Texas Supremes Hold that a Litigant with Assigned Claims Was an Inadequate Class Representative
Yesterday the Texas Supreme Court issued a class action opinion that raises the fundamental question of what are the responsibilities of class representatives? In some jurisdictions, courts refuse to entertain challenges to the adequacy of class representatives, reasoning that so long as class counsel are capable, the class will be adequately represented. Texas lies at the other end of the spectrum, viewing the class representative as a real client who actually makes the decisions in the litigation, not the class counsel. Whether the class representative is a mere figurehead witness or an actual litigant has a significant impact on the adequacy of representation analysis.
In Southwestern Bell Telephone Co. v. Marketing on Hold, Inc., No. 05-0748, slip op. (Tex. Feb. 19, 2010) (now reported at 2010 WL 572876), the plaintiff and putative class representative, Marketing on Hold, was a company that audits its customers' telephone bills and seeks adjustments on their behalf for improper charges in exchange for 50% of what it recovers. The company convinced five of its customers to assign to the company their causes of action against Southwestern Bell, lowering its fee to 30% of recovery.
The theory of class recovery was that Southwestern Bell charged its customers a municipal fee that it had not been authorized to charge from 1991 to 1998.
The defendant challenged the plaintiff's standing to sue, arguing that the assignments of claim were void as against public policy. The Texas Supreme Court rejected this argument, observing that the assignability of a cause of action is generally freely permitted. Slip op. at 5. The court noted that plaintiff "already had a substantial financial interest in the claims against Southwestern Bell prior to assignments" (id.), and thus was not a "stranger/entrepreneur" whose actions "disrupt the class suit vehicle and distort the judicial process." Id. at 6. Accordingly, the court held the assignment was not against public policy and thus the plaintiff had standing to sue.
In analyzing the prerequistes to class certification under Texas's class action rule, Rule 42, the court found for the plaintiff on typicality and predominance. But the court held that the company with assigned claims failed the adequacy of representation test:
We believe courts should scrutinize carefully the motivating interests and incentives of parties that agree at an apparent financial loss to obtain the right to serve as the class representative. . . .
. . . We agree that [plaintiff's] interests conflict with those of the absent class members. [Plaintiff] is not an injured claimant seeking relief to make itself whole, but voluntarily assume the classwide injury in order to serve as the class representative. Unlike the class, [plaintiff] has a materially lesser interest in making itself and the class whole because it was never personally aggrieved by Southwestern Bell's alleged overcharging, and its maximum recovery is less than half the value of any individual claim for damages. For example, because [plaintiff] never paid the alleged overcharges at issue and can retain at best only thirty-percent of any recovery, [plaintiff's] incentive in settling quickly in order to minimize litigation expenses differs from class members who have overpaid and may be willing to hold out for a settlement that approximates their actual damages. For the same reason, [plaintiff's] motivation may encourage pursuit of theories of relief that are more efficient for it, but yield less recovery for absentee class members.
Id. at 16-17 (citation and footnotes omitted). The court went on to explain that although the plaintiff appeared to take a loss (30% rather than its contractual 50%) on the assigned claims of five customers, it still had a number of other contracts with other customers through which it stood to benefit by gaining control of the class action.
This troubled the court because of its view of the responsibilities of a class representative:
Class representation vests a great deal of power in the class representative. The class representative decides, among other matters, which claims to pursue and which to forgo, and the remedies and strategies to pursue in supervising class counsel. . . .
[Plaintiff's] lack of any claim of its own makes it unique among the members of the class. Its only knowledge of the claims it holds must be obtained from its assignors. . . . Both [of plaintiff's officers] indicated that they would rely heavily on [plaintiff's] counsel to conduct the litigation. While we recognize that class counsel's control over class litigation is often greater than it is in non-class litigation, the class action rule contemplates that the class representative is "not simply lending [its] name [] to a suit controlled entirely by the class attorney." 7A Charles Alan Wright, Federal Practice and Procedure sec. 1766 (3d ed. 2005). In this case, [plaintiff's] interest in the litigation by assignment removes it and its counsel one step further from the class members, enhancing the risk of conflicts.
Id. at 17-18. The court thus concluded that plaintiff failed to meet the adequacy of representation requirement.
Where the class representative is expected to control the litigation, Marketing on Hold demonstrates how entrepreneurial speculators who invest in litigation can present special opportunities for mischeif that counsel against allowing them to participate as class representatives.
