Front-end fiduciaries: precertification duties and class conflict.

Author:Landsman-Roos, Nick

INTRODUCTION I. CLASS CONFLICT IN CLASS ACTION LITIGATION A. The Back-End Focus B. Means and Ends II. THE IMPORTANCE OF FRONT-END FIDUCIARIES A. CAFA-Created Conflict B. Binding Stipulations to Avoid CAFA Removal: A Case Study C. The Need for a Framework III. A FRAMEWORK FOR RESOLVING LOYALTY PROBLEMS ON THE FRONT END A. The Contours of a Front-End Fiduciary Duty B. The Framework Applied to Binding Stipulations 1. Binding stipulations prejudice substantive legal rights 2. Probability of success multiplied by potential judgment amount 3. Ex post judicial oversight 4. The inadequacy of opt-out CONCLUSION "[A] lawyer must never forget that he is the master. He is not there to do the client's bidding.... [T]he lawyer must serve the client's legal needs as the lawyer sees them, not as the client sees them." (1)


The traditional wisdom among attorneys and jurists has been that while clients decide the ends of lawsuits, their attorneys control the means of achieving those ends. Clients decide whether to settle suits or plead guilty to crimes, but their attorneys decide, sometimes contrary to clients' wishes, which legal arguments are made. Accordingly, commentators have given many means decisions less attention: which claims are pleaded in a complaint, which witnesses are called at trial, and whether an issue is raised on appeal are all decisions that are frequently, and without objection, made by an attorney. Instead, the focus has conventionally been on ends: whether the outcome of litigation was fair and in line with what was sought by the client.

The potential for conflicts of interest in class actions between attorneys and class members has prompted renewed attention to decisionmaking about litigation ends. In class actions, where most "clients" are absent, decisions about ends--in particular, whether to settle--must be made by an attorney. Much has been said of the potential for conflicts to emerge between attorneys and absent class members in these circumstances. (2) Scholars have outlined the misincentives that cause conflicts to emerge, the extent to which these conflicts undermine the class action as a device for vindicating claims, the problems that arise when settling claims, and whether, as a result, settlements accurately reflect the merit of the suit. (3) Myriad solutions have also been suggested for dealing with these conflicts--ranging from applying more scrutiny under the adequacy requirement of Rule 23(a) of the Federal Rules of Civil Procedure, to providing a more robust notice and opt-out regime, to requiring more active informed consent from unnamed class members. (4)

Taken together, this scholarship can largely be defined by its focus on settlements. Because many analyses of conflicts of interest are retrospective, making ex post judgments about the fairness of a lawsuit's outcome, almost all of the relevant commentary deals with ethics at the end of litigation, following class certification. As a result, most of the discussion about solutions for dealing with these conflicts takes place in a Rule 23 certification framework. Few commentators have recognized the possibility of conflicts of interest at the beginning of class litigation--or, as Linda Mullenix has described it, "at the front end" (5)--and those who have done so have only urged that Rule 23 certification take place sooner. (6) Less attention has been paid to precertification conflicts or to the fiduciary duties, if any, a plaintiff's attorney owes to a class prior to certification. At the same time, while some courts recognize a fiduciary duty owed by class counsel to the unnamed class members before certification, courts are not uniform on this point. (7) Even assuming that courts do recognize a precertification duty, the contours of that duty are unclear.

This Note fills two gaps in the literature about conflicts of interest in class actions. First, there has been no scholarly treatment of the scope and contours of an attorney's fiduciary duty to class members prior to class certification that is, outside the strictures of Rule 23. Precertification conflicts are far more difficult to address because no Federal Rules-based framework exists for considering such conduct. Second, this is the first academic treatment of means-based decisionmaking in class actions. Unlike postcertification inquiries into conflicts of interest concerning settlements, this inquiry is particularly complicated because there is often inadequate information about likely outcomes when certain means are employed. Accordingly, as discussed in this Note, there is considerably more gray area surrounding means-related decisionmaking. In the precertification stage, without information about how the litigation will run its course, attorneys make decisions that could either credibly be defended as in the best interest of the class, or be criticized as in breach of the attorney's fiduciary obligations to those class members.

These questions concerning the contours of an attorney's precertification fiduciary duty to class members when making strategic decisions are not merely academic. They are recurring and yet often unaddressed in a variety of circumstances in class action litigation.

The Supreme Court recently decided a case that could have significantly implicated the fiduciary duties of class counsel at the precertification stage. In Standard Fire Insurance Co. v. Knowles, the Court held that a plaintiff filing a class action complaint in state court may not avoid the federal jurisdictional reach of the Class Action Fairness Act of 2005 by stipulating, prior to certification of the class, that the class will not seek damages that exceed $5 million (the jurisdictional threshold for removal of the action to federal court). (8) The Court reached this holding by concluding that a "precertification stipulation does not bind anyone" but the named class plaintiff and therefore does not reduce the value of the putative class members' claims to an amount below the federal jurisdictional threshold. (9) In so holding, the Court did not address another issue arguably raised by the case: the extent to which this practice implicates fiduciary duties at the precertification stage. (10) An investigation into the contours of such fiduciary duties is important, though, because the same issues recur in a variety of contexts in class actions. For instance, it is becoming increasingly common for class counsel to jettison legal claims prior to class certification to make the certification process easier. Or, in some cases, attorneys have divided claims into separate time periods so as to craft suits with small enough amounts in controversy that they avoid federal jurisdiction. These devices to avoid federal jurisdiction raise sticky questions of fiduciary duties and the role of class counsel.

This Note focuses on just one of these practices--the use of binding stipulations, likely now defunct--as an example for analyzing precertification fiduciary duties. More generally, this Note aims to offer a formulation of the scope of attorneys' precertification fiduciary duties: an attorney breaches his fiduciary duty to absent class members when he makes a decision that prejudices the substantive legal rights of those class members without notice and opportunity for objection. When an action potentially prejudices or does prejudice a substantive legal right of absent class members, an attorney should have an opportunity to offer a good faith defense--that the course of conduct was undertaken in a good faith belief that it would maximize the class's recovery. That defense, in turn, can be evaluated in terms of whether it is legitimate and genuine, or pretextual.

This Note proceeds in three Parts. Part I offers a critical assessment of the existing theoretical treatment of conflicts of interest in class actions. I begin by reviewing the existing back-end focus in class conflict (11) analysis and describing the ways in which this analytic framework is ill suited for front-end conflicts. Part I also unpacks the theoretical debate about whether courts and litigants should be concerned with the means by which class actions are prosecuted or the ends that they are designed to achieve.

Part II contextualizes these theoretical treatments within the context of the Class Action Fairness Act of 2005 (CAFA). I discuss how, since CAFA's passage, plaintiffs' attorneys have developed new strategies for keeping class actions in state courts, and how some of these strategies have the potential to prejudice class members' interests. As a result, questions of conflicts of interest and fiduciary duties have become increasingly important at the front end of litigation. Part II illustrates this phenomenon by focusing on one such stratagem to avoid CAFA removal, which the Supreme Court recently disallowed: the use of binding stipulations to limit the amount in controversy to a total below CAFA's jurisdictional threshold.

Part III offers a framework for treating potential breaches of a class counsel's precertification fiduciary duties. I apply this framework to the example of binding stipulations and argue that in many cases the use of such binding stipulations (even were they permissible to avoid removal to federal court) would constitute a breach of class counsel's fiduciary duties. Lastly, utilizing recent empirical research on class member opt-out rates and applying the teachings of behavioral economics, I respond to the argument that class members' later opportunity to opt out of the class is a sufficient check.


    1. The Back-End Focus

      In his seminal article, Class Action Accountability." Reconciling Exit, Voice, and Loyalty in Representative Litigation, John Coffee asked the important question of how best to hold class counsel accountable to the class members whom they represent. (12) Arguing that class actions are an organizational form...

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