "major" ethical violations, while not prejudicial to the class, may require the "grave option" of denial of class certification. 
Pointing out that mere "slight" or "harmless" breaches of ethics will not impugn the adequacy of class counsel, the Seventh Circuit noted that "unless the violation prejudices one of the parties or undermines the court's ability to resolve the case justly, state bar authorities – not a court – should enforce the rules and sanction the attorney."
Accordingly, the Court determined that unethical conduct that is not necessarily prejudicial to the class but which jeopardizes the integrity of judicial proceedings, "nevertheless raises a 'serious doubt' about the adequacy of class counsel when the misconduct jeopardizes the court's ability to reach a just and proper outcome in the case," such as where counsel attempts to bribe witnesses or fails to correct false testimony.  See Wagner v. Lehman Brothers Kuhn Loeb Inc., 646 F. Supp. 643, 659, 661-62 (N.D. Ill. 1986); Kaplan v. Pomerantz, 132 F.R.D. 504, 510-11 (N.D. Ill. 1990).
Turning to the alleged misconduct regarding the promise of confidentiality and the failure to register the solicitation letters as required by the Wisconsin rules of ethics, the Court concluded that, although the misconduct raised concerns about Plaintiffs Law Firm's professionalism, it did not raise serious doubts about its ability to represent the class faithfully as the misconduct did not prejudice the class, create a conflict of interest, or compromise the integrity of the lawsuit.
With respect to the alleged payment of $5,000 to Fax Business's attorney, noting that defendant never raised the issue before the lower court, the Seventh Circuit stated that if the purpose of the money was to influence Business Owner's testimony or the outcome of the case, such conduct would constitute a serious breach of the rules of ethics that would require denial of class certification. Noting the absence of evidence of such improper motive, the court concluded that it was powerless to impose sanctions or discipline.
Accordingly, the Court of Appeals denied Named Plaintiff's motion to dismiss and affirmed the lower court's class certification.

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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