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Plaintiff May Use Circumstantial Evidence to Prove Class-Wide Reliance

Posted by Philip Kay on February 20, 2010

Good news for plaintiffs in Colorado.  A division of the Colorado Court of Appeals held that in class actions premised on misrepresentation or fraud, the named plaintiff may demonstrate ignorance or reliance (and thus causation) on a class-wide basis using circumstantial evidence that is common to the class, and need not present direct individualized evidence of each class member’s reliance.  In Patterson v. BP American Production Co., 2010 WL 547644 (Colo.App., Feb. 18, 2010), the court rejected the defendant’s argument that each class member must present direct individualized evidence of actual reliance and thus individual questions predominate over questions of law or fact common to the class.  The court’s holding clarifies the recent decision in Garcia v. Medved Chevrolet, Inc., 2009 WL 3765481 (Colo.App.2009), which declined to allow a class-wide presumption of reliance in misrepresentation cases involving face-to-face negotiations between the proposed class members and the defendant.   The Garcia court held that in such cases, individual questions regarding each class member’s reliance predominated over common questions.  While the Patterson court did not go so far as to permit a presumption of reliance, it did somewhat limit Garcia’s predominance analysis to cases in which the proposed class members engaged in individual negotiations with the defendant.  The Patterson court made clear that in misrepresentation or fraud cases where the class members had little or no personal interaction with the defendant, direct evidence of class member reliance is not required and such reliance may be proved on a class-wide basis by circumstantial evidence.


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Another mandatory arbitration clause bites the dust

Posted by Philip Kay on November 7, 2009

Case settled late yesterday, the Friday before a Monday trial.  While I was buried deep in trial prep, Judge Pannell of the Northern District of Georgia issued an excellent ruling on the enforceability of arbitration clauses and class action waiver provisions in consumer contracts.  I discussed this issue back in August, Issue du Jour: Forced Arbitration, and Judge Pannell’s ruling is in line with the (seeming) national trend invalidating mandatory arbitration/class action waiver provisions in consumer contracts.

In Jones v. DirecTV, Inc., 2009 WL 3646197 (N.D.Ga. Oct 29, 2009), the plaintiff filed a class action against DIRECTV for collecting excessive “sales tax” charges ($0.80 per month) and improperly billed “leased receiver” fees ($4.99 per month).  DIRECTV moved to stay the action and compel arbitration based on the broad arbitration clause and a class action waiver provision in its service contract with the plaintiff.

Judge Pannell denied the motion and invalidated the class action waiver provision based on unconscionability.  He based his ruling on the fact that under DIRECTV’s class action waiver provision, claims such as the plaintiff’s would effectively be foreclosed since the costs of prosecuting the claim individually would far exceed the likely recovery.  In so ruling, Judge Pannell validated the very purpose of class action lawsuits:

“The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. The effort and cost of investigating and initiating a claim may be greater than many claimants’ individual stake in the outcome, discouraging the prosecution of these claims absent a class action filing procedure.”

Since the plaintiff in Jones, even if successful on all of her claims, individually stood to recover a very small amount, she would be unlikely to prosecute her claims individually given the costs of litigation.  Thus, DIRECTV’s class action waiver provision was unconscionable because “the remedies available to the plaintiff and members of the proposed class are effectively foreclosed.”  Since the contract (curiously) provided that if the class action waiver provision is deemed unenforceable then the entire arbitration clause is also unenforceable, Judge Pannell invalidated the entire arbitration clause based on the plain language of the contract.  (Not sure how the arbitration clause would have fared absent the tie-in to the class action waiver provision.  DIRECTV’s corporate counsel should have known better – ALWAYS include a severability provision in your consumer contract!)

Maybe I’m reading too much into it, but it does seem like there is a recent trend against the enforceability of mandatory arbitration clauses and class action waiver provisions in consumer contracts.   More judges seem to be looking beyond the strict letter of take-it-or-leave-it consumer contracts and are finding creative ways to get around the more onerous provisions, especially provisions which deny aggrieved consumers access to an effective remedy in court.

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Motions to disqualify: Move early or not at all

Posted by Philip Kay on October 10, 2009

In Murray v. Metropolitan Life Ins. Co., 2009 WL 3080462 (2nd Cir., Sept. 29, 2009), the 2nd Circuit denied class counsel’s motion to disqualify defense counsel based on conflict of interest, but the Court raised more questions than it answered with its broad-brush treatment of the “identity” of defense counsel’s corporate client.

Plaintiffs in this securities class action were policyholders of Metropolitan Life Insurance Company back when it was a mutual insurance company. They filed suit in 2000 alleging they were misled and shortchanged in the transaction by which the company demutualized to become a stock insurance company.  MetLife’s corporate counsel in the demutualization, Debevoise & Plimpton, also served as its lead counsel in this litigation.

Trial was set for September 8, 2009.  Five weeks before trial (i.e., nine years after this action was commenced), plaintiffs moved to disqualify Debevoise because it was MetLife’s corporate counsel in the underlying demutualization. The district court granted the motion to disqualify on September 1, 2009 holding that Debevoise’s representation of MetLife in the demutualization made it counsel to the owner-policyholders as well such that it cannot now represent interests adverse to the policyholders. The district court then stayed its order and immediately certified the issue to the 2nd Circuit.

The 2nd Circuit reversed, finding Debevoise did not have an attorney-client relationship with MetLife’s owner-policyholders by virtue of its representation of MetLife.  The Court held that it was “well-settled” that outside counsel to a corporation represents the “corporation,” not its shareholders or other constituents.

I think the 2nd Circuit should have analyzed this issue a little more thoroughly.  While it may be “well settled” that corporate counsel does not represent the shareholders in their individual capacities, it does not follow that corporate counsel does not represent the shareholders as a collective.  The 2nd Circuit failed to make this distinction, and a closer reading of the “well settled” authority it relied upon reveals merely that corporate counsel does not have an attorney-client relationship with the shareholders individually.   The Court didn’t distinguish between shareholders’ individual vs. collective capacities and in the process distorted the definition of “corporation.”

Who is a “corporation” if not the collective of its shareholders?  The board and officers of a corporation are merely conduits (and fiduciaries) of the shareholders and cannot in any sense be considered “the corporation,” so who exactly did Debevoise represent in the demutualization if not the collective owners-policyholders of MetLife?  The 2nd Circuit was not clear on this point, merely holding that Debevoise represented “the corporation.”  The Court should have engaged in a more thorough analysis of the “identity” of the corporation and who, exactly, Debevoise represented.

The real reason the Court denied class counsel’s motion was because Debevoise had been defense counsel for nine years and class counsel waited until a mere 5 weeks before trial to file its motion to disqualify.  The Court wasn’t about to let class counsel get away with this:

“In this case, disqualification would require MetLife to retain new counsel. Appreciable time and money would be spent to bring new counsel to the state of readiness that Debevoise attained after more than nine years of work. And other circumstances intensify the harm to MetLife: several billions of dollars are at stake, the legal issues are complex, pretrial litigation has been ongoing for more than nine years, and disqualification occurred on the eve of trial.”

Class counsel clearly should have moved for disqualification sooner and their decision to wait until the eve of trial indeed “suggests opportunistic and tactical motives.”  This case is a good reminder that the longer you hold off on a motion to disqualify, the less likely your odds of success.  That said,  MetLife is not an innocent here – the district court ruled back in 2007 that the plaintiff policyholders were the owners of the mutual company and were therefore clients of Debevoise during the demutualization.  Yet, MetLife continued to stick with Debevoise up to the eve of trial instead of obtaining new counsel 2 years ago when it knew this issue was in play.

This Court’s decision in this case raises more questions than it answers and will likely have to be clarified when the 2nd Circuit is inevitably forced to re-examine the issue of corporate “identity,” and its decision in this case, more closely.

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Incentive award for pro-se objector? 10th Cir. says “no,” but leaves door open

Posted by Philip Kay on September 19, 2009

The 10th Circuit addressed a novel issue in UFCW Local 880-Retail Food Employers Joint Pension Fund v. Newmont Mining Corp., 2009 WL 2902565 (10th Cir., Sep 11, 2009):  whether pro-se class action objectors are entitled to incentive awards.

The underlying case was a securities fraud class action commenced in June 2005 in my home District of Colorado.  The case was settled in early 2008.  The settlement called for defendants to create a fund of $15 million, from which various litigation expenses would be paid before the remainder was paid out to the class members.  Class counsel initially requested a fee of $5 million.  Class member Lawrence W. Schonbrun, acting pro se, and another class member, Natasha Engan, represented by counsel, filed objections to the amount of fees requested by class counsel.  Based on the objections, proceedings were held and ultimately the attorney fee award was reduced to $450K.

Mr. Schonbrun then filed an application for an incentive award based on his time and effort spent in the attorney fee proceedings.  The district judge (Judge Marcia Krieger, one of the smartest judges on the bench in my opinion) denied Mr. Schonbrun’s request but granted fellow-objector Ms. Engan her attorney fees because “the services she provided conferred a benefit on class members sufficient to entitle her to a reasonable fee award.”

Mr. Schonberg appealed, claiming that the district court erred in finding that his objection to class counsel’s attorney fees did not benefit the class sufficiently to entitle him to an incentive award. Mr. Schonbrun argued that he was entitled to a pro se incentive award on the same or similar basis as a named class representative.

The 10th Circuit disagreed.  But, it expressly declined to directly decide the issue of whether pro se objectors can ever be entitled to incentive awards.  Instead, the Court focused solely on whether Mr. Schonbrun conferred a benefit on the class and whether Judge Krieger abused her discretion in ruling that he did not.  The Court acknowledged that “[a]n objector whose arguments result in a reduction of attorney-fee and expense awards provides a benefit to the class,” but in this case Mr. Schonbrun’s objections merely mimicked Ms. Engan’s objections and were lacking in any meaningful independent value.  Thus, Mr. Schonbrun did not confer a benefit to the class that was not already provided by Ms. Engan.  “[G]eneral, garden-variety objections usually are not helpful to the court, nor do they benefit the class.”

The Court also declined Mr. Schonbrun’s invitation to apply to his pro se request for an incentive award the same standards applicable to an objector’s request for an attorney fee.  The Court correctly noted the distinction between an objector seeking his own incentive award and an objector seeking payment for his attorney fees.  “A pro se objector’s time and effort is not the same as an attorney fee incurred by an objector… Mr. Schonbrun did not incur attorney fees; therefore, we do not apply the same standards as if he had.”

So, can a pro se objector ever be entitled to an incentive award?  While the Court declined to directly answer the question, it implied that in appropriate circumstances the answer could be “yes.”  But, the threshold requirement is that the objector confer a benefit on the class.  Further, the Court implied that to receive an incentive award, an objector must also put himself “at risk” in the litigation.  Regarding this requirement, see Parker v. Time Warner Entertainment Co., L.P., 2009 WL 1940791 (E.D.N.Y., Jul. 06, 2009): “The amount of the incentive award is related to the personal risk incurred by the individual or any additional effort expended by the individual for the benefit of the lawsuit”.

I’m not aware of any federal circuits that have directly addressed the issue of whether, and in what circumstances, a pro se objector is entitled to an incentive award.  I think the 10th Circuit’s reasoning would likely be followed by other circuits facing this issue and they would require an objector to (1) confer a benefit on the class and (2) incur personal risk in order to be entitled to an incentive award.

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