For the Canadian class actions defence bar — which must occasionally feel disheartened by the unwavering enthusiasm with which our courts have championed class proceedings — the recent ruling in Eubank v. Pella Corporation (7th Cir. June 2, 2014) represents a breath of fresh air from south of the border.

Judge Richard Posner, speaking for a unanimous panel of the Seventh Circuit Court of Appeal, uses blunt and forthright language — alien to a Canadian ear — in acknowledging the risks to justice created by such proceedings.  He places particular emphasis on the inherent conflicts faced by plaintiffs’ class counsel.

To place this candid judicial language in a domestic context, it is necessary to acknowledge that many Canadian judges have embraced class actions with what sometimes appears to be an uncritical and unquestioning enthusiasm.  The bench has exhibited great inventiveness in ensuring that substantive and procedural hurdles are overcome in the interests of permitting proposed class actions to proceed.  Claims which have (at best) marginal merit have received certification.  The fact that almost all such claims are initiated — not by a genuinely aggrieved plaintiff or group of plaintiffs — but rather by a highly motivated and entrepreneurial plaintiffs’ bar, is rarely acknowledged or addressed by Canadian courts.

Refreshingly, Judge Posner exhibits no such reticence, and refuses to treat class actions (or class counsel) with politically correct “kid gloves.”

The Seventh Circuit’s ruling in Eubank commences in an even-handed fashion, with Judge Posner acknowledging that, in the case of meritorious claims, class proceedings are “an ingenious procedural innovation” and ”a worthwhile supplement to conventional litigation procedure.”

However, the Court of Appeal goes on to recognize — and unsparingly describes — the inherent conflicts which accompany such proceedings.  As noted by Judge Posner, the concern begins with class counsel’s self-serving selection of a malleable representative plaintiff (emphasis added):

…Normally only a few of the claimants are named as plaintiffs (sometimes only one, though there are several in this case). The named plaintiffs are the representatives of the class—fiduciaries of its members—and therefore charged with monitoring the lawyers who prosecute the case on behalf of the class (class counsel). They receive modest compensation, in addition to their damages as class members, for their normally quite limited services—often little more than sitting for a deposition—as class representatives. Invariably they are selected by class counsel, who as a practical matter control the litigation by the class. The selection of the class representatives by class counsel inevitably dilutes their fiduciary commitment.

….

The class action is a worthwhile supplement to conventional litigation procedure…, but it is controversial and embattled…, in part because it is frequently abused…. The control of the class over its lawyers usually is attenuated, often to the point of nonexistence. Except for the named plaintiffs, the members of the class are more like beneficiaries than like parties; for although they are authorized to appeal from an adverse judgment…., they have no control over class counsel. In principle the named plaintiffs do have that control, but as we’ve already hinted this is rarely true in practice. Class actions are the brainchildren of the lawyers who specialize in prosecuting such actions, and in picking class representatives they have no incentive to select persons capable or desirous of monitoring the lawyers’ conduct of the litigation.

The Eubank v. Pella appeal arose out of a disputed settlement.  As Judge Posner explained, the settlement of class actions represents one area where class counsel run the risk of abusing their authority (emphasis added):

…The reasons that class actions invariably are settled are twofold. Aggregating a great many claims (sometimes tens or even hundreds of thousands—occasionally millions) often creates a potential liability so great that the defendant is unwilling to bear the risk, even if it is only a small probability, of an adverse judgment. At the same time, class counsel, ungoverned as a practical matter by either the named plaintiffs or the other members of the class, have an opportunity to maximize their attorneys’ fees—which (besides other expenses) are all they can get from the class action—at the expense of the class. The defendant cares only about the size of the settlement, not how it is divided between attorneys’ fees and compensation for the class. …

Thus, the natural self-interest of the parties leads to a settlement amount that is as low as possible, “but heavily tilted toward attorneys’ fees.”

The settlement that had been proposed in the Eubank case was described by Judge Posner as “inequitable — even scandalous,” with class counsel blatantly enriching himself at the expense of his “clients.”  Not surprisingly, it was rejected by the Seventh Circuit Court of Appeal.  Judge Posner’s recitation of class counsel’s misconduct provides a salutary object lesson for any reader.

It is sometimes said that “bad facts make bad law.”  In contrast, the “bad facts” of the Eubank ruling were the catalyst for “very good law.”  Judge Posner’s unvarnished criticism valuably underlines the drawbacks and vulnerabilities that are inherent in every class action, but which are almost never acknowledged by the courts.