Commercial Litigation and Arbitration

When Class Counsel’s Misconduct Requires Denial of Certification — Ethical Standards — “Only the Most Egregious Misconduct”

Reliable Money Order, Inc. v. McKnight Sales Co., 2013 U.S. App. LEXIS 501 (7th Cir. Jan. 9, 2013):

The Ashford Gear litigation was the first to consider whether counsels' misconduct required denial of class certification. Like McKnight here, the defendant in Ashford Gear opposed class certification, arguing the same misconduct that McKnight argues in this case--Kelly's misrepresentations to Ms. Abraham regarding the confidentiality of the fax lists and the misleading solicitation letter. Explaining that "[o]nly the most egregious misconduct on the part of [a plaintiff's] lawyer could ever arguably justify denial of class status," the district court certified the class. Creative Montessori Learning Ctr. v. Ashford Gear LLC, No. 09 C 3963, 2011 WL 3273078, at *4-7 (N.D. Ill. July 27, 2011) [hereinafter Ashford Gear I] (quoting Halverson v. Convenient Food Mart, Inc., 458 F.2d 927, 932 (7th Cir. 1972)). Agreeing with Cy's Crabhouse I that counsel's representations to Ms. Abraham were not "entirely on the up and up," Ashford Gear I nevertheless certified the class relying on the Cy's Crabhouse II decision vacating the protective order. Ashford Gear I, 2011 WL 3273078, at *5. As to the solicitation letter, Ashford Gear I saw a violation of ABA Model Rule of Professional Conduct 7.3(c): the letter misled by suggesting a certified class already existed. Id. at *6. The court, however, "doubt[ed] that [a violation of Rule 7.3(c)] qualifies as the 'most egregious misconduct'" so as to require denial of class certification. Id. at *7. Noting the "considerable experience" of plaintiff's counsel in litigating class actions under the Act and the preference for disciplinary action against the lawyer over denial of certification to punish attorney misconduct, Ashford Gear I certified the class.

Ashford Gear filed a petition for interlocutory review. See Fed. R. Civ. P. 23(f). Plaintiff never responded. We vacated the class certification order and remanded to the district court with instructions to apply a new standard. Ashford Gear II, 662 F.3d at 919. Rejecting the Halverson standard used by the district court, we found the standard from Culver v. City of Milwaukee, 277 F.3d 908 (7th Cir. 2002), more appropriate: "[m]isconduct by class counsel that creates a serious doubt that counsel will represent the class loyally requires denial of class certification." Ashford Gear II, 662 F.3d at 919.

As we explained, unethical conduct by class counsel implicates class certification because class counsel serves as a fiduciary for the unnamed plaintiffs. Id. at 917 (citing Culver, 277 F.3d at 913). Class actions present strong incentives for counsel "to sell out the class by agreeing with the defendant to recommend that the judge approve a settlement involving a meager recovery for the class but generous compensation for the lawyers[.]" Id. at 918 (citing numerous cases). Thus, when "class counsel have demonstrated a lack of integrity" through misconduct and unethical action, "a court can have no confidence that they will act as conscientious fiduciaries of the class." Id.

Ashford Gear II ultimately remanded with instructions to evaluate counsel's misconduct under this standard.

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