The Conflicted Class

May 4, 2001 edition of the San Francisco and Los Angeles Daily Journal.

By Barry N. Endick, Raymond J. Tittmann and Joshua Irwin

Class-action law developed with careful consideration for the due process rights of absent class members. Because absent members' claims are adjudicated by proxy, the Constitution requires that their interests be adequately represented in order for a court's decision to be binding on the class. Hansberry v. Lee, 311 U.S. 31, 40-43 (1940). Federal Rule of Civil Procedure 23(a)(4) reflects this due process concern by requiring, as a necessary precondition to class certification, proof that the representative plaintiffs will adequately represent absent class members.

Adequate representation can be compromised, however, and due process rights threatened, when conflicts exist within the class, either among class members or between class representatives and class members. This can occur when class counsel defines a class too broadly in an effort to raise the stakes. In other cases, the underlying factual circumstances and the very nature of the claim asserted may produce inherent conflicts between class members.

Two recent U.S. Supreme Court cases provide reminders to class-action attorneys as to the importance of protecting absent class members from such conflicts. These cases also provide lessons on how to defeat or strengthen an argument for class certification.

In Amchem Prods. Inc. v. Windsor, 521 U.S. 591, 626-27 (1997), the settlement class included two groups whose interests were "not aligned": absent members who were diagnosed with injuries from asbestos exposure and members who were exposed to asbestos but not yet diagnosed. For the currently injured class members, "the critical goal is generous immediate payments." This goal "tugs against" the interest of exposure-only class members, who would prefer an ample "inflation-protected fund for the future," the justices said. The Supreme Court therefore rejected the settlement, even though the defendant's assets were sufficient to pay both claims and there was no evidence that either of the groups' interests were sacrificed. Thus, even without evidence of an actual conflict, a merely theoretical conflict was enough to prevent class resolution.

Soon after class-action attorneys began a debate over Amchem's significance, the Supreme Court issued Ortiz v. Fibreboard Corp., 527 U.S. 815, 857 (1999), and clarified that the doctrine was not limited to the facts of Amchem. In Ortiz, the court focused not on any intrinsic conflict between class members, but on different external factors that resulted in different values of the members' claims. Because considerable funds were available from an insurance company whose policy expired in 1959, the claims from pre-1959 exposures were worth more than like claims from post-1959 exposures. Therefore, the Ortiz court held that claimants exposed before 1959 had "disparate interests" from claimants exposed after 1959. Remarkably, this conflict was held to bar class resolution even though both groups were treated the same in the proposed settlement: "The very decision to treat [the class members] all the same is itself an allocation decision with results almost certainly different from the results the [claimants] would have chosen."

Amchem and Ortiz demonstrate that whenever class representatives are put in a position of rendering an "allocation decision" ¾ which results when a class includes claims of different values ¾ a conflict exists that prevents class resolution. Such allocation decisions are necessary in several common situations: when some claimants have fatal injuries and others have minor injuries; when some claimants have present claims and others have future claims; when some claimants have statute-of-limitation problems and others do not; and when some claimants’ jurisdictions are more receptive to the claim and others’ jurisdictions are less so.

In In re Telectronics Pacing Sys. Inc., 172 F.R.D. 271, 277 (S.D. Ohio 1997), for example, the court applied Amchem to require formation of three subclasses based on the different states' application of the product liability doctrine.

However, dividing classes into homogenous subclasses under Rule 23(c)(4)(B) is not an easy solution, at least from the perspective of the attorneys representing the class. The conflicting interests of subclasses cannot be adequately represented by the same attorney; each subclass needs separate counsel. Ortiz, 527 U.S. at 856. Not only does this complicate class counsel's job, but any attorney fees recovered will have to be shared by the different law firms representing the different subclasses.

In addition to the conflicts resulting from different claim values, conflicts can result from different motivations. When the representative plaintiffs have personal agendas or views driving their pursuit of the litigation that are contrary to the goals of some absent class members, a court will be disinclined to certify the putative class.

For example, in Kamean v. Local 363, 109 F.R.D. 391, 395 (S.D.N.Y. 1986), the representative plaintiffs were ex-union members suing the union, and had no interest in the union's continued vitality. That motivation obviously conflicted with the interests of current members of the union who had been included in the class.

Similarly, in Broussard v. Meineke Discount Muffler Shops Inc., 155 F.3d 331, 338-339 (4th Cir. 1998), the court rejected a proposed class composed of former and current franchisees of the defendant. Former franchisees benefited from maximizing the damages, whereas current franchisees had at least some interest in the defendant’s continued economic viability. The group of current franchisees was further conflicted among themselves because some had signed releases favoring the defendant and some had not.

These sorts of motivational conflicts are common in the context of collective bargaining. Often, a group of union members will file a class action against their union or an employer challenging an action that the majority of union members had previously approved. In such situations, the class representatives, who are often strong dissenters but in the losing minority, have interests antagonistic to the class, militating against class certification. See, e.g., East Texas Motor Freight System Inc. v. Rodriguez, 431 U.S. 395, 405 (1977).

An intra-class conflict poses an especially difficult problem in Rule 23(b)(2) "non-opt-out" classes, in which an absent class member does not receive even "minimal due process protection" ¾ "the opportunity to remove himself from the class." Philip Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 (1985). Concerned about binding absent members without this minimal opt-out protection, most federal circuit courts have gone further than avoiding conflicts. These courts imply an affirmative "cohesion" element into the Rule 23(b)(2) class-certification analysis, requiring that common issues predominate even though the statute does not explicitly require it. See, e.g., Lemon v. International Union of Oper. Eng'rs, 216 F.3d 577, 580 (7th Cir. 2000).

Attorneys and judges alike should carefully examine the Supreme Court's decisions in Amchem and Ortiz and consider how to avoid these sorts of conflicts, and how to best protect absent class members' due process rights. See, e.g., In re Mego Financial Corp. Securities Litig., 213 F.3d 454, 462 (9th Cir. 2000) (disregarding a "potential" conflict resulting from different claim values, in order to achieve the efficiency of "dispos[ing] of all potential claims" at once). Class conflicts raise serious concerns about fundamental constitutional rights, and they should not be disregarded.

Barry N. Endick, Raymond J. Tittmann and Joshua Irwin practice in the San Francisco litigation group of Paul, Hastings, Janofsky & Walker. They specialize in class action law, frequently in matters involving the environment and ERISA.


2003 The Federalist Society