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‘Balancing Test’ for Conflicts Is Rejected in Litigation After Class Action Settlement

Thursday, April 10, 2014

By Joan C. Rogers  

April 2 --Lawyers who had represented flight attendants in individual lawsuits for compensatory damages following a settlement in a class action are disqualified from representing some class members in litigation claiming misuse of funds by a settlement-created entity on whose board two other class members sit, the Florida Supreme Court decided March 27.

The court pointed out that one of the two lawyers at issue represented an objecting board member in her individual suit for damages, and both lawyers had been privy to the objecting board members' confidences through a “team effort” approach among counsel in the individual actions.

The litigation attacking the settlement-created entity is directly adverse to the two board members who are complaining of the lawyers' conflict, and the lawyers' attempts to drop them violated the “hot potato” rule, the court declared.


“I don't think this decision really upsets the so-called balancing test as it would be used in the more usual situations in class actions.”
Elizabeth J. Cabraser
Lieff Cabraser Heimann& Bernstein

The intermediate appellate court went wrong by applying a flexible balancing test, sometimes used in federal litigation, to assess the disqualification issue rather than simply applying the Florida Rules of Professional Conduct, the court said in an opinion by Chief Justice Ricky Polston.

Most of the lawyers contacted by Bloomberg BNA said they agreed with the supreme court's application of the conflicts rules, at least on the unusual facts of the case. Several of them suggested, however, that the flexible federal approach may still apply to the typical types of conflicts that arise in class actions, such as disagreements among class members about whether to accept a settlement.

No Need to Reject Flexible Approach

William Freivogel, Chicago, told Bloomberg BNA he believes the Florida Supreme Court was correct in disqualifying the lawyers given the fact that the objectors had apparently served as named class representatives who had a full-blown attorney-relationship with the lawyers, and the lawyers have brought a new lawsuit adverse to them.

Nevertheless, Freivogel said on these facts the court had no need to veto the flexible federal approach--in which, for example, class counsel have been permitted to promote settlements in the face of objections from unnamed class members.

The decision should not foreclose application of the flexible federal test in Florida under other circumstances, but it may be difficult for the court to backtrack from its express rejection of that approach, he suggested. Freivogel maintains a website on conflicts of interest at freivogelonconflicts.com.

In adopting a balancing approach, the lower appellate court relied on Lazy Oil Co. v. Witco Corp., 166 F.3d 581 (3d Cir. 1999), and In re Agent Orange Prod. Liab. Litig., 800 F.2d 14 (2d Cir. 1986), along with Kullar v. Foot Locker Retail, Inc., 121 Cal. Rptr.3d 353 (Cal. Ct. App. 2011).

See also In re Corn Derivatives Antitrust Litig., 748 F.2d 157, 163 (3d Cir. 1984) (Adams, J., concurring) (“[C]ourts cannot mechanically transpose to class actions the rules developed in the traditional lawyer-client setting context….”); Bruce A. Green, Conflicts of Interest in Litigation: The Judicial Role, 65 Fordham L. Rev. 71, 127 (1996) (“[T]he conflicts rules do not appear to be drafted with class action procedures in mind and may be at odds with the policies underlying the class action rules.”).

Balancing Test Not Appropriate Here

Boston University law school professor Nancy J. Moore told Bloomberg BNA that while she agrees with a balancing test for some situations in class actions, the supreme court's decision disqualifying the lawyers is “absolutely right” on the facts before the court. Moore is the author of Who Should Regulate Class Action Lawyers?, 5 U. Ill. L. Rev. 1477 (2003), which discussed lawyers' conflicts in class actions.

In this case, Moore said, the lawyers were representing class members in individual lawsuits after the class action settlements and decided to bring a new action directly adverse to clients in the individual suits. A balancing test is inappropriate in a situation such as this where there is a strong attorney-client relationship and the clients are being personally attacked, she said.

The federal cases the intermediate appellate court cited, Moore said, involved completely different facts, such as disagreements among class members about a proposed settlement. The Florida Supreme Court did not need to reject those cases, she said, because they are clearly distinguishable from the case before the court.

Depending on the circumstances, Moore said, lawyers may head off problems by including advance waivers in their retainer agreements with individual clients. For example, she suggested, lawyers can explain that they intend to pursue the client's case as a class action in which the client would be a named representative, and the client needs to understand that if this happens the client's rights would not be the same as an individual client.

'One-Off.'

Longtime plaintiffs' lawyer Elizabeth J. Cabraser, of Lieff Cabraser Heimann & Bernstein in San Francisco, said “I don't think this decision really upsets the so-called balancing test as it would be used in the more usual situations in class actions.”

The decision “seems to be a one-off” due to its unusual fact situation, she told Bloomberg BNA.

The federal courts have developed a body of case law under Fed. R. Civ. P. 23 that addresses problems of subclasses and interclass conflicts during a class action, and that is where the federal balancing test is applied, Cabraser said. She noted that the Florida case involved problems in the administration of a class action settlement, rather than the more familiar context of class certification and settlement approval.

Cabraser pointed out that, in the Florida case, class representatives were put on the board of the entity created in the settlement. While there could have been a good reason for doing so, the case provides an object lesson that “lawyers should carefully consider the wisdom of appointing class representatives to be in charge of the claims process,” she said.

During the long process of settlement administration, Cabraser noted, there frequently will be disagreements with claims administrators. Rule 23(g) gives the court overseeing the class action ongoing jurisdiction, and a lawyer can seek clarification from the court if concerns develop during the process, she said.

Courts Taking a Closer Look

Defense attorney Gregory Mersol said in comments e-mailed to Bloomberg BNA that “we are seeing more cases like this, where courts are more closely examining the ethical duties of class counsel.” Mersol is a partner in BakerHostetler's Cleveland office and focuses his practice on the resolution of class actions and other complex employment disputes.

According to the court's opinion, Mersol said, the lawyers represented at least two class members who were on the board of a research foundation created in the settlement. Apparently, he said, they encouraged the women to share information about the foundation with them and received confidential information about it--and then sought to use the information against it. “I think the court rightly found that that crossed the line,” he said.

Mersol predicted the court's decision will matter to defendants on many levels. First, he said, the claim the lawyers asserted in the new lawsuit sought to change the purpose of a settlement fund from research to funding litigation and paying claims. Both the defendants and many of the putative class members might well have had problems with diverting the funds for these other purposes, he said.

Second, Mersol said, potential conflicts such as this may jeopardize settlement. Few defendants would find it palatable to renegotiate a bargained-for class action settlement, he said.

 

Appellate Court: Use Balancing Test

The Florida case grew out of a class action on behalf of flight attendants against tobacco companies for injuries they allegedly sustained from secondhand smoke. A settlement was reached in which class members gave up their intentional tort and punitive damages claims but retained individual claims for compensatory damages, and in return the defendants established a $300 million fund for a research foundation.

Later, attorneys who were representing a number of flight attendants in their individual actions filed a petition alleging that the foundation was misusing the settlement funds and asking the court to disburse the settlement funds directly to their clients. The trial court disqualified all seven attorneys for the petitioners, but only two of the lawyers--Steven Hunter and Philip Gerson--appealed.

The intermediate appellate court quashed the trial court's order disqualifying Hunter and Gerson. This case demonstrates, it said, why Florida's lawyer conduct rules alone are inadequate to resolve conflicts issues presented when one class member seeks disqualification of another class member's counsel.

Instead, the appellate court applied a balancing test, drawn from federal cases, that weighs the actual prejudice to the objecting clients against the opponent's interest in representation by experienced counsel. Here, it decided, the other class members' right to be represented by Gerson and Hunter was outweighed by any prejudice to the objectors.

Supreme Court: Stick to Rules

Reinstating the disqualification order, the supreme court said the federal courts' balancing test is not the proper test for deciding motions to disqualify counsel. Rather, it said, the Florida Rules of Professional Conduct provide the standard for determining whether counsel should be disqualified in a given case, and the appellate court “lacked the constitutional authority to adopt a new test.”


“[W]e are seeing more cases like this, where courts are more closely examining the ethical duties of class counsel.”
Gregory Mersol
BakerHostetler

The trial court did not abuse its discretion, the supreme court held, in ruling that the lawyers violated Rules 4-1.7 (current-client conflicts) and 4-1.9 (duties to former clients).

Polston pointed out that Hunter had represented Alani Blissard, a class member who was a member of the foundation's board, in her individual suit for 10 years. Because the petition accuses the board--including Blissard--of misusing funds, it is directly adverse to Blissard's interests under Rule 1.7, the court said.

Moreover, Polston said, Hunter's purported termination of any remaining connection to Blissard when Blissard objected to the petition did not prevent Rule 1.7 from being applied to determine whether he should be disqualified.

Another flight attendant on the board, Patricia Young, also objected to the action against the foundation. The court found that as a result of the sharing of information and confidences that occurred in the team approach to the individual suits, Hunter and Gerson both faced a disqualifying conflict under Rule 1.7, even though Hunter may not have been direct counsel to Young and Gerson may not have been direct counsel to either Young or Blissard.

The court also concluded that disqualification was warranted under Rule 1.9. The individual litigation and the challenge to the foundation are substantially related, and the interests of the individuals participating in the action against the foundation are materially adverse to the interests of the two lawyers' former clients who object to the petition, the court said.

Disciplinary Referral

The court asked the Florida Bar to investigate whether any disciplinary rules were violated during the underlying proceedings or in the presentation of the appeal to the supreme court.

Justice R. Fred Lewis concurred in the result.

Young and the other petitioners were represented by Christian D. Searcy of Searcy Denney Scarola Barnhart & Shipley P.A., West Palm Beach, Fla; David J. Sales, Jupiter, Fla.; John W. Kozyak, T. Tucker Ronzetti and Rachel Sullivan of Kozyak Tropin & Throckmorton P.A., Coral Gables, Fla.; John Stewart Mills, Andrew Manko and Courtney Rebecca Brewer of The Mills Firm P.A., Tallahassee, Fla.; Miles A. McGrane III of The McGrane Law Firm, Miami; and Roderick N. Petrey, Coral Gables.

Counsel for Norva Achenbauch and other respondents were Steven K. Hunter and Christopher J. Lynch of Hunter, Williams & Lynch P.A., Miami; Philip M. Gerson and Edward S. Schwartz of Gerson & Schwartz, P.A., Miami; Stanley M. Rosenblatt and Susan Rosenblatt of Stanley M. Rosenblatt P.A., Miami; Marvin Weinstein of Grover & Weinstein P.A., Miami Beach, Fla.; Mark J. Heise and Antonio C. Castro of Boies, Schiller & Flexner, Miami; Kelly Anne Luther of Kasowitz Benson, Miami; Edward A. Moss and Kenneth J. Reilly of Shook Hardy& Bacon LLP, Miami; David Ross of Greenberg Traurig LLP, Miami; Douglas Chumbley and Benjamin Reid of Carlton Fields, Miami; and Stephanie E. Parker, John F. Yarber and John M. Walker of Jones Day, Atlanta.

 

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com


Full text of the supreme court's opinion is at http://www.bloomberglaw.com/public/document/Young_v_Achenbauch_No_SC12988_2014_BL_87460_Fla_Mar_27_2014_Court.

The appellate court's opinion is at http://www.bloomberglaw.com/public/document/Broin_v_Phillip_Morris_Cos_84_So_3d_1107_Fla_3d_DCA_2012_Court_Op.

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