Legal News

A Potential Conflict of Interest Costs a Firm Millions

By Brian Harris

by Joshua D. Wolson

A federal judge in California recently issued a startling ruling that class counsel in an antitrust class action was not entitled to any fees, even though it pursued the case for years and successfully negotiated a $49 million settlement. In effect, the judge converted the case from a contingent-fee case to a pro bono case, all because of a potential ethical conflict arising from a retainer letter that obligated counsel to seek incentive awards for the named plaintiffs in the event of any recovery in the case. 

The issue arose because convincing a person or business to serve as a representative plaintiff in a class action often presents a free rider problem. To wit, if the case is ultimately resolved favorably, either through settlement or trial, every member of the class will benefit.  Yet the named plaintiff will have suffered through discovery, including document requests and depositions, while no absent class member will have suffered the same burdens.  These can be painful, distracting experiences for an individual, and potentially disruptive to a small business.  So a potential class representative could be forgiven for asking, ?What?s in it for me?? 

The decision, by Judge Manuel Real of the Central District of California, makes clear that law firms might not be forgiven if they answer that question with promises to seek incentive payments for the class representatives.  The issue arose when Real granted final approval to a $49 million settlement in an antitrust class action against West Publishing Corp. (owners of BAR/BRI) and Kaplan Inc., alleging that the two companies illegally agreed that Kaplan would stay out of the market for bar study courses.  At the same time, Real was also asked to consider whether to award incentive awards to the named class representatives. Under the terms of the named plaintiffs? retainer agreement, class counsel was obligated to seek incentive awards on a sliding scale ? the greater the recovery for the class, the larger the incentive awards, up to a recovery of $10 million for the class.  For any recovery above $10 million, the incentive awards remained the same. Real rejected the requested incentive awards. 

On appeal, the 9th Circuit noted that the retainer agreement created significant ethical problems for McGuire Woods, which was serving as class counsel. The court of appeals explained that the agreement created a potential conflict between the named plaintiffs ? who had a reduced incentive to seek a recovery above $10 million in the case ? and the absent class members and that California law prohibits an attorney from recovering fees for a conflicting representation.  However, the 9th Circuit did not decide what effect that conflict should have on any fee application.

On remand, Real took the 9th Circuit?s caution very seriously.  In fact, he held that McGuire Woods? failure to secure a waiver of the conflict ? and, of course, given that the conflict was with tens of thousands of absent class members, doing so would have been impossible ? meant that the firm was not entitled to collect any fees.  This is a startling result, particularly under the circumstances:  McGuire Woods was not the firm that entered into the retainer agreement; McGuire Woods secured a settlement far greater than the $10 million threshold of the purported conflict; and all requests for incentive fees were submitted to the court and subject to court scrutiny (although the original retainer agreement was not subject to such scrutiny). 

Nonetheless, assuming the decision holds up on appeal ? and the 9th Circuit?s decision gives no reason to think that it will not ? it is a costly result for McGuire Woods, and an vital cautionary tale for anyone else seeking to sign up potential representative plaintiffs. 

Joshua D. Wolson is a member of the litigation department at Dilworth Paxson.  He can be reached at 215-575-7295 or jwolson@dilworthlaw.com. This posting is for informational purposes only and should not be construed or interpreted as legal advice on any matter.

Full post as published by The Legal Intelligencer Blog on February 22, 2010 (boomark / email).