U.S. Supreme Court opinions have a way of popping up in the most unexpected places. Last week, the U.S. Court of Appeals for the Second Circuit struck down an $18 million settlement that would have compensated freelancers for the unauthorized republication of their work through online databases. That's bad news for many of the writers in the case, who've been waiting years for the money. But thanks to the Second Circuit's invocation of a pair of Supreme Court rulings from the 1990s, the freelancers' decision could end up having much, much broader implications-affecting every class action that involves a limited pot of money. (Hat tip to Andrew Trask of the Class Action Countermeasures Blog, who first reported on the "doctrinal booby trap" in the Second Circuit's 52-page majority opinion.)
Fifteen years ago, in the teeth of the asbestos litigation explosion, the U.S. Supreme Court issued two rulings that essentially squelched efforts by both plaintiffs and defendants to resolve asbestos liability through class actions. In the 1997 Amchem v. Windsor Products and 1999 Ortiz v. Fibreboard Corp. opinions, the Court held that the class-action plaintiffs lawyers who negotiated those settlements hadn't adequately represented asbestos victims with different sorts of claims. In Amchem, the key overlooked-distinction was between plaintiffs who were already injured and those who might develop an asbestos-related disease in the future. In Ortiz, the Court found that plaintiffs with less severe injuries weren't adequately represented because plaintiffs lawyers focused on victims with graver injuries.
Charles Chalmers of Allegiance Litigation cited Amchem and Ortiz when he objected, on behalf of 10 freelancers, to the $18 million settlement between a big group of publishers and a class of freelancers represented by Boni & Zack. The settlement, which was approved by Manhattan federal judge George Daniels in 2001, split claims into three categories. Category A covered work entitled to full Copyright Act protection. Category B was for copyrighted work that's not eligible for statutory damages. Category C covered all uncopyrighted writing. Under the structure of the settlement, if claims exceeded the $18 million publishers agreed to put up, authors with uncopyrighted work would be out of the money. Chalmers, whose clients all have Category C claims, argued that the name plaintiffs and their lawyers were so focused on Category A claims that they didn't adequately represent the interests of the rest of the class.
Supporters of the settlement countered that this deal wasn't analogous to the agreements the Supreme Court nixed in its Amchem and Ortiz rulings. For one thing, as Second Circuit judge John Walker Jr. noted in the majority opinion (also signed by Judge Ralph Winter), there are no future plaintiffs to worry about in the freelance settlement, since online rights are now addressed in standard freelance contracts. Lawyers for the settlement's proponents also contended that the case is distinct from Ortiz because many class members have claims in multiple categories. In the asbestos agreement the Supreme Court bounced in the Ortiz ruling, it was a fairly simple matter to draw a line between plaintiffs with asbestos-related cancer and those with lesser diseases. In the freelancers' settlement, there's no such bright line, especially because the class representatives have claims in all three categories the proposed settlement creates.
The Second Circuit acknowledged that wrinkle, and even nodded to the "intuitive appeal" of the argument that class reps with claims in all the categories can adequately represent each group. Nevertheless, the majority agreed with Chalmers: The different categories have conflicting interests so each must have its own class reps and counsel. "Only the creation of subclasses, and the advocacy of an attorney representing each subclass, can ensure that the interests of that particular subgroup are in fact adequately represented," Judge Walker wrote.
And here's where the appellate court got really creative (or dangerous, depending on your perspective): To solve the problem of plaintiffs who may belong to more than one class, the majority defined subclasses by the claims they represent, not by the plaintiffs in each class. "A plaintiff who holds claims in Categories B and C would, for example, be represented by different subclass representatives and counsel with respect to each category," the opinion said. "Each subclass representative would, in turn, represent plaintiffs' interests with respect to only that category of claim."
Charles Sims of Proskauer Rose, who represents the defendants in the freelancer litigation (including Thomson Reuters), said the ruling could muddle class actions that divide a limited pool of settlement money among plaintiffs with slightly different claims. "This is a very broad holding, broader than any of us have seen before," he said. "It's worrisome from that point of view."
Objectors counsel Chalmers, as you would expect, had quite a different perspective. "The ruling is right in line with Amchem and Ortiz," he said, acknowledging only a "very slight" expansion of the class action requirements the Supreme Court imposed in those rulings. Chalmers said he's looking forward to relaunching negotiations with the defendants. "I think it's going to take more than $18 million to settle this," he told me. "There's no question the defendants are liable. It's up to them-they can either spend the money fighting or agree to settle."
(Reporting by Alison Frankel)
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