Seventh Circuit Rejects Class Settlement Due to Conflicts

This article was first published on Law.com Network

The Seventh Circuit’s opinion in Eubank v. Pella Corp., 2014 U.S. App. LEXIS 10332 (7th Cir., June 2, 2014), provides a reminder of the ethical mandates which must be met in class action litigation.  Judge Posner’s opinion focuses on the fiduciary obligations of the class counsel and class representatives.  Although some of the “lessons learned” may be obvious to experienced class action practitioners, the case provides a checklist of ethical pitfalls to be avoided.

The facts are fairly straight-forward.  Pella allegedly manufactured defective windows which permitted water to damage the window’s wooden frames and the class members’ homes.  Plaintiffs asserted product-liability and consumer-protection law violations of a number of states.  The district court certified two separate classes.  One was for class members who had already replaced their window and the second was for those who had not done so.  The “non-replacement” nationwide class sought only declaratory relief.  There were six separate state subclasses for class members seeking monetary damages.  However, the settlement ignored the certification of two classes and bound all class members – all owners of the defective Pella windows – in a single nationwide class.  The “adversity of subgroups” was a one of “many red flags” for the Court.

Plaintiffs’ counsel valued the settlement at $90 million in order to justify an agreed fee of $11 million.  Class members were entitled to file claims for relief.  Total benefits to the class were contingent on the number of claims made.  The class notice and claim form were complex and onerous.  The claims were subject to numerous defenses that could entirely defeat a class member’s claim.  In addition, some claimants were only entitled to coupons for discounts on future window purchases.  Only 1,276 claims were filed.  They sought less than $1.5 million.

Settlement relief also included a window “warranty extension” for some class members.  However, despite the fact the warranty extension was adopted by Pella before the settlement was negotiated, class counsel included the value of the warranty extension in his $90 million estimate of the settlement value.  Remarkably, the only “evidence” the Court could find in support of the $90 million valuation was the affidavit of an accountant hired by Weiss and apparently a brother of one of the class representative’s lawyers.  The Court concluded the class could not expect to receive more than $8.5 million from the settlement rather than the $90 million value suggested by class counsel.

At first, the only named plaintiff was Leonard Saltzman (“Saltzman”), the father-in-law of lead class counsel, Paul Weiss (“Weiss”).  Weiss’s wife, (Saltzman’s daughter), also a lawyer, was a partner in her husband’s firm.  Both were defendants in a lawsuit charging misappropriation of assets of a former law firm.  Weiss was also recently subject to a disciplinary proceeding in which it was recommended that his license be suspended for 30 months because of “repeated misconduct.”

Four other class members were later added as class representatives.  When they opposed the proposed class settlement, they were removed by Weiss as class representatives, leaving only Saltzman supporting the settlement.  Weiss’s partner successfully moved to add four additional class representatives, who joined with Saltzman in approving the settlement.

Concluding that the settlement was “inequitable – even scandalous” and “flunked the ‘fairness’ standard,” Judge Posner rejected the settlement agreement, reinstated the four “defrocked” class representatives and discharged class counsel, Saltzman and the four other replacement class representatives who signed onto the ill-fated settlement.  Class counsel’s departure was inevitable for a number of reasons.  Weiss’s ethical problems were, alone, a sufficient reason to discharge him.  It was also improper for him to serve as lead counsel in a case in which his father-in-law was a class representative.  Another cause for suspicion was Pella’s agreeing to a $2 million fee advance to Weiss both before class notice was served and the settlement was approved.

FRCP 23(a)(4) requires that “the representative parties will fairly and adequately protect the interests of the class.”  Saltzman and the other class representatives failed to do so.  Saltzman also had an obvious conflict with family members serving as lead counsel.  The class representatives also agreed to a partial coupon settlement which the Court described as “a warning sign of a questionable settlement.”

Mediation is often employed in class action settlements so that a third-party neutral is involved in the process.  Two retired judges were retained in Eubank.  However, class counsel’s use of mediation did not help his cause.  One judge withdrew from the mediation without an explanation being provided.  Remarkably, the second judge only mediated the issue of attorney fees and was not involved in determining relief for the settlement class.

Due to the representative nature of class actions, both counsel and class representatives must “fairly and adequately protect the interests of the class.”  FRCP 23(a)(4).  As noted by Judge Posner, “class actions are the brainchildren of the lawyers who specialize in prosecuting such actions, and in picking class representatives they have no incentive to select persons capable or desirous of monitoring the lawyers’ conduct of the litigation.”  Accordingly, the judge is placed in the role of a quasi-fiduciary to protect the interests of absent class members.  Counsel must likewise be sensitive to potential conflicts when negotiating class settlements.