class member extortion

7/27/2019 Class Member Extortion

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CLASS MEMBER EXTORTION

MATTHEW WEINER


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Overview Addressing the concerns and solutions raised in a law review article entitled

The End of Objector Blackmail? By Brian Fitzpatrick Introduction

Settlement process

Implications arising from a 2002 Supreme Court case

Define professional objector

The Problem

Economic incentives created for professional objectors to extort class counsel Possible Solutions

Attempts made by courts and practitioners to limit professional objectors andobjector blackmail

Examine the proposed rule by Mr. Fitzpatrick

Critique

Show how Mr. Fitzpatricks rule is superior, yet still incomplete in fully thwartingprofessional objectors

Conclusion Mr. Fitzpatricks rule should be adopted, with further standards set by district courts

that create a disincentive for professional objectors lodging frivolous objections at afairness hearings


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Prevalence of Settlement

Certified class actions were two to five times morelikely to settle than cases that contained classallegations but were never certified.

Source: Newberg on Class Actions Appendix XI (4th ed.) EmpiricalStudy of Class Actions in Four Federal District Courts

In a study analyzing the E.D.Pa between years 92-94: Cases that were certified

Total: 36 (64 not certified)

Judgment by Bench Trial: 1

Judgment by Jury Trial: 2

Settlement Approved: 23 (62%) Thomas E. Willging , Laural L. Hooper , Robert J. Niemic, An Empirical

Analysis of Rule 23 to Address the Rulemaking Challenges, 71 N.Y.U. L. Rev.74, (1996)


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Rule 23(e)Settlement, Voluntary

Dismissal, or Compromise

(1) The court must direct notice to all class members (2) A court must conduct a fairness hearing

Determine that the settlement is fair, reasonable, and

adequate

(3) Disclose any agreements made in connection (4) Afford new opportunity to opt-out (only if b3)

(5) Must entertain class members who object

Can only withdraw objection upon approval by court


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Who May Object?

Any class member How important is this?

See In re Prudential Ins. Co. of Am. Sales PracticesLitig., 278 F.3d 175, 201-03 (3d Cir. 2002) (Rosenn, J.,dissenting) Defendants' counsel and Class Counsel reach a point where

they are cooperating in an effort to consummate thesettlements. Even the court at this point may be inclined to favorsettlement of a huge, complex action, and the generalatmosphere becomes largely cooperative.

Objections serve a highly useful vehicle for the members of theclass and the public generally; they require consideration by thecourt and its disposition of them usually provides reassurancethat the settlement and the fees approved are fair and just.

From the conflict of ideas comes crystallization of thought.


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General Consensus Concerning Objectors

[T]he least popular parties in the history of civilprocedure

Edward Brunet, Class Action Objectors: Extortionist FreeRiders or Fairness Guarantors, 2003 U. Chi. Legal F. 403,438-42 (2003)

Objections may be only an effort to obtain attorneys fees' for

the objecting attorney

Such claim-jumping attorneys are able to free ride off the effortsof the initial class counsel, who had already identified an allegedlegal wrong and spent considerable time procuring a settlement.


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Who May Appeal?

Prior to 2002

Only the formal

parties may appeal

Any class memberwho filed an

objection may appeal

Circuit Split

Circuits4,5,6,7, 8, 10 and11

Circuits2,3 and 9


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Who May Appeal?

Only the formal parties mayappeal

Any class member who filed anobjection may appeal

Defendant Defendant

Named Reps Named Reps

Class Counsel (fee awards) Class Counsel (fee awards)

Successful Interveners (FRCP 24) Successful Interveners (FRCP 24)

Any Class Member Filing anObjection


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Devlin v. Scardelleti, 536 U.S. 1 (2002)

Facts Union pension plan was amended in 1991 to add COLA

for retired and active employees

Plan could not support such increase

In 1997, trustees eliminated COLA for all members byenacting an amendment

Trustees filed a class action seeking declaratory judgmentthat 1997 amendment was binding

Petitioner, Devlin, a retired worker, was proposed as classrepresentative for a subclass of retired workers


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Facts Devlin refused to become named rep

Devlin brought his own claim in S.D.N.Y arguing that1997 amendment violated ADEA

Devlins claim was dismissed

Second Circuit thought it appropriate that the district courtholding the class-action (Maryland) should handle all of theseclaims

Maryland had already certified a class under 23(b)(1)

By the time Devlin formally sought intervention, motions

were already filed for the court to approve settlement Intervention was absolutely untimely and thus denied

Devlin appeals motion ruling, as well as settlement approval

Fourth Circuit: Devlin lacks standing not a formal party

Cert granted


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Supreme Court Issue:

[W]hether nonnamed class members who fail to properlyintervene may bring an appeal of the approval of a settlement.

Is Devlin a party for the purposes of appeal

Only parties to a lawsuit, or those that properly become parties,may appeal an adverse judgment. Marino v. Ortiz, 484 U.S. 301(1988)


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Practical Implications Arising from Devlin

Economic Incentives Court

Appeals would be few because, like the objections on whichappeals are based, they are irrational to pursue

Cost of Appeal > Expected Marginal Recovery from Appeal

Dissent

This surely suggests the triumph of hope over experience.

Who is correct?


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The dissent is pointing to the problem of ObjectorBlackmail

To say the substance of an objection is irrational is not to

say that it is irrational to make the objection and file theappeal.

C < (pR) or (pB) Appeal

Where:

C = Marginal cost for objector to pursue appeal

P = Probability

R = Expected Marginal Recovery from Appellate Court B = Expected Blackmail Payment from Counsel


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C < (pR) or (pB) Appeal

Why would counsel pay party to withdraw appeal?

Time Value of Money: A dollar now is worth more than a dollartomorrow

C + (PVft PVfa) > B Payoff appeal

Where: C = Marginal cost for class counsel to defend appeal (include opportunity

costs)

PVft = Present value of counsel fee after initial trial court approval ofsettlement

Pvfa = Present value of counsel fee after appellate determination

B = Payment to settle appeal


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What Devlinnow allows

The Frivolous Objectors now have the right to appealtheir ruling, thereby delaying class counsels fee

Using Shaws numbers:

C + (PVft Pvfa)> B Payoff appeal C + $145.5 - $138.5* > B

Therefore, it is economically rational for the class counsel inShawto payoff the frivolous objectors appeal at any amountless than $7M

Furthermore, despite what the Court stated in Devlin, it is notirrational for the frivolous objectors to pursue appeal (as long

as appeal would cost less than $7M)

* Assumes a 5% rate and an appeal that gets denied in 1 year (veryconservative assumptions)


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What comprises such a frivolous

objection?

Perhaps the district court was wrong in dismissing theobjector and calling the objection frivolous Objector argued: It is abundantly clear that Sears will enjoy

increased floor traffic in its stores from those class memberswho actually use the coupon thereby benefitting Sears evenfurther.

SEARS HAS NOTHING TO DO WITH THIS LAWSUIT! This Court would venture to say this particular language haspreviously been filed in another class-action lawsuit involvingSears. Perhaps that's where it should have stayed.

Nevertheless, because ofDevlin,the objector can nowappeal from this denied frivolous objection


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Side Note: Average fee/cost ratio

Analyzing 346 cases between 1993 2002 (adjustedfor $2002):

Average attorneys fees $8,870,101.

In 252 cases, the average attorneys costs and expenses

$1,061,172. Theodore Eisenberg , Geoffrey P. Miller, Incentive Awards to Class Action

Plaintiffs: An Empirical Study, 53 UCLA L. Rev. 1303 (2006)


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Proposals to Eliminate Blackmail

Sanctions Bond Posting

Undo Devlin

Quick-Pay Provisions

Inalienability


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Bond Posting

Rule: Under Rule 7 of Appellate Procedure, court may require

objectors to post bonds to cover for attorneys fees In re Cardizem CD Antitrust Litig., 391 F.3d 812, 815, 817 (6th Cir.

2004) In re Pharm. Indus. Average Wholesale Price Litig., 520 F. Supp.

2d 274, 279 (D. Mass. 2007)

Pros: Bond can be high enough to successfully thwart objectors who

do not have enough capital and pay for administrative costsattributable to delay in [settlement] distribution

Cons: Judges now have authority to limit appeals from their own

decisions Blackmailers can still appeal from the decision to post bond,

creating more delay Does not directly stop blackmailers if objector has enough

capital to post bond, then blackmailers may still prevail


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Fee Awards for Objectors

General Rule:

Objectors are only awarded fees when:

They expended large amounts of time, money and resources,

They aided the court considerably in its consideration ofproposed settlements and fee awards, and

The class members were ultimately benefitted as a result ofthe objectors' efforts.

See Sparks v. MBNA Corp., 289 F.Supp.2d 510 (D.Del 2003) (Notingthat objector fees are few and far between.)


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class member extortion

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