United States: Dollars And Sense: Federal Court Refuses To Enjoin State Court Squabble Over Attorneys' Fees

Last Updated: February 9 2018
Article by Gerald L. Maatman Jr. and Peter Wozniak

Seyfarth Synopsis:  In a TCPA class action where final settlement (including attorneys' fees) had already received final approval, a federal district court in California denied class counsel's request to enjoin a pending state court action brought by their former colleague to recoup a portion of the attorneys' fees awarded as part of the settlement.

For employers negotiating class action settlements including attorneys' fees, this ruling provides insight into the potential complications in dealing with fractured class counsel constituencies, and a reminder about the limits of federal courts' willingness to enjoin parallel state court proceedings.

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In Dakota Medical, Inc. v. RehabCare Group, Inc. et al., No. 14-CV-2081, 2018 U.S. Dist. LEXIS 15972 (E.D. Cal. Jan. 30, 2018), the parties reached a settlement of a TCPA class action. The settlement included an award of $8,333.33 in attorneys' fees to class counsel.  Id. at *3. Weeks after the settlement received final approval, class counsel moved the District Court to enjoin a state court lawsuit against them by their former colleague, attorney Scott Zimmerman.  Zimmerman's state court suit sought payment from class counsel for his work on the Dakota Medical action, as well as for his work on a prior putative class action (against the same defendants) on which he also worked with class counsel.  Id. at *4-5.  In the District Court, class counsel sought to enjoin Zimmerman's state court action under the All Writs Act (28 U.S.C. § 1651(a)) and the Anti-Injunction Act (28 U.S.C. § 2283).  Class counsel argued that an injunction from the district court was necessary "in aid of" the District Court's jurisdiction in the now-settled class Dakota Medical action, and to avoid relitigation of issues already decided by the district court.  Id. at *5.  Judge Dale A. Drozd of the U.S. District Court for the Eastern District of California denied the motion to enjoin the pending state court action.

Employers can use this decision in to guide their settlement negotiations with class counsel constituencies and inform the sort of assurances that might be sought even when relatively small amounts of attorneys' fees are at stake, and to bear in mind the occasional reticence of federal courts to interfere with parallel state court actions.

Case Background

The underlying litigation involved the alleged sending of a "huge number of junk faxes to various nursing homes and healthcare facilities."  Id. at *3.  After "substantial litigation," the parties settled their dispute.  The settlement agreement provided for class counsel to receive one-third of the $25,000 common fund.  Id.

Zimmerman acted as class counsel in the Dakota Medical action until he was dismissed by the named plaintiffs in March 2016.  Id. at *5 n.1.  He also previously worked with class counsel on another class action against the Dakota Medical defendants, where class certification was ultimately denied.  Id.  Shortly after judgment was entered in the Dakota Medical action, Zimmerman brought a state court action against the Dakota Medical class counsel under a quantum meruit theory, seeking to be paid for his work on both class actions.  Id.

Under the All Writs Act, class counsel moved the district court in Dakota Medical to enjoin Zimmerman's state court suit against them, arguing that "two of the exceptions to the Anti-Injunction Act — the necessary in aid of jurisdiction exception and the relitigation exception — appl[ied] here, permitting [the district court] to enjoin the state court action."  Id. at *7.  Class counsel argued that the "necessary in aid of jurisdiction" exception applied for four reasons: "(1) the state court action 'threatens to frustrate proceedings and disrupt the orderly resolution' of [the Dakota Medical action]; (2) the state court action 'undermines the due process rights of [Dakota Medical] class members to receive notice of and object to attorneys' fees'; (3) allowing the state court action to proceed undermines the procedures set forth in Rule 23 for the awarding of attorneys' fees; and (4) the state court action unfairly penalizes named plaintiff and class representative Dakota Medical."  Id. at *10. Class counsel argued that the "relitigation exception" applied because Zimmerman had a "full and fair" opportunity to litigate his entitlement to fees before the district court in Dakota Medical and that Zimmerman's state court action was "an effort to relitigate [the Dakota Medical] court's decision with respect to the award of attorneys' fees."  Id. at *18.

The Court's Decision

The Court denied class counsel's motion to enjoin Zimmerman's state court lawsuit action on both grounds.

First, the Court addressed class counsel's arguments regarding the "necessary in aid of jurisdiction" exception.  The Court explained that class counsel's first argument fell short, because frustration "and even some disruption" of a federal action are insufficient.  Id. at *8-10..  The Court explained that Zimmerman's state court action would not "damage the settlement of [the Dakota Medical] action in any way."  Id. at *10.  The state court "would presumably award a money judgment in [Zimmerman's] favor" against class counsel, but would not "invade the funds set aside for the class" or otherwise affect the Dakota Medical settlement.  Id.  The Court explained that class counsel's second argument was insufficient because due process does not require class members to be informed as to how attorneys' fees are divided among class counsel.  Id. at *13-14.  The court rejected class counsel's third argument because Zimmerman's state court action did not seek an award of attorneys' fees under Rule 23, it sought quantum meruit damages against class counsel for "the value of the work performed."  Id. at 14.  The Court summarily rejected class counsel's fourth argument as being unsupported by any authority, and noted that class counsel's concerns were "separate and apart" from the Dakota Medical suit itself.

Second, with regard to the "relitigation exception," the Court noted that "class counsel fall far short of establishing the applicability of that exception . . . ."  Id. at *18.  First, the Court explained that class counsel failed to demonstrate that Zimmerman –a non-party in the Dakota Medical suit – was in privity with the parties.  Id. at *19.  According to the Court, some of "the parties to the settlement in this action" were actually adversarial to "Zimmerman's interest in the outcome of the attorneys' fees dispute."  Id. at *20.  The Court also explained that there was no identity of claims between the suits.  As the Court noted, the Dakota Medical suit involved purported TCPA violations involving "junk faxes advertising seminars and workshops on Medicare and Medicaid billing and other issues to healthcare facilities."  Id. at *22.  Zimmerman's suit, however, "concerns what compensation, if any, should be paid to a former attorney of the named plaintiff for his work allegedly performed in connection with both [the Dakota Medical suit] and another lawsuit."  Id.

Accordingly, the Court denied class counsel's motion to enjoin Zimmerman's state court lawsuit.

Implications For Employers

It is not uncommon for the makeup of class counsel constituencies to change over the course of a protracted litigation, or for disputes to arise among plaintiffs' counsel regarding the appropriate payment of attorneys' fees.

In Dakota Medical, final settlement was approved by the Court on September 21, 2017, but the ensuing motion practice regarding the injunction was not resolved for more than four additional months.  Thus, when negotiating class actions settlements, to help ensure expedient resolution of agreed-upon settlements, employers should consider whether and to what extent assurances regarding former class counsel can and should be secured.

Further, particularly in the Ninth Circuit, employers can use this decision to remind themselves of the reluctance of federal courts to interfere with state court actions, even those which from a pragmatic perspective may frustrate or disrupt a federal action.

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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Gerald L. Maatman Jr.
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