Class Action Plaintiffs’ Failure to Argue Choice of Law in District Court and in Opening Brief did not Waive Issue on Appeal, and District Court Erroneously Granted Defense Summary Judgment Motion and Erroneously Denied Class Certification in Breach of Fiduciary Duty Class Action Against Plaintiffs’ Prior Attorneys Based on its Incorrect Determination of Applicable Choice of Law
Based on a complicated fact pattern, plaintiffs filed a putative class action against some of their prior counsel in an asbestos mass action for breach of fiduciary duty, specifically, the breach of fiduciary duty of undivided loyalty and candor in the settlement of asbestos claims. Huber v. Taylor, ___ F.3d ___, 2006 WL 3071384, *4 (3rd Cir. October 31, 2006). In broad terms, the class action complaint alleged that prior counsel had negotiated settlements in which counsel received as attorney fees a smaller percentage of the payments made to putative class members than they received in fees from other clients in related actions, thus creating the incentive for counsel to negotiate higher settlements in cases in which they would receive a larger contingent fee. Id., at *3. Plaintiff’s lawyers sought class certification, which the District Court denied. The parties thereafter filed cross motions for summary judgment; the court agreed with defense attorneys that plaintiffs had failed to demonstrate actual harm – specifically, that the settlements received by plaintiffs would have been more favorable but for the alleged breaches of fiduciary duties – and therefore granted judgment for the defense. Id., at *4. The Third Circuit Court of Appeals reversed because the district court erred in its choice of law determination.
The Circuit Court opinion defines the “Northerners” as plaintiffs in asbestos actions filed in Pennsylvania, Ohio and Indiana, Huber, at *1, and as “Southerners” those plaintiffs in asbestos actions filed in Mississippi and Texas, id., at *2. The class action complaint alleged that “Northerners received payouts that were between 2.5 and 18 times lower than those received by [Southerners],” id. In cases involving Northerners, class counsel had to share their attorney fee award with local counsel but they did not have to utilize local counsel in cases involving Southerners. The Court of Appeal summarized plaintiffs’ arguments at *2 and *3 as follows:
Defendants, in settling these cases for Southerners, did not have to share their fees with Local Counsel, as they had to do with Northerners. Plaintiffs allege that the difference in the settlement payouts to Northerners is attributable to this incentive of Defendants to allocate a greater percentage of aggregate settlements to Southerners in order to minimize Local Counsel’s percentages. . . .[¶] . . . [¶] . . .
. . . Plaintiffs allege that Defendants . . . had a conflict of interest regarding their multiple representation because of the fee arrangements that gave Defendants a larger percentage of Southerners’ recoveries than of Northerners’ and that this created an incentive for Defendants to negotiate settlements that paid more for Southerners’ claims than for Northerners’; and that Defendants never gave proper disclosure of this conflict of interest or of the full terms of the settlement offers.
The Court of Appeals stated that the sums involved were significant, estimating that with respect to “just [a] portion of the total settlements, Defendants stood to gain up to $10 million . . . at the expense of Northerners,” id., at *2. The district court granted the defense motion for summary judgment, however, because it determined that plaintiffs were required to show “causation and actual injury.” Id., at *4. This determination, based on the lower court’s choice of law analysis, was the “lynchpin” of the district court decision to deny class certification and grant summary judgment. Id.
Based on an inscrutable analysis, Huber, at *6-*8, the Third Circuit concluded that plaintiffs had not waived the choice of law issue, explaining at *6:
In this case, we do not believe that Plaintiffs waived the choice of law issue. We conclude instead that the District Court, in determining that “Defendant attorneys assert, and plaintiffs do not disagree that, for purposes of this summary judgment motion, no true conflict of laws exists,” overlooked the fact that, while the parties agreed that there was no true conflict of laws, they disagreed as to what law should apply. (Footnote omitted.)
In another twist of circular reasoning, the Circuit Court alternatively concluded that “even if choice of law issues are waivable, and Plaintiffs failed to raise the issue before the District Court and on appeal, the exceptions to the waiver doctrine would apply here” because “Plaintiffs’ repeated and insistent citation to Texas law as providing the governing standard alerted this Court to the choice of law issue.” Huber, at *6.
The Court of Appeals held that Texas law governed the class action complaint, Huber, at *10-*11. It further observed that Texas law does not require a client to “‘prove actual damages in order to obtain forfeiture of an attorney’s fee for the attorney’s breach of fiduciary duty to the client.’” Id., at *8 (citations omitted). The foundation of the district court’s decision was thus flawed and mandated reversal.
Finally, in light of its other holdings, the Circuit Court vacated the district court’s refusal to certify the lawsuit as a class action and directed the lower court to “reconsider whether to certify the class in light of the application of Texas law.” Huber, at *13.
NOTE: One of the circuit judges dissented on the ground that plaintiffs waived the choice of law issue because they had not raised it in the district court and had not briefed it in their opening brief. See Huber, at *13 et seq. (Fuentes, J., dissenting)