April 29, 2019 / 9:05 PM / 3 months ago

In NFL ruling, 3rd Circuit upholds broad – but not limitless – power for class action judges

(Reuters) - When the 3rd U.S. Circuit Court of Appeals heard arguments last February by litigation funders protesting trial court rulings that voided their contracts with retired pro football players, the appellate panel was explicitly worried about how to define the authority of judges overseeing mass litigation. Can judges presiding over multidistrict litigation or class actions control parties who aren’t even in the cases before them? Can trial courts restrict how plaintiffs use money they’ve been awarded in litigation?

The 3rd Circuit answered those big questions on Friday, in a remarkably straightforward opinion (2019 WL 1868828) written by Chief Judge Brooks Smith for a panel that included Judges Michael Chagares and Stephanos Bibas. The court held that trial judges have broad authority under the All Writs Act and Rule 23 of the Federal Rules of Civil Procedure to issue orders protecting the integrity of their own previous rulings, even if those orders impact parties outside of their cases.

As my colleague Nate Raymond reported Friday, the 3rd Circuit ruled that U.S. District Judge Anita Brody of Pennsylvania was within the bounds of her power when she voided contracts in which NFL retirees, who sued the NFL over alleged neurological injuries, assigned litigation funders a right to seek money from the claim administrator supervising payouts in the class action.

“Under the All Writs Act and Rule 23, the district court had authority to enjoin behavior by third parties to the extent necessary to effectuate and preserve the integrity of its prior orders,” the opinion said. And because Judge Brody signed an order approving a settlement agreement barring ex-players from assigning their claims, the 3rd Circuit said, she correctly exercised her power to void provisions that threatened to undermine her order.

But importantly, the appeals court also said Judge Brody’s power has limits. The trial judge, you may recall, voided all contracts between ex-players and most litigation funders – including contracts in which funders only obtained a right to repayment after players received their awards, rather than a right to seek repayment directly through the claims process.

Judge Brody had ruled that she had authority to void even those contracts as a fiduciary for class members. The 3rd Circuit, however, said she could only act to enforce the settlement agreement’s provision barring players from assigning litigation funders a right to seek money from the claims administrator. Judge Brody, the appeals court held, exceeded her power when she acted to stop litigation funders from demanding repayment outside of the NFL case from players who received cash advances.

“Once the funds are disbursed to the players, the district court’s power over the funds — and any contracts affecting the funds—is at an end,” the 3rd Circuit said. “The court did not have the authority to void (players’) other obligations under the cash advance agreements, particularly without affording the lenders notice and a hearing.”

In essence, according to the 3rd Circuit, judges overseeing class actions can control how settlement money is disbursed but their authority ends with payouts to plaintiffs. In a relatively uncharted area of the law, that seems like a sensible line to draw. In combination with the 9th Circuit’s decision earlier this year in the Volkswagen clean diesel case, upholding trial judges’ authority over class action fee awards in multidistrict litigation, the 3rd Circuit decision confirms that MDL judges have tremendous leeway to make and enforce the rules of the cases they’re overseeing. But the 3rd Circuit clarifies that their power ends at the border of those cases.

The ruling could also have implications for litigation funders that advance money to plaintiffs awaiting settlement payouts.

As the 3rd Circuit explained, hundreds of NFL retirees entered into litigation funding deals in which they accepted high-interest cash advances on their anticipated settlement recoveries. The specific language of the agreements in the NFL case varied, but litigation funders generally describe their products as non-recourse cash advances that don’t have to be repaid if a plaintiff does not collect settlement money. Funders contend these advances are not subject to state restrictions on interest rates because they are not technically loans. (One of the litigation funders that challenged Judge Brody’s orders in the NFL case, RD Legal, just prevailed in a New Jersey state court dispute over whether an advance to a 9/11 plaintiff was, in fact, a loan.)

Class counsel in the NFL case, represented at the 3rd Circuit by New York University law professor Samuel Issacharoff, asserted at oral argument that funding agreements are “disguised” to allow litigation funders to get around state interest rate caps. In particular, Issacharoff said that funders include provisions in which plaintiffs assign them a right to settlement proceeds to evade loan regulations.

The 3rd Circuit didn’t reach a conclusion about the good faith of the assignment provisions in holding that Judge Brody had the authority to void those clauses but can’t stop litigation funders from attempting to enforce their contracts with ex-players outside of the NFL litigation. Though the appeals court said the validity of funding contracts will have to be decided through case-by-case fact-finding in litigation or arbitration, funders took that outcome as a win. In an email statement, Peter Buckley of Fox Rothschild said his client, the litigation funder Thrivest, feels “vindicated” by the 3rd Circuit decision, “especially as it concerns our client’s contract and arbitration rights.”

But I suspect that the next time a big personal injury MDL is resolved through a class action settlement, class counsel will include a more expansive no-assignment provision to curtail litigation funding. And if funders offer plaintiffs advances without assignment provisions, you can expect those agreements to be challenged under regulations restricting interest rates.

No future MDL or class action judge will face the exact same facts as Judge Brody did in the NFL case. But after the 3rd Circuit’s ruling, they’ll have a better idea of where their authority ends.

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