Supreme Court Hears Argument in CAFA Case

The U.S. Supreme Court heard argument in a case raising the issue whether a parens patriae group action by a state attorney general -- a class-like litigation without the procedural protections of a class action -- is removable as a mass action under CAFA.  See Mississippi ex rel. Hood v. AU Optronics Corp.,  No. 12-1036 (U.S., oral argument 11/6/13).

The Fifth Circuit, 701 F.3d 796 (5th Cir. 2012), had announced a claim-by-claim analysis to determine the real party in interest for purposes of CAFA jurisdiction in such parens patriae actions; the Fourth, Seventh and Ninth Circuits have taken a different, more “whole case” approach, considering the entire complaint to determine the real party in interest.  See AU Optronics Corp. v. South Carolina, 699 F.3d 385 (4th Cir. 2012); LG Display Co. v. Madigan, 665 F.3d 768 (7th Cir. 2011); Nevada v. Bank of America Corp., 672 F.3d 661 (9th Cir. 2012).

CAFA allows removal of certain mass actions, even if not styled as class actions, but contains an exception that a suit is not a mass action if all of the claims in the action are asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class) pursuant to a state statute specifically authorizing such action; but when specific individual consumers, in addition to the state, are the real parties in interest, there is no way that all of the claims are asserted on behalf of the general public.

Mississippi, of course, argued for "state sovereign prerogatives.”  And Mississippi focused on the statutory language about a mass action seeking a joint trial, and contended that the parens patriae action did not propose a joint trial for 100 or more plaintiffs' claims. On the other hand, defendants noted that the use of the word “persons” in CAFA's mass action provision clearly required the court to engage in a fact specific claim-by-claim analysis, rather than take a whole-claim approach. CAFA could have, but did not focus on “named plaintiffs.”  It was clear that the Mississippi consumers allegedly harmed by defendants' prices were the real parties in interest.  Regarding the federalism concerns, defendants noted that this was only a question of forum, and federal courts can faithfully enforce state law.

The Washington Legal Foundation, in one of multiple amicus filings, argued that CAFA was enacted to enhance the ability of defendants to remove interstate mass actions to federal court.  The Chief Justice raised the most compelling issue, asking “So the answer is, that there is nothing to prevent 50 attorneys general, from saying, every time there is a successful class action as to which somebody in my State purchased one of the items, we are going to file a parens patriae action, the complaint is going to look an awful lot like the class action complaint, and we want our money” -- in state court, out of the reach of CAFA?

 

New Article on Lawyer Behavior in Mass Torts

For our readers interested in ethical issues in mass torts, a note that Professor Richard Zitrin from UC Hastings has written an article, "Regulating the Behavior of Lawyers in Mass Individual Representations: A Call for Reform,"  3 St. Mary’s J. on Legal Malpractice & Ethics 86 (2013).

Here's the abstract from SSRN:

Cases in which lawyers represent large numbers of individual plaintiffs are increasingly common. While these cases have some of the indicia of class actions, they are not class actions, usually because there are no common damages, but rather individual representations on a mass scale. Current ethics rules do not provide adequate guidance for even the most ethical lawyers. The absence of sufficiently flexible, practical ethical rules has become an open invitation for less-ethical attorneys to abuse, often severely, the mass-representation framework by abrogating individual clients’ rights. These problems can be abated if the ethics rules offered better practical solutions to the mass-representation problem. It is necessary to reform the current rules, but only with a solution that is both practical and attainable, and with changes that maintain the core ethical and fiduciary duties owed by lawyers to their individual clients, including loyalty, candor, and independent professional advice.

Supreme Court Takes CAFA Parens Patriae Issue

The U.S. Supreme Court granted cert last week to address whether a state attorney general's parens patriae antitrust action is removable as a mass action under the Class Action Fairness Act of 2005.  See Mississippi v. AU Optronics Corp., No. 12-1036 (U.S., certiorari granted 05/28/13).

As noted in the respondents' papers, CAFA expands federal diversity jurisdiction for both “class actions” and “mass actions.” A “mass action” is defined as any civil action in which monetary relief claims of 100 or more persons are proposed to be tried jointly.  The definitions of “class actions” and “mass actions” are connected, as a mass action is deemed to be a class action removable to federal court if it otherwise meets the provisions of a “class action,” including CAFA’s unique minimal diversity.

Determining whether the 100 person level is satisfied requires consideration of whose claims are actually being asserted, as the Court has held that diversity  jurisdiction must be based upon the citizenship of
real parties to the controversy. E.g.,  Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 461 (1980).  Where the action filed by the State seeks monetary relief claims on behalf of more than 100 unnamed persons who are among the real parties in interest and any one of them is diverse from any defendant, CAFA applies.  This was the approach of the 5th Circuit here, 701 F.3d 796, 800 (5th Cir. 2012), under the so-called “claim-by-claim" approach.  In contrast other courts look to the "state’s complaint as a whole." E.g., AU Optronics Corp. v. South Carolina, 699 F.3d 385, 394 (4th Cir. 2012).

It will be interesting to see if the Court applies the notion from the unanimous CAFA decision in Standard Fire that treating a nonbinding stipulation (on damages) from the class rep before a class is even certified as if it were binding on the later class would “exalt form over substance, and run directly counter to CAFA's primary objective: ensuring federal court consideration of interstate cases of national importance.”

 

 

Drug Maker Defeats AG Motion to Dismiss Action Challenging Private Contingency Counsel

We have warned readers before about the dangerous and growing practice of governmental agencies delegating state police powers to private (plaintiff) attorneys on a contingency fee basis.  The latest round in this nationwide battle comes from Kentucky, where the court recently ruled that Merck can continue its suit alleging violation of its due process rights after the state hired such outside counsel.  See Merck Sharp & Dohme Corp. v. Conway, No. 3:11-cv-51 (E.D. Ky., 12/19/12).

The matter underlying this action arose from Merck’s marketing and distribution of the prescription medication Vioxx. The AG filed suit against Merck in the Franklin County Circuit Court in 2009, alleging a violation of the Kentucky Consumer Protection Act (“KCPA”). Merck removed the case to federal court, and the action was then transferred to the Eastern District of Louisiana on April 15, 2010, as part of the multidistrict litigation, In re Vioxx Product Liability Litigation, MDL No. 1657.  But on January 3, 2012, the District Court for the Eastern District of Louisiana granted the AG’s motion to remand, concluding that the case was improperly removed from state court. In re Vioxx Prods. Liab. Litig., MDL No. 1657, 2012 WL 10552, at *14 (E.D. La. Jan. 3, 2012).

Now, approximately one year into the proceeding, the AG had retained outside counsel to take over the Vioxx KCPA litigation.  Under the contract executed, private counsel agreed to be compensated by a contingency fee “to be withheld from any settlement award resulting from the litigation.” Merck filed suit against the AG in federal court in August, 2011, seeking a declaratory judgment and injunctive relief. In its complaint,  Merck alleged that the AG had “delegated his coercive powers to private lawyers having a clear, direct and substantial financial stake in the outcome...."  The case was "a punitive enforcement action that must be prosecuted in the public interest or not at all.”  As a result, Merck asserted, its “right to due process under the Fourteenth Amendment had been infringed.” 

The AG moved to dismiss, and the issue in this decision focused on the abstention doctrine announced in Younger v. Harris, 401 U.S. 37 (1971); it provides that when a state proceeding is pending, principles of federalism dictate that any federal constitutional claims should be raised and decided in state court without interference by the federal courts. See Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 17 (1987).  If a federal district court concludes that its resolution of the case before it would directly interfere with ongoing state proceedings, then it must determine whether to abstain from hearing the case altogether, under the following: (1) there must be an ongoing state
judicial proceeding; (2) the proceeding must implicate important state interests; and (3) there
must be an adequate opportunity in the state proceeding to raise constitutional challenges.

Merck argued that the AG’s active litigation in federal court — through the filing of answers, motions to dismiss, and motions for summary judgment — was sufficient to establish that proceedings of substance had taken place before the remand, i.e., before an action had been pending in state court.  The court agreed that the abstention doctrine did not require a strict view of the federal action timeline nor a formalistic approach to the abstention analysis. Using a "common sense approach," several factors weighed in favor of a conclusion that proceedings of substance had taken place: (1) the federal action had been pending for over seven months when the state court proceeding was remanded on March 20, 2012; (2) on the date of the remand, there were two important motions that were fully briefed and ripe for adjudication; and (3) the court had held a scheduling conference during which the parties advised the court about their positions on those two motions. Based on these facts, the court concluded that the federal action was well beyond an “embryonic stage.” Because the state proceeding was not “ongoing” in a meaningful sense, abstention was not appropriate under the principles of Younger.

Your humble blogger notes that the legal policy of many states strongly favors open, competitive bidding for contracts involving state funds. Such requirements, included in some state Constitutions and various statutes, are designed to prevent fraud, eliminate bias and favoritism, and thus protect vital public interests. Those same goals of open and good government reside in the requirement that state officials give their undivided loyalty to the people of a state. Many of the contingent fee contracts used by state officials to bring mass tort actions violate the core principle that attorneys pursuing actions on behalf of the state represent a sovereign whose obligation to govern impartially is essential to its right to govern. Government attorneys must exercise independent judgment as a ministers of justice and not act simply as advocates. The impartiality required of government lawyers cannot be met where the private pecuniary interest inherent in the contingent fee is the primary motive force behind the bringing of the action. By turning over sovereign prosecutorial-like power to contingency counsel, a state effectively creates a new branch of government – motivated by the prospect of private gain rather than the pursuit of justice or the public welfare. This subversion of neutrality does more than implicate the due process rights of those confronting such tainted prosecutions. Direction of state prosecutions by financially interested surrogates also damages the very public interest that such litigation is supposed to advance. 
 

Supreme Court Passes on Case Involving State Retention of Private Counsel

The U.S. Supreme Court declined last week to review a California Supreme Court ruling that permitted cities and counties to engage private attorneys for public nuisance litigation against lead paint defendants on a contingency fee basis.  See Atlantic Richfield Co. v. Santa Clara County, Calif., No. 10-546 (U.S. cert. denied 1/10/11).

Readers may recall our previous posts on the important issue of  the power of government agencies to retain private plaintiffs attorneys on a contingency fee basis to prosecute nuisance litigation.  One case we posted on was County of Santa Clara v. The Superior Court of Santa Clara County, Cal., No. S163681 (7/26/10), in which a group of public entities composed of various California counties and cities were prosecuting a public-nuisance action against numerous businesses that manufactured lead paint.

The state supreme court permitted the use of contingency fee counsel with restrictions. To pass muster, neutral government attorneys must retain and exercise the requisite control and supervision over both the conduct of private attorneys and the overall prosecution of the case. Such control of the litigation by neutral attorneys supposedly will provide a safeguard against the possibility that private attorneys unilaterally will engage in inappropriate prosecutorial strategy and tactics geared to maximize their monetary reward. Accordingly, when public entities have retained the requisite authority in appropriate civil actions to control the litigation and to make all critical discretionary decisions, the impartiality required of government attorneys prosecuting the case on behalf of the public has been maintained, said the court. 

We noted that the list of specific indicia of control identified by the court seem quite strained, and to elevate form over substance, written agreements over human nature. Defendants sought cert review. In amicus filings, various trade organizations including the American Chemistry Council, the American Coatings Association, and the National Association of Manufacturers, argued that the financial incentives inherent in contingency-fee agreements simply distort the decision-making of both the government lawyers and the private attorneys they retain. Inadequately grounded contingency fee arrangements distort the state's duty of even-handedness not only to defendants, but also to the public. The amici argued that public nuisance cases are not typical tort lawsuits because they claim to be pursued in the public interest. It violates due process for the type of personal financial assessment made by contingency fee private lawyers to impact the decisions in a public nuisance action brought in the government's sovereign capacity. The briefing also raised another important practical issue: the attorney-client privilege and work-product doctrines will block any meaningful inquiry into whether the government is actually exercising the appropriate control that he state court said would solve these issues.

These kinds of contingency fee prosecutors threaten to diminish the public's faith in the fairness of civil government prosecutions. These arrangements frequently result in allegations that government officials are doling out contingency fee agreements to lawyers who make substantial campaign contributions.


 

Use of Contingency Fee Private Counsel Appealed

A variety of business groups have weighed in as amici, asking the Supreme Court to recognize how contingency fee arrangements by California counties and cities pursuing lead paint litigation violated the due process rights of the defendants. Atlantic Richfield Co. v. County of Santa Clara, No. 10-546 (U.S., amicus curiae brief submitted 11/24/10).

Readers may recall our previous posts about how the California supreme court had taken a major step backward by modifying a 1985 decision that had limited the power of government agencies to retain private plaintiffs attorneys on a contingency fee basis to prosecute nuisance litigation. County of Santa Clara v. The Superior Court of Santa Clara County, No. S163681 (Cal. 7/26/10).

A group of public entities composed of various California counties and cities were prosecuting a public-nuisance action against numerous businesses that manufactured lead paint. Defendants moved to bar the public entities from compensating their privately retained counsel by means of contingent fees. The lower court, relying upon People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985), ordered that the public entities were barred from compensating their private counsel by means of any contingent-fee agreement, reasoning that under Clancy, all attorneys prosecuting public-nuisance actions must be “absolutely neutral.”

The state supreme court acknowledged that Clancy arguably supported defendants' position favoring a bright-line rule barring any attorney with a financial interest in the outcome of a case from representing the interests of the public in a public nuisance abatement action. The court proceeded to engage in a reexamination of the rule in Clancy, however, finding it should be "narrowed," in recognition of both (1) the wide array of public-nuisance actions (and the corresponding diversity in the types of interests implicated by various prosecutions), and (2) the different means by which prosecutorial duties may be delegated to private attorneys supposedly without compromising either the integrity of the prosecution or the public's faith in the judicial process.

The state court had previously concluded that for purposes of evaluating the propriety of a contingent-fee agreement between a public entity and a private attorney, the neutrality rules applicable to criminal prosecutors were equally applicable to government attorneys prosecuting certain civil cases. The court had noted that a prosecutor's duty of neutrality stems from two fundamental aspects of his or her employment. As a representative of the government, a prosecutor must act with the impartiality required of those who govern. Second, because a prosecutor has as a resource the vast power of the government, he or she must refrain from abusing that power by failing to act evenhandedly.

But then, the court concluded that to the extent Clancy suggested that public-nuisance prosecutions always invoke the same constitutional and institutional interests present in a criminal case, that analysis was "unnecessarily broad" and failed to take into account the wide spectrum of cases a state may bring. The court described a range of cases; criminal cases require complete neutrality. In some ordinary civil cases, neutrality is not a concern when the government acts as an ordinary party to a controversy, simply enforcing its own contract and property rights against individuals and entities that allegedly have infringed upon those interests. The nuisance cases fall between these two extremes on the spectrum of neutrality required of a government attorney. The case was not an “ordinary” civil case in that the public entities' attorneys were appearing as representatives of the public and not as counsel for the government acting as an ordinary party in a civil controversy. The case was being prosecuted on behalf of the public, and, accordingly, the concerns identified in Clancy as being inherent in a public prosecution were, indeed, implicated.

But, despite that, state supreme court found that the interests affected in this case were not similar in character to those invoked by a criminal prosecution or the nuisance action in Clancy. The case would not have resulted in an injunction that prevents the defendants from continuing their current business operations. The challenged conduct (the production and distribution of lead paint) has been illegal in the state since 1978. Accordingly, whatever the outcome of the litigation, no ongoing business activity would be enjoined. Nor would the case prevent defendants from exercising any First Amendment right. Although liability may be based in part on prior commercial speech, the remedy would not involve enjoining current or future speech, said the court.

While a heightened standard of neutrality was required for attorneys prosecuting public-nuisance cases on behalf of the government, that heightened standard of neutrality is not always compromised by the hiring of contingent-fee counsel to assist government attorneys in the prosecution of a public-nuisance abatement action. Use of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation.

In so finding, the court downplayed the reality that the public attorneys' decision-making conceivably could be influenced by their professional reliance upon the private attorneys' expertise and a concomitant sense of obligation to those attorneys to ensure that they receive payment for their many hours of work on the case.To pass muster, neutral government attorneys must retain and exercise the requisite control and supervision over both the conduct of private attorneys and the overall prosecution of the case. Such control of the litigation by neutral attorneys supposedly will provide a safeguard against the possibility that private attorneys unilaterally will engage in inappropriate prosecutorial strategy and tactics geared to maximize their monetary reward. .

The list of specific indicia of control identified by the state supreme court seem quite strained, however, and to elevate form over substance, and written agreements over human nature. The authority to settle the case involves a paramount discretionary decision and is an important factor in ensuring that defendants' constitutional right to a fair trial is not compromised by overzealous actions of an attorney with a pecuniary stake in the outcome.  In reality, even if the control of private counsel by government attorneys is viable in theory, it fails in application because private counsel in such cases are hired based upon their expertise and experience, and therefore always will assume a primary and controlling role in guiding the course of the litigation, rendering illusory the notion of government “control”.

Defendants are seeking cert review. In amicus filings, various trade organizations including the American Chemistry Council, the American Coatings Association, and the National Association of Manufacturers, have argued that the financial incentives inherent in contingency-fee agreements simply distort the decision-making of both the government lawyers and the private attorneys they retain. Inadequately grounded contingency fee arrangements distort the state's duty of even-handedness not only to defendants, but also to the public.  The amici argue that public nuisance cases are not typical tort lawsuits because they claim to be pursued in the public interest. It violates due process for the type of personal financial assessment made by contingency fee private lawyers impacts the decisions in a public nuisance action brought in the government's sovereign capacity. The briefing also raises another important practical issue: the attorney-client privilege and work-product doctrines will block any meaningful inquiry into whether the government is actually exercising the appropriate control that he state court said would solve these issues.

California Supreme Court Amends Rules for Government Retention of Private Contingent Fee Counsel

The California supreme court has taken a major step backward by modifying a 1985 decision that had properly limited the power of government agencies to retain private plaintiffs attorneys on a contingency fee basis to prosecute nuisance litigation. County of Santa Clara v. The Superior Court of Santa Clara County, Cal., No. S163681 (7/26/10). 

A group of public entities composed of various California counties and cities were prosecuting a public-nuisance action against numerous businesses that manufactured lead paint. Defendants moved to bar the public entities from compensating their privately retained counsel by means of contingent fees. The lower court, relying upon People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985), ordered that the public entities were barred from compensating their private counsel by means of any contingent-fee agreement, reasoning that under Clancy, all attorneys prosecuting public-nuisance actions must be “absolutely neutral.”

The supreme court acknowledged that Clancy arguably supported defendants' position favoring a bright-line rule barring any attorney with a financial interest in the outcome of a case from representing the interests of the public in a public-nuisance abatement action. The court proceeded to engage in a reexamination of the rule in Clancy, however, finding it should be "narrowed," in recognition of both (1) the wide array of public-nuisance actions (and the corresponding diversity in the types of interests implicated by various prosecutions), and (2) the different means by which prosecutorial duties may be delegated to private attorneys supposedly without compromising either the integrity of the prosecution or the public's faith in the judicial process.

The court had previously concluded that for purposes of evaluating the propriety of a contingent-fee agreement between a public entity and a private attorney, the neutrality rules applicable to criminal prosecutors were equally applicable to government attorneys prosecuting certain civil cases. The court had noted that a prosecutor's duty of neutrality stems from two fundamental aspects of his or her employment. As a representative of the government, a prosecutor must act with the impartiality required of those who govern. Second, because a prosecutor has as a resource the vast power of the government, he or she must refrain from abusing that power by failing to act evenhandedly.

But now, the court concluded that to the extent Clancy suggested that public-nuisance prosecutions always invoke the same constitutional and institutional interests present in a criminal case, that analysis was "unnecessarily broad" and failed to take into account the wide spectrum of cases that fall within the public-nuisance rubric. In the present case, found the court, both the types of remedies sought and the types of interests implicated differed significantly from those involved in Clancy and, accordingly, invocation of the strict rules requiring the automatic disqualification of criminal prosecutors was unwarranted.

The court described a range of cases; criminal cases require complete neutrality. In some ordinary civil cases, neutrality is not a concern when the government acts as an ordinary party to a controversy, simply enforcing its own contract and property rights against individuals and entities that allegedly have infringed upon those interests. The present case fell between these two extremes on the spectrum of neutrality required of a government attorney. The case was not an “ordinary” civil case in that the public entities' attorneys were appearing as representatives of the public and not as counsel for the government acting as an ordinary party in a civil controversy. A public-nuisance abatement action must be prosecuted by a governmental entity and may not be initiated by a private party unless the nuisance is personally injurious to that private party. The case was being prosecuted on behalf of the public, and, accordingly, the concerns identified in Clancy as being inherent in a public prosecution were, indeed, implicated.

But, the court found that the interests affected in this case were not similar in character to those invoked by a criminal prosecution or the nuisance action in Clancy.  This case would not result in an injunction that prevents the defendants from continuing their current business operations. The challenged conduct (the production and distribution of lead paint) has been illegal in the state since 1978. Accordingly, whatever the outcome of the litigation, no ongoing business activity would be enjoined. Nor would the case prevent defendants from exercising any First Amendment right. Although liability may be based in part on prior commercial speech, the remedy would not involve enjoining current or future speech, said the court.

With the public-nuisance abatement action being prosecuted on behalf of the public, the attorneys prosecuting this action, although not subject to the same stringent conflict-of-interest rules governing the conduct of criminal prosecutors or adjudicators, were held to be subject to a heightened standard of ethical conduct applicable to public officials acting in the name of the public — standards that would not be invoked in an ordinary civil case.  That is,  to ensure that an attorney representing the government acts evenhandedly and does not abuse the unique power entrusted in him or her in that capacity — and that public confidence in the integrity of the judicial system is not thereby undermined — a heightened standard of neutrality is required for attorneys prosecuting public-nuisance cases on behalf of the government.

The court then determined that this heightened standard of neutrality is not always compromised by the hiring of contingent-fee counsel to assist government attorneys in the prosecution of a public-nuisance abatement action.  Use of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation.  In so finding, the court downplayed the reality that the public attorneys'  decision-making conceivably could be influenced by their professional reliance upon the private attorneys' expertise and a concomitant sense of obligation to those attorneys to ensure that they receive payment for their many hours of work on the case.

To pass muster, neutral government attorneys must retain and exercise the requisite control and supervision over both the conduct of private attorneys and the overall prosecution of the case. Such control of the litigation by neutral attorneys supposedly will provide a safeguard against the possibility that private attorneys unilaterally will engage in inappropriate prosecutorial strategy and tactics geared to maximize their monetary reward. Accordingly, when public entities have retained the requisite authority in appropriate civil actions to control the litigation and to make all critical discretionary decisions, the impartiality required of government attorneys prosecuting the case on behalf of the public has been maintained, said  the court.

The list of specific indicia of control identified by the court seem quite strained, and to elevate form over substance, written agreements over human nature. The authority to settle the case involves a paramount discretionary decision and is an important factor in ensuring that defendants' constitutional right to a fair trial is not compromised by overzealous actions of an attorney with a pecuniary stake in the outcome. The court found that retention agreements between public entities and private counsel must specifically provide that decisions regarding settlement of the case are reserved exclusively to the discretion of the public entity's own attorneys. Similarly, such agreements must specify that any defendant that is the subject of such litigation may contact the lead government attorneys directly, without having to confer with contingent-fee counsel.

But in reality, even if the control of private counsel by government attorneys is viable in theory, it fails in application because private counsel in such cases are hired based upon their expertise and experience, and therefore always will assume a primary and controlling role in guiding the course of the litigation, rendering illusory the notion of government “control”.  The concurring opinion questioned whether public attorneys under all foreseeable circumstances will be able to exercise the independent supervisory judgment the majority concludes is essential if private counsel are to be retained under contingent fee agreements. 

The court noted that the issues all arose under its authority to regulated the practice of law, and no statutes or state constitutional provisions were at issue, which may distinguish the case from the issue in other states.