Discrimination plaintiffs can sue class-action lawyers for fraud

The Court of Appeals reinstates a class action lawsuit filed by employment discrimination victims who claimed their attorneys sold them up the river by signing a separate $7.5 million deal with management as a means to settle the cases quickly.

The case is Johnson v. Nextel Communications, decided on September 26. Here's what happened: 587 Nextel employees wanted Leeds, Morelli & Brown, a Long Island law firm that specializes in employment discrimination cases, to represent them in their discrimination claims. The law firm then signed a $7.5 agreement with Nextel. In exchange for this money, Leeds Morelli would have to do the following: (1) persuade its clients en masse to abandon their legal and administrative proceedings against Nextel, abandon their right to a jury trial and accept an expedited mediation/arbitration and (2) allow Leeds Morelli to work as a Nextel consultant for the next two years once their clients' claims are resolved, a deal that would no doubt conflict out that law firm from representing any more Nextel clients. As the Second Circuit (Winter, Hall and Cederbaum [D.J.]) notes, "none of the payments were conditioned on recovery by any of [Leeds Morelli's] clients."

So Leeds Morelli is serving two masters: their discrimination clients and Nextel, who employed the clients. The clients sued Leeds Morelli for, among other things, fraud, legal malpractice and breach of fiduciary duty to its clients. The victims of this double-sided deal say that Leeds Morelli did not share all the details of its deal with Nextel. They also sue Nextel for aiding an abetting breach of fiduciary duty. The Court of Appeals says the plaintiffs state a claim, and the lawsuit thus moves forward to discovery.

The Second Circuit says this deal with Nextel stinks and creates a massive conflict of interest by inducing the law firm to settle its clients' cases in exchange for $7.5 million in an "irresistible incentive" from the very employer its clients were trying to sue. Judge Winter outlines the many ways that Leeds Morelli would collect all this money by getting its clients to sign over their rights against Nextel. "Leeds, Morelli & Brown was being paid by Nextel in effect to ignore its duty to represent clients as individuals with differing claims and interests that might require differing amounts of time and preparation vigorously to pursue a recovery." No doubt the Second Circuit thinks this deal with Leeds Morelli was unethical.

The Court says there cannot be informed consent here; the clients cannot "knowingly" waive their objections to any conflict of interest. The Circuit says that, in light of its relationship with Nextel, Leeds Morelli could not have given its clients independent advice as to whether to sign their settlement agreements with Nextel. For these clients to fully understand the multiple conflicts of interest such that they could waive the conflict, they would have to consult with another attorney to explain it all to them. By definition, the Court says, this cannot be informed consent.