September 29, 2011
From my colleague Adam Zimmerman:
When defendants settle cases involving a large group of people, they often won’t settle without some kind of “peace” — a binding release from nearly all of the potential plaintiffs. The decline of class action settlements, however, means that peace often comes through informal aggregate agreements — a practically binding settlement process, usually negotiated outside of court, between a defendant and a plaintiff firm with many similarly aggrieved clients. But in Johnson v. Nextel Comm., Inc., a case likely to raise new obstacles for the lawyers who agree to such large settlements, the Second Circuit recently recognized that clients may sue their own attorneys–and even opposing counsel–for entering into an overarching settlement agreement whose terms jeopardize counsels’ ability to give “due consideration to [plaintiffs'] differing claims.”
The Johnson settlement mirrors features of much larger informally aggregated settlements — like Vioxx and Fen Phen — that have troubled mass tort scholars like Howard Erichson. The settlement agreement in Johnson created a dispute resolution process for a large group of clients, represented by the same law firm, who commenced similar employment discrimination claims against Nextel. Among other things, the agreement included tight time frames for claimants to participate and resolve their claims; the agreement even reduced plaintiff counsels’ fee awards, on a sliding scale, when they failed to persuade clients to meet those deadlines or participate in the settlement. By entering into the deal, according to the Second Circuit, the plaintiffs’ former lawyers “violated [their fiduciary] duty to advise and represent each client individually, giving due consideration to differing claims, differing strengths of those claims, and differing interests in one or more proper tribunals in which to assert those claims.” The Second Circuit also found that defendants “aided and abetted” the plaintiffs’ lawyers and that the deal itself gave rise to a presumption of damages.
The scope of the Second Circuit’s decision remains unclear. In a footnote, the Second Circuit cautioned that it would not “necessarily preclude” such “group treatment” in other cases whereÂ ”manageable numbers of claimants are involved” and “defendants are not paying the claimants’ lawyer to aggregate the claims.” And this particular settlement was unusually egregious–among other things, the plaintiffs’ law firm also agreed to take on a multi-million dollar consulting agreement with defendants after all the individual claims finally settled. But the Second Circuit’s opinion also reflects the same strong view of client autonomy that brought down many large class action settlements–and accordingly–calls into question a number of more recent mass settlements forged without significant court oversight.
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