Front-End Fiduciaries: Pre-Certification Duties and Class Conflict

Abstract

On August 31, 2012, the Supreme Court granted certiorari in Standard Fire Insurance v. Knowles to decide whether named plaintiffs may defeat removal under the Class Action Fairness Act of 2005 by filing 'binding stipulations' with complaints in state court, capping a class’s recovery at under $5 million (the jurisdictional threshold for removal). The case presents an opportunity to address an issue under-theorized in the existing literature on class actions: what fiduciary duties, if any, are owed by a plaintiff's attorney to potential absent class members in a class action prior to certification? What are the contours or scope of such a pre-certification fiduciary duty?

This paper fills two gaps in the literature about fiduciary duties (or more broadly conflicts of interest) in class actions. First, there has been little scholarly treatment of the scope and contours of an attorney’s fiduciary duty to class members prior to class certification - that is, outside the strictures of Rule 23. Pre-certification conflicts are far more difficult to address because no federal rules-based framework exists for addressing pre-certification conduct. Second, this is the first academic treatment of means-based decision making in class actions. Unlike post-certification inquiries into conflicts of interest concerning settlements, this inquiry is particularly complicated because there is often inadequate information about likely outcomes when certain means are employed. Conceivably, there is considerably more grey area surrounding means-related decision making. In the pre-certification stage, without information about how the litigation will run its course, attorneys make decisions that could credibly be defended as in the best interest of the class, or as in breach of the attorney’s fiduciary obligations to those class members.

In discussing pre-certification fiduciary duties, this paper investigates the legitimacy of 'binding stipulations' as a case study. In addition to this specific analysis, this paper offers a specific formulation of the scope of attorneys’ pre-certification fiduciary duties: an attorney breaches his fiduciary duty to class members when he makes a decision that prejudices the substantive legal rights of absent class members without notice and opportunity for objection. When an action potentially prejudices or does prejudice a substantive legal right of absent class members, an attorney should have an opportunity to offer a good faith defense - that the course of conduct was undertaken in a good faith belief that it would maximize the class’s recovery. That defense, in turn, can be evaluated in terms of whether it is legitimate, genuine, or pretextual.

Keywords: fiduciary duties, class actions, Rule 23, Knowles, standard fire, Supreme Court, conflicts of interest