A blatant inequity: contributions to the common benefit fund in multidistrict litigation.

• Author: Downing, Jack
• Position: LAW SUMMARY

1. INTRODUCTION

   The U.S. legal system is a remarkable mechanism that strives to operate with justice and efficiency. However, it is not without flaws and loopholes. Upon discovery, these defects are often exploited for the material benefit of those involved. (1) In a profession where every hour is counted, practicing attorneys often attempt to earn as much money as possible while expending the least amount of time. (2) Somewhere along the line, many attorneys lose sight of what really matters--serving their clients and the justice system.

   This Note discusses a growing problem in cases with an established common benefit fund ("CBF") for attorneys' fees, where a judge orders all parties involved to set aside a percentage of the recovery to ensure that each attorney is adequately compensated for his or her services. Specifically, in federal multidistrict mass tort litigation, plaintiffs' attorneys often have clients in both federal and state court who have been harmed by the same party and through the same conduct. (3) In these circumstances, if a CBF is established in federal court, all attorneys involved will have access to the work product conducted in furtherance of the federal litigation. (4) There is nothing stopping those attorneys from applying the common work product to their current and future cases filed in state court. (5) Accordingly, if plaintiffs' attorneys are successful in their state court litigation, they will not have to contribute any portion of their state court recovery to the federal court CBF. (6) As a result, attorneys can effectively obtain the benefit of work product created by other attorneys without paying for it. Federal multidistrict litigation ("MDL") often involves hundreds of depositions, dozens of experts, and millions of documents for review. (7) The cost of this work product can amount to millions of dollars and tens of thousands of hours of time. (8) This inherent unfairness should not exist in our justice system.

   This Note analyzes the nuances of this issue and offers resolutions to its fundamental problems. Part II includes an overview of the MDL litigation, the plaintiffs' lead counsel selection process, and the function and nature of CBFs. This Part will also include the judicial justification for creating a CBF in federal MDLs. Part III examines current problems with CBFs. In particular, this Part will focus on plaintiffs' attorneys' ability to use work product obtained for the federal MDL in their concurrent state court cases without having to contribute any portion of their recovery in state court to the federal CBF. Part IV will then examine the arguments for and against ordering plaintiffs' attorneys to contribute a portion of their state court recoveries to the federal CBF.

2. LEGAL BACKGROUND

   In order to conserve judicial resources, the Judicial Panel on Multidistrict Litigation ("JPML") assigns a single district court, one with personal jurisdiction and proper venue, to an MDL pursuant to 28 U.S.C. [section] 1407.(9) This allows all relevant federal cases to be consolidated into a single proceeding. (10) For purposes of efficiency, similar cases in state court may be removed to the federal district court if diversity exists and the removal requirements are satisfied. (11) After the JPML assigns the case to the proper district court, the judge in that district will appoint a leadership counsel on behalf of all the plaintiffs in the MDL. (12) In making his or her decision, the judge considers a variety of different factors, including "the attorneys' ability to command the respect of their colleagues and work cooperatively" with everyone involved in the MDL. (13) Courts believe this is especially important, because the leadership counsel determines the plaintiffs' strategic course of action and establishes a CBF to which all of the plaintiffs' attorneys involved must contribute. (14)

   The prevalence of MDL lawsuits has increased over the past several decades. (15) In 2014, 120,449 MDL actions were pending in federal courts, affecting hundreds of thousands of attorneys and plaintiffs across the country. (16) In total, MDLs make up nearly forty percent of all federal civil actions. (17)

   The common benefit governing principles are derived from the common benefit doctrine, which was initially established in Trustees v. Greenough. (18) The Manual for Complex Litigation outlines the doctrine. (19) It states:

   Lead and liaison counsel may have been appointed by the court to perform functions necessary for the management of the case but not appropriately charged to their clients. Early in the litigation, the court should... determine the method of compensation... and establish the arrangements for their compensation, including setting up a fund to which designated parties should contribute in specified proportions. Guidelines should cover staffing, hourly rates, and estimated charges for services and expenses. (20) For decades, CBFs have been used as a means to justly compensate attorneys for their services in MDLs. (21) Traditionally, in a single action, an attorney receives a fixed percentage of the recovery, as a contingency fee, if there is a settlement or if the plaintiff is awarded damages. (22) In an MDL, attorneys, including those in the leadership group, often perform "duties beyond their responsibilities to their own clients." (23) These duties include taking depositions, hiring experts, and reviewing documents to an extent well beyond what would be required in an individual case. (24) Attorneys assume these duties to benefit all plaintiffs as a whole, and the work product obtained by the leadership counsel is accessible to all plaintiffs' attorneys involved in the litigation. (25) Since every attorney receives the benefit of the work product obtained by only a few, creating a CBF is "a necessary incident to achievement of the goals of multidistrict litigation." (26) In order to prevent this inequity, it is necessary to implement a proportional payment system based on the amount of work performed by each attorney. (27) The costs of which will be distributed among those who benefit from the common work product. (28)

   To establish a CBF, the plaintiffs' attorneys involved must meet before the litigation begins to determine a fair amount to be allocated as a fixed percentage of the recovery. (29) The court effectuates the CBF by requiring the defendant to "hold back" the amount of the CBF from the total recovery. (30) The defendant must then pay a percentage to the CBF, pursuant to the court's determination made at the outset of the litigation. (31) Therefore, upon recovery, the only party over which the court exercises jurisdiction in dealing with the CBF is the defendant; the court does not "levy" the assessment directly on the plaintiff, but rather orders the defendant to "set aside" a determined percentage as the CBF. (32) During the litigation, each attorney logs the number of hours spent and the type of work conducted. (33) Once the recovery is made, each attorney performing common benefit work is paid from the CBF based on the number of hours logged, quality of work, overall size of the recovery, and other factors. (34)

   This system has several loopholes that allow attorneys to avoid fully contributing to the CBF--a full contribution being one based on the recovery of every client for whom the MDL work product is applied. As will be discussed below, attorneys will strategically choose to file as many cases as they can in state court. This prevents them from having to contribute to the CBF in the MDL for their recovery in state court. As long as these attorneys have at least one client in the MDL, they will have access to the work product obtained by the leadership group and any other attorney working on the litigation. (35) Several courts have addressed this issue. (36)

3. RECENT DEVELOPMENTS

   With the presence of a federal MDL, there are often state court cases involving the same core dispute. (37) This can happen when there is a local defendant destroying federal diversity jurisdiction. (38) If a plaintiff's attorney believes the laws to be more favorable in a certain state, he or she may join a defendant in that state to defeat diversity and keep the case in that state. (39) With no legitimate grounds for joinder other than defeating diversity jurisdiction, a court may rule that the joinder is fraudulent, in which case the judge will remove the case to the federal MDL. (40) For those cases that do not get removed, the question remains: Does the MDL court have jurisdiction to require the defendant to hold back a percentage of the state court recovery from attorneys representing clients in both the federal MDL and state court?

   1. The Federal MDL Court's Jurisdiction Restrictions

      There is a split of authority regarding the jurisdiction issue. Federal courts are hesitant to assert jurisdiction over matters brought in state court, but in cases in which there is a federal MDL and accompanying state court litigation sharing the same core controversy, the jurisdictional limitations of each court become unclear. (41) With a lack of case law on this particular issue, some courts have taken into account the issues raised in In re Showa Denko. (42) In Showa Denko, the U.S. Court of Appeals for the Fourth Circuit reviewed an MDL district court's order of a holdback assessment that applied not only to the cases transferred to the MDL court, but also to the related state court cases and non-transferred federal cases. (43) The court held that the MDL trial court did not have jurisdiction to order a contribution from parties who appeared before different courts and not also before that MDL trial court. (44) Further, the court concluded the authority to consolidate cases before one MDL judge "is merely procedural and does not expand the jurisdiction of the district court to which the cases are transferred." (45) Other courts have also accepted this notion. (46)

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