United States: Lawyers Sanctioned For Seeking To Settle Federal Court Class Action In State Court

Last Updated: August 17 2016
Article by D. Matthew Allen

Lawyers seeking to settle class actions pending in federal court by dismissing and refiling in state court beware! In two recent orders, a federal judge in the Western District of Arkansas ruled that the attorneys representing a class and defendants alike violated Rule 11 and abused the judicial process by this practice. The court sanctioned the lawyers for the class in the form of a reprimand. It retreated from a formal sanction of the defendants' lawyers because it was not convinced they acted in bad faith. Nonetheless, both sides were subjected to substantial criticism.

It appears to have been a common practice in Arkansas (and perhaps elsewhere) to seek to implement in state court the settlement of a class action pending in federal court. In many states, including Arkansas, litigants perceive the review in state court to be more lenient, particularly in light of CAFA restrictions on settlement terms and attorney's fees awards. Such was the case in Adams v. United Services Automobile Association. The plaintiff filed the case in Arkansas state court, but the defendants removed it to federal court pursuant to CAFA. The parties eventually settled the case on a classwide basis. The settlement agreement called for the federal case to be dismissed, and the case to be refiled and resolved in state court. In the state court settlement filings, the parties valued the settlement at $3.4 million. The defendants paid class counsel $1.8 million pursuant to a "quick-pay provision." The state court approved the settlement despite a 4 percent claim rate. Although over 15,000 notices were sent to class members, only 651 made claims.

The same day the state court entered its order approving the settlement, the federal court issued a show-cause order as to why sanctions should not issue against the settling attorneys for improperly engaging in mid-litigation forum shopping. On April 14, 2016, the court ruled that under prior Eighth Circuit precedent, a party is not permitted to dismiss a federal court lawsuit merely to escape an adverse decision or seek a more favorable forum. Class counsel admitted that they sought to implement the settlement in state court because Arkansas made it more difficult for class members to object. Arkansas also does not apply a rigorous analysis test to determining class certification. In its April 14 order, the court expressed an intent to sanction all settling attorneys – for plaintiff and defendants alike.

In its August 3 order, the court reaffirmed that sanctions against plaintiff's counsel were appropriate, rejecting counsel's arguments that the attorneys had never been sanctioned before, the dismissal practice was common in class litigation, and the federal court lacked authority to review the settlement when no class was certified at the time of the dismissal. The court, however, backed off its intent to sanction defense counsel because the record reflected that the defendants directed its counsel to settle, putting them between a rock and a hard place, given the plaintiff's demand to return to state court.

Although the only sanction against plaintiff's counsel was a reprimand, the case is a warning shot to all class action lawyers that forum shopping in order to settle a class action, no matter how common the practice may be, will no longer be countenanced.

Adams v. United Services Automobile Association, 2016 WL 1465433 (W.D. Ark. Apr. 14, 2016, subsequent opinion, 2016 WL 4129115 (W.D. Ark. Aug. 3, 2016).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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