Silencing the objectors

Ikeda, Katherine

The siren song of Rule 23 can lead lawyers, parties, and courts into rough waters where their ethical compass offers only uncertain guidance.1

INTRODUCTION

The class action is a powerful medium to provide redress to large numbers of individuals who have been harmed in similar ways. Each year millions of people are represented through class action lawsuits.2 In some instances, individuals are represented without their knowledge, consent or ability to control their legal representation.3 Due to the vast number of individual rights affected by class action litigation and the departure from traditional procedural protections afforded by conventional, bipolar litigation, many commentators have argued for heightened review of class action settlements.4 Persuaded by assertions that "settlement class actions"5 provide substantial opportunities for plaintiffs'

lawyers to collude with defendants' lawyers to extinguish the claims of absentee class members without fair and adequate compensation or representation, recently, some courts have undertaken a substantive and detailed review of "settlement class actions."6 However, it does not appear that judicial review has extended to individual settlements within the class action.7 To the contrary, the Court of Appeals for the First Circuit recently concluded that district and appellate courts are not obligated, under Rule 23(e) of the Federal Rules of Civil Procedure, to review individual side settlements made between class counsel and class members who object to the class action settlement.8 I disagree with this conclusion.

Part I of this Note provides a brief overview of the class action device and the benefits of class action litigation. It also reviews the First Circuit decision which permits class counsel to make side settlements with objectors within the class. Part II responds to the First Circuit's opinion, arguing that the inherent weaknesses in class action settlements and settlement class actions create systematic incentives for class counsel to disregard her fiduciary duties to class members when she makes side settlements with class objectors. It also suggests that side settlements between class counsel and class objectors9 may result in dissimilar treatment for similarly situated class members and affect the total settlement by creating potential intra-class conflicts under Rule 23(a). Furthermore, secret side settlements indicate potential violations of the ethical duties class counsel owes to the class, the court, and the public. Finally, this Note reaches the conclusion that in order to ensure the class and the district court can properly evaluate the settlement and class counsel's representation, the court should use its supervisory power and special responsibility in class actions to require class counsel to disclose side settlements for review.

I. BACKGROUND

A. THE CLASS ACTION: AN OVERVIEW

The class action is a procedural tool allowing individual class representatives to assert their own claims as well as the claims of other individuals who share a

common interest.10 The class action device is used as an alternative to conventional, individual litigation because it is efficient and provides significant benefits to both plaintiffs and defendants. The paramount advantage of the class action litigation model is efficiency:11 class actions reduce costs associated with litigating individual claims by allowing plaintiffs to aggregate and resolve their claims in one lawsuit rather than litigating hundreds or thousands of separate lawsuits.12 The defendants, the courts, and the public also benefit from class actions through the reduction of transaction costs associated with repetitive litigation.13

Beyond general notions of efficiency, the class action is also beneficial because it allows individuals who have smaller claims to vindicate their rights. 14 Under the conventional model of litigation, individuals with small claims are prevented from pursuing their cases because the potential recovery would not outweigh the costs of litigation.15 Neither the rational plaintiff nor the rational plaintiff's attorney would pursue a claim that would reap small damages and large litigation costs.16 However, the class action alters the conventional litigation calculus and allows an individual who has a claim of small value to pool her claim with other similarly harmed individuals. The resulting decrease in transaction costs and increase in overall damages permits the individual to protect her interests and the legal interests of those who might not otherwise be protected without the class action device.17

The class action vehicle not only provides an efficient structure to resolve many interests at once and protect the interests of the unprotected, it also provides a method to resolve the claims of similarly harmed individuals in a fair and consistent manner.18 Unlike the traditional litigation model that promises reparation to individuals who are the first to "knock on the courthouse door," the class action can ensure that the injuries of all plaintiffs will be redressed irrespective of how quickly they file a lawsuit.19 As a result, in theory, the class

action compensates individuals based on the type and the extent of their injury and not external factors such as the timing of litigation.

Finally, the class action lawsuit is beneficial to defendants because it also decreases their litigation costs, and allows them to generally, and in some instances specifically,20 determine their existing and future liability. Consequently, with their liability established and limited, defendants can attempt to ensure their businesses remain viable by quashing their investors' and business partners' fears of potential liability and by investing the company's energies and resources in the businesses and not the litigation.

Despite the fact that class actions have similar goals and benefits, there is no one kind of class action lawsuit. In fact, there are many different kinds of class actions. Class actions vary depending on the type of claim that is asserted and the type of relief that is sought. Some types of class actions are fairly well known by the public; including21 securities class actions,22 consumer class actions,23 toxic products class actions,24 and discrimination class actions.25 Yet, despite the public's familiarity with certain types of class actions, most lay people do not realize that class actions are subjected to different legal requirements, depending upon the type of relief that is sought.26

To certify, maintain, or settle a class action, the action must satisfy a two-step process. First, it must meet the four prerequisites of Federal Rule of Civil Procedure 23(a).27 These prerequisites are generally referred to as numerosity, commonality, typicality, and adequacy. Numerosity is discharged if "the class is so numerous that joinder of all members is impractical."28 A class has sufficient commonality if "there are questions of law or fact common to the class."29 Typicality is fulfilled if "the claims or defenses of the representative parties are

typical of the claims or defenses of the class."33 The final hurdle imposed by Rule 23(a) is that "the representative parties will fairly and adequately protect the interests of the class."31

Assuming that all of the qualifications under Rule 23(a) are met, the second set of requirements turn upon the type of relief the class action seeks to obtain. Rule 23(b) designates three different types of class actions: binding class actions, injunctive or declaratory class actions, and class actions that provide monetary relief.32

Under Rule 23(b)(1), a class action will bind class members if separate action by individual class members would risk establishing "incompatible standards of conduct for the party opposing the class"33 or would "as a practical matter be dispositive of the interest" of non-party class members "or substantially impair or impede their ability to protect their interests."34 In other words, class actions that seek Rule 23(b)(1)(A) certification will be maintained only if individual litigation might result in contradictory orders. Class actions that seek Rule 23(b)(1)(B) certification, commonly referred to as a "limited fund" class action, must demonstrate that individual adjudication of the controversy would prejudice the class members themselves. In other words, without unitary adjudication, some claimants will recover, while others who won later judgments may have no fund against which to recover.35 Furthermore, in order to qualify for "limited fund" class action certification the defendant must demonstrate the limit and insufficiency of its assets, i.e., if the claims against the defendant were realized, the damages from those claims would be greater than the defendant's assets.36

Another type of class action is the injunctive class action. Pursuant to Rule 23(b)(2), a class action will provide injunctive or declaratory relief if the class demonstrates the party opposing the class has acted or refused to act on grounds generally applicable to the class.37

Finally, the last common type of class action is the one that provides damages. Under Rule 23(b)(3), parties to a class action will be eligible to receive monetary relief if the class shows that common issues of law or fact predominate over questions affecting only individual class members and that the class action is

superior to any other method of adjudication.38 For the purposes of this Note, the Rule 23(b)(3) damages class action will be used to address the issue of whether side settlements with class objectors violate Rule 23 and class counsel's ethical duties to the class.

Rules 23(a) and (b) address the prerequisites for the class action to be certified, maintained, and litigated. However, if the parties to a class action wish to settle or dismiss the class action there is an additional requirement. Under subsection (e) of the Federal Rules of Civil Procedure 23, the district court is obligated to approve the dismissal or compromise of a class action.39 In practical terms, once the plaintiffs and defendants propose a class action settlement, the district court must hold a "fairness hearing" to determine whether or not it should approve the terms of the settlement.40 At the fairness hearing any party to the proceeding has the opportunity to voice its concerns or support for the proposed settlement. The court may hear objections at the fairness hearing from the plaintiffs' and defendants' attorneys,41 class representatives,42 class members,43 and other individuals who the court determines may provide valuable information about the propriety of the settlement.44 Once the district court conducts the fairness hearing it will require the parties to provide notice to the class of any judicially sanctioned settlement or dismissal.45

B. THE FIRST CIRCUIT DECISION

The focal point of this Note is the First Circuit's decision in Duhaime v. John Hancock Mutual Life Insurance.46 In Duhaime, the First Circuit Court of Appeals considered whether side settlements47 between class counsel and class objectors, while the case was pending appeal, should be disclosed to the district court for

review and approval under Rule 23(e).48 The appeal was based on an underlying securities fraud class action lawsuit initiated by former insurance policyholders.49 The plaintiffs and defendants agreed on a settlement and presented it to the district court for approval and simultaneous class certification.50 Pursuant to Rule 23(e), the district court held a fairness hearing to consider whether the proposed "settlement class action" was fair, reasonable, and adequate. At the fairness hearing, separately retained attorneys for class members Metzenbaum and the "Rose Objectors," i.e., not class counsel or the class representatives, objected to the settlement.51 The district court approved the settlement and the Rose Objectors filed an appeal.52 Later, the Rose Objectors withdrew their appeal because they received a "very, very good" side settlement from class counsel and/or the defendants.53 The side settlement produced a recovery that was apparently more favorable to the class objectors than the class settlement was to other class members.54 When Metzenbaum learned of the side settlement between class counsel and the Rose Objectors he filed an appeal arguing that the district court must be informed of and review the side settlement under Rule 23(e).55

Although the issue before the First Circuit was whether a district court must scrutinize and approve appellate side settlements after the district court had already approved the class action settlement itself, the First Circuit holding appears to suggest that a district court is never required to approve side settlements unless the class action settlement itself is affected by the side settlement or unless there are systematic incentives for class counsel to disregard her fiduciary duties to the class.56 In other words, if the class action settlement itself is not affected by the side settlement and there exist no systematic incentives for class counsel to ignore her fiduciary duties to the class, a district court is not required to scrutinize and approve side settlements that are made: (1) prior to time the district court approves the settlement and certifies the class; (2) after the district court approves the settlement but before the case is appealed; or

(3) after the district court approves the settlement and the case is before the appellate court.57

The First Circuit utilized three different analyses to arrive at its conclusion. First, the Court found that the plain language of Rule 23(e) only requires a district court to approve "the dismissal or the compromise of '[the] class action' itself."58 The First Circuit did not believe that the language of Rule 23(e) suggested that settlements peripheral to the class action require judicial review and approval.

Second, the Court found that the underlying policy of Rule 23(e) does not support the review of side settlements. Citing other circuit court opinions on class action case law, the First Circuit noted that judicial review of class action settlements has been used only when it is necessary to protect against systematic incentives that encourage class counsel or class representatives to act in degradation of their fiduciary duties.59 The Court concluded there were no such systematic incentives when counsel makes a side settlement with members of the class.60

Finally, although the First Circuit acknowledged that courts are concerned with ensuring adequate and similar treatment for all similarly situated class members, "tradition" and class action case law do not require the court intervene to ensure all that class members get the same benefit when individual class members decide to retain separate counsel.61 Although the First Circuit acknowledged that "different recoveries for similarly harmed persons who have remained in the class and are represented by class counsel can constitute powerful evidence that a

fiduciary obligation has not been honored,"62 the Court found that was not the case in Duhaime. Because Metzenbaum and the Rose Objectors retained separate representation, the First Circuit concluded that they were not similarly situated enough to view a difference in their final recovery as evidence of a breach of class counsel's fiduciary duty.63 If a class member decides to pursue different litigation strategies with an attorney other than class counsel, any benefit reaped from that litigation decision does not need to be reviewed by the district court unless the benefit obtained through the side settlement affects the overall class settlement.64 Implicitly the Court found that although the total recoveries obtained by the class and the Rose Objectors were different, the disparity did not affect the class action settlement itself. Even though the Rose Objectors were receiving a premium for dropping their appeal, this benefit did not affect Metzenbaum and the other absentee class members since they would still receive the full benefit of the original class settlement.65

In sum, under the First Circuit's analysis, side settlements between class counsel and class objectors do not violate Rule 23(e) or class counsel's fiduciary duties to the class because: (1) the plain language of Rule 23(e) does not compel judicial examination of a settlement peripheral to the class action itself; (2) no systematic incentives exist to encourage class counsel to disregard its fiduciary duties to absentee class members when class counsel makes a side settlement to silence class objections; and (3) "tradition" and case law do not suggest that similarly situated class members must receive similar compensation if one of the class members retains different counsel and pursues different litigation strategies, and if the class action settlement itself is unaffected by the side settlement.

II. A RESPONSE To DUHAIME

An attorney buying off her own client? Who wouldn't think something was amiss when an attorney procures a side settlement with her client in order to prevent the client from objecting to the merits of her own settlement? The concept of secret settlements conjures up images of two parties exchanging money in some sort of backroom deal-one party buying silence, the other "making out like a bandit." Although class members who benefit from the side settlement may not question the propriety of class counsel making side settlement with members of the class, class members who did not benefit from the side settlement may not agree that their attorney, i.e., the class's attorney, acted appropriately by secretly increasing some members' ultimate recovery over others'. While this practice is not illegal, side settlements between class counsel

and class objectors produce many potential problems. Side settlements create systematic incentives for class counsel to disregard their fiduciary duties to the detriment of the class. They suggest dissimilar treatment for similarly situated class members and illuminate potential class conflicts under Rule 23(a). Side settlements also create the appearance that class counsel may have violated her ethical obligations to the court, the class, and the public.

A. SIDE SETTLEMENTS BETWEEN CLASS COUNSEL AND CLASS OBJECTORS CREATE SYSTEMATIC INCENTIVES FOR CLASS COUNSEL TO DISREGARD HER FIDUCIARY DUTIES

The Duhaime opinion accurately notes that judicial review of settlements in the class action context extends only where systematic incentives encourage class counsel to act in degradation of her fiduciary duties. Although some class action case law concludes that judicial review is not required to guard against ineffective representation when class counsel procures side settlements with class objectors,66 an analysis of the inherent problems of class actions and the underlying policy of judicial review of "settlement class actions" suggest systematic incentives exist for class counsel to disregard her fiduciary duties in the face of side settlements with objectors.

1. SYSTEMATIC INCENTIVES EXIST FOR CLASS COUNSEL TO ACT IN DEGRADATION OF HER FIDUCIARY DUTIES BEFORE THE DISTRICT COURT APPROVES THE SETTLEMENT

Commentators and courts alike have consistently noted that before a district court grants class certification and approves the settlement, class counsel is presented with systematic incentives to act in degradation of her fiduciary duties. Incentives for attorneys to serve their own interests at the expense of the class are born out of inherent structural weaknesses in the class action model of litigation.

The most significant structural weakness in the class action model is the fundamental difference in the class members' role in the litigation and the settlement of the lawsuit.67 Conventional litigation assumes that a plaintiff will vindicate her rights by retaining an attorney who will pursue her claim, at

her direction, while consistently keeping her informed about the matter.68 Class action litigation differs from conventional litigation in significant ways that prevent the client's ability to monitor and control the litigation and its outcome. First, in class action lawsuits most class members do not know their rights are being adjudicated until they receive a settlement notice or they receive notice that the settlement has already been approved.69 As a result, it is impossible for most class members to monitor the litigation and their attorney's behavior. Second, even if notice is provided to class members, sometimes it is not informative enough to give class members sufficient opportunity to evaluate the settlement and respond to its terms.70 Third, class actions have unique "free-rider" problems that create low incentives for class members to monitor the class action because the costs of monitoring often exceed the individual benefit to the class member.71 The inevitable flipside to the benefit of class action lawsuits,72 free-riding inhibits monitoring because the value of an individual class member claims may be so low that a rational class member would not invest a substantial amount of time in monitoring the adjudication of the class action.73 The final distinguishing factor between the plaintiffs' role in conventional litigation and the plaintiffs' role in class actions is that class members can be bound by a settlement over their objections.74 Under the traditional attorney-client rubric, the client makes decisions concerning the lawsuit's objectives and whether to dismiss or settle her claim.75 However, in class actions the attorney makes these

decisions.76 Consequently, as a result of notice, information, free-riding and decision-making imbalances, class members have a difficult time monitoring class counsel's behavior or exercising control over the litigation and settlement decisions that ultimately impact their rights.

The structural problems that exist in class actions also infect the monitoring and involvement of the named class representatives. Although, in theory, class actions delegate authority to class representatives to pursue a common claim and impose a duty on class representatives to ensure that absentee members' interests are adequately protected, "as a practical matter, once a class is certified, named plaintiffs generally are neither highly motivated nor well situated to monitor the congruence between counsel's conduct and class preferences."77 Tellingly, courts do not even require class counsel to keep class representatives apprised of the status of the class action, nor do courts require class counsel to obtain the consent of the class representatives before they pursue a particular action.78 As a result of these structural norms, neither class members, nor class representatives, monitor the class action or class counsel's behavior.

The outcome of these structural weaknesses is a concentration of power in class counsel.79 At first blush, this prospect may not concern many people. Perhaps, it is because lawyers are assumed to act in the best interest of their clients.80 This, however, is not the natural default in class actions. As a normative matter, class action lawsuits create conflicts between class counsel and class member interests.81 Lawyers in class actions have strong incentives to serve their own interests at the expense of the class. These misincentives can be explained in terms of risk minimizing behavior. Class counsel is economically liable for the outcome of the class action; if the class recovers so does class counsel.82 However, if the class does not recover or settle, class counsel is liable for the time and resources she invested in the class action.83 Therefore, class counsel naturally

treats the class action as "a risky asset that requires continuing investment decisions."84 These "investment decisions" have the potential to compel class counsel to minimize her risk by accepting premature settlements in order to keep expenditures low and aggregate fee recovery relatively high.85 Likewise, these investment decisions also compel class counsel to minimize her risk by highlighting the strengths of the settlement in order to ensure the settlement (and her attorney fees) are approved, even though the settlement may not be in the "best interests" of the class.86

The structural weaknesses that produce attorney-client conflicts are even more prominent in "settlement class actions," where the court postpones formal certification until the parties have successfully negotiated a settlement.87 Typically in settlement class actions, class counsel and defendants' lawyers negotiate a settlement prior to filing the class action. It is only after the terms of the settlement have been negotiated that the parties seek class certification for settlement purposes only.88 The by-product of this procedure is the markedly reduced opportunity for the court and the class to oversee and assess the propriety of settlement, as well as maintain the whole litigation and the class certifying process.89 Settlement classes make it difficult for the courts and class members to effectively monitor the negotiating process that produces the settlement because the process is finished right when the courts and the class realize it began. Moreover, the courts and the class also have a difficult time evaluating the propriety of the settlement because they:

.. lack the information necessary to determine the likely extent of liability, fair and adequate representation, what the strength and weaknesses of the parties' positions are, or how much the class will benefit under the settlement. Moreover, the court performs its role as supervisor/protector without the benefit of a full adversarial briefing on the certification issues. With less information about the class, the judge cannot as effectively monitor for collusion, individual settlements, buy-offs (where some individuals use the class action device to benefit themselves at the expense of absentees), and other abuses.90

Finally, the courts' and the class' decision-making is impaired because class counsel and the defendant's attorneys are likely to feed the court information in a

settlement hearing that would convey the settlement's strengths and not its weaknesses.91 The result is that class counsel can use the cloak of a settlement class action to indulge in self-interested behavior and "generate fees for themselves without any effective monitoring by class members who have not been apprised of the pendency of the action."92 This self-serving behavior, combined with the concentration of power in class counsel, results in a process that presents a favorable opportunity for class counsel to ignore her fiduciary duties to her benefit but to the detriment of the class.

2. SYSTEMATIC INCENTIVES EXIST FOR CLASS COUNSEL TO ACT IN DEGRADATION OF HER FIDUCIARY DUTIES AFTER THE DISTRICT COURT APPROVES THE SETTLEMENT

Systematic incentives also exist for class counsel to conceal settlement flaws in order to guarantee that she will receive attorney fees even after the district court approves the settlement and prior to appellate review. Although class counsel may find some comfort in the knowledge that the district court has already approved the settlement, the reality is that the district court's approval of the settlement does not mean the settlement is correct or the court's order is binding. As discussed previously, structural weaknesses in the class action model of litigation can prevent class representatives and class members from monitoring and reporting problems with the settlement, in turn compromising the court's ability to adequately scrutinize the settlement.93 Further, with endless dockets94 and constant pressure to resolve the claims of hundreds or thousands of victims, district courts have institutional incentives that can push them to accept tainted settlements.95 Even in the wake of highly scrutinized class action lawsuits, district courts have failed to properly assess class action settlements and

settlement class actions.96 Ultimately, the reassurance that a district court has already evaluated the settlement is not much reassurance at all; settlements are vulnerable to attack and invalidation on appeal. Consequently, with class objectors ready to challenge the validity of a district court's decision, class counsel has significant incentives to silence their objections in order to ensure the appellate court does not hear the settlement's weaknesses. Because a class counsel's fees are tied to an appellate court's approval of the settlement, there exists considerable incentive for her to silence class objectors after the settlement has been approved by the district court.

B. SIDE SETTLEMENTS BETWEEN CLASS COUNSEL AND CLASS OBJECTORS RESULT IN DISSIMILAR TREATMENT FOR SIMILARLY SITUATED CLASS MEMBERS AND AFFECT THE CLASS SETTLEMENT BY CREATING POTENTIAL INTRA-CLASS CONFLICTS UNDER RULE 23(A)

The crux of the First Circuit's opinion in Duhaime rests upon its analysis that the Rose Objectors and the class (including Metzenbaum) were not "similarly situated" enough to view the final recovery as evidence of a breach of class counsel's fiduciary duty to class members. The court made much of the fact that because the Rose Objectors retained separate counsel on appeal and made different litigation decisions, they were not "similarly situated" to other class members. As a result of their dissimilar positions, the Court reasoned that the District Court did not need to ensure similar compensation unless the benefit obtained through the side settlement affected the class settlement itself. Although the Court correctly noted that courts are concerned with adequate and similar results for all similarly situated class members, it ultimately concluded, "we simply have no tradition of court intervention to ensure that similarly victimized plaintiffs who have retained separate counsel and have made different litigation decisions get similar results."97

As an initial matter, it seems important to determine in what instances retaining separate counsel may result in a determination that class members are differently situated and should therefore receive different recoveries for similar injuries, and whether in fact the Rose Objectors actually "retained separate counsel." The First Circuit makes a legitimate point about different recoveries for individuals who retain separate counsel. Generally, individuals who have similar injuries to class members, but who decide to retain separate counsel and pursue different litigation strategies, are not required to have similar results. For example, if I was part of a class action and decided to opt out of the settlement to sue the defendants

separately, I could receive a very different recovery even though I have injuries similar to the rest of the class. However, opting out, retaining separate counsel, and then receiving dissimilar damages is not the same as remaining in the class, being legally entitled to the relief secured by the class settlement, and then retaining different counsel to object on appeal. The fundamental difference is that the individual who opts out of the initial settlement and retains separate counsel is not entitled to the benefit of the class settlement; the class objector is. As a result, despite the fact that class objectors and class members may have different attorneys on appeal, class members and class objectors are ultimately in the same position whether the settlement is altered or sustained on appeal.98 Both groups are bound to the final settlement. In essence, class counsel still represents class objectors on appeal, vis-a-vis the class objectors' status as class members, even though class objectors may have retained different lawyers and pursued different litigation strategies.99 In other words, class objectors are similarly situated with class members even though they might have different counsel on appeal.

Reflecting on Duhaime, it is important to note that the Rose Objectors did not "opt out" and receive an additional benefit because they decided to pursue a different litigation strategy with separate counsel. If this were the case, the Court's reasoning would seem sound. Instead, the Rose Objectors, who were still members of the class, received an additional benefit due to their pending appellate objections.100 The end result was that the Rose Objectors received a more favorable settlement than other similarly situated class members because they objected to the settlement on appeal. Moreover, even assuming that class objectors and class members are not "similarly situated" enough to conclude they should receive similar compensation, the First Circuit recognized that judicial review of the side settlement would be necessary if the class settlement itself was affected by the side settlement with the class objectors.101 Although the Duhaime court concluded that the class action settlement itself was not affected by the side settlement, I believe that it was.

Under the "outcome review analysis" 102 of In re GMC, side settlements with class objectors call into question the adequacy of the settlement itself. The

dissimilar treatment of similarly situated class members suggests a potential intra-class conflict that must be disclosed to the court by default.103 In In re GMC, the Third Circuit Court of Appeals invalidated and remanded for additional review the district court's settlement of a nationwide, consumer class action lawsuit. 104 Plaintiffs were owners of GMC trucks that were prone to explosion because the gas tanks were mounted on the exterior of the vehicle.105 The class action requested that General Motors either recall the trucks, repair the trucks, or pay for their repair.106 The settlement provided two choices of relief. each class member could receive a non-transferable107 $1,000 certificate redeemable over a 15-month period for any new GMC truck, or each class member could receive a $500 certificate that was purchasable by any third-party.108

Reviewing the district court's approval of the settlement, the Third Circuit concluded the settlement itself was most likely inadequate under Rule 23(a) because it created an intra-class conflict. The Court found that the intra-class conflict arose when the GM settlement provided class members with different ultimate recoveries109 although the settlement assumed that all class members were equally injured.110 Finding that the district court failed to "adequately discharge its duties to safeguard the interests of the absentees" because it did not properly assess the fact that "some segments of the class are treated differently from others,"111 the Third Circuit concluded "on the current record, the settlement clearly fails to meet the standards required for judicial approval."112

Using the Third Circuit's "outcome review analysis,"113 side settlements affect

the settlement itself by creating different recoveries for similarly situated class members. Applying the logic of In re GMC to the facts of Duhaime, side settlements with class objectors impact the recovery of similarly situated class members-although the Duhaime class objectors' and class members' injuries were the same, their ultimate recoveries were different. Even though, as the First Circuit suggests, the settlement itself can be said to properly benefit class members equally,114 the final recovery clearly suggests a different conclusion: similarly situated class members are impacted differently by the conclusion of the class action settlement. Therefore, per In re GMC, the dissimilar treatment of similarly situated class members suggests that the settlement itself was inadequate, under Rule 23(a), because it created an intra-class conflict.

C. SIDE SETTLEMENTS WITH CLASS OBJECTORS INDICATE A POTENTIAL VIOLATION OF CLASS COUNSEL'S ETHICAL DUTIES TO THE CLASS, THE COURT, AND THE PUBLIC

Although the Duhaime opinion considered whether side settlements between class counsel and class objectors should be reviewed by the district court because side settlements create systematic incentives for class counsel to disregard her fiduciary duties, or resulted in dissimilar treatment of class members, it failed to consider whether class counsel's ethical duties require her to disclose side settlements to the class and the court for review. In the class action context, secret side settlements between class counsel and class objectors not only create systematic incentives for class counsel to disregard her fiduciary duties and to treat similar class members differently, they suggest that class counsel has violated her duty to communicate relevant information, duty of loyalty, and duty to avoid the appearance of impropriety.

1. SIDE SETTLEMENTS BETWEEN CLASS COUNSEL AND CLASS OBJECTORS INDICATE CLASS COUNSEL HAS VIOLATED THE DUTY TO COMMUNICATE RELEVANT INFORMATION

Side settlements that are made between class counsel and class objectors, before the district court approves the class action settlement itself, violate class counsel's duty to communicate relevant information. Model Rule 1.4 states that "[a] lawyer shall explain a matter to the extent reasonable necessary to permit the client to make informed decisions regarding the representation."115 The comment to Model Rule 1.4 suggests that a lawyer should provide her client with sufficient information to intelligently make decisions regarding a settlement offer.116

Applied to class actions settlements, Model Rule 1.4 suggests that class members need to be fully informed of all relevant information that will help them assess the adequacy of the proposed settlement and decide whether to accept the settlement or to opt out.117 Yet, when class counsel withholds information about settlements that produce different recoveries for similarly situated class members, she withholds relevant information that would enable class members to make a fully informed decision about the settlement. Side settlements that are not disclosed to the class prohibit class members from considering how much their claims are worth in relation to other class members' claims, what the strength and weaknesses of the settlement are, and what criteria were used to assess the value of their claims.118 The effect of side settlements between class counsel and class objectors is that they impair individual class members' ability to intelligently decide whether to accept the settlement or to opt out.119 Furthermore, when class counsel makes a secret side settlement that treats similarly-harmed individuals in dissimilar ways, it allows class members to extinguish their claims without the benefit of relevant information that may affect their decision about the settlement.

Some commentators have suggested that it is inappropriate to mechanically apply ethical rules, like Model Rule 1.4, to class action relationships because the rules were developed outside the class action context.120 However, Comment 3 to Model Rule 1.4 helps instruct attorneys on how to address the problems they encounter while attempting to communicate relevant information to a large group of people, such as class members.121 Comment 3 notes that although "it is often impossible or inappropriate to inform every one of its members about legal affairs, ordinarily the lawyer should address communication to the appropriate officials in the organization."122 Therefore, pursuant to Comment 3, class counsel should at least divulge the side settlements to the people who are responsible for guarding the class interests: class representatives and the court. Class counsel should disclose the side settlement to class representatives so they can assess the value of their claims and their settlement against the objectors' claims and the objectors' settlement in order to determine whether or not the class settlement provides adequate relief for the class' claim.

2. SIDE SETTLEMENTS BETWEEN CLASS COUNSEL AND CLASS OBJECTORS SUGGEST A VIOLATION OF CLASS COUNSEL'S DUTY OF LOYALTY TO THE CLASS

Side settlements between class counsel and class objectors also indicate that class counsel has violated her duty of loyalty to the class. The secret buy-off of class objectors that results in more favorable treatment of one segment of the class suggests that class counsel has preferred one part of the class over another and has attempted to conceal a conflict that might prevent her from securing approval of the settlement and her attorneys fees.

Under Model Rule 1.7(b), class counsel has a duty of loyalty to the entire class.123 The rule is designed to ensure that attorneys remain loyal to their clients' interests and do not prefer their own or someone else's interests to those of their client.124 Side settlements between class counsel and class objectors undercut Model Rule 1.7(b). When class counsel arbitrarily 125 increases the recovery of class objectors, she has de facto given more favorable treatment to a subsection of the class and arguably violated her duty to loyally represent the interests of the entire class. Side settlements between class counsel and class objectors are analogous to the settlements in Georgine v. Amchem, which many commentators have suggested were unethical. 126

In Georgine, asbestos plaintiffs' lawyers and the Center for Claims Resolution (CCR), a claim-settling organization incorporated by asbestos defendants, negotiated a settlement class action for individuals who would develop asbestosrelated illnesses in the future. Pursuant to the settlement agreement, class counsel "grandfathered out" 14,000 of its own pre-existing asbestos clients, along with thousands of pre-existing clients of other asbestos lawyers. In essence, Georgine class counsel negotiated two settlements for the same class of individuals: one settlement for the class and one side settlement for its clients. The result was that individuals who were clients of class counsel and other asbestos lawyers received a substantially higher recovery than the rest of the class.127 According to Professor Koniak, the side settlement produced a recovery for pre-existing clients of class counsel and other asbestos lawyers that was 54%-72% better than the recovery for the rest of the class.128 The outcome was that certain segments of the class received a premium, i.e. were paid more money, for their status as clients of the people who negotiated the settlement. Although the Georgine district court

did not find that the settlement represented a conflict of interest,129 many commentators have suggested that the disparity in recovery suggests an ethical violation of the duties owed to the class. 130

Although side settlements between class counsel and class objectors do not alter the class settlement itself, the final recovery for the two groups of class members demonstrates disparate treatment analogous to the settlements in Georgine. In Georgine, similarly situated class members received more money because of their status as pre-existing clients of class counsel or other asbestos lawyers. In Duhaime, similarly situated class members received more money because they objected to the settlement at the fairness hearing and they were willing to keep objecting to the settlement on appeal. The result in both Georgine and Duhaime was that similarly situated class members received different recoveries based on factors other than their claims and injuries. A class members' compensation should not be based on whether she has objected or will object in the future. Instead, compensation should be based on her claims and injuries. Any settlement that prefers one part of the class over another part of the class, regardless of whether the side settlements are made before or after the district court has approved the settlement, suggests a violation of class counsel's duty of loyalty to the entire class and should be disclosed to the court.131

An obvious issue that must be examined when assessing whether class counsel has violated her duty of loyalty to the class is class counsel's motivation to make side settlements with class objectors. I suggest two possible motivations.

First, a rational attorney who invests her time and money into a class action will make side settlements, i.e., buy-off objectors, in order to ensure the court never hears valid arguments that might disrupt the court's approval or affirmation of the settlement.132 The reason: attorney fees. Like many plaintiffs' lawyers, attorneys who represent class members in class action lawsuits are compensated for their time and expenses on a contingent fee basis.133 As a result of the contingent fee structure, many commentators have argued that class attorneys

have misincentives 134 to settle the class action on a less favorable basis than if the class litigated their claims.135 Professor Coffee describes this behavior as entrepreneurism. According to Coffee, plaintiff's attorneys, like entrepreneurs, invest their time and money with at least one eye towards compensation. Consequently, when settlement talks emerge, plaintiff's attorneys tend to calculate the likelihood of compensation instead of solely acting as a fiduciary for their client. A plaintiff's attorney acts not so much as an agent for the class, but as an entrepreneur who "regards litigation as a risky asset that requires continuing investment decisions."136 The outcome is that class attorneys are driven to settle the class action for smaller amounts than may be recovered by pursuing protracted settlement talks or litigation in order to minimize the risk of loss and maximize the attorney's recovery of fees and expenses. 137

Similar to the misincentives that confront class counsel's decision to settle, class attorneys are attracted to the idea of entering into side settlements to ensure that the class action settlement is secure from any disruption that may result if an objector highlights a weakness in the settlement. Because class counsel is compensated only when successful, she bears the costs of failure and faces personal liability if she obtains a judgment smaller than the settlement offer,138 or if the court de-certifies the class and disapproves of the settlement. As a result, like an entrepreneur who seeks to ensure her investment is protected, class counsel may find it tempting to offer generous side settlements to class objectors in order to silence their objections against the settlement, thereby increasing the likelihood that the court will approve the settlement. The result of these side settlements is that when class counsel silences objectors' arguments she increases the odds that the district court will approve the settlement and her attorney's fees, and that the appellate court will affirm the settlement and her attorney fees. This opportunistic139 behavior not only betrays class expectations that its attorney will advance its interests above all others, but suggests that class counsel is laboring under an impermissible conflict of interest and has violated her duty of loyalty to the entire class. Finally, it demonstrates an inherent danger in class action settlements-that class counsel will use her position to "sell out" the interests of the class in exchange for substantial attorney fees.140

Naturally, the suggestion that class counsel may violate her duty of loyalty to the class by making side settlements with class objectors is not the only paradigm through which to view such behavior. The second reason why a rational class counsel would consider making a side settlement with class objectors is to save the class the time and money that results from defending against frivolous objections. Under this theory, class counsel will buy-off class objectors to reduce transaction costs associated with defending against meritless objections at the fairness hearing and/or on appeal. In other words, when class counsel buys-off objectors, she is acting in the best interests of the class by paying the objectors to go away.141

Even though the reason behind class counsel's behavior is less insidious than the desire to bury a conflict in order to secure the settlement, and ultimately, attorney fees, this behavior still casts a doubtful eye on the settlement and undermines the court's duty to guard the class' interests. As discussed previously, class actions have inherent structural weaknesses that create opportunities for class counsel to prefer herself over the class's interests.142 Due to these unique problems the district court has a duty to monitor the class action for self-serving behavior and inadequacies that will have a detrimental impact on the settlement.143 In light of these considerations, it seems extremely inappropriate for class counsel to usurp the court's role as guardian of the class and unilaterally decide that the objector's arguments have no merit. Clearly, under Rule 23(e), the court is required to evaluate such arguments.144 Moreover, it is likely that the district court intends to hear the of type arguments objectors will make, since the court holds fairness hearings.145 Therefore, it seems improper for class counsel to replace herself as ultimate guardian of the class' interests and conclude the objectors' arguments are without merit. Although one may suggest that class counsel is merely acting in the best interests of the class by reducing transaction costs associated with defending the settlement against class objectors' appeal, this does not explain why class counsel would secretly make side settlements

with class objectors.146 In light of the structural weaknesses that prevent class representatives from monitoring class counsel's behavior, it seems imperative that class counsel disclose side settlements to the district court so the court can fulfill its duty as guardian of the class and determine whether the side settlement creates any impermissible conflicts within the class.147 As stated previously, I do not suggest that side settlements are per se breaches of class counsel's fiduciary duty, but I do suggest that side settlements with class objectors should be disclosed to the court so it may evaluate whether the side settlement creates an impermissible conflict and/or violates the attorney's ethical duties to the class.

3. SIDE SETTLEMENTS BETWEEN CLASS COUNSEL AND CLASS OBJECTORS DEMONSTRATE CLASS COUNSEL HAS VIOLATED THE DUTY TO AVOID THE APPEARANCE OF IMPROPRIETY

In addition to placing in question class counsel's adherence to her duty to communicate relevant information and her duty of loyalty, secret side settlements with objectors also suggest that class counsel has violated her duty to avoid the appearance of impropriety.

Canon 9 of the Model Code of Professional Responsibility states:

Public confidence in the law and lawyers may be eroded by irresponsible or improper conduct of a lawyer. On occasion, ethical conduct of a lawyer may appear to laymen to be unethical. In order to avoid misunderstandings and

hence to maintain confidence, a lawyer should fully and promptly inform his client of material developments in the matters being handled for the client. 148

In the American tradition of advocacy, an attorney fulfills two fundamental roles. Foremost, the lawyer acts as an advocate for her client; she is required to zealously represent her client before the court and in negotiations with the opposing parties.149 However, this role is qualified by the lawyer's responsibilities to the opposing party, the court, and the public. Throughout the Model Rules of Professional Conduct, the lawyer's role as advocate for the client is limited by her duties to third parties. The Model Rules create duties to opposing parties and their counsel by prohibiting a lawyer from obstructing access to material information or attempting to silence relevant witnesses who possess material information.150 The Model Rules also establish duties to the court by requiring a lawyer to disclose material information to the court when it is necessary to avoid assisting a criminal or fraudulent act by the client. 151 Finally, Canon 9 152 creates a general duty to the public to maintain public confidence in the bar.153 The rationale underlying Canon 9 suggests a lawyer has a duty to avoid even the appearance of impropriety in order to maintain public confidence in the integrity of the legal system and the legal profession.154

Various courts have given teeth to the duty to avoid the appearance of impropriety by using the duty as the basis to invalidate class action settlements and attorneys' fees.155 The most notable decision is the Third Circuit's decision in In re Eastern Sugar Antitrust Litigation. In In re Eastern Sugar, plaintiffs' and defendants' counsel voted to merge their respective law firms after they settled a nationwide class action lawsuit. Although the class action settlement was approved by the district court almost one year prior to the vote to initiate merger negotiations between the two law firms,156 the Third Circuit found that class counsel violated its duty to avoid the appearance of impropriety when it did not disclose the merger negotiations to the district court.157 Although no actual conflicts of interest arose because the class action settlement was approved prior to the merger negotiations, the appellate court still found the public could have

believed that class counsel might be induced to compromise its representation of the class in matters that remained before the court in order to receive more favorable merger terms.158

Relying on Canon 9, the Third Circuit found that attorneys have a general duty to maintain public confidence in the integrity of the legal system and the legal profession.159 In order to fulfill this duty, the Court emphasized, "it is necessary not only to avoid actual wrongdoing but also the appearance of wrong doing."160 As a result, the appellate court found that class counsel should have disclosed the merger negotiations to the district court in order to allow the court to weigh all the circumstances and protect the interests of the parties and the legal system.161 Inevitably, the Third Circuit used class counsel's violation of the duty to avoid the appearance of impropriety as a basis to potentially strip class counsel of a substantial portion of its attorneys' fees. 162

Like the merger negotiations in In re Eastern Sugar, secret side settlements between class counsel and class objectors, before and after the district court has approved the settlement, create the appearance of impropriety. By their very nature, secret side settlements ensure that no party will object to the class settlement. The promise of a higher recovery in exchange for silence necessarily suggests that class counsel is attempting to bury information. Whether the buy-offs are intended to silence class objectors because the settlement is inadequate or the buy-offs are intended to reduce transaction costs,163 side settlements might lead the public and the class to conclude that class attorneys are attempting to conceal a deficiency in the settlement. The settlement may appear tainted when class counsel seeks to circumvent court processes designed to ensure that the class settlement is fair by offering objectors a benefit in return for their silence. Although no actual impropriety may exist, it does not defeat class counsel's obligation to disclose the information to the court. As the Third Circuit noted in In re Eastern Sugar, despite class counsel's belief that the negotiations did not affect the adequacy of the representation, the evaluation of such behavior "[is] one for the court to strike, not counsel."164

Notably, the Model Rules of Professional Conduct, which supplanted the Model Code in 1983, do not contain the language of Canon 9.165 However, a similar concept, embodied in Model Rule 1.7, protects against conflicts of

interests. As a result, many jurisdictions that have adopted the Model Rules may not be persuaded by the pre-1983, Third Circuit rationale. However, this fact has not prevented courts from using the underlying policy against impropriety, along with its unique oversight function in class action lawsuits, to conclude that such disclosure is warranted. In In re Agent Orange Product Liability Litigation, the Second Circuit found, under Rule 23(e), that the district court should use various ethics code guidelines, including the appearance of counsel's conduct, to judge the settlement and attorneys' fees.166 Relying on the appearance of impropriety standard outline in the City of Detroit v. Grinnell Corp., and the court's duty to protect the rights of the class, the Second Circuit invalidated class counsel's fees.167 Likewise, in In re GMC, the Third Circuit concluded that the district court's oversight function in class action lawsuits serves not only to detect instances of "the actual abuse [that potential attorney-class conflicts] may cause, but also [the] potential public misunderstandings they may cultivate in regard to the interests of class counsel."168 Consequently, the mere specter of impropriety requires class counsel to disclose its side settlements to the class and the court to maintain public confidence in the Bar and the legal process.

CONCLUSION

Secret side settlements between class counsel and class objectors should engender concern among objectors, class members, courts, and commentators. As courts and commentators have consistently recognized, the inherent structural problems in the class action form of litigation not only results in a concentration of power in class counsel, but also creates potential conflicts among class counsel and class members. When these general structural problems and attorney misincentives are combined with the possibility that class objectors will disrupt a settlement, class counsel has important systematic incentives to disregard her fiduciary duties to the class in favor of herself. Furthermore, side settlements create a disparity in the final recovery of similarly situated class members, which suggests that class counsel has breached her fiduciary duty to the class. Disparate recovery between class members may not only indicate that class counsel has breached her fiduciary duties, but may also affect the settlement itself by creating potential intra-class conflicts under Rule 23(a). Finally, secret side settlements

indicate that class counsel has violated her ethical duty to inform her client of relevant information, her duty of loyalty, and her duty to avoid the appearance of impropriety. Therefore, as a result of these potential fiduciary, substantive rule, and ethical violations, the court should require class counsel to disclose side settlements to the court and the class for review.

KATHERINE IKEDA*

* J.D., Georgetown University Law Center, May 2001. 1 would like to thank Professors Carrie Menkel-Meadow and Colette Matzzie for their tremendous patience and considerable guidance on the draft of this note. This note is dedicated to my grandmother, Katherine Sheehy Gorin, and my foster mother, Vesta Kay Curry - two extraordinary women, without whom I would have not known the meaning of humanity, strength, and compassion. You are a constant inspiration.

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