Creative Montessori Learning Center v. Ashford Gear LLC, No. 11-8020, (7th Cir. Nov. 22, 2011) (Posner, J.) read opinion here.  This decision of the U.S. Court of Appeals for the 7th Circuit finds its place on this blog primarily because it addresses the conduct of class action counsel which is a topic discussed in the many Delaware decisions involving class action litigation.  For an article discussing a relatively recent decision of the Delaware Court of Chancery that addressed standards of conduct for class action counsel, see article available here.

What this Case is About

This decision refers to a federal statute that has application to virtually any business.  That statute is the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. Section 227.  The TCPA imposes, on anyone who sends an unsolicited fax advertisement, statutory damages of $500 per fax, which can be trebled if the Court finds that the violation was willful or knowing.  Especially in years past, it was not uncommon for relatively small businesses to send 20,000 or more mass faxes for marketing purposes.  If found liable under the TCPA, the staggering judgments, based on the statutory damages for each fax sent, that could be obtained by class actions based on this Act could, quite simply, put most companies out of business.

Specific Issue Addressed

The specific issue addressed in this case was the exact type or level of misconduct by class counsel that would create a serious doubt that counsel would be able to represent the class loyally such that class certification will be denied.  More particularly, the issue on appeal was: what standard of conduct should be applied to determine whether the misconduct by class counsel has been so egregious as to warrant a de-certification of a class. 

Brief Overview of Holding

In this decision, the appellate court vacated the certification of the class and remanded to the trial court with directions that the trial court apply a different standard of attorney misconduct and to re-evaluate the gravity of the misconduct of class counsel and its implications for the likelihood that class counsel will adequately represent the class.

The Court discussed the amendments effective in 2003 to Federal Rule of Civil Procedure 23, which added subsection (g):  “to guide the court in assessing proposed class counsel as part of the certification decision.”  The new sub-section emphasizes that class counsel must “fairly and adequately represent the entire class.”  Fed. R. Civ. P. 23(g)(1)(B).  In determining when misconduct of class counsel will raise serious doubt as to whether this prerequisite can be satisfied, the Court distinguished other cases relied on by the District Court, and instead required the application of fiduciary duties described in the decision of Culver v. City of Milwaukee, 277 F.3d 908, 913 (7th Cir. 2002). 

The Court emphasized that class counsel owes a fiduciary obligation of particular significance to their clients when the class members are consumers, who ordinarily lack both the monetary stake and the sophistication in legal commercial matters that would motivate and enable them to monitor the efforts of class counsel on their behalf.  The Court explained that it was difficult for it to monitor counsel in the place of nominal clients because judges in our system are more accustomed to playing the role of arbiter in an adversary proceeding “rather than imitating a Continental-style investigating magistrate – – when faced with an alliance of the supposed adversaries (unless there is an objector).” 

The Court concluded its reasoning, in part, by noting that a serious or major ethical violation should place on class counsel “a heavy burden of showing that they are adequate representatives of the class.”