Reverse Auction Ploy by Competing Class Counsel Creates Right of Intervention by Class Members Whose Settlement Demands Were Underbid

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Reverse Auction Ploy by Competing Class Counsel Creates Right of Intervention by Class Members Whose Settlement Demands Were UnderbidIn a case that reveals the darker aspects of what can sometimes be an ugly competition for the class counsel role, the Eleventh Circuit rendered an opinion last week finding that a group of plaintiffs were entitled to intervene in a class action settlement by a rival group of plaintiffs.

In Technology Training Assocs., Inc. v. Cin-Q Autos., Inc., a group of plaintiffs and their class counsel filed a class action similar to one already pending, then immediately announced a $20 million settlement. The class claims involved unsolicited “junk” faxes sent to over 180,000 recipients in alleged violation of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227. The plaintiffs who had filed the earlier (and still pending) similar class action moved to intervene pursuant to Rule 24, Fed. R. Civ. P., alleging that the defendant and the second group of plaintiffs were collusively settling on more favorable terms with the second plaintiff group, in what is known as a “reverse auction,” to knowingly undercut the higher demands of the first group. The motion to intervene argued that the second group of plaintiffs were inadequately representing the intervenors’ interests because some of those second plaintiffs’ claims were (or could be) barred by the statute of limitations, unlike the claims of the intervenors, which gave the second group of plaintiffs greater incentive to reduce their demands. The district court, however, denied the movants’ motion to intervene, finding that the movants could object at the “fairness hearing” rather than intervene.

In reversing the district court, Chief Judge Carnes, writing for the court, noted that Rule 24’s right to intervene was independent of Rule 23’s procedural protections such that “Rule 23’s procedural protections” did not “mean the movants fail to satisfy Rule 24(a)(2)’s third prong[,]” as the district court found.  In light of this finding, the court went further and analyzed whether the movants for intervention had satisfied their burden of showing that the settling plaintiffs’ representation of the movants’ interest “may be” inadequate. The court found that the movants had met this “minimal” burden, agreeing that the settling plaintiffs had a greater incentive to settle because their claims may be barred by the statute of limitations, an issue the movants did not have.

Even more telling, though, was the court’s finding that the record evidence showed that “plaintiffs’ counsel … deliberately underbid the movants in an effort to collect attorney’s fees while doing a fraction of the work that movants’ counsel did.” Slip Op. at 10. This evidence included some damning emails exchanged between counsel for the defendants and counsel for the low bidding plaintiffs. The court stated that this evidence not only showed that the settling plaintiffs’ (and their counsel’s) interests were aligned with the defendant, such that “plaintiffs cannot be expected to adequately represent the movants’ interests[,]” but also that such a “desire to grab attorney’s fees instead of a desire to secure the best settlement possible for the class” constituted a violation of counsel’s “ethical duty to the class.” (citing Am. Bar Ass’n, Ethical Guidelines for Settlement Negotiations § 4.2.2 (2002)).

The Eleventh Circuit’s decision in Technology Training Assocs., Inc. should serve as another warning to settling litigants that reverse auction settlements are likely to draw increased judicial skepticism, and that communications in the course of such reverse auctions may well become evidence against the settlement.