Complex Litigation

Seventh Circuit Unmasks Class Action Ills

By Michael Hoenig - New York Law Journal - December 13, 2010

This article, the third in our current series on class action imbroglios, rounds out our brief survey of systemic and institutional ills attending consumer fraud, products liability and warranty class action litigation, as reflected in recent case law.1 Weeks ago, Judge Richard A. Posner, writing for a panel of the U.S. Court of Appeals for the Seventh Circuit, dramatically exposed unwholesome class action dynamics in Thorogood v. Sears, Roebuck & Co.,2 a decision issued on Nov. 2. The court further denied a petition for rehearing on Dec. 2, issuing a pungent statement responding to "over the top" accusations by plaintiffs' counsel. If the name of the Thorogood case sounds familiar it may be because we wrote about a 2008 decision in the very same litigation in our column last month. This new Thorogood decision bristles sharply as it deals afresh with "the specific tactics of class counsel, which include…something close to settlement extortion."3

In a nutshell, here is what happened in this third appeal arising out of what Judge Posner calls "a near-frivolous class action suit."4 An attorney named Clinton Krislov filed a class action suit on behalf of Thorogood (we will call him T) and a half million other purchasers scattered across 28 states and the District of Columbia of Kenmore dryers that had been advertised as having stainless steel drums. The suit claimed that the sale of a dryer so advertised is deceptive unless the drum is made entirely of stainless steel because otherwise it might rust and thereby stain clothes in the dryer. T claimed the advertising deceived him because the front of the drum was made of ceramic-coated "mild" steel that did not contain chromium.

T's individual claim was based on Tennessee's consumer protection statute, but the suit alleged that the unnamed class members had identical claims under similarly worded state consumer statutes in their own states, including California. The suit was filed in a state court and removed to a federal district court in Illinois under the Class Action Fairness Act. The district judge certified the class. The Seventh Circuit reversed and ordered the class decertified5 as "a notably weak candidate for class treatment." Common issues of law or fact did not predominate over the issues particular to each purchaser of a stainless steel Kenmore dryer and, further, there were no common issues of law or fact.6 The district court then decertified the class.

The Seventh Circuit explained that advertisements for clothes dryers mention a host of features that might matter to consumers, such as price, size, electrical usage, appearance, speed and controls, but not the prevention of clothing stains attributable to rust. The litigation of individual class member claims would have "devolved into a series of individual hearings in which each class member who wanted to pursue relief against Sears would testify as to what he understood to be the meaning of a label or advertisement that identified a dryer as containing a stainless steel drum." Judging from the record and the argument of T's lawyer, T's concerns were "a confabulation." The "important point is that there would be no economies of class action treatment because there would be no issues that could be resolved in a single, class-wide evidentiary hearing."7

There also were considerations regarding class action treatment as to the relief sought by T himself and on behalf of class members. Since T sought actual damages, the calculation of class members' actual damages would require individual proofs. The court's opinion elaborates the problems of ascertaining individuals' actual damages. Though "serious," however, this was not "the deal breaker." Rather, the deal breaker was "the absence of any reason to believe there was a single understanding of the significance of advertising clothes dryers as containing a stainless steel drum, and so a predominating issue that was common to all class members."8

After the class was decertified, T was left with his individual claim. With the parties in agreement that the maximum damages T could recover under Tennessee law were $3,000, Sears made T an offer of judgment under Rule 68 of the civil rules of $20,000 inclusive of attorney's fees. The district judge, believing that T should receive no attorney's fees, dismissed the suit because the defendant's offer exceeded the amount in controversy ($3,000, without attorneys' fees) and so the case was moot.

T appealed claiming that he had incurred attorney's fees of $246,000 and, even though that exceeded the value of his relief by a factor of 82, he claimed the fees had been a worthwhile investment that Sears should reimburse. Because Sears had offered him in settlement an amount equal to the maximum damages (and more) that he could have recovered for his individual claim, he argued that his theory of liability had been vindicated.

Circumventing Judgment

He sought a judgment on which he hoped to build a claim for attorney's fees and to "obtain a litigation advantage in other states." T's counsel told the district court he wanted a judgment in his client's individual case, not only as a premise for an attorney's fee award but also so he could use it as "offensive" res judicata in other cases and thereby preclude Sears from defending similar cases on the merits. As Judge Posner observed, attorney Krislov "was already planning to circumvent our order decertifying the class by bringing class actions elsewhere." Said the court, "lawyer Krislov is nothing if not determined, indeed pugnacious."9

Now we flash forward to the subject matter of the new appeal in Thorogood. T's counsel filed a virtually identical class action suit in a California federal district court in the name of one Martin Murray. The suit was limited to California purchasers but still very large. Sears went back to the federal district court in Illinois that had decertified the class and sought an injunction enjoining the California lawsuit under the "All Writs Act."

The district judge ruled against Sears since it could obtain adequate relief against being harassed by repetitive litigation by pleading collateral estoppel in Mr. Murray's suit in California. In California, however, the district judge rescinded his acceptance of Sears' defense of collateral estoppel when plaintiff filed an amended complaint. That judge then allowed discovery against Sears to proceed, denying the injunction. Sears appealed the Illinois district court's ruling. This resulted in the new Thorogood decision by the Seventh Circuit. The court held that Sears was entitled to an injunction.

Lawyer Krislov argued that the Murray case in California is "different" from T's case. Yet Mr. Murray was a member of T's class; and Mr. Krislov, who is Mr. Murray's counsel, had argued in Thorogood's case that the laws of all 29 jurisdictions in which class members resided were so similar that "all litigants [including all class members] are governed by the same legal rules." Now Mr. Krislov is "singing a different tune" contending that California's consumer fraud law is different from that of the other 28 jurisdictions (a contention that is "irrelevant to the applicability of collateral estoppel"). The contention is also irrelevant because the preclusive effect of a federal judgment—here the judgment in the Illinois federal court decertifying T's class—is determined by federal law.10

Mr. Murray's California claims, when Sears pleaded the defense of collateral estoppel, were "identical" to T's. They challenged the same advertising for the same models of clothes dryer. Mr. Murray acknowledged that he was alleging "a similar general set of operative facts as alleged in the Thorogood case." Later, Mr. Murray's amendment of the complaint in California alleged additional facts causing the district judge there to reverse his earlier ruling and allow "bulky" discovery requests. Writing for the Seventh Circuit panel, Judge Posner described a slew of class action ills echoing points made in the earlier Thorogood decision issued in 2008 when ordering decertification of the class.

The class action device "lends itself to abuse." The lawyers are "primarily interested in their fees." Class members' stakes in the litigation are ordinarily too small to motivate them to "supervise the lawyers in an effort to align the lawyers' incentives with their own." Defense lawyers are willing to trade small damages for high attorney's fees. These convergent incentives forge a community of interest between class counsel and the defendants, but may leave class members "out in the cold." The trial judge's responsibility is difficult to discharge when the judge confronts a "phalanx of colluding counsel."

Then there is the problem of "costly error" which creates a "pressure for settlement that may be disproportionate to the actual merits of the suit." A trial becomes a "roll of the dice." A "simple throw" may determine the outcome of an immense number of separate claims (hundreds of thousands in the dryer litigation). "There is no averaging of decisions over a number of triers of fact having different abilities, priors, and biases." The risk of error becomes asymmetric. "A small probability of a large dollar loss can be a large dollar figure."11

Threatening Letter

Exposing yet another class action ill, Judge Posner continued with "a variant of the foregoing problem," namely, when class counsel can, as they are attempting to do in their "scorched-earth campaign against Sears," increase the "number of throws of the litigation dice." If, for example, class counsel have a 10 percent chance of winning a given statewide class action against a given defendant, and they can sue that defendant 50 times (one suit per state), they are pretty certain to win quite a number of their cases, although the aggregate damages will be smaller than if they won a single nationwide class action. For example, if class counsel only filed 12 cases, the probability that defendant would win them all would be only 28 percent. And the probability of the defendant's winning all the cases would fall to one-half of one percent if class counsel sued in all 50 states. "And this despite the fact that the defendant in our example has a 90 percent chance of winning any one of the 50 cases."12

An additional asymmetry, also adverse to defendants, involves the cost of pretrial discovery in class actions. One purpose of discovery—improper and rarely acknowledged but pervasive—is: "it makes one's opponent spend money."13 In most class action suits, including the one against Sears, plaintiffs have more to discover in defendant's records (including e-mails, "the vast and ever-expanding volume of which has made the cost of discovery soar") than vice versa. Since usually it is defendant's conduct that is the focus of the litigation, it is in their records that the plaintiffs "will want to rummage in quest for smoking guns."14

The merit of Mr. Murray's case, like T's (of which it is a close copy) "is slight." But the pressure on Sears to settle on terms advantageous to its opponent will mount up if class counsel's ambitious program of discovery is allowed to continue. A letter to Sears' counsel by attorney Mark Boling, Mr. Murray's co-counsel, illustrates the point. The court prints Mr. Boling's letter as an "Appendix."15 The letter reminds Sears that discovery is proceeding and "will involve Plaintiff's counsel delving into the full extent of Defendants' alleged wrongdoing" in order to justify not only equitable relief but punitive damages—"which are potentially very large given the size of the class and the possible preclusive use of any judgments favorable to the plaintiffs in suits brought in other states."

The letter continues: "as we progress through the various stages of this litigation, the cost of settlement will necessarily increase…. At this point, we may want to consider whether an appropriate olive branch for resolution can be mutually created on a class wide basis commensurate with the status of the case. If interested, please pick up the telephone and call me. In the meantime, Plaintiff will continue to diligently and timely prosecute this case to an appropriate result." In other words, says the court, "unless Sears settles now (implicitly for modest relief for the class and an agreement with class counsel to recommend to the judge generous fees for Krislov and Boling) it will incur the considerable cost of responding to class counsel's distended project of 'delving' and assume the risk of a very large adverse judgment." And, as Mr. Boling's letter also points out, "if plaintiff is successful on a motion for class certification, the court as the gate keeper will demand a more significant recovery for resolution."

This threat "to turn the screws on Sears" is all the more credible because Mr. Murray's suit is a duplicate of T's but with just enough differences to confuse the district judge in California about Sears' collateral estoppel defense. "If the refusal to enjoin Mr. Murray's suit sticks, there is nothing standing in the way of Mr. Krislov filing carbon-copy class actions against Sears in other states as well."16

Enjoining vexatious litigation is preferable to the harassment of time-consuming procedure to prove a defendant's res judicata or collateral estoppel claims in another court. There is no way Sears can recoup the expense of responding to Mr. Murray's extravagant discovery requests and of "filing preclusion defenses against duplicative class actions in other states." The harm it faces from the denial of the injunction is "irreparable" and its remedy at law "against settlement extortion nonexistent." The injunction is Sears' only means, "other than submitting to lawyer Boling's demands, of avoiding being drowned in the discovery bog."17

The court then discussed what kind of injunction should issue. The members of T's class must be enjoined "as well as the lawyers so that additional Murrays don't start popping up, class action complaint in hand, all over the country, represented by other members of the class action bar." Since T did participate actively in seeking class certification and his representation by lawyer Krislov was "adequate (it was energetic and pertinacious to a fault)," unnamed class members can be bound by the judgment.

The decertification order "does not preclude any of the class members from filing individual suits." All that is precluded is the filing by members of T's class, which includes the members of Mr. Murray's class, or by the lawyers for those classes. The injunction should be applicable to enjoin further "copycat" suits in state as well as in federal courts. The court notes that the U.S. Supreme Court's grant of certiorari in the Smith v. Bayer Corp. case—a topic discussed in our October 2010 column18—involves a federal court enjoining copycat suits filed in state courts. In Thorogood it is a federal court enjoining another federal court. Nevertheless, the court deems it unlikely that injunctive relief against class action harassment would be held inappropriate in federal rather than state courts.

Conclusion

The incisive Thorogood opinion unmasks systemic class action ills that many courts refuse to face, let alone act against. Exposed is the lawyer-driven, fee-seeking nature of an expansive trend to try to bring all corporate behavior under a consumer fraud act umbrella, to conduct massive discovery, to pursue scorched-earth class action campaigns, and, as the court put it, to "turn the screws on" defendants and pursue "something close to settlement extortion." If one reads the class attorney's letter (see Appendix to the opinion), one is struck by how remarkably similar it sounds to letters or verbal messages routinely sent in class litigation.

Also "must" reading is the Seventh Circuit's statement in its order denying plaintiffs' counsel's petition for rehearing, which had expressed outrage at the panel's characterization of the attorneys' litigation tactics. The court responds sharply and head-on. At the end of the order denying rehearing, the court lists decisions and law review commentary criticizing tactics employed by some class lawyers—a useful catalogue for litigators.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes

1. Our two preceding columns were devoted to the subject. See Hoenig, "Class Actions to Be Decided by the Supreme Court," New York Law Journal, Oct. 18, 2010, p. 3; "Class Action Imbroglios Revisited," NYLJ, Nov. 12, 2010, p. 3. See also our earlier articles, "'Monkey Business' in the Class Action Jungle," NYLJ, Sept. 10, 2007, p. 3; "Class Action Imbroglios Revisited," NYLJ, May 13, 2002, p. 3.

2. 2010 U.S. App. LEXIS 22807 (7th Cir. Nov. 2, 2010), pet. for rehearing and rehearing en banc denied, No. 10-2407 (7th Cir. Dec. 2, 2010) (Slip Op. of Order and Statement).

3. Id. LEXIS, at *15.

4. Id., LEXIS at *1.

5. 547 F.3d 742 (7th Cir. 2008).

6. Id. at 746-47.

7. Thorogood, 2010 U.S. App. LEXIS 22807, at *7-*8.

8. Id., LEXIS at *9-*10.

9. Id., LEXIS at *12.

10. Id., LEXIS at *12-*13.

11. Id., LEXIS at *16-*19.

12. Id., LEXIS at *19-*20 (performing the calculations).

13. Id., LEXIS at *20 (quoting from Brian Anderson & Andrew Trask, "The Class Action Playbook," §4.5, pp. 115-116 (2010) and citing an American College of Trial Lawyers joint project with the Institute for the Advancement of the Legal System, the "Interim Report").

14. Id., LEXIS at *20-*21.

15. See Id., LEXIS at *34-*39.

16. Id., LEXIS at *21-*22.

17. Id., LEXIS at *24-*25.

18. "Class Actions to Be Decided by the Supreme Court," supra n. 1.

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