Last year at this time, we posted about two recent orders from a federal judge in Arkansas that found Rule 11 violations and abuses of the judicial process by attorneys for both the plaintiffs and the defense. Specifically, the district court found that counsel for both plaintiffs and defendants violated Rule 11 when they stipulated to dismissal of a yet-uncertified class action “for the improper purpose of seeking a more favorable forum and avoiding an adverse decision.” The court also determined that counsels’ “use of properly-attached federal jurisdiction as a mid-litigation bargaining chip was an abuse of the judicial process.” The court sanctioned the lawyers for the class in the form of a reprimand. Because it was not convinced that the defense attorneys acted in bad faith, those lawyers avoided an actual sanction. Notwithstanding, the district court was highly critical of the professional conduct of the attorneys involved, criticism that is stinging with or without an actual sanction.
The attorneys appealed to the Eighth Circuit Court of Appeals. The Eighth Circuit allowed the Competitive Enterprises Institute’s Center for Class Action Fairness to appear in defense of the district court’s judgment. On July 25, 2017, the Eighth Circuit reversed the judgment, ruling that the district court abused its discretion by (i) concluding that the attorneys violated Rule 11; (ii) concluding that the attorneys abused the judicial process; and (iii) imposing sanctions.
First, the Eighth Circuit examined the contours of Rule 41(a)(1) and held that the district court “misread” the Court’s precedent related to such voluntary dismissals. According to the Court, stipulating to a dismissal under Rule 41(a)(1) for the purpose of forum shopping and avoiding an adverse result does not amount to sanctionable conduct. The stipulated dismissal in this case “was in accordance with Rule 41(a)(1)(A)(ii).”
Second, the Eighth Circuit examined whether the district court’s judgment might be justified by Rule 23(e), which states that “[t]he claims, issues, or defenses of a certified class may be settled, voluntarily dismissed, or compromised only with the court’s approval.” The Court concluded that, “[g]iven that (1) the overwhelming majority of courts have held that when no class has been certified, voluntary dismissal of a putative class action is governed not by Rule 23 but by Rule 41, and (2) CAFA did not affect the 2003 amendment to Rule 23[,] . . . a reasonable lawyer would have a colorable legal argument that a stipulation of voluntary dismissal under Rule 41(a)(1)(A)(ii) is permissible in a case in which the class has not yet been certified.” Notably, the Eighth Circuit expressly refused to actually decide the scope of the post-2003 version of Rule 23(e): “We decline to determine whether the post-2003 version of Rule 23(e) requires court approval for a dismissal or compromise even if a class has not yet been certified. It is sufficient to hold that counsel had at least a colorable argument.”
In the end, these attorneys had their names cleared on appeal after suffering much criticism from the district court for their exercise of professional judgment in how to resolve the putative class action. But the whole episode still serves as a cautionary note to class action attorneys for plaintiffs and defendants alike that creative class settlement approaches may lead to unforeseen or uncomfortable challenges. Despite its reversal, the Eighth Circuit did observe that “[t]he district court’s frustration with what it perceived as an abuse of the federal court system and lack of candor with the court is understandable.”