The Second Circuit vacated a class certification order issued by the Southern District of New York, finding that Rule 23(b)(3)’s predominance and superiority requirements could not be met given the necessity of applying 27 states’ laws to putative class claims for breach of fiduciary duty, legal malpractice and breach of contract. The case involved a “novel approach to dispute resolution that continues to provoke a debate among experts in legal ethics.” The plaintiffs were 587 employees of Nextel Communications, Inc. (“Nextel”), hailing from 27 states, who entered into retainer agreements, most of them in writing, with the law firm Leeds, Morelli & Brown (“LMB”) regarding their employment discrimination claims against Nextel. Rather than file suit, LMB arranged a dispute resolution process to settle the plaintiffs’ claims en masse with Nextel, which, in turn, provided LMB certain monetary guarantees for resolving the plaintiffs’ claims within a specified time. LMB obtained conflict of interest waivers from most of the plaintiffs during the process of settling with Nextel.
Following conclusion of the dispute resolution process, the plaintiffs, on behalf of all Nextel employees represented by LMB, brought suit against LMB and Nextel. The plaintiffs in the instant case, opt outs from other class action litigation that had settled, alleged that LMB breached its fiduciary duties to the class, committed malpractice, breached retainer agreements, and, further, that Nextel aided and abetted LMB’s misconduct. In granting the plaintiffs’ motion for class certification, the district court found that New York law applied to all the plaintiffs’ claims. After the parties stipulated to dismissal with prejudice of claims against LMB, Nextel appealed.
The Second Circuit found that “there are undoubtedly common issues present in this case that will affect the liability determination for all members of the class” including the nature of the settlement agreement with plaintiffs and Nextel’s role in negotiating and executing it. Applying the Restatement’s “significant relationship” test, however, the court determined that the laws of each class member’s home state needed to be applied to both the tort and contract claims. Given the need to apply 27 different state laws, the court held that “the case for finding the predominance of common issues and the superiority of trying this case as a class action diminishes to the vanishing point.”
Regarding the tort claims for malpractice and breach of fiduciary duty, the law of some class members’ home state allowed the plaintiffs to waive LMB’s conflict, while the law of other class members’ home state did not. Moreover, determining whether a waiver was legally effective in at least one state (where 25% of the class members resided) would involve a factually intensive inquiry with respect to each putative class member. According to the court, such an inquiry was “so individualized and client-specific” that even creating a subclass for problematic states “would not achieve any economies of scale.” The court further held that the waiver issue was also critical to resolving the plaintiffs’ breach of retainer agreement claims given the law in the various states and, as a result, individualized issues would overwhelm common ones. The court thus concluded that common issues do not predominate and that resolution by a class action is not superior, vacated the district court’s certification order and remanded the case for further proceedings.