On Appeal from the United States District Court for the Western District of Pennsylvania District Court No. 02-cv-00304 District Judge: Honorable Arthur J. Schwab.
The opinion of the court was delivered by: Roth, Cicuit Judge
Argued on January 12, 2006
Before: SCIRICA*fn1, Chief Judge, FUENTES and ROTH*fn2, Circuit Judges
This case presents the ironic scenario of class action plaintiffs' attorneys who are being sued for breach of fiduciary duty and related counts by a putative class that the attorneys themselves formed for asbestos personal injury litigation. For the reasons stated below, we will vacate the District Court's grant of summary judgment to defendant attorneys and its denial of class certification, and remand this case for further proceedings consistent with this opinion.
I. Background and Jurisdiction
Our case begins in Jefferson County, Mississippi, where an asbestos personal injury case, captioned Cosey v. E.D. Bullard Co., No. 95-00069 (Miss. Cir. Ct. Jefferson Cty.), was commenced in 1995. Mississippi law does not provide for class actions, but it has liberal joinder rules and a reputation as a plaintiff-friendly jurisdiction. Accordingly, over the next four years, several thousand asbestos personal injury plaintiffs were joined in Cosey, along with more than two hundred defendants. In 1998, a trial was conducted in Cosey for the cases of twelve plaintiffs with malignant asbestos-related diseases. Those twelve Cosey plaintiffs were awarded approximately $48.5 million in damages. The sole attorneys of record for all the Cosey plaintiffs were Robert A. Pritchard and Christopher Fitzgerald.
At the time the Cosey verdict was delivered, there were more than 2,000 other asbestos cases pending in Jefferson County. The large award in Cosey prompted many companies with potential asbestos liability to explore settlements. In May 1999, before any settlements were reached, Pritchard brought a second asbestos personal injury mass action in Mississippi state court, Rankin v. A-Bex Corp., No. 99-00086 (Miss. Cir. Ct. Jefferson Cty.),*fn3 in which the Plaintiffs in this suit were joined.
The Plaintiffs, Roland L. Huber, William J. Airgood, Anthony Defabbo, John Dinio, Ernest Gishnock, John Bidlencsik,*fn4 Hilma Mullins, and William Deem, are former steelworkers from Pennsylvania, Ohio, and Indiana. All eight Plaintiffs were exposed to asbestos at some point in their careers. None have developed malignant asbestos-related disease. All the Plaintiffs except Huber are or were smokers. Plaintiffs, along with 2,637 other asbestos-exposed individuals from Pennsylvania, Ohio, and Indiana (collectively the Northerners) retained counsel in their home states (Local Counsel) to prosecute their asbestos claims for a 40% retainer fee.
Local Counsel had previously entered into co-counsel agreements with Robert G. Taylor II, a Texas attorney involved in Cosey.*fn5 Taylor had his own client base in Texas but was looking to expand his asbestos client "inventory." Taylor contracted with Local Counsel to serve as co-counsel for any future asbestos plaintiffs that Local Counsel would represent in exchange for Taylor receiving between 95% and 97.5% of Local Counsel's fees if suit were brought outside of Local Counsel's home state, and a smaller amount if suit were brought in the home state. The agreements between Taylor and Local Counsel provided that, if the asbestos suits were filed in a state other than Local Counsel's home state, Texas law would govern the contingent fee contract.
Taylor's fee arrangement is key for understanding Plaintiffs' case. First, it meant that employment as Local Counsel could only be profitable as volume, rote work because Local Counsel would keep only one to two percent of any client's recovery. Local Counsel had little incentive to focus on any particular case. Since many recoveries were in the range of a few thousand dollars, Local Counsel collected very little from any particular representation. Second, the fee arrangement meant that, all things being equal, co-counsel representations were less profitable to Taylor than representations of direct clients because of the fee-splitting involved. Third, the arrangement meant that the one to two percent Local Counsel cut, when aggregated among all Local Counsel, as it was from Taylor's perspective, represented a sizeable amount given the hundreds of millions of dollars of recoveries.
Taylor himself had entered into upstream co-counsel agreements with Fitzgerald and Pritchard, who in turn entered into an upstream co-counsel agreement with Joseph B. Cox, Jr.,*fn6 to negotiate settlements, for which Cox would receive four percent of all gross settlements. Plaintiffs allege that they were never informed of the various co-counsel arrangements.
Cox negotiated settlements with asbestos defendants W.R. Grace, Owens Corning, Fiberboard, and the Center for Claims Resolution (CCR), an organization created by 19 asbestos defendants to settle asbestos claims. Under the terms of all the settlements, the payout varied both by level of injury and by the home state of the claimants. In all the settlements negotiated by Cox, Northerners received payouts that were between 2.5 and 18 times lower than those received by plaintiffs from Mississippi and Texas (Southerners). Northerners, who joined in the Mississippi actions nonetheless received a larger settlement than similar asbestos plaintiffs from Pennsylvania, Ohio, and Indiana usually receive in their home state courts.*fn7
Defendants, in settling these cases for Southerners, did not have to share their fees with Local Counsel, as they had to do with Northerners. Plaintiffs allege that the difference in the settlement payouts to Northerners is attributable to this incentive of Defendants to allocate a greater percentage of aggregate settlements to Southerners in order to minimize Local Counsel's percentages. This marginal percentage difference becomes significant in light of the scale of the settlements. The record contains the approximate or maximum values of eleven of the nineteen settlement agreements negotiated by Defendants.*fn8 We calculate these eleven settlement agreements to total some $400 million. Therefore, on just this portion of the total settlements, Defendants stood to gain up to $10 million (2.5% of $400 million) at the expense of Northerners (and Local Counsel), depending on how the settlements were allocated between Northerners and Southerners.
Defendants reply to this allegation by asserting that the settlements were not aggregate settlements that they then allocated as they saw fit. Instead, Defendants claim that the plaintiffs in the settled cases were presented with offers that varied for different individuals based on factors such as the type of injury or asbestos exposure, lifestyle habits like smoking, and geographic origin. Defendants claim that geographic origin is an appropriate factor in determining settlement value because jury verdicts in northern states are traditionally lower than in southern states and because, in southern courts, jury verdicts for Northerners are typically lower than for Southerners in their home state. For the purposes of this appeal, we need not resolve whether these settlements were aggregated, but we note that there is language in some of the settlement agreements that strongly supports the contention that they were aggregate settlements.*fn9 Moreover, the very documents Defendants cite in their brief refer to the settlements as aggregate.*fn10
After each of the settlement agreements was negotiated, the Northerners received various disclosures. These disclosures were made by Local Counsel and by Parapro Enterprises, Inc., a paralegal service associated with Taylor. The Northerners were presented with a release, a check, and a disbursement sheet. The release was explained orally to Northerners by Parapro paralegals. The disclosures did not reveal the settlements' material terms or the nature of Defendants' involvement in the cases. The written disclosures stated that further information about the settlements was available on request. The record does not state whether any of the Plaintiffs sought to avail themselves of this information.*fn11 Plaintiffs have introduced evidence that neither the Parapro paralegals nor Local Counsel were themselves aware of the full terms of the settlements or even had access to the complete settlement agreements.
The Plaintiffs brought suit in the Western District of Pennsylvania on behalf of a putative class of Northerners. Plaintiffs have not sued their Local Counsel or Parapro. Plaintiffs alleged several counts, including breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and conspiracy to breach fiduciary duty. Specifically, Plaintiffs have alleged that Defendants breached their fiduciary duties of undivided loyalty and candor. Plaintiffs allege that Defendants owed them a fiduciary duty as their counsel; that Defendants engaged in an undisclosed, multiple representation; that Defendants had a conflict of interest regarding their multiple representation because of the fee arrangements that gave Defendants a larger percentage of Southerners' recoveries than of Northerners' and that this created an incentive for Defendants to negotiate settlements that paid more for Southerners' claims than for Northerners'; and that Defendants never gave proper disclosure of this conflict of interest or of the full terms of the settlement offers.
The District Court denied Plaintiffs' class certification motion for four reasons. First, the District Court found that individual questions about disclosures, reliance, causation, damages, and choice of law predominated over issues common to the class, so the motion for class certification failed to meet the requirements of FED. R. CIV. P. 23(b). Second, the District Court also concluded that, because of the predominance of individual questions, a class action was not the most efficient way to litigate the matter. Third, the District Court denied class certification on the ground that the Plaintiffs were not typical of the putative class of Northerners because six of the eight Plaintiffs had not qualified for the CCR settlement offer. Finally, the District Court held that the Plaintiffs were inadequate class representatives because their interests were no longer aligned with other Northerners due to the fact that they were no longer represented by Defendants in asbestos litigation, unlike other Northerners, and that this would create a conflict of interests between them and the putative class.
The parties cross-moved for summary judgment. The District Court denied Plaintiffs' motion and granted Defendants' motion because it found that Plaintiffs had failed to present evidence of actual harm or evidence that Defendants' non-disclosures were the proximate cause of their harm, both required elements in all of Plaintiffs' claims. The District Court defined the actual harm requirement as a showing of any evidence that "'but for' defendant attorneys' conduct, [Plaintiffs] could or would have received more favorable offers." The District Court noted that there was record evidence from representatives of the asbestos defendants that "even though Pennsylvania, Ohio, and Indiana plaintiffs undoubtedly received less money than the Mississippi plaintiffs, they still received higher settlement offers than those normally paid to asbestos claimants from those states because of the leverage these northern claimants gained from being joined with the Mississippi claimants in a Mississippi court." The District Court also noted that Plaintiffs' claims that they would have received higher settlements were only speculation, as "Plaintiffs have adduced no evidence that they would have obtained more favorable offers from any of the other asbestos defendants with whom they settled their claims." Finally, the District Court found that plaintiffs have failed to present evidence from which a reasonable person could conclude that defendants['] alleged non-disclosures proximately caused any plaintiff to accept settlements they would not have otherwise accepted. Rather, the evidence shows that plaintiffs either were given or had direct access to such information but chose to remain unaware, and at best did not recall basic facts surrounding when, where and if they read the documentation presented to them explaining the settlement.
Plaintiffs have appealed both the denial of class certification and summary judgment in respect to three claims: breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, and civil conspiracy to breach of fiduciary duty. Plaintiffs have not appealed from the grant of summary judgment to Defendants on claims of fraud, conspiracy to defraud and convert, legal malpractice, conversion, and violation of deceptive trade practices laws.
The District Court had subject matter jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. We undertake a plenary review of grants of summary judgment. Gottshall v. Consol. Rail Corp., 56 F.3d 530, 533 (3d Cir. 1995). Summary judgment is only appropriate if there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). In reviewing the District Court's grant of summary judgment, we view the facts in a light most favorable to the non-moving party. Gottshall, 56 F.3d at 533.
The lynchpin of the District Court's decisions on class certification and summary judgment was its determination that all of Plaintiffs' causes of action required a showing of causation and actual injury. The District Court noted that the putative class had individualized injuries, which impeded class certification, while the individual Plaintiffs had not shown any personal injury, thereby defeating their action. We agree with the District Court that, if Plaintiffs must show causation and actual injury, they lose on both parts of their appeal. We disagree with the District Court, however, as to whether the relevant law requires a showing of causation and actual injury.
The District Court's determination that actual injury was required in all of Plaintiffs' causes of action was not based on an analysis of any particular state's laws, even though this is a diversity action. In a diversity action, the court "must apply the choice of law rules of the forum state to determine what substantive law will govern." Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). This action was commenced in the United States District Court for the Western District of Pennsylvania, so the District Court properly turned to Pennsylvania's choice of law rules.
Before a choice of law question arises, there must first be a true conflict between the potentially applicable bodies of law. On Air Entm't Corp. v. Nat'l Indem. Co., 210 F.3d 146, 149 (3d Cir. 2000). If there is no conflict, then the district court sitting in diversity may refer interchangeably to the laws of the states whose laws potentially apply. Id. If there is a conflict between the potentially applicable laws, then Pennsylvania uses the "significant relationship" test of the Restatement (Second) of Conflicts of Laws. ...