Opinion ID: 39709
Heading Depth: 4
Heading Rank: 1

Heading: Hamlin’s status as an outside lawyer

Text: Appellants note that Hamlin is an “outside lawyer” for New Jersey, and they claim that his involvement violates Berger I. In discussing the adequacy standards of Rule 23 in Berger I, however, we addressed the relationship between the class representative and the class counsel. We did not address the present situation in which another attorney, not affiliated with class counsel, is engaged by the class representative to assist it in its monitoring 12 of class counsel.3 The guidelines in Berger I do not prevent a proposed class representative from hiring an outside attorney (not affiliated with class counsel) to help the class representative in carrying out its role as such and in overseeing proposed class counsel, as long as that outside attorney has no conflicts with the class.4 While appellants correctly point out that class counsel cannot also serve as the class representative, the cases they cite do not reach the present situation. In Zylstra v. Safeway Stores, Inc., 578 F.2d 102 (5th Cir. 1978), cited by appellants, we emphasized the potential conflicts between the class counsel and the class itself, explaining: “We reach that conclusion because of the conflict of interest which is inherent in such a situation. An attorney whose fees will depend upon the outcome of the case and who is also a class member or closely related to a class member cannot serve the interests of the class with the same unswerving devotion as an attorney who has no interest other than representing the class members.” Id. at 104. 3 Although our opinion in Berger I refers to counsel, lead counsel, their counsel, representatives’ counsel, plaintiffs’ counsel, and lawyers, all of these terms are used as synonyms for class counsel. One modifier for counsel that we did not employ in the Berger I opinion is outside. While Hamlin is admittedly an outside lawyer, he is not class counsel. 4 As the district court here observed, additional outside counsel with no potential conflicts with the class (i.e. counsel whose fees are not contingent upon the outcome of the litigation or on approval of class counsel) can help the class representative. In Berger I we noted that “class representatives need not be legal scholars and are entitled to rely on [class] counsel.” 257 F.3d at 483. However, as we noted in Berger I, there are limits to this position because too much reliance by the class representative on class counsel shifts the balance of power and brings to the fore the potential conflicts of interest between class counsel and the class. As the class representative becomes more competent in legal matters, it becomes less reliant on class counsel. 13 Similarly, in Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999), also cited by appellants, we rejected an attorney’s attempt to serve as both class counsel and class representative, noting that “her duty to represent class interests would impermissibly conflict with her chance to gain financially from an award of attorneys’ fees.” 174 F.3d at 559. The principal concern underlying the adequacy guidelines in Berger I is the protection of the due process rights of the absent members of the class. 257 F.3d at 480. In Berger I, as in Zylstra and Matassarin, we sought to avoid any conflict with the interests of the absent class members. Id. (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997)). With Hamlin and New Jersey, the district court properly found no potential conflicts with the interests of the absent class members. Certification Order, 226 F.R.D. at 567. b. The fact that Hamlin’s fees are borne by class counsel The district court did “recognize[] that it would be troubling if Judge Hamlin, like outside counsel, was only paid if New Jersey prevailed, but this is not the case.” Id. at 568. The district court reviewed the relevant features of Hamlin’s compensation: “Judge Hamlin was retained by the Attorney General of New Jersey, and it is the Attorney General, not outside counsel, who can terminate his services. His compensation is determined by the Attorney General, not outside counsel. The Attorney General reviews and approves each bill Judge Hamlin submits, and only after the Attorney General reviews and approves the bill does outside counsel transfer payment to Judge Hamlin. . . . 14 Judge Hamlin's compensation is assured for as long as he performs in a manner deemed satisfactory by the Attorney General of New Jersey. Judge Hamlin has great incentive to act objectively in protecting the interests of New Jersey and the class of plaintiffs, and little incentive to take actions adverse to New Jersey's interests.” Id. at 567–68. The evidence supports these findings and appellants do not serously argue otherwise. We agree with the district court’s finding that Hamlin’s pay arrangement does not create a conflict of interest with the class members. Hamlin is not a puppet of class counsel, and he does not answer to class counsel. On the contrary, Hamlin answers to the New Jersey Attorney General. Hamlin’s pay is not contingent on the outcome of the class action, nor is it contingent on any approval thereof by class counsel or on keeping class counsel happy. Hamlin’s interests are fully aligned with those of New Jersey, which are fully aligned with those of the absent members of the class.5 As part of their argument regarding Hamlin’s pay, appellants claim that New Jersey, by requiring class counsel to pay Hamlin’s fees, has established a “pay to play” arrangement in violation of the PSLRA and, therefore, should be deemed an inadequate class representative. For support, appellants point to the PSLRA requirement that the class representative file a sworn 5 Even if these payments reduce New Jersey’s litigation costs, they do not affect New Jersey’s interest in a high settlement. New Jersey has every incentive to recover every penny of its more than $40 million in losses, which translates into a proportionally high recovery for the class. Thus, New Jersey’s interests are aligned with those of the class. 15 certification that “states that the plaintiff will not accept any payment for serving as a representative party on behalf of a class beyond the plaintiff’s pro rata share of any recovery, except as ordered or approved by the court in accordance with paragraph (4).” 15 U.S.C. § 78u-4(a)(2)(A)(vi).6 Although appellants attempt to characterize this arrangement as some sort of bribe to the state by describing it as, in effect, “giving New Jersey thousands of dollars for the right to represent the State,” we find nothing improper about the actual arrangement. In this case, thousands of dollars are not being given to New Jersey, nor are thousands of dollars being given to a state official to influence his or her decision to hire class counsel. Instead, the requirement to pay Hamlin’s compensation was an open part of the general proposal process for all law firms seeking to represent New Jersey in securities class actions. From the beginning, this was an understood uniform, specified cost of undertaking this legal work on a contingency basis. As New Jersey points out, “In contingent fee cases, counsel routinely agree to advance the value of their time and other expenses directly related 6 Section 78u-4(a)(4) provides: “(4) Recovery by plaintiffs The share of any final judgment or of any settlement that is awarded to a representative party serving on behalf of a class shall be equal, on a per share basis, to the portion of the final judgment or settlement awarded to all other members of the class. Nothing in this paragraph shall be construed to limit the award of reasonable costs and expenses (including lost wages) directly relating to the representation of the class to any representative party serving on behalf of a class.” 16 to the litigation.” The payments provided for clearly do not involve New Jersey receiving more than its portion, on a share basis, of any final judgment or settlement of the action so as to violate the first sentence of section 78u-4(a)(4); nor does the court’s approval of the arrangement violate the second sentence of that section (see note 6 supra). The evidence does not establish that this is a “payment for serving as a representative party” such that the PSLRA precludes the district court’s approval of the arrangement and appointment of New Jersey as class representative. B. New Jersey’s alleged conflict with the class due to KPMG Appellants claim that New Jersey’s failure to name KPMG as a defendant in this case, coupled with the fact that KPMG is New Jersey’s auditor, demonstrates a conflict of interest with the class that should disqualify New Jersey from serving as class representative. KPMG was EDS’s outside auditor during the class period. Because plaintiffs allege fraudulent behavior primarily associated with revenue reporting under the NMCI contract, appellants argue that “KPMG is a prime candidate to be a defendant in this case.” Appellants claim that “a class representative who fails to sue a potential defendant with which it has a professional or personal relationship is presumptively inadequate.” Id. We reject appellants’ contentions in this respect. Appellants rely on Paper Systems, Incorporated v. Mitsubishi Corporation, 193 F.R.D. 601 (E.D. Wis. 2000), to support their 17 claim of presumptive inadequacy. In Paper Systems, the proposed class representative, Paper Systems, “caused its largest supplier to be dismissed as a defendant at the behest of Paper Systems’ president, on the ground that he had ‘a good relationship with them.’” Id. at 611. The Paper Systems court began its analysis with the observation that “generally, failure to join all defendants is a strategy choice, and except for a showing of unique circumstances, is probably not a ground for finding inadequacy.” Id. (emphasis added). The court held that “Paper Systems’ conduct in dismissing Appleton can in no way be considered a strategic decision on behalf of the class members it purported to represent. Paper Systems’ actions appear to betray a conflict of interest between named parties and the class they seek to represent.” Id. The court found Paper Systems’ conduct to be proof of the unique circumstances needed for finding that Paper Systems was an inadequate class representative. Id. Appellants’ next authority is Dubin v. Miller, 132 F.R.D. 269 (D. Colo. 1990), where the court found that “Plaintiff's personal relationship with former director Dale Tower casts a further cloud upon plaintiff's suitability to fulfill his fiduciary role. Tower was a director for thirteen months during the class period, yet he has not been named as a defendant. . . . The omission to sue a potential defendant cannot but prejudice the class.” Id. at 272. The Dubin court continued, however, noting that “While the 18 authorities cited by plaintiff do stand for the proposition that a class plaintiff need not join every possible defendant, plaintiff is obligated to supply a persuasive reason for the non-joinder.” Id. at 273. The final authority cited for appellants’ proposition is Kolin v. American Plan Corporation, No. CV-84-3183, 1986 WL 36311 (E.D.N.Y. Apr. 3, 1986), where the court found inadequate a class representative who, due to family ties with potential defendants, was “unable to examine certain potential claims of the class.” Id. at . The Kolin court noted: “The crux of the Rule 23(a)(4) requirement is that plaintiffs and plaintiffs’ counsel not have any interests antagonistic to those of the class.” Id. We essentially agree with the statement in Paper Systems that “generally, failure to join all defendants is a strategy choice, and except for a showing of unique circumstances, is probably not a ground for finding inadequacy.” 193 F.R.D. at 611. Even if these cases do support a presumption of inadequacy against a class representative who fails to sue a potential defendant, it is not a particularly strong presumption, and it is certainly not an irrebuttable one. In this case, any such presumption was rebutted by New Jersey. The district court found that “New Jersey has no self-interest in protecting KPMG,” and “New Jersey has shown its zeal in pursuing class interests, even when those interests conflict with KPMG's interests.” Certification Order, 226 F.R.D. 19 at 570. Moreover, the district court noted that “New Jersey has also stated that it is willing to sue all viable defendants, even KPMG, if the facts lead there; thus far, the facts have not led to suing KPMG.” Id. New Jersey also explains that its “decision not to sue KPMG was not based on any relationship it had with KPMG. Rather, New Jersey’s decision was based on the fact that EDS concealed its fraud from the market and from KPMG.” There are also valid strategic reasons for New Jersey to not name KPMG as a defendant. We agree with the district court’s conclusion on this issue: “New Jersey is only a client of KPMG – not vice versa – so it has no self-interest in appeasing KPMG. . . . New Jersey would not necessarily benefit financially by maintaining a good relationship with KPMG. Thus, the Court does not believe there are unique circumstances here that threaten adequacy.” 226 F.R.D. at 570. C. New Jersey’s alleged conflict with certain class members due to the ERISA class action Appellants claim that New Jersey has a disqualifying conflict of interest with the interests of certain members of the proposed class who are also participants in EDS’s 401(k) plan and, as such, have an ERISA class action pending against the same defendants. The disqualifying conflict with the 401(k) participants, according to appellants, is that “the ERISA case is based on a broader theory of loss causation than the securities case and the two cases involve different measures of damages.” Certification Order, 226 20 F.R.D. at 568 (footnote omitted). Because the theory of loss causation in the ERISA action is broader than the theory of loss causation in this securities case, appellants claim that the 401(k) participants will be judicially estopped from asserting their theory in the ERISA action. We disagree. “Judicial estoppel ‘prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or some earlier proceeding.’ The purpose of the doctrine is to prevent litigants ‘from “playing fast and loose” with the courts . . . .’” Hall v. GE Plastic Pacific PTE Ltd., 327 F.3d 391, 396 (5th Cir. 2003) (quoting Ergo Science, Inc. v. Martin, 73 F.3d 595, 600 (5th Cir. 1996)). Before a party can be judicially estopped, however, “it must be shown that ‘the position of the party to be estopped is clearly inconsistent with its previous one; and . . . that party must have convinced the court to accept that previous position.’” Id. (quoting Ahrens v. Perot Systems Corp., 205 F.3d 831, 833 (5th Cir. 2000)). Here, the district court hearing both cases explained how the position of the plaintiffs in the ERISA class is complementary with the position taken by the plaintiffs in the securities class. 226 F.R.D. at 569. Although the theories in each action are different, they are not mutually exclusive. Id. For these reasons, we find that the district court applied the correct legal standard to its Rule 23(a)(4) adequacy determination and it did not abuse its discretion in finding that New Jersey will 21 fairly and adequately protect the interests of the absent class members.