by Mac R. McCoy, D. Matthew Allen, and Allison L. Kirkwood
Florida’s class action rule, Fla. R. Civ. P. 1.220, provides a procedural device akin to joinder whereby a named plaintiff acting in a representative capacity on behalf of a defined group of similarly situated individuals — each of whom may have only a nominal amount of individual damages — pursues common claims against one or more defendants in order to obtain relief for all members of the class.
It is a recognized tenet of class action jurisprudence that “[t]he policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.”1 A class action attempts to resolve this problem by “aggregating the relatively paltry potential recoveries into something worth someone’s (usually an attorney’s) labor.”2 Bringing a lawsuit as a putative class action significantly ups the ante for all parties involved, including courts, because “[t]he granting of class certification considerably expands the dimensions of the lawsuit, and commits the court and the parties to much additional labor over and above that entailed in an ordinary private lawsuit.”3
Ethics issues are among the dimensions that expand considerably in class action litigation. The potentially high stakes nature of class action litigation combined with the unique procedural framework governing it give rise to significant ethical quandaries that do not necessarily occur outside the class action context. These quandaries stem directly from the unique features of the class action device itself, including 1) the fiduciary nature of the named plaintiff’s representative role and class counsel’s role vis-à-vis absent class members; 2) class counsel’s desire to maximize payment of contingent attorneys’ fees from the defendant; and 3) the defendant’s desire to minimize the risk of future litigation after settlement.
This article discusses three specific ethical issues that arise with some frequency in class action settlements: 1) incentive awards to named plaintiffs above and beyond their recovery of individual damages; 2) class counsel’s negotiation of attorneys’ fees in class action settlements; and 3) settlement agreements purporting to limit class counsel’s future representation of new plaintiffs against the settling defendant.
Incentive Awards for Named Plaintiffs
It has become increasingly common for class action settlements to include additional monetary payments to the named plaintiff(s), commonly referred to as “incentive awards” or “incentive agreements.” These payments are often many times the value of the named plaintiff’s individual damages claim. For example, a named plaintiff may have an individual damages claim of $7 or less, but the incentive award he or she proposes to receive as a component of a settlement may be as high as $5,000.4 The unnamed class members do not receive or share in any part of incentive awards. Thus, these payments may appear facially inconsistent with the class representative’s obligation to represent adequately the interests of the entire class, without seeking to maximize his or her own economic gain at the expense of other class members. Additionally, these payments to the named plaintiffs may appear inconsistent with class counsel’s fiduciary obligation to represent adequately the interests of all members of the class and to advise the named plaintiff with regard to his or her own fiduciary obligations to the entire class. Nevertheless, Florida law appears to permit incentive payments to class representatives under certain circumstances, subject to review and approval by the trial court.
Florida’s Third District confronted the issue of incentive awards in a pair of consumer class actions involving insurance, but it reached very different conclusions as to the propriety of the incentive awards approved by the trial courts in each case.
In Grosso v. Fidelity National Title Insurance Company, 983 So. 2d 1165 (Fla. App. 2008), the named plaintiff brought a putative class action against a title insurer, alleging that the defendant had overcharged class members for title insurance premiums.5 Before the trial court had an opportunity to rule on class certification, the parties entered into a settlement agreement that provided for a $5,000 incentive award to the named plaintiff.6 The amount of the incentive award greatly exceeded the dollar value of the named plaintiff’s individual damages claim and was in fact approximately one hundred times greater than the amounts each of the other class members would receive under the proposed settlement.7 The trial court approved the settlement agreement after a fairness hearing and certified a settlement class over the objections of certain class members.8 The objecting class members appealed, challenging, among other things, the fairness of the settlement and the named plaintiff’s adequacy to represent them.9
The Third District held that because the parties had sought class certification and approval of their settlement agreement simultaneously, the trial court was required to “apply heightened scrutiny and take a more active role as a guardian of the interests of the absent class members.”10 The court underscored the danger that class counsel’s and class representatives’ fiduciary responsibilities may become compromised when a class is certified for settlement purposes because of the potential for collusion, buy-offs, and other possible abuses.11 Finding that the trial court had failed to exercise such heightened scrutiny before approving the proposed settlement, the court of appeal reversed the class certification decision.12 The court of appeal was particularly troubled that the trial court failed to apply heightened scrutiny or make specific findings regarding the incentive award payout to the named plaintiff, which potentially called into question the named plaintiff’s commitment to the class.13 “Because Figueroa is to receive payment at approximately one hundred times the value of her claim as a member of the putative class, and where her interest may be focused on obtaining a large recovery for herself, the trial court was required, but failed to scrutinize, whether Figueroa’s incentive to settle was influenced by her own personal gain.”14
In contrast, the Third District subsequently approved a class action settlement that included a $10,000 incentive award for the named plaintiff in Altamonte Springs Imaging, L.C. v. State Farm Mutual Automobile Insurance Company, 12 So. 3d 850 (Fla. 3d DCA 2009). The plaintiff in Altamonte Springs was an MRI provider who brought a putative class action on behalf of similarly situated providers seeking to collect unpaid fees from an insurer for MRI services.15 The parties reached a settlement agreement and the trial court — over the objections of a class member — entered a consent judgment approving the settlement, certifying a settlement class, and awarding fees to the class representative and its attorneys.16 The objector appealed, arguing, among other things, that the $10,000 incentive award was inappropriate.17
The Third District affirmed the incentive award on grounds that 1) the defendant directly paid the award to the plaintiff rather than the award being withdrawn from a pool of money designated for class members, and 2) the trial court determined that the incentive award was reasonable.18 On the issue of reasonableness, the court explained:
The position as fiduciary for the class is less an honor than a headache. The representative plaintiff is identified as a class litigant in public records (potentially affecting credit reports and disclosures for financing), is subject to fiduciary duties to the class, may be deposed and required to produce records, and must meet with counsel and appear in court, for example.19
As of the date of this article, no Florida ethics opinions have specifically addressed the ethical implications of incentive awards in class action settlements. The Grosso and Altamonte Springs cases illustrate, however, that incentive awards to named plaintiffs are not a given in Florida class actions. They must be scrutinized by the trial court under a standard of reasonableness, which is informed, at least in part, by the fiduciary responsibilities of the class representative and class counsel to protect the interests of absent class members.
Attorneys’ Fees for Class Counsel
From class counsel’s perspective, class action litigation involves the potential for significant economic risk because the vast majority of class action plaintiffs are unable to compensate class counsel on an hourly fee basis or to pay the costs associated with protracted and complex lawsuits. Frequently, therefore, class counsel agree to represent the named plaintiff and the proposed class on a contingent fee basis and to advance the costs of the litigation unless or until a recovery is obtained. An unavoidable consequence of such arrangements, however, is that at some point during the negotiation of any class action settlement, class counsel must negotiate the amount of attorneys’ fees and costs to be paid from any settlement. Because parties can structure class action settlements in a variety of ways, the issue of how and when to ethically broach the topic of attorneys’ fees and costs for class counsel can be incredibly complex. This complexity can lead to a conflict of economic interests between class counsel who want to maximize the attorneys’ fees they receive from any settlement and members of the settlement class who want to maximize both individual and classwide recovery.
As explained by at least one court, “[s]ettlement classes create especially lucrative opportunities for putative class attorneys to generate fees for themselves without any effective monitoring by class members who have not yet been apprised of the pendency of the action.”20 Thus, “to fully discharge its duty to review and approve class action settlement agreements, a court must assess the reasonableness of the attorneys’ fees.”21 This review serves “to protect the nonparty members of the class from unjust or unfair settlements affecting their rights and to minimize the conflicts that may arise between the attorney and the class, named plaintiffs and absentees, and various subclasses.”22 More generally, “the court’s examination of attorneys’ fees guards against the public perception that attorneys exploit the class action device to obtain large fees at the expense of the class.”23
Recently, in The Florida Bar v. Adorno, 60 So. 3d 1016 (Fla. 2011), the Florida Supreme Court addressed some of the ethical constraints that apply to class counsel in this context. Adorno involved a disciplinary action brought by The Florida Bar against an attorney who represented plaintiffs in a putative class action against the city of Miami challenging the legality of a fire rescue assessment.24 After six years of extensive litigation and on the eve of trial, class counsel negotiated a settlement that included the payment of $7 million to seven of the named plaintiffs in the lawsuit who collectively had only $84,000 in alleged damages.25 The settlement agreement also provided that class counsel was to receive $2 million in attorneys’ fees.26 The settlement agreement did not provide for any relief for other members of the proposed class (which had not been certified at the time the settlement was reached because the trial court had deferred ruling on class certification).27
After the city of Miami paid the first installment of the settlement, other property owners who were members of the abandoned class, but were not among the original named plaintiffs in the lawsuit, sought to intervene for purposes of petitioning the trial court to vacate the settlement.28 The trial court granted the motion to intervene, vacated the settlement, and ordered the named plaintiffs and class counsel to disgorge the payments made to them, finding that the named plaintiffs and class counsel had breached their respective fiduciary duties to the unnamed class members.29 The trial court had been under the impression that the settlement was a classwide resolution — even though no class had yet been certified — because “from the inception of the case, the parties had treated it as a class action,” and the court had repeatedly stated that it intended to certify the class.30 The trial court concluded that “the class action was ‘ultimately disregarded for personal gain’ and the ‘amounts settled for by the individual plaintiffs bear no rational relation to the extent of their damages,’” because the named plaintiffs were refunded the full amount of the assessments they had paid, plus a premium of approximately 800 percent.31 The named plaintiffs appealed.32 On appeal, the Third District affirmed the trial court’s decision to vacate the settlement, holding that “[i]t defies any bounds of ethical decency to view class counsel’s actions as anything but a flagrant breach of fiduciary duty.”33
The Florida Bar subsequently pursued ethics charges against both class counsel and the defendant’s counsel for the handling of the proposed settlement.34A referee ultimately recommended that class counsel be found guilty of violating Rule 4-1.7 (conflict of interest), 4-1.5 (excessive or prohibited fee), and 4-8.4 (misconduct), and recommended public reprimand as an appropriate disciplinary sanction.35 On review, the Florida Supreme Court approved the referee’s recommendation regarding class counsel’s guilt, but imposed a heightened disciplinary sanction in the form of a three-year suspension from the practice of law — which the court characterized as “the most severe sanction short of disbarment.”36
The court was troubled by a number of factors in the case. First, the court found that class counsel had “negotiated to the detriment of the other class members when he settled for the named plaintiffs for an amount grossly disproportionate to the value of their individual claims. In doing so, he received a $2 million fee for [his] firm, while he ignored or abandoned the putative class members.”37 Second, the court found that the settlement “left thousands of potential class plaintiffs unable to effectively pursue their claims against the city and placed them in a financially disadvantageous situation” because the $7 million constituted approximately 30 percent of the city’s estimated refund liability in the case.38 Third, the court noted that the parties had entered into a standstill agreement with regard to the litigation while the settlement was pending and that class counsel had requested the named plaintiffs to sign nondisclosure agreements regarding the settlement.39 The effect of these actions was to prevent unnamed class members from receiving notice of the settlement and to provide the city with ammunition to assert statute of limitations defenses to the remaining class members’ claims.40 Fourth, the case had been treated as a class action from the outset of the litigation, and people other than the named plaintiffs were known to be part of the class.41
With specific regard to attorneys’ fees, the court held that
because [class counsel] negotiated the settlement in a manner that resulted in a large fee for his firm and abandoned the putative class, [counsel] violated rule 4-1.7(a)(2) (a lawyer shall not represent a client if there is a substantial risk that the representation of one or more clients will be materially limited by a personal interest of the lawyer).”42
According to the court, “[a] fee obtained by unethical means is a prohibited fee.”43 The court also found the fee to be excessive because class counsel’s engagement agreement with the named plaintiffs was not a contingency fee agreement.44 Instead, the engagement agreement provided that class counsel would be paid a nonrefundable retainer fee for trial and appeal, fixed cost payments at both court levels, and any excess fees awarded by the court.45 There was, therefore, no basis for class counsel to seek $2 million in fees in the settlement.46
Adorno makes it abundantly clear that class counsel must tread extremely cautiously — and within the confines of the rules of ethics and their fiduciary obligations to absent class members — when negotiating the issue of fees and costs in the context of a class action settlement.
Future Representation by Class Counsel
Barring a pretrial dismissal, denial of class certification, or entry of summary judgment in the defendant’s favor, settlement is frequently the only strategic alternative most defendants have to the uncertainty of a jury trial on the merits of the class claims. Defendants who choose to settle to avoid a jury trial want as much finality as they can obtain and, in that regard, may desire to negotiate terms restricting the ability of class counsel to represent future plaintiffs against the same defendant. For their part, class counsel may have every incentive to agree to such limitations in order to induce the defendant to enter into a lucrative settlement agreement. A bird in the hand is, as they say, worth two in the bush.
Under Florida law, however, a settlement agreement that seeks to restrict an attorney’s right to represent another party against the defendant is never valid. The Florida Rules of Professional Conduct expressly prohibit an attorney from participating in a settlement agreement that restricts an attorney’s right to practice law. Specifically, Rule 4-5.6(b) states that “[a] lawyer shall not participate in offering or making . . . an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy.” (Emphasis added.) The comment to Rule 4-5.6 explains that “[s]ubdivision (b) prohibits a lawyer from agreeing not to represent other persons in connection with settling a claim on behalf of a client.” This prohibition applies to all lawyers, not just those negotiating settlements in class action lawsuits. Given the high-dollar amounts involved in many class action settlements, however, the prospect of limiting class counsel’s ability to use attorneys’ fees recovered through a settlement to finance future litigation against the same defendant can be particularly tempting.
In 2005, the Committee on Professional Ethics issued an advisory opinion addressing this prohibition, though not specifically in the class action context.47 The advisory opinion states that the following factors must be taken into account when determining whether a particular provision of a settlement agreement complies with Rule 4-5.6(b):
• Consideration of whether the provision imposes restrictions on the attorney broader than the attorney’s own client would be able to insist upon;
• Whether the provision would limit the attorney’s independent professional judgment in the representation of other clients;
• Whether the provision allows an opposing party to indirectly achieve a restriction on the lawyer’s right to practice;
• Whether the provision benefits the client of the opposing party; and
• Whether the provision furthers or hinders the public policy reasons Rule 4-5.6 was founded upon.48
The advisory opinion also underscores the fact that Rule 4-5.6(b) applies both to the attorney making the offer and to the attorney accepting it.49 Thus, in the context of a class action settlement, neither the class counsel nor counsel representing the defendant ethically may enter into a settlement agreement containing a restriction on the ability of class counsel to represent future clients against the same defendant.
Moreover, the sanctions for violating Rule 4-5.6(b) can be severe, depending upon the circumstances. For example, the Florida Supreme Court imposed heavy sanctions against each of four partners in a law firm that represented 20 different plaintiffs in crop-damage suits against a fungicide manufacturer.50 In the course of negotiating a settlement, the defendant agreed to pay $59 million in damages to 19 of the plaintiffs and nearly $6.5 million in fees to plaintiffs’ counsel, contingent upon a secret side agreement not to pursue future claims against the defendant.51 The defendant also agreed to engage plaintiffs’ counsel’s law firm to do future work on an hourly basis.52 The sanctions imposed by the Florida Supreme Court included public reprimand, suspension or disbarment, and hefty disgorgement or restitution with interest, depending on the level of involvement of each of the attorneys in the misconduct.53
There is no opportunity, therefore, for parties to class action litigation in Florida to negotiate a restriction on class counsel’s future representation of clients against a settling defendant, and the ethical consequences for doing so are potentially very severe.
The ethical issues described above are but a few of the considerations that routinely arise in the course of class action settlements in Florida. Nevertheless, it is clear that the very nature of the class action device carries with it additional ethical challenges and limitations that do not necessarily exist (or, if they do, may be less amplified) outside of the class action context.
1 Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997)), and referring to class actions under Fed. R. Civ. P. 23, the federal analogue to Fla. R. Civ. P. 1.220).
3 InPhyNet Contracting Servs., Inc. v. Soria, 33 So. 3d 766, 771 (Fla. 4th D.C.A. 2010) (quoting Baptist Hosp. of Miami, Inc. v. Demario, 661 So. 2d 319, 321 (Fla. 3d D.C.A. 1995)).
4 See, e.g., Grosso v. Fidelity Nat’l Title Ins. Co., 983 So. 2d 1165, 1174 (Fla. 3d D.C.A. 2008) (rejecting a proposed settlement that would have awarded the named plaintiff $5,000, while similarly situated class members would receive, on average, only $7).
5 Grosso v. Fidelity Nat’l Title Ins. Co., 983 So. 2d 1165 (Fla. 3d D.C.A. 2008)
6 Id. at 1169.
7 Id. at 1169, 1173.
8 Id. at 1168.
9 Id. at 1167-68.
10 Id. at 1170.
11 Id. at 1170-71.
12 Id. at 1172-74.
13 Id. at 1171, 1173-74.
14 Id. at 1173.
15 Altamonte Springs, 12 So. 3d at 852. The authors’ firm, Carlton Fields, P.A., represented State Farm in this case.
17 Id. at 854.
18 Id. at 857.
20 Grosso, 983 So. 2d at 1170-71 (quoting In re Gen. Motors Corp. Pick-Up Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 788 (3d Cir. 1995)).
21 Nelson v. Wakulla County, 985 So. 2d 564, 573 (Fla. 1st D.C.A. 2008).
22 Id.; see also Kuhnlein v. Dep’t of Revenue, 662 So. 2d 309, 311 (Fla. 2005) (noting the potential for conflict between class counsel and members of the class in a common fund settlement).
23 Nelson, 985 So. 2d at 573.
24 Adorno, 60 So. 3d at 1018-19.
25 Id. at 1018.
27 Id. at 1018-20.
28 Id. at 1021-22.
29 Id. at 1022.
31 Id. (quoting the trial court’s order).
33 Id. at 1018-19 (quoting Masztal v. City of Miami, 971 So. 2d 803, 809 (Fla. 3d D.C.A. 2007)).
34 Id. at 1023.
36 Id. at 1019, 1036-37.
37 Id. at 1024.
39 Id. at 1025.
41 Id. at 1025, 1027.
42 Id. at 1028-29.
43 Id. at 1030.
47 See Fla. Eth. Op. 04-2, 2005 WL 4692972 (Jan. 21, 2005).
48 Id. at *8.
49 Id. at *5 (“[A]ny residual doubt about whether the prohibition applies to both sides of an agreement is resolved by Rule 4-8.4(a) which prohibits an attorney from violating the rules through the acts of another. Therefore, an attorney who induces another attorney to violate an ethics rule would be guilty of violating the ethics rules as well.”).
50 See Florida Bar v. Rodriguez, 959 So. 2d 150 (Fla. 2007); Florida Bar v. Ferraro, 839 So. 2d 700 (Fla. 2003); Florida Bar v. Friedman, 940 So. 2d 428 (Fla. 2006); Florida Bar v. St. Louis, 967 So. 2d 108 (Fla. 2007).
51 Rodriguez, 959 So. 2d at 155.
53 Id. at 152-53 (describing the various disciplinary sanctions against each attorney involved).
Mac R. McCoy is a shareholder of Carlton Fields (Tampa) and is a member of the firm’s Business Litigation and Trade Regulation Practice Group and Class Action Task Force. He is a 2001 graduate of Stetson University College of Law.
D. Matthew Allen is a shareholder of Carlton Fields (Tampa) and the head of the firm’s Class Action Task Force, as well as lead editor of its class action blog, Classified. He is a 1990 graduate of Vanderbilt University School of Law.
Allison L. Kirkwood is an associate of Carlton Fields (Tampa) and is a member of the firm’s Business Litigation and Trade Regulation Practice Group and Class Action Task Force. She is a 2010 graduate of the University of Florida Fredric G. Levin College of Law.
This column is submitted on behalf of the Trial Lawyers Section, Craig Anthony Gibbs, chair, and D. Matthew Allen, editor.