Should Late Shopping of Class Settlements Draw Sanctions?

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By Perry Cooper

Sept. 8 — A recent Arkansas news article tipped off a federal judge that plaintiffs' attorneys dismissed their insurance class action from his court only to refile it in a state court where they believed a pending settlement would have an easier time getting approved.

The news led the judge to formally reprimand some of the plaintiffs' attorneys involved. He also gave a warning to some of the defense counsel in the case for their complicity in what he characterized as improper, late-in-the-game forum shopping of a settlement he characterized as unfair.

It’s hard to say how often this kind of maneuvering occurs because federal judges rarely find out what happens with cases after they leave their courts.

But two ethics professors commend the court for shining a light on a settlement and a practice the court found wanting—one that benefited class counsel and the defendant at the expense of the class.

However, the sanctions in this case are being appealed by both the plaintiffs' attorneys and defense counsel who incurred the court's wrath. And, one consumer advocate warns, “forum shopping” shouldn't be used as a pejorative term across the board.

The attorneys may have just been zealous advocates for their clients—doing what they thought they needed to do to get the deal approved in this instance.

The fact that the deal was found by a court to be unfair—a claims-made settlement with a 4 percent claims rate—is the real issue, he said.

Newsworthy Settlement Approval

The underlying class action at issue here was originally filed by Mark and Katherine Adams in Arkansas state court. They challenged the method used by insurer United Services Automobile Association to calculate the value of their homeowner's insurance claims.

USAA removed the case to federal court under the Class Action Fairness Act, 28 U.S.C. § 1332(d). The case proceeded before Judge P.K. Holmes III of the U.S. District Court for the Western District of Arkansas for 17 months until the parties reported that they had reached a settlement and sought dismissal from federal court. Holmes granted the motion.

Typically, that would have ended Holmes' involvement in the case.

However, a subsequent article in Arkansas Business made Holmes take the unusual step of reexamining the case, the federal judge said in his initial Dec. 21, 2015 order contemplating sanctions.

As it turns out, the day after Holmes dismissed the case from his court, the parties refiled the suit in the original state court with a settlement attached. The state court approved the deal, and awarded class counsel $1.85 million in fees despite a 4 percent claims rate from the $3.45 million settlement fund.

The settlement also provided that any unclaimed funds would go back to USAA.

Many of those details were spelled out in the news article. Arkansas Business covered the case because one of the plaintiffs' attorneys involved in the suit, John Goodson, is married to Arkansas Supreme Court Justice Courtney Goodson. She was running for chief justice that winter and there were allegations that she had received a significant amount of money from class action lawyers in that race.

Rule 11 Sanctions

Holmes took umbrage with the amount of time and energy his court put into the case only to have the parties dismiss the case from federal court and win easy settlement approval in state court.

Holmes formally reprimanded five of the plaintiffs' attorneys, including John Goodson, under Fed. R. Civ. P. 11 in a Aug. 3 opinion. He found they acted in bad faith by engaging in “improper mid-litigation forum shopping in a manner calculated to evade federal review and prevent the court from carrying out its obligation to putative class members” (17 CLASS 799, 8/12/16).

The law of the Eighth Circuit prohibits a party from dismissing “merely to escape an adverse decision” or “to seek a more favorable forum,” Holmes said.

He was more lenient on the three attorneys who represented USAA. USAA's directive to settle the suit put them “between the proverbial rock of asking the court to do something they knew it could not do—grant a motion to dismiss so they could pursue this action in a more favorable forum and avoid an adverse decision—and the hard place of violating their ethical duty to settle as directed by their client,” he said.

Holmes said the conduct of the three defense attorneys was characterized “more by a sense of helplessness in the face of ethical obligations to their client than it was by bad faith.”

He decided that a finding that they violated Rule 11 would be sufficient to deter them from future misconduct, so no formal sanction was necessary.

He cleared 10 other attorneys involved in the case, finding they abused the judicial process but not in bad faith.

Headed to Eighth Circuit

Attorneys for both sides have appealed the Rule 11 findings to the Eighth Circuit.

On Sept. 6, the appeals court granted leave for Ted Frank, director of the Competitive Enterprise Institute's Center for Class Action Fairness, to appear as an amicus supporting the district court's order.

Frank, in seeking to weigh in on the case, argued that no one would defend Holmes' order on appeal even though the sanctions were necessary to curb class action abuses.

He pointed out that class counsel justified their decision to seek approval of the deal in state court because Arkansas law doesn't allow class members who object to a settlement to appeal its approval.

Class counsel had said that class members would actually benefit from the limitation because Arkansas's requirement that objectors formally intervene to appeal would limit “serial objectors” and result in a faster payout to the class.

Back to the Bad Old Days

The propriety of the underlying settlement and the type of forum shopping the parties engaged in here will no doubt receive further scrutiny as the appeal works its way through the Eighth Circuit.

But how often does this type of thing happen? And is this kind of last-minute court shuffling really improper anyway?

Requests for comment to several attorneys involved in the case were unsuccessful. So their own arguments in defense of their actions will have to await their appellate briefing.

Those interviewed by Bloomberg BNA said it's unclear how frequent this practice is because judges usually have no reason to know what happens to a case after it leaves their courtrooms.

Here, Judge Holmes only found out about the case's afterlife from a news story that involved local politics.

“It is uncommon for judges to pay attention to a case after it has been dismissed from their court,” Howard Erichson, who specializes in the ethics of complex litigation at Fordam University School of Law in New York told Bloomberg BNA in an e-mail.

Erichson said he was surprised that the judge found a Rule 11 violation here, but “that does not mean I'm unhappy about it.”

“I am pleased to see the court taking seriously the problem of the breakdown of the adversary system that occurs with settlement class actions,” he said in an e-mail.

He said the situation harkens back to the “bad old days” when plaintiffs would seek out “magnet jurisdictions” that were lenient on class deals. Defendants would do anything they could to avoid those jurisdictions, “with the big exception that defendants would seek those jurisdictions along with plaintiffs' lawyers when they wanted to get a judge to rubber-stamp an inadequate class settlement,” he said.

CAFA was supposed to curb this problem by expanding federal jurisdiction over class actions. “But as this case demonstrates, settling parties may try to work around CAFA by agreeing to file their settlement class action in state court,” he said.

Another complex litigation ethics professor says it's not hard to justify the conduct of defense counsel here.

“Defense counsel were likely serving the best interests of their clients,” Joshua Davis of the University of San Francisco School of Law told Bloomberg BNA in an e-mail.

Some legal ethicists say that defense counsel have an obligation not to be complicit in conduct that might harm the class, he said. But he and others find that “hard to square with our adversarial system.”

Why Is ‘Forum Shopping' a Dirty Word?

Professor and consumer advocate Brian Wolfman said courts throw around “forum shopping” as a pejorative when really the problem in instances like this may be unfair underlying settlement terms.

He declined to comment specifically on the USAA case because he hasn't followed it closely.

“The lawyer is actually not fulfilling her responsibility to be a zealous advocate for her client if she’s not forum shopping,” Wolfman, who runs the Georgetown Law appellate litigation clinic in Washington, told Bloomberg BNA.

But he wonders why it is always the plaintiffs' attorneys that come under fire when courts complain of forum shopping. “It takes two to tango,” he said. “The defendants are the ones agreeing to the deal.”

Wolfman said forum shopping isn't the real problem—the concern is that this settlement seems like a bad deal.

“If the plaintiffs say to themselves, ‘We want to do this because we suspect that the federal district court will reject this deal but we actually think this is a great deal for our clients,' sure they want to go back to state court to get the deal approved,” he said.

Changing forums late in the game should certainly raise red flags for the court tasked with approving a settlement, he said.

But the law gives plaintiffs options on where to pursue cases. And robust removal gives an option for the defendant too.

“The law is intended to give options,” Wolfman said. Forum shopping isn't the kind of conduct that should be “automatically sanctionable.”

To contact the reporter on this story: Perry Cooper in Washington at

To contact the editor responsible for this story: Steven Patrick at

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