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San Francisco Recorder

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San Francisco Recorder

    San Francisco Recorder

    July 18, 2005

    “Reverse Auctions Have No Class – Lawyers Square Off with Firms Trying to Undercut Settlements” by Justin Scheck

Linda Dardarian expected an aggressive fight in her class action against Countrywide

    Home Loans but she didn‟t think it would be against another plaintiff lawyer trying to

    settle her case for half its worth.

    That was the battle she faced last year, when the law firm led by prominent attorney

    David Boies tried to settle a Los Angeles employment suit against Countrywide out from

    under her.

    “I was furious,” said Dardarian, a partner at Goldstein, Demchak, Baller, Borgen &

    Dardarian in Oakland. “My feeling was that they used the other case as a way to stop the

    court in Los Angeles and interfere with my ability to represent my clients.”

    Dardarian experienced a rarity in employment cases, but it‟s common enough in the class

    action bar that there‟s a name for it: the reverse auction. In big cases, defendants facing

    multiple suits can pit plaintiffs firms against each other in hopes of getting the cheapest

    and most comprehensive settlement.

    “When there are overlapping claims, the defendant can go and shop the deal for the

    lowest price,” said Samuel Issacharoff, a Columbia Law School professor who helped

    Dardarian fend off the Boies firm.

    One defense attorney said there‟s an advantage to having multiple settlements on the

    table. “You obviously are trying to get the broadest relief possible for the cheapest

    amount,” said Dominic Surprenant, a partner with ________.

    Daniel Girard, a partner with Girard Gibbs & DeBartolomeo in San Francisco, knows all

    about that. He‟s spent the past two years in a game of legal whack-a-mole, flying to

    courts in Florida, Illinois and Texas to beat back the settlement offers that tend to pop up

    when he has an expensive case headed to trial.

    “It‟s just amazing because of the brazenness of it,” he said. Stopping a reverse auction generally requires convincing a judge to rule that a proposed

    settlement is unfair. But this doesn‟t always work, and plaintiff lawyers are often forced

    to take other measures in and out of court to prevent another firm from settling their claims.

    Ethical gray areas in class action law have allowed reverse auctions to become a trend,

    said Joseph McMonigle, an ethics expert and partner at Long & Levitt in San Francisco.

He said that competing filings can allow defendants to pick the plaintiff with the weakest

    case. With weaker opposition, he said, defense lawyers have more leverage to reach a

    cheap settlement.

    There is the danger that a lawyer in that position might be tempted to cut a worse deal for

    his clients just to make sure he gets paid. Since there are few clear rules on the duty a

    plaintiff lawyer has to a prospective class that hasn‟t been certified, there‟s some ethical

    wiggle room. “It certainly isn‟t something that makes the legal profession shine,”

    McMonigle said.

    As bad a break as reverse auctions can be for the lawyers being undercut, the settlements

    tend to be a disaster for class members the deal can result in undervalued payouts,

    inflated attorneys‟ fees, no injunctive relief and blanket immunity for a defendant from

    follow-up claims.

    Dardarian said she doesn‟t see the Boies firm as a clear predator in her Countrywide case

     Boies had been litigating other cases against the lender before Dardarian filed hers. But

    she said Boies‟ proposed settlement was a raw deal for her class. It would have settled overtime claims for plaintiffs spanning several states including Dardarian‟s California class – for $16 million.

    After a nasty epistolary spat with Caryl Boies David Boies‟ partner and daughter –

    Dardarian persuaded a Texas judge to overrule that deal last year. Dardarian finally

    settled her suit in April coming away with $30 million for California plaintiffs.

    Caryl Boies said she didn‟t engage in a reverse auction, and said she didn‟t know whether Countrywide tried to enter the cheaper settlement with her to avoid Dardarian‟s more

    valuable claims.

    “I don‟t want to speculate on what they‟re thinking. Their goal was to settle all of the

    claims, and they could not do that in California,” Boies said. Reverse auctions are a new concern for Dardarian. Her firm where partners come from places like the NAACP and tend to retire early to write hiking books or start a nonprofit

    specializes in employment law, an island of civility in the harshly competitive class

    action bar.

    But the success of firms like Goldstein, Demchak may be changing that, as other lawyers

    seeking big payouts get into the field.

    Take the example of Mary Anne Sedey. In another case of an employment reverse

    auction, the St. Louis plaintiff lawyer had to hire more than 20 outside attorneys to defeat

    another firm‟s attempt to undercut her discrimination suit against Rent-A-Center. Four months after Sedey filed her case, another firm took a discrimination suit it had

    already filed on behalf of two clients and refiled it as a class action.

Sedey got rid of the competing firm‟s $12 million settlement deal by lobbying scores of

    class members to file objections. She eventually came away with $47 million for the

    class in 2002.

    While Sedey and Dardarian fended off their competitors, the large awards they came

    away with create an incentive for other firms to get in on the employment suits.

    Yet Dardarian and Sedey are optimistic that employment class actions will remain an

    oasis of good manners.

    “I‟m hoping this is not a trend,” Sedey said. Girard gave up that hope years ago.

    WHACK-A-MOLE Reverse auctions have become a routine concern for consumer lawyers like Girard and

    Mark Chavez, of the Mill Valley firm Chavez & Gertler. And for good reason.

    The two have repeatedly had other firms try to settle suits out from under them. Earlier

    this year, Girard fought back a deal that would have ended his suit over American

    Online‟s billing practices.

    He says the case could produce damages exceeding $500 million, but an Illinois firm

    tried to settle the claims for $25 million in an Illinois state court.

    The lawyers there added new charges to their complaint as part of the settlement

    agreement to jettison Girard‟s federal claims in California, he said.

    In May, a judge in U.S. District Court for the Central District of California placed an

    injunction on the Illinois deal.

    Girard is also trying to strike down a settlement of a class action against American

    Express, alleging that defense lawyers pitted various firms against one another in a

    reverse auction.

    And in 2003, he defeated a Texas settlement over Hyundai horsepower claims before

    reaching his own more valuable deal.

    In that case, Girard had filed a complaint in Orange County Superior Court in late 2002;

    three weeks later, another firm filed a suit making the same allegations in Beaumont,

    Texas.

    Girard said the carmaker balked when he made a key discovery request: a sealed

    document from an unrelated court case in which a Hyundai employee said the company

    knew about its horsepower problems for years.

    “We were trying to get that affidavit unsealed when they went to the Beaumont

    plaintiffs,” Girard said. He said Hyundai wanted to settle with the Texas lawyers – who

had conducted no discovery to avoid the bigger liability that the discovery material

    would have created in California.

    In early 2003, Hyundai reached a settlement with the Texas lawyers that would have

    provided free lube jobs to class members. After protests by Girard, a Texas judge refused

    to approve that settlement and didn‟t hide his disapproval of the competing lawyers‟

    proposed deal.

    “With the exception of [the competing] attorneys, who negotiated the settlement and

    stand to receive $2 million if it is approved, none of the other class members or counsel

    with the pending actions against Hyundai supports the proposed settlement,” wrote

    Jefferson County Judge Gary Sanderson.

    Chavez has had two similar experiences in recent years. In 2002, he was unable to stop

    another firm from settling a case he says he originated against a lending company. And

    he is currently trying to defeat another lawyer‟s effort to settle a suit he has against Craftmatic beds.

    Girard said the problem is on the rise.

    “It‟s been in the air for some time now,” he said. “It‟s in the last few years that the

    atmosphere seems to have evolved into a sort of „anything goes‟ mentality.”

    CUTTING THEIR LOSSES

    While some reverse auctions are the result of malicious intent, Issacharoff said, it‟s not

    always a case of unscrupulous lawyers jumping a high-stakes claim. Most come about

    when plaintiff lawyers inadvertently find themselves with competing claims. When one

    such firm realizes its case is weak, it may enter a cheap settlement, rather than walk away

    with a defeat and little or no recovery.

    He said Caryl Boies‟s situation in Countrywide may be a prime example.

    Boies, he said, was put in a tough spot when a Texas judge sent her case to arbitration

    which eliminated the class-action aspect of the case.

    “In essence,” Boies said, “we were a lawsuit without a house, because Countrywide‟s

    arbitration provision also prohibits collective actions.” In supporting Dardarian, Issacharoff said Boies had been left with no leverage to force a

    settlement unless she offered a deal that would also settle out Dardarian‟s expensive

    California claims. (Boies disagrees, saying she had leverage in the form of threatened

    future suits.)

    “There are bottom feeders that go around shopping for cheap class actions,” Issacharoff

    said. “But I don‟t think the Boies‟ firm is one of them.”

The all-or-nothing nature of plaintiff litigation can make it tempting for a lawyer to sell

    out the class, said Columbia law professor John Coffee who coined the term reverse

    auction.

    Coffee said the result of negotiations by lawyers with little leverage is often a settlement

    that benefits the defendant and plaintiff lawyer at the expense of the class. It essentially

    makes the plaintiff and defense lawyers partners against the class members, he said.

    “Once you realize you‟re losing, the only way to win it through collusion,” he said.

    RIM FORECAST G

    Despite the recent experiences of Dardarian and Sedey, employment lawyers say they‟re

    not bracing for an onslaught of lowball settlements.

    “It is more collegial in the plaintiff employment bar,” said James Finberg, a partner at

    Lieff Cabraser Heimann & Bernstein.

    And Barry Goldstein, of counsel, with Goldstein Demchak, agrees. He said employment

    lawyers are more aware of reverse auctions since Dardarian presented a paper at an April

    American Bar Association conference about the problem.

    But, Coffee warns, “the field of labor class actions is expanding.” And this generates

    concern.

    “As it expands, you‟re importing problems that may exist in other parts of the

    profession,” Goldstein said.

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