CHICAGO (Legal Newsline) - A federal appeals court has overturned approval of a class action settlement that it described as "inequitable - even scandalous."
Monday, the U.S. Court of Appeals for the Seventh Circuit overturned a settlement involving window-maker Pella Corporation that was estimated to be worth $90 million, though the court feels its value is much, much less.
Class counsel was to receive $11 million in fees, but one of those lawyers is the embattled Paul M. Weiss, who is facing a possible 30-month suspension from practicing law because of allegations that he asked former female employees to have sex with him and exposed himself to them.
The Seventh Circuit's opinion, authored by Judge Richard Posner, says U.S. District Judge James B. Zagel, of the Northern District of Illinois, ignored both the arguments of objectors and danger signs that the Seventh Circuit and other courts have warned judges "to be on the lookout for."
"In this case, despite the presence of objectors, the district court approved a class action settlement that is inequitable - even scandalous," Posner wrote.
"The case underscores the importance both of objectors (for they are the appellants in this case - without them there would have been no appellate challenge to the settlement) and of intense judicial scrutiny of proposed class action settlements."
The opinion also includes a statement on the benefits of class action lawsuits but also notes that judges accustomed to adversary proceedings aren't always qualified to judge a settlement's fairness when both the defendant and the plaintiffs attorneys are seeking the same outcome.
"The defendant cares only about the size of the settlement, not how it is divided between attorneys fees and compensation for the class," Posner wrote.
"From the selfish standpoint of class counsel and the defendant, therefore, the optimal settlement is one modest in overall amount but heavily tilted towards attorneys fees."
Litigation against Pella began in 2006 over allegations that its ProLine Series of windows had a defect that allowed water to enter, damaging a wooden frame and the house itself.
Two classes were certified - one of customers who had already replaced or repaired the alleged defect and one of customers who hadn't.
Initially, the only named plaintiff was a dentist whose son-in-law was lead counsel for the class. His son-in-law is Weiss, who is the founder and senior partner of Complex Litigation Group.
The Illinois Attorney Registration and Disciplinary Commission Hearing Board has recommended a 30-month suspension for Weiss.
In 2008, the ARDC launched disciplinary proceedings against Weiss in a complaint that eventually grew to include allegations of sexual harassment and unethical lewd conduct against seven women.
The complaint against Weiss detailed claims of assault, battery, phone harassment, public indecency and disorderly conduct stemming from Weiss' interactions with the women from 2000 to 2010.
Weiss, for instance, is specifically accused of asking five former female employees to have sex with him, inappropriately touching them, repeatedly calling them at home and of exposing himself to them, as well as two other women.
Plaintiff Leonard Saltzman's daughter, Weiss' wife, was also a partner in Weiss' firm. The two are defendants in a lawsuit that alleges they misappropriated the assets of their former firm, Freed & Weiss.
That firm was still another class counsel in the Pella case. An objector argued "the dissolution and descent into open warfare that consumed Freed & Weiss in 2011 and 2012 clearly rendered that firm inadequate class counsel, especially in light of the articulated financial needs of the partners that drove the settlement of this case."
"The impropriety of allowing Saltzman to serve as class representative as long as his son-in-law was lead class counsel was palpable," Posner added.
Four more named plaintiffs were added after the case was filed, but those four opposed approval of the settlement.
"But pursuant to a motion filed by George Lang, who at the time was a partner of Weiss, four other class members were added as named plaintiffs (Lang says that Weiss rather than he picked them)," Posner wrote.
The new four plaintiffs supported approval of the settlement.
Lang, however, now represents the four plaintiffs who were replaced and filed objections to the settlement. Also representing an objector was Ted Frank, founder of the Center for Class Action Fairness.
Posner wrote that $11 million in fees in a $90 million settlement is not usually a problem. But the settlement did not specify how much money would be received by class members, only a procedure by which class members could claim damages.
"So there was an asymmetry: class counsel was to receive its entire award of attorneys fees up front; class members were to obtain merely contingent claims, albeit with a (loosely) estimated value of $90 million (actually far less, as we'll see)."
Zagel approved the settlement before a deadline for filing claims and made no attempt to estimate how many claims were likely to be filed, Posner wrote.
The Seventh Circuit also took issue with the facts that any reduction in the $11 million in attorneys fees revert to Pella and not to class members.
"The settlement should have been disapproved on multiple grounds," Posner wrote.
"Only a tiny number of class members would have known about the family relationship between the lead class representative and the lead class counsel - a relationship that created a grave conflict of interest; for the larger the fee award to class counsel, the better off Saltzman's daughter and son-in-law would be financially - and (which sharped the conflict of interest) by a lot.
"They may well have had an acute need for an infusion of money, in light not only of Weiss' ethical embroilment, which cannot help his practice, but also of the litigation against him by his former law partners and his need to finance his new firm."
An attorney for Weiss told the Madison County Record in April that Weiss would appeal the ARDC's findings and the proposed suspension.
"The Illinois Attorney Registration and Disciplinary Commission (ARDC) has pursued 'ethics' charges against Mr. Weiss related primarily to allegations of sexual harassment, despite a specific rule that prohibits ethics charges for sexual harassment against an attorney unless a court or administrative agency has found that the attorney committed sexual harassment (no court or administrative body has ever found that Mr. Weiss committed sexual harassment)," Stephanie L. Stewart wrote.
"And despite the fact that Mr. Weiss has never been criminally charged for any of this conduct, the ARDC has pursued these ethics claims by charging him solely with committing 'criminal' conduct (one additional charge that Mr. Weiss engaged in conduct prejudicial to the administration of justice was recommended to be dismissed by the Hearing Board).
"We intend to appeal these issues. At trial, the ARDC's main witness admitted to previously lying under oath about the events in question, and another witness who claimed Mr. Weiss had inappropriately touched her leg admitted that Mr. Weiss had never committed criminal conduct (as to her, the Board recommended dismissal of all of the charges against Mr. Weiss). All charges but one involve alleged conduct that occurred more than a decade ago, and none involved clients or the practice of law."
Posner said Weiss' troubles with the ARDC should have been reason enough to disqualify him from serving as class counsel.
Despite the $90 million estimate, Posner said Pella Corporation only estimated the value of the settlement at $22.5 million.
Members of the class could either file a claim that had a maximum damages award of $750 or submit to arbitration.
Posner said the claim forms require a claimant to submit "arcane" data, including the purchase order number, glass etch information, product identity stamp and unit identification label.
"And that's assuming that class members even attempt to file claims," he wrote.
"The notice of settlement that was sent to them is divided in to 27 sections, some with a number of subsections.
"Considering the modesty of the settlement, the length and complexity of the forms, and the unfamiliarity of the average homeowner with arbitration, we're not surprised that only 1,276 claims (of which 97 sought arbitration) had been filed as of February 2013, out of the more than 225,000 notices that had been sent to class members.
"The claims sought in the aggregate less than $1.5 million and were likely to be worth even less because Pella would be almost certain to prevail in some, maybe most, of the arbitration proceeding."
The Seventh Circuit also removed Saltzman as lead plaintiff and Weiss' firm as class counsel. The four named plaintiffs who were removed after they objected to the settlement were reinstated as lead plaintiffs.
Posner concluded that after "eight largely wasted years, much remains to be done in this case."
From Legal Newsline: Reach editor John O'Brien at email@example.com.
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