Download 03-1856 Not Supp. Auth. Attachment 2-15-06

376 F.3d 656
376 F.3d 656, RICO Bus.Disp.Guide 10,706
(Cite as: 376 F.3d 656)
Briefs and Other Related Documents
United States Court of Appeals,
Seventh Circuit.
Lynne A. CARNEGIE, on behalf of herself and all
others similarly situated,
Plaintiff-Appellee,
v.
HOUSEHOLD INTERNATIONAL, INC., et al.,
Defendants-Appellants.
Nos. 04-8008, 04-8009.
Submitted May 15, 2004.
Decided July 16, 2004.
Background:
Recipients of income -tax refund
anticipation loans (RALs) brought class actions
against bank and tax preparers, alleging various
claims including violation of Racketeer Influence and
Corrupt Organizations Act (RICO). Following
disapproval of proposed settlement in one of the
actions, 260 F.Supp.2d 680, Bucklo, J., classes were
certified to pursue RICO claims, see 220 F.R.D. 542.
Defendants sought interlocutory appeals, which were
consolidated.
Holdings: The Court of Appeals, Posner, Circuit
Judge, held that:
(1) grant of interlocutory appeal was appropriate
given novel issues;
(2) judicial estoppel precluded defendants from
challenging adequacy of class for settlement
purposes, but not for litigation purposes;
(3) fact that class contained millions of members did
not, by itself, make litigation unmanageable; and
(4) different district court's refusal to certify class in
earlier action involving same defendants and same
allegations was not preclusive, given defendants'
earlier insistence in instant action that class treatment
was appropriate.
Affirmed.
West Headnotes
[1] Federal Courts
660.5
170Bk660.5 Most Cited Cases
Grant of interlocutory appeal from class certification
was appropriate given fact that case involved novel
Page 1
issues whose prompt resolution was important to
development of law of class actions as well as to
resolution of instant case, namely, procedures and
criteria for converting settlement class into litigation
class when initial settlement is later disapproved, and
bearing of doctrine of judicial estoppel on class
action litigation. Fed.Rules Civ.Proc.Rule 23(f), 28
U.S.C.A.
[2] Estoppel
68(2)
156k68(2) Most Cited Cases
Judicial estoppel precluded defendants in consumer
fraud class action, who had previously urged
acceptance of large class size as appropriate for
global settlement, from challenging, following
disapproval of proposed settlement, adequacy of class
for settlement purposes on ground that it was too
vast; however, defendants could challenge class on
ground that it was too large for litigation, as opposed
to settlement.
[3] Estoppel
68(2)
156k68(2) Most Cited Cases
Reversal need not affect application of judicial
estoppel.
[4] Federal Civil Procedure
182.5
170Ak182.5 Most Cited Cases
Fact that class certified in consumer fraud action
involving income -tax refund anticipation loans
(RALs) contained millions of members did not, by
itself, make litigation unmanageable; if no settlement
occurred and liability was found, separate
proceedings could be held to determine entitlements
of individual class members to relief. Fed.Rules
Civ.Proc.Rule 23(c)(4)(A), 28 U.S.C.A.
[5] Federal Civil Procedure
165
170Ak165 Most Cited Cases
Tools available to district court to address problems
created by presence in class action litigation of
individual damages issues include: (1) bifurcating
liability and damage trials with same or different
juries; (2) appointing magistrate judge or special
master to preside over individual damages
proceedings; (3) decertifying class after liability trial
and providing notice to class members concerning
how they may proceed to prove damages; (4) creating
subclasses; or (5) altering or amending class.
Fed.Rules Civ.Proc.Rule 23, 28 U.S.C.A.
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[6] Federal Civil Procedure
173
170Ak173 Most Cited Cases
District court could require defendants in class action
to present their objections to class certification rather
than requiring plaintiff to move for certification,
given fact that court had earlier issued de facto
certification of class for purposes of settlement, and
fact that court explicitly placed on plaintiff burden of
persuasion on validity of defendants' objections to
certification.
Fed.Rules Civ.Proc.Rule 23, 28
U.S.C.A.
[7] Judgment
746
228k746 Most Cited Cases
Federal district court's refusal to certify nationwide
class in Racketeer Influenced and Corrupt
Organizations Act (RICO) suit alleging mail and wire
fraud on part of tax preparers and lenders in
connection with refund anticipation loans (RALs)
was not preclusive in subsequent RICO action
involving same allegations and same defendants,
given defendants' change of position; defendants,
who argued preclusion in opposing class certification
in second action, had, at time of proposed settlement
of that action which was later disapproved, insisted
that class treatment of RICO claim in second action
was entirely appropriate. 18 U.S.C.A. § § 1341,
1343, 1961 et seq.
*658 Scott R. Lassar (submitted), Sidley Austin
Brown & Wood, Anton R. Valukas, Jenner & Block,
Chicago, IL, for Petitioners.
Ronald L. Futterman, Futterman
Chicago, IL, for Respondent.
&
Howard,
Before CUDAHY, POSNER, and ROVNER, Circuit
Judges.
POSNER, Circuit Judge.
[1] We have consolidated for decision petitions, filed
by two groups of defendants in a consumer-finance
class action litigation, for leave to appeal an order by
the district court certifying a plaintiff class.
Fed.R.Civ.P. 23(f) authorizes us to entertain such
interlocutory appeals. The rule does not state criteria
for the exercise of this discretionary authority. But
the case law teaches that the more novel the issue
presented by the appeal and so the less likely that the
district court's resolution of it will stand, the more
important the resolution of the issue is either to the
particular litigation or to the general development of
class action law, and the more likely the prompt
resolution of the issue is to expedite the litigation and
prevent a coercive settlement, the stronger the case
for allowing the appeal.
E.g., In re
Bridgestone/Firestone, Inc., 288 F.3d 1012, 1016
(7th Cir.2002); Blair v. Equifax Check Services, Inc.,
181 F.3d 832, 834-35 (7th Cir.1999); Newton v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 259
F.3d 154, 164 (3d Cir.2001); Prado-Steiman v. Bush,
221 F.3d 1266, 1278 (11th Cir.2000);
Waste
Management Holdings, Inc. v. Mowbray, 208 F.3d
288, 294 (1st Cir.2000). The issues that the petitions
ask us to consider, in the setting of a class of
millions, concern, first, the procedures and criteria
for converting a settlement class into a litigation class
when having initially been approved the settlement is
later disapproved, and, second, the bearing of the
doctrine of judicial estoppel on class action litigation.
These are novel issues whose prompt resolution is
important to the development of the law of class
actions as well as to the resolution of the present
case. The petitions to appeal are therefore granted.
The merits of the appeals have been fully briefed and
we can therefore proceed to decide them without
requiring further briefing.
The litigation arose out of refund anticipation loans
made jointly by the defendants, who for simplic ity
we'll refer to as "the bank" and "the tax preparer."
When the tax preparer files a refund claim with the
Internal Revenue Service on behalf of *659 one of its
customers, the customer can expect to receive the
refund within a few weeks unless the IRS decides to
investigate the return. Even a few weeks is too long
for the most necessitous taxpayers, and so the bank
will lend the customer the amount of the refund for
the period between the filing of the claim and the
receipt of the refund. The annual interest rate on
such a "refund anticipation loan" (RAL) will often
exceed 100 percent. Although the bank is the lender,
the tax preparer arranges the loan. It is contended
that the customer is told neither that the bank pays
the tax preparer a fee for having generated the loan
nor that the tax preparer receives an ownership
interest in the loan.
Beginning in 1990 a number of class-action suits
were brought against the defendants on behalf of a
total of 17 million refund-anticipation borrowers,
charging violations of various state and federal laws,
including RICO. The basic claim is that the
defendants lead the borrowers to believe that the tax
preparer is their fiduciary, much as if they had hired a
lawyer or an accountant to prepare their income tax
returns, as affluent people do, whereas, unbeknownst
to them, the tax preparer is engaged in self-dealing.
This conduct is alleged to constitute a scheme to
defraud in violation of the federal mail-and wire-
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fraud statutes. Violations of those statutes are
"predicate offenses" that can form the basis of a
RICO charge.
In 1999 the named plaintiff in one of the suits
entered into a settlement agreement with the bank
and the tax preparer. This was to be a "global"
settlement: the members of all the classes would
divide up a $25 million fund put up by the defendants
in exchange for the release of all claims arising out of
the RALs. The district judge approved the settlement
and enjoined (with one exception) the other RAL
class actions, Zawikowski v. Beneficial National
Bank, No. 98 C 2178, 2000 WL 1051879 (N.D.Ill.
July 28, 2000), but we reversed, Reynolds v.
Beneficial National Bank, 288 F.3d 277 (7th
Cir.2002), on the ground that the district judge had
failed to scrutinize the fairness of the settlement
adequately. We were concerned that the settlement
might have been the product of collusion between the
defendants, eager to minimize their liability, and the
class lawyers, eager to maximize their fees.
The district judge to whom the case was reassigned
on remand concluded that the settlement had indeed
been unfair and disapproved it. 260 F.Supp.2d 680
(N.D.Ill.2003).
There was no appeal.
The
proceedings continued in the district court, with both
the named plaintiff and the class counsel replaced.
Although no class had formally been certified in the
earlier proceedings, rather than require the new
plaintiff to move for certification the judge asked the
defendants for their objections to certification, and
they responded. She agreed with some of the
objections, rejected others, and, in effect, certified the
same class that had been contemplated by the
rejected settlement, which is to say all RAL
borrowers (with a few exceptions) whose claims
weren't barred by the statute of limitations. But she
limited the certification to prosecution of just the
RICO claim, plus one breach of contract claim
involving the law of only one state.
[2][3] The defendants object mainly to the procedure
the judge employed and to the brevity with which she
pronounced the class manageable despite its vast
size. In the previous round of this protracted
litigation the defendants had urged the district court
to accept the giant class as appropriate for a global
settlement, had prevailed in their urging, and so are
now precluded by the doctrine of judicial estoppel,
see, e.g., *660New Hampshire v. Maine, 532 U.S.
742, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001), from
challenging its adequacy, at least as a settlement class
(the significance of this qualification will appear in
Page 3
due course). It is true that we reversed the district
court's approval of the settlement, but a reversal need
not affect the application of judicial estoppel. In re
Cassidy, 892 F.2d 637, 641 (7th Cir.1990); Hall v.
GE Plastic Pacific PTE Ltd., 327 F.3d 391, 398-99
(5th Cir.2003); U.S. Philips Corp. v. Sears Roebuck
& Co., 55 F.3d 592, 597 (Fed.Cir.1995); cf. 18B
Charles Alan Wright, Arthur R. Miller & Edward H.
Cooper, Federal Practice and Procedure § 4477 (2d
ed.2002). The reason lies in the purpose of the
doctrine. The canonical statement of that purpose is
that it is "to protect the integrity of the judicial
process." E.g., New Hampshire v. Maine, supra, 532
U.S. at 749-50, 121 S.Ct. 1808; United States v.
Christian, 342 F.3d 744, 747 (7th Cir.2003). But we
have been a little more precise. We have said that "a
party who prevails on one ground in a lawsuit cannot
turn around and in another lawsuit repudiate the
ground. If repudiation were permitted, the incentive
to commit perjury and engage in other litigation fraud
would be greater. A party envisaging a succession of
suits in which a change in position would be
advantageous would have an incentive to falsify the
evidence in one of the cases, since it would be
difficult otherwise to maintain inconsistent
positions." McNamara v. City of Chicago, 138 F.3d
1219, 1225 (7th Cir.1998) (citations omitted). In
other words, "the purpose of the doctrine ... is to
reduce fraud in the legal process by forcing a
modicum of consistency on a repeating litigant."
Ladd v. ITT Corp., 148 F.3d 753, 756 (7th Cir.1998);
see also Bethesda Lutheran Homes & Services, Inc. v.
Born, 238 F.3d 853, 858 (7th Cir.2001).
The antifraud policy that animates the doctrine si
fully engaged when a party obtains a judgment on a
ground that it later repudiates, even if his opponent,
the loser in that first case, is able, obviously at some
expense to itself but also placing a demand on
judicial resources, to get the judgment reversed.
Anyway the defendants benefited from the temporary
approval of the settlement, which they used to enjoin
other RAL litigation against them; and having
reaped a benefit from their pertinacious defense of
the class treatment of the case for purposes of
settlement they cannot now be permitted to seek a
further benefit from reversing their position.
It is true that we went on to say in McNamara that
"the doctrine of judicial estoppel requires ... that the
party sought to be estopped have obtained a favorable
judgment or settlement on the basis of a legal or
factual contention that he wants to repudiate in the
current litigation. Otherwise it would be inconsistent
with the rule that permits inconsistent pleadings." 138
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F.3d at 1225. But the defendants did obtain a
judgment. The fact that it was reversed on appeal has
nothing to do with a party's right to explore
inconsistent alternative positions in the early stages
of a lawsuit.
[4] The defendants are correct, however, that a class
might be suitable for settlement but not for litigation.
The class might be unmanageable if the case were
actually tried yet manageable as a settlement class
because the settlement might eliminate all the thorny
issues that the court would have to resolve if the
parties fought out the case. Amchem Products, Inc. v.
Windsor, 521 U.S. 591, 620, 117 S.Ct. 2231, 138
L.Ed.2d 689 (1997). But although the district judge
might have said more about manageability, the
defendants have said nothing against it except that
there are millions of class members. That *661 is no
argument at all. The more claimants there are, the
more likely a class action is to yield substantial
economies in litigation. It would hardly be an
improvement to have in lieu of this single class action
17 million suits each seeking damages of $15 to $30.
The rejected settlement capped damages at thes e
amounts for single and multiple RALs respectively,
and while the amounts may be too low they are
indicative of the modest stakes of the individual class
members. The realistic alternative to a class action is
not 17 million individual suits, but zero individual
suits, as only a lunatic or a fanatic sues for $30. But
a class action has to be unwieldy indeed before it can
be pronounced an inferior alternative--no matter how
massive the fraud or other wrongdoing that will go
unpunished if class treatment is denied--to no
litigation at all.
[5] Often, and possibly in this case as well, there is a
big difference from the standpoint of manageability
between the liability and remedy phases of a class
action. The number of class members need have no
bearing on the burdensomeness of litigating a
violation of RICO. Whether particular members of
the class were defrauded and if so what their damages
were are another matter, and it may be that if and
when the defendants are determined to have violated
the law separate proceedings of some character will
be required to determine the entitlements of the
individual class members to relief. Fed.R.Civ.P.
23(c)(4)(A); Allen v. International Truck & Engine
Corp., 358 F.3d 469 (7th Cir.2004); Bell Atlantic
Corp. v. AT&T Corp., 339 F.3d 294, 307 n. 16 (5th
Cir.2003); In re Visa Check/MasterMoney Antitrust
Litigation, 280 F.3d 124, 141 (2d Cir.2001);
Robinson v. Metro -North Commuter R.R., 267 F.3d
147, 168-69 (2d Cir.2001). That prospect need not
Page 4
defeat class treatment of the question whether the
defendants violated RICO. Once that question is
answered, if it is answered in favor of the class, a
global settlement along the lines originally negotiated
(though presumably with different dollar figures) will
be a natural and appropriate sequel. And if there is
no settlement, that won't be the end of the world.
Rule 23 allows district courts to devise imaginative
solutions to problems created by the presence in a
class action litigation of individual damages issues.
Those solutions include "(1) bifurcating liability and
damage trials with the same or different juries; (2)
appointing a magistrate judge or special master to
preside over individual damages proceedings; (3)
decertifying the class after the liability trial and
providing notice to class members concerning how
they may proceed to prove damages; (4) creating
subclasses; or (5) altering or amending the class." In
re Visa Check/MasterMoney Antitrust Litigation,
supra, 280 F.3d at 141.
We did note in our previous decision an unremarked
conflict of interest between those class members who
took out one or two refund anticipation loans and
those who took out more than two and would thus,
because of the $30 cap that we just mentioned,
receive no compensation for the additional harm that
they suffered. 288 F.3d at 282. But we went on to
say that "in light of the modesty of the stakes even of
class members who had multiple refund anticipation
loans and the expense of subdividing the class (and
how many subdivisions would be necessary to reflect
the full range of damages?), we are not disposed to
regard this particular defect in the settlement as
fatal."
[6] The defendants argue that by requiring them to
present their objections to class certification rather
than requiring the plaintiff to move for certification,
the district judge improperly altered the burden of
proof on the question whether the *662 class should
be certified. Not so. Although the plaintiff class had
not formally been certified in the earlier proceedings,
that was indeed a formal defect--a technical oversight
that was surprising but from a practical standpoint
inconsequential. The case had been settled as a class
action, notices had been sent, objections had been
considered and rejected--all on the assumption that a
class had been certified.
This was de facto
certification, albeit of a settlement class only, and
that was enough, we think, to empower Judge
Bucklo, in the exercise of her discretion to manage
litigation before her in an efficient and expeditious
manner, to require the defendants to list their
objections to the certification of a litigation class,
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especially since she was explicit that the burden of
persuasion on the validity of the objections would
remain on the plaintiffs. They carried the burden
easily. Remember that the defendants themselves
had argued that the class was appropriate for
settlement purposes. That did not conclude the
question whether it was appropriate for litigation if
the settlement fell through, as we have explained and
as the district judge recognized. But it was some
indication that there were issues appropriate for
determination on a class basis.
The defendants argue that the named plaintiff has not
been shown to be an adequate representative of the
class, but the district judge thought otherwise on
sufficient grounds. The defendants also argue that
class certification is barred by collateral estoppel, and
this argument requires a fuller discussion.
[7] In re Bridgestone/Firestone, Inc., Tires Products
Liability Litigation, 333 F.3d 763 (7th Cir.2003),
holds that a judicial finding that a class should not be
certified is, at least in some circumstances, entitled to
collateral estoppel effects; and in Buford v. H & R
Block, Inc., 168 F.R.D. 340 (S.D.Ga.1996), aff'd, 117
F.3d 1433 (11th Cir.1997) (per curiam), a federal
district judge refused to certify a nationwide class
action charging, just as in this case, that our
defendants' practices with respect to RALs violated
RICO. The judge recognized that the question
whether RICO was violated was separate from the
question whether the targets of the violation had been
injured by the violation. 18 U.S.C. § 1964(c);
Holmes v. Securities Investor Protection Corp., 503
U.S. 258, 267-68, 112 S.Ct. 1311, 117 L.Ed.2d 532
(1992). The predicate acts in the RICO claim are
violations of the mail-and wire-fraud statutes, and
these statutes are violated by a "scheme or artifice to
defraud," 18 U.S.C. § § 1341, 1343, whether or not
the scheme succeeds and therefore causes injury.
E.g., United States v. Tadros, 310 F.3d 999, 1006
(7th Cir.2002); United States v. Coffman, 94 F.3d
330, 333- 34 (7th Cir.1996); United States v. Daniel,
329 F.3d 480, 486 (6th Cir.2003). The separation of
liability and injury issues is illustrated by the
suggestion in Moore v. PaineWebber, Inc., 306 F.3d
1247, 1255-56 (2d Cir.2002), that in a suit charging
"uniform misrepresentations" the question whether
they were indeed misrepresentations would be
appropriate for class treatment, with the question of
reliance, and damages suffered, by individual class
members left for satellite proceedings. See also In re
Prudential Ins. Co. of America Sales Practices
Litigation, 148 F.3d 283 (3d Cir.1998).
Page 5
The judge in Buford thought, however, that the issue
of violation would be swamped by issues concerning
whether the borrowers had been deceived-- had relied
on the fraud, and thus had been injured, whether
directly, as in American Chiropractic Ass'n, Inc. v.
Trigon Healthcare Inc., 367 F.3d 212, 233 (4th
Cir.2004); Bank of China v. NBM LLC, 359 F.3d
171, 178 (2d Cir.2004); *663Byrne v. Nezhat, 261
F.3d 1075, 1109-10 (11th Cir.2001), and Summit
Properties Inc. v. Hoechst Celanese Corp., 214 F.3d
556 (5th Cir.2000), or perhaps, as in Systems
Management, Inc. v. Loiselle, 303 F.3d 100, 104 (1st
Cir.2002), indirectly. Those issues would have to be
resolved separately for each class member. In
deciding that therefore the case was inappropriate for
class treatment, the judge was applying the
presumption against class action certification in
RICO cases that has been articulated by the Fifth
Circuit in Sandwich Chef of Texas, Inc. v. Reliance
Nat'l Indemnity Ins. Co., 319 F.3d 205, 219 (5th
Cir.2003).
We are dubious about such a
presumption. The question whether RICO was
violated can be separated from the question whether
particular intended victims were injured, and thus
can--or so a district court could determine without
being thought to have abused its discretion--be
resolved in a single proceeding with the issue of
injury parceled out to satellite proceedings, as is
frequently done in class action tort iltigation, see,
e.g., Exxon Co. v. Sofec, Inc., 54 F.3d 570, 575-76
(9th Cir.1995); In re Bendectin Litigation, 857 F.2d
290, 308-13 (6th Cir.1988), of which the RAL class
litigation is a species.
The adequacy of the judge's reasoning in Buford is
not important, however, if, as the defendants contend,
his ruling is entitled to collateral estoppel effect. But
they overread Bridgestone/Firestone to hold that any
ruling denying class certification is binding in future
litigation. Our decision was more nuanced. See 333
F.3d at 767-69. For example, we pointed out that the
binding effect of such a ruling would depend on
whether the class members who would be affected by
it had been adequately protected by the class
representatives and class counsel in the proceeding in
which the ruling was made. The judge in Buford
discussed the issue of adequacy at some length,
however, 168 F.R.D. at 352-55, and we are not
disposed to reexamine his ruling. But it is too late for
the defendants to plead collateral estoppel when,
though knowing of the Buford decision, which was
issued in 1996 and affirmed the following year, they
insisted until last year, when the district court on
remand from our decision threw out the settlement,
that class treatment of the RICO claim was entirely
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appropriate. Until then they desperately wanted the
RICO claim included in the class settlement so that
they wouldn't have to face it in any other RAL suits.
They prevailed in the present litigation, until the
settlement was finally rejected, by arguing that
Buford was wrong. They are estopped to argue now
that it was right. And anyway collateral estoppel is
an affirmative defense that is forfeited if not raised in
timely manner, and it was not raised in a timely
manner in this case.
Page 6
Briefs and Other Related Documents (Back to top)
• 04-8008 (Docket) (Apr. 12, 2004)
• 04-8009 (Docket) (Apr. 12, 2004)
END OF DOCUMENT
The defendants tell us that anything that makes it
easier for a settlement class to molt into a litigation
class will discourage the settlement of class actions.
They say that defendants have settled class actions
"in the past secure in the knowledge that if the
settlement agreement should unravel, they would be
restored to the pre-certification position and remain
free to defend against any future effort to certify a
class for litigation purposes." But the defendants in
this case were perfectly free to defend against
certification; they just didn't put up a persuasive
defense. Anyway their argument is unrealistic. The
pressures for settlement of class actions are enormous
and will not be lessened significantly by our
upholding the class certification.
We are mindful that no district judge has as yet
explicitly addressed whether the other criteria for
class certification, besides adequacy of representation
of the class, have been met in this case. Those
criteria are whether "(1) the class is so *664
numerous that joinder of all members is
impracticable; (2) there are questions of law or fact
common to the class; (3) the claims or defenses of
the representative parties are typical of the claims or
defenses of the class." Fed.R.Civ.P. 23(a). There is
no need for a remand on these questions, however.
Criteria (1) and (2) have been met;
and the
satisfaction of (3) is implicit in Judge Bucklo's
rejection of the defendants' contention that to handle
their dispute with the class members in the class
action format would be unmanageable. There has
been substantial compliance with the requirements of
the rule, and no more is required, Shvartsman v.
Apfel, 138 F.3d 1196, 1201 (7th Cir.1998); Berger v.
Iron Workers Reinforced Rodmen Local 201, 843
F.2d 1395, 1401 (D.C.Cir.1988), especially in a case
in which the defendants were enthusiastic proponents
of class treatment until their opportunistic change of
heart.
AFFIRMED.
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400 F.3d 505
400 F.3d 505, 34 Employee Benefits Cas. 2005
(Cite as: 400 F.3d 505)
Page 1
[2] Declaratory Judgment
118Ak305 Most Cited Cases
305
Briefs and Other Related Documents
United States Court of Appeals,
Seventh Circuit.
In re: ALLSTATE INSURANCE COMPANY;
Agent Transition Severance Plan,
Petitioners.
No. 04-8022.
Submitted Jan. 30, 2005.
Decided March 8, 2005.
Background: Former employees who had retired or
had converted to independent-contractor status
brought class action against former employer under
Employee Retirement Income Security Act (ERISA),
alleging interference with receipt of enhanced
retirement/conversion benefits, as well as breach of
fiduciary duty. The District Court, 213 F.Supp.2d
862, Moran, Senior District Judge, denied agency's
motion to dismiss, and certified the class of former
employees with respect to the interference claim, 223
F.R.D. 489. Former employer appealed the
certification.
Holding: The Court of Appeals, Posner, Circuit
Judge, held that lawsuit could not properly be
certified as class action, under federal rule of civil
procedure governing class actions for injunctive or
declaratory relief.
Vacated.
West Headnotes
[1] Federal Civil Procedure
170Ak177.1 Most Cited Cases
177.1
[1] Federal Civil Procedure
180
170Ak180 Most Cited Cases
Class actions under federal rule of civil procedure
governing actions for injunctive relief generally do
not require giving class members notice of the suit
and a chance to opt out of it and bring their own,
individual suits; class actions seeking damages
generally do require giving class members notice and
a chance to opt out. Fed.Rules Civ.Proc.Rule 23(b,
c), 28 U.S.C.A.
[2] Federal Civil Procedure
180
170Ak180 Most Cited Cases
When the main relief sought in a class action is
injunctive or declaratory, and the damages are only
incidental, the suit can be maintained under federal
rule of civil procedure governing class actions
seeking injunctive or declaratory relief, which does
not require giving class members the chance to opt
out. Fed.Rules Civ.Proc.Rule 23(b)(2), 28 U.S.C.A.
[3] Jury
34(1)
230k34(1) Most Cited Cases
When a class action is limited to equitable relief or
incidental damages, such that the computation of
damages is mechanical and does not require
individual calculation, the award of damages by a
judge does not run afoul of the Seventh Amendment's
right to a jury trial in federal civil cases. U.S.C.A.
Const.Amend. 7; Fed.Rules Civ.Proc.Rule 23(b), 28
U.S.C.A.
[4] Declaratory Judgment
118Ak305 Most Cited Cases
305
[4] Federal Civil Procedure
170Ak177.1 Most Cited Cases
177.1
[4] Federal Civil Procedure
170Ak180 Most Cited Cases
180
[4] Federal Civil Procedure
184.5
170Ak184.5 Most Cited Cases
Employee Retirement Income Security Act (ERISA)
lawsuit by former employees who had retired or had
converted to independent-contractor status, alleging
interference
with
receipt
of
enhanced
retirement/conversion benefits, and breach of
fiduciary duty, could not properly be certified as class
action, under federal rule of civil procedure
governing class actions for injunctive or declaratory
relief, which did not require giving class members
notice and an opportunity to opt out; former
employees
alleged
different
circumstances
surrounding their discharge from employment, which
would affect whether they were entitled to relief, so
that employees were entitled to notice and an
opportunity to opt out. Employee Retirement Income
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400 F.3d 505
400 F.3d 505, 34 Employee Benefits Cas. 2005
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Security Act of 1974, § 2 et seq., 29 U.S.C.A. §
1001 et seq.; Fed.Rules Civ.Proc.Rule 23(b)(2, 3),
(c), 28 U.S.C.A.
[5] Declaratory Judgment
118Ak305 Most Cited Cases
305
[5] Federal Civil Procedure
177.1
170Ak177.1 Most Cited Cases
When, though the class action is for declaratory
relief, the effect of the declaration on individual class
members will vary with their particular
circumstances, the class members should be given
notice of the class action so that they can decide
whether they would be better off proceeding
individually. Fed.Rules Civ.Proc.Rule 23(b)(2), (c),
28 U.S.C.A.
Richard C. Godfrey, P.C., Sallie G. Smylie, Andrew
B. Bloomer, Donna M. Welch (submitted), and Jane
S. Park, Kirkland & Ellis, Chicago, IL, for
Petitioners.
Lawrence Walner, Walner & Associates, Chicago,
IL, for Respondents.
Before POSNER, RIPPLE, and SYKES, Circuit
Judges.
POSNER, Circuit Judge.
Allstate petitions us under Fed.R.Civ.P. 23(f) for
leave to appeal the district court's decision to certify
under Rule 23(b)(2) a class of plaintiffs who allege
that Allstate constructively discharged them in order
to deprive them of benefits to which ERISA entitled
them. We grant the petition (and proceed to decide
the merits) because it presents a novel and important
issue: whether certification under Rule 23(b)(2) is
proper when, though injunctive or declaratory relief
is sought rather than damages, individual hearings
may be necessary to determine causation and hence
liability.
The plaintiffs' complaint, which the district court
held states a claim, alleges the following facts: In
1998 Allstate decided to replace its employee
insurance agents with independent contractors, and
before announcing a severance package for
employees who would lose their jobs harassed them,
in violation of ERISA § 510, 29 U.S.C. § 1140, so
that they would quit before they could take advantage
of the severance benefits. It harassed them by
extending office hours, imposing burdensome
reporting requirements, reducing or eliminating
reimbursement for office expenses, and setting
Page 2
unrealistic sales quotas. As a result of the campaign
of harassment, between December 1998 and May
1999 176 agents quit outright and 1,106 others quit as
employees but became independent contractors. The
class seeks a judgment declaring that the members
are entitled to the benefits they would have received
under Allstate's ERISA plan had they been fired
rather than quitting. Armed with the declaration,
they will then ask the court to award them those
benefits.
[1] A Rule 23(b)(2) class action does not require
giving class members notice of the suit and a chance
to opt out of it and bring their own, individual suits;
a Rule 23(b)(3) class action does. The thinking
behind this distinction is that declaratory or
injunctive relief will usually have the same effect on
all the members of the class as individual suits
would. *507Lemon v. International Union of
Operating Engineers, Local No. 139, 216 F.3d 577,
580 (7th
Cir.2000);
Jefferson v. Ingersoll
International, Inc., 195 F.3d 894, 897 (7th Cir.1999);
Holmes v. Continental Can Co., 706 F.2d 1144, 1157
(11th Cir.1983). For example, were Allstate enjoined
from issuing a particular type of insurance policy,
there wouldn't be any purpose in allowing individual
members of the class to opt out and seek their own
injunction. They would all sink or swim together.
Indeed, as Judge Friendly explained in Galvan v.
Levine, 490 F.2d 1255, 1261 (2d Cir.1973), "insofar
as the relief sought [in a class action] is prohibitory,
an action seeking declaratory or injunctive relief ... is
the archetype of one where class action designation is
largely a formality, at least for the plaintiffs." In
contrast, when damages are sought, it is quite likely
that some individual class members will want to sue
on their own (provided that the potential damages per
class member are substantial) rather than participate
in a class-wide award, because they may have greater
than average damages.
[2] But this is in general rather than in every case.
When the main relief sought is injunctive or
declaratory, and the damages are only "incidental,"
the suit can be maintained under Rule 23(b)(2).
Jefferson v. Ingersoll International Inc., supra, 195
F.3d at 898; Allison v. Citgo Petroleum Corp., 151
F.3d 402, 415 (5th Cir.1998); Probe v. State
Teachers' Retirement System, 780 F.2d 776, 780 (9th
Cir.1986); see Berger v. Xerox Corp. Retirement
Income Guarantee Plan, 338 F.3d 755, 763-64 (7th
Cir.2003); Murray v. Auslander, 244 F.3d 807, 812
(11th Cir.2001).
The operational meaning of
"incidental" damages in this setting is that the
computation of damages is mechanical, "without the
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need for individual calculation," Manual for Complex
Litigation (Fourth) § 21.221 (2004), so that a
separate damages suit by individual class members
would be a waste of resources. See Allison v. Citgo
Petroleum Corp., supra, 151 F.3d at 415. The
present case is one of incidental damages because if
the plaintiffs get the declaration they are seeking, the
benefits to which the ERISA plan entitles them will
simply be read off from the plan. Compare Robinson
v. Metro-North Commuter R.R. Co., 267 F.3d 147,
163-64 (2d Cir.2001).
[3] When limited to incidental damages as the cases
define the term, the award of damages by a judge
does not run afoul of the Seventh Amendment's right
to a jury trial in federal civil cases. For when
calculation of damages is mechanical, there is no
right to a jury trial because summary judgment would
be granted. When, moreover, the basic relief sought
in a case is equitable, the judge can award damages in
the exercise of his equity powers, and thus without
calling in a jury, under the "clean up" doctrine of
equity. For the application of this principle to
ERISA, see May Dept. Stores Co. v. Federal Ins. Co.,
305 F.3d 597, 603 (7th Cir.2002). The present suit is
an ERISA suit.
[4] But just as the presence of a damages claim does
not always require insisting that the case proceed
under Rule 23(b)(3), so the fact that declaratory or
injunctive relief is sought (and no, or only incidental,
damages) should not automatically entitle the class to
proceed under Rule 23(b)(2). There can be critical
differences among class members that are
independent of differences in the amount of damages.
In this case, the critical difference concerns the
circumstances that induced the members of the class
to quit their employment with Allstate. One of the
named plaintiffs alleges that he was constructively
discharged because he was unable to comply with the
new office-hour requirements, another because he
was harassed by his manager's enforcement of
Allstate's new policies, and another because he was
forced to attend too many *508 unnecessary
meetings. This variance in circumstances doubtless
pervades the entire class. Given the size of the class,
more than a thousand individual hearings will be
necessary in order to determine which members were
really forced to quit and which quit voluntarily; only
the former are entitled to relief.
[5] This is not to say that the case is unsuitable for
class treatment. It may well be highly suitable. A
single hearing may be all that's necessary to
determine whether Allstate had a policy of forcing its
Page 3
employee agents to quit. This issue could be decided
first and then individual hearings conducted to
determine which of the members of the class were
actually affected by the policy rather than having
decided to quit for their own reasons. Fed.R.Civ.P.
23(c)(4)(A).
That would be a more efficient
procedure than litigating the class-wide issue of
Allstate's policy anew in more than a thousand
separate lawsuits. We explained this kind of hybrid
procedure in Carnegie v. Household International,
Inc., 376 F.3d 656, 661 (7th Cir.2004), and need not
repeat the explanation here. But when, though the
suit is for declaratory relief, the effect of the
declaration on individual class members will vary
with their particular circumstances, they should be
given notice of the class action so that they can
decide whether they would be better off proceeding
individually. In re Monumental Life Ins. Co., 365
F.3d 408, 417 (5th Cir.2004).
Several cases suggest that it might not be necessary
to convert such a proceeding to Rule 23(b)(3)
because adequate notice and an opportunity to opt out
could be provided within the context of a Rule
23(b)(2) proceeding. See, besides Monumental,
Jefferson v. Ingersoll International Inc., supra, 195
F.3d at 898 ("instead of divided certification--perhaps
equivalent to it--the judge could treat a Rule 23(b)(2)
class as if it were under Rule 23(b)(3), giving notice
and an opportunity to opt out on the authority of Rule
23(d)(2)" (emphasis in original)), and Lemon v.
International Union of Operating Engineers, Local
No. 139, supra, 216 F.3d at 582 ("the third option
discussed in Jefferson is that the district court might
certify the class under Rule 23(b)(2) for both
monetary and equitable remedies but exercise its
plenary authority under Rules 23(d)(2) and 23(d)(5)
to provide all class members with personal notice and
opportunity to opt out, as though the class was
certified under Rule 23(b)(3)"). The statement in
Lemon is dictum, however, and Jefferson carefully
left open the question whether the procedure we
quoted from that opinion is ever proper. See 195
F.3d at 899. As the quotation from Lemon makes
clear, such an effort to restructure Rule 23(b)(2)
would be complicated and confusing--unnecessarily
so, given the ready availability of the 23(b )(3)
procedure.
We conclude that this class action should have been
certified, if at all, under Rule 23(b)(3) rather than
under (b)(2).
The certification is therefore
VACATED.
400 F.3d 505, 34 Employee Benefits Cas. 2005
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Briefs and Other Related Documents (Back to top)
• 04-8022 (Docket) (Nov. 29, 2004)
END OF DOCUMENT
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Only the Westlaw citation is currently available.
Page 1
conclusions of law.
I. CLASS DESCRIPTION
United States District Court,
W.D. Pennsylvania.
James D. MEYER, individually, and on behalf of a
group of similarly situated
individuals, Plaintiff,
v.
CUNA MUTUAL GROUP, Defendant.
No. Civ.A. 03-602.
Jan. 25, 2006.
Mark T. Coulter, Peirce, Raimond & Coulter,
Pittsburgh, PA, for Plaintiff.
Amanda M. Abraham, Roland C. Goss, W. Glenn
Merten, Jorden Burt, Washington, DC, Dennis St.
John Mulvihill, Daniel L. Rivetti, Robb Leonard
Mulvihill, Pittsburgh, PA, for Defendant.
MEMORANDUM OPINION
CONTI, J.
*1 Pending before the court is a motion for class
certification (Doc. No. 30) filed pursuant to Federal
Rule of Civil Procedure 23(b)(3) in the abovecaptioned civil action by James D. Meyer ("plaintiff"
or "Meyer"). Plaintiff seeks class certification for
persons who purchased disability insurance issued in
the state of Pennsylvania from the defendant CUNA
Mutual Group (the "defendant" or "CUNA") pursuant
to policies containing a particular definition of "Total
Disability" and whose claims for disability benefits
were allegedly wrongfully denied after those persons
had received disability benefits pursuant to the policy
for approximately a twelve-month period. [FN1]
FN1. See class definition infra Part I for a
more precise description of the class.
On December 16, 2004, the court held a class
certification hearing. On February 25, 2005, the
plaintiff submitted a proposed trial plan (Doc. No.
47), the defendant submitted a response to the
proposed trial plan (Doc. No. 46), and the parties
submitted proposed findings of fact and conclusions
of law (Doc. No. 49).
Pursuant to Federal Rule of Civil Procedure 52, this
court makes the following findings of fact and
Plaintiff sought in his amended complaint the
certification of a nationwide class. Plaintiff seeks in
his motion for class certification, however, the
certification of a state-wide class limited to the
Commonwealth of Pennsylvania. Plaintiff seeks
certification of a class defined as follows:
All persons who purchased disability insurance
issued in Pennsylvania from the defendant CUNA
Mutual Group, or its subsidiaries, which policies
contain the definition of total disability including
the following material language: "After the first
twelve consecutive months of disability, the
definition changes and requires the Member to be
unable to perform any of the duties of his
occupation, or any occupation for which he is
reasonably qualified", [sic] to the extent that such
individuals were determined by the defendant to be
not able to perform all of the duties of his or her
occupation, but were determined by the defendant
to be capable of sufficient physical activity that the
defendant decided that they were no longer eligible
for total benefits under the defendant's
interpretation of the subject policy.
Plaintiff's and Defendant's Proposed Findings of
Fact and Conclusions of Law ("Joint Filing") at 2
(citing Plaintiff's Brief in Support of Motion for Class
Certification ("Pl.'s Br.") at 8).
II. FINDINGS OF FACT
A. Background Facts
1. On February 24, 1999, plaintiff purchased credit
disability insurance pursuant to a group policy (the
"policy") issued by defendant CUNA to URE Federal
Credit Union (the "credit union") in connection with
the financing by the credit union of an automobile
purchase made by plaintiff. Joint Filing, Agreed
Findings of Fact ("AFF") ¶ 3.
2. The policy provided that, in the event plaintiff
became totally disabled, defendant would make
payments on the loan to the credit union on plaintiff's
behalf. AFF ¶ 6 (citing Group Credit Insurance
Policy at 4).
*2 3. The policy contained a definition of "Total
Disability" that provided:
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during the first 12 consecutive months of disability
means that a member is not able to perform
substantially all of the duties of his occupation on
the date his disability commenced because of a
medically determined sickness or accidental bodily
injury. After the first 12 consecutive months of
disability, the definition changes and requires the
member to be unable to perform any of the duties
of his occupation or any occupation for which he is
reasonably qualified by education, training or
experience.
AFF ¶ 7 (citing Group Credit Insurance Policy at
1).
4. This policy was approved by the Pennsylvania
Insurance Department, as required by Pennsylvania
law, before being sold to plaintiff. AFF ¶ 8.
5. The policy at issue--including the language
defining total disability-- resulted from defendant's
efforts to modify language in its policies during the
1980s and to use "plain language" in drafting its
policies. Pl.'s Br., Ex. 8, Deposition of Diane Konz
("Konz.Dep.") at 14-18. Diane Konz, defendant's
representative, testified:
Q: Okay. Now, in changing whatever that prior
not-plain language policy was to this plain
language policy, do you recall whether nor not any
changes were made to the words describing total
disability?
A: We re-cast the definition to simply make it--to
use easier words to understand.
Q: Okay. And was the reason for doing that at that
time the fact the insurance commissions were
requesting plain language be used?
A: Yes.
Q: And in this particular instance at that point in
time was the Pennsylvania Insurance Commission
requesting plain language be used?
A: Not at that time.
Q: Was that something you anticipated coming
down the road?
A: Yes.
Konz Dep. at 18.
6. Ms. Konz testified in her deposition that she
worked with a team at CUNA that drafted insurance
contracts, submitted them to state regulators, and
worked with the regulators to gain approval. Konz
Dep. at 6-7. Ms. Konz testified that the drafting team
included the manager of claims, the manager of
underwriting, the manager of accounting, an actuary,
and herself on behalf of the government relations and
regulatory compliance group. Id. Ms. Konz testified
that she drafted the language of the policy at issue
Page 2
during CUNA's efforts to modify policies to contain
plain language. Konz Dep. at 21. Defendant asserts
that the policy was drafted by a group, whereas
plaintiff asserts that the policy was drafted by Ms.
Konz, but reviewed by a group. See Defendant's
Proposed Findings of Fact ("DFF") ¶ 2 and Plaintiff's
Response thereto.
7. Ms. Konz is a high school graduate without a
formal education in law. Konz Dep. at 9. Ms. Konz
testified that she cannot recall ever reading any legal
cases dealing with interpretation of insurance
contracts. Konz Dep. at 10. Ms. Konz was trained onthe-job, in-house, by defendant CUNA. Konz Dep. at
9-10. This policy was Ms. Konz's first opportunity to
participate as a member of a drafting team from start
to finish on a policy. Konz Dep. at 15.
*3 8. Plaintiff obtained a loan in the face amount of
$19,838.44 and purchased a credit disability
insurance policy with respect to that loan. The policy
was effective on February 24, 1999 and the premium
for the policy was $1,230.00. AFF ¶ 4.
9. Plaintiff worked as a brakeman and conductor for
Union Railroad for approximately 31 years. AFF ¶ 2.
10. On May 27, 2000, plaintiff suffered an injury at
work while moving a train from one yard to another.
AFF ¶ 5, 9.
11. As a result of the injury plaintiff was diagnosed
with a herniated cervical disc with radiculopathy,
leading to surgical discectomy. AFF ¶ 10.
12. Plaintiff sued his employer Union Railroad as a
result of this incident, alleging that Union Railroad
was responsible for his injuries because the
equipment he was using at the time he was injured
was defective. AFF ¶ 11. Plaintiff received a jury
verdict in this lawsuit in the amount of $600,000.00.
AFF ¶ 12. This jury verdict was vacated by an
appellate court in September 2004. AFF ¶ 13.
13. In connection with this injury, plaintiff filed a
claim for disability benefits under the policy at issue
in this lawsuit. AFF ¶ 14.
14. In response to plaintiff's claim, CUNA began to
pay plaintiff disability benefits. AFF ¶ 15. CUNA
made its first payment of disability benefits to
plaintiff on August 2, 2000 for the period of July 7,
2000 through July 27, 2000. Id.
15. The definition of "Total Disability" in the policy
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defines "Total Disability" during the first twelve
consecutive months of disability differently from
"Total Disability" during the time period thereafter.
See AFF ¶ 7. The policy defines "Total Disability"
during the first twelve consecutive months of
disability to mean "that a member is not able to
perform substantially all of the duties of his
occupation on the date his disability commenced
because of a medically determined sickness or
accidental bodily injury." Id. The policy states that
the definition of "Total Disability" during the time
period thereafter "changes and requires the member
to be unable to perform any of the duties of his
occupation or any occupation for which he is
reasonably qualified by education, training or
experience." Id.
16. CUNA paid plaintiff disability benefits for the
period between July 7, 2000, and July 7, 2001,
pursuant to the definition of "Total Disability" that
governed the first twelve months of disability
because for that period CUNA determined that
plaintiff was totally disabled according to that
definition. AFF ¶ 16.
17. CUNA paid plaintiff disability benefits for the
period between July 8, [2001] [FN2] through
November 24, 2002, pursuant to CUNA's
interpretation of the definition of "Total Disability"
that governed the time period after twelve months
had passed from the date the disability commenced
because for that period CUNA determined that
plaintiff was totally disabled according to that
definition. AFF ¶ 17; AFF ¶ 30.
FN2. The Agreed Findings of Fact state that
CUNA continued to pay benefits to plaintiff
"from July 8, 2000 through November 24,
2002, pursuant to the second sentence of the
definition of total disability." The court,
however, infers that the parties meant to
state "from July 8, 2001 through November
24, 2002." AFF ¶ 17 (emphasis added).
B. Medical Evaluations
*4 18. During the time period that CUNA paid
benefits to plaintiff under the policy, plaintiff was
treated by several physicians. AFF ¶ 18.
19. During this period, plaintiff saw Dr. Antoin
Munirji on a monthly basis for an extended period of
time. AFF ¶ 19. In conjunction with each visit, Dr.
Munirji completed two different forms relating to
plaintiff's disability status: an internal office form
Page 3
used at Dr. Munirji's office (the "Munirji form") and
a form provided by CUNA to Dr. Munirji (the
"CUNA form"). AFF ¶ ¶ 21, 23.
20. The Munirji form contained the question: "Can
patient return to his/her pre-injury job without
restrictions?" The question was followed by spaces to
mark "Yes" and/or "No." AFF ¶ 22.
21. The CUNA form contained the question: "Has
patient been released to return to work?" The
question was followed by spaces to mark "Yes"
and/or "No." AFF ¶ 23.
22. In order to complete the certification forms, Dr.
Munirji tested plaintiff's strength and range of
motion, and recorded these results. AFF ¶ 24.
23. On several occasions physicians authorized
plaintiff to return to work in a sedentary, light, or
medium duty capacity. AFF ¶ 25.
24. For example, on November 13, 2000, Dr.
Munirji submitted a claim form to CUNA indicating
that plaintiff had as of October 11, 2000, regained the
ability to return to work subject to light duty
restrictions. Munirji Dep. at 12-14, Ex. 3 at 2. See
DFF ¶ 18 and Plaintiff's Response thereto. On
December 5, 2000, Dr. Munirji submitted a claim
form to CUNA indicating again that plaintiff had
regained the ability to return to work subject to light
duty restrictions as of October 11, 2000. Munirji Dep,
Ex. 3 at 4.
25. CUNA representative Tarry Blanke testified in
her deposition that Dr. Levin had submitted a
certification to CUNA indicating that plaintiff could
return to light duty work in some capacity as of June
8, 2000. DFF ¶ 16 (citing Blanke Dep. at 45). (Dr.
Levin's report, Ex. 7 to Blanke's deposition, does not
appear in the record.)
26. During plaintiff's deposition he was questioned
about a report written by Dr. Talbott which
apparently indicated Dr. Talbot had stated that
plaintiff was capable of full time light employment,
as opposed to returning to plaintiff's occupation as a
conductor / brakeman. DFF ¶ 17 (citing Pl. Dep. at
92-94). (Dr. Talbott's report, part of Ex. 7 to
plaintiff's deposition, does not appear in the record.).
27. Plaintiff believed that as of October 25, 2000 he
was capable of performing sedentary or light work on
a full time basis. AFF ¶ 26.
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28. Later, on May 3, 2002, Dr. Munirji indicated that
plaintiff was capable of performing modified light
duties at work, so long as he did no above-shoulder
work and no lifting over 10-15 pounds. AFF ¶ 27. In
December 2002, Dr. Munirji informed CUNA that
plaintiff was capable of performing modified light
duties at work, so long as he did no above-shoulder
work and no lifting over 10-15 pounds. AFF ¶ 28.
On December 10, 2002, Dr. Munirji submitted a form
to CUNA and indicated that plaintiff was capable of
performing "modified light duty." AFF ¶ 29.
*5 29. Dr. Munirji's report of December 31, 2002,
however, demonstrates that though plaintiff was
capable of performing modified light duties, plaintiff
continued to suffer effects of his injury that prevented
him from returning to his time-of-injury occupation.
PFF ¶ 2. The report indicates, for example, that
plaintiff was "totally disabled from performing his
own occupation" and that Dr. Munirji expects either
"no change" or "unknown," rather than
"improvement"
or
"deterioration,"
regarding
plaintiff's injury. Pl.'s Br., Ex. 6 at 1. In addition, Dr.
Munirji testified in his deposition that in the years
since 2002, plaintiff's physical condition has not
significantly improved and that plaintiff remained
unable to perform substantially all of the activities of
his prior occupation as a conductor for Union
Railroad. PFF ¶ 3, 5.
30. Although several physicians authorized plaintiff
at various times after his disabling injury to return to
working in some capacity subject to light or medium
duty restrictions, there is no indication in the record
that any physician certified that after the disabling
injury plaintiff could perform all of the duties of his
time-of-injury occupation--conductor / brakeman at
Union Railroad.
Page 4
railroad employment, Mr. Matey could not determine
whether plaintiff could return to his railroad
employment. Id. Mr. Matey reported, however,
among other things, that he "fe[lt] less than confident
that return to full duty would be advised at this time"
and that "[i]f prior position is unavailable [he] fe[lt]
[plaintiff]'s abilities suggest he could return [to]
medium duty work at this time with below weight
limits recommended." Appendix in Support of
CUNA's Memorandum in Opposition to Plaintiff's
Motion for Class Certification ("Def.App."), Pl.'s
Dep., Ex. 2, Matey Report at 1.
33. In 2002, counsel for plaintiff referred plaintiff to
Charles
Cohen,
Ph.D.,
a
licensed
psychologist/vocational expert, for a vocational
evaluation in 2002. AFF ¶ 35. The results of this
evaluation are detailed in a report (the "Cohen
Report") dated September 30, 2002. Id. Dr. Cohen
concluded, among other things, that "[plaintiff] has a
loss of earnings capacity associated with his inability
to perform his previous job on the railroad."
Def.App., Pl.'s Dep., Ex. 1, Cohen Report at 8.
*6 34. The vocational/employment evaluations
contained conclusions that plaintiff was capable of
some light or medium work duty, even if he could not
return to his original job. DFF ¶ 26 (citing Pl.'s Dep.,
Ex. 10 & 11). Mr. Matey concluded that plaintiff
could work at a job with "medium duty"
requirements. Pl.'s Dep., Ex. 10. Dr. Cohen
concluded that though plaintiff could no longer
perform his job as conductor/brakeman and his skills
are not transferable to other work, he may have been
able to secure employment in some other occupation
such as retail sports equipment sales. Pl.'s Dep., Ex.
11.
D. Termination of Benefits
C. Vocational / Employment Evaluations
31. During the time period that CUNA paid benefits
to plaintiff under the policy, plaintiff participated in
two vocational/employment evaluations. AFF ¶ 31.
32. In late 2001, plaintiff's surgeon, Dr. El-Kadi,
recommended plaintiff for a vocational evaluation in
late 2001. AFF ¶ 32. This evaluation was performed
by Mr. Matey, Director of Physical Therapy at Rehab
Plus. Id. The results of this evaluation are detailed in
a report (the "Matey Report") dated November 29,
2001. AFF ¶ 33. Mr. Matey concluded that plaintiff
could work at a job with "medium duty"
requirements, but due to incomplete information
about the specific physical requirements of plaintiff's
35. CUNA paid plaintiff benefits under the policy
until November 24, 2002. AFF ¶ ¶ 30-33, 37.
36. On or about January 27, 2003, CUNA informed
plaintiff by letter that he was no longer eligible for
benefits under the policy. AFF ¶ 36. In the letter
plaintiff was informed that, though CUNA had
processed his claim for the period September 25,
2000, through November 24, 2002, it was terminating
his benefits under the policy. The letter explained in
pertinent part:
Based on information obtained, no additional
benefits may be extended at this time.
The information obtained indicated you're capable
of modified light duty work. This, along with other
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information contained in your claim file, indicates
that you are no longer unable to perform any
occupation. Therefore, your claim has been closed.
The Credit Disability Insurance contract contains a
definition of total disability. According to this
definition, total disability during the initial 12
consecutive [sic] months of disability means you
are not able to perform the duties of your
occupation. After the initial 12 consecutive months
of disability, the definition changes and states that
you must be disabled from performing any
occupation for which you are reasonably qualified
by education, training, or experience.
Def.App., Blanke Affidavit, Ex. A (Letter from
Carolyn J. Frye to James D. Meyer) (the "January 27,
2003 letter").
37. The January 27, 2003 letter is a form letter sent
by CUNA to disability claimants (1) to whom CUNA
had paid twelve consecutive months of benefits under
a credit disability policy, and (2) for whom CUNA
had received information indicating that the claimant
was capable of returning to work in some capacity.
AFF ¶ 38.
38. As of the date CUNA responded to an
interrogatory (interrogatory number four) served by
plaintiff, CUNA believed as best as can be
determined that approximately 1,545 claims fell into
a category for Pennsylvania residents from April 29,
1997 to April 29, 2003, which is the statute of
limitations period for the putative class in this case.
The category referred to was for insureds who were
insured under policies containing the language at
issue in this case whose benefits were terminated
after CUNA determined that the insured was capable
of sufficient physical ability--although not enough to
perform the duties of the insured's occupation--to be
no longer eligible for benefits. The data was limited
to Pennsylvania residents because insurance
certificates with this definition of disability were only
sold to Pennsylvania residents. See AFF ¶ ¶ 39-40.
[FN3]
FN3. CUNA's designated representative for
the purposes of testifying to claims
procedures, Tarry Blanke, testified in her
deposition that she received a request from
the in-house legal department to assist them
in identifying relevant claims, that she
participated in ascertaining the number of
claims by contacting the IT Department and
giving them parameters for identifying the
claims, and that she passed on this
information to the legal department. Blanke
Page 5
Dep. at 26-27. This process apparently led to
defendant's answer to interrogatory number
four. In an affidavit submitted with
defendant's opposition to the motion for
class certification, Ms. Blanke further
explained that (1) this number was
ascertained by determining from computer
records that the same form of letter sent to
plaintiff was sent to 1,545 Pennsylvania
residents; (2) it was not determined by
defendant why the persons who had received
this form of letter stopped receiving
benefits; and (3) in sending the letter,
CUNA did not make any determination of
whether each recipient of the letter could
have returned to their pre-injury job without
restriction. Plaintiff objects that this
Affidavit submitted after the close of
discovery and days prior to argument is
untimely, contradicts defendant's answer to
interrogatory number four, and cannot
vitiate that answer. The court need not
resolve that objection because the answer to
interrogatory number four is sufficient to
meet plaintiff's burden on the numerosity
requirement for a class certification at this
stage of the proceedings.
*7 39. CUNA's practice is to include in a letter to an
insured denying benefits all of the bases upon which
benefits are being denied because CUNA understands
that is expected and required under the Fair Claims
Practices Act. Blanke Dep. at 67.
E. Plaintiff's Current Employment Status
40. At the time of plaintiff's deposition he could
perform all of the verbal requirements of his job as
brakeman/conductor, but could not perform all of the
physical
requirements
of
his
job
as
brakeman/conductor. AFF ¶ 42.
41. Plaintiff testified during his deposition that the
rules promulgated by his union, the United
Transportation Union (the "union") prevented him
from taking a different job with his employer. AFF ¶
43. Plaintiff explained that brakeman/conductors do
not have light duty work, his agreement with the
union prevented him from switching from
brakeman/conductor to some other position such as
being a clerk, and that in his 31 years of experience at
the railroad he had never had any other job than
brakeman/conductor. Pl.'s Dep. at 73-74.
42. Plaintiff testified during his deposition that since
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becoming disabled he had not discussed job training
possibilities with his union, considered attending any
kind of job training or education courses to prepare
himself for a new occupation, or looked for or
applied for a new job. AFF ¶ 44-45.
43. Plaintiff has the ability to perform tasks
associated with some occupations other than
brakeman/conductor. AFF ¶ 46.
44. Plaintiff receives a monthly disability pension
from the Railroad Retirement Board in the amount of
$2,230.00. AFF ¶ 47. In June 2004, plaintiff received
a lump sum "US Carnegie" pension payment in the
amount of approximately $167,000.00. AFF ¶ 48;
Pl.'s Dep. at 21-22.
F. Plaintiff's Adequacy as Class Representative
45. Plaintiff has expressed his willingness to serve as
class representative, and to vigorously prosecute this
case on behalf of the entire class. PFF ¶ 22;
Amended Complaint ¶ ¶ 11,15-16.
46. Because defendant has represented that it sold
this policy only in Pennsylvania, there are no
variations in state law which create conflicts of
interest between members of the proposed class. PFF
¶ 24.
47. On April 16, 2004, the court entered a case
management order providing that class certification
discovery close on August 23, 2004, and that
plaintiff's motion for class certification be filed by
September 14, 2004. AFF ¶ 58.
48. On July 12, July 19, and August 20, 2004,
counsel for defendant requested dates for deposing
plaintiff. AFF ¶ 59.
49. Plaintiff's deposition was scheduled for the week
of September 20, 2004, but was thereafter postponed
because plaintiff's counsel was unavailable. AFF ¶
60.
50. The parties filed a joint motion to amend the case
management order (Doc. No. 28) on or about
September 13, 2004. The court, upon consideration
of the parties' joint motion, amended the case
management order on September 15, 2004, and
ordered that class certification discovery be
concluded by October 8, 2004, and that plaintiff's
motion for class certification be filed by October 29,
2004. AFF ¶ 61.
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*8 51. Plaintiff's deposition was re-scheduled for
September 30, 2004. AFF ¶ 62.
52. Several days before plaintiff's scheduled
deposition, an appellate court vacated plaintiff's
$600,000.00 jury verdict against his employer. AFF ¶
63. Because of the appellate court's opinion, plaintiff
informed his attorney that he believed that "the
judicial system did not work" and that "he was not
willing on that date to participate in it." AFF ¶ 64.
Plaintiff stated that he had lost faith in the legal
system and was unwilling to be deposed. AFF ¶ 65.
Plaintiff at no time claimed that he was ill or had an
unforeseen conflict with the scheduled deposition.
Instead, plaintiff refused to attend it. AFF ¶ 66. The
day before the scheduled deposition plaintiff's
counsel informed defendant's counsel that plaintiff
refused to attend the September 30, 2004 deposition.
AFF ¶ 67.
53. Defendant's counsel re-noticed plaintiff's
deposition for October 5, 2004, three days before the
close of class discovery, as a courtesy to plaintiff's
counsel. AFF ¶ 68. Plaintiff's counsel, however, was
unable to secure plaintiff's attendance on October 5,
2004, and plaintiff failed to appear at the October 5
deposition. AFF ¶ 69.
54. Class discovery closed, therefore, without
defendant having an opportunity to depose plaintiff.
AFF ¶ 70.
55. Plaintiff sought and received an extension of the
class discovery period and plaintiff was deposed on
October 28, 2004. AFF ¶ 72.
56. At his deposition plaintiff agreed that if a class
representative exposed the members of a putative
class that he seeks to represent possibly to adverse
consequences due to a failure to abide by court rules
that such conduct would not be in the best interests of
the members of the class. AFF ¶ 73; Pl.'s Dep. at 17.
57. Plaintiff asserts that there was no prejudice to
any party and no harm done to the class in light of the
delay occasioned by the re-scheduling of plaintiff's
deposition. PFF ¶ 25.
58. Plaintiff does not know the physical capabilities
or level of education, training, and experience of any
member of the putative class. AFF ¶ 49.
59. At the time of his deposition plaintiff was
unaware that a class representative is expected to pay
discovery and notice expenses inherent in all class
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action litigation, did not expect to incur expenses in
connection with the litigation, and indicated that at
that time he was unable to pay the potential expense
of class notice or discovery in this action. Pl.'s Dep.
at 6.
60. Plaintiff has arranged for costs and expenses of
this matter to be contingently advanced by plaintiff's
counsel in the above-captioned civil action. AFF ¶
50. Plaintiff avers that the contingent fee agreement
properly provides that plaintiff's counsel may
advance the costs of litigation, repayment of which is
contingent on the outcome of the matter. DFF ¶ 47
and Plaintiff's Response thereto (citing Pennsylvania
Rule of Professional Conduct 1.8(e)(I)).
*9 61. Plaintiff's proposed class counsel, Mark T.
Coulter and D. Aaron Righn of Peirce, Raimond and
Coulter, P.C. have experience litigating class actions,
including consumer cases, and possess the resources
to prosecute this case. AFF ¶ 51.
G. Issues Related to Administration of the Class
Action
62. Were the class to be certified, plaintiff's trial plan
asserts that a damages determination would not be
problematic and defendant's trial plan asserts that a
damages determination would be problematic. [FN4]
FN4. No facts relevant to the size of the
claims of putative class members were
referred to by either party.
III. Procedural Background
1. Plaintiff brings this action on his own behalf, and
on behalf of similarly situated individuals who were
granted, but later denied, benefits under credit
disability insurance policies purchased from the
defendant. AFF ¶ 52-3; Amended Complaint (Doc.
No. 21) at 1-3.
2. Plaintiff's initial complaint (Doc. No. 1) sought
certification of a nationwide class based upon claims
for breach of contract, breach of fiduciary duty,
violation of the Pennsylvania Unfair Trade Practices
Act and Consumer Protection Law, and violation of
Pennsylvania's bad faith insurance statute.
3. Defendant filed a motion to dismiss this complaint
(Doc. No. 6) which the court granted in part as to the
breach of fiduciary duty claim and denied in part as
to the remaining claims in its memorandum order of
February 11, 2004 (Doc. No. 12), noting that plaintiff
Page 7
had conceded in his response to the motion to dismiss
that count three of the complaint fails to state a claim
as to breach of fiduciary duty.
4. Plaintiff subsequently filed an amended complaint
(Doc. No. 21) with leave of the court re-alleging
claims for breach of contract, breach of fiduciary
duty, and violation of the Pennsylvania Bad Faith
statute, and further alleging violations of the Unfair
Trade Practices Act and Consumer Protection laws of
all 50 states and the District of Columbia and
violation of the covenant of good faith and fair
dealing under common laws of all 50 states, the
District of Columbia, and federal common law. AFF
¶ 55.
5. Defendant filed a motion to dismiss this complaint
(Doc. No. 22) which the court in its memorandum
order of December 20, 2004 (Doc. No. 41) granted as
to count three, the breach of fiduciary duty claim,
granted in part as to count four, the unfair trade
practices claim, and denied without prejudice as to
count six, the breach of the implied covenant of good
faith and fair dealing claim. AFF ¶ 56. The court
granted in part the motion to dismiss as to count four,
the unfair trade practices and consumer protection
claim, dismissing that claim to the extent that it
purported to state a claim for violations of unfair
trade practices of all 50 states and the District of
Columbia as well as the federal statute prohibiting
unfair trade, and permitting plaintiff to maintain such
a claim to the extent the claim alleges violations of
the Pennsylvania Unfair Trade Practices Act and
Consumer Protection Law. AFF ¶ 57. The court
denied defendant's motion to dismiss count six
without prejudice to defendant's rights to revisit the
issue upon a more fully developed record in a motion
for summary judgment. Id.
*10 6. Plaintiff asserts that defendant's sworn
discovery responses have indicated that the policy
language at issue in this case was used only in
Pennsylvania. PFF ¶ 21. Plaintiff seeks, therefore, in
his motion for class certification creation of a class
limited to Pennsylvania participants. Id. In the event
that subsequent discovery should demonstrate that
defendant's discovery responses were erroneous
regarding the use of this clause only in Pennsylvania,
whether by intent or omission, plaintiff reserves the
right to request the court to reconsider the scope of
the proposed class. Id.
IV. CONCLUSIONS OF LAW
1. To be certified, a class must satisfy the four
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requirements of Federal Rule of Civil Procedure
23(a): (1) numerosity; (2) commonality; (3)
typicality; and (4) adequacy of representation.
Fed.R.Civ.P. 23(a). If the Rule 23(a) requirements
are met, the court must then find that the class fits
within one of the three categories of class actions set
forth in Federal Rule of Civil Procedure 23(b). In Re
Community Bank of Northern Virginia, 418 F.3d 277,
302 (3d Cir.2005). See also Chiang v. Veneman, 385
F.3d 256, 264 (3d Cir.2004); In Re LifeUSA, 242
F.3d 136, 143 (3d Cir.2001); Georgine v. Amchem.
Prods., Inc., 83 F.3d 610, 624 (3d Cir.1996), aff'd.
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 117
S.Ct. 2231, 138 L.Ed.2d 689 (1997); Baby Neal v.
Casey, 43 F.3d 48, 55 (3d Cir.1994).
2. The proponent of class certification has the burden
of proving each of the prerequisites of a class action
under Rule 23(a) and that the class fits within one of
the three categories of class actions set forth in Rule
23(b). Chiang, 385 F.3d at 264. The court notes,
however, that it is not necessary for plaintiff to
establish the merits of his case at the certification
stage, and that in determining whether the class will
be certified, the substantive allegations of the
complaint must be taken as true. Chiang, 385 F.3d at
262 (citing Eisen v. Carlisle & Jacquelin, 417 U.S.
156, 177-78, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974)).
In deciding a motion for class certification, the court
must be satisfied "after a rigorous analysis" that all
the requirements for class certification are met.
General Telephone Co. v. Falcon, 457 U.S. 147, 160,
102 S.Ct. 2364, 72 L.Ed.2d 740 (1982). As the
United States Court of Appeals for the Third Circuit
has recently made clear, failure to follow the
procedures required before approving a class action is
an abuse of discretion. In Re Community Bank of
Northern Virginia, 418 F.3d 277 (3d Cir.2005)
(settlement-only class).
A. The Class Definition
3. Plaintiff proposes class certification for a group of
individuals who purchased disability benefits policies
in Pennsylvania from defendant containing a certain
definition of "Total Disability" which provided that:
during the first 12 consecutive months of disability
means that a member is not able to perform
substantially all of the duties of his occupation on
the date his disability commenced because of a
medically determined sickness or accidental bodily
injury. After the first 12 consecutive months of
disability, the definition changes and requires the
member to be unable to perform any of the duties
of his occupation or any occupation for which he is
Page 8
reasonably qualified by education, training or
experience.
*11 AFF ¶ 7 (citing Group Credit Insurance Policy
at 1). Plaintiff seeks certification of a class defined as
follows:
All persons who purchased disability insurance
issued in Pennsylvania from the defendant CUNA
Mutual Group, or its subsidiaries, which policies
contain the definition of total disability including
the following material language: "After the first
twelve consecutive months of disability, the
definition changes and requires the Member to be
unable to perform any of the duties of his
occupation, or any occupation for which he is
reasonably qualified", [sic] to the extent that such
individuals were determined by the defendant to be
not able to perform all of the duties of his or her
occupation, but were determined by the defendant
to be capable of sufficient physical activity that the
defendant decided that they were no longer eligible
for total benefits under the defendant's
interpretation of the subject policy.
4. The crux of plaintiff's case is that the definition of
"Total Disability" in defendant's disability insurance
policies is ambiguous on its face. Specifically,
plaintiff points to the language used to describe the
second period of disability (the period after the first
twelve consecutive months of disability has passed)
as problematic.
5. Plaintiff's proposed class definition is predicated
on the definition of
"Total Disability" in the
disability insurance policies sold in Pennsylvania by
defendant. Plaintiff proposes a class of claimants
who, like plaintiff, were initially approved for total
disability benefits but whose benefits were
subsequently terminated based upon a determination
by defendant that the claimant, while "not able to
substantially perform all of the duties of his
occupation" as referenced in the initial definition of
the total disability provision, nevertheless was
capable of sufficient physical activity that defendant
deemed the insured no longer eligible for total
disability benefits under defendant's interpretation of
the policy provisions.
6. Plaintiff avers that this class contains
approximately 1,545 claimants based upon
defendant's response to interrogatory number four,
which indicated that "[a]s best as can be determined
at the present time, CUNA believes that
approximately 1,545 claims fall in to [sic] this
category for Pennsylvania residents from April 29,
1997 to April 29, 2003, which is the statute of
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limitations period for the putative Class in this case."
incorrect.
7. Plaintiff maintains that, using the subject language
in the policy sold to plaintiff, defendant identified
approximately 1,545 individuals who remained
occupationally disabled, and yet were terminated
from receipt of their benefits after a twelve-month
period (or thereafter) based upon defendant's
interpretation of the policy provisions which plaintiff
contends entitled those claimants to continued
coverage. Plaintiff seeks to use the policy language
itself to define and limit the class. Plaintiff argues
that the proposed class definition is sufficiently clear
to encompass an ascertainable group of individuals
who share common and predominate issues of law
and fact, a group that is too large reasonably to
anticipate individual prosecution of the case, and a
group that lends itself to management as a class
action.
2. Class is Not Readily Ascertainable
*12 8. Defendant argues, however, that (1) plaintiff's
class definition bears no relation to his claims; (2) the
class is not readily ascertainable; (3) the class may
not include persons whose claims are barred by the
applicable statute of limitations; and (4) plaintiff has
no standing to represent disability claimants who
purchased different policies than he did. The court
addresses these concerns in turn.
1. Relationship of Class Definition to Plaintiff's
Claims
9. Defendant argues that it is inappropriate for
plaintiff's class definition to refer to a determination
with respect to "all of the duties" of one's occupation,
which defendant submits is the standard for benefits
during the first twelve months of disability.
Defendant argues that plaintiff's claims relate to a
denial of benefits subject to the standard for benefits
during the period after twelve months of benefits.
The court cannot agree with defendant's position.
Though the claims advanced by plaintiff relate
specifically to the ambiguity inherent in the definition
of "Total Disability" during the period after twelve
months of coverage, there is nothing fundamentally
defective about a class definition that requires
looking to both the first and second parts of the
definition to ascertain the class. Defining the class to
include those claimants who were first given benefits
subject to the first part of the definition and then
denied benefits subject to the second part of the
definition in fact narrows the group to those who are
similarly situated as the plaintiff and who may have a
claim if plaintiff succeeds in establishing that
defendant's interpretation of the policy language was
10. Defendant argues that the class is not readily
ascertainable because it is not precise, objective, and
presently ascertainable without detailed person-byperson analysis to determine who falls within the
class.
11. Defendant is correct that a clear class definition
is critically important because it identifies the persons
who are entitled to relief, bound by a final judgment,
and entitled to notice in a Rule 23(b)(3) action like
this one. "A class must be clearly defined and only
members can be legally bound by settlements or
judgments in the class action." In re School Asbestos
Litigation, 56 F.3d 515, 519 (3d Cir.1995) (citations
omitted).
12. Defendant cites authority from other circuits to
the effect that class proponents must propose a class
definition which is "precise, objective, and presently
ascertainable." See, e.g., Neumont v. Monroe County,
198 F.R.D. 554, 557 (S.D.Fla.2000) (for a class
definition to be viable, class membership must be
capable of ascertainment under objective standards);
O'Connor v. Boeing N. Am., Inc., 184 F.R.D. 311,
319 (C.D.Cal.1998) (class definition should be
"precise, objective and presently ascertainable").
13. Further, defendant argues that if it is necessary to
engage in a person-by-person analysis to determine
who falls within a proposed class, the composition of
the class cannot be ascertained through reasonable
effort, and class certification must be denied. See,
e.g., Crosby v. Social Sec. Admin., 796 F.2d 576, 580
(1st Cir.1986) (denying certification where definition
of class made "class members impossible to identify
prior to individualized fact-finding and litigation").
Defendant argues that, here, the members of the
putative class can only be identified through detailed
person-by-person inquiry, and not through a
reasonable effort, because plaintiff's proposed class
consists of individuals who were unable to perform
substantially all of the duties of their pre-injury
occupation, but were denied benefits because they
could work in another occupation for which they
were reasonably qualified by education, training or
experience. According to defendant, there is no way
to determine whether individuals meet this
requirement without an individualized review of the
claims file for each of the 1,545 claimants plaintiff
contends are members of the putative class.
Defendant points out, further, that there is no
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guarantee that each claim file will contain the factual
information necessary to make these determinations,
and to the extent that such information is not present
in any file, additional investigation would be
necessary.
*13 14. Defendant fails to address head on in its
opposition brief, however, the fact that the 1,545
figure came from defendant, not plaintiff. Defendant
certified in its answer to plaintiff's interrogatory that
approximately 1,545 claimants in the state of
Pennsylvania during the applicable time period fell
into the category described by plaintiff. It is
inappropriate for defendant to now protest that this
number is inaccurate, or the criteria for determining it
not clear, precise, and objective. In addition, some
amount of individualized inquiry may, but does not
necessarily, defeat class certification on some or all
issues. See Chiang, 385 F.3d 256 at 267 (Becker, J.)
("We note in this regard that courts commonly use
Rule 23(c)(4) to certify some elements of liability for
class determination, while leaving other elements to
individual
adjudication--or,
perhaps
more
realistically, settlement."); Carnegie v. Household
Int'l, Inc., 376 F.3d 656, 661 (7th Cir.2004) (Posner,
J.) ("[I]t may be that if and when the defendants are
determined to have violated the law separate
proceedings of some character will be required to
determine the entitlements of the individual class
members to relief."). This issue will be addressed
more thoroughly below.
3. Claims Barred by Statute of Limitations
15. Defendant argues that the class may not include
persons whose claims are barred by the applicable
statute of limitations. While plaintiff's class definition
does not explicitly refer to a time period, plaintiff
asserts that the class is made up of the approximately
1,545 claims identified by defendant in its answer to
interrogatory number four, in which defendant
explained "these 1545 claims fall into this category
from Pennsylvania residents from April 29, 1997 to
April 29, 2003, which is the statute of limitation [sic]
period for the putative class in this case." The 1,545
claims, therefore, by defendant's own determination,
do not include claims barred by the applicable statute
of limitations.
4. Standing
16. Defendant argues that plaintiff has no standing to
represent disability claimants who purchased
different policies than he did. As a threshold matter,
individual standing is a prerequisite for the
Page 10
maintenance of all actions, including class actions.
Osgood v. Harrah's Entertainment, Inc., 202 F.R.D.
115, 120-21 (D.N.J.2001) (citations omitted). While
there is no additional standing requirement for a
plaintiff who seeks to represent a class, questions
relating to Article III standing, however, frequently
overlap and are sometimes confused with the criteria
required for class certification embodied in Federal
Rule of Civil Procedure 23(a). Id.
17. Though defendant cites the constitutional
standard for standing in its opposition brief,
defendant actually makes a standing argument that
should be addressed pursuant to the criteria contained
in Rule 23. That is, Article III standing requires (1)
the plaintiff must have suffered an injury in fact; (2)
there must be a causal connection between the injury
and the conduct complained of--the injury has to be
fairly traceable to the challenged action of the
defendant and not the result of the independent action
of some third party not before the court; and (3) it
must be likely, as opposed to merely speculative, that
the injury will be redressed by a favorable decision.
Society Hill Towers Owners' Ass'n v. Rendell, 210
F.3d 168, 175-176 (3d Cir.2000); Trump Hotels &
Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d
478, 484-85 (3d Cir.1998). See also Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560-61, 112
S.Ct. 2130, 119 L.Ed.2d 351 (1992). Further,
constitutional
standing
implicates
prudential
considerations that overlap, but extend beyond, the
inquiry under Article III. The United States Court of
Appeals for the Third Circuit has summarized those
prudential principles as follows: (1) the plaintiff
generally must assert his own legal rights and
interests, and cannot rest his claim to relief on the
legal rights or interests of third parties; (2) even when
the plaintiff has alleged redressable injury sufficient
to meet the requirements of Article III, the federal
courts will not adjudicate abstract questions of wide
public significance which amount to generalized
grievances pervasively shared and most appropriately
addressed in the respective branches; and (3) the
plaintiff's complaint must fall within the zone of
interests to be protected or regulated by the statute or
constitutional guarantee in questions. Society Hill
Towers Owners' Ass'n, 210 F.3d at 177- 178
(citations omitted)
*14 18. The court in Osgood explained the
relationship between standing and the Rule 23 criteria
in a prospective class action:
Though there is no additional standing requirement
for the plaintiff who seeks to represent a class, a
proper class action requires a similarity of claims
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between the named plaintiffs and the class
members. This similarity of claims is tested not by
principles of standing, but by the application of the
Rule 23(a)(3) criteria. If a class action is proper,
then by definition the class representative's claims
will be typical of the class. Thus the class plaintiff's
individual standing, linked to his or her asserted
claim, becomes automatically linked to the class
claim. Having standing which a class
representative shares with the members of a class is
another way of saying that the class representative
is a proper party to raise a particular issue common
to the class. The commonness of issues is an
express requirement of Rule 23 and is an attribute
of the issue involved, rather than a threshold
characteristic of whether the issue meets the
constitutional
case
or
controversy
test.
Accordingly, a plaintiff who meets individual
standing requirements possesses [standing] in the
constitutional sense, and whether the plaintiff may
represent the rights of others depends on the
application of Rule 23 tests in the case of a class
action[.]
202 F.R.D. at 120-21 (citing Herbert B. Newberg &
Alba Conte, Newberg On Class Actions § 2.05 (3d
ed.1992)) (emphasis added).
an interrogatory ... if the party learns that the
response is in some material respect incomplete or
incorrect and if the additional or corrective
information has not otherwise been made known to
the other parties during the discovery process or in
writing."). Under Federal Rule of Civil Procedure
37(c) there can be consequences to failing to amend a
prior response to discovery as required by Rule
26(e)(2). Fed.R.Civ.Proc. 37(c)(1). The figure of
1,545 represents, at the very least, that some
nontrivial number of claimants in the ballpark of
1,545 were represented by defendant during
discovery to fall within the class of claimants that
plaintiff seeks to identify.
19. Defendant's argument that it is improper for
plaintiff to represent CUNA policyholders who may
have purchased different policies than plaintiff did,
therefore, is an argument that goes to the similarity of
claims between the named plaintiff and the class
members, and the similarity of claims is tested not by
principles of constitutional standing, but by the
application of the Rule 23(a)(3) criteria. Id.
22. To be certified, a class must satisfy the four
requirements of Federal Rule of Civil Procedure
23(a): (1) numerosity; (2) commonality; (3)
typicality; and (4) adequacy of representation.
Fed.R.Civ.P. 23(a). Rule 23(a) specifically provides:
One or more members of a class may sue or be
sued as representative parties on behalf of all only
if (1) the class is so numerous that joinder of all
members is impracticable, (2) there are questions
of law or fact common to the class, (3) the claims
or defenses of the representative parties are typical
of the claims or defenses of the class, and (4) the
representative parties will fairly and adequately
protect the interests of the class.
20. Defendant's standing argument must fail, in
addition, if all of the policies contain the same
material language defining "Total Disability." This
question is disputed to the extent that defendant, who
produced the figure of 1,545 claims, now contends
that "there is no evidence that the definition is the
same in the policies for all members of the putative
class."
Joint
Filing,
Defendant's
Proposed
Conclusions of Law ("DCL") ¶
25; see also
Def.App., Blanke Affidavit at 2-3. Defendant's
position, however, relies on the post-discovery
affidavit of defendant's representative, Ms. Blanke,
and may contradict defendant's answer during
discovery to plaintiff's interrogatory. There is no
evidence that this new information was furnished to
plaintiff as a timely supplement to defendant's
response to plaintiff's interrogatory as required by
Federal Rule of Civil Procedure 26(e)(2) ("A party is
under a duty seasonably to amend a prior response to
*15 21. The class definition is sufficiently precise,
objective, and presently ascertainable to submit to
class certification if the other prerequisites of a class
action are met. In addition, if upon further
information the parties discover that the class
definition must be modified, the court has the
discretion to do so. See Rule 23(c)(1)(C) ("An order
under Rule 23(c)(1) may be altered or amended
before final judgment.").
B. Rule 23(a) Prerequisites to a Class Action
23. The United States Court of Appeals for the Third
Circuit Court has explained that the requirements of
Rule 23(a) are meant to ensure that class action
treatment is necessary and efficient and that it is fair
to absentees under the particular circumstances of a
case. Baby Neal, 43 F.3d at 55 (Becker, J.).
Numerosity addresses the first of these concerns (i.e.,
the necessity of class action treatment) while
commonality, typicality, and adequacy address
whether the class action can be maintained in a fair
and efficient manner. Id.
1. Numerosity
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24. Rule 23(a)'s numerosity requirement focuses on
the necessity of class action treatment where the class
is so numerous that joinder of all members is
impracticable. See Fed.R.Civ.P. 23(a). The proposed
class here consists of approximately 1,545 claimants.
[FN5] While no number definitively establishes
numerosity, a class as large as this one is sufficiently
numerous for joinder to be impracticable. As the
United States Court of Appeals for the Third Circuit
has explained:
FN5. Defendant's response to plaintiff's
interrogatory is sufficient to meet plaintiff's
burden on this matter. If the information
furnished in the response is erroneous and
the numerosity requirement is not met, then
the court has the authority to decertify the
class pursuant to Rule 23(c)(1)(C) ("An
order under Rule 23(c)(1) may be altered or
amended before final judgment."). As
previously noted, there may be issues that
defendant will need to address under Rules
26(e)(1) and 37(c).
On the subject of how many is enough, Professor
Moore has written "While the attitude taken
towards a given number may vary, each opinion
reflects a practical judgment on the particular facts
of the case. Thus no hard and fast number rule can
or should be stated, since 'numerosity' is tied to
'impracticability' of joinder under the specific
circumstances. Nevertheless, some general
tendencies can be observed. While there are
exceptions, numbers under twenty-one have
generally been held to be too few. Numbers
between twenty-one and forty have evoked mixed
responses and again, while there are exceptions,
numbers in excess of forty, particularly those
exceeding one hundred or one thousand have
sustained the requirement."
Weiss v. York Hosp., 745 F.2d 786, 808 n. 5 (3d
Cir.1984) (citing 3B J. MOORE, MOORE'S
FEDERAL PRACTICE ¶ 23.05[1], at 23-150 (2d
ed.1982) (footnotes omitted)). Defendant argues,
however, that plaintiff has failed to establish that
joinder is impracticable, and that plaintiff improperly
rests only on the estimated number of claims and asks
the court to infer impracticability without engaging in
any analysis that joinder is impracticable.
*16 25. While defendant is correct that a class
proponent cannot rely on bare assertions of
numerosity and conclusory allegations that joinder is
impractical, plaintiff bases his position that joinder is
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impracticable on the number of claims reported by
CUNA to fall into the category that plaintiff seeks to
certify. The court, looking at the totality of the
circumstances before it, finds that the numerosity
requirement set forth in Rule 23(a) is satisfied.
Though plaintiff could have been more effusive in its
argument that joinder of the approximately 1,545
claims is impracticable, there is sufficient basis in the
record for the court to find that the class is "so
numerous that joinder of all members is
impracticable." Fed.R.Civ.P. 23(a). As noted by
defendant, practicability of joinder depends on a
number of factors, including: the size of the class,
ease of identifying members and determining
addresses, ease of service on members if joined,
geographical dispersion and whether proposed
members of the class would be able to pursue
remedies on an individual basis. Liberty Lincoln
Mercury, Inc. v. Ford Marketing Corp., 149 F.R.D.
65, 74 (D.N.J.1993) (citations omitted). Here, the
court's determination that joinder is impracticable
rests primarily on the size of the class. Because here
the number of potential class members is so large as
to make joinder difficult if not impossible, and
because the size of the individual claims may make it
unlikely that the claims would be prosecuted on their
own, [FN6] the court determines that the joinder is
sufficiently impracticable and the numerosity
requirement is satisfied. See id.
FN6. While the record is not sufficient at
this point for the court to determine
conclusively that the size of the individual
claims is so small that claimants are unlikely
to prosecute individual claims on their own,
the size of the named plaintiff's claim-considering that the face amount of the debt
for which the credit disability policy was
issued, $19,838.44, and the court not being
apprised by either party that other lawsuits
have been filed support an inference that the
size of the individual claims may make it
unlikely that the claims would be prosecuted
on their own.
2. Commonality
26. The commonality requirement set forth in Rule
23(a) is satisfied if the named plaintiff shares at least
one question of fact or law with the grievances of the
prospective class. Baby Neal, 43 F.3d at 56 (citations
omitted). As the United States Court of Appeals for
the Third Circuit has noted, the commonality
requirement "is not a high bar." Chiang, 385 F.3d at
265. See also Baby Neal, 43 F.3d at 56 ("Because the
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requirement may be satisfied by a single common
issue, it is easily met...."). Furthermore, and relevant
to the harm alleged in this case, "class members can
assert such a single common complaint even if they
have not all suffered actual injury; demonstrating that
all class members are subject to the same harm will
suffice." Id. (emphasis in original) (citations omitted).
27. Here, plaintiff alleges that the entire class, by its
definition, was (1) subject to the same legal harm-namely, denial of disability benefits by defendant,
and more specifically, denial of disability benefits
under the same allegedly ambiguous policy language
which forms the basis of plaintiff's complaint; and (2)
limited to those individuals who were determined by
defendant to be physically unable to resume their
prior occupation, yet were considered by defendant to
be ineligible for continuing disability benefits under
identical policy language.
*17 28. Defendant does not directly contes t
commonality in its memorandum in opposition or in
its proposed conclusions of law contained in the joint
filing. Defendant argues, however, that plaintiff
failed to show that common issues of fact or law
predominate as required by Rule 23(b). This court
addresses commonality here and will address
predominance below.
29. The court finds that the named plaintiff shares at
least one question of fact or law with the grievances
of the prospective class. The court notes, in
particular, that all class members had their disability
benefits terminated by defendant subject to
defendant's interpretation of the same material
language defining "Total Disability" which defendant
used in its disability benefits policies in
Pennsylvania. Further, this very language provides
the basis for the named plaintiff's case. For this
reason, it is clear that at least one common issue of
law binds the class members: Was the policy
language ambiguous? And if so, a second common
issue of law would bind the class members: What are
the legal implications of the ambiguity? These issues
may well be addressed at the merits stage of the case.
The court finds at this stage, however, that for the
purposes of deciding the certification motion at least
one common question of law is shared by plaintiff
and the members of the putative class. Upon this
finding, the court holds that the commonality
requirement of Rule 23(a) is met.
3. Typicality
30. Rule 23(a) requires that "the claims or defenses
Page 13
of the representative parties are typical of the claims
or defenses of the class." Fed.R.Civ.P. 23(a)(3). It has
been noted that "[t]he concepts of commonality and
typicality are broadly defined and tend to merge" and
both seek to assure that the interests of absentees will
be fairly and adequately represented. Baby Neal, 43
F.3d at 56 (citing 7A CHARLES A. WRIGHT, ET
AL., FEDERAL PRACTICE AND PROCEDURE §
1764, at 247 (1986)). See also In Re Community
Bank, 418 F.3d at 303. Neither commonality nor
typicality, however, mandates that all putative class
members share identical claims. In Re Community
Bank, 418 F.3d at 303; Baby Neal, 43 F.3d at 56.
31. Moreover, despite their similarity in seeking to
protect the interests of absentees, commonality and
typicality are dis tinct requirements. Baby Neal, 43
F.3d at 56. Where commonality evaluates the
sufficiency of the class, typicality evaluates the
sufficiency of the named plaintiff. Id. (citing Hassine
v. Jeffes, 846 F.2d 169, 177 n. 4 (3d Cir.1988). [FN7]
FN7. The court in Baby Neal noted further
that:
We underscore at the outset that neither
[typicality nor commonality] mandates that
all putative class members share identical
claims, and that factual differences among
the claims of the putative class members do
not defeat certification.
Id. at 56. See also Eisenberg v. Gagnon, 766
F.2d 770 (3d Cir.1985) (certifying securities
fraud class action despite differences in
injuries); Troutman v. Cohen, 661 F.Supp.
802, 811 (E.D.Pa.1987) (certifying subclass
of 1,973 nursing home patients challenging
reductions in levels of nursing care
designations
over
commonality
and
typicality objections "because it is not the
unique facts of the individual appeals which
give rise to this action but rather the decision
making process").
32. Typicality assesses whether the named plaintiff
has incentives that are aligned with those of absent
class members so as to assure that the absentees'
interests will be fairly represented by the named
plaintiff. Baby Neal, 43 F.3d at 57. In other words,
"[t]he typicality criterion is intended to preclude
certification of those cases where the legal theories of
the named plaintiffs potentially conflict with those of
the absentees by requiring that the common claims
are comparably central to the claims of the named
plaintiffs as to the named absentees." Id. Typicality, it
has been explained, entails an inquiry whether the
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named plaintiff's individual circumstances are
markedly different, or the legal theory upon which
the named plaintiff's claims are based is different
from one upon which the claims of other class
members will be based. Id. (citing Hassine, 846 F.2d
at 177; Eisenberg, 766 F.2d at 786).
*18 33. Inquiries related to typicality ask whether
the plaintiff's individual circumstances are different
from that of absentees and whether plaintiff's legal
theory is different from that of absentees. Yet, as the
United States Court of Appeals for the Third Circuit
explained with respect to typicality in Baby Neal,
even claims marked by factual differences in injury,
but in which the same course of conduct gives rise to
claims based on the same legal theory, are not
necessarily rendered atypical by virtue of those
factual differences:
Commentators have noted that cases challenging
the same unlawful conduct which affects both the
named plaintiffs and the putative class usually
satisfy the typicality requirement irrespective of the
varying fact patterns underlying the individual
claims.... Actions requesting declaratory and
injunctive relief to remedy conduct directed at the
class clearly fit this mold.
[F]actual differences will not render a claim
atypical if the claim arises from the same event or
practice or course of conduct that gives rise to the
claims of the class members, and if it is based on
the same legal theory ..... Indeed, even relatively
pronounced factual differences will generally not
preclude a finding of typicality where there is a
strong similarity of legal theories. Where an action
challenges a policy or practice, the named plaintiffs
suffering one specific injury from the practice can
represent a class suffering other injuries, so long as
all the injuries are shown to result from the
practice....
43 F.3d at 58 (internal citations and quotations
omitted) (emphasis added).
34. Here, plaintiff argues Rule 23(a)'s typicality
requirement is satisfied for much the same reasons
that the commonality requirement is satisfied: (1) the
class definition identifies a group of disability
benefits claimants, including plaintiff, whose
disability benefits were terminated subject to
defendant's interpretation of the same policy
language, the very language which is at the heart of
the merits of plaintiff's case; and (2) the class
definition is limited to individuals whose factual
circumstances, though potentially different in
multiple respects, are similar in that they all stand
similarly before defendant as claimants who were
Page 14
determined to be unable to resume their prior
occupation, yet considered by defendant to be
ineligible for continuing benefits due to defendant's
interpretation of identical policy language defining
"Total Disability."
35. Defendant argues, to the contrary, that plaintiff
failed to demonstrate that his claims are typical of the
claims of the members of the putative class.
According to defendant, plaintiff's claims are
"typical" of other members of the class only if proof
of plaintiff's factual circumstances will also
automatically prove the claims of all other class
members. In Liberty Lincoln Mercury, Inc. v. Ford
Marketing Corp., 149 F.R.D. 65, 74 (D.N.J.1993),
relied upon by defendant, the court stated: "[G]iven
[representative]'s
highly
individualized
circumstances, [representative]'s claims are not
typical of the class at large.... 'If proof of the
representatives' claims would not necessarily prove
all the proposed class members' claims, the
representative' claims are not typical of the proposed
members' claims." ' (citations omitted). The court in
Liberty Lincoln Mercury, however, focused on the
"the lack of commonality and highly individualized
facts among proposed class members" and stated that,
in those circumstances, "no proposed Dealer could be
said to have claims 'typical' of the entire class." Id. In
Liberty Lincoln Mercury the district court also
recognized the standard for typicality:
*19 Even when there are actual differences
between the representative parties and the rest of
the class, a proposed class will meet Rule 23(a)(3)
requirements if "the claim arises from the same
events or practice or course of conduct that gives
rise to the claims of the class members, and if it is
based on the same legal theory." Grasty v.
Amalgamated Clothing and Textile Wkrs. Union,
etc., 828 F.2d 123, 130 (3d Cir.1987) (citing
Newberg, Class Actions, § 3.15), cert. denied, 484
U.S. 1042, 108 S.Ct. 773, 98 L.Ed.2d 860 (1988);
see also Hassine v. Jeffes, 846 F.2d 169, 177 (3d
Cir.1988).... As the Circuit has indicated: "Rule 23
does not require that the representative plaintiffs
have endured precisely the same injuries that have
been sustained by class members, only that the
harm complained of be common to the class."
Hassine, 846 F.2d at 177 (emphasis omitted).
Id. at 77 (some internal citations omitted). [FN8]
FN8. With respect to typicality, defendant
also relies on Parke v. First Reliance Std.
Life. Ins. Co., 368 F.3d 999 (8th Cir.2004).
In Parke, the United States Court of Appeals
for the Eighth Circuit affirmed the district
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court's denial of class certification in a
disability benefits case where the named
plaintiff claimed that the insurer in that case
engaged in a practice of awarding long-term
disability benefits to a claimant, then
terminating or suspending them without
asking for or receiving evidence that the
claimant's condition had changed. Id. at
1004. The court of appeals determined that
denial of certification was appropriate in that
case because the propriety of terminating
any claimant's benefits remained "dependent
on the facts of the individual case" and "the
question whether a breach occurred remains
a case-by-case determination." Id. at 100405. That decision, however, bears only
superficial similarity to this one. Though
both deal with the termination of disability
benefits, Parke did not involve a common
issue of contract interpretation as this matter
does; rather, in Parke, liability for
termination of benefits was based upon
highly individualized inquiry into each
claimant's case. Therefore, Parke is
distinguishable and does not change the
analysis herein.
36. Here, the harm complained of is common to the
class. Both plaintiff and the members of the putative
class, taking as true the substantive allegations of the
complaint, were subject to the same course of
conduct by defendant that gives rise to claims that are
based on the same legal theory. See Chiang, 385 F.3d
at 262 (substantive allegations of the complaint are
taken as true for purposes of deciding the class
certification motion). See also Baby Neal, 43 F.3d at
58 ("[F]actual differences will not render a claim
atypical if the claim arises from the same event or
practice or course of conduct that gives rise to the
claims of the class members, and if it is based on the
same legal theory."). Both plaintiff and the members
of the putative class were allegedly denied disability
benefits based upon identical language in defendant's
disability insurance policies--namely, defendant's
definition of "Total Disability." The typicality
requirement of Rule 23(a)(3) is, therefore, satisfied in
this case.
4. Adequacy
37. Rule 23(a) requires that "the representative
parties will fairly and adequately protect the interests
of the class." Fed.R.Civ.P. 23(a)(4). The adequacy
requirement, thus, addresses the sufficiency of the
named plaintiff. As the United States Court of
Page 15
Appeals for the Third Circuit explained, "[a]dequacy
of representation assures that the named plaintiffs'
claims are not antagonistic to the class and that the
attorneys for the class representatives are experienced
and qualified to prosecute the claims on behalf of the
entire class." Baby Neal, 43 F.3d at 55.
38. The adequacy require ment "encompasses two
distinct inquiries designed to protect the interests of
absentee class members: 'it considers whether the
named plaintiffs' interests are sufficiently aligned
with the absentees,' and it tests the qualifications of
the counsel to represent the class." ' In Re Community
Bank, 418 F.3d at 303 (3d Cir.2005) (quoting In Re
Gen. Motors Corp. Pick-Up Truck Fuel Tank Prod.
Liab. Litig., 55 F.3d 768, 800 (3d Cir.1995)
("G.M.Trucks" )). Defendant cites Hassine v. Jeffes,
846 F.2d 169, 179 (3d Cir.1987) and Bogosian v.
Gulf Oil Corp., 561 F.2d 434, 449 (3d Cir.1977),
cert. denied, 434 U.S. 1086, 98 S.Ct. 1280, 55
L.Ed.2d 791 (1978), to the effect that there are three
required components to adequacy: (1) that the
putative named plaintiff has the ability and the
incentive to represent the claims of the class
vigorously; (2) that he or she has obtained adequate
counsel; and (3) that there is no conflict between the
individual's claims and those asserted on behalf of the
class. The court in Hassine stated that "[t]he inquiry
that a court should make regarding the adequacy of
representation requisite of Rule 23(a)(4) is to
determine that the putative named plaintiff has the
ability and the incentive to represent the claims of the
class vigorously, that he or she has obtained adequate
counsel, and that there is no conflict between the
individual's claims and those asserted on behalf of the
class." Id. (citations omitted). While the court in
Hassine did not specifically identify these factors as
"three required components of adequacy," as does
defendant, this court will examine nonetheless all of
the factors listed above from Hassine as well as the
factors identified in In Re Community Bank under
two prongs: (1) the adequacy of the named plaintiff;
and (2) the adequacy of plaintiff's counsel.
*20 39. Regarding the first prong of the adequacy
analysis --adequacy of the named plaintiff--the court
will examine (i) whether the putative named plaintiff
has the ability and the incentive to represent the
claims of the class vigorously; and (ii) whether the
named plaintiff's interests are sufficiently aligned
with the absentees' interests. First, with respect to
plaintiff's ability and incentive, plaintiff asserts that
plaintiff has expressed his willingness to serve as
class representative and to prosecute vigorously this
case. Defendant, however, points to facts in the
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record that challenge plaintiff's ability and incentive.
Defendant argues that (1) plaintiff's alleged lack of
engagement in the suit, demonstrated by his alleged
insufficient knowledge of litigation generally and the
litigation of this case; (2) plaintiff's failure to comply
with the court's case management order and Federal
Rule of Civil Procedure 30 by failing to participate in
his scheduled deposition before the close of fact
discovery; and (3) plaintiff's failure to agree to
shoulder the financial burden of class representation,
all support a finding that plaintiff is inadequate as a
class representative in this civil action.
40. The court notes, as an initial matter, that plaintiff
has the burden of proving that the prerequisites for a
class action are met, and the initial burden to adduce
evidence to support a finding that he will fairly and
adequately protect the interests of the class are met.
As to adequacy, however, "in most cases, adequate
representation presumptions are usually invoked in
the absence of contrary evidence by the party
opposing the class." Alba Conte & Herbert Newberg,
Newberg on Class Actions § 7:24 (4th ed.2002).
More specifically:
On the issue of no conflict with the class, one of
the tests for adequate representation, the
presumption fairly arises because of the difficulty
of proving negative facts. On the issue of
professional competence of counsel for the class
representative, the presumption fairly arises that all
members of the bar in good standing are
competent. Finally, on the issue of intent to
prosecute the litigation vigorously, the favorable
presumption arises because the test involves future
conduct of persons, which cannot be prejudged
adversely.
Id. (citations omitted). Further,
[i]f there are any doubts about adequate
representation or potential conflicts, they should be
resolved in favor of upholding the class, subject to
later possible reconsideration, or subclasses might
be created initially. Alternatively, notice should be
sent to the class inviting others to come in as
additional class representatives.
Id. (citations omitted) (emphasis added).
41. Regarding plaintiff's ability and incentive to
prosecute the case, the court finds that with respect to
plaintiff's knowledge of this litigation and plaintiff's
failure to agree to shoulder the financial burden of
class representation, and in light of the authority
above regarding resolving doubts as to intent to
prosecute the litigation vigorously in favor of
plaintiff, any potential defects with the named
plaintiff that interfere with the fair and efficient
Page 16
prosecution of the action will be cured either by the
competence of plaintiff's counsel, who the parties
agree are adequate counsel to prosecute the action
and who have agreed to advance the expenses of
litigation, or by reconsideration of the named plaintiff
as class representative. If the need arises, the court
can reconsider the representative's adequacy and even
consider a replacement representative.
*21 42. Regarding plaintiff's failure to appear for his
scheduled deposition before the close of fact
discovery, on the record before the court, plaintiff's
failure, while not condoned, is not indicative of his
current intent to prosecute the case vigorously in light
of the totality of the circumstances at the time of the
deposition, i.e. the disappointment occasioned by the
vacating of his $600,000.00 jury verdict during the
time period in question. The parties ultimately were
able to cooperate in a relatively short time frame -approximately thirty days--and schedule and take
plaintiff's deposition. No serious prejudice to the
class resulted from the delay, albeit the delay was
upsetting to the other party.
43. For the above reasons, with respect to this first
prong of the adequacy analysis, the court finds the
proposed plaintiff adequate.
44. Regarding the second prong of the adequacy
analysis, whether plaintiff's counsel is qualified to
represent the class, the parties agree that plaintiff's
proposed class counsel, Mark T. Coulter and D.
Aaron Righn of Peirce, Raimond and Coulter, P.C.,
have experience litigating class actions, including
consumer cases, and possess the resources to
prosecute this case. See AFF ¶ 51. With respect to
this second prong of the adequacy analysis, the court
finds the proposed class counsel adequate.
45. Given the reasons set forth above, the adequacy
requirement of Rule 23(a) is satisfied in this case.
C. Certification of a Class Action Pursuant to Rule
23(b)(3)
46. In deciding a motion for class certification, if the
Rule 23(a) requirements are met, the court must then
find that the class fits within one of the three
categories of class actions set forth in Federal Rule of
Civil Procedure 23(b). In Re Community Bank, 418
F.3d at 302; Chiang, 385 F.3d at 264; In Re LifeUSA,
242 F.3d at 143; Baby Neal, 43 F.3d at 55.
47. This action invokes Rule 23(b)(3), which
provides:
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An action may be maintained as a class action if
the prerequisites of [Rule 23(a) ] are satisfied, and
in addition:
...
(3) the court finds that the questions of law or fact
common to the members of the class predominate
over any questions affecting only individual
members, and that a class action is superior to
other available methods for the fair and efficient
adjudication of the controversy. The matters
pertinent to the findings include: (A) the interest of
members of the class in individually controlling the
prosecution or defense of separate actions; (B) the
extent and nature of any litigation concerning the
controversy already commenced by or against
members of the class; (C) the desirability or
undesirability of concentrating the litigation of the
claims in the particular forum; (D) the difficulties
likely to be encountered in the management of a
class action.
Fed.R.Civ.P. 23(b)(3). The court addresses whether
common questions of fact or law predominate over
individual questions and whether the class action
device is the superior method of adjudication of the
controversy in turn.
Page 17
defenses of the class.' ") (quoting Amchem, 521 U.S.
at 623-24).
1. Common Questions of Fact or Law Predominate
Over Individual Questions
49. Here, plaintiff's claims arise out of defendant's
interpretation of specific language used by defendant
in its disability benefits policies-- namely, language
defining "Total Disability." The class is defined to
include only those individuals who were denied
benefits pursuant to this language. The crux of
plaintiff's case at the merits stage will be a
determination whether this language is ambiguous,
and if so, what legal consequences flow from the
ambiguity. At this stage, the court refrains from
making any determination as to the merits of this
claim. The court, however, recognizes for the
purpose of deciding the class certification motion that
determining whether contract language is ambiguous
is a question of law for the court. In re Montgomery
Ward & Co., Inc., 428 F.3d 154, 161 (3d Cir.2005).
If an agreement is unambiguous, the court can
declare its meaning as a matter of law. Id. (citations
omitted). If an agreement is ambiguous, its meaning
is a question of fact. Id. Further, if identical language
was material in the denial of disability benefits to all
of the members of the putative class, then on the
question of interpreting the language, the court finds
that common questions of law and fact predominate
over individual ones.
*22 48. The predominance inquiry focuses on
whether the proposed class is sufficiently cohesive to
warrant adjudication by representation. In Re
Community Bank, 418 F.3d at 308-09. "A proper
predominance inquiry 'trains on the legal or factual
questions that qualify each member's case as a
genuine controversy, questions that preexist any
settlement.' " Id. (citing Amchem, 521 U.S. at 62324). In this vein, the predominance inquiry is related
to, but more strenuous than, the commonality
requirement set forth in Rule 23(a). Chiang, 385 F.3d
at 273 ("[B]ecause the Rule 23(b)(3) predominance
requirements
incorporate
the
commonality
requirement of 23(a), it is possible that 'even if Rule
23(a)'s commonality requirement is satisfied ... the
predominance criterion is far more demanding.' ")
(quoting Amchem, 521 U.S. at 623-24). The
predominance requirement is that "the common
issues must constitute a 'significant part' of the
individual cases." Id. (citations omitted). The
predominance requirement's relation to Rule 23(a)'s
typicality requirement has been noted as well. See In
Re Community Bank, 418 F.3d at 308-09 ("[A]
predominance analysis 'is similar to the requirement
of Rule 23(a)(3) that claims or defenses of the named
representative must be 'typical of the claims [or]
50. Further, the fact that some individualized inquiry
may be required with respect to other issues in the
litigation, or with respect to damages, does not
impugn the court's ability to certify a class for the
purpose of deciding the issue of contract
interpretation which underlies plaintiff's claims and
similar claims of absentee members of the class. As
noted above, some amount of individualized inquiry
can, but does not necessarily, defeat class
certification on some or all issues. See Chiang, 385
F.3d 256 at 267 (Becker, J.) ("We note in this regard
that courts commonly use Rule 23(c)(4) to certify
some elements of liability for class determination,
while leaving other elements to individual
adjudication-or,
perhaps
more
realistically,
settlement."); Carnegie v. Household Int'l, Inc., 376
F.3d 656, 661 (7th Cir.2004) (Posner, J.) ("[I]t may
be that if and when the defendants are determined to
have violated the law separate proceedings of some
character will be required to determine the
entitlements of the individual class members to
relief."). Courts have flexibility to certify a class as to
certain issues pursuant to Rule 23(c)(4)(A), which
provides that "[w]hen appropriate an action may be
brought or maintained as a class action with respect
to particular issues." The United States Court of
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Appeals for the Third Circuit has long recognized
and affirmed this flexibility. See, e.g., Chiang, 385
F.3d 256 at 267, 273; Eisenberg v. Gagnon, 766 F.2d
770, 786 (3d Cir.1985); Bogosian v. Gulf Oil Corp.,
561 F.2d 434, 456 (3d Cir.1977).
*23 51. Courts have recognized, particularly with
respect to damages, that the necessity to engage in
some individual inquiry at the damages stage does
not necessarily defeat certifying a class for the
purposes of determining liability over issues that are
properly considered as part of a class action. See In
Re Community Bank, 418 F.3d at 305-6 (3d
Cir.2005). As the court explained in Carnegie v.
Household Int'l, Inc., 376 F.3d 656, 661 (7th
Cir.2004):
Often ... there is a big difference from the
standpoint of manageability between the liability
and remedy phases of a class action.... [I]t may be
that if and when the defendants are determined to
have violated the law separate proceedings of some
character will be required to determine the
entitlements of the individual class members to
relief ..... That prospect need not defeat class
treatment of the question whether the defendants
violated [the law].
Id. (internal citations omitted). The court also noted:
Once [the question of liability] is answered, if it is
answered in favor of the class, a global settlement
... will be a natural and appropriate sequel. And if
there is no settlement, that won't be the end of the
world. Rule 23 allows district courts to devise
imaginative solutions to problems created by the
presence in a class action litigation of individual
damages issues. Those solutions include "(1)
bifurcating liability and damage trials with the
same or different juries; (2) appointing a magistrate
judge or special master to preside over individual
damages proceedings; (3) decertifying the class
after the liability trial and providing notice to class
members concerning how they may proceed to
prove damages; (4) creating subclasses; or (5)
altering or amending the class."
Id. (Posner,
J.)
(quoting
In
re
Visa
Check/MasterMoney Antitrust Litigation, 280 F.3d
124, 141 (2d Cir.2001).
52. In this case, liability issues that hinge on contract
interpretation and language ambiguity will be
decided based upon questions of law or fact common
to the members of the class. A recent opinion from
the United States District Court for the Eastern
District of New York certifying a breach of contract
class action is instructive. In Steinberg v. Nationwide
Mutual
Insurance
Co.,
224
F.R.D.
67
Page 18
(E.D.N.Y.2004), the court noted that adjudication of
the claims at issue would require the court to interpret
key terms, definitions, and contractual provisions that
were substantively similar if not identical in all of the
defendant's relevant insurance contracts, and that
these contracts could be considered uniform or "form
contracts" for the purposes of the litigation. The court
noted that "in light of Rule 23, claims arising from
interpretations of a form contract appear to present
the classic case for treatment as a class action, and
breach of contract cases are routinely certified." Id.
(internal quotations and citations omitted). This case,
like Steinberg, involves common questions of law or
fact that hinge upon an interpretation of the language
defining "Total Disability" in defendant's disability
benefits contracts. Though defendant argues that the
application of "Total Disability," no matter how it is
interpreted, necessarily requires individualized
determinations for each member of the putative class,
the court finds that, at least as to the issues of
interpreting the contract language and whether the
language is ambiguous, common issues of fact and
law predominate over any individualized inquiries.
See In Re Montgomery Ward & Co., Inc., 428 F.3d
154 (3d Cir.2005) (explaining that determin ing
whether contract language is ambiguous is a question
of law for the court; if an agreement is unambiguous,
the court can declare its meaning as a matter of law;
if an agreement is ambiguous, its meaning is a
question of fact); Emerson Radio Corp. v. Orion
Sales Inc., 253 F.3d 159, 164 (3d Cir.2001).
*24 53. The court thus finds that questions of law or
fact common to the members of the class
predominate over questions affecting only individual
members. In particular, the court finds that the
question of contract interpretation that underlies
plaintiff's claims is a question common to all of the
class members who were denied continuing disability
benefits based upon defendant's interpretation of
language used in the relevant policies.
2. Class Action is Superior Method of Adjudication
of the Controversy
54. As explained by the United States Court of
Appeals for the Third Circuit most recently in In Re
Community Bank, "[t]he superiority requirement asks
a district court 'to balance, in terms of fairness and
efficiency, the merits of a class action against those
of "alternative methods" of adjudication.' " 418 F.3d
at 277 (quoting Georgine v. Amchem Prods., Inc., 83
F.3d 610, 632 (3d Cir.1996), aff'd, 521 U.S. 591, 117
S.Ct. 2231, 138 L.Ed.2d 689 (1997)). Matters
pertinent to this inquiry include:
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(A) the interest of members of the class in
individually controlling the prosecution or defense
of separate actions; (B) the extent and nature of any
litigation concerning the controversy already
commenced by or against members of the class;
(C) the desirability or undesirability of
concentrating the litigation of the claims in the
particular forum; [and] (D) the difficulties likely to
be encountered in the management of a class
action.
Fed.R.Civ.P. 23(b).
55. Here, considering the interest of members of the
class in individually controlling the prosecution or
defense of separate actions, and balancing the merits
of the class action device with respect to efficiency
and fairness with individual prosecutions, the court
determines that the interests of the members of the
class weigh in favor of certification because the costs
of prosecution and the potentially numerous number
of class members inform the court's determination
that the class action is the superior method.
Considering the extent and nature of any litigation
concerning the controversy already commenced by or
against members of the class, the court is only aware
of this civil action and determines that this factor
weighs neither in favor of nor against certification.
Considering the desirability or undesirability of
concentrating the litigation of the claims in the
particular forum, the court notes that the policy was
issued only in Pennsylvania and that no other
alternative forum readily presents itself as more
desirable than this one. Considering the difficulties
likely to be encountered in the management of a class
action, the court is sensitive to both the efficiency
gains and losses that are potentially attributable to
certifying the class. On the one hand, certification
should bring substantial efficiency gains because the
multiple claims, approximately 1,545 based on the
record developed thus far, could be litigated in one
forum, at one time. On the other hand, the court is
aware of the administrative burdens that maintaining
and litigating a class action, especially one pursuant
to Rule 23(b)(3) which requires adherence to the
Rule's notice provisions, can cause. On balance,
efficiency concerns weigh in favor of class
certification.
Page 19
resolved at the summary judgment stage. That is,
plaintiff's trial plan envisions class certification at
least as to the question of contract interpretation. A
motion for summary judgment as to that issue may
well impact the possibility of settlement. As to
damages, plaintiff envisions that if the class is
certified and a decision favorable to the class is
obtained with respect to the contract interpretation
issues, the court could then determine the appropriate
manner in which to proceed with respect to damages
issues. Defendant objects to plaintiff's trial plan on
the grounds that a trial plan should outline and
demonstrate how a case could be tried manageably
on a class-wide basis, and that plaintiff's trial plan is
deficient because it fails to address more than one
manner in which the case may reasonably develop.
Defendant argues that individual determinations will
be necessary not only at the damages phase, but also
as part of the liability determination, based on
defendant's position that the application of the
definition of "Total Disability" will require individual
interpretations. Defendant argues further that if
defendant is found liable at the liability phase, the
court will still have to determine the damages owed
to each member of the class. Plaintiff, defendant
argues, does not provide in his trial plan a specific
formula or methodology for doing so, nor disclose
how such data will be obtained. Defendant avers that,
contrary to plaintiff's assumption that the facts
necessary for damages calculations are readily
available from defendant, in fact defendant does not
maintain a database with the pertinent data.
57. The court is satisfied that certification at this
stage is appropriate. If the liability issue is
determined unfavorably to the class then the case will
be resolved. If the liability issue is determined in
favor of the class, then the court may consider on a
fully developed record whether to decertify the class
or to take other appropriate action.
IV. CONCLUSION
For the foregoing reasons, plaintiff's motion for class
certification (Doc. No. 30) is GRANTED. An
appropriate Order follows.
V. ORDER
*25 56. Reviewing the plaintiff's proposed trial plan
and the defendant's response, the court notes that
plaintiff asserts in its filing that the core issue of
defendant's liability relating to the insurance
contracts in issue is one that readily lends itself to
class disposition, and that if liability on this issue can
be resolved as a class action, then liability can be
AND NOW, this 25th day of January, 2006, upon
consideration of plaintiff's motion for class
certification (Doc. No. 30), all related submissions,
and the hearing held on December 16, 2004, and in
accordance with this court's findings of fact and
conclusions of law set forth herein, IT IS HEREBY
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ORDERED that plaintiff's motion for class
certification is GRANTED. The following class of
plaintiffs shall be certified:
All persons who purchased disability insurance
issued in Pennsylvania from the defendant CUNA
Mutual Group, or its subsidiaries, which policies
contain the definition of total disability including
the following material language: "After the first
twelve consecutive months of disability, the
definition changes and requires the Member to be
unable to perform any of the duties of his
occupation, or any occupation for which he is
reasonably qualified", [sic] to the extent that such
individuals were determined by the defendant to be
not able to perform all of the duties of his or her
occupation, but were determined by the defendant
to be capable of sufficient physical activity that the
defendant decided that they were no longer eligible
for total benefits under the defendant's
interpretation of the subject policy.
*26 IT IS FURTHER ORDERED that the class
claims and issues shall be those set forth in the
Amended Complaint (Doc. No. 21), and that the
following shall serve as class counsel pursuant to
Federal Rule of Civil Procedure 23(g): Mark T.
Coulter and D. Aaron Righn of Peirce, Raimond and
Coulter, P.C.
IT IS FURTHER ORDERED that the parties shall
promptly meet and confer with respect to a plan of
class notice that complies with Rule 23(c)(2)(B) and
directs to class members the best notice practicable
under the circumstances, including individual notice
to all members who can be identified through
reasonable effort, and which concisely and clearly
states in plain, easily understood language: (1) the
nature of the action, (2) the definition of the class
certified, (3) the class claims, issues, or defenses, (4)
that a class member may enter an appearance through
counsel if the member so desires, (5) that the court
will exclude from the class any member who requests
exclusion, stating when and how members may elect
to be excluded, and (6) the binding effect of a class
judgment on class members under Rule 23(c)(3). The
parties shall submit a plan of class notice that
complies with these requirements within twenty (20)
days from the date of this Order.
Slip Copy, 2006 WL 197122 (W.D.Pa.)
END OF DOCUMENT
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Motions, Pleadings and Filings
United States District Court,
D. Massachusetts.
In re LUPRON® MARKETING AND SALES
PRACTICES LITIGATION.
Master File No. 01-CV-10861-RGS.
MDL NO. 1430.
May 12, 2005.
Background:
Patients, health care plans, and
insurers filed multi-district litigation (MDL) class
action under Racketeer Influenced and Corrupt
Organizations Act (RICO) and state consumer
protection statutes seeking damages incurred because
of alleged scheme orchestrated by pharmaceutical
manufacturer to inflate retail price of prescription
drug. Parties filed motion for final approval of
settlement agreement, permanent certification of
class, and entry of final judgment.
Holdings: The District Court, Stearns, J., held that:
(1) class counsel adequately notified class members
of proposed settlement;
(2) certification of settlement class was warranted;
and
(3) approval of proposed settlement was warranted.
Motion granted.
West Headnotes
[1] Compromise and Settlement
89k68 Most Cited Cases
68
[1] Federal Civil Procedure
179
170Ak179 Most Cited Cases
Class counsel adequately notified class members of
proposed settlement of consumer protection claims
against pharmaceutical manufacturer, even though
direct mail was not used to contact consumer class,
where notice plan called for nationwide publication
notice, solicitation of public service radio
announcements and mainstream news coverage,
posting of court-approved notices on websites,
establishment of interactive claims information
website, and toll free telephone number to take
questions from class members, plan exposed 80
Page 1
percent of members of consumer class on three or
more occasions to notice of proposed settlement and
procedure for submitting claims, and accurate
mailing list for direct mail would have required
obtaining of patient names and addresses from
medical providers, insurers, and pharmacies.
Fed.Rules Civ.Proc.Rule 23, 28 U.S.C.A.
[2] Federal Civil Procedure
161.1
170Ak161.1 Most Cited Cases
In determining whether to certify settlement class,
court need not inquire whether case, if tried, would
present intractable management problems. Fed.Rules
Civ.Proc.Rule 23(b)(3), 28 U.S.C.A.
[3] Federal Civil Procedure
161.1
170Ak161.1 Most Cited Cases
When settlement class is proposed, it is incumbent on
district court to give heightened scrutiny to class
certification requirements in order to protect absent
class members. Fed.Rules Civ.Proc.Rule 23, 28
U.S.C.A.
[4] Federal Civil Procedure
182.5
170Ak182.5 Most Cited Cases
Certification of settlement class was warranted in
action seeking damages incurred because of alleged
scheme orchestrated by pharmaceutical manufacturer
to inflate retail price of prescription drug, where class
included tens of thousands of third party payers
(TPP), hundreds of thousands of consumers, all class
members would need to establish that they purchased
drug at price derived from fraudulently inflated
average wholesale price (AWP), as well as scienter
on manufacturer's part, and complicity on part of
physicians and clinics who billed members directly or
through their insurers at price derived from inflated
AWP, claims of class representatives were typical of
those of members of class, class representatives were
adequate, individual issues primarily involved
amount of damages to be awarded to individual class
members, and few, if any, members of settlement
class had incurred damages in amount sufficient to
justify costs of pursuing individual action. Fed.Rules
Civ.Proc.Rule 23, 28 U.S.C.A.
[5] Federal Civil Procedure
165
170Ak165 Most Cited Cases
Commonality requirement for class certification does
not require that every class member share every
factual and legal predicate of action. Fed.Rules
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Civ.Proc.Rule 23(a), 28 U.S.C.A.
[6] Federal Civil Procedure
164
170Ak164 Most Cited Cases
Sufficient nexus is established to show typicality
necessary for class certification if claims or defenses
of class and class representative arise from same
event or pattern or practice and are based on same
legal theory. Fed.Rules Civ.Proc.Rule 23(a), 28
U.S.C.A.
[7] Federal Civil Procedure
176
170Ak176 Most Cited Cases
Proposed class must be precisely defined and its
members must be ascertainable through application
of stable and objective factors so that court can
decide, among other things, who will receive notice,
who will share in any recovery,
and who will be bound by judgment. Fed.Rules
Civ.Proc.Rule 23, 28 U.S.C.A.
[8] Compromise and Settlement
51
89k51 Most Cited Cases
While settlement and compromise are favored by
law, in ruling on proposed settlement in class action,
court has fiduciary duty to absent members of class in
light of potential for conflicts of interest among class
representatives and class counsel and absent
members. Fed.Rules Civ.Proc.Rule 23, 28 U.S.C.A.
[9] Compromise and Settlement
89k57 Most Cited Cases
57
[9] Compromise and Settlement
59
89k59 Most Cited Cases
Approval of proposed settlement in class action is to
be given if settlement is untainted by collusion and is
fair, adequate, and reasonable.
Fed.Rules
Civ.Proc.Rule 23, 28 U.S.C.A.
[10] Compromise and Settlement
70
89k70 Most Cited Cases
When sufficient discovery has been provided and
parties have bargained at arms -length, there is
presumption in favor of proposed settlement in class
action. Fed.Rules Civ.Proc.Rule 23, 28 U.S.C.A.
[11] Compromise and Settlement
56.1
89k56.1 Most Cited Cases
In assessing proposed settlement of class action,
court should consider: (1) complexity, expense and
likely duration of lit igation; (2) reaction of class to
settlement; (3) stage of proceedings and amount of
discovery completed; (4) risks of establishing
Page 2
liability; (5) risks of establishing damages; (6) risks
of maintaining class action through trial; (7) ability
of defendants to withstand greater judgment; (8)
range of reasonableness of settlement fund in light of
best possible recovery; (9) range of reasonableness
of settlement fund to possible recovery in light of all
attendant risks of litigation. Fed.Rules Civ.Proc.Rule
23, 28 U.S.C.A.
[12] Compromise and Settlement
59
89k59 Most Cited Cases
Storm warnings indicative of collusive settlement of
class action are lack of significant discovery and
extremely expedited settlement of questionable value
accompanied by enormous legal fee. Fed.Rules
Civ.Proc.Rule 23, 28 U.S.C.A.
[13] Compromise and Settlement
61
89k61 Most Cited Cases
Approval of proposed settlement was warranted in
multi-district litigation (MDL) class action seeking
damages incurred because of alleged scheme
orchestrated by pharmaceutical manufacturer to
inflate retail price of prescription drug, despite
objectors' contentions that larger settlement could
have been obtained, and that release was broader than
warranted by size of settlement, where negotiations
were conducted at arms -length, unclaimed funds
would not revert to manufacturer, release would have
no effect on liability of any alleged coconspirator,
continued litigation of case would be noxiously
burdensome to all involved, most vociferous
objectors were persons enlisted by counsel competing
with MDL counsel for control of litigation, case was
in litigation for nearly four years before settlement
was reached, case was very complex, proving
damages represented significant risks to consumer
class, and consumer fund appeared more than
adequate to fully compensate all consumer claimants
and to perhaps pay dividend.
Fed.Rules
Civ.Proc.Rule 23, 28 U.S.C.A.
[14] Compromise and Settlement
57
89k57 Most Cited Cases
Settlement court reviewing fairness of compromise in
class action does not decide merits of case or resolve
unsettled legal questions. Fed.Rules Civ.Proc.Rule
23, 28 U.S.C.A.
*76 Elizabeth K. Ainslie, Schnader, Harrison, Segal
& Lewis LLP, Philadelphia, PA, Kenneth D. Quat,
Concord, MA, for Objectors.
Stephen D. Annand, Cohen, Milstein, Hausfeld &
Toll, Washington, DC, *77Richard W. Cohen,
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Page 3
Lowey, Dannenberg, Bemporad & Slelinger, P.C.,
White Plains, NY, Michael J. Flannery, The David
Danis Law Firm, P.C., St. Louis, MO, Marlene F.
Gibbons, Cohen Milstein Hasufeld & Toll West
Tower, Washington, DC, Michael D. Hausfeld,
Cohen, Milstein, Hausfeld & Toll, Washington, DC,
Joseph D. Jackson, Jr., Baxley, Dillard, Dauphin,
McKnight & Barclift, Birmingham, AL, Jeffrey L.
Kodroff, Spector & Roseman, Philadelphia, PA, Lisa
M. Mezzetti, Cohen, Milstein, Hausfeld & Toll,
Washington, DC, Todd A. Seaver, Berman,
DeValerio, Pease, Tabacco, Burt & Pucillo, Boston,
MA, Thomas G. Shapiro, Shapiro, Haber & Urmy
LLP, Boston, MA, Thomas M. Sobol, Hagens,
Berman LLP, Boston, MA, Donna F. Solen, Cohen,
Milstein, Hausfeld & Toll, Washington, DC, for
Plaintiffs.
2004, the court preliminarily certified a settlement
class consisting of consumers and certain Third Party
Payers (TPPs), and gave its preliminary approval to a
proposed settlement agreement between TAP, Abbott
Laboratories (Abbott), and Takeda Pharmaceuticals
Company Ltd. (Takeda), [FN2] and the universe of
prospective litigants who claimed to have suffered
economic damages as a result of TAP's Lupron®related pricing practices. [FN3] Under the terms of
the settlement, TAP transferred $150 million into an
escrow account to satisfy the claims of consumers
and TPPs who had made purchases of Lupron®
between 1985 and 2005, and to pay the fees and
expenses of plaintiffs' counsel. The parties now seek
final approval of the settlement, permanent
certification *78 of the class, and entry of final
judgment.
Anita B. Bapooji, Goodwin, Procter LLP, Boston,
MA, Laura D. Cullison, Winston & Strawn, Chicago,
IL, Daniel A. Curto, McDermott, Will & Emery LLP,
Boston, MA, James R. Daly, Jones, Day, Chicago,
IL, Monica Meier Franceschini, Goodwin Procter
LLP, Boston, MA, Donald R. Frederico, McDermott,
Will & Emery, Boston, MA, George Lombardi,
Winston & Strawn, Chicago, IL, Martin F. Murphy,
Bingham, McCutchen LLP, Boston, MA, Rheba
Rutkowski, Bingham, McCutchen LLP, Boston, MA,
Joseph F. Savage, Jr., Goodwin Procter, LLP,
Boston, MA, Eric W. Snapp, Winston & Strawn,
LLP, Chicago, IL, Fiona S. Trevelyan, Bingham,
McCutchen LLP, Boston, MA, Matthew A.
Wolfman, Testa, Hurwitz & Thibeault, LLP, Boston,
MA, for Defendants.
FN1. Lupron®, the trade name for
leuprolide acetate, is principally used in the
treatment of prostrate cancer. It is also
effective in the treatment of endometriosis,
precocious puberty, and uterine fibroid
preoperative anemia.
Lupron® is
administered by intramuscular injection,
typically in the arm or buttocks, in daily or
monthly doses.
Consequently, most
Lupron® is sold through doctors who
administer the injections to their patients.
Donald E. Haviland, Kline & Specter, Philadelphia,
PA, Ronald J. Ranta, Beverly, MA, Shanin Specter,
Kline & Specter, Philadelphia, PA, for Intervenor
Plaintiffs.
MEMORANDUM AND ORDER APPROVING
SETTLEMENT AND CERTIFYING THE CLASS
STEARNS, District Judge.
This aspiring Multi-District Litigation (MDL) class
action was brought by patients, health care plans, and
insurers seeking damages incurred because of an
alleged scheme orchestrated by TAP Pharmaceutical
Products, Inc. (TAP) to inflate the retail price of the
prescription drug Lupron®. [FN1] Plaintiffs'
principal claims are based on the civil provisions of
the Racketeer Influenced and Corrupt Organizations
Act (RICO), 18 U.S.C. § 1962, and various state
consumer protection statutes. On November 24,
FN2. TAP is a venture jointly owned by
Abbott and Takeda. TAP, which is based in
Waukegan, Illinois, has a corporate identity
separate from its owners, that is, it has its
own officers and board of directors.
FN3. In the Settlement Agreement, the class
is defined as "[a]ll individual persons or
entities who, [between January 1, 1985,
through March 15, 2005] made Lupron®
Purchases. Excluded from the class are the
Settling Health Plans; Defendants, their
respective present and forme r, direct and
indirect, parents, subsidiaries, divisions,
partners and affiliates; and the United States
government, its officers, agents, agencies
and departments, and all other government
entities' claims, to the extent that they
previously released their claims pursuant to
the 2001 Settlement Agreement and Release
resolving the matter of United States of
America v. TAP Pharmaceutical Products,
Inc. (D.Mass.) and related litigation."
The court held a three-day Fairness Hearing
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beginning on April 13, 2005. Valerie Samsell and
Milton Greene were permitted to intervene as
objectors to the settlement.
The Intervenors
participated in the hearing through retained counsel,
the Philadelphia-based firm of Kline & Specter.
Having considered the evidence presented at the
hearing, the objections, the arguments of counsel, and
the full record of the case, the court will grant the
motion for final certification of the class, confirm the
appointment of class counsel, and approve the
proposed settlement.
BACKGROUND
Procedural History
On October 16, 2001, TAP pled guilty in the federal
district court to violations of the Prescription Drug
Marketing Act, 21 U.S.C. § § 331(t), 333(b). [FN4]
TAP admitted that it had encouraged doctors to
fraudulently bill the federal Medicare program for
free samples of Lupron® as part of a "brand loyalty"
scheme. The intent was to provide incentives to
doctors to prescribe Lupron® instead of cheaper,
similarly effective drugs, such as Zoladex®
(manufactured by AstraZeneca). Pursuant to a plea
agreement with the United States government, TAP
paid a $290,000,000 criminal fine and $559,483,560
in civil restitution and penalties, the largest
beneficiary of which was the federal Medicare
program, although $25,516,440 was paid to the fifty
States and the District of Columbia to compensate for
overcharges absorbed by state Medicaid programs.
TAP also executed a Corporate Integrity Agreement
with the Inspector General of the Department of
Health and Human Services (HHS) and the state
Attorneys-General committing to changes in the
supervision of its marketing and sales staff and
agreeing to report to Medicare and Medicaid the true
"Average Sales Price" (ASP) of its reimbursable
drugs. Abbott and Takeda agreed to cooperate fully
with any further government investigation of TAP in
exchange for an agreement by the United States to
forgo a prosecution alleging complicity by Abbott
and Takeda in TAP's wrongdoing.
FN4. Following TAP's plea, an indictment
was unsealed against six present and former
TAP employees and a Massachusetts
urologist alleging a criminal conspiracy to
defraud Medicare. Several other urologists
pled guilty to criminal informations. Alan
Mackenzie, W. Donald Meek, Donald
Patton, and Eric Otterbein, the highest
ranking TAP executives indicted in
connection with the alleged scheme, were
Page 4
among a group of TAP employees who,
after a lengthy trial, were acquitted on July
14, 2004, of any criminal wrongdoing. See
U.S. v. MacKenzie, No. 01-CR-10350-DPW
(D.Mass.).
At the heart of the scheme was TAP's overt or tacit
encouragement of doctors to bill Medicare for
Lupron® at an imaginary "Average Wholesale Price"
(AWP) provided by TAP to the Red Book, an
industry publication used by Medicare and other
TPPs to establish payment schedules for
reimbursable prescription drugs. [FN5] "TAP knew
that [it] could 'raise' the average wholesale price of
Lupron® at any time by simply forwarding to the
Redbook a new and higher average wholesale price.
This allowed TAP, in effect, to control the maximum
Medicare reimbursement paid to a doctor for
[prescribing]
*79
Lupron®."
Government's
Sentencing Memorandum, at 12. The government
acknowledged that its "global" settlement with TAP
did not provide restitution to private insurers and copaying patients who may have been overcharged for
Lupron®, but noted that "some patients and health
insurers have commenced litigation against TAP to
recover overpayments caused by the criminal conduct
and thus have a forum in which to demonstrate and
obtain any appropriate damages." Id. at 4.
FN5. While Medicare Part B does not
generally reimburse the costs of selfadministered drugs, it does pay providers for
up to 80 percent of the "allowable cost" of
physician-injected drugs like Lupron®. The
remaining 20 percent is paid by the
Medicare beneficiary as a "co-payment."
"Allowable cost" was defined by HHS
regulations from 1992 to 1998 as the lesser
of a drug's estimated actual acquisition cost
or its national average wholesale price
(AWP). 42 C.F.R. § 405.517 (amended
Nov. 2, 1998; Jan. 7, 2004; Nov. 15, 2004).
Prior to 1992, Medicare reimbursements
were based on the "reasonable charge
method." From 1998 to 2004, "allowable
cost" was defined as the lesser of a drug's
estimated actual acquisition cost or 95
percent of AWP. 42 C.F.R. § 405.517. For
2004, reimbursement for Lupron® was set
at the lesser of the actual charge on the bill
or 81 percent of the April 1, 2003 AWP for
Lupron®. 42 C.F.R. § 414.707. For 2005,
reimbursement is based on the ASP. 42
C.F.R. § 414.904. The AWP was taken by
HHS from the Drug Topics Red Book (Red
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Book
), a pharmaceutical industry
publication compiling wholesale drug
prices. The AWP for Lupron® published in
the Red Book was supplied by TAP. No
independent verification of the actual AWP
was undertaken by HHS, Medicare, or the
editors of the Red Book. The published
AWP for Lupron® as reported by TAP
ranged from $418.75 in 1992 to $623.79 in
2001.
In fact, a number of actions were brought in various
state and federal courts against TAP, Abbott, and
Takeda on behalf of co-paying patients, direct
purchasers of Lupron®, private health care plans, and
insurers that were not included in the governmentnegotiated civil settlement. The unifying themes of
these civil claims are allegations that the defendants
fraudulently manipulated the AWP for Lupron® and
engaged in unscrupulous practices in the marketing
of the drug. They are also mostly pled, as in this
case, under the federal RICO law and state consumer
protection statutes. [FN6] According to plaintiffs, the
AWP reported by TAP for Lupron® bore no
resemblance to the actual prices being charged to
doctors, nor did it bear any relationship to a
reasonable interpretation of the terms "average" or
"wholesale."
The AWP rather was inflated at
plaintiffs' expense to funnel hidden profits to doctors.
As summarized in the Consolidated Amended
Complaint:
FN6. The factual allegations and legal
theories underlying the Consolidated
Amended Complaint are set out at length in
In re Lupron® Marketing and Sales
Practices Litigation, 295 F.Supp.2d 148
(D.Mass.2003).
[t]he improper marketing and sales practices
include, inter alia: (a) deliberately overstating the
published average wholesale price ("AWP") for
Lupron®--the rate upon which Medicare
reimbursement (and Medicare beneficiaries ['] copayments) as well as many other insurers'
payments are set--so that Plaintiffs and the Class
pay an artificially inflated amount of money for
Lupron®; (b) providing free samples of Lupron®
to medical providers and instructing them, with the
intent, that they could and should unlawfully bill
Medicare, private insurers and individual patients
for the free samples; (c) providing other unlawful
financial inducements and hidden price discounts;
and (d) actively concealing, and causing others to
conceal, information about the true price being
Page 5
charged for Lupron®.
Id. ¶ 4. TAP's concession in its guilty plea that its
sales representatives distributed $31 million in "free"
Lupron® samples between 1993 and 1999 figures
prominently in most of the civil complaints. The
complaints also mirror the government's criminal
case in reciting other irregular financial inducements
offered by TAP to doctors to stimulate the sales of
Lupron®, including volume discounts, rebates,
"education" grants, junkets, off-invoice pricing, free
goods, credit memos, supposed consulting fees, and
debt forgiveness.
William Porter filed the first of two Lupron®-related
class actions in the Massachusetts federal district
court on May 18, 2001. Similar cases seeking class
action status were filed in Alabama, Illinois, and
Minnesota. [FN7] On December 17, 2001, all
pending federal class actions were consolidated by
the MDL Panel (MDLP) in this district for pretrial
proceedings. Two cases filed on behalf of Blue
Cross and Blue Shield entities (Blues) in the District
of Massachusetts were later joined with the MDL
action as related cases. [FN8]
FN7. The lead plaintiffs in six of these cases
are named as plaintiffs in the Consolidated
Amended Complaint. The six cases are:
Russano v. TAP Pharmaceutical Products,
Inc. (N.D.Ill.C.A. No. 01- 6982); Goetting
v. TAP Pharmaceutical Products, Inc.
(S.D.Ill.C.A. No. 01-703); Porter v. TAP
Pharmaceutical
Products,
Inc.
(D.Mass.C.A. No. 01-10861);
Beacon
Health Plans, Inc. v. TAP Pharmaceutical
Products, Inc. (D.Mass.C.A. No. 01-10897);
Brickey v. TAP Pharmaceutical Products,
Inc. (N.D.Ala.C.A. No. 01-2770); and Twin
Cities Bakery Workers Health and Welfare
Fund v. TAP Pharmaceutical Products, Inc.
(D.Minn.C.A. No. 01-2023).
FN8. The Blues cases are Empire
Healthchoice, Inc., d/b/a/ Empire Blue
Cross
and
Blue
Shield
v.
TAP
Pharmaceutical
Products,
Inc.
(D.Mass.C.A.02-10015), and Blue Cross
and Blue Shield of Florida, Inc. v. TAP
Pharmaceutical
Products,
Inc.
(D.Mass.C.A.02-10139). On January 14,
2003, the court approved a stipulation
adding Oxford Health Plans, Inc., and
Horizon Healthcare Services, Inc., as parties
to the Consolidated Amended Complaint.
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*80 Several Lupron®/AWP cases were also filed as
either state or nationwide class actions in state courts.
Counsel in a number of these cases, including those
in California (In re Lupron® Drug Cases, San
Francisco Superior Court, JCCP No. 4238; Peralta v.
Abbott Laboratories, Los Angeles County Superior
Court, No. BC 259587); Texas (Benoit v. Takeda
Chemical Industries Ltd., et al., Jefferson County
District Court, No. B166742); and Illinois (Clark v.
TAP Pharmaceuticals, Inc. et al., Williamson County
Circuit Court No. 01L132;
Jarman v. TAP
Pharmaceutical Products, Inc. et al., Madison
County Circuit Court, No. 01L1019), agreed to
coordinate discovery efforts with the counsel
appointed by this court as the interim representatives
of the interests of the MDL plaintiffs. However,
Kline & Specter, which directly or through local
counsel had brought class actions in Arizona, North
Carolina, and New Jersey, refused to join in the
cooperative effort. [FN9] Kline & Specter instead
embarked on a preemptive strategy to seize control of
the litigation by using the state court proceedings to
gain leverage over counsel cooperating with the
MDL action. [FN10]
FN9. On December 31, 2001, Kline &
Specter filed a class action in the North
Carolina Superior Court on behalf of lead
plaintiff Harry Stetser.
The complaint
named the Lupron® defendants (TAP,
Abbott and Takeda), as well as Johnson &
Johnson, a distributor of Lupron®, and two
wholly-owned
Johnson
&
Johnson
subsidiaries, Ethicon Endo-Surgery and
Indigo Laser Corporation as defendants. On
April 24, 2003, Superior Court Judge Paul
Jones certified Stetser as a nationwide class
action. On July 6, 2004, the Court of
Appeals reversed the decision and
decertified the nationwide class. On January
7, 2005, Judge Jones recertified Stetser as a
North Carolina-only class action, retroactive
to October 8, 2004. On October 9, 2001,
Kline & Specter filed a class action against
the Lupron® defendants in the New Jersey
Superior Court on behalf of lead plaintiff
Bernard Walker alleging unjust enrichment,
fraud, civil conspiracy, and violations of the
New Jersey consumer protection statute. On
August 29, 2003, Superior Court Judge
Joseph Visalli denied the request to certify a
nationwide class of Lupron® purchasers, but
certified a New Jersey-only Lupron® class.
Judge Visalli is proceeding to trial on
Walker's individual claims. On June 28,
Page 6
2002, an Arizona law firm allied with Kline
& Specter filed a class action in the
Maricopa County Superior Court against the
Lupron® defendants and other drug
manufacturers that had also used AWP as a
marketing tool. The complaint mirrors the
causes of action set out in the Walker
complaint. On March 10, 2005, Superior
Court Judge Rebecca Albrecht stayed
proceedings in Swanston pending a
certification ruling in the MDL action.
FN10. Bringing an end to unseemly attempts
to exact advantage over class action
defendants
or
lawyers
representing
competing plaintiffs' claims by exploiting
the potential for conflict inherent in a federal
system of coordinate sovereigns was a
principal argument advanced by advocates
of the Class Action Fairness Act of 2005.
The Act essentially consolidates all class
actions with multi-state constituencies in the
federal courts.
On February 11, 2002, the court held a case
management conference to establish a discovery and
motions schedule. By that time, the defendants had
assembled a central depository containing more than
300 boxes of case-related documents to which
plaintiffs' counsel (including Kline & Specter) were
given access.
On March 15, 2002, the MDL
plaintiffs filed a Consolidated Amended Complaint,
and on June 7, 2002, a Corrected Consolidated
Amended Complaint. Takeda, a Japanese company,
challenged the Consolidated Amended Complaint on
jurisdictional grounds. On January 24, 2003, the
court denied Takeda's motion to dismiss in part,
holding that while plaintiffs Goetting and Russano
had failed to establish specific jurisdiction over
Takeda, they had produced sufficient prima facie
evidence to establish general jurisdiction under the
"doing business" test of the Illinois Long-Arm
Statute, 735 Ill. Comp. Stat. § 5/2-209(b)(4). See In
re Lupron Mktg. & Sales Practices Litig., 245
F.Supp.2d 280, 295-297 (D.Mass.2003).
On November 25, 2003, after another heated
exchange of briefs and arguments, the court issued a
lengthy decision on defendants' Rule 12(b)(6) motion
to dismiss, ultimately rejecting the (not
inconsequential) arguments that political question
considerations, statutes of limitations issues, and the
"filed rate doctrine" operated to bar the litigation in
its entirety. The court found the RICO claims as pled
(alternatively identifying TAP as the enterprise and
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Page 7
Takeda and Abbott as RICO "persons," or the three
defendants as an "enterprise-in-fact" with each *81
defendant acting as a RICO "person") sufficient to
satisfy the requirements of Rule 9(b). The court also
ruled that the state consumer protection act claims
were not preempted by the Employment Retirement
Income Security Act of 1974 (ERISA), § 514(a), 29
U.S.C. § 1144(a), or the Medicare Act. The court,
however, agreed with defendants that plaintiffs had
failed to plead a manageable RICO claim of an
"association-in-fact" involving all doctors and clinics
in the United States who had sold Lupron® at a price
derived from AWP. Consequently, it dismissed the
physician-related claims.
and Abbott. Liberty reimburses beneficiaries under a
special cancer treatment policy for Lupron®
injections. United reimburses beneficiaries who
purchase a supplemental Medicare insurance policy
for prescription drug co-payments including
Lupron®. Both insurers based their reimbursement
rates on the published AWP. On May 14, 2004, the
court issued a decision denying motions by TAP and
Abbott to dismiss both complaints. On August 4,
2004, the court denied a motion by TAP to dismiss a
similar complaint brought by Aetna Health, Inc.,
alleging claims under RICO and the Pennsylvania
insurance fraud statute, 18 PA. CONS. STAT. ANN.
§ 4117(a)(2) (West 2005). [FN11]
In February of 2004, the MDL plaintiffs, apparently
content with the nucleus of the remaining state and
federal claims, moved to certify a class consisting of
[a]ll persons or entities who paid for Lupron® at a
price in whole or in part calculated by reference to
the AWP as published in national pharmaceutical
publications such as the Red Book and First Data
Bank (the "Class") during the period from January
1, 1991, through September 30, 2001 (the "Class
Period"). Excluded from the Class are (a)
Defendants and any entity in which any Defendant
has a controlling interest, and their legal
representatives, officer, directors, assignees and
successors, and (b) any co-conspirators.
The impending hearing on the certification motion
precipitated a flurry of discovery disputes as the
parties maneuvered for position. See Orders dated
March 1, 2004 (re: Motion to Compel Calculations);
March 1, 2004 (re: Motion to Compel Individual
Plaintiffs' Releases); March 2, 2004 (re: Motion to
Compel Individual Plaintiffs to Produce Documents);
March 17, 2004 (re: Motion to Compel TAP to
Produce Documents); April 5, 2004 (re: Temporary
Stay); April 16, 2004 (re: Certification of Order for
Appellate Review); April 23, 2004 (re: Production of
Transcripts of Deposition of TAP Employees); June
14, 2004 (re: protective order); June 25, 2004 (re:
motion for modification of schedule). On May 6,
2004, TAP filed an emergency petition with the First
Circuit Court of Appeals seeking an order of
mandamus vacating the order of this court
compelling the production of documents for which
TAP had claimed attorney-client privilege and
attorney work-product protection. On July 12, 2004,
the First Circuit denied TAP's petition.
FN11. On October 3, 2003, Aetna filed suit
in the Eastern District of Pennsylvania.
After the complaint was transferred by the
MDLP to the District of Massachusetts,
Aetna added by amendment three counts
under RICO. At oral argument, Aetna
waived three of its originally filed state law
claims.
On January 22, 2004, the MDLP transferred to this
court "tag-along" actions brought by Liberty National
Life Insurance Company (Liberty) and United
American Insurance Company (United) against TAP
On August 12, 2004, the court held an extended
hearing on MDL plaintiffs' class certification motion,
and took the matter under advisement. On October
11, 2004, as the court was completing the draft of its
decision, the MDL parties notified the court that they
had reached a settlement, which if approved, would
eliminate the need to certify a litigation class. The
MDL parties then moved for preliminary approval of
the negotiated settlement.
Immediately after the settlement was announced,
Kline & Specter filed a motion to intervene on behalf
of Valerie Samsell and Milton Greene. [FN12] The
court allowed the motion "*82 for the purpose of
participating in the process established by the court
for the evaluation of the proposed settlement." On
November 24, 2004, after a hearing in which counsel
for the MDL parties and the Intervenors participated,
the court gave preliminary approval to the proposed
settlement and settlement class. [FN13]
MDL
counsel were ordered to implement the Settlement
Notice Plan and to establish an interactive website on
which notice materials could be accessed and
downloaded by prospective class members.
FN12. Samsell and Greene object to the
settlement as negotiated. Although Samsell
and Greene are clients of Kline & Specter,
neither appears to be a potential beneficiary
of a pending Lupron® lawsuit other than the
MDL action, including any lawsuit brought
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by Kline & Specter.
Samsell believes
(apparently mistakenly) that Kline &
Specter represents her in a coverage dispute
with an insurer who refused to reimburse her
for Lupron® purchased on behalf of family
members.
FN13. On December 6, 2004, the
Intervenors appealed the Preliminary
Approval Order and asked the district court
to stay its proceedings pending the outcome
of the appeal. The district court declined to
do so. See Rule 23(f). As of this date, no
action has been taken by the Court of
Appeals.
On December 10, 2004, less than three weeks after
the court's preliminary approval order, the MDL
plaintiffs filed an emergency motion asking the court
to enjoin Kline & Specter from
improper communication with members of the
Lupron® Purchaser Class, dissemination of false,
misleading and confusing information to members
of the Lupron® Purchaser Class concerning both
the MDL settlement and the status of other state
court proceedings related to Lupron®, the
improper solicitation of opt outs from the MDL
settlement, and plans to conduct individual trials of
Lupron® related claims in specific state court
proceedings while the MDL settlement is pending
review and approval by this court.
Defendants filed a similar motion of their own. The
MDL parties directed the court to Kline & Specter
websites established under the domain names
www.lupronlaw.com and
www.lupronclass.com
purporting to "welcome" potential members to "the
class" and inviting Lupron® purchasers "to register
for the Lupron® class action." After reviewing the
websites, the court issued a Memorandum and Order
in which it found that the Kline & Specter websites
were intended to mislead potential members of the
MDL class. The court concluded that the typical
registrant on a Kline & Specter website would not
know that he or she was opting out as a participant in
the MDL class by "registering" with Kline & Specter.
Moreover, neither of the websites explained that a
registrant who opted for inclusion "in litigation in the
state courts" might (depending on his or her state of
residence) be left with no means of recovery. [FN14]
The court acknowledged that while "[Kline &
Specter] and attorney Haviland are perfectly free to
criticize the proposed settlement agreement ... they
are not privileged to engage in deceptive conduct
manipulating the very consumers they claim to
protect." Order dated December 21, 2004, at 3. The
Page 8
court ordered Kline & Specter to remove the
purported "registration" form from the websites and
to prominently display a banner stating that the
websites had not been authorized by the MDL court,
and directed that a complete list of all "registrants" be
produced to the court (under seal) for inspection.
Upon in camera review of the list, the court found
that the great majority of those who had "registered"
were not residents of New Jersey or North Carolina,
the states in which Kline & Specter had Lupron®
actions pending. [FN15]
FN14. The websites appear to have
originated as part of the notice plan
undertaken in the later decertified North
Carolina Stetser action, and to have been
resuscitated by Kline & Specter as
convenient fora for attacking the proposed
MDL settlement.
FN15. According to the list submitted by
Kline & Specter, some 7,000 prospective
class members had registered with Kline &
Specter, of whom some 600 are residents of
New Jersey and North Carolina.
Immediately after the court ruled on the website
issue, it learned that on December 29, 2004, attorney
Haviland had addressed a "Dear Client" letter to
every person who had registered on the Kline &
Specter websites. The letter began by noting that the
national class previously certified in North Carolina
had "recently" been decertified (in fact, it had been
decertified six months earlier) and *83 reported
(accurately) that nonresidents of North Carolina were
"no longer included in and being protected by the
North Carolina case." The letter then advised
registrants "to affirmatively protect their rights going
forward" by opting out of the MDL settlement and by
completing a Kline & Specter Retainer Agreement.
The letter then presented a distorted picture of the
MDL settlement, including the patently false
statement that MDL claimants would be paid only 3
cents for each dollar of their actual damages. The
letter was signed by attorney Haviland as "Co-Lead
Counsel for State Court Plaintiffs and the State Court
Classes," without any disclosure of the fact that Kline
& Specter was serving as lead counsel in pending
Lupron® actions in only two states.
Having found the "Dear Client" letter to contain a
number of deliberate misrepresentations and
falsehoods, the court ordered that a curative notice be
sent by Kline & Specter to all of the letter's
recipients. [FN16]
The notice highlighted
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misstatements in the "Dear Client" letter, informed
recipients living outside of North Carolina and New
Jersey that Kline & Specter had not filed state
lawsuits on their behalf, and warned that persons
opting out of the MDL class might be required to
bring a lawsuit personally to recover damages from
the Lupron® defendants.
The court advised
recipients of the "Dear Client" letter desiring more
information to contact the MDL Claims
Administrator or to discuss with Kline & Specter
their rights and obligations under any retainer
agreement. [FN17]
FN16. The curative notice was drafted by
the court after soliciting suggestions from
the MDL parties and comments from Kline
& Specter.
FN17. The court allowed Kline & Specter's
request that for economic and client privacy
reasons it rather than the MDL Claims
Administrator be permitted to mail the
curative notice to the list of registrants.
After the mailing of the curative notice, the court
sent Letters of Request to Judge Jones in North
Carolina (dated February 2, 2004), and Judge Visalli
in New Jersey (dated January 27, 2004), the presiding
judges in the Stetser and Walker cases. The Letters
noted the misinformation disseminated by Kline &
Specter and the efforts undertaken by the court to
provide prospective MDL class members with a full
understanding of their rights and the opportunity to
make an informed choice about participating in either
the federal or (where available) state Lupron®
litigation. As a matter of comity, the court asked
Judge Jones and Judge Visalli to defer ruling on
dispositive motions or proceeding with any
potentially preclusive trials until this court could
convene a hearing and rule on the fairness of the
proposed MDL settlement.
Intervenors then moved to disqualify this judge from
continuing to preside over the MDL proceedings,
arguing that the federal court's "unsolicited"
communications with the state court judges gave "an
objective appearance of partiality, if not actual
partiality," by demonstrating that "Judge Stearns has
become fully engaged with the MDL litigants in their
efforts to deprive Walker, Stetser, Nelson and
DeMontbrun of their timely day in court."
Intervenors' Memorandum, at 5. The court denied the
motion, noting the longstanding federal policy
encouraging MDL judges to communicate directly
with state court judges presiding over parallel cases
Page 9
in the interests of avoiding conflicts and conserving
judicial resources.
See Manual for Complex
Litigation, Fourth, § 20.312 (Fed.Jud.Ctr.2004)
(Manual).
The court commenced a three-day Fairness Hearing
on April 13, 2005.
Prior to the hearing, the
Intervenors filed seven boxes of exhibits, together
with associated memoranda and affidavits. MDL
plaintiffs and TAP also submitted substantial briefs
and affidavits. The court provided the MDL parties
and Intervenors each a total of fours hours for the
presentation of evidence, with an additional hour for
argument. Objectors who requested to appear were
allotted time to address the court, including several
objectors affiliated with Kline & Specter. [FN18]
The *84 court heard direct testimony from nine
witnesses called by the MDL plaintiffs and the
Intervenors, and received in deposition form the
testimony of seven additional witnesses offered by
Intervenors. The Intervenors submitted twenty-three
exhibits at the hearing, the MDL plaintiffs eighteen,
and the MDL defendants four. Three insurers
appeared to express their support for the settlement.
[FN19]
FN18. Prior to the hearing, Paula Treskow
withdrew her objection after reviewing with
MDL counsel the reasons for the
apportionment of the settlement funds
between the consumer and TPP classes.
Larry Crown (co-counsel with Kline &
Specter in the Arizona AWP case) addressed
the court on behalf of objector Swanston.
Jennifer Koiles, Esq., explained that an
objection filed on behalf of Rhonda Marcus
on the mistaken belief that the settlement
documents had been sealed by the court.
FN19. Michael Hefter, Esq., addressed the
court in support of the settlement on behalf
of Empire Health Choice, Inc., Aetna, and
Cobalt.
Notice
Notice to the class was disseminated by Hilsoft
Notifications, a Pennsylvania company "specializing
in
designing,
developing,
analyzing
and
implementing large-scale, un-biased legal notification
plans." Hilsee Aff. ¶ 2. Todd B. Hilsee, the
president of Hilsoft, has served as a notice expert in
more than 175 class action cases, including In re
Holocaust Victims Assets Litig., No. CV-96-4849
(E.D.N.Y.); In re Domestic Air Transp. Antitrust
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Litig., MDL 861 (N.D.Ga.); In re Dow Corning
Corp., 95-20512-11 (Bankr.E.D.Mich.);
In re
Synthroid Mktg., MDL 1182 (N.D.III.); and In re
Bridgestone/Firestone Tires Prods. Liab. Litig., MDL
No. 1373 (S.D.Ind.). Hilsee was the only notice
expert invited to testify before the Advisory
Committee on Civil Rules on the amendment to Rule
23 requiring "clear, concise, plain language notices."
Hilsee was also asked by the Federal Judicial Center
to design model notices to illustrate Rule 23 plain
language "best practices."
The notice plan approved by the court provided for
individual notice where practicable as well as
nationwide publication notice, the solicitation of
public service radio announcements and mainstream
news coverage, the posting of court-approved notices
on Lupron®-related websites, the establishment of an
interactive
claims
information
website
(www.lupronclaims.com), and a toll free telephone
number to take questions from class members. The
Notice Program was designed to
(a) effectively reach approximately 80% or more of
consumer Class members; (b) provide the
consumer Class members reached with multiple
opportunities to be exposed to the Notice--on
average three or more times each; (c) provide a
comprehensive and virtually complete reach of
TPP Class members by way of mailed summary
Notice; (d) use targeted notice vehicles and stateof-art notice planning (i.e. media known to be used
by Class members), with audiences that can be
mathematically calculated; (e) provide thorough
and fair geographic coverage of the United States;
(f) design a program broadly targeting Class
members without disadvantaging any potential
Class member on the basis of geography (where
they choose to live) or demographics (e.g. their age
or socio-economic status); (g) develop a program
consistent with other notice programs we have
designed that have been court-approved and that
we have implemented for large classes certified for
purposes of settlement in federal courts,
Massachusetts courts, and elsewhere; (h) use high
quality notification vehicles and methods in order
to convey the importance of the information
affecting Class members' rights; (i) write and
design Notices in plain language that will be
"noticed" as well as simple, clear, easy to
understand and act upon; (j) ensure that Class
members who choose to participate can
conveniently act on their right to claim a payment
from the settlement through repetition, a variety of
notice distribution methods, and notice design
features; and (k) ensure an overall effective effort
Page 10
based on all relevant communication standards.
Hilsee Aff. ¶ 28. To enhance consumer exposure,
Hilsoft studied the media habits of persons most
likely to have received or procured Lupron®
injections: men fifty years of age and older (prostate
cancer); women ages 18 to 64 (endometriosis);
parents of children likely to have been afflicted by
precocious puberty; and African-American women
ages 18 to 64 (the population group most susceptible
to uterine fibroids).
The Claims Administrator, Complete Claim
Solutions, Inc., reported that on January *85 7, 2005,
it mailed a "TPP Notice Packet" to 235,480 potential
TPP class members. TPP and Consumer Notice
Packets were mailed to the Attorneys General of the
fifty States (two packets were sent to the Office of
the Attorney General in Pennsylvania--one to the
then current Attorney General and one to the
Attorney General-elect), Puerto Rico, and the Virgin
Islands. As of April 4, 2005, 3,206 Consumer Notice
Packets had been mailed to potential class members
who contacted the Lupron® Hotline to request a
claims package.
According to Hilsee, the plan exposed 80 percent of
the members of the consumer class on three or more
occasions to notice of the proposed settlement and
the procedure for submitting claims. Specifically,
Hilsee calculates that adults over 18 were reached an
average of 3 times, 85 percent of living adults treated
for prostate cancer were exposed an average of 3.7
times, 80.7 percent of all men over 50 were exposed
an average of 3.1 times, 83.2 percent of women
between the ages of 18 and 64 3.0 times, 80.8 percent
of parents 3.1 times, and 86.2 percent of African
American women between the ages of 18 and 64 an
average of 3.2 times. Hilsee published notice in 947
newspapers, in Sunday newspaper supplements
(Parade Magazine and USA Weekend), and in
publications as diverse as American Legion,
Cosmopolitan, Ebony, Field & Stream, National
Enquirer, Newsweek, Parents, People, Popular
Mechanics, Reader's Digest, Time and VFW
Magazine. Hilsee testified that the notice was
positioned opposite news articles and editorial
features to increase the likelihood that it would be
read.
Hilsee testified that additional exposure was
achieved through public service announcements, the
website, and free media coverage of the settlement.
Hilsoft produced and distributed fifteen, thirty and
sixty second public service announcements to 1,250
radio stations, including the top three to six adult
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stations in every major media market. Hilsoft also
"selected the voice talent to help ensure that Class
members would identify with the voice from the
standpoint of demographic matching." Hilsee Aff. ¶
70. As of March 15, 2005, 127 radio stations in
thirty-seven states had aired the announcement a total
of 25,083 times (an average of 198 broadcasts per
radio station). Hilsee estimates that this figure
translates into an audience of 61,953,500 adults. The
www.lupronclaims.com website
address
was
prominently displayed in all notice materials and
website keywords were registered with hundreds of
search engines, including Google, AOL, Ask Jeeves,
Lycos, Yahoo!, WebCrawler, and AltaVista. Hilsee
testified that as of April 15, 2005, 38,187 "hits" had
been recorded at the website. [FN20] On January 7,
2005, a court-approved informational release was
issued to established news wires reaching more than
450 health and medical publications, as well as 4,200
press outlets throughout the country.
The
informational release was also sent to sixty-eight
support groups for the diseases treated by Lupron®.
FN20. A "hit" is an instance of a web page
being loaded by an Internet user into his or
her browser.
At the Fairness Hearing, Hilsee testified that direct
mail was not used to contact the consumer class
because of privacy and practicality concerns. To
compile an accurate mailing list would have required
the obtaining of patient names and addresses from
medical providers, insurers, and pharmacies that are
for the most part forbidden from divulging patient
information by federal and state privacy laws. Hilsee
testified that in his experience with similar cases,
including the Synthroid® and Paxil® drug litigations,
"privacy concerns stood in the way of being able to
consider giving individual notice to patients.... In this
particular circumstance, it's even more problematic,
because these are very personal issues, prostate,
infertility, [and] precocious puberty."
Fairness
Hearing, April 14, 2005 Tr. at 154. Also, because the
class period dates back to 1985, most of the older
addresses (even if they could be obtained) would
have no value for purposes of direct mail. Id., April
14, 2005 Tr. at 151. [FN21]
FN21. Hilsee also cited studies showing that
75 percent of direct mail is thrown away by
the recipient or the recipient's "gatekeeper"
without being opened. Hilsee Aff. at 55 n.
30.
*86 [1] Hilsee explained that a "placard" program
Page 11
(advocated by Intervenors' counsel) would have been
ineffective for several reasons. Placard notice is
usually positioned in pharmacies while almost all
consumer class me mbers received Lupron®
injections directly from their physicians (who would
be unlikely to display a potentially incriminating
notice in their offices). According to Hilsee, placard
notice is "a tool that [he] would [n]ever rely on nor
has [he] ever [done so] in providing constitutionallyadequate notice under due process concerns."
Fairness Hearing, April 14, 2005 Tr. at 163. Hilsee
pointed out that the Intervenors' counsel did not
utilize placard notice (or patient direct mail) in giving
notice of a proposed settlement to the Stetser
"national class." In Hilsee's opinion the Notice Plan
"as implemented, fully satisfied the notice
requirements of Federal Rule of Civil Procedure 23,
including the new plain language requirements of
Rule 23(c)(2)." Hilsee Aff. ¶ 81.
The Parties to the Settlement
The proposed settlement of this case involves two
distinct agreements.
The first is between the
defendants and the Settling Health Plans (SHPs).
[FN22] The SHPs are a consortium of insurance
companies and health plans that provide prescription
drug benefits to an estimated 70 percent of the
197,869,000 persons in the United States who are
covered by private medical insurance. The SHPs
brought a separate complaint against the defendants.
The SHPs are not associated as a class and have
settled in their individual capacities with the
defendants. The SHPs agreement is before the court
for informational purposes only.
FN22. The term SHPs is common to both
agreements.
The second agreement, which has been presented for
the court's approval, is between the defendants and
the "Lupron® Purchaser Class." This class consists
of consumer-purchasers and TPPs that are not part of
the SHPs settlement.
The class TPPs consist
primarily of self-insured employers and Taft-Hartley
benefit plans. The SHPs are explicitly excluded from
the Lupron® Purchaser Class.
The Proposed Settlement
The total amount allocated between the two
settlement agreements is $150 million. Of this sum,
$40 million is earmarked for the claims of individual
consumers, while $55 million is initially allocated to
the claims of the TPP class members, and an
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additional $55 million to those of the SHPs.
Attorneys' fees and expenses are subtracted from
each pool, with the SHPs paying their own fees and
costs, and the members of the Lupron® Purchaser
Class paying the fees and costs of class counsel in
proportion to the ultimate amounts awarded to
consumer-purchasers and class TPPs. The first $1
million in notice and claims expenses is to be borne
by the class TPPs; thereafter the TPPs and the
consumer-purchasers are to bear their respective
costs in processing any remaining claims. Incentive
payments to class representatives will be borne
separately by each funding pool. Any unclaimed
surplus in the consumer pool will not revert to TAP,
but will be distributed by the court at its discretion.
[FN23] TAP is, however, entitled to a refund from
the TPP pool in proportion to the value of the claims
of those TPPs that opt out of the class settlement.
FN23. If the court designates a charity as the
recipient of any surplus funds, the
Settlement Agreement permits TAP to take a
corresponding tax deduction.
A mechanism is also provided to adjust the division
of funds between the class TPPs and the SHPs
depending on claims experience. To the extent that
the SHPs group accounts for more than 50 percent of
the eligible claims, it will receive a proportionate
contribution from the class TPP pool, net of
expenses, attorneys' fees, and the deduction for opt
outs from the TPP class. Conversely, if the SHPs
group accounts for less than 50 percent of the eligible
claims, the TPPs will take a proportionate share of
the SHPs pool, to a maximum of $15 million. [FN24]
By way of example, if 70 percent of the approved
claims *87 originate from the SHPs group, it will be
entitled to an additional $22 million (20 percent) of
the $110 million allocated between the SHPs and the
class TPPs, net of fees, expenses, and opt out
deductions.
FN24. To insure payment of this $15
million, the SHPs will initially distribute
only $40 million in claims, and will place
the remaining $15 million in escrow until
the claims of all SHPs and class TPPs are
processed.
Consumer-purchasers are entitled to recover 30
percent of their total out-of-pocket payments for
Lupron®, or $100, whichever is greater, unless the
total amount of claims exceeds the amount allotted to
the consumer pool. If the pool is depleted, pay-outs
to consumers will be reduced on a pro rata basis.
Page 12
MDL counsel estimate that after payment of expenses
and attorneys' fees, $27.5 million will be available to
the consumer-purchaser class, an amount that MDL
plaintiffs' counsel believe will be sufficient to pay all
claims in full. On the other hand, because the TPP
class may experience a higher claims rate, in the
event its fund pool becomes oversubscribed the class
through its representatives has agreed to share the
funds available on a pro rata basis according to each
TPP's purchase of Lupron® in 2000-2001.
A
representative sample method was chosen to avoid
the expense involved in recreating twenty years of
purchasing data.
According to the analysis of MDL plaintiff's expert,
Dr. Raymond Hartman, the allocation of the
settlement funds is deliberately weighted to favor the
consumer-purchaser class over the SHPs and the
class TPPs. (Hartman Decl., at 1-2).
By Dr.
Hartman's
calculation,
the
average
spread
(AWP/ASP) was 182 percent between 1993 and 2000
(the years for which reliable data is available).
(Hartman Decl. at 15.) Assuming that an AWP/ASP
percentage spread of 125 percent (the "but-for
spread") would be expected by the market, the
difference between the actual and the but-for spread
in the years analyzed by Dr. Hartman is 57 percent.
This "unreasonable" 57 percent excess in the spread
amounts to approximately 30 percent of the actual
spread, explaining Dr. Hartman's opinion that a 30
percent of AWP recovery to consumers is reasonable.
[FN25], [FN26]
FN25. As an example, a 30 percent claims
reimbursement pegged to an AWP of $182
would result in a recovery of $54.60
(roughly equivalent to the presumed
overcharge of $57).
FN26. Dr. Meredith Rosenthal, an MDL
plaintiffs' expert who testified at the final
approval hearing, points out that while
consumer claims most likely account for 9
to 13 percent of the total overcharges (with
extremes of 7 to 25 percent), consumers will
receive 27 percent of the settlement. Dr.
Rosenthal and Dr. Hartman believe that
consumer damages over the period from
1991 to 2001 amounted to some $166
million. Of this amount, $150 million was
borne by Medicare patients making out-ofpocket or coinsurance payments, and $16
million was borne by consumers paying
coinsurance in a private context. Both
experts are of the opinion that the
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overcharge for private consumers was
around 30 percent, whereas for Medicare
patients it was around 45 percent, because of
the difference in what they consider to be
the baseline. The but-for price for Medicare
(that is, what Medicare patients would have
paid absent the inflation) they set at the
ASP, whereas the but-for price in the private
context they set at 80 percent of the AWP.
Both experts, however, consider a 30
percent recovery to be a reasonable
approximation of the economic damages to
the class members.
CLASS CERTIFICATION
Rule 23(a) sets out several prerequisites for a class
action. A class may be certified only if:
(1) the class is so numerous that joinder of all
members is impracticable; (2) there are questions
of law or fact common to the class; (3) the claims
or defenses of the representative parties are typical
of the claims or defenses of the class; and (4) the
representatives will fairly and adequately protect
the interests of the class.
Fed.R.Civ.P. 23(a).
Plaintiffs seek to certify a class pursuant to Rule
23(b)(3). This section provides that a class action
may be maintained only if, in additional to the
prerequisite of Rule 23(a):
the court finds that the questions of law or fact
common to the members of the class predominate
over any questions affecting only individual
members, and that a class action is superior to
other available methods for the fair and efficient
adjudication of the controversy. The matters
pertinent to the findings include: (A) the interest of
members of the class in individually controlling the
prosecution or defense of separate actions; (B) the
extent and nature of any litigation concerning the
controversy already commenced by or against
members *88 of the class; (C) the desirability or
undesirability of concentrating the litigation of the
claims in the particular forum; (D) the difficulties
likely to be encountered in the management of a
class action.
Fed.R.Civ.P. 23(b)(3).
[2][3] "A district court must conduct a rigorous
analysis of the prerequisites established by Rule 23
before certifying a class." Smilow v. Southwestern
Bell Mobile Sys., Inc., 323 F.3d 32, 38 (1st Cir.2003).
In "determinating the propriety of a class action, the
question is not whether the plaintiff or plaintiffs have
stated a cause of action or will prevail on the merits,
Page 13
but rather whether the requirements of Rule 23 are
met." Waste Mgt. Holdings, Inc. v. Mowbray, 208
F.3d 288, 298 (1st Cir.2000) (quoting Eisen v.
Carlisle & Jacquelin, 417 U.S. 156, 178, 94 S.Ct.
2140, 40 L.Ed.2d 732 (1974) (internal citation
omitted)). In the settlement context, however, there
is an important refinement to the Rule 23 analysis:
the court "need not inquire whether the case, if tried,
would present intractable management problems."
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620,
117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). When a
settlement class is proposed, it is incumbent on the
district court to give heightened scrutiny to the
requirements of Rule 23 in order to protect absent
class members. [FN27] Amchem, 521 U.S. at 620,
117 S.Ct. 2231.
This cautionary approach
notwithstanding, the law favors class action
settlements. City P'ship Co. v. Atl. Acquisition Ltd.
P'ship, 100 F.3d 1041, 1043 (1st Cir.1996).
FN27. The heightened scrutiny rule is a
byproduct of the controversy over the
concept of a settlement class, a litigation
device that was initially viewed with deep
suspicion by courts and commentators who
feared (not without justification) that it
invited collusion between defendants and
fee-hungry lawyers.
Judge Becker
summarizes the arguments for and against
settlement classes in his seminal decision on
the subject, In re General Motors Corp.
Pick-Up Truck Fuel Tank Prods. Liab.
Litig., 55 F.3d 768, 787-792 (3d Cir.1995).
(a) Numerosity
[4] The class easily meets the Rule 23(a)
requirement that "the class [be] so numerous that
joinder of all members is impracticable." While the
mortality rate associated with prostate cancer,
coupled with the extended class period, makes it
impossible to predict the size of the class to any
degree of mathematical certainty, the class includes
thousands of TPPs and tens if not hundreds of
thousands of consumer-purchasers or their estates.
(b) Commonality
[5] While at least one common issue of fact or law at
the core of the action must shape the class, Rule 23(a)
does not require that every class member share every
factual and legal predicate of the action. In re
General Motors Corp., 55 F.3d at 817. "The
threshold of 'commonality,' is not high. Aimed in
part at 'determining whether there is a need for
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combined treatment and a benefit to be derived
therefrom,' the rule requires only that resolution of
the common questions affect all or a substantial
number of the class members." Jenkins v. Raymark
Indus., Inc., 782 F.2d 468, 472 (5th Cir.1986)
(citation omitted). In this case, there are a number of
common issues of fact and law that the class
members would be required to establish to prove the
defendants' liability, as well as their entitlement to
damages. All class members would need to establish
that (1) they purchased Lupron® (2) at a price
derived from a fraudulently inflated AWP (3)
published by defendants as part of a concerted
marketing scheme involving, inter alia, the provision
of "free" samples, rebates, debt forgiveness, junkets,
and "education grants" (4) that was intended to funnel
hidden profits to doctors (5) as an inducement to
prescribe Lupron® instead of less expensive
alternatives like Zoladex®. The class would also be
required to prove scienter on defendants' part, as well
as complicity on the part of physicians and clinics
who billed members directly or through their insurers
at a price derived from the inflated AWP. The civil
RICO statute (the mainstay of the Consolidated
Amended Complaint) would require the class to
prove as a matter of fact and law that defendants (1)
conducted (2) an enterprise (either a legal entity or an
association in fact) (3) through a pattern (at least two
*89 related acts) (4) of racketeering activity. [FN28]
Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479,
496, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). In
short, the commonality requirement is easily
satisfied. [FN29]
FN28. The predicate acts alleged by
plaintiffs to constitute racketeering activity
on the part of the defendants are mostly
mailings and electronic communications
plead as violations of the mail and wire
fraud statutes. See Neder v. United States,
527 U.S. 1, 20, 119 S.Ct. 1827, 144 L.Ed.2d
35 (1999).
FN29. While the Intervenors suggest that
some Lupron® purchasers might not have
been charged an AWP-based price or might
not have paid for Lupron® distributed to
doctors as "free" samples, plaintiffs'
evidence credibly demonstrates that virtually
every purchase of Lupron® during the class
period was influenced to one degree or
another by the defendants' manipulation of
the published AWP. Given the needle and
haystack problems that would be associated
with any attempt to cull out the minuscule
Page 14
number of purchasers (if they in fact exist)
who did not pay for Lupron® based on
AWP or who did not receive a bill for a free
sample, the inclusion of all purchasers of
Lupron® in the class is an expeditious
means of insuring that all purchasers who
were affected by the scheme receive relief.
(c) Typicality
[6] "A sufficient nexus is established [to show
typicality] if the claims or defenses of the class and
the class representative arise from the same event or
pattern or practice and are based on the same legal
theory." In re Terazosin Hydrochloride Antitrust
Litig., 220 F.R.D. 672, 686 (S.D.Fla.2004) (finding
that representatives were typical of plaintiffs subject
to an overcharge for a prescription drug despite the
fact that class members paid for the overcharge in
different ways) (quoting Kornberg v. Carnival Cruise
Lines, Inc., 741 F.2d 1332, 1337 (11th Cir.1984)).
"Although [the plaintiffs] may not have suffered
identical damages, that is of little consequence to the
typicality determination when the common issue of
liability is shared." In re Lorazepam & Clorazepate
Antitrust Litig., 202 F.R.D. 12, 28 (D.D.C.2001)
(finding representatives' claims typical despite the
fact that some class members bought prescription
drugs directly while others bought from agents or
wholesalers at various rates) (quoting Lewis v. Nat'l
Football League, 146 F.R.D. 5, 9 (D.D.C.1992)).
Typicality is not a demanding test. Forbush v. J.C.
Penney Co., Inc., 994 F.2d 1101, 1106 (5th
Cir.1993).
Intervenors challenge the typicality of the claims of
the class representatives, relying on the briefs filed by
the defendants prior to the hearing on the certification
of a litigation class asserting that no class
representative actually paid for Lupron® at the AWP.
[FN30] The challenge is without merit. The court is
satisfied, based on the affidavits presented by the
MDL plaintiffs, that the Lupron® purchases of the
class representatives were impacted by TAP's
publication of an inflated AWP for Lupron®. The
class representatives, in common with all other class
members, claim to have been damaged by the
defendants' price manipulation scheme. They claim
to have been unaware of the fraudulent conduct in
which the defendants were engaged. They seek to
recover the maximum amount of damages possible,
as would any member of the class, and they seek to
do so under the civil RICO statute and state consumer
protection laws, as would most of the members of the
class. In sum, I find that the claims of the class
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representatives *90 are typical of those of the
members of the class.
FN30. Intervenors additionally assert that
the class representatives are not typical of
class members who have claims based on
the diversion theory pressed by Intervenors'
counsel in the North Carolina state court
action in that no class representative claims
to have been victimized by this alleged
scheme. The complaint filed in North
Carolina alleges that the Johnson & Johnson
companies are liable for conspiring with
TAP to sell excess Lupron® to doctors in
North Carolina, a "Least Costly Alternative"
(LCA) state, at a discount. The defendants
then allegedly allowed or encouraged
doctors to resell the surplus Lupron® in
non-LCA states at a profit, as a means of
preserving Lupron®'s market share at a time
when doctors were switching their patients
to Zoladex® because of LCA programs.
Assuming that these allegations are true,
they simply represent a variant in the overall
marketing scheme resulting in the same
generic injury-- economic damages-suffered by the class representatives. See In
re Prudential Ins. Co. of Am. Sales Practices
Litig., 148 F.3d 283, 311-312 (3d Cir.1998)
(rejecting the argument that to satisfy the
typicality
requirement,
the
class
representatives must share every form of
injury suffered by the class); City P'ship,
100 F.3d. at 1044 (same).
(d) Adequacy
"The [adequacy] rule has two parts. The moving
party must show first that the interests of the
representative party will not conflict with the
interests of any of the class members, and second,
that counsel chosen by the representative party is
qualified, experienced, and able to vigorously
conduct the proposed litigation." Andrews v. Bechtel
Power Corp., 780 F.2d 124, 130 (1st Cir.1985). "In
complex actions such as this one, named plaintiffs are
not required to 'have expert knowledge of all details
of the case, ... and a great deal of reliance on the
expertise of counsel is to be expected.' " County of
Suffolk v. Long Island Lighting Co., 710 F.Supp.
1407, 1416 (E.D.N.Y.1989) (citation omitted).
Intervenors challenge the adequacy of the class
representatives, but the challenge is lacking in
analysis, and for the most part appears to be the
Page 15
product of sloppy investigation. [FN31]
The
Intervenors first accuse the TPP representatives,
Twin Cities Bakeries and Beacon Health Plans, of
being "professional plaintiffs." Even if the accusation
is true (no evidence suggests that it is), it has no
relevance to the competence of these TPPs to act as
representatives of the TPP class.
If anything,
experience with prior similar litigation and
knowledge of the legal issues involved enhances their
role as class representatives.
Intervenors also
complain that the consumer representatives are
reluctant role players who lack knowledge of
allocation issues, the scope of the releases granted to
the defendants, and the settlement in general. These
allegations are not borne out by the record. Mrs.
Brickey, in her capacity as the executor of the estate
of William Brickey, submitted to a seven hour
deposition at the defendants' request. There is
nothing surprising in the fact that Mrs. Brickey and
Mrs. Goetting, the widows of the original class
representatives, are unschooled in the intricacies of
the legal process or the complexities of prescription
drug pricing. They are, however, fully aware of the
circumstances in which their husbands purchased
Lupron®. During the Fairness Hearing, consumer
class representative William Porter (who is 78 years
old) gave a telephone deposition in which he
demonstrated a full understanding of the settlement
and the consequences of the release being offered to
the defendants. Intervenors also argue that a number
of potential conflicts exist among class members.
Those that are identified are illogical. Individual
differences in damages suffered do not create a class
conflict when recovery varies in direct proportion to
the amount of individual damages incurred. The fact
that a SHP may be able to pull into the SHPs group
benefit plans that it has a contractual right to
represent does not create a conflict by allowing a
SHP to "steal" from the TPP class. There is nothing
untoward about contracts for representation, and the
only likely effect of a SHP's exercise of the right to
appropriate a claim is the revenue-neutral shift of a
payment that would be made in any event from one
pool to the other. Also, unlike the situation in In re
General Motors Corp., 55 F.3d at 800-01, where the
class representatives were individual truck owners
whose interests were in conflict with unrepresented
fleet owners who received a less generous settlement,
the Lupron® class representatives include both TPPs
and consumer-purchasers.
No objector has
complained of any disparity in the benefits negotiated
on behalf of consumer-purchasers and TPPs giving
rise to an intra-class conflict. Nor are there any
potential disparities in possible recoveries under state
law of a significant enough magnitude to warrant
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separate state proceedings. [FN32] In *91 sum, I find
the representation to be adequate.
FN31. With respect to the second
component
of
the
adequacy
of
representation prerequisite, the Intervenors
make a rhetorical attack on the competence
of MDL plaintiffs' counsel, accusing them of
being "feeble," "disarmed," "ineffectual,"
and interested only in their fees, but without
citing anything by way of evidentiary
support for these insults (other than reckless
claims of conflicts of interest that were
exposed at the Fairness Hearing as false).
The court has previously found MDL
counsel to be highly competent and zealous
in their pursuit of the interests of the class.
Nothing said in the Intervenors' brief or
adduced at the Fairness Hearing would
cause the court to revise that finding.
FN32. Intervenors claim that certain MDL
plaintiffs' counsel face ethical conflicts
because of their involvement in other drug
pricing cases. Intervenors, for example,
assert that the lead class counsel represents
the State of Nevada in a suit involving
similar Lupron® claims. In fact, the Nevada
lawsuit does not involve Lupron®, but other
drugs. A similar accusation that one of the
class counsel represented doctors suing
certain SHPs who were also plaintiffs in the
MDL action proved equally untrue.
(e) Predominance
"The Rule 23(b)(3) predominance inquiry tests
whether proposed classes are sufficiently cohesive to
warrant adjudication by representation." Amchem,
521 U.S. at 623, 117 S.Ct. 2231. "Predominance is a
test readily met in certain cases alleging consumer or
securities fraud or violations of antitrust laws." Id. at
625, 117 S.Ct. 2231. "Where ... common questions
predominate regarding liability, then courts generally
find the predominance requirement to be satisfied
even if individual damages issues remain," for "[t]he
individuation of damages in consumer class actions is
rarely determinative under Rule 23(b)(3)." Smilow,
323 F.3d at 40. See also Tardiff v. Knox County, 365
F.3d 1, 6-7 (1st Cir.2004) (the certification of a
litigation class of individuals subjected to illegal strip
searches was not improper despite the fact that
individual damages would inevitably vary depending
upon each individual's claims of emotional distress,
lost wages, and medical bills). Similarly, "where
Page 16
common issues otherwise predominated, courts have
usually certified Rule 23(b)(3) classes even though
individual issues were present in one or more
affirmative defenses," for "[i]f ... evidence later
shows that an affirmative defense is likely to bar
claims against at least some class members, then a
court
has
available
adequate
procedural
mechanisms." Smilow, 323 F.3d at 39-40. See also
Waste Mgt., 208 F.3d at 296 ("Although a necessity
for
individualized
statute-of-limitations
determinations invariably weighs against class
certification under Rule 23(b)(3), we reject any per se
rule that treats the presence of such issues as an
automatic disqualifier."); Tardiff, 365 F.3d at 5
(noting that the probability that some members of the
class were lawfully strip searched did not defeat class
certification, since class members could be grouped
by the seriousness of the crime for which they were
arrested); Carnegie v. Household Int'l, Inc., 376 F.3d
656, 660-63 (7th Cir.2004) (Posner, J.) (affirming a
RICO class certification and suggesting procedural
mechanisms that at a later stage in the proceedings
could be used to address the issues of whether
particular class members were defrauded and the
ext ent of any corresponding damages).
Courts dealing with allegations of pricing fraud in an
analogous antitrust context have generally found
common issues to predominate despite individual
differences in amounts paid, the method of payment,
and potential knowledge of the fraud. See, e.g., In re
Linerboard Antitrust Litig., 305 F.3d 145, 163 (3d
Cir.2002) ("Key questions will not revolve around
whether Appellees knew that the prices paid were
higher than they should have been or whether
Appellees knew of the alleged conspiracy among
Appellants. Instead, the critical inquiry will be
whether 'defendants successfully concealed the
existence of the alleged conspiracy, which proof will
be common among the class members in each class.'
") (citation omitted); In re Cardizem CD Antitrust
Litig., 200 F.R.D. 326, 345 (E.D.Mich.2001) ("The
courts have routinely rejected similar arguments,
despite differences in prices paid by class members,
where the plaintiffs show that the 'minimum baseline
for beginning negotiations, or the range of prices
which resulted from negotiations, was artificially
raised (or slowed in its descent) by the collusive
actions of the defendants.' ") (quoting In re
Commercial Tissue Prods., 183 F.R.D. 589, 595
(N.D.Fla.1998)
(internal
citations
omitted));
Terazosin, 220 F.R.D. at 694-700 (finding plaintiff
purchasers of drugs showed predominance of
common issues in a suit alleging increased prices
from antitrust conspiracy to prevent generic
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competition). But see Lienhart v. Dryvit Sys., Inc.,
255 F.3d 138, 147-49 (4th Cir.2001) (decertifying
class in part because of the possible contributory
negligence of contractors who may have failed to
follow instructions in installing defendant's house
siding product); Markarian v. Conn. Mutual Life Ins.
Co., 202 F.R.D. 60, 63-70 (D.Mass.2001) *92
(denying certification in part because despite
evidence that company may have encouraged
salespersons to use a misleading sales pitch,
determination of whether it was actually used in
particular cases would require individual inquiry).
Here, issues common to the class predominate over
those that are personal to class members. The core
factual issues involve the manner in which the
defendants marketed Lupron® to physicians; the
methodology of the Medicare and private-payor
reimbursement systems; the effect of competition
from Zoladex® on Lupron®'s market share; and the
impact of the defendant's marketing scheme on the
actual price of the drug. As previously observed, the
need to establish the elements of a civil RICO claim-the conduct of an enterprise through a pattern of
racketeering activity--poses mixed issues of fact and
law common to the class. Individual issues, on the
other hand, primarily involve the amount of damages
to be awarded to individual class members, a factor
disfavored in determining predominance. While the
extent to which individual class members were aware
of the defendants' marketing scheme might weigh
against certification, particularly in the case of the
larger insurers that were arguably aware that the
AWP for Lupron® was an artificial number, these
entities are part of the SHPs group that has settled
outside of the class. [FN33] Thus, this issue does not
create individual predominance.
FN33. Intervenors finally note some
differences in the state consumer protection
laws plead by various members of the class.
These differences, however, do not pose a
serious obstacle to certification. See In re
Prudential Ins. Litig., 148 F.3d at 315
("Courts have expressed a willingness to
certify nationwide classes on the ground that
relatively minor differences in state law
could be overcome at trial by grouping
similar state laws together and applying
them as a unit."); Mowbray, 208 F.3d at
292, 296-297 (variations in twenty states'
laws concerning reliance, waiver, and
statutes of limitations did not cause
individual issues to predominate). In any
event, the issue is one of manageability,
Page 17
which is not a consideration in the
certification of a settlement class. See
Amchem, 521 U.S. at 620, 117 S.Ct. 2231.
(f) Superiority
Rule 23(b)(3) requires a class action to be "superior
to other available methods for the fair and efficient
adjudication of the controversy."
The matters pertinent to the findings include: (A)
the interest of members of the class in individually
controlling the prosecution or defense of separate
actions; (B) the extent and nature of any litigation
concerning the controversy already commenced by
or against members of the class;
(C) the
desirability or undesirability of concentrating the
litigation of the claims in the particular forum; (D)
the difficulties likely to be encountered in the
management of a class action.
Id. "In adding 'predominance' and 'superiority' to the
qualification-for-certification list, the Advisory
Committee sought to cover cases 'in which a class
action would achieve economies of time, effort, and
expense, and promote ... uniformity of decision as to
persons similarly situated, without sacrificing
procedural fairness or bringing about other
undesirable results.' " Amchem, 521 U.S. at 615, 117
S.Ct. 2231. "[A] class action has to be unwieldy
indeed before it can be pronounced an inferior
alternative--no matter how massive the fraud or other
wrongdoing that will go unpunished if class treatment
is denied--to no litigation at all." Carnegie, 376 F.3d
at 661.
The superiority analysis dovetails with the
predominance analysis. The issue here is one that lies
at the very heart of the invention of the class action as
a litigation vehicle: few, if any, members of the
settlement class have incurred damages in an amount
sufficient to justify the costs of pursuing an
individual action. That fact alone makes a class
action the only means by which most class members
can obtain redress. Even if the claims could be
prosecuted individually, their sheer number would
make it unlikely that any significant number would
be resolved during the lifetimes of the consumer class
members.
The court finds that under the
circumstances, a class action is superior to any other
mechanism for adjudicating this case (including
joinder). [FN34]
FN34. In the court's experience, joinder of
parties for trial in numbers above two dozen
is unworkable.
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Page 18
*93 (g) Ascertainability of the Class
class definition.
[7] "The proposed class must be precisely defined
and its members must be ascertainable through the
application of 'stable and objective factors' so that a
court can decide, among other things, 'who will
receive notice, who will share in any recovery, and
who will be bound by the judgment.' " Van West v.
Midland Nat'l Life Ins. Co., 199 F.R.D. 448, 451
(D.R.I.2001) (finding insufficiently definite a class of
persons harmed by the unspecified "wrongful
conduct" of defendant's sales agents, whose practices
differed from transaction to transaction). Compare
Crosby v. Soc. Sec. Admin., 796 F.2d 576, 580 (1st
Cir.1986) (finding that a class of disability benefits
claimants who did not receive a hearing "within a
reasonable time" was impossible to ascertain in any
objective fashion); In re Copper Antitrust Litig., 196
F.R.D. 348, 358-360 (W.D.Wis.2000) (finding that
the class was unascertainable where indirect
purchasers had no means of knowing if they had been
harmed) with Lorazepam, 202 F.R.D. at 22-25
(finding that the complexities of the pharmaceutical
market did not make purchasers of drugs
unascertainable, and collecting cases certifying
classes of direct purchasers in complex markets).
FAIRNESS DETERMINATION
General Considerations
Intervenors make three challenges to ascertainability.
First, they argue that self-funded plans might not
know if they are members of the class. Second, they
argue that the class period post-dates the notice, so
that some persons who purchase Lupron® after the
notice period may not know that they are in the class.
Even if these persons learn of the class, Intervenors
argue, they may do so after the March 15 deadline for
objections and with a limited opportunity to opt out.
Third, they argue that the class is "sprawling,"
making it difficult to ascertain the appropriate time
frame and to differentiate included from excluded
entities.
The first argument is without merit. A self-funded
plan may determine whether it has the right to file a
claim in its own name, or whether the right belongs
to the SHP that administers claims on its behalf, by
simply reviewing its contract with the SHP. The
second argument has no relevance to ascertainability,
but is rather concerns the sufficiency of the notice
given to members of the class. The third argument is
entirely unsupported by analysis, and is on its face
unpersuasive. The inclusion of "all purchasers"
rather than purchasers who paid in reference to AWP
makes purchasers easier, not harder, to ascertain,
while the opening and closing dates of the class could
not be set out any more clearly than they are in the
[8][9][10][11] While the factors to be considered in
making a fairness determination pursuant to Rule
23(e) often overlap with the class certification
requirements of Rule 23(a) and (b), a court is
required to analyze fairness as a separate and distinct
issue. Rule 23(e) "was designed to function as an
additional requirement, not a superseding direction,
for the 'class action' to which Rule 23(e) refers is one
qualified for certification under Rule 23(a) and (b)."
Amchem, 521 U.S. at 621, 117 S.Ct. 2231. While
settlement and compromise are favored by the law,
the court has a fiduciary duty to absent members of
the class in light of the potential for conflicts of
interest among class representatives and class counsel
and the absent members. "Rule 23(e) imposes on the
trial judge the duty of protecting absentees, which is
executed by the court's assuring the settlement
represents adequate compensation for the release of
the class claims." In re General Motors Corp., 55
F.3d at 805. Approval is to be given if a settlement is
untainted by collusion and is fair, adequate, and
reasonable. "When sufficient discovery has been
provided and the parties have bargained at arms length, there is a presumption in favor of the
settlement." City P'ship, 100 F.3d at 1043. While
the First Circuit has not established a formal protocol
for assessing the fairness of a settlement, other
circuits have identified factors deemed appropriate
for consideration. The most commonly referenced
factors were identified by the Second Circuit in City
of Detroit v. Grinnell Corp., 495 F.2d 448 (2d
Cir.1974), overruled on other grounds by Missouri v.
Jenkins, 491 U.S. 274, 109 S.Ct. 2463, 105 L.Ed.2d
229 (1989):
*94 (1) the complexity, expense and likely duration
of the litigation; (2) the reaction of the class to the
settlement; (3) the stage of the proceedings and the
amount of discovery completed; (4) the risks of
establishing liability; (5) the risks of establishing
damages; (6) the risks of maintaining the class
action through the trial; (7) the ability of the
defendants to withstand a greater judgment; (8) the
range of reasonableness of the settlement fund in
light of the best possible recovery; (9) the range of
reasonableness of the settlement fund to a possible
recovery in light of all the attendant risks of
litigation.
Id. at 463 (citations omitted). As a prelude to
consideration of each of each of these factors, the
court will briefly describe the negotiations that
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produced the proposed settlement and the principal
objections tabled by the Intervenors, and principally
the allegation that this is a collusive settlement.
[12][13] The storm warnings indicative of collusion
are a "lack of significant discovery and [an]
extremely expedited settlement of questionable value
accompanied by an enormous legal fee." In re
General Motors Corp., 55 F.3d at 801.
The
successful negotiations that led to this settlement
were consummated relatively quickly (they appear to
have been concluded in one or two days). However,
the negotiations must be viewed in the context of the
lit igation as a whole. [FN35] The successful
negotiation built on an earlier, three-month attempt to
reach a settlement in 2003. The negotiations were
not bilateral. MDL counsel wisely chose to secure
separate and independent representation for the two
distinct subclasses, the consumer-purchasers and the
TPPs. At the Fairness Hearing, the court heard the
testimony of Gregory Cox, the lead counsel in the
Texas Lupron® action, and Stephen Rosenfeld, an
attorney with extensive experience in pharmaceutical
litigation (who is not affiliated with the MDL
steering committee).
Cox and Rosenfeld were
designated to represent consumers in the
negotiations. Operating on the assumption that the
consumer share of the damages might amount to at
most 15 percent of the total damages, Rosenfeld
testified that his (and Cox's) primary objective was to
maximize their percentage recovery from the
settlement fund. The achievement of that objective
over the resistance of the more powerful SHPs group
is strong evidence of the arms -length nature of the
negotiations. A secondary objective of the consumer
representatives, insuring that any unclaimed funds
did not revert to TAP, was also achieved.
FN35. One of the concerns with so-called
"drive by" class actions is that the court
called upon to certify the class and approve
the settlement is presented with a fait
accompli and has no independent means of
verifying the lawyers' representations. Here,
several years of hotly contested litigation
has educated the court in the factual and
legal intricacies of the case and the relative
strengths and weaknesses of the parties'
respective positions.
Intervenors' criticism is directed less at the
percentage of the allocation of the fund to consumers
than at the size of the fund itself, which they contend
would be larger but for a "reverse auction"
orchestrated by the defendants. The only support
Page 19
offered for this allegation is the affidavit of Geoffrey
Miller, a New Yo rk University law professor, which
while instructive on the theory of reverse auctions,
disavows any familiarity with the negotiations in this
case. Intervenors' stronger argument is that the
impetus to settle on defendants' part arose from the
impending Walker trial in New Jersey (where
attorney Haviland serves as lead counsel), and that
the defendants found the MDL steering committee to
be a more pliant negotiating partner than Kline &
Specter as the latter would have insisted on a larger
settlement fund in exchange for a release. This
would be a persuasive argument if it were true. I
credit defendants' representation that the global peace
that they desired could never have been negotiated
with Kline & Specter. The firm represents less than 5
percent of the national pool of consumer-purchasers
and more critically, almost none of the TPPs, the
entities with claims of 90 percent of the damages. As
a consequence, a settlement with Kline & Specter
was never considered a realistic alternative, and
hence no global negotiations were ever undertaken
with the firm.
Intervenors' final substantive objection is that the
release agreed to by MDL counsel is *95 broader
than warranted by the size of the settlement.
Intervenors offered two witnesses on the subject, Ms.
Samsell, who is involved in a dispute with her insurer
over coverage for Lupron®, and Steven Rowan, a
prostate cancer patient who appears to have been the
victim of fraudulent billing by his treating clinic.
Both witnesses had been told by Kline & Specter that
the release would extinguish their claims.
An
attorney appearing for Robert Swanston, the class
representative in the Arizona action, argued that the
release given to TAP might conceivably be
interpreted as immunizing other pharmaceutical
companies which Swanston alleges conspired with
TAP in the manipulation of the AWP of other drugs.
As to the first two issues, MDL counsel agree that the
only claims extinguished by the release are those
related to defendants' marketing, pricing, and sale of
Lupron®. [FN36] The release would have no affect
on insurance coverage disputes or on overcharging
claims unrelated to TAP's conduct. Insofar as
Swanston is concerned, the release of TAP would
have no affect on the liability of any alleged
coconspirator. It has always been the law that a
legally immune party may be part of an actionable
conspiracy. [FN37] See, e.g., Standefer v. United
States, 447 U.S. 10, 15-21, 100 S.Ct. 1999, 64
L.Ed.2d 689 (1980). While the issue of the release of
physicians who prescribed Lupron® was not a
subject of testimony at the Fairness Hearing, it is
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touched upon in the Intervenors' brief. However, as
MDL counsel point out, their RICO enterprise
theories involving physicians were dismissed by the
court as either failing the RICO tests of association,
organization and control, or if brought individually
against 10,000 urologist enterprises as totally
impracticable and unmanageable. In re Lupron®
Litig., 295 F.Supp.2d at 173-174 & n. 27.
Consequently, MDL plaintiffs' counsel state, and
correctly so, that in releasing the claims against the
urologists, they gave up little of consequence. [FN38]
FN36. I agree with Intervenors that as
written the release does not make the point
as clearly as did MDL counsel at the
Fairness Hearing that it is intended to cover
only conduct related to defendants' alleged
fraudulent activity in marketing Lupron®. I
will ask that the Proposed Final Judgment
clarify the scope of the release in this
respect.
FN37. Intervenors also complain of the
absence of prospective injunctive relief
barring TAP from engaging in similar
overpricing in the future. I agree with the
MDL parties that the Corporate Integrity
Agreements entered by TAP with the United
States Government and the State Attorneys
General make any such relief redundant.
FN38. MDL counsel also note that neither
Intervenors' counsel nor anyone else has
actually brought a direct claim against a
urologist.
The Grinnell Factors [FN39]
FN39. I have not considered one of the
traditional Grinnell factors, the risks of
maintaining the suit as a class action through
trial. As Judge Scirica observed in In re
Prudential Ins. Litig., 148 F.3d at 321, this
factor is largely irrelevant in settlement-only
cases as Amchem does not require a
manageability inquiry in a settlement
context.
(a) the complexity, expense and likely duration of
the litigation
The continued litigation of the case would be
noxiously burdensome to all involved, given the
twenty year duration of the alleged RICO conspiracy,
the involvement of a foreign party (Takeda), and the
Page 20
differing orders of proof required to establish (or
defeat) the claims of the consumer and TPP
subclasses. MDL plaintiffs' counsel report having
incurred over $14 million in fees and over $1 million
in costs to date. I have to assume that the costs
incurred in defending the case are of a similar
magnitude and are compounded by the rearguard
skirmishes being fought with Kline & Specter. These
costs and fees would escalate precipitously if the case
were to be litigated through certification of a
litigation class, summary judgment and the two or
four trials (depending on the bifurcation of liability
and damages as between the two subclasses) that
would be required to achieve a comprehensive
verdict. This process would reasonably take another
two to three years to complete, and at least another
year to resolve on appeal. Given the fact that many
in the consumer claimant class are elderly and/or ill,
it is in the interest of this subclass to bring the
litigation to a closure, particularly one that allows a
distribution of damages, as expeditiously as possible.
*96 (b) the reaction of the class to the settlement
Absent polling data, which is not available to the
court, this factor can be analyzed only by comparing
the number of objectors and opt outs with the number
of claimants, and by assessing the extent to which
notice effectively reached absent class members. As
of May 9, 2005, 10,614 consumer claims had been
filed with the Claims Administrator. To date 7,123
of these claims have been processed for a total
claimed amount of $15,320,831.81.
The only
significant number of opt outs are persons who have
been excluded from the settlement by Kline &
Specter. [FN40] Most of the these persons are
residents of states in which the firm has no Lupron®
action pending. Only forty-nine persons unaffiliated
with Kline & Specter have opted out of the settlement
on their own initiative and only ten persons submitted
objections (several of whom are associated with
Kline & Specter). [FN41] See In re Prudential Ins.
Litig., 148 F.3d at 318 (in assessing the weight of the
objections, the district court properly considered the
fact that the most vociferous objectors were persons
enlisted by counsel competing with MDL counsel for
control of the litigation). As previously indicated, the
SHPs, the parties with the largest claim to damages,
but also the group most vulnerable to defendants'
affirmative defenses, have settled separately with
defendants. Of the TPP class members, 880 have
submitted claims , of which 286 have been processed
for a total claimed amount of $39,160,604.89. None
of the TPPs has objected to the settlement, and of the
some 235,000 TPPs who received mail notice, only
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fourteen have elected to opt out. Finally, six state
Attorneys General purported to exercise opt outs on
behalf of the citizens of their states who are otherwise
qualified as members of the consumer-purchaser
class. [FN42] With respect to the effectiveness of
notice, in the absence of any evidence to the contrary,
I accept the testimony of Todd Hilsee that the plan he
designed achieved its objective of exposing 80
percent of the members of the consumer class on
three or more occasions to notice of the proposed
settlement and the procedure for submitting claims,
and of providing direct written notice to all TPPs that
might be affected by the settlement. I have examined
the materials that were used to publicize the
settlement, and I agree with Hilsee's opinion that they
complied in all respects with the "plain, easily
understood language" requirement of Rule 23(c). In
sum, I find that the notice given meets the
requirements of due process.
FN40. The Claims Administrator has
received several letters from attorney
Haviland purporting to exercise blanket opt
outs on behalf of 783 (or as many as 978)
consumers who are said to be clients of
Kline & Specter. (The exact number is
difficult to ascertain as the lists submitted by
attorney Haviland are inconsistent). See
Supplemental Decl. of Thomas R. Glenn.
Some of the consumers on various of the
lists have independently filed claims with
the MDL Claims Administrator. The MDL
parties have asked that the court either strike
the Haviland opt outs and give each person
affected an opportunity to decide personally
whether or not to join the MDL class, or at a
minimum, that the court require Kline &
Specter to submit proof that attorney
Haviland has the authority to exercise the
exclusions on each individual's behalf.
FN41. As previously noted, the objection of
Paula Treskow was withdrawn prior to the
Fairness Hearing.
After hearing the
uncontradicted statements of MDL counsel
that no consideration was given in exchange
for withdrawal of the objection, and that the
objection was withdrawn on the merits after
Treskow and her attorney had the
opportunity to review the settlement
documents in depth, the court will give its
approval for the withdrawal as required by
Rule 23(e)(4)(B).
FN42. This matter is in the process of being
Page 21
separately briefed after the court questioned
the authority of the Attorneys General to act
on behalf of private citizens without their
express consent. It would appear now that
at least some of the Attorneys General have
come to the view that the court's scepticism
is well-taken.
(c) stage of the proceedings and the amount of
discovery completed
As the procedural history of the case outlined earlier
makes clear, the case was in litigation for nearly four
years before the settlement was reached. Some 500
boxes of documents totaling over a million pages had
been produced by the defendants for review.
Twenty-six depositions had been taken, including
depositions of TAP's senior management. Discovery
has been sufficient to give *97 counsel an informed
view of the strengths and weaknesses of plaintiffs'
case. More impressive, however, than the sheer
volume of documents reviewed and depositions taken
is the skillful use that MDL plaintiffs' counsel have
made of that discovery in fending off aggressive and
equally skillful motions brought by defendants,
several of which had the potential of collapsing the
plaintiffs' case.
(d) the risks of establishing liability and damages
[14] As any experienced lawyer knows, a significant
element of risk adheres to any litigation taken to
binary adjudication. With respect to establishing
liability, plaintiffs' principal risks arise from: (1) the
complexity of the case;
(2) the difficulty of
establishing any uniform practice in the actual use of
the AWP in marketing Lupron®, particularly
Lupron® sold through TPPs pursuant to negotiated
contracts; (3) the difficulty of deflecting defenses
based on imputed knowledge that the AWP was
subject to manipulation by the defendants, as well as
apparent government ratification of the defendants'
conduct; and (4) related statutes of limitations
defenses. [FN43] The plaintiffs face formidable,
albeit not insurmountable obstacles in presenting to a
lay jury a clear, and yet legally sufficient, narrative of
the evidence, [FN44] while defendants have a
powerful argument that the AWP was known to
Congress and large insurers to be an artificial
benchmark with no real market significance. [FN45]
Proving damages represents two significant risks to
the consumer class: (1) a number of consumers (or
their estates) would likely no longer have records
available to prove the extent of their Lupron®
purchases; while (2) those consumers who made flat
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co-payments for prescription drugs might be found to
have suffered no damages at all, as a co-payment is a
fixed fee that does not vary with the price of the drug
in question. The TPPs, on the other hand, which
account for the lion's share of the damages, were the
most likely to have been aware of the manipulation of
AWP by TAP and therefore the most vulnerable to
TAP's knowledge defense.
FN43. In noting the risks, the court is not
passing judgment on the ultimate outcome.
A settlement court reviewing the fairness of
a compromise does not "decide the merits of
the case or resolve unsettled legal
questions." Carson v. Am. Brands, Inc., 450
U.S. 79, 88 n. 14, 101 S.Ct. 993, 67 L.Ed.2d
59 (1981).
FN44. While the standard of proof in a
criminal case is much higher than in a civil
one, it cannot go unremarked that the
government failed to win a single conviction
in its trial of some dozen TAP executives
and employees who were indicted for their
roles in the marketing of Lupron®.
FN45. This consideration appears to have
led the government to abandon an AWPbased criminal prosecution of TAP and to
substitute instead the allegations of "free
sample" fraud to which TAP pled guilty.
(e) ability of the defendants to withstand a greater
judgment
This defendant-oriented factor is largely neutral as
there seems little doubt that TAP and its venture
partners (Takeda and Abbott) are defendants with
classic deep pockets.
(f) the amount of the settlement fund in contrast to
the best possible recovery
In applying this test of reasonableness, "the present
value of the damages plaintiffs would likely recover
if successful, appropriately discounted for the risk of
not prevailing, should be compared with the amount
of the proposed settlement." In re General Motors
Corp., 55 F.3d at 806 (quoting Manual § 30.44).
Measured against the civil recovery from TAP
obtained by the government under the threat of
debarment, the proposed settlement is roughly
commensurate in size.
More importantly, the
sufficiency of the allotment to the consumer fund,
which was initially difficult to judge because of the
Page 22
lack of claims experience and uncertainty as to the
size of the ultimate claimant pool, now appears more
than adequate to fully compensate all consumer
claimants and to perhaps pay a dividend. While it is
possible to hypothesize about larger amounts that
might have been recovered, [FN46] as do
Intervenors, *98 Judge Becker counsels: "[t]he
evaluating court must ... guard against demanding too
large a settlement based on its view of the merits of
the litigation; after all, settlement is a compromise, a
yielding of the highest hopes in exchange for
certainty and resolution." In re General Motors
Corp., 55 F.3d at 806. Based on Dr. Hartman's and
Dr. Rosenthal's analysis of the likely damages, the
opinions of experienced MDL counsel, and my own
determination that the risks plaintiffs face in
establishing a viable litigation class outweigh any
potential benefit to be gained by further litigation, I
find that the proposed settlement lies within the range
of reasonableness.
FN46. Intervenors' counsel are consistently
inconsistent in their evaluation of what
might optimally be recovered, ranging from
$300 million with a 50 percent chance of an
adverse result to literally billions of dollars
with no risk whatsoever.
ATTORNEYS' FEES AND COSTS
Under the terms of the Settlement Agreement, and
subject to the court's approval, class counsel may
seek reasonable attorneys' fees not to exceed 30
percent of the $95,000,000 settlement fund (after
deducting any amount that might be rebated to TAP
because of TPP exclusions). [FN47] MDL class
counsel have petitioned the court for an award of
attorneys' fees in the amount of $23,750,000 and for
reimbursement of $1,822,754.71 in costs. [FN48]
The court finds the fee request to be within the range
of reasonableness, given the duration and intensity of
the litigation, and the results achieved. [FN49] It will,
however, defer making specific findings until all
outstanding motions are resolved and final judgment
is entered. The award of attorneys' fees will in any
event not exceed 25 percent of the settlement fund,
and should the court award less, it will order any
surplus to be paid into the appropriate pool. Class
counsel also request that the court approve modest
incentive awards totaling $100,000, including $5,000
to be paid to each named consumer plaintiff who was
deposed, $2,500 to be paid to each named consumer
plaintiff who was not deposed, and $25,000 to be
paid to each of the named TPP plaintiffs. Incentive
awards are recognized as serving an important
function in promoting class action settlements,
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particularly where as here, the named plaintiffs
participated actively in the litigation. Denney v.
Jenkens & Gilchrist, 2005 WL 388562, at *31
(S.D.N.Y. Feb.18, 2005).
Consequently, I will
approve the awards as requested.
FN47. Despite the terms of the Settlement
Agreement, class counsel have agreed that
the collective request for fees will not
exceed 25 percent of the settlement fund.
Page 23
and costs until all outstanding motions are resolved,
including any involving disputes over the allocation
of an attorneys' fee award; and
(8) ORDER MDL counsel to submit a joint proposed
form of final judgment within *99 thirty (30) days of
the court's resolution of all outstanding motions other
than those concerning the award of attorneys' fees
and costs.
SO ORDERED.
FN48. The lodestar as of the date the
petition was filed, April 6, 2005, amounted
to $14,503,055.50, meaning that class
counsel were seeking an award at a
multiplier of 1.64, a number that will shrink
as
additional
hours
are
expended
implementing the settlement. The court
takes no position for present purposes as to
the appropriateness of the requested
multiplier.
FN49. At the Fairness Hearing, MDL
counsel and TAP suggested that any excess
funds in the consumer pool be used to
increase the percentage of the recovery
allocated to consumer-purchasers, to provide
for additional notice and further distribution
to absent class members, or to fund a cy pres
award to benefit the consumer class as a
whole.
228 F.R.D. 75, RICO Bus.Disp.Guide 10,888
Motions, Pleadings and Filings (Back to top)
• 2001 WL 34132013 (Trial Pleading) Class Action
Complaint (May. 18, 2001)
• 1:01cv10861 (Docket) (May. 18, 2001)
END OF DOCUMENT
ORDER
For the foregoing reasons, the court will:
(1) OVERRULE the objections to the settlement
class and the proposed settlement;
(2) APPROVE the withdrawal of the Treskow and
Marcus objections pursuant to Rule 23(e)(4)(b);
(3) CERTIFY the proposed class, the court having
found that the class satisfies the prerequisites of
Rules 23(a) and (b);
(4) APPROVE the proposed settlement as fair,
reasonable, and adequate for purposes of Rule 23(e);
(5) APPOINT interim class counsel as permanent
class counsel pursuant to Rule 23(g)(1)(A);
(6) APPROVE the award of incentive fees to the
named class plaintiffs;
(7) DEFER acting on the petitions for attorneys' fees
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Motions, Pleadings and Filings
United States District Court,
S.D. New York.
Thomas DENNEY, R. Thomas Weeks, Norman R.
Kirisits, Kathryn M. Kirisits, TD
Cody Investments, L.L.C., RTW Investments, L.L. C.,
NRK Syracuse Investments,
L.L.C., DKW Partners, DKW Lockport Investors,
Inc., Donald A. Destefano,
Patricia J. Destefano, DD Tiffany Circle Investments
L.L.C., Tiffany Circle
Partners, Diamond Roofing Company, Inc., Jeff
Blumin, JB Hilltop Investments
L.L.C., Kyle Blumin, KB Hoag Lane Investments,
L.L.C., L. Michael Blumin, MB
St. Andrews Investments, L.L.C., Fayetteville
Partners, and Laurel Hollow
Investors, Inc., on their own behalf and on behalf of
all others similarly
situated, Plaintiffs,
v.
JENKENS & GILCHRIST, a Texas Professional
Corporation, Jenkens & Gilchrist, an
Illinois Professional Corporation, BDO Seidman,
L.L.P., Pasquale & Bowers,
L.L.P., Cantley & Sedacca, L.L.P., Dermody, Burke,
and Brown, Certified Public
Accountants, PLLC, Paul M. Daugerdas, Paul
Shanbrom, Edward Sedacca, Deutsche
Bank AG, and Deutsche Bank Securities, Inc., d/b/a
Deutsche Bank Alex Brown, a
Division of Deutsche Bank Securities, Inc.,
Defendants.
No. 03 Civ. 5460(SAS).
Feb. 18, 2005.
Background: Buyers of currency options pursuant
to allegedly fraudulent tax strategy sued law firm
advancing strategy, underwriters and others. Parties
sought class certification and approval of settlement
agreement creating fund of approximately $81
million.
Holdings: The District Court, Scheindlin, J., held
that:
(1) commonality, typicality and adequacy
requirements for class action certification were
satisfied;
Page 1
(2) requirement that common issues predominate
over individual issues was satisfied;
(3) settlement would be approved as fair and
reasonable;
(4) bar on contribution and indemnification claims
by non participating defendants, compensated for by
judgment credits, would be approved;
(5) counsel would be entitled to recovery out of
common fund, at less than requested amount;
(6) counsel for objectant to settlement would be
entitled to fees award; and
(7) lead plaintiffs would be paid additional $10,000,
to reflect extra work on case.
Class certified; settlement approved.
See, also, 2004 WL 2997930.
West Headnotes
[1] Federal Civil Procedure
163
170Ak163 Most Cited Cases
Numerosity requirement for class action certification,
under federal procedure rule, is generally satisfied
when putative class consists of more than 40
members. Fed.Rules Civ.Proc.Rule 23(a)(1), 28
U.S.C.A.
[2] Federal Civil Procedure
165
170Ak165 Most Cited Cases
Critical inquiry, in determining whether commonality
requirement for class action certification has been
satisfied, is whether common questions are at core of
cause of action alleged. Fed.Rules Civ.Proc.Rule
23(a)(2), 28 U.S.C.A.
[3] Federal Civil Procedure
164
170Ak164 Most Cited Cases
Typicality requirement for class action certification,
under federal procedure rule, is satisfied if claims of
named plaintiffs arise from same practice or course
of conduct that gives rise to claims of proposed class
members. Fed.Rules Civ.Proc.Rule 23(a)(3), 28
U.S.C.A.
[4] Federal Civil Procedure
164
170Ak164 Most Cited Cases
To satisfy adequacy of representation requirement,
for class action certification under federal procedure
rule, putative class representatives must have interest
in fairly and vigorously pursuing claims of class, and
have no interests that are antagonistic to those of
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other class members.
23(a)(4), 28 U.S.C.A.
Fed.Rules Civ.Proc.Rule
[5] Federal Civil Procedure
165
170Ak165 Most Cited Cases
Requirement for class action certification, under
federal procedure rule governing maintainability of
class action, that common issues predominate over
individual issues, is far more demanding than
commonality requirement which was prerequisite to
certification. Fed.Rules Civ.Proc.Rule 23(a)(2), (b),
28 U.S.C.A.
[6] Federal Civil Procedure
161.2
170Ak161.2 Most Cited Cases
Determination of whether requirement for
certification of class action, that it be superior method
of adjudicating dispute, is satisfied, requires
consideration of (1) interest of members of class in
individually controlling prosecution or defense of
separate actions, (2) extent and nature of any
litigation concerning controversy already commenced
by or against members of class, (3) desirability or
undesirability of concentrating litigation of claims in
particular forum, and (4) difficulties likely to be
encountered in management of class action.
Fed.Rules Civ.Proc.Rule 23(b)(3), 28 U.S.C.A.
[7] Compromise and Settlement
57
89k57 Most Cited Cases
In determining whether proposed class action
settlement should be approved as fair, court is to
consider (1) the complexity, expense and likely
duration of the litigation, (2) the reaction of the class
to the settlement, (3) the stage of the proceedings and
the amount of discovery completed, (4) the risks of
establishing liability, (5) the risks of establishing
damages, (6) the risks of maintaining the class action
through the trial, (7) the ability of the defendants to
withstand a greater judgment, (8) the range of
reasonableness of the settlement fund in light of the
best possible recovery, and (9) the range of
reasonableness of the settlement fund to a possible
recovery in light of all the attendant risks of
litigation.
Fed.Rules Civ.Proc.Rule 23(e), 28
U.S.C.A.
[8] Federal Ci vil Procedure
187
170Ak187 Most Cited Cases
Commonality requirement for class action
certification was satisfied in suit by putative class
consisting of buyers of currency options pursuant to
allegedly fraudulent tax strategies advocated by law
firm; same issues of existence of fraud,
Page 2
reasonableness of reliance, and excessiveness of fees
charged were present in all cases.
Fed.Rules
Civ.Proc.Rule 23(a)(2), 28 U.S.C.A.
[9] Federal Civil Procedure
187
170Ak187 Most Cited Cases
Typicality requirement for class action certification
was satisfied, in suit by buyers of currency options
pursuant to allegedly fraudulent tax strategy
presented by law firm, even though strategy was
presented to representative plaintiffs by different
marketers. Fed.Rules Civ.Proc.Rule 23(a)(3), 28
U.S.C.A.
[10] Federal Civil Procedure
187
170Ak187 Most Cited Cases
Adequacy of representation requirement, for class
action certification under federal procedure rule, was
satisfied in suit against law firm, by buyers of
currency options, pursuant to firm's allegedly
fraudulent tax strategy, even though there was
alleged conflict, as putative representatives had been
injured as result of penalties assessed by tax
authorities and some class members had not been so
assessed; all putative class members had paid firm for
supposedly bad legal advice.
Fed.Rules
Civ.Proc.Rule 23(a)(4), 28 U.S.C.A.
[11] Federal Civil Procedure
187
170Ak187 Most Cited Cases
Requirement for certification of class action, under
federal procedure rule, that common issues
predominate over individual issues, was satisfied in
suit by buyers of currency options pursuant to
allegedly fraudulent tax strategy advocated by law
firm; while different state laws would be initially
involved, choice of law rules would lead to
concentration on Illinois law, many questions
involved federal law, and firm's conduct would be
evaluated against standard of care applicable to
federal tax practitioner. Fed.Rules Civ.Proc.Rule
23(b)(3), 28 U.S.C.A.
[12] Federal Civil Procedure
187
170Ak187 Most Cited Cases
Requirement for certification of class action, under
federal procedure rule, that class suit be superior
method of adjudicating dispute, was satisfied in suit
by buyers of currency options pursuant to allegedly
fraudulent tax strategy advocated by law firm;
individual suits would quickly exhaust assets of firm,
and deplete insurance, resulting in recoveries only to
buyers who most quickly asserted rights. Fed.Rules
Civ.Proc.Rule 23(b)(3), 28 U.S.C.A.
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[13] Compromise and Settlement
61
89k61 Most Cited Cases
Court would approve, as fair and reasonable,
settlement of class action suit by buyers of currency
options pursuant to tax strategy allegedly
fraudulently advocated by law firm, when settlement
involved $70,057,805 from insurance, $5.25 million
from firm, and $6.25 million from individual
defendants, with possibility of $25 million more from
insurance, and there was protection of buyers relative
to other buyers opting out of settlement; settlement
was
intensively negotiated, class response was positive,
case was well-developed at time of settlement, risks
of establishing liability and damages were significant,
considering that other law firms concurred in advice
in question, decertification might occur, firm was
already losing attorneys and might lose more if
required to pay more on claims, and amount was
within reasonable range of recovery. Fed.Rules
Civ.Proc.Rule 23(e), 28 U.S.C.A.
[14] Compromise and Settlement
61
89k61 Most Cited Cases
Court would approve, as settlement of class action
suit by buyers of currency futures as tax strategy
against law firm that developed strategy, bar on
claims by non-settling defendants against settling
defendants, seeking contribution or indemnification
for claims by buyers, when nonsettling defendants
were granted credit against judgment obtained by
class member, to replace lost contribution or
indemnification rights.
Fed.Rules Civ.Proc.Rule
23(e), 28 U.S.C.A.
[15] Compromise and Settlement
89k68 Most Cited Cases
68
[15] Federal Civil Procedure
179
170Ak179 Most Cited Cases
Notice of approval of proposed settlement of class
action, by buyers of currency options pursuant to
allegedly fraudulent tax strategy advocated by law
firm, satisfied requirements of federal procedure rule;
notice was mailed to 1,286 purchasers of securities in
question, containing all information required by rule,
class members were given 136 days to opt out, terms
of settlement were clearly given and summarized in
major financial newspaper, and amendment was
widely and timely circulated and described.
Fed.Rules Civ.Proc.Rule 23(c)(2)(B), 28 U.S.C.A.
[16] Federal Civil Procedure
180
Page 3
170Ak180 Most Cited Cases
Court would not grant second period, during which
buyers of currency options pursuant to allegedly
fraudulent tax strategy advocated by law firm could
opt out of proposed settlement, when after expiration
of first period terms of proposed settlement were
changed so that insurer could allocate some of its
settlement commitment to processing of opt-out
claims, increasing amount of money earmarked for
those claims and increasing attractiveness of opt-out
alternative. Fed.Rules Civ.Proc.Rule 23(c)(2)(B), 28
U.S.C.A.
[17] Federal Civil Procedure
180
170Ak180 Most Cited Cases
Buyers of securities pursuant to allegedly fraudulent
tax strategy developed by law firm could not opt out
of class of claimants, after expiration of opt-out
period, on grounds that they did not comprehend
significance of provision granting protection to nonclass members. Fed.Rules Civ.Proc.Rules 23(d),
60(b)(1, 2), 28 U.S.C.A.
[18] Federal Civil Procedure
187
170Ak187 Most Cited Cases
Court could preliminarily certify class, for purpose of
considering settlement of putative class action suit by
buyers of currency options pursuant to allegedly
fraudulent tax advice from law firm, even though
federal procedure rule was amended to preclude
general practice of preliminary certification.
Fed.Rules Civ.Proc.Rule 23(c)(1)(C), (e).
[19] Attorney and Client
155
45k155 Most Cited Cases
Under the "common fund" doctrine, where an
attorney succeeds in creating a common fund for the
benefit of a class of plaintiffs, that attorney is entitled
to a reasonable fee to be set by the court and taken
from the fund.
[20] Attorney and Client
155
45k155 Most Cited Cases
Factors to be considered, in determining amount of
attorney fees to be awarded out of common fund
created through efforts of attorney, are (1) time and
labor expended by counsel, (2) magnitude and
complexities of litigation, (3) risk of litigation, (4)
quality of representation, (5) requested fee in relation
to settlement and (6) public policy considerations.
[21] Attorney and Client
155
45k155 Most Cited Cases
Amount of proposed settlement agreement, resolving
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suit by participants in tax strategy against attorneys
advocating strategy, was excessive in providing for
reimbursement of participants' attorney fees of
$16,936,084.84, representing 20.8% of fund created
as settlement of suit; cross checking by dividing
proposed figure by lodestar amount arrived at by
multiplying hours spent by applicable rates, produced
multiplier of 2.04 and hourly fee of $1,071, which
would be reduced to 1.5 multiplier and fee of
$12,610,44.84, in middle or range for $80 million
recoveries.
[22] Attorney and Client
155
45k155 Most Cited Cases
Counsel for currency option buyers who objected to
proposed settlement of class action arising out of
allegedly fraudulent tax strategy was entitled to
award out of fund created through litigation, even
though buyers would not be participating.
[23] Federal Civil Procedure
2736
170Ak2736 Most Cited Cases
Lead plaintiffs, in class action suit by buyers of
currency options pursuant to allegedly fraudulent tax
strategy, would be entitled to $10,000 from common
fund created through settlement, as compensation for
extra work done in furtherance of suit.
*320 David R. Deary, W. Ralph Canada, Shore &
Deary, L.L.P., Dallas, Texas, Jeffrey Daichman,
Nahum Kainovsky, Kane Kessler, P.C., New York
City, Joe R. Whatley, Jr., Othni Lathram, Whatley
Drake, L.L.C., Birmingham, Alabama, Ernest Cory,
Cory Watson Crowder & Degaris, P.C., Birmingham,
Alabama, Stephen F. Malouf, Dallas, Texas, for
Plaintiffs.
Larry Black, Austin, Texas, for Defendants Paul
Daugerdas, Erwin Mayer, and Donna Guerin.
Rod Phelan, Baker Botts, L.L.P., Dallas, Texas, for
Defendant Jenkens & Gilchrist, P.C.
H. Lamar Mixson, Alison Berkowitz Prout,
Bondurant, Mixson & Elmore, L.L.P., Atlanta,
Georgia, Steven Spielvogel, Gallion & Spielvogel,
Garden City, New York, for Plaintiffs Eric Harslem,
Lorraine Clasquin, Douglas MacGregor, Jeffrey
Clarke and Loretta Clarke.
Philip E. Bryant, Boyer & Ketchand, Houston,
Texas, for Plaintiffs Denis Hoasjoe and Robert
Moore.
Robert J. Clary, Owens, Clary & Aiken, L.L.P.,
Dallas, Texas, for Plaintiffs James Mattei and J. Scott
Page 4
Mattei.
Lawrence M. Hill, Seth C. Farber, Dewey
Ballantine, L.L.P., New York City, for Defendants
Deutsche Bank AG and Deutsche Bank Securities.
Michael R. Young, Michelle Nadel, Brian A.
Turetsky, Willkie Farr & Gallagher, New York City,
for Defendants BDO Seidman and Paul Shanbrom.
Shirah Neiman, Justin S. Weddle, Assistant United
States Attorneys, Southern District of New York,
New York City, for the Government.
*321 OPINION & ORDER
SCHEINDLIN, District Judge.
I. INTRODUCTION
Plaintiffs allege in this putative class action that
defendants violated the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and are liable
for damages and other relief arising from unjust
enrichment, breach of contract, breach of the duty of
good faith and fair dealing, breach of fiduciary
duties,
fraud,
negligent
misrepresentation,
professional malpractice, unethical, excessive and
illegal fees, and conspiracy. [FN1] On May 14,
2004, the Court preliminarily certified a settlement
class and approved a proposed settlement with
defendants Jenkens & Gilchrist, P.C., Paul
Daugerdas, Erwin Mayer and Donna Guerin
(collectively, "Jenkens"). [FN2] Lead Plaintiffs now
seek final approval of the settlement and certification
of the class, and entry of a proposed final judgment.
Lead Counsel seek an award of attorney's fees and
expenses for their efforts. [FN3] On January 24,
2005 the Court held a hearing on the fairness of the
settlement. Having considered all objections, a class
is hereby certified and the settlement is approved in a
separate Order issued today. This opinion explains
the decision to certify the class and approve the
settlement.
FN1. See Second Amended Complaint.
Lead Plaintiffs in this action, acting on
behalf of themselves and all others similarly
situated, include: Thomas Denney, R.
Thomas Weeks, Norman Kirisits, Kathryn
M. Kirisits, NRK Syracuse Investments,
L.L.C., RTW High Investments, L.L.C., TD
Cody Investments, L.L.C., DKW Lockport
Investments, Inc., DKW Partners, Donald A.
DeStefano, Patricia J. DeStefano, DD
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Tiffany Circle Investments, L.L.C., Tiffany
Circle
Partners,
Diamond
Roofing
Company, Inc., Jeff Blumin, Kyle Blumin,
L. Michael Blumin, JB Hilltop Investments,
L.L.C., KB Hoag Lane Investments, L.L.C.,
MB St. Andrews Investments, L.L.C., and
Laurel Hollow Investors, Inc. (collectively,
the "Denney Plaintiffs"). In addition, in
connection with this settlement, both the
plaintiffs in the case of Camferdam v.
Jenkens & Gilchrist, No. 02 Civ. 10100
(S.D.N.Y.) (Henry N. Camferdam, Jeffrey
M. Adams, Jay Michener, and Carol Trigilio
(collectively, the "Camferdam Plaintiffs"))
and Jack Riggs, plaintiff in Jack Riggs v.
Jenkens & Gilchrist, No. 03-6291-C
(Co.Ct.Dallas, Tex.) have appeared in this
action as additional class representatives.
Denney and Camferdam are class actions;
Riggs is not.
FN2. The Class is defined as follows: all
Persons who, from January 1, 1999, through
December 31, 2003, inclusive, either (1)
consulted with, relied upon, or received oral
or written opinions or advice from Jenkens
& Gilchrist or any Jenkens & Gilchrist
attorney concerning any one or more of the
Tax Strategies and who in whole or in part
implemented, directly or indirectly, any one
or more of the Tax Strategies or (2) filed
with a Person described in (1) a joint tax
return for the year(s) in which such Tax
Strategy was implemented, and (3) the legal
representatives, heirs, successors, and
assigns of all Persons described in (1) and
(2). The Class includes, without limitation,
the individuals, partnerships, limited liability
companies, trusts, corporations and other
legal entities that Jenkens & Gilchrist or any
Jenkens & Gilchrist attorney advised
concerning, that were formed in connection
with, or that engaged or were utilized in any
one or more of the Tax Strategies. The
Class excludes, however, any Persons
described in (1), (2) and (3) who timely
elected to be excluded from the Class and
did not later timely revoke that election.
The "Tax Strategies" are defined as: those
tax-reducing strategies that are the basis of
the Denney, Camferdam and Riggs suits, as
well as all other tax-reducing strategies
advised upon or opined about by any of the J
& G Defendants involving (a) basis enhancing investment transactions, (b)
Page 5
basis -enhancing derivatives structure, (c)
basis leveraged investment swap spreads, (d)
hedge option monetization of economic
remainders, (e) basis adjustment remainder
trust, (f) gain option partnerships, or (g)
other basis -enhancing, basis -preserving,
and/or gain-avoidance transactions utilizing
options and/or indebtedness and involving
corporations and/or partnerships.
The "J & G Defendants" are defined as:
Jenkens & Gilchrist and all Persons
(including Daugerdas, Mayer and Guerin)
who, during all or any part of the period
January 1, 1998, to date, held the status of
director, officer, stockholder, partner,
principal, member, owner and/or employee
in any of the entities comprising Jenkens &
Gilchrist (whether or not any such Person
has been sued).
FN3. The Denney and Camferdam Plaintiffs
are represented by the firms of Deary
Montgomery DeFeo & Canada, LLP
("DMDC"), Whatley Drake LLC ("Whatley
Drake"), Cory Watson Crowder & DeGaris,
P.C. ("Cory Watson"), and Kane Kessler,
P.C. ("Kane Kessler").
Jack Riggs is
represented by the firm of Stephen F.
Malouf, P.C. ("Malouf").
II. BACKGROUND
A. The Alleged Conspiracy
This case arises out of tax and consulting services
offered by several professional law and accounting
firms. In their Second Amended Complaint, the
Denney Plaintiffs *322 allege that, in the mid -1990's,
Jenkens, in concert with Deutsche Bank [FN4] and
others, developed a tax shelter strategy based on the
purchase of foreign currency options. The strategy,
sometimes with minor variations, was marketed
under various names, including "Currency Options
Bring Reward Alternatives," or COBRA.
The
gravamen of plaintiffs' allegations is that Jenkens,
and the other defendants, knew that the tax strategies
lacked economic substance and would be held invalid
by the IRS, but falsely held them out to plaintiffs as
legitimate.
FN4. "Deutsche Bank" refers to Deutsche
Bank AG and Deutsche Bank Securities.
The Denney Plaintiffs allege that Jenkens and
Deutsche Bank recruited a number of accounting
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firms (the "Marketing Participants") to market the tax
strategies to their clients. The Marketing Participants
included, inter alia, BDO [FN5] and Ernst & Young.
Once the Marketing Participants identified a suitable
client, they would arrange a meeting to present the
tax strategy to the client.
FN5. "BDO" refers to BDO Seidman, LLP
and Paul Shanbrom.
At these presentations, plaintiffs allege, the
Marketing Participants would represent that the tax
strategy was "legitimate and in accordance with all
applicable tax laws, rules, and regulations [and] was
not a 'sham transaction' that would be ignored or
disallowed for tax purposes." [FN6] The Marketing
Participants further represented that the tax strategy
was devised by them, not by Jenkens. "The crux of
the sales pitch was always that a major law firm,
Jenkens & Gilchrist, would prepare an 'independent'
opinion letter confirming the propriety of the [tax
strategy], which would supposedly provide insurance
in the event of an audit." [FN7] Plaintiffs allege that
Jenkens was not, in fact, able to provide a truly
"independent" opinion letter, but could provide only
"a pre-fabricated and canned legal opinion
confirming the propriety of their own tax strategy."
[FN8]
Plaintiffs allege that Jenkens charged
excessive and unreasonable fees for its advice and
opinion letters.
FN6. Denney Second Amended Complaint ¶
99.
FN7. Id. ¶ 85.
FN8. Id. ¶ 86.
Essentially these same representations were
allegedly made to all members of the class. After
plaintiffs entered and completed the tax shelter
transactions, Jenkens provided them with an opinion
letter attesting to the legitimacy of the tax strategies.
[FN9] These opinion letters were substantially
identical.
Page 6
Jenkens with respect to the tax strategies,
and who began, but did not complete the
transactions, and did not receive opinion
letters. Jenkens' Memorandum of Law in
Support of Class Certification and Approval
of the Settlement ("Jenkens Mem.") at 6 n.
4.
B. The Denney Plaintiffs
The Denney Plaintiffs were introduced to COBRA
by their accountants, the small firm of Pasquale &
Bowers, who had been recruited by BDO to market
COBRA to their clients.
Pasquale & Bowers
contacted the Denney Plaintiffs regarding COBRA in
September 1999. The Denney Plaintiffs subsequently
met with the Pasquale Defendants and BDO to
discuss the strategy.
At the presentation in
September 1999, BDO and Pasquale made the
representations described above.
The Denney
Plaintiffs decided to engage in the transaction in
October 1999, and retained Jenkens to advise them.
With the assistance of Jenkens, the Denney Plaintiffs
created various partnerships and limited liability
companies for the purpose of carrying out the
COBRA transactions. The Denney Plaintiffs entered
into the COBRA transactions in November 1999.
Jenkens sent each of the Denney Plaintiffs virtually
identical opinion letters in March 2000. [FN10] The
opinion letters advised that the COBRA strategy was
legitimate. The Denney Plaintiffs allege that these
letters are representative of similar letters provided to
all Class Members. [FN11]
In reliance on
defendants' *323 representations, the Denney
Plaintiffs reported the COBRA transactions on their
tax returns for 1999.
FN10. See Denney Second Amended
Complaint ¶ 157. One of the Denney
Plaintiffs did not receive his opinion letter
until September 2000.
FN11. See id. ¶ 157.
C. The Camferdam and Riggs Plaintiffs
FN9. The class includes not only those who
directly received opinion letters from
Jenkens, but also those who filed joint
returns with such a person, and the
partnerships and other entities that were
formed in connection with, or that engaged
or were utilized in any one or more of the
tax strategies. The definition also includes
several dozen taxpayers who consulted
The plaintiffs in Camferdam and Riggs have
appeared in this action as additional class
representatives.
The Camferdam Plaintiffs sold their business in
1999, realizing a combined capital gain in excess of
$70 million. [FN12] Ernst & Young, who had for
several years provided accounting services to the
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business and to two of the individual Camferdam
Plaintiffs, advised the Camferdam Plaintiffs during
the transaction. [FN13] Shortly after the transaction,
Ernst & Young approached the Camferdam Plaintiffs
to market the COBRA strategy to them.
On
November 5, 1999, the Camferdam Plaintiffs
attended a presentation by Ernst & Young, at which
Ernst & Young allegedly made the above
representations with regard to COBRA. [FN14]
FN12. See Camferdam First Amended
Complaint ¶ 46.
FN13. See id. ¶ 47.
FN14. See id. ¶ ¶ 51-63.
The Camferdam Plaintiffs engaged in the COBRA
transactions on November 16, 1999. [FN15] They
subsequently retained Jenkens & Gilchrist to provide
opinion letters.
Jenkens sent each plaintiff a
substantially identical opinion letter in March 2000.
The Camferdam Plaintiffs also received a second,
substantially identical opinion letter from the law
firm of Brown & Wood. In reliance on these
representations, the Camferdam Plaintiffs included
the COBRA transactions on their tax returns.
FN15. See id. ¶ ¶ 64-74.
Jack Riggs' investments were managed by Deutsche
Bank. [FN16] Riggs alleges that "Deutsche Bank
solicited Jack Riggs to hire the Jenkens Defendants"
to procure advice relating to the tax strategies.
[FN17] Riggs carried out the tax strategy. Riggs
retained Ernst & Young, who he alleges were secretly
working together with Deutsche Bank and Jenkens to
develop and promote the tax strategies, to prepare his
1999 tax returns, reflecting the tax strategy. [FN18]
FN16. See Riggs Fourth Amended Petition ¶
30.
FN17. See id. ¶ 24.
FN18. See id. ¶ ¶ 25, 26, 30.
D. The Settlement Negotiations
Class Counsel and Jenkens began settlement
discussions in November 2003. Jenkens' insurance
carriers claimed that their policies did not cover the
damages alleged by plaintiffs. Jenkens asserted that
it was severely stressed by the pressure of the tax
shelter litigation; the firm was having difficulty
Page 7
retaining lawyers and staff, and was in danger of
filing for bankruptcy protection.
Following an
investigation of the insurance carriers' claims, "and
the perilous circumstances of [Jenkens], Class
Counsel believed it was in the best interest of all
Class Members to immediately attempt to negotiate a
global settlement." [FN19]
FN19. Declaration of Lead Counsel in
Support of Certification and Approval of the
Settlement ("Lead Counsel Decl.") ¶ 48.
The parties, including the Camferdam and Riggs
Plaintiffs, along with Jenkens' insurance carriers,
participated in three mediation sessions, on
December 17- 18, 2003, January 16-17, 2004, and
February 19, 2004. Retired Federal Judge Robert
Parker presided over these mediations, which he has
described as "difficult" and "intense." [FN20] These
negotiations resulted in a Mediated Settlement
Agreement, dated March 4, 2004, and a Stipulation of
Settlement, dated April 28, 2004, signed by all
parties, including Jenkens' insurance carriers. The
settlement agreement provided for a settlement fund
of $75 million, consisting of $63.5 million from the
insurance carriers, $5.25 million from Jenkens, and a
total of $6.25 million from the individual defendants.
[FN21] The agreement also provided for extensive
informal discovery from Jenkens.
FN20. Declaration of Retired Judge Robert
M. Parker, Mediator ("Parker Decl.") ¶ 6.
FN21. The settlement contains no explicit
plan of allocation.
The Stipulation of
Settlement provides that the court-appointed
Special Masters will recommend a plan of
allocation for the Court's approval, taking
into account various factors relating to the
extent of each class member's injuries.
*324 The Court preliminarily approved this
settlement on May 14, 2004, and notice was sent to
the class. Class members were given until September
27, 2004 to opt out of the class. One hundred and
twenty-two plaintiffs timely elected to opt out.
[FN22] This put the settlement at risk. The
settlement contemplated the release of Jenkens'
insurers in return for their contribution to the
settlement fund;
it thus left Jenkens without
insurance to defend the claims of opt outs. Jenkens
had earlier stated that it was unable and unwilling to
settle in the face of significant numbers of opt outs.
Because of the opt out problem, the parties held a
fourth round of mediation on December 1-2, 2004,
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presided over by retired Judge Parker and by Michael
Young of Judicial Arbitration and Mediation
Services, who had been appointed Special Master by
the Court.
FN22. Thirty-three of these plaintiffs
subsequently returned to the Class.
E. The Amended Settlement
This fourth round of mediation resulted in an
Amended Mediated Settlement Agreement, dated
December 2004. The amended settlement provides
for an increased settlement fund of $81,557,805,
consisting of $70,057,805 from the insurance
carriers, $5.25 million from Jenkens, and a total of
$6.25 million from the individual defendants. The
insurers have further agreed to make $24,942,195-the remainder of the "unreinstated" insurance
coverage under Jenkens' policy--available to Jenkens
to defend or resolve the claims of opt-outs. In
addition, a further $25 million in "reinstated"
coverage may be available. [FN23]
FN23. Jenkens' primary carrier asserts that
the claims in this case do not trigger
reinstatement of the additional coverage.
Pursuant to the amended settlement, Jenkens
has agreed to release the excess carriers
from any reinstatement claim, in return for
the excess carriers' waiver of coverage
defenses and policy defenses on the $75
million of unreinstated insurance coverage.
F. The Bar Order and Judgment Credit
As part of the settlement, the parties' proposed
judgment contains a Bar Order and Judgment Credit
provision. Because this provision is the focus of
most of the objections, [FN24] it warrants further
description.
FN24. See infra Part II.G.
The Bar Order provides that all non-settling
defendants and all third parties are barred and
enjoined from commencing or prosecuting any action
against Jenkens on a "Claim Over." [FN25] A Claim
Over is defined as any claim that
FN25. Proposed Judgment (submitted in
final form on January 27, 2005) ¶ 12.
(i) directly or indirectly arises out of or is based
upon, related to or connected with any of the Tax
Page 8
Strategies, and (ii) is for recovery of amounts that
the Non-Settling Defendant or Third Party paid or
owes to the Class (if the case in which an issue
arises is a class action) or a Class Member (if the
case in which an issue arises is brought by a Class
Member). "Claims Over" includes, but is not
limited to, all claims by a Non-Settling Defendant
or Third Party for contribution and indemnity for
amounts owed or paid to a Class Member. It does
not, however, include claims based on a written
indemnity agreement.... [FN26]
FN26. Id. ¶ 1(b).
Essentially, the Bar Order prohibits any non-settling
defendant or third party from seeking contribution or
indemnification from Jenkens. The Bar Order is
mutual: it also prohibits Jenkens from seeking
contribution or indemnification from non-settling
defendants or third parties. [FN27] Non-settling
defendants and third parties are not precluded from
seeking contribution from Jenkens for damages they
might eventually be required to pay to plaintiffs who
have opted out of the class. [FN28] The Bar Order
applies only to claims for contribution (however
denominated); it does not bar any independent
claims non-settling defendants and third parties may
have against Jenkens.
FN27. See id. ¶ 12.
FN28. See id.
To compensate non-settling defendants and third
parties for the loss of their contribution claims, the
proposed judgment also contains a Judgment Credit
provision. Pursuant to this provision, the Court is
asked to *325 order that any judgment or award
obtained by a class member against a non-settling
defendant or third party will be reduced "by the
amount or percentage, if any, necessary under
applicable law to relieve the Released Persons [the
Jenkens defendants] of all liability to such NonSettling Defendant or Third Party on such barred
Claims."
[FN29]
This reduction is to be
"accomplished by judgment reduction, partial or
complete release, settlement credit, setoff, election to
recover exclusively under an award for which there is
no Claim Over, or such other method as may be
permitted by applicable law." [FN30] The proposed
judgment further states that "Such judgment credit,
settlement credit, release or setoff shall be in an
amount or percentage sufficient under applicable law
as determined by the court in which the issue arises
to compensate the Non-Settling Defendant or Third
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Page 9
Party for the loss of its Claim Over." [FN31]
FN29. Id. ¶ 13(a).
FN30. Id. ¶ 13(b).
FN31. Id. ¶ 13(c).
The Judgment Credit provision does not specify a
single method of calculating the credit. Instead, it
leaves the calculation of the credit to the "applicable
law" of the jurisdiction in which a class member may
win a judgment or award against a non-settling
defendant or third party. The credit will be whatever
is necessary under the applicable law to compensate
the non-settling defendant or third party for the loss
of its claim for contribution. [FN32]
FN32. In the majority of states, the
applicable law precludes claims for
contribution against settling defendants, and
provides a compensating judgment credit.
See, e.g., Tex. Civ. Prac. & Rem.Code §
33.015; N.Y. Gen. Oblig. Law § 15.108(b)
(McKinney 2003). In those jurisdictions,
the Bar Order and Judgment Credit
provisions will have no effect, and the
judgment credit will be determined by the
applicable law-- generally, either a pro tanto
reduction, equal to the amount paid by
Jenkens attributable to common damages, a
pro rata reduction, apportioning an equal
share of liability to each tortfeasor, or a
proportionate fault reduction, based on a
determination of Jenkens' and the third
party's relative share of fault. See In re
Masters Mates & Pilots Pension Plan, 957
F.2d 1020, 1027-1030 (2d Cir.1992)
(discussing methods of calculating judgment
credit).
In jurisdictions in which
contribution
claims
against
settling
tortfeasors are not permitted, non-settling
defendants and third parties will not be
entitled to any judgment credit.
In
jurisdictions in which contribution claims
against settling tortfeasors are permitted,
non-settling defendants and third parties will
be entitled to a judgment credit equal to the
value of the contribution claims they would
have been able to assert against Jenkens, but
for the Bar Order.
disseminated a supplemental notice of the amended
settlement to the class, and the Court extended the
deadline for objections to January 10, 2005, to
accommodate objections to the amended settlement.
The Court received objections from three groups of
plaintiffs: the "Harslem" plaintiffs, the "Mattei"
plaintiffs, and the "Moore" plaintiffs. [FN33] The
Court also received objections from two non-settling
defendants, BDO and Deutsche Bank, and from the
Government. A fairness hearing was held on January
24, 2005. In response to objections, the settlement's
proponents agreed to certain changes to the language
of the proposed judgment offered for the Court's
approval; I therefore ordered one final notice to the
class, including the language of the proposed
judgment, and a final one-week extension of the time
for objections.
The Court received continued
objections from the Harslem Plaintiffs, the Mattei
Plaintiffs, BDO, Deutsche Bank and the Government;
there were no new objectors.
FN33. The Harslem Plaintiffs are Eric
Harslem, Lorraine Clasquin, Douglas
MacGregor, and Jeffrey and Loretta Clarke.
The Mattei Plaintiffs are James E. Mattei
and J. Scott Mattei. The Moore Plaintiffs
are Denis Hoasjoe and Robert Moore.
III. LEGAL STANDARD
A. Class Certification
Federal Rule of Civil Procedure 23 governs class
certification. To be certified, a putative class must
meet all four requirements of Rule 23(a) as well as
the requirements of one of the three subsections of
Rule 23(b). In this case, as in most cases seeking
money damages, plaintiffs bear the burden of
demonstrating that the class meets the requirements
of Rule 23(a)-- referred to as numerosity,
commonality, typicality, *326 and adequacy [FN34]-and that the action is "maintainable" under Rule
23(b)(3). [FN35] Under Rule 23(b)(3)--the only
applicable subsection of Rule 23(b)--"common"
issues of law or fact must "predominate over any
questions affecting only individual members," and a
class action must be demonstrably "superior" to other
methods of adjudication. [FN36]
FN34. See Caridad v. Metro-North
Commuter R.R., 191 F.3d 283, 291 (2d
Cir.1999).
G. Objections and the Fairness Hearing
On
December
29,
2004,
the
settling
parties
FN35. See Amchem Prods., Inc. v. Windsor,
521 U.S. 591, 614, 117 S.Ct. 2231, 138
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L.Ed.2d 689 (1997).
Page 10
conformance with Rule
indispensable." [FN43]
23(a)
remains
...
FN36. Fed.R.Civ.P. 23(b)(3).
The Supreme Court has held that when a class is
certified for settlement purposes only, the
"specifications of [Rule 23]--those designed to
protect absentees by blocking unwarranted or
overbroad class definitions--demand undiluted, even
heightened, attention."
[FN37]
The Court
recognized one exception to this requirement: when
confronted with a settlement class, "a district court
need not inquire whether the case, if tried, would
present intractable management problems." [FN38]
FN37. Amchem Prods., 521 U.S. at 620, 117
S.Ct. 2231.
FN38. Id.
The Second Circuit requires a "liberal" construction
of Rule 23. [FN39] Thus, "to deny a class action
simply because all of the allegations of the class do
not fit together like pieces in a jigsaw puzzle [ ]
would destroy much of the utility of Rule 23."
[FN40] Notwithstanding the general liberality in this
circuit towards class certification motions, the
Supreme Court unequivocally requires district courts
to undertake a "rigorous analysis" that the
requirements of Rule 23 have been satisfied. [FN41]
FN39. See Korn v. Franchard Corp., 456
F.2d 1206 (2d Cir.1972); In re Lloyd's Am.
Trust Fund Litig., No. 96 Civ. 1262, 1998
WL 50211, at *5 (S.D.N.Y. Feb. 6, 1998)
("The Second Circuit has directed district
courts to apply Rule 23 according to a
liberal
rather
than
a
restrictive
interpretation.").
FN40. Green v. Wolf Corp., 406 F.2d 291,
300 (2d Cir.1968).
FN42. See In re Initial Public Offering, No.
21 MC 92, 2004 WL 2297401, at *19
(S.D.N.Y. Oct. 13, 2004).
FN43. Falcon, 457 U.S. at 161, 102 S.Ct.
2364.
"In order to pass muster, plaintiffs--who have the
burden of proof at class certification--must make
'some showing' " that the proposed class comports
with Rule 23. [FN44] That showing may take the
form of, for example, expert opinions, evidence (by
document, affidavit, live testimony, or otherwise), or
the uncontested allegations of the complaint.
However, "a district court is forbidden to weigh the
evidence on class certification [and] plaintiffs need
not establish the elements of Rule 23 by a
preponderance of the evidence." [FN45]
FN44. In re Initial Public Offering, 2004
WL 2297401, at *19 (quoting Caridad, 191
F.3d at 292) (original emphasis).
FN45. Id. (citing Caridad, 191 F.3d at 293).
1. The Requirements of Rule 23(a)
a. Numerosity
[1] Rule 23 requires that the class be "so numerous
that joinder of all members is impracticable." [FN46]
"Impracticability does not mean impossibility of
joinder, but refers to the difficulty or inconvenience
of joinder." [FN47] Although precise calculation of
the number of *327 class members is not required,
and it is permissible for the court to rely on
reasonable inferences drawn from available facts,
numbers in excess of forty generally satisfy the
numerosity requirement. [FN48]
FN46. Fed.R.Civ.P. 23(a)(1).
FN41. General Tel. Co. of the Southwest v.
Falcon, 457 U.S. 147, 161, 102 S.Ct. 2364,
72 L.Ed.2d 740 (1982).
In ruling on class certification, a district court may
not simply accept the allegations of plaintiffs'
complaint as true. [FN42] Rather, it must determine,
after a "rigorous analysis ," whether the proposed
class comports with all of the elements of Rule 23.
"[S]ometimes it may be necessary for the court to
probe behind the pleadings before coming to rest on
the certification question.... [A]ctual, not presumed,
FN47. In re Independent Energy Holdings
PLC Sec. Litig., 210 F.R.D. at 479 (citing In
re Avon Sec. Litig., No. 91 Civ. 2287, 1998
WL 834366, at *5 (S.D.N.Y. Nov. 30,
1998)).
FN48. See Trief v. Dun & Bradstreet Corp.,
144 F.R.D. 193, 198 (S.D.N.Y.1992).
b. Commonality
[2] Commonality requires a showing that common
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issues of fact or law affect all class members. [FN49]
A single common question may be sufficient to
satisfy the commonality requirement. [FN50] "The
critical inquiry is whether the common questions are
at the core of the cause of action alleged." [FN51]
FN49. See Fed.R.Civ.P. 23(a)(2); see also
Trief, 144 F.R.D. at 198.
FN50. See German v. Federal Home Loan
Mortgage Corp., 885 F.Supp. 537, 553
(S.D.N.Y.1995).
FN51. Labbate-D'Alauro v. GC Servs. Ltd.
P'shp., 168 F.R.D. 451, 456 (E.D.N.Y.1996)
(quotation omitted). Accord In re "Agent
Orange" Prod. Liab. Litig., 818 F.2d 145,
166-67 (2d Cir.1987).
c. Typicality
[3] The typicality requirement "is not demanding."
[FN52] A named plaintiff's claims are "typical"
pursuant to Rule 23(a)(3) where each class member's
claims arise from the same course of events and each
class member makes similar legal arguments to prove
the defendants' liability. [FN53] "The rule is satisfied
... if the claims of the named plaintiffs arise from the
same practice or course of conduct that gives rise to
the claims of the proposed class members." [FN54]
Accordingly, the commonality and typicality
requirements " 'tend to merge' because '[b]oth serve
as guideposts for determining whether ... the named
plaintiff's claim and the class claims are so interrelated that the interests of the class members will be
fairly and adequately protected in their absence.' "
[FN55]
FN52. Forbush v. J.C. Penney Co., 994 F.2d
1101, 1106 (5th Cir.1993) (citing Shipes v.
Trinity Indus., 987 F.2d 311, 316 (5th
Cir.1993)).
FN53. See Robinson v. Metro-North
Commuter R.R. Co., 267 F.3d 147, 155 (2d
Cir.2001).
FN54. Marisol A. v. Giuliani, 929 F.Supp.
662, 691 (S.D.N.Y.1996), aff'd, 126 F.3d
372 (2d Cir.1997).
FN55. Caridad, 191 F.3d at 291 (alterations
in original) (quoting Falcon, 457 U.S. at 157
n. 13, 102 S.Ct. 2364).
d. Adequacy
Page 11
[4] Plaintiffs must also show that "the representative
parties will fairly and adequately protect the interests
of the class." [FN56] To do so, plaintiffs must
demonstrate that the proposed class representatives
have no "interests [that] are antagonistic to the
interest of other members of the class." [FN57]
Class representatives must have "an interest in fairly
and vigorously pursuing" the claims of the class, so
that there is an "assurance of vigorous prosecution."
[FN58] In addition, "Rule 23(a)(4) requires that
plaintiffs demonstrate that class counsel is qualified,
experienced, and generally able to conduct the
litigation." [FN59]
FN56. Fed.R.Civ.P. 23(a)(4).
See also
Banyai v. Mazur, 205 F.R.D. 160, 164
(S.D.N.Y.2002).
FN57. Baffa v. Donaldson, Lufkin &
Jenrette Sec. Corp., 222 F.3d 52, 60 (2d
Cir.2000). An antagonistic interest arises
when there is a "fundamental conflict or
inconsistency between the claims of the
proposed class members" that is "so
palpable as to outweigh the substantial
interest of every class member in proceeding
with the litigation." In re NASDAQ MarketMakers Antitrust Litig., 169 F.R.D. 493,
514-15 (S.D.N.Y.1996).
FN58. Robinson, 267 F.3d at 170.
FN59. Marisol A., 126 F.3d at 378.
Class representatives cannot satisfy Rule 23(a)(4)'s
adequacy requirement if they "have so little
knowledge of and involvement in the class action that
they would be unable or unwilling to protect the
interests of the class against the possibly competing
interest of the attorneys." [FN60] However, it is
well established that "in complex litigations ... a
plaintiff need not have expert knowledge of all
aspects of the case to qualify as a class
representative, and a great deal of reliance upon the
expertise of counsel is to be expected." [FN61]
FN60. Baffa, 222 F.3d at 61 (quotations and
citation omitted).
FN61. In re AM Int'l Inc., Sec. Litig., 108
F.R.D. 190, 196-97 (S.D.N.Y.1985).
*328 2. Rule 23(b)
If plaintiffs can demonstrate that the proposed class
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satisfies the elements of Rule 23(a), they must then
establish that the action is "maintainable" as defined
by Rule 23(b). Rule 23(b) provides that "an action
may be maintained as a class action if the
prerequisites of subdivision (a) are satisfied, and in
addition" one of three alternative definitions of
maintainability is met. The proponents of this
settlement argue that the action is maintainable under
subsection (b)(3), which requires "that questions of
law or fact common to the members of the class
predominate over any questions affecting only
individual members, and that a class action is
superior to other available methods for the fair and
efficient adjudication of the controversy." [FN62]
Rule 23(b)(3) thus has two elements: "predominance"
and "superiority."
FN62. Fed.R.Civ.P. 23(b)(3).
[5] "Class-wide issues predominate if resolution of
some of the legal or factual questions that qualify
each class member's case as a genuine controversy
can be achieved through generalized proof, and if
these particular issues are more substantial than the
issues subject only to individualized proof." [FN63]
"The 23(b)(3) predominance requirement is 'more
stringent' and 'far more demanding than' the
commonality requirement of Rule 23(a)." [FN64]
Courts have frequently found that the requirement
was not met where, notwithstanding the presence of
common legal and factual issues that satisfy the
commonality requirement, individualized inquiries
predominate. [FN65] Nonetheless, the Supreme
Court has noted that "[p]redominance is a test readily
met in certain cases alleging consumer or securities
fraud...." [FN66]
FN63. Moore v. PaineWebber, Inc., 306
F.3d 1247, 1252 (2d Cir.2002).
FN64. Maneely v. City of Newburgh, 208
F.R.D. 69, 76 (S.D.N.Y.2002) (quoting
Amchem Prods., 521 U.S. at 623-24, 117
S.Ct. 2231).
FN65. See, e.g., In re Methyl Tertiary Butyl
Ether ("MTBE") Prods. Liab. Litig., 209
F.R.D. 323, 353 (S.D.N.Y.2002) (finding
individual issues predominate although
defendants
conceded
commonality);
Augustin v. Jablonsky, No. 99-CV-3126,
2001 WL 770839, at *13 (E.D.N.Y. Mar. 8,
2001) (finding individualized issues of
proximate causation predominate despite
plaintiffs' showing of commonality under
Page 12
Rule 23(a)(2)); Martin v. Shell Oil Co., 198
F.R.D. 580, 592-93 (D.Conn.2000) (finding
individualized proof of breach, causation,
and
trespass
predominates
where
commonality was not contested).
FN66. Amchem Prods., 521 U.S. at 625, 117
S.Ct. 2231.
[6] The superiority prong of Rule 23(b)(3) requires a
court to consider whether a class action is superior to
other methods of adjudication. [FN67] In making the
requisite inquiries into predominance and superiority,
courts should consider, inter alia,
FN67. See Fed.R.Civ.P. 23(b)(3). See also
Eisen v. Carlisle & Jacquelin, 417 U.S. 156,
164, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974).
(A) the interest of members of the class in
individually controlling the prosecution or defense
of separate actions; (B) the extent and nature of
any litigation concerning the controversy already
commenced by or against members of the class;
(C) the desirability or undesirability of
concentrating the litigation of the claims in the
particular forum; (D) the difficulties likely to be
encountered in the management of a class action.
[FN68]
FN68. Fed.R.Civ.P. 23(b)(3).
Where a class is being certified solely for settlement
purposes, a court need not consider the last of these
factors, the manageability issues that would arise if
the case were to be litigated as a class action, "for the
proposal is that there be no trial." [FN69]
FN69. Amchem Prods., 521 U.S. at 620, 117
S.Ct. 2231.
B. The Fairness of the Proposed Settlement
There is a "strong judicial policy in favor of
settlements, particularly in the class action context."
[FN70] "The compromise of complex litigation is
encouraged by the courts and favored by public
policy." [FN71] However, the *329 Court "must
eschew any rubber stamp approval in favor of an
independent evaluation" of the settlement. [FN72] In
carrying out this evaluation, "[t]he Court has a
fiduciary duty to the non-representative class
members who were not party to the settlement
agreement 'because inherent in any class action is the
potential for conflicting interests among the class
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representatives, class counsel, and absent class
members.' " [FN73]
FN70. In re PaineWebber Ltd. P'ships Litig.,
147 F.3d 132, 138 (2d Cir.1998).
FN71. 4 Alba Conte & Herbert B. Newberg,
Newberg on Class Actions § 11:41, at 87
(4th ed.2002).
FN72. City of Detroit v. Grinnell Corp., 495
F.2d 448, 462 (2d Cir.1974), abrogated on
other grounds by Goldberger v. Integrated
Resources, Inc., 209 F.3d 43 (2d Cir.2000).
The Court should, however, "stop short of
the detailed and thorough investigation that
it would undertake if it were actually trying
the case." Id.
FN73. In re Global Crossing Sec. & ERISA
Litig.,
225
F.R.D.
436,
454-55
(S.D.N.Y.2004) (quoting Martens v. Smith
Barney, Inc., 181 F.R.D. 243, 262
(S.D.N.Y.1998)).
"A court may approve a class action settlement if it
is 'fair, adequate, and reasonable, and not a product of
collusion.' A court determines a settlement's fairness
by looking at both the settlement's terms and the
negotiating process leading to settlement." [FN74]
"A presumption of fairness, adequacy, and
reasonableness may attach to a class settlement
reached in arm's-length negotiations between
experienced, capable counsel after meaningful
discovery." [FN75]
FN74. Wal-Mart Stores, Inc. v. Visa U.S.A.,
Inc., 396 F.3d 96, 116-17 (2d Cir.2005)
(quoting Joel A. v. Giuliani, 218 F.3d 132
(2d Cir.2000)).
FN75. Id. (citing Manual for Complex
Litigation, Third, § 30.42 (1995)). Accord
Thompson v. Metro. Life Ins. Co., 216
F.R.D. 55, 61 (S.D.N.Y.2003) ("A strong
presumption of fairness attaches to proposed
settlements that have been negotiated at
arm's length.").
[7] In addition to looking at the negotiating process,
courts consider the following factors in the approval
of class action settlements:
(1) the complexity, expense and likely duration of
the litigation; (2) the reaction of the class to the
settlement; (3) the stage of the proceedings and the
Page 13
amount of discovery completed; (4) the risks of
establishing liability; (5) the risks of establishing
damages; (6) the risks of maintaining the class
action through the trial; (7) the ability of the
defendants to withstand a greater judgment; (8) the
range of reasonableness of the settlement fund in
light of the best possible recovery; (9) the range of
reasonableness of the settlement fund to a possible
recovery in light of all the attendant risks of
litigation. [FN76]
FN76. Grinnell Corp., 495 F.2d at 463.
When a settlement is negotiated before class
certification, the danger of collusion between
defendants and class counsel is heightened.
Moreover, a settlement agreement "generates [ ]
momentum" and may look, to class members and
even to the court, "like a fait accompli." [FN77]
Therefore, "a proposed settlement negotiated before
class certification is subjected to a higher degree of
scrutiny than a later settlement." [FN78]
FN77. Mars Steel Corp. v. Continental
Illinois Nat'l Bank & Trust Co., 834 F.2d
677 (7th Cir.1987).
FN78. 5-23 Moore's Federal Practice--Civil
§ 23.161 (3d ed.2004). Accord County of
Suffolk v. Long Island Lighting Co., 907
F.2d 1295, 1323 (2d Cir.1990).
C. Permitting a Second Opt-Out Opportunity
Under Rule 23(e)(3)
Federal Rule of Civil Procedure 23(e)(3) provides
that "[i]n an action previously certified as a class
action under Rule 23(b)(3), the court may refuse to
approve a settlement unless it affords a new
opportunity to request exclusion to individual class
members who had an earlier opportunity to request
exclusion but did not do so." [FN79] The Advisory
Committee Note states that:
FN79. Fed.R.Civ.P. 23(e)(3).
[t]he decision whether to approve a settlement that
does not allow a new opportunity to elect exclusion
is confided to the court's discretion. The court may
make this decision before directing notice to the
class under Rule 23(e)(1)(B) or after the Rule
23(e)(1)(C) hearing. Many factors may influence
the court's decision. Among these are changes in
the information available to class members since
expiration of the first opportunity to request
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exclusion, and the nature of the individual class
members' claims. [FN80]
FN80. Fed.R.Civ.P.
Committee Note.
23(e)(3)
Page 14
paid to Jenkens for their opinion letters and advice
are recoverable. The requirement of commonality is
thus easily met here.
Advisory
*330 IV. DISCUSSION
A. Class Certification
The threshold issue, before undertaking any
consideration of the fairness of the settlement, is
whether the class may be certified under Rule 23.
For the following reasons, I find that certification is
appropriate.
1. Rule 23(a)
a. Numerosity
Over the period in question--January 1, 1999 through
December 31, 2003-- Jenkens issued advice
concerning the tax strategies to over 1,100 clients.
This number is more than sufficient to render joinder
of all class members impracticable. No objector
contests numerosity.
b. Commonality
[8] The common questions in this case are
overwhelming. All members of the class received
legal advice from Jenkens concerning the tax
strategies. If this case were to proceed to trial, all
class members' claims would involve the same
common questions of liability, including: (1) was the
tax advice correct? (2) If not, was it negligent, or
knowingly false? (3) Did the advice fail to disclose
material facts about the transactions, or the
controlling law? (4) Did Jenkens falsely represent
that its advice and opinion letters were
"independent"? (5) Was reliance on the Jenkens
advice and opinion letters reasonable, given that each
letter asserted only that the strategies were "more
likely than not" to pass muster? (6) Were the fees
charged unreasonable and excessive?
These
questions of law and fact are at the core of this
action, and are more than sufficient to establish
commonality.
In addition, each class member's claims involve
common questions of fact as to the alleged
conspiracy between Jenkens and the other
defendants, and as to the extent to which Jenkens was
responsible for the representations made by their
alleged co-conspirators. [FN81] Finally, even at the
damages stage, there are many common issues of
law, including whether the allegedly excessive fees
FN81. See Buford v. H & R Block, 168
F.R.D. 340, 349 (D.Ga.1996) ( "In RICO
cases, commonality is frequently satisfied.
An alleged scheme to defraud which affects
a class of people is a common question of
law and/or fact, regardless of the
characteristics of the scheme's intended
victims.").
c. Typicality
[9] The Denney, Camferdam, and Riggs Plaintiffs,
like all class members, received legal advice from
Jenkens regarding the tax strategies, and executed
those tax strategies.
All proposed class
representatives allege that they were injured by the
same acts of Jenkens and by the same alleged
conspiracy as the rest of the class. [FN82] The fact
that some class members were approached by
different Marketing Participants does not defeat
typicality. "When it is alleged that the same unlawful
conduct was directed at or affected both the named
plaintiff and the class sought to be represented, the
typicality requirement is usually met irrespective of
minor variations in the fact patterns underlying
individual claims." [FN83]
FN82. See 5-23 Moore's Federal Practice-Civil § 23.24 ("In actions under [RICO], the
typicality requirement is satisfied if the
claims of the class representative and the
class arise from the same scheme by the
defendant to defraud class members.").
FN83. Robidoux v. Celani, 987 F.2d 931,
936-37 (2d Cir.1993).
d. Adequacy
No objector challenges the adequacy of the class
representatives' counsel. There can be no question
that class counsel are highly experienced, qualified
and able, and have been zealous in their prosecution
of this case.
The Harslems challenge the adequacy of the
proposed class representatives, arguing that the
proposed class is divided by a conflict of interest.
The Denney Plaintiffs, the Harslems argue, were
introduced to COBRA by the accounting firm of
Pasquale & Bowers, while the Harslems were
introduced to the scheme by Ernst & Young.
Pasquale & Bowers is a small, local firm, while Ernst
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& Young is one of the world's largest accounting and
financial services firms. Therefore (the Harslems'
argument runs) because *331 Jenkens "represent[s]
the only 'fat wallet' to the Denney [Plaintiffs]," the
Denney Plaintiffs are only concerned with
maximizing their recovery from Jenkens. [FN84]
The Harslems, by contrast, are mainly concerned
with their recovery from Ernst & Young, "a wrongdoer with far deeper pockets" than either Jenkens or
Pasquale & Bowers. [FN85] The Harslems object to
the judgment credit provision in the proposed
settlement, which is a necessary concession to secure
a settlement with Jenkens, but might limit their
recovery from Ernst & Young. Even without the
proposed judgment credit provision, however,
settlement with Jenkens would still affect the rights
of class members against joint tortfeasors, because
many states have statutory judgment credit rules.
[FN86] The Harslems argue that they and the class
representatives therefore have fundamentally
opposed interests with respect to a settlement with
Jenkens: the Harslems argue that they, and similarly
situated class members, would prefer not to put their
recovery from deep pocketed third parties at risk by
settling with Jenkens, while the Denney Plaintiffs
have nothing to lose by such a settlement.
FN84. Harslem Plaintiffs' Memorandum of
Law in Support of Motion to Opt Out or in
the Alternative to Object to the Settlement
("Harslem Mem.") at 4.
FN85. Id. at 4.
FN86. See, e.g., N.Y. Gen. Oblig. Law §
15-108(b).
The Harslems' argument would be compelling, were
it supported by the facts; but it is not. First, all class
representatives (and almost all class members,
including the Harslems) have claims against
Deutsche Bank, another deep pocket who acted (in
most cases) as the counter-party to the tax shelter
transactions and is alleged to have been a part of the
conspiracy. Second, the Denney Plaintiffs were
introduced to COBRA not only by Pasquale &
Bowers, but also by the undeniably deep-pocketed
BDO. [FN87] The Camferdam Plaintiffs, joined in
this action as class representatives, were introduced
to the scheme by Ernst & Young, and are in
essentially the same position as the Harslems.
[FN88] Jack Riggs was introduced to the scheme by
Deutsche Bank, and used Ernst & Young to prepare
his tax returns. [FN89] Thus, all of the class
representatives have claims against deep-pocketed
Page 15
third parties, similar to those of the Harslem
Plaintiffs, which will be affected equally by the
settlement with Jenkens. The interests of the class
and its representatives are therefore aligned: in
agreeing to the judgment credit provision, each class
member and their representatives are making an
equal concession, in return for an equal share of the
benefits of the settlement.
FN87. The Harslems assert that "at least
two" of the Denney Plaintiffs have stated
that they have no complaint against BDO.
Harslem Mem. at 3 n. 8 (citing November 1,
2003 Affidavit of Thomas Denney in
Opposition to BDO's Motion to Compel
Arbitration and October 30, 2003 Affidavit
of Kyle Blumin in Opposition to BDO's
Motion to Compel Arbitration).
The
Harslems appear to have misconstrued
Denney and Blumin's affidavits. In those
affidavits, Denney and Blumin stated only
that their complaints against BDO were not
based on BDO's performance of the services
described in their consulting agreements
(and were therefore not subject to the
arbitration clauses in those agreements);
they certainly did not abandon their claims
against BDO.
FN88. See Camferdam First Amended
Complaint, ¶ ¶ 10-12. The Harslems argue
that their claims against Ernst & Young are
stronger than those of the Camferdams.
This is not persuasive. The fact that their
complaint uses slightly stronger language
than the Camferdams' complaint to describe
essentially
the
same
conduct
and
representations (i.e., alleging that Ernst &
Young promised that the chance of being
audited was "next to nothing") does not
demonstrate that their claim against Ernst &
Young will fare significantly better in
litigation than the Camferdams' claim.
FN89. Riggs Fourth Amended Petition ¶ ¶
24-26.
[10] The Matteis raise a different potential conflict.
They assert that there is an irreconcilable conflict
between class representatives and some class
members because the former have been injured as a
result of penalties assessed by the tax authorities,
while the latter have not yet suffered any injury
although penalties may be assessed against them in
the future. The Matteis argue that this "is reminiscent
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of the conflict that plagued the proposed settlement
class in Amchem." [FN90] For the following
reasons, this argument is unavailing.
FN90. Mattei Plaintiffs' Supplemental
Memorandum of Law Opposing Class
Certification and Settlement at 7.
*332 In Amchem, the Supreme Court addressed a
challenge to approval of a settlement class in a large
consolidated asbestos litigation. The "sprawling" and
"amorphous" class [FN91] included both injured
plaintiffs and plaintiffs who had been exposed to
asbestos but who had not yet manifested any injury.
The Court held that the class representatives could
not adequately represent both groups of plaintiffs.
FN91. Amchem Prods., 521 U.S. at 627-28,
117 S.Ct. 2231.
In significant respects, the interests of those within
the single class are not aligned. Most saliently, for
the currently injured, the critical goal is generous
immediate payments. That goal tugs against the
interest of exposure-only plaintiffs in ensuring an
ample, inflation-protected fund for the future.
[FN92]
FN92. Id. at 626, 117 S.Ct. 2231.
There were several problems with the proposed
settlement class in Amchem. First, the exposure-only
plaintiffs might never suffer an injury or might
manifest an injury decades after the settlement.
Second, if they did eventually suffer an injury, the
magnitude of that injury was impossible to assess at
the time of the settlement. As noted by the Third
Circuit, those who were not yet injured faced "vastly
different outcomes." [FN93] Finally, because of the
size of the class and the uncertainty as to whether
some potential claimants would ever be damaged, it
was difficult or impossible to ascertain class
members and provide adequate notice to all putative
class members, many of whom may not have been
aware that they were exposed to asbestos.
FN93. Georgine v. Amchem Prods., 83 F.3d
610, 633 (3d Cir.1996). (finding that
plaintiffs might suffer from asbestosis, lung
cancer, mesothelioma or a number of other
conditions).
None of these problems plague the class now before
this Court. First, members of this class have been
identified as all those who received tax advice from
Page 16
the Jenkens defendants, and implemented the tax
strategies in whole or in part, during a fixed time
frame, between January 1, 1999 and December 31,
2003. Each of those 1,076 class members has
received notice of the settlement. [FN94] Thus all
class members are known to the settling parties and
have been identified. Second, all class members have
suffered a cognizable injury because they paid
(allegedly) excessive fees for (allegedly) negligent or
fraudulent tax advice. [FN95] While it is true that
some class members do not yet know the full extent
of their injury, because they may yet be assessed
penalties by the IRS, the cut-off for such assessments
is rapidly approaching. The IRS must assess a tax
deficiency within three years after the return is filed.
[FN96] Thus, all injuries can be determined within a
finite period of time. Because all groups of plaintiffs,
both the audited and the unaudited, have already
manifested some injury, and because even the
unaudited will be audited soon, if they are audited at
all, they share a common interest in obtaining some
recovery at this time. [FN97]
FN94. The figure of 1,076 does not include
persons who are class members because they
filed joint returns with those to whom
Jenkens rendered opinions, or the 121 class
members who received advice from Jenkens
and implemented the strategies in part, but
received no opinion letters. See Jenkens
Mem. at 6 n. 4.
FN95. Among the proposed factors to be
considered in allocating the settlement is
"the amount of fees paid to Jenkens &
Gilchrist by the Class Member." Stipulation
of Settlement at 40.
FN96. See 26 U.S.C. § 6501(a). Jenkens
estimates that approximately 60% of class
members engaged in the tax strategies in
1998 or 1999, and are therefore protected by
the statute of limitations if they have not
already been audited.
FN97. Moreover, it is possible to predict the
extent of an unaudited class member's
potential exposure for back taxes and
penalties. In allocating the fund, the Special
Masters and the Court will of course take
care to ensure that sufficient funds are
reserved for those who have not yet been
audited.
It is always possible to identify potential class
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conflicts. For example, some plaintiffs have a greater
or lesser tolerance for facing the risks of trial versus
settlement. The Second Circuit has noted that "not
every
potential
disagreement
between
a
representative and class members will stand in the
way of a class suit." [FN98] Rather, "the conflict
*333 that will prevent a plaintiff from meeting the
Rule 23(a)(4) prerequisite must be fundamental."
[FN99] There are no such fundamental conflicts
here. [FN100]
FN98. Wal-Mart Stores, Inc. v. Visa USA
Inc., 280 F.3d 124, 145 (2d Cir.2001)
(quoting 1 Herbert B. Newberg & Alba
Conte, Newberg on Class Actions § 3.26, at
3-143 (3d ed.1992)).
FN99. Id. Accord Valley Drug Co. v.
Geneva Pharms., Inc., 350 F.3d 1181, 1189
(11th Cir.2003) ("the existence of minor
conflicts alone will not defeat a party's claim
to class certification: the conflict must be a
fundamental one going to the specific issues
in controversy.").
FN100. I note that all potential class
members received notice of this settlement
months ago. Yet this potential problem was
raised by a single objector less than a week
ago. While this in itself does not defeat the
objection, it strongly suggests that the
argument lacks merit.
2. Rule 23(b)(3)
a. Predominance
[11] The Harslems argue that common issues do not
predominate over individual ones.
First, the
Harslems observe that different class members were
introduced to the scheme by different Marketing
Participants, and argue that the resulting factual
differences among class members' claims defeat
predominance. Second, they argue that the claims
asserted "are ill-suited for class treatment because the
strength of the claims depends on very individual
factual inquiries," in particular with reference to
reliance. [FN101] Third, they point to differences in
levels of sophistication among class members.
Finally, they argue that the fact that many different
states' laws could apply to these claims prevents a
finding of predominance. None of these arguments is
persuasive.
FN101. Harslem Mem. at 17.
Page 17
Despite the factual differences pointed to by the
Harslems, "the issues in the class action that are
subject to generalized proof, and thus applicable to
the class as a whole ... predominate over those issues
that are subject only to individualized proof."
[FN102] The core issues in class members' claims
against Jenkens relate to Jenkens' representations to
the class members, in particular the opinion letters.
Jenkens' opinion letters were substantially identical.
The legal advice given by Jenkens regarding the tax
strategies was always the same. Thus, generalized
proof--the opinion letters, and other evidence of
Jenkens' legal advice--could be used to establish
liability. Although different plaintiffs dealt with
different accounting firms, it is Jenkens' conduct
toward plaintiffs that would be relevant to the
determination of liability, and that conduct was
essentially the same with respect to all class
members. Jenkens' liability toward all class members
turns on the same questions of law and fact identified
above--most significantly, whether the advice was
negligently given, or knowingly false.
FN102. In re Visa Check/MasterMoney
Antitrust Litig., 280 F.3d 124, 136 (2d
Cir.2001) (quotation marks and citation
omitted).
The fact that class members relied not only on
Jenkens' representations to them, but also on the
representations of several different accounting firms,
does not defeat predominance.
In Moore v.
PaineWebber, Inc., the Second Circuit held that class
certification for fraud-based claims could be proper
where the misrepresentations made to each member
of the class were materially uniform, and reliance
could thus be "established by generalized proof."
[FN103] The Moore court further held that even oral
misrepresentations, made by different sales agents,
could be considered materially uniform, even in the
absence of proof that the misrepresentations followed
a specific script. [FN104]
FN103. 306 F.3d 1247, 1253 (2d Cir.2002).
However, mere "proof of a central,
coordinated scheme" among defendants is
not sufficient to establish predominance, if
the representations are not materially
uniform. Id.
FN104. Id. at 1255 ("While training and the
existence of scripts are relevant factors, the
inquiry should remain focused on whether
material variations in the misrepresentations
existed.... Thus, the fact that sales agents
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submitted affidavits that they did not
participate in training programs or follow
scripts, even if uncontroverted, is
insufficient to demonstrate by itself that the
misrepresentations themselves were not
materially uniform.").
Here, as noted, Jenkens' most important
representations--in the form of their opinion letters-were both written and materially uniform. It is these
representations that are at the core of the case, and
would predominate in plaintiffs' attempts to prove
liability.
Insofar as the case turns on oral
representations, *334 it appears that those
representations were also materially uniform.
Although the form of the representations may have
varied, the basic pitch was always the same: that the
tax shelters were legitimate and supported by
independent legal advice, and that plaintiffs would
not face penalties. The only difference the Harslems
point to is that they were (allegedly) informed that
"their chances of being audited were next to nothing"
while other plaintiffs were informed that they might
be audited, but that the shelter was legitimate and that
the opinion letter would protect them from penalties.
[FN105]
Despite these (alleged) differences in
emphasis, the basic message is the same in both
cases. [FN106] Thus, "[a]ll plaintiffs [would] rely on
the same or substantially similar documents,
statements, and legal theories to prove the defendants'
liability." [FN107]
FN105. Harslem Mem. at 20. By contrast,
the Moore court pointed to far more
substantial
differences
among
the
representations made to plaintiffs: e.g.,
"[o]ne customer complaint states that the
broker misrepresented the Provider as a
retirement program with insurance benefits;
another states that the broker represented
that the Provider was an IRA; a third
specifically states that the broker never
mentioned that the Provider was a life
insurance product." Moore, 306 F.3d at
1256.
FN106. See Klay v. Humana, 382 F.3d 1241
(11th Cir.2004), cert. denied, --- U.S. ----,
125 S.Ct. 877, 160 L.Ed.2d 825 (2005). In
Klay, the Eleventh Circuit affirmed the
certification of a class of physicians suing
certain HMOs for fraud-based RICO claims.
The court rejected the defendants' argument
that
individual
issues
of
reliance
predominated. The court found that while
Page 18
the defendants engaged in a variety of
specific communications with physicians,
they all conveyed essentially the same
message--that the defendants would honestly
pay physicians the amounts to which they
were entitled. Thus, "common evidence
(that is, [ ] legitimate inferences based on
the nature of the alleged misrepresentations
at issue)" would predominate in proving
reliance, and certification was proper. Id. at
1259.
FN107. In re Interpublic Secs. Litig., No. 02
Civ. 6527, 2003 WL 22509414, at *4
(S.D.N.Y. Nov. 6, 2003).
With respect to plaintiffs' RICO and conspiracy
claims, the predominant issue is the existence of a
conspiracy between Jenkens and the other
defendants. Moreover, many of plaintiffs' allegations
of fraud turn on the alleged conspiracy, insofar as
plaintiffs allege that Jenkens purported to be
providing "independent" analysis of COBRA when it
was in fact deeply involved in COBRA's marketing
and design. The existence and nature of this alleged
conspiracy is therefore an issue that is common to
each plaintiff, and predominates over the differences
among different groups of plaintiffs who were
introduced to the alleged conspiracy by different
accounting firms. [FN108]
FN108. See Klay, 382 F.3d at 1255-57
(approving certification of fraud-based
RICO class, and holding that "the existence
of a conspiracy, and whether the defendants
aided and abetted each other, were also
issues common to each of the plaintiffs that
tended to predominate ... the numerous
factual issues relating to the conspiracy are
common to all plaintiffs ... and would
necessarily have to be reproven by every
plaintiff if each [plaintiff's] claim were tried
separately.").
See also Carnegie v.
Household Int'l, Inc., 376 F.3d 656 (7th
Cir.2004) (holding that, because "the
question whether RICO was violated was
separate from the question whether the
targets of the violation had been injured,"
the prospect of separate proceedings "to
determine the entitlements of the individual
class members to relief ... need not defeat
class treatment of the question whether the
defendants violated RICO. Once that
question is answered, if it is answered in
favor of the class, a global settlement ... will
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Page 19
be a natural and appropriate sequel.").
investment advice" are not sufficient to
defeat certification); In re Data Access Sys.
Sec. Litig., 103 F.R.D. 130, 139
(D.N.J.1984) ("There will always be some
individuals who read the financial
statements directly, others who read
secondary analyses ... and many others who
relied on advice of stockbrokers or friends.
If defendants' argument were to prevail that
factual differences of this nature were
sufficient to defeat class action certification,
there could never be a class action of
securities purchasers.").
Common issues also predominate with respect to
plaintiffs' claims that Jenkens' fees were excessive
and unreasonable. The burden of this claim is that
Jenkens charged high fees for advice and opinion
letters which were "canned' and 'prefabricated' [and]
used with hundreds, if not thousands, of other clients
and ... the Jenkens Defendants charged these clients
the same or similar fees for the same services and
expended little, if any additional time or effort in
providing the opinion letters and advice." [FN109]
In proving this claim, each plaintiff would
necessarily rely primarily on the same proof of
Jenkens' course of conduct; each plaintiff would
have to prove that Jenkens provided essentially
identical advice and opinion letters to other plaintiffs,
and the marginal cost of providing the advice was
therefore very low.
FN109.
Denney
Complaint ¶ 376.
Second
Amended
The Harsle ms also argue that predominance fails
because class members had varying *335 levels of
sophistication regarding tax law. In any fraud-based
class action, there will be differing levels of
sophistication among plaintiffs; nevertheless, the
Supreme
Court
has
clearly
stated
that
"[p]redominance is a test readily met in certain cases
alleging consumer or securities fraud." [FN110]
This argument arises frequently in the context of
securities fraud;
in that context, courts have
consistently held that differences in levels of
sophistication are not sufficient to defeat
predominance. [FN111] It is important to note that,
regardless of differing levels of sophistication, each
plaintiff in this case could prove reliance by the same
common evidence. Although some plaintiffs may
have known more about tax matters than others, all
plaintiffs relied on the advice of their accountants and
lawyers on tax matters of great complexity; even a
sophisticated plaintiff could be found to have
reasonably relied on such advice.
Finally, the Harslems argue that "when the law of a
claim varies by state, and when putative class
members are dispersed across 41 states ...
predominance must fail as a matter of law." [FN112]
This argument is unavailing. Because this is a
settlement-only class, the Court need not be
concerned with the feasibility of managing the trial of
a class action involving many different states' laws.
[FN113] While "there may be situations where
variations in state laws are so significant so as to
defeat commonality and predominance even in a
settlement class certification," [FN114] that is not
the case here.
FN112. Harslem Mem. at 22.
FN113. See In re Warfarin Sodium Antitrust
Litig., 391 F.3d 516, 529 (3d Cir.2004)
("when dealing with variations in state laws,
the same concerns with regards to case
manageability that arise with litigation
classes are not present with settlement
classes, and thus those variations are
irrelevant to certification of a settlement
class."). See also Manual for Complex
Litigation, Fourth ("Manual") § 22.921 n.
1477 ("variations in state law that might
make a class-wide trial unmanageable might
not defeat certification for settlement
purposes.").
FN110. Amchem Prods., 521 U.S. at 625,
117 S.Ct. 2231.
FN114. In re Warfarin Sodium Antitrust
Litig., 391 F.3d at 529.
FN111. See, e.g., Kennedy v. Tallant, 710
F.2d 711, 717 (11th Cir.1983) ("The degree
of investment experience or sophistication
of each of the class members is irrelevant.");
In re Initial Public Offering, 2004 WL
2297401, at *32 (differences among class
members in "access to sophisticated
First, I note that many of the key issues here are
matters of federal law; for example, plaintiffs' RICO
claims. Second, many of plaintiffs' most significant
state law causes of action may be governed by a
single state's law, that of Illinois. In determining
which state's law to apply, a federal court looks to the
choice of law rules of the state in which it sits.
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[FN115] Under New York's choice of law rules, a
court gives controlling effect to the law of the
jurisdiction with the most significant interest in the
specific issues involved in the dispute. [FN116] A
state has a paramount interest in regulating the
conduct of attorneys licensed to practice within its
borders. [FN117] Plaintiffs' claims for malpractice
(and
related
claims,
such
as
negligent
misrepresentation, and disgorgement of excessive
fees) would therefore likely be governed by the law
of Illinois.
FN115. See Klaxon Co. v. Stentor Elec. Mfg.
Co., 313 U.S. 487, 496-497, 61 S.Ct. 1020,
85 L.Ed. 1477 (1941).
FN116. See id., 495 F.2d at 452-53.
FN117. See The Diversified Group, Inc. v.
Daugerdas, 139 F.Supp.2d 445, 453
(S.D.N.Y.2001).
Even insofar as plaintiffs' claims would require the
application of varying state laws, the variations are
not so great as to defeat predominance. "When a
class action raises common issues of conduct that
would establis h liability under a number of states'
laws, it is possible for those common issues to
predominate and for class certification to be an
appropriate mechanism for handling the dispute."
[FN118] Plaintiffs' state law claims turn *336 largely
on issues of federal tax law: e.g., was Jenkens'
advice reasonable in light of published IRS Notices
and federal tax law? The basic principles that will
determine liability on class members' common law
claims will not vary substantially from state to state.
[FN119] For example, plaintiffs' breach of contract
claims turn on general principles of contract
interpretation, which tend to be uniform among the
states. [FN120] Even if plaintiffs' malpractice claims
are not governed by Illinois law, the elements of
plaintiffs' malpractice claims are substantially
uniform. An attorney is held to the standard of care
of a practitioner in his or her field: [FN121] because
Jenkens was engaged in the same practice with
respect to each class member, it is likely that,
regardless of the applicable state law, Jenkens would
be held to a uniform standard of care--that of a
practitioner in federal tax law. Thus, although there
may be some variations in applicable law,
particularly with respect to damages, [FN122] the
variations are not so great as to defeat predominance.
FN118. In re Buspirone, 185 F.Supp.2d 363,
377 (S.D.N.Y.2002). Accord Klay, 382 F.3d
Page 20
at 1262 ("if a claim is based on a principle
of law that is uniform among the states,
class certification is a realistic possibility");
Steinberg v. Nationwide Mut. Ins. Co., 224
F.R.D. 67, 77 (E.D.N.Y.2004) ("A claim or
defense can implicate common issues and be
litigated collectively, despite the existence
of state law variations, so long as the
elements of the claim or defense are
substantially similar....").
FN119. Plaintiffs bear the burden of
showing, through an "analysis of state law
variations," that such variations do not
"swamp common issues." In re Currency
Conversion Fee Antitrust Litig., 230 F.R.D.
303, 311, No. 03 Civ. 2843, 2004 WL
2750091, at *8 (S.D.N.Y.2004) (quotations
omitted). Plaintiffs have met this burden,
demonstrating in detail that their state law
claims are based on substantially uniform
principles.
See Class Representatives'
Supplemental Brief in Support of Class
Settlement and Final Certification at 1-13,
Apps. 4-6.
FN120. See Klay, 382 F.3d at 1263 ("A
breach is a breach is a breach, whether you
are on the sunny shores of California or
enjoying a sweet autumn breeze in New
Jersey.").
FN121. See, e.g., Cunningham v. Langston,
Frazer, Sweet & Freese, P.A., 727 So.2d
800, 803 (Ala.1999); Rhodes v. Batilla, 848
S.W.2d 833, 843 (Tex.App.--Houston [14th
Dist.] 1993); Bent v. Green, 39 Conn.Supp.
416, 466 A.2d 322, 325 (1983); Rodriguez
v. Horton, 95 N.M. 356, 622 P.2d 261, 264
(1980).
FN122. For example, the availability of back
taxes and interest as damages may vary from
state to state. See Seippel v. Jenkens &
Gilchrist, P.C., 341 F.Supp.2d 363, 383-85
(S.D.N.Y.2004) (noting split of authority
and citing cases).
b. Superiority
[12] Although class members' individual claims are
substantial, and individual resolution of these claims
would not be impossible, it is clear that class-wide
resolution would be the superior method. The
pressure of a thousand individual lawsuits would, in
all probability, cause Jenkens to collapse and file for
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bankruptcy. [FN123] The total value of plaintiffs'
claims greatly exceeds Jenkens' available assets, the
value of which would be substantially reduced in
bankruptcy. [FN124] Jenkens' insurance, the only
significant asset which plaintiffs could pursue, is a
"wasting policy," which is eroded by the cost of
defense. Moreover, if Jenkens were to file for
bankruptcy, the firm's carriers would be "relieved of
concerns of a 'bad faith' claim for failing to settle
within policy limits leading to the destruction of a
going concern enterprise" and would be free to assert
coverage defenses. [FN125] The likely outcome of a
thousand individual suits, then, would be that at most
only the first few plaintiffs at the front of the race to
the courthouse would recover anything.
FN123. See Declaration of Arthur Steinberg,
Jenkens' Bankruptcy Expert ("Steinberg
Decl."), ¶ 7(b) ("It is evident that, at this
stage, the failure of the firm to now settle the
class action will lead to a major exit of firm
partners with the high probability of the firm
being thrust into a 'wind down' mode, and
ultimately bankruptcy.").
FN124. See id. ¶ 19 (explaining that the
value of Jenkens' assets would be
dramatically reduced in bankruptcy, as the
defunct firm's former shareholders would
lose interest in collecting unpaid fees from
clients).
FN125. See id. ¶ ¶ 8-17.
B. Approval of the Settlement
1. The Procedural Fairness of the Settlement
This settlement is the product of extensive,
protracted, arm's length negotiations by experienced
and capable counsel. [FN126] There is *337 no
indication of collusion between Lead Counsel and
Jenkens; indeed, on more than one occasion, it
appeared that negotiations would break down. The
concerns and objections of opt outs were a significant
factor in negotiations, and resulted in important
improvements in the settlement as late as December,
2004. The parties reached their final settlement only
after the plaintiffs had conducted months of merits
and confirmatory discovery. The presence of a courtappointed special master during the December 2004
negotiations helped ensure that the proceedings were
free of collusion or undue pressure. [FN127] For
these reasons, the proposed settlement is entitled to a
strong presumption of fairness.
Page 21
FN126. See Parker Decl. ¶ ¶ 6-7 ("The
parties were plainly bargaining at arm's
length. While many mediations are intense,
this one was especially so ... All parties,
especially the Plaintiffs, were very well
represented in these negotiations [and]
bargained very hard."). See also Declaration
of Michael D. Young, court-appointed
Special Master, ¶
10 ("Class counsel
vigorously negotiated on behalf of the
class.").
FN127. See County of Suffolk, 907 F.2d at
1323 (noting that the presence of a courtappointed mediator during pre -certification
hearings helped to ensure the absence of
collusion or undue pressure).
2. The Grinnell Factors
[13] Application of the Grinnell factors weighs in
favor of acceptance of the settlement. First, litigation
of these claims would be highly complex and
expensive. Plaintiffs allege a huge and intricate
conspiracy between Jenkens and a large number of
global financial and legal institutions, over the course
of years. The investigation of such a claim, putting
aside trial costs, would be exceedingly complex and
expensive. Moreover, the underlying claims involve
complicated tax transactions. A central issue in the
case is whether Jenkens knew or should have known
that COBRA was contrary ot established law and
published IRS Notices. If this case were to be tried,
both sides would be heavily dependent on tax law
experts, further compounding the expense and
complexity of the case. The burden on the parties
would be significant.
Second, the reaction of the class has been generally
positive. Out of over one thousand class members,
three groups, comprising nine class members, have
objected, and a further eighty-nine plaintiffs have
opted out. Even after the Court gave a third and final
round of notice and objections, [FN128] no class
member raised any complaint apart from the nine
who had objected previously.
This reflects a
rejection rate of less than 10%.
Courts have
frequently found this factor to be satisfied in the face
of similar or higher levels of dissent. [FN129] I find
the low level of dissent in this case particularly
striking given the fact that each class member's
individual claim against Jenkens is substantial; these
are not plaintiffs who would remain silent if the
settlement was unfair.
FN128. See infra Part IV.C.
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FN129. See, e.g., Stoetzner v. U.S. Steel
Corp., 897 F.2d 115, 118-19 (3d Cir.1990)
(noting that "out of 281 class members, only
twenty-nine[ ] filed objections to the
proposed settlement"); Grant v. Bethlehem
Steel Corp., 823 F.2d 20, 24 (2d Cir.1987)
(noting that "[o]nly 45 of 126 class members
expressed opposition to the settlement");
Laskey v. International Union, United
Automotive, Aerospace and Agricultural
Implement Workers, 638 F.2d 954, 956 (6th
Cir.1981) ( "Significantly, only seven [class
members] out of 109 made any kind of
objection"); In re Lloyd's Am. Trust Fund
Litig., No. 96 Civ. 1262, 2002 WL
31663577, at *23 (S.D.N.Y. Nov. 26, 2002)
(noting that "[o]ut of the approximately
1,350 Class Members, only 239--or less than
18 percent-- have submitted objections");
Boyd v. Bechtel Corp., 485 F.Supp. 610, 624
(N.D.Cal.1979) ("the Court finds persuasive
the fact that eighty-four percent of the class
has filed no opposition.").
The third factor looks to "the stage of the
proceedings and the amount of discovery completed[;
these] are important factors to consider in order to
ensure that plaintiffs have had access to material to
evaluate their case and assess the adequacy of any
settlement proposal." [FN130] Here, the parties
reached a tentative settlement agreement at an early
stage in this litigation, prior to discovery. [FN131]
However, pursuant to the parties' stipulation of
settlement, Jenkens provided the class with extensive
discovery. Jenkens has produced approximately
70,000 documents relating to the merits of the class
claims and the financial status of Jenkens. [FN132]
Lead counsel have conducted extensive interviews
*338 with Jenkens witnesses, including the individual
Jenkens defendants. [FN133] Plaintiffs thus "have a
clear view of the strengths and weaknesses of their
cases" and of the adequacy of the settlement.
[FN134]
FN130. In re PaineWebber Ltd. P'ships
Litig., 171 F.R.D. 104, 126 (S.D.N.Y.1997),
aff'd, 117 F.3d 721 (2d Cir.1997).
FN131. See Lead Counsel Decl. ¶ 39.
FN132. See id. ¶ 40.
Page 22
FN134. In re Warner Communications Sec.
Litig.,
618
F.Supp.
735,
745
(S.D.N.Y.1985).
As to the fourth and fifth factors, the risks of
establishing liability and damages are significant. In
assessing this factor, the Court si not required to
"decide the merits of the case or resolve unsettled
legal questions" [FN135] or to "foresee with absolute
certainty the outcome of the case."
[FN136]
"[R]ather, the Court need only assess the risks of
litigation against the certainty of recovery under the
proposed settlement." [FN137] Here, Jenkens has
substantial defenses to all of plaintiffs' claims.
Jenkens notes, in particular, the "limited 'more likely
than not' nature of the opinions," and the fact that
many other law and accounting firms gave similar
opinions, which it argues will make it hard to
demonstrate a breach of the standard of care.
[FN138] Jenkens also argues that the class members- millionaire tax avoiders--make unsympathetic
plaintiffs, and that there is a substantial possibility
that they will be found to be more than 50% at fault
themselves. Even if plaintiffs were able to prove
liability, many of plaintiffs' significant items of
damages may not be recoverable. For example,
plaintiffs may not be able to recover for back taxes or
interest on back taxes. [FN139]
FN135. Carson v. American Brands, Inc.,
450 U.S. 79, 88 n. 14, 101 S.Ct. 993, 67
L.Ed.2d 59 (1981).
FN136. In re Austrian & German Bank
Holocaust Litig., 80 F.Supp.2d 164, 177
(S.D.N.Y.2000).
FN137. Global Crossing, 225 F.R.D. 436,
458-59.
FN138. Jenkens Mem. at 19.
FN139. See Seippel, 341 F.Supp.2d at 38385.
Sixth, there is some risk of maintaining class status
throughout trial. Were this action to proceed to trial,
proving reliance and damages might prove
unmanageable. [FN140] This is especially true in
light of the fact that, unlike in many class actions,
plaintiffs could bring these claims individually; thus,
the superiority of class action treatment would be
hard to establish if this case were to be litigated.
FN133. See id. ¶ 42.
FN140. See In re Prudential Ins. Co. Am.
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Page 23
Sales Practice Litig. Agent Actions, 148
F.3d 283, 321 (3d Cir.1998) (noting that,
because manageability is a factor if a class
proceeds to trial, but not at settlement, there
will always be a risk of maintaining class
status at trial that favors settlement,
rendering this test somewhat "toothless.").
but now has only 420. See January 17, 2005
Declaration of Thomas H. Cantrill ¶ 5.
The seventh factor requires the Court to examine the
ability of the defendant to withstand a higher
judgment. This factor "does not require that the
defendant pay the maximum it is able to pay."
[FN141] The test takes into account the possibility
that, if the case were to go to trial, the defendant
would not be able to survive. "The purpose behind
this consideration is to determine whether defendant
could withstand a judgment significantly higher than
the settlement figure, assuming the case were
litigated.... If a higher judgment would excessively
impact the company's shareholders or would
jeopardize the company's survival, this factor weighs
in favor of approving the settlement." [FN142]
I am less convinced that the individual defendants'
contributions are reasonable in light of their ability to
withstand a greater judgment.
However, the
individual defendants' potential contributions are
relatively minor compared to the available insurance.
Moreover, the individual defendants might well
succeed on their claim that they are entitled to full
indemnification from Jenkens. The low contributions
from individual defendants do not render the
settlement unfair when weighed against all other
considerations. [FN147]
FN141. O'Keefe v. Mercedes-Benz USA, 214
F.R.D. 266, 301 (E.D.Pa.2003).
FN142. Berkley v. United States, 59 Fed.Cl.
675, 713 (2004) (citing In re Cendant Corp.
Litig., 264 F.3d 201, 240 (3d Cir.2001); In
re Prudential Ins. Co. of America Sales
Practices Litig., 148 F.3d at 321).
Jenkens' contribution to the settlement is $5.25
million--"over 5% of equity shareholder profits last
year." [FN143] Although this contribution may not
seem large, given the magnitude of plaintiffs' claims,
Jenkens may not be able to withstand a greater
judgment.
Jenkens is already in a weakened
condition, facing severe retention problems. [FN144]
Jenkens argues, persuasively, that it could not
contribute more to the settlement without causing
more lawyers to leave the firm, likely resulting in the
firm's collapse: "[a]lready unstable, the firm cannot
ask its shareholders to [contribute] more and expect
them to *339 decline offers from competitors."
[FN145] If the case were to go to trial, the firm
would be unlikely to survive. [FN146]
Given
Jenkens' position, it does not appear that the firm
could withstand a significantly greater judgment.
FN145. Jenkens Mem. at 25.
FN146. See Declaration of Ward Bower,
Legal Consultant, ¶ ¶ 4-10.
FN147. See D'Amato v. Deutsche Bank, 236
F.3d 78, 86 (2d Cir.2001) (upholding
approval of settlement although the
defendants' ability to withstand a greater
judgment weighed against approval, where
other Grinnell factors were met).
Finally, the eighth and ninth factors --the range of
reasonableness of the settlement fund in light of the
best possible recovery and the range of
reasonableness of the settlement fund in light of all
the attendant risks of litigation--weigh in favor of the
settlement.
Plaintiffs' best possible recovery is
limited, given the likelihood that, absent this
settlement, Jenkens would fail and declare
bankruptcy, and the only available assets would be
insurance--an uncertain source of recovery, given the
carriers' coverage defenses.
Moreover, class
members' claims, in the aggregate, greatly exceed the
available insurance or Jenkens' assets. Absent a
settlement, only the first few plaintiffs in line, at best,
would recover anything. There is also a significant
possibility that class members would not prevail if
this case were to go to trial.
FN143. See January 21, 2005 Supplemental
Declaration of Thomas H. Cantrill, Jenkens'
President and Chairman of the Board, ¶ 8.
Although the settlement fund by itself represents a
fair and reasonable recovery, I note that the
settlement also includes significant non-monetary
benefits. Pursuant to the settlement, Jenkens has
agreed to provide (and has already provided)
discovery on plaintiffs' claims. The value of this
agreement is hard to determine, but it is not
negligible. [FN148]
FN144. The firm had 615 lawyers in 2000,
FN148. Of course, plaintiffs could possibly
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obtain much of this information through
ordinary discovery processes. In practice,
however, plaintiffs may have more success
obtaining information from a cooperative,
settling
defendant
than
from
an
uncooperative defendant through an
adversarial discovery process. See Lisa
Bernstein and Daniel Klerman, An
Economic Analysis of Mary Carter
Settlement Agreements, 83 Geo. L.J. 2215,
2222-23 (1995) (noting the value of
agreements to cooperate with discovery
pursuant to settlement:
absent such
cooperation, "[a]dverse information is
ordinarily disclosed only in response to
narrowly tailored discovery requests or
when a defendant or his attorney fears that
not revealing the information will lead to the
imposition of sanctions. A recent study of
the discovery process found that attempts to
conceal information are often successful.").
For the foregoing reasons, I find that the settlement
is fair and reasonable. I will, however, discuss the
specific objections made to certain provisions of the
proposed judgment.
3. Non-Settling Defendants' Objections to the Bar
Order
[14] Non-settling defendants BDO, joined by
Deutsche Bank, object to the bar order and judgment
credit. Although "[i]n a class action settlement, the
normal focus is on the fairness, reasonableness and
adequacy of the settlement to the plaintiff class ...
[w]here the rights of third parties are affected [ ] their
interests too must be considered.... Moreover, if third
parties complain to a judge that a decree will be
inequitable because it will harm them unjustly, [s]he
cannot just brush their complaints aside." [FN149]
FN149. Masters Mates, 957 F.2d at 1025-26
(quotations and citations omitted).
Such bar orders are common in class action
settlements. "If a non-settling defendant against
whom a judgment had been entered were allowed to
seek payment from a defendant who had settled, then
settlement would not bring the latter much peace of
mind." [FN150] Because federal policy strongly
favors settlement, especially in complex litigation,
courts may approve a bar on contribution claims
between the settling defendants *340 and the nonsettling defendants, "so long as there is a provision
that gives the non-settling defendants an appropriate
right of set-off from any judgment imposed against
Page 24
them." [FN151] If courts were not able to limit the
liability of settling defendants through bar orders, "it
is likely that no settlements could be reached."
[FN152]
FN150. Id. at 1028.
FN151. In re WorldCom Inc., ERISA Litig.,
339 F.Supp.2d 561, 569 (S.D.N.Y.2004)
(quoting Masters Mates, 957 F.2d at 1028).
FN152. In re Ivan F. Boesky Sec. Litig., 948
F.2d 1358, 1369 (2d Cir.1991).
Nonetheless, "[a] settlement bar should not be
approved unless it is narrowly tailored and preceded
by a judicial determination that the settlement has
been entered into in good faith and that no one has
been set apart for unfair treatment." [FN153] In
assessing the fairness of a bar order, a court may
weigh relative fault, the likelihood of a plaintiff's
success at trial, and the adequacy of the resources of
the most culpable party to ensure that "a settling
defendant escapes neither the responsibility for his
wrongdoing nor, therefore, the deterrent effect which
underlies the right to contribution." [FN154]
FN153. Masters Mates, 957 F.2d at 1031.
FN154. Id. at 1028.
The order proposed here leaves the calculation of the
judgment credit to the applicable law of the various
jurisdictions in which a class member may bring a
claim. BDO urges the Court to impose, on all cases
the class members may bring, the capped
proportionate share judgment credit approved in
Gerber v. MTC Electronic Technologies. [FN155]
Although the Gerber court approved that approach, it
does not require it, and a "one-size-fits-all" judgment
credit is neither required nor appropriate here.
FN155. 329 F.3d 297, 303 (2d Cir.2003)
("Under this rule, the credit given for the
settlements will be the greater of the
settlement amount for common damages (a
'pro tanto' rule) or the 'proportionate share'
of the settling defendants fault as proven at
trial."). Although the court approved this
formu la as fair, it did "not hold that such a
formula is required." Id.
"There may [ ] be instances in which a settlement
may be approved without the identification of a
specific judgment reduction provision." [FN156] In
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In re Ivan F. Boesky, [FN157] the Second Circuit
approved a judgment credit that required class
members to "reduce or satisfy any judgment against a
nonsettling defendant to the extent necessary to
extinguish any claims of such non-settling defendant
for indemn ity or contribution from [the settling
defendants], as may be determined by the Court or
jury." [FN158] The court noted that
FN156. In re WorldCom Inc., ERISA Litig.,
339 F.Supp.2d at 569.
FN157. 948 F.2d 1358, 1362 (2d Cir.1991).
FN158. Id. (quotation omitted).
[t]he precise methods of judgment reduction to be
employed are left to a time when, if ever,
judgments against particular nonsettling defendants
are obtained. Deferring these issues avoids the
enormous complexities of hypothesizing findings
of fact and law regarding future litigation against
nonsettling defendants.... Claims by nonsettling
defendants for contribution or indemnification may
raise issues as to the legal basis for the particular
judgment and the precise facts found. Moreover,
choice-of-law questions may preclude use of a
single judgment-reduction method for each
nonsettling defendant. Other complexities may
arise that are not evident at this time and on this
record. [FN159]
FN159. Id. at 1363, 1369.
Here, class members have already brought numerous
actions, on a variety of state al w and federal law
theories, in jurisdictions all over the nation, against
non-settling defendants and numerous other third
parties. To impose a single method of judgment
reduction on all claims that have been or might be
brought by class members, in any court or tribunal,
regardless of the applicable law, would be not be
appropriate. [FN160] Non-settling defendants and
third parties will be fully *341 compensated for the
loss of their contribution claims: the order ensures
that they will receive a judgment credit at least equal
to the contribution claim they might otherwise assert.
[FN161] To force the settling parties to accept a
judgment credit provision that would provide BDO
with a credit that is potentially greater than the value
of the contribution claims it might otherwise have
been able to assert--as BDO suggests --would give
BDO a windfall, and would be an impediment to
settlement. [FN162] Moreover, forcing courts all
over the country to follow a particular method of
Page 25
judgment reduction, which may conflict with their
own policies and procedures, would be an
unwarranted interference with their proceedings.
FN160. If class members win an award
against non-settling defendants in this court,
in the present action, the judgment credit
would likely be at least the amount of the
class member's recovery under the
settlement attributable to common damages,
in order to comport with this circuit's "onesatisfaction" rule. See Masters Mates, 957
F.2d at 1031.
In order that non-settling defendants may
know promptly how the judgment credit in
Denney will be calculated, should this case
go to trial, and be able to prepare their
litigation strategy accordingly, non-settling
defendants in Denney are invited to request
the opportunity to brief the issue of the
appropriate judgment credit to be applied in
this case, under the applicable law.
FN161. BDO observes that the proposed
judgment "notes the 'Settling Parties' intent
to fully protect the Released Persons [i.e.,
Jenkens] from all Claims Over,' no similar
language
describes
the
non-settling
defendants' right to be fully compensated.
Rather, the judgment reduction language
speaks only in terms of amounts or
percentages 'sufficient ... to compensate the
Non-Settling Defendant.' " February 4,
2005 Letter to the Court from BDO at 2
(original emphasis). BDO is "concerned
that another court ... could interpret [this
language] as prioritizing Jenkens ['] interests
over the interests of the non-settling
defendants." Id. I will nonetheless approve
the proposed judgment on the understanding
that no such construction should be placed
on this language. The purpose of the
judgment credit is to fully compensate nonsettling defendants for the loss of their
contribution claims.
FN162. The uniform method of judgment
reduction suggested by BDO might also, in
certain situations, under compensate
nonsettling defendants and third parties for
the loss of their contribution claims --e.g.,
where the applicable law would permit a pro
rata contribution claim, which might exceed
both the proportionate share and the pro
tanto credit.
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This settlement was the result of aggressive, arm's
length bargaining. Given the limits on Jenkens'
ability to withstand a greater judgment, I have found
the settlement to be fair. There is no indication that
BDO or other non-settling defendants have been
treated unfairly. I also note that while BDO argues
that the bar order is too generous to class members,
the Harslem Plaintiffs argue that it is too generous to
non-settling defendants. Such conflicting objections
suggest that the provision strikes the proper balance.
4. The Harslem Plaintiffs' Objections to the
Judgment Credit
The Harslem Plaintiffs also object to the judgment
credit provision. First, the Harslem Plaintiffs object
on the ground that the judgment credit's impact falls
unequally on different groups of class members,
being especially unfair to those who have claims
against deep-pocketed third parties. As I explained
earlier, this argument is not supported by the facts.
All Lead Plaintiffs, like the Harslem Plaintiffs, have
essentially identical claims against deep-pocketed
third parties, and will also suffer the impact of the
judgment credit provision. In accepting the judgment
credit provision, all plaintiffs have made a reasonable
concession, necessary to secure the benefits of
settlement.
The Harslem Plaintiffs also argue, citing National
Super Spuds, Inc. v. New York Mercantile Exchange,
[FN163] In re Auction Houses Antitrust Litigation,
[FN164] and Wal-Mart Stores, [FN165] that the
judgment credit provision is an impermissible
attempt to impair claims "non-class claims outside
the factual predicate for the settlement." [FN166]
This argument is unavailing.
FN163. 660 F.2d 9 (2d Cir.1981)
FN164. 42 Fed.Appx. 511 (2d Cir.2002).
FN165. 396 F.3d 96.
FN166. Harslem Mem. at 14 (emphasis
removed).
The authority cited by the Harslem Plaintiffs stands
for the proposition that courts may not approve a
settlement that releases claims that are not based on
the identical factual predicate as those asserted by the
class; however, "class action releases may include
claims not presented and even those which could not
have been presented as long as the released conduct
arises out of the 'identical factual predicate' as the
Page 26
settled conduct." [FN167] In In re Auction Houses
(an unpublished *342 summary order) the Second
Circuit expanded the reach of this doctrine, holding
that Super Spuds requires rejection of a settlement
which "merely impairs, rather than extinguishes"
claims held only by a subset of the class, and arising
out of a different factual predicate. [FN168] The
settlement in that case contained a provision which
prohibited class members from bringing certain nonclass claims in United States courts, though it
allowed them to be brought elsewhere. The subset of
the class who held those non-class claims received no
additional compensation. Although the non-class
claims were not extinguished, but only impaired,
FN167. Wal-Mart Stores, 396 F.3d at 10708 (citing TBK Partners, Ltd. v. Western
Union Corp., 675 F.2d 456 (2d Cir.1982)).
FN168. In re Auction Houses Antitrust
Litig., 42 Fed.Appx. 511, 519 (2d Cir.2002).
the impairment is an 'uncompensated sacrifice of
claims of members ... which were not within the
description of claims assertable by the class.' That
the impairment may be slight is of no moment, as
we cannot say that it is valueless ... yet it is exacted
without any compensation whatsoever. [FN169]
FN169. Id. (quoting Super Spuds, 660 F.2d
at 19).
This doctrine is not applicable here. Class Members'
claims against third parties have not been released,
nor, within the meaning of In re Auction Houses,
impaired without compensation.
The Harslem
Plaintiffs may still bring their claims against Ernst &
Young; the judgment credit provision will only
affect their claims against third parties to the extent
that plaintiffs have already been compensated for
damages arising out of those claims by Jenkens. The
contribution law of the majority of states would
reduce the Harslem Plaintiffs' claims against third
parties even if the settlement contained no judgment
credit provision.
If courts were to accept the Harslem Plaintiffs'
argument that a judgment credit provision is an
impermissible impairment of claims against third
parties, this would create a serious obstacle to any
settlement. There could never be a bar order and
judgment credit provision in any partial settlement in
which some of the plaintiffs also brought the same
claims against different third parties--a not
uncommon situation in class actions alleging a
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conspiracy among multiple defendants. Without the
possibility of a bar order, partial settlement in such
cases would be extremely unlikely.
The Second Circuit has explained that "at the heart
of our concern [in National Super Spuds] was the
danger that a class representative not sharing
common interests with other class members" would
sacrifice the interests of those other class members.
[FN170] That is not the case here. The Harslem
Plaintiffs' interests with respect to the judgment credit
provision are aligned with those of class
representatives. The judgment credit provision is
part of the price of the settlement for all class
members: the settlement fully compensates the
Harslem Plaintiffs, like every other class member, for
accepting the provision.
FN170. TBK Partners, Ltd., 675 F.2d at 462.
Accord Wal-Mart Stores, 396 F.3d at 110-11
(noting that "Super Spuds hinged on the fact
that the class representatives did not possess
the [released claims]" and distinguishing
Super Spuds on the basis that lead plaintiffs
were also members of the sub-classes whose
claims were released, and "their interests
are, therefore, aligned with the interests of
those
classes.");
In
re
Visa
Check/Mastermoney Antitrust Litig., 297
F.Supp.2d 503, 514 (E.D.N.Y.2003) ("there
is no specter here, as there was in National
Super Spuds, of settling plaintiffs giving
away claims possessed only by absent class
members in exchange for the settlement.").
5. The Government's Objection to Paragraph
14
The Government objects to Paragraph 14 of the
proposed order. Paragraph 14 provides that:
Neither this Judgment, the Stipulation of
Settlement, nor any act performed or document
executed pursuant to or in furtherance of the
Stipulation of Settlement: (i) is or shall be deemed
to be or shall be used as an admission of, or
evidence of, the validity of any Released Claims or
any wrongdoing by or liability of any Released
Persons; (ii) is or shall be deemed to be or shall be
used as an admission of, or any evidence of, any
fault or omissions of any Released Person in any
statement, release or written document or financial
report issued, filed or made; (iii) shall be offered
or received in evidence against any Released
Person in any civil, criminal or administrative*343
action or proceeding in any court, administrative
agency, arbitral or other tribunal other than such
Page 27
proceedings as may be necessary to consummate or
enforce the Stipulation of Settlement, the releases
executed pursuant thereto, and/or the Judgment,
except that the Stipulation of Settlement and the
Judgment and the Exhibits thereto may be filed in
the Litigation or in any subsequent action brought
against any of the Released Persons in order to
support a defense or counterclaim of any Released
Person of res judicata, collateral estoppel, release,
good faith settlement, judgment bar or reduction, or
any other theory of claim or issue preclusion or
similar defense or counterclaim, including without
limitation specific enforcement of the settlement
embodied in the Stipulation of Settlement by way
of injunctive relief.
The Government objects to this paragraph on the
ground that "it is not appropriate for this or any Court
to determine, in the abstract, the admissibility or use
of documents or acts in other proceedings." [FN171]
FN171. January 24, 2005 Letter to the Court
from the Government at 3.
At the Government's request, the settling parties
have inserted language into the proposed judgment
which provides that "[n]othing in this Judgment
prejudices or limits in any way the right of the
Government of the United States to obtain or use
information," and furthermore, that "[n]othing in this
Judgment or in any agreement of the parties that
relates to the admissibility of evidence shall apply to
or be binding on the Government or any federal
administrative agency, or shall be binding on any
court with respect to the Government or any federal
administrative agency." [FN172] The Government
concedes that these provisions are sufficient to
protect the Government's interests. [FN173] The
Government therefore has no standing to object to
paragraph 14. Moreover, the Government offers no
authority in support of its objection. Provisions such
as paragraph 14 are common in judgments
accompanying class action settlements. [FN174]
Such orders may be necessary to encourage
settlement. [FN175] The parties who are most likely
to be affected by this provision--non-settling
defendants and third parties--have raised no objection
to it. The Government's objection is therefore
overruled.
FN172. Proposed Judgment ¶ 15.
FN173. See January 24, 2005 Letter to the
Court from the Government at 4. See also
Transcript of January 24, 2005 Fairness
Hearing at 60.
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FN174. See, e.g., In re Vitamins Antitrust
Litig.,
305
F.Supp.2d
100,
108
(D.D.C.2004); Teachers' Retirement System
of Louisiana v. A.C.L.N., Ltd., No. 01 Civ.
11814, 2004 WL 1087261, at *8 (S.D.N.Y.
May 14, 2004); Galloway v. Southwark
Plaza Ltd. P'ship, No. 01 Civ. 835, 2003
WL 22657200, at *10 (E.D.Pa. Oct. 27,
2003); Vista Healthplan, Inc. v. BristolMyers Squibb Co., 287 F.Supp.2d 65, 68
(D.D.C.2003); Cooper v. Miller Johnson
Steichen Kinnard, Inc., No. 02 Civ. 1236,
2003 WL 23335321, at *4 (D.Minn. July 22,
2003);
In re Compact Disc Minimum
Advertised Price Antitrust Litig., No. MDL
1361, 2003 WL 21685581, at *13 (D.Me.
July 18, 2003); In re General Instrument
Securities Litigation, 209 F.Supp.2d 423,
439 (E.D.Pa.2001);
In re Intelligent
Electronics, No. 92 Civ. 1905, 1997 WL
786984, at *3 (E.D.Pa. Nov. 26, 1997).
FN175. Cf. Federal Rule of Evidence 408
(providing that evidence of settlement
offers, or of conduct or statements made in
settlement negotiations, is not admissible to
prove liability for or invalidity of the claim
or its amount). This rule is grounded
principally on the "public policy favoring
the compromise and settlement of disputes."
Fed.R.Evid. 408 Advisory Committee Note.
Page 28
exclude themselves from the class, (iii) the binding
effect of a class judgment on all class members who
do not request exclusion, and (iv) class members'
right to object to the partial settlement and appear
through counsel. [FN178]
FN176. Fed.R.Civ.P. 23(c)(2)(B).
FN177. Eisen, 417 U.S. at 173, 94 S.Ct.
2140; Fed.R.Civ.P. 23(c)(2)(B).
FN178. See Fed.R.Civ.P. 23(c)(2)(b).
In addition, Rule 23(e)(B) requires that "the court
must direct notice in a reasonable manner to all class
members who would be bound by a proposed
settlement, voluntary dismissal, or compromise."
[FN179]
FN179. Fed.R.Civ.P. 23(e)(b).
There are no rigid rules to determine whether a
settlement notice to the class satisfies constitutional
or Rule 23(e) requirements; the settlement notice
must fairly apprise the prospective members of the
class of the terms of the proposed settlement and of
the options that are open to them in connection
with the proceedings. Notice is adequate if it may
be understood by the average class member.
[FN180]
FN180. Wal-Mart Stores, 396 F.3d at *11314 (quotation omitted).
C. Adequacy of the Notice
[15] Rule 23(c)(2)(B) requires that "for any class
certified under Rule 23(b)(3), the court must direct
to class members the best notice practicable under the
circumstances, including individual notice to all
members who can be identified through reasonable
effort." [FN176] The notice must inform each class
member of the nature of the action and the class
certified, and that "he has the right to exclude himself
from the action on request or to enter an appearance
through counsel, and further that the judgment,
whether favorable or not, will bind all class members
not requesting exclusion." [FN177]
It is not
necessary that every class member receive actual
notice, so long as class counsel acted reasonably in
selecting means likely to inform persons *344
affected.
Rule 23(c)(2)(B) specifies certain
information that a class notice in a Rule 23(b)(3)
action must contain, including (i) the nature of the
case, the clas s definition, and the claims, issues, or
defenses in the action, (ii) class members' right to
Due to confidentiality concerns, the notices sent to
class members were mailed directly by Jenkens. On
June 29, 2004, Jenkens mailed notice to the last
known addresses of 1286 persons. This notice
clearly stated all of the information required by Rule
23(c)(2)(b). Class members were given 136 days to
opt out of the settlement, a more than adequate
allowance of time. [FN181] The notice clearly
informed class members of the terms of the
settlement. [FN182] Class Counsel published a
Summary Notice in the Wall Street Journal on the
same day.
FN181. See Weinberger v. Kendrick, 698
F.2d 61, 70 (2d Cir.1982) (holding a six
week opt out period to be adequate).
FN182. The Harslem Plaintiffs' argument
that the notice did not adequately inform
them of the judgment credit provision is
without merit. The notice informed them
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that "Class Members will be required to
protect [Jenkens] from liability to other
defendants
and
third
parties
for
contribution....
This will require Class
Members who recover a judgment or make
other recovery against another defendant or
third party to grant the defendant or third
party a judgment credit or other form of setoff." June 29 Notice at 9. This language
clearly informed class members of the
judgment credit provision.
On December 29, 2004, following the amendments
to the settlement in December, 2004, Jenkens mailed
a supplemental notice to all class members who had
not previously opted out.
The notice clearly
described the nature of the changes to the settlement,
and included the original and the amended mediated
settlement agreements. The supplemental notice
informed class members that the deadline for
objections
was
extended
by
one
week.
Simultaneously, Class Counsel published a summary
of the notice in the Wall Street Journal. Finally,
because the settlement proponents made minor
changes to the language of the proposed judgment to
accommodate objections, Jenkens, at the Court's
instructions and in an excess of caution, mailed a
third round of notice to all class members
(individually, or to counsel if known), containing the
final proposed judgment and extending the time
frame for objections.
The notice was thus more than adequate, both
procedurally and with respect to its content.
C. No Further Opt-Out Opportunity Is Required
1. Rule 23(e)(3)
[16] The Harslem, Moore and Mattei plaintiffs ("the
objectors") argue that the Court should grant them a
second opportunity to opt out. Under the new Rule
23(e)(3), a court is permitted to allow class members
a second opportunity to opt out. This is a matter for
the Court's discretion; the objectors have failed to
show any reason for the Court to exercise its
discretion to permit such an opportunity.
The Advisory Committee Note to Rule 23(e)(3)
states that "[m]any factors may influence the court's
decision [to grant a second opt-out]. Among these
are changes in *345 the information available to class
members since expiration of the first opportunity to
request exclusion." [FN183] The objectors argue
that the information available to them has changed
since the expiration of the original opt-out date.
Page 29
However, the proposed settlement has only improved
since the June 28 Notice: the settlement fund is now
$6.56 million larger, and to be divided among 89
fewer class members. Nevertheless, the objectors
argue that the relative attractiveness of opting out has
also changed. In the original settlement, no insurance
funds were allocated to the defense of opt-out claims;
in the amended settlement, the insurers have set aside
$25 million (with the possibility of another $25
million in reinstated coverage) to defend or settle the
claims of opt-outs. Therefore, the objectors argue
that opting out now presents a more attractive
prospect.
FN183. Fed.R.Civ.P.
Committee Note.
23(e)(3) Advisory
Rule 23(e)(3) was not meant to require an automatic
second opt-out whenever a proposed settlement is
amended after the close of the first opt-out period.
The Advisory Committee Note makes it clear that a
change in information about the settlement is only
one factor to be considered in informing the exercise
of the court's discretion. Rule 23(e)(3) was intended
to be applied sparingly, to a limited number of cases,
and in particular to cases where the first opt-out
period closed prior to reaching a settlement:
The rules committees also believe that providing a
second opt-out opportunity in a limited number of
cases, when warranted, will not be unduly
disruptive to settlement. It will make a difference
only in cases in which the class is certified and the
initial opt-out period expires before a settlement
agreement is reached. It is irrelevant in the many
cases in which a settlement agreement is submitted
to the court simultaneously with a request that a
class be certified. In the cases in which it might be
used, moreover, the court retains broad discretion.
[FN184]
FN184. See Comm. on Rules of Practice &
Procedure, Agenda F-18 (Appendix D,
Proposed Rule Amendments of Significant
Interest) (2002) (available at http://
www.uscourts.gov/rules/supct1202/
controversial.pdf).
Both before and after the 2003 amendments, courts
have consistently rejected arguments that due process
requires a second opportunity to opt out when the
final terms of a proposed settlement become known-even in those cases where the initial opt-out period
expires before a settlement agreement is reached.
[FN185] "[T]o hold that due process requires a
second opportunity to opt out after the terms of the
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settlement have been disclosed to the class would
impede the settlement process so favored in the law."
[FN186] Rule 23(e)(3) was not intended to alter this
sound policy by mandating a second opt out
opportunity every time parties renegotiate their
settlement in any respect.
FN185. See, e.g., In re Lloyd's Am. Trust
Fund Litig., 2002 WL 31663577, at *12
("Due process requires only that Class
Members have notice of the proposed
settlement and an opportunity to be heard at
a fairness hearing.
If the proposed
settlement is fair, adequate and reasonable,
due process does not afford Class Members
a second opportunity to opt out."). See also
In re Visa Check/Mastermoney Antitrust
Litig., 297 F.Supp.2d at 518 n. 18
("[Objectors] requested that Class members
be given a second opportunity [under the
new Rule 23(e)(3), which had taken effect
eighteen days prior to the court's decision] to
opt out of the Class now that the
Settlements' terms are known. Because I
have approved these Settlements as fair,
however, due process does not afford Class
members a second opportunity to opt out.")
(citation omitted).
FN186. Officers for Justice v. Civil Serv.
Comm'n of the City and County of San
Francisco, 688 F.2d 615, 635 (9th
Cir.1982).
Here, the June 28 Notice clearly apprised all class
members of the terms of the settlement. There has
been no material change in the settlement adverse to
the class: the proposed settlement has only improved
since the June 28 Notice. The fact that Jenkens has
subsequently negotiated with its insurers for money
to defend the claims of opt-outs is a matter outside
the proposed settlement, and cannot justify a new
opt-out period. A number of class members, with the
same information as Objectors, took the gamble of
opting out prior to the close of the first period, taking
the risk that Jenkens would be unable to find
resources to meet their claims; Objectors chose not
to take that risk.
Objectors are a tiny minority of the class, who chose
not to opt out of the class in a *346 timely manner.
[FN187] If the Court were to grant a second opt out
opportunity, the resulting delay and uncertainty
would pose significant risks of killing the settlement
and driving Jenkens into bankruptcy, depriving the
Page 30
vast majority of the class of the benefits of
settlement. The Objectors' request for a second opt
out opportunity pursuant to Rule 23(e)(3) is therefore
denied. [FN188]
FN187. See In re Visa Check/Mastermoney
Antitrust Litig., 297 F.Supp.2d at 518 n. 18
(declining to exercise discretion under Rule
23(e)(3) to grant second opt-out opportunity
in part "in light of the infinitesimal number
of objections.").
FN188. I note also that the Harslem
Plaintiffs sought a belated opportunity to opt
out on the basis of excusable neglect in
December 2004 (prior to the amendment of
the settlement), claiming that they had failed
to comprehend the judgment credit
provision. See December 2, 2004 Letter to
the Court of Steven Spielvogel, counsel to
the Harslem Plaintiffs.
The Harslems
therefore cannot credibly claim that they
wish to opt out now because new
information about the amended settlement
has become available.
2. Excusable Neglect
[17] Claiming "excusable neglect," certain objectors
ask that the Court permit them to opt out of the class
on an individual basis. They argue that their failure
to opt out in a timely fashion should be excused
because they failed to comprehend the judgment
credit provision as described in the notice, and
because the information on which they relied in
choosing to remain in the class has changed since the
end of the first opt out period.
Pursuant to Rule 60(b)(1), Rule 60(b)(2), and Rule
23(d), courts have the power to grant an extension of
the time to opt out on a showing of "excusable
neglect." [FN189] The movant must show "both
good faith and a reasonable basis for not acting
within the specified period." [FN190] "Even upon a
finding of excusable neglect, it remains within the
district court's sole discretion whether or not to grant
the extension." [FN191] Courts rarely grant such
extensions, recognizing that "granting leave to file
untimely exclusions would undermine the finality of
judgments entered therein and would discourage
settlement of such actions. Defendants would be
loath to offer substantial sums of money in
compromise settlements of class actions unless they
can rely on the notice provisions of Rule 23 to bind
class members." [FN192] So, for example, courts
have refused to permit an extension of the opt-out
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Page 31
period on the basis of "excusable neglect" even in
cases where a class member never received notice, so
long as the notice was sent out by means that
comport with due process. [FN193]
previous notice and opt-out period was ineffective,
and the Court must grant a new notice and opt-out
period when the class is finally certified. The Mattei
Plaintiffs' argument is creative, but unavailing.
FN189. In re Prudential Secs. Ltd. P'shps.
Litig.,
164
F.R.D.
362,
368-69
(S.D.N.Y.1996).
FN194. See Transcript of January 24, 2005
Fairness Hearing at 35-36.
FN190. Id.
FN191. Id. (citing In re Four Seasons Sec.
Laws Litig., 493 F.2d 1288 (10th Cir.1974)
and Supermarkets General Corp. v.
Grinnell, 490 F.2d 1183 (2d Cir.1974)).
FN192. In re Prudential Secs. Ltd. P'shps.
Litig., 164 F.R.D. at 368-69. Accord In re
VMS Ltd. P'shp. Secs. Litig., No. 90 C 2412,
1995 WL 355722, at *2 (D.Ill. June 12,
1995) ("courts will not act under Rule
60(b)(6) unless extraordinary circumstances
are present.... A too liberal application of
Rule 60(b) in class actions would undermine
the finality of judgments entered therein and
would discourage settlement of such
actions.").
FN193. See In re VMS P'ship Secs. Litig.,
1995 WL 355722, at *2.
Objectors have failed to show excusable neglect.
The notice clearly stated that the settlement would
impose a judgment credit in actions against nonsettling defendants and third parties. Objectors'
failure to comprehend that provision--even if genuine
and in good faith--does not constitute excusable
neglect. Objectors' argument that they should be
permitted to opt out because of changes to the
settlement's terms is more properly treated as a
request for a general second opt-out opportunity for
the class as a whole under Rule 23(e)(3); to the
extent the available information has changed, it has
changed for the entire class, not simply objectors.
Objectors' request is therefore denied.
3. Preliminary Certification Was Proper
[18] At the Fairness Hearing, the Mattei Plaintiffs
raised a third argument for a second opt-out
opportunity. [FN194] The original notice to the class
was sent out pursuant to the Court's May 2004 order
preliminarily certifying *347 the class. The Mattei
Plaintiffs argue that, following the 2003 amendments
to Rule 23, a court no longer has the power to
preliminarily certify a settlement class; therefore, the
Prior to the 2003 Amendments, Rule 23(c)(1) stated
that "[a]s soon as practicable after the
commencement of an action brought as a class action,
the court shall determine by order whether it is to be
so maintained. An order under this subdivision may
be conditional." The 2003 amendments to Rule
23(c)(1)(C) deleted the provision that a class
certification "may be conditional." The Advisory
Committee Note explains that "[a] court that is not
satisfied that the requirements of Rule 23 have been
met should refuse certification until they have been
met." [FN195]
FN195. Fed.R.Civ.P. 23(c)(1)(C) Advisory
Committee Note.
Courts have frequently certified settlement classes
on a preliminary basis, at the same time as the
preliminary approval of the fairness of the settlement,
and solely for the purposes of settlement, deferring
final certification of the class until after the fairness
hearing. [FN196] Courts have continued to follow
this procedure even after the 2003 amendments came
into effect on December 1, 2003. [FN197] The
Manual for Complex Litigation continues to
recognize the practice, [FN198] as do other
authorities. [FN199] In deleting the reference to
"conditional" certification, the Committee did not
intend to abolish this commo n and vital practice. The
amendment was directed at different problems. The
Advisory Committee's report described its concern:
"[t]he provision for conditional class certification is
deleted to avoid the unintended suggestion, which
some courts have adopted, that class certification
may be granted on a tentative basis, even if it is
unclear that the rule requirements are satisfied."
[FN200] The Committee was troubled by the "fear
that emphasis on the conditional nature of a
certification order will encourage some courts to
grant certification without searching inquiry, relying
on later developments to determine whether
certification is in fact appropriate." [FN201]
FN196. See Weinberger, 698 F.2d at 72
(discussing the practice of sending
"simultaneous notice of the pendency of a
class action and of a proposed settlement to
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prospective class members" and concluding
that, despite certain misgivings, and the need
for heightened scrutiny to protect against
collusion, "[a] blanket rule prohibiting the
use of temporary settlement classes ... does
not appear necessary or desirable....
Temporary settlement classes have proved
to be quite useful in resolving major class
action disputes [and] most courts have
recognized their utility.").
text reflects the amendments. See id. at 2.
FN197. See, e.g., Sylvester v. Cigna Corp.,
225 F.R.D. 391 (D.Me.2005);
In re
WorldCom, Inc. Sec. Litig., No. 02 Civ.
3288, 2005 WL 78807 (S.D.N.Y. Jan. 11,
2005); In re Lupron (R) Mktg. & Sales
Practices Litig., 345 F.Supp.2d 135
(D.Mass.2004); Yong Soon Oh v. AT & T
Corp., 224 F.R.D. 357 (D.N.J.2004); In re
Lutheran Bhd. Variable Ins. Prods. Co.
Sales Practices Litig., No. 99 MDL 1309,
2004 WL 2931352 (D.Minn. Dec. 16, 2004);
Medina v. Manufacturer's & Traders Trust
Co., No. 04 C 2175, 2004 WL 3119019, at
*1 (D.Ill. Dec. 14, 2004) (noting conditional
certification on December 8, 2003 in related,
prior action); Global Crossing Sec., 225
F.R.D. 436; In re Serzone Prods Liab.
Litig., No. MDL 1477, 2004 WL 2849197
(S.D.W.Va. Nov. 18, 2004); McDaniel v.
Universal Fid. Corp., No. 04 C 2157, 2004
U.S. Dist. LEXIS 21320 (D.Ill. Oct. 21,
2004); Latino Officers Ass'n City of New
York, Inc. v. City of New York, No. 99 Civ.
9568, 2004 WL 2066605 (S.D.N.Y. Sep. 15,
2004); Moore v. Halliburton Co., No. 3:02CV-1152, 2004 WL 2092019 (D.Tex. Sept.
9, 2004); Serventi v. Bucks Technical High
School, 225 F.R.D. 159 (E.D.Pa.2004);
Klabo v. Myhre, No. 3:02-CV-0877, 2004
WL 554794 (D.Ind. Feb. 6, 2004); In re The
St. Paul Companies, Inc. Sec. Litig., No. 02
Civ. 3825, 2004 WL 1459426 (D.Minn.
June 7, 2004).
FN201. Comm. on Rules of Practice &
Procedure, Report of the Civil Rules
Advisory Committee (May 20, 2002)
(available
at
http://www.uscourts.
gov/rules/supct1202/CVReport-final.pdf).
FN198. See Manual § 21.612 (observing
that "[s]ettlement classes -- classes certified
as class actions solely for settlement--can
provide significant benefits to class
members ..."). See also id. § 21.633
(calling for a "preliminary determination" of
certifiability in connection with preliminary
approval of the settlement). The fourth
edition of the Manual went to press before
the 2003 Amendments took effect, but the
FN199. See 5-23 Moore's Federal Practice-Civil § 23.161.
FN200. Comm. on Rules of Practice &
Procedure, Agenda F-18: Report of the
Judicial Conference 8-21 (Sept.2002)
(available
at
http://
www.uscourts.
gov/rules/jc09-2002/Report.pdf).
*348 Rule 23 directs courts to make a decision as to
certification "at an early practicable time." [FN202]
The Second Circuit has explained that "[t]he reason
for this rule is plain: fundamental fairness requires
that a defendant named in a suit be told promptly the
number of parties to whom it may ultimately be liable
for money damages." [FN203] The Second Circuit
has noted "the onerous effect of failing to decide
class certification promptly, finding that a district
court's failure to decide class certification 'early in the
proceedings not only produced below an atmosphere
of confusion, but also made [its] appellate review
more difficult.' " [FN204]
FN202. Fed.R.Civ.P. 23(c)(1)(A). Prior to
2003, the Rule stated that the certification
decision should be made "as soon as
practicable after the commencement of an
action." The 2003 amendment to Rule
23(c)(1)(A) recognized that there are
sometimes legitimate reasons to defer
certification; nevertheless, the certification
decision should not be "unjustifiably
delayed."
Fed.R.Civ.P.
23(c)(1)(A)
Advisory Committee Note.
FN203. Siskind v. Sperry Ret. Program, 47
F.3d 498, 503 (2d Cir.1995).
FN204. In re Philip Morris Inc. v. National
Asbestos Workers Med. Fund, 214 F.3d 132
(2d Cir.2000) (quoting Henry v. Gross, 803
F.2d 757, 769 (2d Cir.1986)).
For these reasons, the Committee was concerned that
the conditional certification option might encourage
courts to delay undertaking the rigorous analysis
required by Rule 23 prior to reaching a certification
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decision, instead taking the "approach of certify now
and worry later."
[FN205] This practice often
resulted in confusion and unfairness. [FN206]
Different considerations apply, however, in the
context of a settlement class.
Where settling
defendants and plaintiffs both support certification,
there is little danger in a preliminary certification that
defers a final certification decision until after the
fairness hearing.
Preliminary certification of a
settlement-only class is not an end-run around a
court's duty to conduct a rigorous analysis of the
propriety of certification; rather, it is an essential
part of the settlement process, and an indispensable
tool for the efficient management of complex
litigation.
FN205. Southwestern Refining Co., Inc. v.
Bernal, 22 S.W.3d 425, 435 (Tex.2000)
(criticizing the practice of certifying classes
without performing an analysis of the
predominance requirement, or where
predominance is in doubt, on the assumption
that certification may be withdrawn later, or
even "postulat[ing] that because a settlement
or a verdict for the defendant on the
common issues could end the litigation
before any individual issues would be
raised, predominance need not be evaluated
until later.").
FN206. See 5-23 Moore's Federal Practice-Civil § 23.45 (noting, in particular, that "a
number of cases purported to certify classes
conditionally, and left for a later time the
determination whether the laws of the
relevant states were too divergent to permit
a
finding
that
common
issues
predominated.").
When a court is presented with a motion for
preliminary certification and approval of a proposed
settlement, the merits of certification are bound up
with the proposed settlement. The Amchem court
recognized and accepted the concept of a settlement
class, acknowledging that due to the complexity of
the class members' claims such a class might not be
certifiable in the absence of a settlement because the
litigation would not be manageable. Courts must
therefore have the ability to preliminarily certify
settlement classes that could not be certified if the
settlement fails and the case proceeds to trial. At the
preliminary approval stage, the settlement is
unopposed. The court is not in a good position to
make a final decision as to settlement (and therefore
certification), because the court has yet not heard any
Page 33
objections. [FN207] Moreover, after the opt-out
period has expired, the settlement's proponents may
wish to abandon the settlement or renegotiate the
terms; the settlement cannot be fully assessed until
the opt-out and objection period has closed. The
position advanced by the objectors here would
require a court to order final certification of a
settlement class, long before it is able to give final
approval to the settlement. This makes little sense, as
the propriety of certification may depend on whether
there is a viable settlement. [FN208]
FN207. See In re Lupron (R) Mktg. & Sales
Practices Litig., 345 F.Supp.2d at 137 ("I
see no practical way to ascertain the fairness
of the proposed settlement to the consumer
class other than by proceeding with
conditional class certification and giving
notice with the opportunity for its members
to opt in or out of the settlement.").
FN208. And, indeed, the amended Rule 23
continues to recognize that a court's decision
to certify a class "may be altered or
amended
before
final
judgment."
Fed.R.Civ.P.
23(c)(1)(C).
Thus,
certification is always contingent on
subsequent events and information that may
require the court to revisit its decision.
*349 The parties also need the flexibility of moving
for certification on a preliminary basis. Settling
defendants, in particular, must be able to support
certification of a settlement class, while being free to
oppose certification for litigation purposes if the
settlement collapses. [FN209] If this Court adopted
the argument pressed by the objectors, defendants
would be required to seek a final and binding
certification of the class prior to the onset of the optout period and before any objections, taking the risk
that the objections may convince the court to reject
the settlement, or that opt-outs may be numerous
enough to make settlement worthless. This would be
a disincentive to settlement.
FN209. See Manual § 21.612. See also
Carnegie, 376 F.3d at 656 (holding that a
defendant who urges a court to certify a
class for settlement, and prevails, may later
contest certification for litigation if the
settlement fails, but only as to
manageability).
These policy considerations explain why, in the
settlement context, courts regularly make a
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preliminary determination as to the propriety of
certification, at the same time as the preliminary
approval of a proposed settlement, postponing the
final decision on certification until the court is ready
to evaluate the settlement. These considerations
further explain why courts have continued the
practice of preliminary certification of settlement
classes, despite the 2003 Amendments' disapproval
of conditional certification. [FN210]
FN210. I am not blind to the countervailing
considerations. In particular, where the final
determination of certification is postponed
until after the close of the opt-out and
objection period, the settlement has
"momentum" and a court is under great
pressure to accept it as a fait accompli. The
answer to this problem is that courts must
conduct the required rigorous analysis,
despite this pressure.
On the other hand, the 2003 amendments should
prevent one particularly troubling practice engaged in
by some courts. As one leading authority has
explained:
In the past, the term "settlement class" was misused
to refer to a temporary class approved by the court
on a conditional basis, for the limited purpose of
conducting settlement negotiations. Courts that
made use of this unrecognized type of "settlement
class" tentatively assumed the existence of a class
in order to permit the parties to negotiate a
settlement; and those courts would "conditionally"
certify a class without the thorough certification
analysis required by Rules 23(a) and (b). Because
those courts indulged in the assumption of the
class's existence only until a settlement was
reached or the parties abandoned the negotiations,
those classes were sometimes referred to as
"temporary" or "provisional" classes. [FN211]
FN211. 5-23 Moore's Federal Practice--Civil
§ 23.161 (e mphasis added).
This practice is to be avoided. Assuming the
existence of a class, without conducting any
preliminary inquiry into whether the Rule 23
requirements are satisfied, in order to permit the
parties to engage in "open-ended settlement
negotiations" will undoubtedly delay the certification
decision. [FN212] The same authority, however,
explicitly recognizes the practice followed in this
case.
FN212. See id.
Page 34
A true "settlement class" arises when the named
parties to an uncertified class action reach a
provisional settlement that they wish to make
binding on the class as a whole. In those cases, the
parties move the court for simultaneous class
certification and approval of the settlement.
Typically, the court then orders a combined notice
of the certification, opt-out rights, and the proposed
settlement, and combines the fairness hearing on
the proposed settlement with a hearing on class
certification. If the settlement is approved and the
class is certified, absent class members who do not
opt out are bound by the settlement agreement.
[FN213]
FN213. Id. (citing In re GMC Pick-Up
Truck Fuel Tank Prods. Liab. Litig., 55 F.3d
768, 778 (3d Cir.1995))("the court
disseminates notice of the proposed
settlement and fairness hearing at the same
time it notifies class members of the
pendency of class action determination.
Only when the settlement is about to be
finally approved does the court formally
certify the class, thus binding the interests of
its members by the settlement.").
*350 In sum: the 2003 amendments to Rule 23
were not intended to prohibit the practice of
preliminary certification of settlement-only classes,
with final certification to follow after the fairness
hearing. However, the amendments were intended to
emphasize that, even at the stage of preliminary
certification, courts should conduct a rigorous Rule
23 analysis. A court should never merely assume the
existence of a class.
I have discussed this rather technical issue at length
because of the recent change to Rule 23 eliminating
conditional certification. The important issue from
the perspective of the objectors, however, is whether
the notice they received provided them with due
process. As noted earlier, the notice sent to all
putative class members was sufficient in all respects;
whether the May 14 Order was preliminary or final
does not affect the quality of the notice. The
objectors, like other class members, had all the
information they needed to make an informed
decision as to whether to opt out or remain in the
class; they chose to remain in the class and are
properly bound by that decision. I have scrutinized
the settlement and found it to be fair, reasonable, and
adequate, and not a product of collusion or undue
pressure. To permit the Mattei Plaintiffs now to opt
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out of a settlement of which they had full notice
(risking the settlement for the overwhelming majority
of class members) merely because the class
certification was preliminary rather than final would
elevate form over substance.
Page 35
percentage of the fund created for the benefit of the
class." [FN221]
FN218. See id. at 50.
FN219. See Pennsylvania v. Delaware
Valley Citizens' Council for Clean Air, 478
U.S. 546, 565, 106 S.Ct. 3088, 92 L.Ed.2d
439 (1986).
D. Attorney's Fees
1. General Principles
[19] The "equitable" or "common fund" doctrine
governing awards of attorneys' fees was established
more than a century ago in Trustees v. Greenough.
[FN214] Where an attorney succeeds in creating a
common fund for the benefit of a class of plaintiffs,
that attorney is entitled to a reasonable fee to be set
by the court and taken from the fund. [FN215]
FN214. 105 U.S. 527, 533, 26 L.Ed. 1157
(1881).
FN215. See Boeing Co. v. Van Gemert, 444
U.S. 472, 478, 100 S.Ct. 745, 62 L.Ed.2d
676 (1980) ("The [common fund] doctrine
rests on the perception that persons who
obtain the benefit of a lawsuit without
contributing to its cost are unjustly enriched
at the successful litigant's expense.")
While an award of attorneys' fees is justified by the
common fund doctrine, the amount of "fees awarded
in common fund cases [must] not exceed what is
'reasonable' under the circumstances."
[FN216]
Furthermore "[w]hat constitutes a reasonable fee is
properly committed to the sound discretion of the
district court ... and will not be overturned absent an
abuse of discretion, such as a mistake of law or a
clearly erroneous factual finding." [FN217]
FN216. Goldberger v. Integrated Resources,
Inc., 209 F.3d 43, 47 (2d Cir.2000).
FN217. Id. (internal citation omitted).
Both the lodestar and percentage of fund methods
are available in calculating fee awards in class action
settlements. [FN218] The lodestar method multiplies
the number of hours reasonably expended by a
reasonable hourly rate for attorneys of similar skill
within a given geographic location. [FN219] "Courts
in their discretion may increase the lodestar by
applying a multiplier based on factors such as the
riskiness of the litigation and the quality of the
attorneys." [FN220] The percentage of fund method
is a simpler calculation in that the award is "some
FN220. Wal-Mart Stores, 396 F.3d at 12021 ("The multiplier takes into account the
realities of a legal practice by rewarding
counsel for those successful cases in which
the probability of success was slight and yet
the time invested in the case was
substantial.... As the chance of success on
the merits or by settlement increases, the
justification for using a risk multiplier
decreases."). Accord In re "Agent Orange"
Prod. Liab. Litig., 818 F.2d 226, 236 (2d
Cir.1987) (citations omitted).
FN221. Savoie v. Merchants Bank, 166 F.3d
456, 460 (2d Cir.1999) (citing Blum v.
Stenson, 465 U.S. 886, 900 n. 16, 104 S.Ct.
1541, 79 L.Ed.2d 891 (1984)). While the
simplicity of the percentage of fund method
may be initially appealing, the lodestar
figure should be used to cross-check the
reasonableness of the fees determined under
the percentage of fund method.
See
Goldberger, 209 F.3d at 50 ("[W]e
encourage the practice of requiring
documentation of hours as a 'cross check' on
the reasonableness of the requested
percentage.... [W]here used as a mere crosscheck, the hours documented by counsel
need not be exhaustively scrutinized by the
district court.").
*351 [20] Despite the availability of both methods,
"the trend in this Circuit is toward the percentage
method." [FN222] Regardless of which method is
used, the following Goldberger factors determine the
reasonableness of a fee award:
FN222. Wal-Mart Stores, 396 F.3d at 12021.
(1) the time and labor expended by counsel;
(2) the magnitude and complexities of the
litigation;
(3) the risk of the litigation ...;
(4) the quality of representation;
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(5) the requested fee in relation to the settlement;
and
(6) public policy considerations. [FN223]
FN223. Goldberger, 209 F.3d at 50 (internal
quotation marks and citation omitted).
[21] Furthermore, "the percentage used in
calculating any given fee award must follow a
sliding-scale and must bear an inverse relationship to
the amount of the settlement. Otherwise, those law
firms who obtain huge settlements, whether by
happenstance or skill, will be over-compensated to
the detriment of the class members they represent."
[FN224] While the Goldberger court recognized the
ever increasing use of benchmarks within the 25%
range, it cautioned that the use of such benchmarks
"could easily lead to routine windfalls where the
recovered fund runs into the multi-millions."
[FN225] In cases with recoveries of between $50 and
$75 million, courts have traditionally awarded fees in
the range of 12% to 20%. [FN226] Case citations are
of limited usefulness, however, as a "fee award
should be assessed based on scrutiny of the unique
circumstances of each case." [FN227]
FN224. In re Indep. Energy Holdings PLC,
No. 00 Civ. 6689, 2003 WL 22244676, at *6
(S.D.N.Y. Sept. 29, 2003).
FN225. Goldberger, 209 F.3d at 52.
FN226. See, e.g., In re Twinlab Corp. Sec.
Litig., 187 F.Supp.2d 80, 88 (E.D.N.Y.2002)
(12% of $26,500,000);
In re Dreyfus
Aggressive Growth Mut. Fund Litig., No. 98
Civ. 4318, 2001 WL 709262, at *7
(S.D.N.Y. June 22, 2001) (15% of
$18,500,000); In re Fine Host Corp. Sec.
Litig., No. MDL 1241, 2000 WL 33116538,
at *6 (D.Conn. Nov. 8, 2000) (17.5% of
$17,750,000); Varljen v. H.J. Meyers &
Co., Inc., No. 97 Civ. 6742, 2000 WL
1683656, at *5 (S.D.N.Y. Nov. 8, 2000)
(20% of $5,000,000); In re Health Mgmt.
Sec. Litig., 113 F.Supp.2d 613, 614
(S.D.N.Y.2000) (20% of $4,500,000). See
also In re Arakis Energy Corp. Sec. Litig.,
No. 95 CV 3431, 2001 WL 1590512, at *9
(E.D.N.Y. Oct. 31, 2001) ("[T]he trend
within this circuit after Goldberger has been
to award attorney's fees in amounts
considerably less than 30% of common
funds in securities class actions, even where
there is a substantial contingency risk.")
Page 36
(citing cases).
FN227. Goldberger, 209 F.3d at 53.
2. Application of the Goldberger Factors
Lead Class Counsel, on their own behalf and on
behalf of Other Class Counsel Counsel, seek
attorneys' fees of $16,310,000 and expenses of
$624,484.84. The requested attorneys' fee award
alone represents approximately 20% of the
$81,557,805 Settlement and is equivalent to 2.04
times the lodestar figure of $7,990,643.50. [FN228]
Lead Counsel argue that such an award is justified
based upon the Goldberger factors.
FN228. This lodestar figure is comprised of
the following: $5,173,025 from Deary
Montgomery DeFeo & Canada, LLP;
$1,549,350 from Cory Watson Crowder &
DeGaris, P.C.; $972,483.50 from Whatley
Drake, LLC; and $295,785 from Stephen F.
Malouf, Esq. See Additional Evidentiary
Support For Class Representatives' Motion
For Final Approval Of Class Settlement,
Final Certification Of The Class And Award
Of Attorneys' Fees And Costs.
a. The Time and Labor Expended by Counsel
Plaintiffs' allegations required extensive pre-filing
investigatory work by counsel.
Class Counsel
undertook an extensive investigation of the tax
shelter business and analysis of the applicable law as
well as widespread consultation with tax advisors and
other experts. The result was the filing of the Denney
and Camferdam class actions.
Five law firms devoted almost 18,800 hours of
professional time to investigating, prosecuting and
settling the claims.
Lead Counsel have been
consumed with the litigation and settlement of these
two class actions. The following is a list of some of
the tasks Lead Class Counsel performed in
connection with this litigation:
Interviewed Class Members and their tax advisors
*352 Reviewed and analyzed class members'
documents
Researched and analyzed relevant law and legal
issues
Identified and analyzed defendants' liability and
damages for Class Members' claims
Briefed substantial motions and participated in
numerous oral arguments
Prepared discovery
Participated in extensive settlement negotiations,
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including four lengthy mediation sessions
Held extensive conferences with Class Members
and their counsel
Reviewed and analyzed over 200,000 documents
produced by the J & G Defendants pursuant to the
informal "merits" discovery provision of the
settlement agreement
Conducted extensive interviews of the Jenkens &
Gilchrist defendants as part of the financial
"confirmatory" discovery
Reviewed and analyzed financial documents
produced by the J & G Defendants as well as
Jenkens & Gilchrist's insurance policies
Retained and consulted with tax advisers and other
experts
In short, Class Counsel vigorously and efficiently
litigated this case and were successful in reaching a
global settlement agreement that is reasonably
beneficial to the plaintiff class.
Page 37
not an issue as the success of this case should deter
others from engaging in this sort of conduct in the
future, which benefits society as a whole.
As to the fifth factor, counsel seek an award of fees
and expenses totaling
$16,936,084.84 which
represents 20.8% of the total Settlement of
$81,557,805. This combined award includes
attorneys' fees of $16,311,600 which is 20% of the
Settlement. While these percentages are not per se
unreasonable, although they are at this highest end of
the 12 to 20% range of reasonable for settlements in
the range of $50 to 70 million, the resulting attorneys'
fee award is 2.04 times the lodestar figure of
$7,990,643.50. Under the particular circumstances of
this case, a multiplier of 2.04 is excessive.
Accordingly, the fee award as a percentage of the
settlement must be reduced to bring the resulting
multiplier in line with what is reasonable.
3. The Lodestar Cross-Check
b. The Magnitude and Complexity of the Case
This action was complex not only in terms of the
procedural requirements associated with major class
actions, but the underlying substantive claims
involved complicated tax strategies. Class Counsel
had to expend significant time learning the
complicated tax shelter business in order to prosecute
plaintiffs' claims. To succeed, Class Counsel had to
understand very sophisticated tax issues. Prosecution
of this action was heavily dependent on expert
testimony, thereby adding to the complexity of the
case. In sum, this is undoubtedly a complex class
action litigation.
c. The Risk of the Litigation
There was a significant risk that absent a class
settlement with Jenkens, the vast majority of Class
Members would have recovered nothing from this
defendant. This was due, in part, to significant issues
regarding defendants' insurance coverage. Another
risk was that the pressure of this litigation would
force Jenkens to dissolve and file for bankruptcy,
thereby frustrating any potential recovery. Thus, two
separate sources of risk made the chance of
recovering any damages from Jenkens especially
speculative.
d. Remaining Goldberger Factors
The fourth Goldberger factor--the quality of Class
Counsel's representation--is not an issue here as this
case was well litigated by very skilled lawyers. Not
only did their skill and expertise contribute to the
favorable settlement for the class, it contributed to the
overall efficiency of the case. The sixth factor is also
A review of the lodestar computations for the
various firms reveals a disproportionate ratio of
partner to associate hours expended in this litigation.
For example, Deary Montgomery DeFeo & Canada
expended 11,413 attorney hours in total. The total
number of hours by partners and local counsel billing
at $525 per hour is 7,499, which represents
approximately 66% of the total. Cory Watson
Crowder & DeGaris, P.C. logged in a total of 3,101
attorney hours, 1,947 hours of which are from a
partner billing at $525 per *353 hour. That firm's
partner hours make up nearly 63% of total attorney
hours. Whatley Drake's attorney hours total 2,225.90,
of which 910.90 are attributable to partners billing at
$550 per hour. At that firm, partner hours constitute
approximately 41% of total attorney hours. Finally,
all of Stephen F. Malouf's time, totaling 563.4 hours,
was billed at his hourly rate of $525 per hour.
The above analysis reveals that the partners at the
firms comprising Class Counsel did not delegate as
much of the work to associates as they might have.
[FN229] Thus, the resulting lodestar figure of
$7,990,643.50 is somewhat inflated. To permit a fee
award amounting to 2.04 times this inflated lodestar
figure would be a disservice to the plaintiff class.
Indeed, one would be hard pressed to conclude that
Class Members would agree to compensate a
majority of the work performed at $1,071 per hour,
which is what a 2.04 multiplier would do. I therefore
conclude that a multiplier of 1.5 is more appropriate
under the circumstances. Applying this multiplier to
the lodestar figure results in an attorneys' fee award
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of $11,985,965, which is approximately 15% of the
Settlement. Added to this is an award of $624,484.84
for counsel's unreimbursed expenses. [FN230]
FN229. See In re Dreyfus, 2001 WL
709262, at *7 ("[A]t most firms partners
play a largely supervisory role, while the
basic work on the case is performed by more
junior staff who bill at lower rates.").
FN230. See Miltland Raleigh-Durham v.
Myers,
840
F.Supp.
235,
239
(S.D.N.Y.1993) ("Attorneys may be
compensated for reasonable out-of-pocket
expenses incurred and customarily charged
to their clients....").
Accordingly, the total award for attorneys' fees and
expenses is
$12,610,449.84, which represents
approximately 15.5% of the total Settlement funds,
which is well within the range of 12 to 20% referred
to earlier. The total award includes attorneys's fees
of $11,985,965 and unreimbursed expenses of
$624,484.84. [FN231] While the total award is
$4,324,035 less than the total amount requested of
$16,934,484.84, it is more than sufficient to
compensate the attorneys for their labor and their
assumption of risk at the beginning of this litigation.
As aptly stated by Judge John Gleeson in the Visa
Check/Mastermoney litigation, "[i]f [this] amounts to
punishment, I am confident there will be many
attempts to self-inflict similar punishment in future
cases." [FN232]
FN231. $81,665 of this sum is to be
allocated to counsel for the Harslems,
reducing the total award to class counsel to
$12,528,784. See infra Part IV.D.4.
FN232. In re Visa Check/Mastermoney
Antitrust Litig., 297 F.Supp.2d at 525.
4. The Harslem Plaintiffs' Request For Fees
[22] Counsel for the Harslem Plaintiffs, the firm of
Bondurant, Mixson & Elmore, LLP ("Bondurant"),
request that a portion of the fee award, in the range of
1.5% of the fund awarded to class counsel, be
allocated to them.
For the following reasons,
Bondurant is entitled to a fee, although not in the
amount requested.
It is well settled that objectors have a valuable and
important role to perform in policing class action
settlements. [FN233] Accordingly, "they are entitled
Page 38
to an allowance as compensation for attorneys' fees
and expenses where a proper showing has been made
that the settlement was improved as a result of their
efforts." [FN234] Courts may also consider whether
the objectors "aided the court and enhanced the
adversarial process by generating debate about issues
relating to the proposed settlement which otherwise
would not have been discussed." [FN235] "The
*354 trial judge has broad discretion in deciding
whether, and in what amount, attorneys' fees should
be awarded, since she is in the best position to
determine whether the participation of objectors
assisted the court and enhanced the recovery."
[FN236]
FN233. See White v. Auerbach, 500 F.2d
822, 828 (2d Cir.1974).
FN234. Id.
FN235. Great Neck Capital Appreciation
Inv. P'ship, L.P. v. Pricewaterhousecoopers,
L.L.P., 212 F.R.D. 400, 413 (E.D.Wis.2002)
(citing White, 500 F.2d at 828). Accord In
re Visa Check/MasterMoney Antitrust Litig.,
No. 96 Civ. 5283, 2004 U.S. Dist. LEXIS
8729, at *5 (E.D.N.Y. Apr. 27, 2004)
("Although it is true that the objectors'
briefings did not drive my decision to reduce
Lead Counsel's request for fees, their
arguments did sharpen the debate by
introducing contrary case law, and by
requiring Lead Counsel to more fully brief
the issue in reply papers. In short, the
objectors' contribution was to make the
proceedings more adversarial.");
In re
Domestic Air Transp. Antitrust Litig., 148
F.R.D. 297, 359 (N.D.Ga.1993) (awarding
fees to objectors who "significantly refined
the issues germane to a consideration of the
fairness of this complex settlement and[ ]
transformed the settlement hearing into a
truly adversarial proceeding").
FN236. White, 500 F.2d at 828.
Counsel for the Harslems both enhanced the
adversarial process, and secured benefits for the
class. The Harslems raised a number of significant
objections to the settlement and to the propriety of
certification. While their objections were ultimately
unsuccessful, they served to generate debate and
focus the issues before the Court. For example, their
objections to the proposed judgment credit helped to
refine the parties' and the Court's understanding of
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this important provision. The Harslems' objections
conferred a benefit on the class by forcing the settling
parties to clarify the judgment credit provision,
removing certain ambiguities that might have worked
to the detriment of class members in subsequent
proceedings.
Bondurant is therefore entitled to some
compensation. However, the suggested award of
1.5% of the fund awarded to class counsel is
excessive. The lodestar value of Bondurant's services
is $54,615. Bondurant also incurred expenses of
$49,917, for a total in fees and expenses of
$104,532.90. [FN237] An award of 1.5% of the fund
awarded to class counsel would amount to $179,784,
representing 3.3 times the lodestar value of
Bondurant's services, and 1.7 times the combined
value of fees and expenses. There is no justification
for granting the Harslems' counsel a significantly
higher award, relative to their time and expenses,
than class counsel. Bondurant did not bear the risk
and the expense of the months of intense negotiations
leading to this settlement; instead, it "argued the
nuances of the settlement during the twilight of this
litigation." [FN238] Although objectors benefitted
the class by clarifying ambiguities in the judgment
credit provision, they did not achieve any substantive
improvements in the settlement. "An appropriate fee
award for objectors under these circumstances would
compensate counsel for the reasonable fees and
expenses actually accrued in pursuit of their
objections, nothing more." [FN239]
FN237. These figures do not include time
spent on seeking to opt out of the settlement.
FN238. In re Domestic Air Transp. Antitrust
Litig., 148 F.R.D. at 359.
Page 39
expenditure on local counsel was surely reasonable. I
will therefore reduce the requested sum by 50%.
[FN242] This results in a total award of fees and
expenses of $81,665.
FN240. In re Excess Value Ins. Coverage
Litig., No. M-21-84, 2004 U.S. Dist. LEXIS
24368, at *18 (S.D.N.Y.2004).
FN241. See Affidavit of H. Lamar Mixson,
Harslems' counsel, in support of fee
application.
FN242. See SEC v. Goren, 272 F.Supp.2d
202,
214
(E.D.N.Y.2003)
(reducing
unitemized expense in receivership fee
application by 50%, in recognition that some
amount of that expense must have been
reasonable).
The settlement fund for the class is reasonable, but,
as a result of Jenkens' vulnerable condition, not
particularly generous. As a result, I conclude that the
burden of paying the Harslems' fees and expenses
should not fall on the class. Accordingly, $81,665 of
the $12,610,449.84 award of attorney's fees and
expenses is to be allocated to counsel for the
Harslems.
5. Incentive Awards
[23] Plaintiff request a "modest incentive award" of
$10,000 for each of the individual *355 Lead
Plaintiffs. [FN243] "Such awards are not uncommon
and can serve an important function in promoting
class action settlements." [FN244] In making these
awards, courts generally consider:
FN243. Lead Counsel Decl. ¶ 86.
FN239. Id.
"The fee applicant has the burden of establishing the
reasonableness of the expenses it seeks to recover;
therefore, a failure to itemize the reasons for
substantial expenditures is grounds for a reduction in
the amount of an expense award." [FN240] By far
the most substantial of the expenses claimed by
Bondurant is the cost of retaining local counsel. This
alone accounts for $45,734, and is approximated
without any itemization or support. It is impossible
for the Court to determine the reasonableness of this
expense. On its face, $45,734 appears excessive: the
work of drafting the Harslems' objections appears to
have been done largely if not entirely by Bondurant.
[FN241]
Nevertheless, some of Bondurant's
FN244. Sheppard v. Consol. Edison Co. of
N.Y., Inc., No. 94 Civ. 0403, 2002 WL
2003206, 2002 U.S. Dist. LEXIS 16314
(S.D.N.Y. Aug. 1, 2002).
the existence of special circumstances including
the personal risk (if any) incurred by the plaintiffapplicant in becoming and continuing as a litigant,
the time and effort expended by that plaintiff in
assisting in the prosecution of the litigation or in
bringing to bear added value (e.g., factual
expertise), any other burdens sustained by that
plaintiff in lending himself or herself to the
prosecution of the claim, and, of course, the
ultimate recovery. [FN245]
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FN245. Roberts v. Texaco, Inc., 979 F.Supp.
185, 200 (S.D.N.Y.1997).
In addition, courts consider the relationship between
the requested incentive award and the amounts
recovered by absent class members under the
settlement. [FN246]
FN246. Sheppard, 2002 WL 2003206 at *56, 2002 U.S. Dist. LEXIS 16314 at *17-20.
Class Counsel have stated that Lead Plaintiffs were
involved in settlement discussions, and, "while each
of these individuals was in a position to capitalize on
lawsuits already filed to attempt to get a full or at
least far greater recovery for themselves [they] took
seriously their role to arrive at a settlement in the best
interest of the Class as a whole." [FN247] In light of
Class Counsel's representations, I find that Lead
Plaintiffs are entitled to a reasonable incentive award.
The requested incentive award of $10,000 is
comparable to incentive awards granted in other
cases. [FN248]
An award of $10,000 is also
proportionate to the amount absent class members
will recover under the settlement. [FN249]
Page 40
against Jenkens. The joint motion of Jenkens and
Lead Plaintiffs for entry of final judgment confirming
the certification of the settlement class and approving
the class settlement is granted. Class Counsel's
motion for fees and expenses is granted to the extent
stated above. The request of counsel for the Harslem
Plaintiffs for fees and expenses is granted to the
extent stated above. Lead Plaintiffs' request for an
incentive award is granted. Objectors' requests to opt
out of the class are denied. The Clerk of the Court is
directed to close these motions [# s 173, 181, 187,
188].
SO ORDERED:
Motions, Pleadings and Filings (Back to top)
• 1:03cv05460 (Docket) (Jul. 23, 2003)
END OF DOCUMENT
FN247. Lead Counsel Decl. ¶ 85.
FN248. See Sheppard, 2002 WL 2003206 at
*6-7, 2002 U.S. Dist. LEXIS 16314 at *2122 (citing cases approving incentive awards
ranging from $336 to $303,000, with most
awards being in the $10,000 to $50,000
range).
FN249.
The
settlement
provides
$81,557,805 for 1,076 class members, or
roughly $65,000 per plaintiff, after counsels'
fees, and making the unlikely assumption
that all class members file a claim. The
requested incentive award is thus roughly
15%, at most, of the average class recovery.
See Sheppard, 2002 WL 2003206 at *6-7,
2002 U.S. Dist. LEXIS 16314 at *22-23
(approving as proportionate incentive
awards $7,795 higher than the highest class
payment of $21,372).
V. CONCLUSION
For the foregoing reasons, I hereby approve the
proposed settlement as fair, reasonable and adequate,
and certify the proposed class. Certification is solely
for the purpose of settlement of the class claims
© 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.