Johnson v. Nextel Commc'ns Inc.

• Decision Date: 04 March 2015
• Docket Number: Docket No. 14–454.
• Citation: 780 F.3d 128
• Parties: Michael S. JOHNSON, individually and on behalf of the class, Patricia Long Correa, individually and on behalf of the class, Donna Dymkowski, individually and on behalf of the class, Antonio Samuel, individually and on behalf of the class, Angelette Waters, individually and on behalf of the class, Vincent Hall, individually and on behalf of the class, Plaintiffs–Appellees, v. NEXTEL COMMUNICATIONS INC., a Delaware Corporation, Defendant–Cross Claimant–Cross Defendant–Appellant, Leeds, Morelli & Brown PC, Lenard Leeds, Steven A. Morelli, Jeffrey K. Brown, James Vagnini, Federic David Ostrove, Bryan Mazolla, John Doe, 1–10, a fictitious designation for presently unknown Defendants, Susan Fitzgerald, Jane Doe, 1–10, a fictitious designation for presently unknown Defendants, Defendants–Cross Claimants–Cross Defendants.
• Court: U.S. Court of Appeals — Second Circuit

780 F.3d 128

Michael S. JOHNSON, individually and on behalf of the class, Patricia Long Correa, individually and on behalf of the class, Donna Dymkowski, individually and on behalf of the class, Antonio Samuel, individually and on behalf of the class, Angelette Waters, individually and on behalf of the class, Vincent Hall, individually and on behalf of the class, Plaintiffs–Appellees

v.NEXTEL COMMUNICATIONS INC., a Delaware Corporation, Defendant–Cross Claimant–Cross Defendant–Appellant

Leeds, Morelli & Brown PC, Lenard Leeds, Steven A. Morelli, Jeffrey K. Brown, James Vagnini, Federic David Ostrove, Bryan Mazolla, John Doe, 1–10, a fictitious designation for presently unknown Defendants

Susan Fitzgerald, Jane Doe, 1–10, a fictitious designation for presently unknown Defendants, Defendants–Cross Claimants–Cross Defendants.

Docket No. 14–454.

United States Court of Appeals, Second Circuit.

Argued: Dec. 9, 2014.

Decided: March 4, 2015.

Jennifer F. Connolly (Steve W. Berman and Kenneth S. Thyne on the brief), Hagens Berman Sobol Shapiro, LLP, Washington, D.C., for Plaintiffs–Appellees.

Mark D. Harris (Lawrence R. Sandack and John E. Roberts on the brief), Proskauer Rose LLP, New York, NY, for Nextel Communications, Inc.

Before: WESLEY, HALL, and LYNCH, Circuit Judges.

Opinion

GERARD E. LYNCH, Circuit Judge:

This case arises from a novel approach to aggregate litigation that continues to provoke debate among experts in legal ethics.¹ The law firm of Leeds, Morelli & Brown PC (“LMB” or “the firm”), representing 587 employees with discrimination claims against their employer, Nextel Communications, Inc. (“Nextel”), agreed with Nextel to set up a dispute resolution process whereby the employees' claims would be resolved with Nextel without litigation. After most of the cases were settled through the dispute resolution process, a group of Nextel employees brought this suit, putatively on behalf of a class comprising all of the Nextel employees represented by LMB, against both LMB and Nextel, alleging, inter alia, breach of fiduciary duty, legal malpractice, and breach of contract. In an earlier appeal, we vacated a decision dismissing the complaint and remanded the case. Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131, 135–37 (2d Cir.2011) (“Nextel I ”).

The district court (George B. Daniels, Judge ) subsequently certified a class pursuant to Federal Rule of Civil Procedure 23(b)(3). In granting plaintiffs' motion for class certification, the district court applied New York law to all of the class members' claims, even though the class members hailed from twenty-seven different states, and held that common issues predominated over the individual issues in the case, even though a Colorado state court had held that, under Colorado law, individual clients' waivers of the law firm's conflict of interest eliminated LMB's liability as to those clients. Because we conclude that the district court erred in its choice-of-law analysis, and that a proper analysis makes clear that the individual issues in this case will predominate over the common issues plaintiffs have identified, we VACATE the district court's class certification order and REMAND the case for further proceedings.

BACKGROUND ²

I. Original discrimination complaints against Nextel

In 2000, a large number of Nextel employees retained LMB to pursue employment discrimination claims against Nextel. The firm had gathered clients with such claims, eventually coming to represent 587 Nextel employees from twenty-seven different states.³ Each client entered into a separate retainer agreement with LMB, most but not all of them in writing. Generally speaking, the agreements provided that the employee-client was retaining the firm to represent him or her in negotiating a settlement with Nextel.⁴ In the event of a settlement or monetary award, the proceeds would be split, with the client receiving two-thirds of the total settlement or award figure and LMB receiving one-third.

Rather than pursue separate settlements for each of the 587 individual claimants, however, LMB agreed with Nextel to settle the claims en masse. The agreement, known as the Dispute Resolution and Settlement Agreement (“DRSA”), created a dispute resolution process whereby (1) Nextel would interview each claimant, (2) a non-binding mediation of claims would be conducted, and (3) any claims left unresolved by the mediation would be referred to binding arbitration. The DRSA provided that Nextel would pay LMB $2 million up front to persuade its clients to drop their pending lawsuits against Nextel and sign individual agreements to participate in the dispute resolution process. The DRSA further provided that Nextel would pay another $1.5 million to the firm upon resolution of half of the claims and a final $2 million upon resolution of the remaining claims. However, the final payment came with a time limit: if LMB did not resolve all of the claims within forty- five weeks of the effective date of the DRSA, Nextel was permitted to deduct $50,000 each month until all claims were resolved. Finally, the DRSA provided that Nextel would retain LMB as a consultant for a period of two years following the resolution of all claims for a fee of $2 million, bringing the total value of the DRSA for the firm to $7.5 million. Both LMB and Nextel obtained opinion letters from experts in legal ethics who concluded that the fee arrangement and dispute resolution process proposed in the DRSA were ethical, so long as LMB provided disclosure to, and obtained consent from, the individual clients.

Following the execution of the DRSA, LMB sought agreements (the “individual agreements”) from its clients to participate in the dispute resolution process and to waive any conflict of interest on the part of LMB. LMB was ultimately able to obtain individual agreements from most of its clients, and to resolve all but fourteen of the claims against Nextel through the dispute resolution process, resulting in a total payout by Nextel to the employees of $3.9 million—a little more than half of the total fees LMB received from Nextel.⁵

II. State court malpractice litigation against LMB

In 2002, two employees who had been represented by LMB in the dispute resolution process brought a class action against LMB in Colorado state court, alleging that the firm had breached the retainer agreements and its fiduciary duty to its clients by entering into the DRSA with Nextel; Nextel was not named as a defendant. Foster v. Leeds Morelli & Brown, P.C., No. 02–CV–1484 (Colo.Dist.Ct. Arapahoe County). That suit ended in a classwide settlement approved by the Colorado court. Forty-one of the 587 original claimants opted out of the Foster settlement and retained the right to bring individual suits.

Two of the class members who opted out of the Foster settlement brought a separate action, also in Colorado state court, against LMB and Nextel. McNeil v. Leeds Morelli & Brown, P.C., No. 03–cv–893 (Colo.Dist.Ct. Denver County). Nextel was dismissed from the case. The claims against LMB were tried to a jury, which returned a verdict for the firm, finding that the plaintiffs had knowingly waived any conflict of interest presented by the DRSA by signing the individual agreements. The Colorado Court of Appeals affirmed the jury's verdict, holding that Nextel's payment of legal fees to LMB was fully disclosed to plaintiffs, that plaintiffs expressly waived any conflict by signing the individual agreements, and that plaintiffs therefore had consented to any conflict presented by the DRSA. McNeil v. Leeds Morelli & Brown, P.C., No. 07CA2533, slip op. at 22–23, 2009 WL 1241589 (Colo.Ct.App. May 7, 2009), cert. denied, No. 09SC523, 2009 WL 4759121 (Colo.2009).

III. The instant lawsuit

This action was begun as a putative class action against LMB and Nextel on October 23, 2006, in New Jersey state court. The named plaintiffs, all residents of New Jersey, were six of the Foster class opt-outs who had not been part of the McNeil litigation. Defendants removed the case to federal court. On September 21, 2007, the United States District Court for the District of New Jersey transferred the case to the United States District Court for the Southern District of New York. Johnson v. Nextel Commc'ns, Inc., No. 06–CV–5547 (DMC), 2007 WL 2814649, at *6 (D.N.J. Sept. 21, 2007).

Defendants then moved to dismiss the complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). On March 31, 2009, the district court issued a Memorandum and Order granting the motion. Johnson v. Nextel Commc'ns, Inc., No. 07 CV 8473(GBD), 2009 WL 928131 (S.D.N.Y. Mar. 31, 2009). The district court specifically held that by signing the individual agreements, the employees demonstrated that they were aware of the DRSA and expressly waived any conflict of interest. Id. at *3. Consequently, the district court dismissed the breach of fiduciary duty claim against LMB and the claims against Nextel for aiding and abetting LMB's breach of fiduciary duty. Id. at *3, *9. As to plaintiffs' claim for breach of contract based on the retainer agreements, the district court held that “plaintiffs have failed to sufficiently plead ... failure of performance on the part of [LMB].... Plaintiffs contracted for, and received, legal representation from [LMB]. Nowhere do the plaintiffs allege that the settlement, to which they voluntarily agreed, was inadequate compensation or disproportionate to their individual claims.” Id. at *4. The court therefore dismissed the breach of contract claim against LMB and the tortious interference with contract claim against Nextel. Id. at *4, *9.⁶

We vacated and remanded in a decision that has important ramifications for the issues here. Nextel I, 660 F.3d 131. First, we held that New Jersey choice-of-law rules applied to the claims because the case was originally brought in the District of New Jersey. Id. at 137–38. We noted that the parties agreed that there was no actual conflict between New...