ETHICAL ISSUES IN CLASS ACTIONS . - Parker Mills LLP
ETHICAL ISSUES IN CLASS ACTIONS& DERIVATIVE LITIGATION
DAVID B. PARKER is a trial lawyer and founder of Parker Mills LLP in LosAngeles. His practice is focused on commercial, professional liability andinsurance litigation. Often described as a "lawyer’s lawyer," his practice extendsto counseling and litigation in legal ethics and disputes between and amonglawyers. Past Chair of LACBA’s Professional Responsibility and EthicsCommittee and the Errors and Omission Prevention, member of the State Bar’sCommittee on Professional Responsibility and Conduct, former member of theABTL Board of Governors, and active member of the Lawyers ProfessionalLiability Bar Association and the Association of Professional ResponsibilityLawyers, Mr. Parker also serves as an expert witness and consultant, and is afrequent speaker and author in his fields of expertise, which extend to directors andofficers insurance, class and derivative actions and the liability of corporateofficers and directors. A graduate of UCLA Law School (1976), he was Order ofthe Coif and Assoc. Editor of the Law Review.SHAWN M. HARPEN is a partner in the Securities and Shareholder Litigation &SEC Enforcement Practice Group of Jones Day, resident in the Firm’s Irvineoffice. Her practice focuses on complex commercial litigation, with an emphasison the defense of directors and officers in securities class and derivative actions.She has assisted public and private companies, officers and directors in matterspending before state and federal courts across the country. For the past severalyears, Ms. Harpen has been named one of Los Angeles Magazine’s “SouthernCalifornia Super Lawyers Rising Stars.” She serves on the Professionalism andEthics Committee of the Orange County Bar Association and was appointed to theState Bar of California’s Standing Committee on Professional Responsibility andConduct in 2006. She also has been a speaker and contributing author forprograms on corporate compliance, securities litigation, professional responsibilityand ethics. A magna cum laude graduate of The University of Toledo College ofLaw (1998), she was Order of the Coif and an Assistant Executive Editor for TheUniversity of Toledo Law Review.DIANE L. KARPMAN has counseled lawyers for more than two decades. Shedefends lawyers in attorney discipline and regulatory proceedings before the StateBar Court and in ethics litigation support (motions to disqualify, breach offiduciary duty, conflicts, etc.). An established authority in attorney ethics andstandards of professional care, Ms. Karpman is frequently retained as an expert1
witness in legal malpractice actions and related proceedings. Ms. Karpman haswritten and lectured extensively for the ABA, State Bar Educational Symposiums,State Bar Conventions, Los Angeles Trial Lawyers, Los Angeles County Bar andlocal bar associations in professional responsibility and legal ethics. She is acontributing editor for Bender's Attorney Ethics (competency and trust accountmanagement); coauthor of the California Lawyer's Guide to ProfessionalResponsibility, published in 1994, 1995 & 1996, by Shepards/McGraw-Hill; andassociate editor of the Cornell Ethics Project with Professor Roger Cramton. Sheis a former Chair of the Association of Professional Responsibility Lawyers andthe Los Angeles County Bar's Professional Responsibility and Ethics Committee.During the last decade, she authored the "Ethics Byte" column in the CaliforniaBar Journal. Ms. Karpman is an L.A. Superior Court Appointed Legal EthicsConsultant; a participant in the Member Consultant Group for the American LawInstitute and Principles of Aggregate Litigation. She spoke at the ABA's NationalEthics Symposium last year in Chicago on, "Aggregate Settlements and EthicsRules," and counsels several firms actively in Class Actions, Aggregate litigationand MDL litigation.2
Ethical Issues in Class Actions & Derivative Litigation1David B. ParkerShawn M. HarpenDiane L. Karpman1.Applicability of Ethics Rules in Class Action Litigation.“Traditional attorney ethics rules are not applied axiomatically in representativelitigation.” (Diane L. Karpman, Class Action Ethics Considerations (2007) p. 2(unpublished manuscript in progress, on file with author) (“Karpman Article”)(citing In re Agent Orange Product Liability Litigation (2d Cir. 1986) 800 F.2d14, 19 (“Agent Orange”) (“The traditional rules that have been developed in thecourse of attorneys’ representation of the interests of clients outside of the classaction context should not be mechanically applied to the problems that arise in thesettlement of class action litigation.”)); In re Corn Derivatives Antitrust Litigation(3d Cir. 1984) 748 F.2d 157, 163 (“Corn Derivatives”) (conc. opn. of Adams, J.)(“courts cannot mechanically transpose to class actions the rules developed in thetraditional lawyer-client setting context”); Lazy Oil Co. v. Witco Corp. (3d Cir.1999) 166 F.3d 581, 590 (“Witco”) (citing and quoting both Agent Orange andJudge Adams’ concurring opinion in Corn Derivatives).)In fact, there are only two (2) references to the California Rules of ProfessionalConduct (“CRPC”) 2 specifically relating to class actions: 3a.Rule 3-310(D): When the settlement is subject to Court approval, theaggregate settlement provision requiring the informed written consent of aclient does not apply. 4b.Rule 3-510(B): Communication of the settlement offer must be made tothe named class representatives.Note, there is authority that states ethics rules which are inconsistent with theoverarching goals of class actions are trumped if they are not harmonious withnational goals. “Rule 23 is designed for the nation as a whole.” (Rand v.1The opinions contained herein are those of the authors personally and should not be attributed to theCommittee on Professional Responsibility and Conduct or the law firms of Parker Mills LLP, Jones Day orKarpman & Associates. These materials primarily focus on California authorities; differences may and will exist inother jurisdictions. The information provided is not intended as, nor may it be relied upon as, legal advice. Thespeakers wish to acknowledge Justin D. Denlinger, Theodore F. Frank and Ann C. Schneider, associates with ParkerMills LLP, along with Kevin Logan, an associate in the Irvine office of Jones Day, for their valuable assistance inthe preparation of this article.2Unless otherwise noted, all further references to any rule shall be to the CRPC.3See Menkel-Meadow, Ethics and the Settlement of Mass Torts: When the Rules Meet the Road (1995) 80Cornell L. Rev. 1159 (arguing that, if only two sections of the CRPC exempt class actions, then logically, theremainder of the CRPC rules apply to class actions).4Rule 3-310 Official Discussion (“Paragraph (D) is not intended to apply to class action settlements subjectto court approval.”).3
Monsanto Co. (7th Cir. 1991) 926 F.2d 596, 600.) Nonetheless, practitionersshould proceed with caution as preemption must be determined according toapplicable authorities on a case by case basis.2.Who Is the Client and What Are Class Counsel’s Obligations?A written fee agreement in class action litigation is a rarity. However, even wherea plaintiff has executed one, it will not bind any absent class members nor willsuch an agreement bind the Court. (Long Beach City Employees Assn., Inc. v.City of Long Beach (1981) 120 Cal.App.3d 950, 959.)a.Uncertified Class: Where the putative class has not been certified, theattorney acting as “class counsel” may represent multiple named plaintiffsseeking common relief on behalf of themselves and other similarlysituated individuals (including unnamed plaintiffs). Here, the attorney’sclients are the named plaintiffs. 5 (L.A. County Bar Assn. Formal Opn.481 & fn. 2 (1995); Rest.3d Law Governing Lawyers, § 14, com. f.) 6i.b.Class Counsel’s Relationship with Class Representative: Closerelationship between class counsel and class representative (i.e.,familial, spousal and business associate) may create a barrier toclass certification. (Blue Chip Stamps v. Superior Court (1976) 18Cal.3d 381, 134.) Class certification has also been denied whereclass attorney is a percipient witness to an asserted claim. (Reichv. Club Universe (1981) 125 Cal.App.3d 965, 970-71 (“Reich”).)Certified Class: However, where the class is certified, and attorney actingas class counsel represents all class members (including unnamedmembers). (Agent Orange, supra, 800 F.2d at p. 18 (holding that the classattorney is guardian of the class and owes fiduciary duty to each member);but see Rule 3-510(B) and Bus. & Prof. Code § 6103.5(a) (for purposes ofcommunicating settlement offers, class action “client” is limited to namedclass representatives).)i.“[T]he scope of representation ([along with] duties owed to classmembers) by class counsel is [generally] determined withreference to the certification order. (Janik v. Rudy, Exelrod & Zieff(2004) 119 Cal.App.4th 930, 934 (“Janik”) ([holding that] once aclass is certified, class counsel assumes duty to competently5Accord, American Bar Association Model Rules of Professional Conduct (“Model Rules”), Rule 1.7, com.25 (“When a lawyer represents or seeks to represent a class of plaintiffs or defendants in a class-action lawsuit,unnamed members of the class are ordinarily not considered to be clients of the lawyer for [concurrent conflict ofinterest] purposes.”); see also Schick v. Berg (2d. Cir. 2005) 430 F.3d 112, 116-17 (holding that, for malpracticepurposes, unnamed class members are not clients of class counsel until the class is certified).6Paul W. Vapnek, Mark L. Tuft, Ellen R. Peck and Justice Howard B. Wiener (Ret.)., Cal. Practice Guide:Professional Responsibility (The Rutter Group 2007) ¶ 3:131.20 (“Vapnek, et al., Professional Responsibility”).4
represent class members in pursuing claims “as to which the classwas certified.”).)” 7ii.“However, class counsel’s duties extend beyond the claimsliterally described in the class certification order to includeadvising class members of all related claims they reasonablywould expect to be considered, [especially those claims that wouldbe barred by res judicata if not asserted by class counsel.] (Janik,supra, 119 Cal.App.4th at pp. 939-42.).” 8 “[T]he attorney may stillhave a duty to alert the client to reasonably apparent legalproblems even though they fall outside the scope of the retention.(Nichols v. Keller (1993) 15 Cal.App.4th 1672, 1684 (“Nichols”);Janik, supra, 119 Cal.App.4th at pp. 940-41.).‘The attorney need not advise and caution of every possiblealternative, but only of those that may result in adverseconsequences if not considered The attorney need not representthe client on such matters. Nevertheless, the attorney shouldinform the client of the limitations of the attorney’s representationand of the possible need for other counsel.’ (Nichols, supra, 15Cal.App.4th at p. 1684; Janik, supra, 119 Cal.App.4th at pp. 94041.).” 9“While lead counsel owes a generalized [fiduciary] duty tounnamed class members, the existence of such a fiduciary does notcreate an inviolate attorney-client relationship with each and everymember of the putative class.” (In re McKesson HBOC, Inc.Securities Litigation (N.D.Cal. 2000) 126 F.Supp.2d 1239, 1245(“McKesson”); see also Atari, Inc. v. Superior Court (1985) 166Cal.App.3d 867, 872 (“Atari”).)c.Duties of Co-Counsel: All attorneys in a co-counsel relationship in classaction matters individually owe each and every client the duty of loyalty.In Huber v. Taylor (3d Cir. 2006) 469 F.3d 67, 81 (on remand to Huber v.Taylor (W.D.Pa. 2007) 519 F.Supp.2d 542) (collectively “Huber”), 10 aputative class of plaintiffs brought an action against their former lead classcounsel (attorneys at a large Texas firm) that had contracted with variouslocal counsel around the country, alleging breach of fiduciary duty with7Vapnek, et al., Professional Responsibility, supra, ¶ 3:21.8.Vapnek, et al., Professional Responsibility, supra, ¶ 3:21.8.9Vapnek, et al., Professional Responsibility, supra, ¶ 3:39.10It is important to note that the Huber court relied on Burrow v. Arce (Tex. 1999) 997 S.W.2d 229(“Burrow”), in finding that punitive damages and attorneys’ fees were available to plaintiffs under Texas law.“Texas law does permit recovery of punitive damages in [breach of fiduciary duty] cases, even in the absence ofactual harm or damages.” (Huber, supra, 519 F.Supp.2d at p. 561, fn. 5 (relying on Burrow).) “Under Texas law, ‘aclient need not prove actual damages in order to obtain forfeiture of an attorney's fee for the attorney's breach offiduciary duty to the client.’” (Huber, supra, 469 F.3d at p. 77 (citing Burrow at p. 240).)85
respect to asbestos personal injury litigation. Lead counsel were found tohave breached their fiduciary duty of undivided loyalty and candor to theirclients by failing to disclose material terms of various settlements or thenature of lead counsel/local counsel's involvement in the case. The courtfound that lead counsel owed a fiduciary duty to plaintiffs under Texaslaw; although plaintiffs did not reside in Texas, lead counsel heldthemselves out as plaintiffs’ attorneys, entered into agreements regardingrepresentation of plaintiffs, signed and filed pleadings on plaintiffs' behalf,negotiated settlements for plaintiffs' claims, and collected fees fromplaintiffs. "The [fiduciary] duty [that an attorney owes a client] may notbe dispensed with or modified simply for the conveniences and economiesof class actions." (Id. at p. 82.)3.Attorney Communications.Prior to certification, a potential class member is not a party 11 within the meaningof Rule 2-100’s anti-contact provisions. 12a.Reasons for Contact: 13i.Plaintiffs’ lawyers may want to contact potential claimants (precertification) for a variety of reasons, including:(1)to notify them that a class is pending;(2)to notify them of applicable statute of limitation issues;(3)to locate new class representatives if the court hasconcluded that a class cannot otherwise be certified; 14 or(4)“[o]ther plaintiff’s lawyers or firms may attempt tocompete in contact with prospective claimants to garner thelargest number of plaintiffs in their client pool before theappointment of lead counsel. The number of plaintiffsrepresented by counsel is a factor considered by the court inthe appointment of lead counsel.” 1511Communication by defense counsel with potential class members (pre-certification) is generallypermissible, because no attorney client relationship exists. (Babbitt v. Albertson’s Inc. (N.D.Cal. Jan. 28, 1993, No.C-92-1883 SBA(PJH)) 1993 U.S. Dist. Lexis 18801, at *5.); Atari, supra, 166 Cal.App.3d at p. 873.)12Model Rule 4.2 is the counterpart to CRPC Rule 2-100.13Class Action & Complex Case Management--California (Comr. Bruce Mitchell ed., forthcoming 2008)(unpublished manuscript in progress, on file with Class Action Publishers, Inc.).14Budget Finance v. Superior Court (1973) 34 Cal.App.3d 794, 799; La Sala v. American Savings & LoanAssn. (1971) 5 Cal.3d 864, 874; Best Buy v. Superior Court (2006) 137 Cal.App.4th 772, 779 (“Best Buy”).15Karpman Article, supra, at pp. 9-10. This is especially true in securities class actions and is required by thePrivate Securities Litigation Reform Act of 1995. (Id. at p. 10, fn. 25.)6
ii.b.Defendants’ attorneys may want to contact potential claimantsprior to certification: 16(1)to investigate the claim as to class certification and themerits;(2)to develop an affirmative defense;(3)to settle with a named plaintiff or a potential class; or(4)to encourage prospective claimants to opt-out.Pre-Certification Communications with Potential Class Members: Whilesolicitation is generally prohibited, 17 class counsel is permitted to contactpotential class members to investigate and prepare the action. (HowardGunty Profit Sharing Plan v. Superior Court (2001) 88 Cal.App.4th 572,578 (“Howard Gunty”) (“[Plaintiffs] are permitted precertificationcommunication with potential class members for the purpose ofinvestigation and preparation of their claims or defenses.”).) 18“Model Rules of Professional Conduct 4.2 [anti-contact rule] and 7.3[solicitation] do not generally prohibit counsel for either plaintiff ordefendant from communicating with persons who may in the futurebecome members of the class. Both plaintiff's and defense counsel mustnevertheless comply with Model Rule 4.3 [dealing with unrepresentedpersons].” (ABA Com. on Prof. Ethics, Formal Ethics Opn. 07-445(2007).)“[B]anning communications with class members presumptively violatesthe First Amendment [ ]. (Gulf Oil Co. v. Bernard (1981) 452 U.S. 89,103-04 [101 S.Ct. 2193] (“Gulf Oil”) (order prohibiting plaintiffs andlawyers from communicating with potential class members interfered withefforts to inform potential class members of lawsuit’s existence and madeit difficult to obtain information about lawsuit’s merits from persons theysought to represent); see also Fed. Rules Civ.Proc., rule 23(d), 28 U.S.C;ABA Model Rules Prof. Conduct, rule 7.2, com. 4 (excluding notificationof class action members from solicitation prohibition in Model Rules, rule7.3).).” 19General Rule: Thus, generally there is no court oversight of precertification communications with potential class members. (Parris v.16After class certification, counsel for the class becomes the sole legal representative, which then barsdefense counsel from contacting any class member (directly or indirectly). See Mallen & Smith, Legal Malpractice(4th Ed. 2007) (“Mallen & Smith”) § 30:53, p. 691 (citing Blanchard v. EdgeMark Financial Corp. (N.D.Ill. 1997)175 F.R.D. 293).17Rule 1-400(B), (C).18See Vapnek, et al., Professional Responsibility, supra, ¶ 2:333.10.19See Vapnek, et al., Professional Responsibility, supra, ¶ 2:333.10.7
Superior Court (2003) 109 Cal.App.4th 285, 296 (“Parris”) (finding suchoversight to be an improper prior restraint on speech); Atari, supra, 166Cal.App.3d at p. 871 (“Absent a showing of actual or threatened abuse,both sides should be permitted to investigate the case fully.”).)Exception: Court oversight of pre-certification communications ispermissible upon a showing of necessity to avoid particular harm. (Parris,supra, 109 Cal.App.4th at pp. 299-300 (“A trial court may rule on thepropriety of precertification communications only if the opposing partyseeks an injunction, protective order or other relief. If such a motion isbrought, the trial court may impose restrictions on such communicationsonly ‘by a showing of direct, immediate and irreparable harm.’”(emphasis added)); Atari, supra, 166 Cal.App.3d at p. 871 (“Absent ashowing of actual or threatened abuse, both sides should be permitted toinvestigate the case fully.” (emphasis added)); Howard Gunty, supra, 88Cal.App.4th at p. 580 (“any ‘order limiting communications betweenparties and potential class members should be based on a clear record andspecific findings that reflect a weighing of the need for a limitation and thepotential interference with the rights of the parties.’ (Gulf Oil, supra, 452U.S. at p. 101.).”) (emphasis added).)Beware of Use of Term “Notice” in Communications with ClassMembers: Federal Rules of Civil Procedure (“FRCP”) Rule 23 refers tothe court’s use of “notices,” e.g., to inform potential class members of thenature of the action and their rights, as well as proposed settlements. Useof the term “notice” in attorney communications with class members maybe deceptive in that it suggests that the communication was required bythe court. (McKesson, supra, 126 F.Supp.2d at pp. 1242-44 (enjoining useof mass mailed solicitations entitled “Notice of Opportunity to JoinMcKesson HBOC/Proxy/Breach of Fiduciary Duty Litigations” and whichinadequately described the class action process, requiring dissemination of“curative” notice, and allowing rescission of solicited “opt out”agreements).)c.Miscommunication to the Class: Counsel, who represented a competingsubsequent cla
DAVID B. PARKER is a trial lawyer and founder of Parker Mills LLP in Los Angeles. His practice is focused on commercial, professional liability and insurance litigation. Often described as a "lawyer’s lawyer," his practice extends to counseling and litigation in legal ethics and disputes between and among lawyers.
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