When Class Counsel Crosses an Ethical Line

Class actions allow for the aggregation of numerous small claims into what can prove to be a very large payday for the lawyers representing the class. On the one hand, this mechanism allows plaintiffs with small-value claims to vindicate rights that otherwise likely would not be brought to court. On the other hand, the system creates a disparity between the incentives of individual class members and the lawyers who represent the class. A recent Seventh Circuit decision uses the “adequacy” prong of Rule 23 in an attempt to ensure that class counsel do not improperly exploit this conflict.

In Creative Montessori Learning Centers v. Ashford Gear LLC, the Seventh Circuit decertified a class based on attorney misconduct. The district court for the Northern District of Illinois had certified a class of recipients of unsolicited faxes, allegedly sent in violation of the Telephone Consumer Protection Act. The Act imposes damages of $500 for each “junk fax” and provides for treble damages for willful violations. The named plaintiff had received two junk faxes, entitling it to $3,000 in damages, at most. Potential damages for the entire class, however, ran in the tens of millions.

A law firm that specialized in Telephone Consumer Protection Act suits assembled the class. Instead of waiting for potential plaintiffs to come to it, the law firm contacted a fax broadcaster – a company that faxes advertisements as an agent of the advertiser – asking for fax transmission reports, promising not to disclose the information to any third party. The lawyers then contacted the businesses on the reports, telling them they were “likely to be a member of the class,” even though class certification – or the filing of a suit, for that matter – had not yet taken place.

The district court found attorney misconduct, both in obtaining the fax broadcaster’s files based on a promise of confidentiality that concealed the purpose of obtaining the material, and in making the misleading representation that a class had been certified. The court determined, however, that discipline by the bar was the appropriate remedy, ruling that only the most egregious misconduct could ever arguably justify denial of class status. The appeals court reversed this decision, holding that the district court’s “egregious misconduct” standard would condone and invite unethical conduct. Instead, courts should deny class certification if counsel’s conduct creates a “serious doubt” that they will represent the class loyally.

In formulating this standard, the court relied on the “adequacy” requirement of Rule 23(a)(4) and on Rule 23(g)(1)(B), which permits a court appointing class counsel to consider any matter “pertinent to counsel’s ability to fairly and adequately represent the interests of the class.” The panel focused on the highly coercive nature of class actions and the conflicts inherent in class representation. For one, there is a substantial incentive for the class action defendant to settle, regardless of the merits of the case, because the damages in these suits can be astronomical. Here, for example, the court observed that the case turned a $3,000 dispute into an $11.11 million dispute (before trebling), with a potential judgment that would have easily sent Ashford Gear, a home furnishings wholesaler with only three employees and $500,000 in annual sales, into bankruptcy. Furthermore, settlement can provide a lucrative reward for class counsel even if it means a paltry sum for individual class members. Therefore, there is an incentive for class counsel, with the defendant’s complicity, to “sell out the class” in the course of representation. For this reason, courts must be vigilant in ensuring that class members are represented fairly and adequately, especially when class members are consumers who lack the financial stake and legal knowledge to monitor class counsel effectively.

With this responsibility in mind, the court held that counsel’s loyalty to the interests of the class was sufficiently in question to warrant denial of class certification. The decision sends notice that, at least in the Seventh Circuit, attorneys who resort to underhanded means to solicit class action plaintiffs cannot expect to be rewarded with an opportunity to represent the class they have assembled.

Posted in Rule 23 Compliance Issues

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