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After the U.S. Supreme Court’s controversial decision in Concepcion, there has been much debate over the rising tendency of companies to forbid their customers from bringing class actions against them. Another company has recently won another round. Charles Schwab Corp. modified their account agreements last year, prohibiting class-action lawsuits and restricting the ability of consumers to consolidate arbitration cases. This decision came after settlements of class-action lawsuits in which Schwab agreed to pay $235 million for misleading marketing of its high-interest YieldPlus money market fund between May 2006 and March 2008.
The Financial Industry Regulatory Authority’s (FINRA’s) enforcement department charged Schwab with violating its rules by restricting consumers’ class-action and arbitration rights. The FINRA hearing panel agreed that it was against the rules of the private group, which regulates broker-dealers and administers arbitration panels. However, due to the Supreme Court’s recent interpretation of the Federal Arbitration Act, the panel found that those rules are unenforceable.
While FINRA does not actually make or enforce the law, it can tell broker-dealers that, if they want to remain members, they have to abide by its “fair-play” rules. The Securities and Exchange Commission requires all broker-dealers to be members and all brokers who sell securities to be licensed by FINRA.

Of the three actions FINRA brought against Schwab, it did win won. The hearing panel decided that Schwab had violated FINRA’s rules by limiting the powers of arbitrators to consolidate individual client claims in hearings and fined Schwab $500,000 for the violation. It also ordered the company to remove that condition from its customer agreements. A spokesman for Schwab said the language has already been removed.

A FINRA spokeswoman said it is currently reviewing the decision and cannot yet comment on whether they will appeal to the National Adjudicatory Council. Plaintiffs lawyers though, have speculated that an appeal is almost certain.

Schwab has said in a statement that it is pleased with the decision. “The company believes that customers are better served through the existing FINRA arbitration process and that class-action lawsuits are a cumbersome and less effective means of resolving disputes – for both parties.”

Officials in the securities industry anticipate that more firms will try to revise their customer agreements after this decision.

While some have called this a significant step backwards for customers, others are not so sure. While the ruling does threaten most securities class-actions, the panel does not make the law and so this decision is unlikely to affect far-reaching law.

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The terms of a proposed class action settlement call for Merrill Lynch to pay $40 million to settle claims brought by approximately 1,400 brokers regarding deferred compensation that Merrill Lynch allegedly refused to pay the brokers after its merger with Bank of America.

Despite the large price tag, however, the proposed settlement may still leave claims with roughly 2,000 brokers unsettled, according to MSN Money. The brokers who are not party to the class action settlement would be left to privately pursue their claims against Merrill Lynch. The proposed settlement may still leave roughly 2,000 brokers to battle privately against the brokerage.

What is deferred compensation?

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Since the United States Supreme Court’s ruling on AT&T Mobility v. Concepcion, many consumers across the nation have found it difficult to enforce their right to litigation. The Supreme Court maintained that, since arbitration is a superior means of solving disputes, the arbitration clauses many companies are adding to their consumer contracts are enforceable.
Many consumers disagree. The arbitration clauses which more and more companies are adding to their consumer contracts require consumers to give up their right to litigation. Instead, any dispute must be handled in arbitration. This is unfair to consumers as it prevents class actions, thereby severely decreasing the damages that can be awarded and making it less likely that many consumers who suffered only a small financial loss will pursue their grievance at all. Arbitrations are also handled by a company hired by the defendant, often making it more difficult for prosecuting consumers to get a fair hearing. We stongly advise consumers not sign arbitration agreements when making large purchases for items such as for cars or RVs. In those types of cases consumers have the leverage to say no to arbitration.

Many judges have found their hands tied by this Supreme Court decision and forced consumers into arbitration with the companies with which they signed a contract. The Washington State Supreme Court, on the other hand, has recently ruled in favor of the consumer in Gandee v. LDL Freedom Enterprises Inc. In the first such case to reach the Washington Supreme Court since the Concepcion decision, the Court affirmed the Pierce County Superior Court’s ruling which denied the Defendant’s motion to compel arbitration.

In this case, the defendant, a debt adjusters company, had provided a contract with an arbitration clause which went further than merely requiring arbitration. It also required said arbitration to be handled in Orange County, California, rather than the consumers’ home state of Washington; drastically shortened the consumers’ statute of limitations from the normal 4 years to a mere 30 days; and threatened that, if the consumers sued and lost, they would be responsible for all of the Defendant’s attorneys fees and legal costs.

The Gandees challenged the arbitration clause, saying that it is unconscionable and unenforceable under Washington contract law. The trial court agreed and the Defendants appealed the decision, putting the case before the Washington Supreme Court, which agreed with the trial court.

The Court held that the terms of the arbitration clause were grossly one-sided and existed to discourage potential claimants from accessing their rights due to the heavy cost burden imposed by the clause. While this may seem to fly in the face of the United States Supreme Court Concepcion decision, the Washington Supreme Court does not seem to think so. The opinion reads, “Concepcion provides no basis for preempting our relevant case law nor does it require the enforcement of Freedom’s arbitration clause.”

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Under the First Amendment to the Constitution and lawyers’ ethics rules, the public and litigants have a right to know about about matters that are resolved in our court and litigation system. For instance a car dealer who repeatedly engages in consumer fraud, bait and switch and false advertising or who regularly sells lemon cars should not be able to hide litigation about its misconduct from the public though use of confidential settlement agreements. This is particularly true because the Supreme Court has allowed contracts of adhesion to force consumers to arbitrate claims in secret forums against big business such as car dealers and other businesses such as cell providers and cable television companies. The combination of secret arbitration proceedings and of defendants using confidentiality clauses in settlement agreements to hide misconduct that has been exposed through litigation is keeping misconduct by many businesses secret.

In a recent case our firm litigated a so called pro-consumer rights law firm that regularly litigates consumer fraud cases on behalf of consumer victims used such a confidentiality clause to refuse to cooperate and force us to go to court to uncover the details of repeated false advertising engaged in by a business whose pattern of misconduct had already been exposed through extensive litigation. This so called pro-consumer rights law firm had documents that were not publicly available which put the lie to false testimony provided by the owners of the deceptive business. These lawyers in this firm, who have a practice that should make them sympathetic to protecting consumer rights and freedom to obtain information about public lawsuits, participated in trying to hide the very misconduct that they had litigated to expose. This type of conduct according to a recent Chicago Bar Association ethics advisory opinion violates lawyer ethics rules.

At the request of Lubin Austermuehle’s long time co-counsel Dmitry Feofanov of ChicagoLemonLaw.com , the Chicago Bar Association just issued the below ethics advisory opinion concluding that use of certain confidentiality provisions in consumer rights, class action and other important litigation are unethical under Illinois attorney ethics rules. These same rules apply in many other states. There has been a recent trend among defendants to demand these confidentiality provisions.

You can click here for a copy of the opinion.

Below is the full text of this important advisory opinion in full:

Chicago Bar Association
Informal Ethics Opinion 2012-10
Committee on Professional Responsibility
Opinions Subcommittee

The Professional Responsibility Committee of the Chicago Bar Association has
issued the following informal legal ethics opinion as a public service to aid the inquiring
lawyer in interpreting the Illinois Rules of Professional Conduct. The opinion represents
the judgment of a member or members of the Committee and does not constitute an official
act of the Chicago Bar Association. The opinion is not binding upon the Attorney
Registration and Disciplinary Commission or on any court and should not be relied upon
as substitute for legal advice.

The Committee has received the following inquiry:

(1) Is the confidentiality provision of the proposed settlement agreement attached
hereto as Exhibit A ethical under Illinois Rule of Professional Conduct 3.4(f)?
(2) Is the confidentiality provision of the proposed settlement agreement attached
hereto as Exhibit A ethical under Illinois Rule of Professional Conduct 5.6(b)?
(3) May a defendant’s lawyer, as part of settlement discussions, demand that the
settlement agreement include a provision that prohibits plaintiffs counsel
from disclosing publicly available facts about the case on plaintiffs counsel’s
website or through a press release?

Opinion

Inquiry 1: Settlement Agreement Non-Cooperation Provisions and Rule 3.4(f)
Illinois Rule of Professional Conduct 3.4(f) states that a “lawyer shall not. . . request a person
other than a client to refrain from voluntarily giving relevant information to another party” unless
that person is a relative or agent of the client and the lawyer reasonably believes that the person’s interests will not be adversely affected by refraining from disclosure. I I I . R. PROF’L CONDUCT R. 3.4(f) (2010). As the comments to Rule 3.4 explain, the rule is based on the belief that “[fjair competition in the adversary system is secured by prohibitions against destruction or concealment of evidence, improperly influencing witnesses, obstructive tactics in discovery
procedure, and the like.” Id. cmt. 1.

Settlement agreements are not exempt from Rule 3.4(f). S.C Ethics Advisory Comm. Op. 93-20
(1993). Therefore, when negotiating a settlement agreement, a lawyer cannot ethically request
that the opposing party agree that it will not disclose potentially relevant information to another
party. Id. The Committee believes that “another party” in Rule 3.4(f) means more than just the
named parties to the present litigation. Rather, it should be interpreted more broadly to include
any person or entity with a current or potential claim against one of the parties to the settlement
agreement. A more narrow interpretation would undermine the purpose of the rule and the proper functioning of the justice system by allowing a party to a settlement agreement to conceal important information and thus obstruct meritorious lawsuits.

Here, the defendant has proposed a settlement provision that would prohibit the plaintiff from,
among other things, disclosing the “existence, substance and content of the claims” and “all
information produced or located in the discovery processes in the Action” unless “disclosure is
ordered by a court of competent jurisdiction, and only if the other party has been given prior
notice of the disclosure request and an opportunity to appear and defend against disclosure . . .”
That proposed settlement provision therefore precludes the plaintiff from voluntarily disclosing
relevant information to other parties. As a result, it violates Rule 3.4(f) and a lawyer cannot
propose or accept it. I I I . R. PROF’L CONDUCT R. 3.4(f); S.C. Ethics Advisory Comm. Op. 93-20 (1993).

Inquiry 2: Settlement Agreement Confidentiality Provisions and Rule 5.6(b) llinois Rule of Professional Conduct 5.6(b) states that a “lawyer shall not participate in offering or making . . . an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy.” I I I . R. PROF’L CONDUCT R. 5.6(b).There are three main public policy rationales for Rule 5.6(b): (i) to ensure the public will have broad access to legal representation; (ii) to prevent awards to plaintiffs that are based on the value of keeping plaintiffs’ counsel out of future litigation, rather than the merits of plaintiffs case; and (iii) to limit conflicts of interest.

By its own terms, Rule 5.6(b) plainly applies to direct restrictions on the right to practice law.
Moreover, certain indirect restrictions on the right to practice law violate Rule 5.6(b) as well,
namely, a lawyer agreeing not to bring future claims against a defendant, and a number of ethics
authorities have determined that some confidentiality provisions in settlement agreements violate
Rule 5.6(b).

According to the American Bar Association’s Ethics Opinion 00-417, a provision in a settlement
agreement that prohibits a lawyer’s future “use” of information learned during the litigation
violates Rule 5.6(b), because preventing a lawyer from using information is no different than
prohibiting a lawyer from representing certain persons. ABA Standing Comm. on Ethics &
Prof 1 Responsibility, Formal Op. 00-417 (2000). That same opinion further determined that a
settlement provision that prohibits a lawyer’s future “disclosure” of such information generally is
permissible, because without client consent the lawyer already generally is foreclosed from
disclosing information about the representation. Id.

However, not all limitations on the disclosure of information are ethical. Rather, as several
authorities have stated, whether a settlement provision restricting a lawyer’s “disclosure” of
information violates Rule 5.6(b) depends on the nature of the information. Numerous ethics
authorities have determined that settlement provisions may prohibit a party’s lawyer from
disclosing the amount and terms of the settlement (provided that information is not otherwise
known to the public), because that information generally is a client confidence and consequently
is required by the rules of professional conduct to be kept confidential absent client consent.
D.C. Bar Ethics Op. 335 (2006); N.Y. State Bar Ass’n Comm. on Prof 1 Ethics Op. 730 (2000);
N.D. State Bar Ass’n Ethics Comm Op. 97-05 (1997); Col. Bar Ass’n Ethics Comm. Op. 92 (1993); N.M. Bar Ass’n Advisory Ops. Comm. Op. 1985-5 (1985). On the other hand, ethics
authorities have found that a settlement agreement may not prohibit a party’s lawyer from disclosing information that is publicly available or that would be available through discovery in
other cases. D.C. Bar Ethics Op. 335 (2006); N.Y. State Bar Ass’n Comm. on Prof 1 Ethics Op.
730 (2000); N.D. State Bar Ass’n Ethics Comm. Op. 97-05 (1997).

Based on the foregoing authority, the Committee believes that under Rule 5.6(b), a settlement
agreement may not prohibit a party’s lawyer from using information learned during the instant
litigation in the future representation of clients. The Committee agrees with the American Bar
Association that prohibiting a lawyer from using such information essentially is no different than
prohibiting a lawyer from representing certain clients in the future, and thus such a settlement
provision is an impermissible restriction on the practice of law in violation of Rule 5.6(b).
In addition, the Committee believes that pursuant to Rule 5.6(b) a settlement agreement may not
prohibit a party’s lawyer from disclosing publicly available information or information that
would be obtainable through the course of discovery in future cases. The Committee agrees with
the District of Columbia Ethics Committee, and other ethics authorities cited above, that drawing
such a line strikes an appropriate balance between the genuine interests of parties who wish to
keep truly confidential information confidential and the important policy of preserving the
public’s access to, and ability to identify, lawyers whose background and experience may make
them the best available persons to represent future litigants in similar cases.

Applying those principles here, the Committee believes that the settlement provision as currently
drafted does not comply with Rule 5.6(b). While it is permissible for the settlement agreement to
prohibit the disclosure of the “substance, terms and content of the settlement agreement
(assuming that information is not otherwise publicly known), the settlement agreement violates
Rule 5.6(b) because it broadly forecloses the lawyer’s disclosure of information that appears to
be publicly available already, such as the fact that a lawsuit was filed and certain claims were
asserted, as well as other information that could be obtained (and in fact was obtained) in
discovery. The settlement agreement therefore should be re-written to permit the lawyer’s use of
information learned during the dispute and to permit the lawyer’s disclosure of publicly available
information and information that would be available through discovery in other litigation.
Inquiry 3: Settlement Agreement Restrictions on Attorney Advertising and Rule 5.6(b)
Based on the principles discussed above, the Committee believes that under Rule 5.6(b), a
settlement agreement may not prohibit a party’s lawyer from disclosing publicly available facts
about the case (such as the parties’ names and the allegations of the complaint) on the lawyer’s
website or through a press release. See, e.g., D.C. Bar Ethics Op. 335 (2006).

Dated: February 12,2013
CHICAGO BAR ASSOCIATION
PROFESSIONAL RESPONSIBILITY COMMITTEE
OPINIONS SUBCOMMITTEE

EXHIBIT A – Proposed Confidentiality Provision in Settlement Agreement
8. Plaintiff and his counsel agree that the existence, substance and content of the
claims of the Action, as well as all information produced or located in the discovery processes in
the Action shall be completely confidential from and after the date of this Agreement. Similarly,
the existence, substance, terms and content of this Agreement shall be and remain completely
confidential. Plaintiff shall not disclose to anyone any information described in this paragraph,
except: (a) if disclosure is ordered by a court of competent jurisdiction, and only if the other
party has been given prior notice of the disclosure request and an opportunity to appear and
defend against disclosure and/or to arrange for a protective order; (b) Plaintiff may disclose the
contents of this Agreement to his attorneys, accounting and/or tax professionals as may be
necessary for tax or accounting purposes, subject to an express agreement to become obligated
under and abide by this confidential and non-disclosure restriction; and (c) Plaintiff may disclose
that the Action has been dismissed.

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Class actions have become increasingly more common in recent years as attorneys are choosing to represent businesses in complex litigation on a contingent fee basis, whereby they do not collect any fees until the plaintiff is successful in its claim.

Contingency class action business litigation is common in massive civil lawsuits involving allegations of unsafe pharmaceuticals, medical malpractice, asbestos claims, trademark infringement, and consumer fraud, to name a few. Most recently class action lawsuits have been filed against a number of large banks and financial institutions regarding allegations of fraudulent benchmark interest rates.

Advantages of Class Action

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When things go wrong in the operating room, it can sometimes be difficult to discern who the real perpetrator is. In the case of thousands of hip implants designed and sold by Johnson & Johnson, the issue is with the company producing and selling the implants, not the hospital or the doctor. Andrew Ekdahl, appointed in 2011 to head the company’s troubled DePuy Orthopaedics division after the flawed implant had been recalled, tried at first to say that it was not the design that was flawed. Rather, he argued that the surgeons were not implanting them correctly.

However, there is much evidence which allegedly points to the contrary. Before it was sold in the U.S., the device (the Articular Surface Replacement, or A.S.R.) was used in other countries for an alternative hip replacement procedure called resurfacing. It was not used in the United States because the Food and Drug Administration would not pass it due to concerns about “high concentration of metal ions” found in the blood of patients who had received the device.
Mr. Ekdahl, head of the marketing team in charge of the device at the time, failed to disclose this information when marketing the device outside of the United States. When a news article appeared last year about the FDA’s ruling, Mr. Ekdahl issued a statement that any implication that the FDA had determined there were safety issues with the A.S.R. was “simply untrue”. In 2009, the FDA was still asking the company for more safety information regarding the hip implant version which was being used in the United States.

Since the A.S.R.’s introduction to the U.S. in 2005, more than 10,000 lawsuits have been filed against DePuy regarding the device. The first of these cases to go to trial is currently being fought in court in Los Angeles. Recently, portions of Mr. Ekdahl’s videotaped testimony was shown for the jury. In the video, when pressed as to whether DePuy decided to recall the A.S.R. due to safety issues, Ekdahl insisted that the company did it “because it did not meet the clinical standards we wanted in the marketplace.”

Despite that assertion, Mr. Ekdahl and other DePuy marketing executives all allegedly publicly stated at the time that the device was performing extremely well. Internal documents on the other hand, conflict with those statements. The documents have recently been made available to the public as a result of the litigation.

Included in these documents is a statement made in 2008 by Dr. William Griffin, a surgeon who served as one of DePuy’s top consultants. He allegedly told Mr. Ekdahl and two other DePuy marketing officials that he had concerns regarding the cup component of the A.S.R. and that he believed it should be “redesigned”.

Before the device was recalled in 2010, DePuy was aggressively promoting it in the U.S. as a breakthrough device and implanting it into thousands of patients. Yet internal DePuy projections estimated that it would allegedly fail in 40% of patients within five years, a rate eight times higher than normal.

According to Mr. Ekdahl’s testimony, he did participate in a meeting that resulted in a proposal to redesign the A.S.R.’s cup, but the plan was dropped. The reasoning used was that sales of the device did not justify the expense.

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While the internet boom led to a lot of money in a very short amount of time for many people and businesses, it is important to remember that developing business and making business deals are two very different things. The makers of Dragon Systems, a company that sold speech recognition software, learned this the hard way after they sold the company to Lernout & Hauspie in exchange for $580 million in Lernout stock. The deal was made in 2000 and, in 2001, Lernout’s accounting was exposed as a huge fraud. The company collapsed into bankruptcy, taking with it Dragon’s shareholders, including James and Janet Baker, the founders of Dragon and owners of 51% of its stock.

Since then, the Bakers have spent the better part of the past 12 years in litigation against several parties, taking about $70 million in court. In 2009, they turned their legal sights on Goldman Sachs, who had helped negotiate the deal. According to the Bakers, the advice they were given came from a team of four investors who they referred to as the “Goldman 4”. Their testimony presented this team as a group of inexperienced young bankers who had failed to properly perform their jobs. Their inadequacies allegedly cost the Baker’s a fortune while making a pretty $5 million for Goldman Sachs.

The Goldman Sachs side however, tells a very different story. Their financial engagement letter, which was heavily negotiated by high-powered lawyers on both sides, required that it provide nothing more than “financial advice and assistance in connection with the transaction”. As an investment bank, its job did not include that kind of research and due diligence. According to Goldman Sachs, that part of the deal was up to Dragon and its accountants. The firm was responsible only for coordinating the sale, negotiating the price and evaluating growth prospects for Lernout.

In its briefs, Goldman refuted the depiction of the “Goldman 4”. During the trial, the firm provided testimony saying that the Bakers were in a rush to sell Dragon, in part because it was in financial trouble. (Dragon was later sold out of the Lernout bankruptcy for $33 million). Goldman Sachs also pointed out that there were warning signs about Lernout, including news reports about Lernout’s questionable accounting practices. Goldman even provided a memo to Dragon warning that, for these reasons, it should conduct extensive research on Lernout before making the deal.

One of the “Goldman 4”, Richard Wayner, testified voluntarily in order to clear his name. He testified that, after Goldman Sach’s memo warning Dragon about the possible risks involved in selling to Lernout, he had “a very heated conversation” with Ellen Chamberlain, Dragon’s CFO. In this conversation, Chamberlain allegedly said that “Dragon did not want to do this additional level of detail.”

Other problems included Dragon choosing to take an all-stock deal instead of the standard half-stock and half-cash. This was arranged during a meeting which did not include Goldman Sachs (the bank says it was never invited, whereas the Bakers called the bank a no-show). Once the stock was received, the Bakers allegedly did not take steps to hedge the Lernout stock they received, even after they were advised to do so.

After 16 days of trial, the jury sided with Goldman Sachs on all counts and also found that the Bakers had breached their fiduciary duties to the board in failing to inform it of Lernout’s issues.

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