Huber v. Taylor , 469 F.3d 67 ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
10-31-2006
Huber v. Taylor
Precedential or Non-Precedential: Precedential
Docket No. 05-1757
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 05-1757
RONALD L. HUBER; WILLIAM J. AIRGOOD;
ANTHONY DEFABBO; JOHN DINIO;
ERNEST GISHNOCK; JOHN BIDLENSCIK;
HILMA MULLINS; WILLIAM DEEM,
Appellants
v.
ROBERT G. TAYLOR, II; ROBERT G. TAYLOR, II, P.C.;
CLETUS P. ERNSTER, III; GEORGE E. CIRE, JR.;
TAYLOR & CIRE; TAYLOR & ERNSTER PC;
ROBERT A. PRITCHARD;
CHRISTOPHER FITZGERALD;
LAW OFFICES OF ROBERT A. PRITCHARD;
PRITCHARD LAW FIRM, PLLC; JOSEPH B. COX, JR.;
JOSEPH B. COX, JR., LTD.; COX AND COX, L.L.P.;
R. G. TAYLOR, II, P.C.; J. ROBERT DAVIS, JR.;
TAYLOR, DAVIS & ERNSTER, P.C.
On Appeal from the United States District Court
for the Western District of Pennsylvania
District Court No. 02-cv-00304
District Judge: Honorable Arthur J. Schwab
Argued on January 12, 2006
Before: SCIRICA*, Chief Judge, FUENTES and ROTH**,
Circuit Judges
(Opinion Filed October 31, 2006)
Samantha L. Southall, Esquire
Nicole Tuman, Esquire
Esther S. Trakinski, Esquire (ARGUED)
Cohen Pope
1633 Broadway
New York, NY 10019
Counsel for Appellants
*This case was argued before the panel of Judges Roth,
Fuentes, and Rosenn. As Judge Rosenn passed away on
February 7, 2006, Chief Judge Scirica has been added to the
coram.
**Judge Roth assumed senior status on May 31, 2006.
2
Howard M. Klein, Esquire
Stephen R. Weaver, Esquire
Jeannette M. Brian, Esquire
Conrad, O’Brien, Gellman & Rohn
1515 Market Street, 16th Floor
Philadelphia, PA 19102-1916
Counsel for Appellees Robert G. Taylor, II,
Robert G. Taylor, II, P.C. and R. G. Taylor, II,
P.C.
William M. Wycoff, Esquire
J. Alexander Hershey, Esquire
Thorp, Reed & Armstrong, LLP
301 Grant Street
One Oxford Centre, 14th Floor
Pittsburgh, PA 15219
Counsel for Appellees Ernster, Cire and Davis
Kevin L. Colosimo, Esquire
Thorp, Reed & Armstrong, LLP
301 Grant Street
One Oxford Centre, 14th Floor
Pittsburgh, PA 15219
Counsel for Appellees Pritchard, Fitzgerald,
Law Offices of Robert A. Pritchard and
Pritchard Law Firm, PLLC
3
Thomas C. DeLorenzo, Esquire (ARGUED)
Marshall, Dennehey, Warner, Coleman & Goggin
1845 Walnut Street, 16th Floor
Philadelphia, PA 19103
Counsel for Appellees Joseph B. Cox, Jr. and
Joseph B.Cox, Jr., Ltd.
Anita B. Weinstein, Esquire
Cozen O’Connor
1900 Market Street
Philadelphia, PA 19103-3508
Counsel for Appellee Cox and Cox L.L.P.
OPINION
ROTH, Cicuit Judge:
This case presents the ironic scenario of class action
plaintiffs’ attorneys who are being sued for breach of fiduciary
duty and related counts by a putative class that the attorneys
themselves formed for asbestos personal injury litigation. For
the reasons stated below, we will vacate the District Court’s
grant of summary judgment to defendant attorneys and its denial
of class certification, and remand this case for further
proceedings consistent with this opinion.
4
I. Background and Jurisdiction
Our case begins in Jefferson County, Mississippi, where
an asbestos personal injury case, captioned Cosey v. E.D.
Bullard Co., No. 95-00069 (Miss. Cir. Ct. Jefferson Cty.), was
commenced in 1995. Mississippi law does not provide for class
actions, but it has liberal joinder rules and a reputation as a
plaintiff-friendly jurisdiction. Accordingly, over the next four
years, several thousand asbestos personal injury plaintiffs were
joined in Cosey, along with more than two hundred defendants.
In 1998, a trial was conducted in Cosey for the cases of twelve
plaintiffs with malignant asbestos-related diseases. Those
twelve Cosey plaintiffs were awarded approximately $48.5
million in damages. The sole attorneys of record for all the
Cosey plaintiffs were Robert A. Pritchard and Christopher
Fitzgerald.
At the time the Cosey verdict was delivered, there were
more than 2,000 other asbestos cases pending in Jefferson
County. The large award in Cosey prompted many companies
with potential asbestos liability to explore settlements. In May
1999, before any settlements were reached, Pritchard brought a
second asbestos personal injury mass action in Mississippi state
court, Rankin v. A-Bex Corp., No. 99-00086 (Miss. Cir. Ct.
Jefferson Cty.),1 in which the Plaintiffs in this suit were joined.
The Plaintiffs, Roland L. Huber, William J. Airgood,
1
In December 1999, Rankin was removed to the federal
District Court for the Southern District of Mississippi as Rankin
v. A-Bex Corp., 1:99-cv-00558-WJG.
5
Anthony Defabbo, John Dinio, Ernest Gishnock, John
Bidlencsik,2 Hilma Mullins, and William Deem, are former
steelworkers from Pennsylvania, Ohio, and Indiana. All eight
Plaintiffs were exposed to asbestos at some point in their
careers. None have developed malignant asbestos-related
disease. All the Plaintiffs except Huber are or were smokers.
Plaintiffs, along with 2,637 other asbestos-exposed individuals
from Pennsylvania, Ohio, and Indiana (collectively the
Northerners) retained counsel in their home states (Local
Counsel) to prosecute their asbestos claims for a 40% retainer
fee.
Local Counsel had previously entered into co-counsel
agreements with Robert G. Taylor II, a Texas attorney involved
in Cosey.3 Taylor had his own client base in Texas but was
looking to expand his asbestos client “inventory.” Taylor
contracted with Local Counsel to serve as co-counsel for any
future asbestos plaintiffs that Local Counsel would represent in
exchange for Taylor receiving between 95% and 97.5% of Local
Counsel’s fees if suit were brought outside of Local Counsel’s
home state, and a smaller amount if suit were brought in the
home state. The agreements between Taylor and Local Counsel
2
We note that there is inconsistency between the case
caption and the documentary record as to the spelling of Mr.
Bidlencsik’s name. In the case caption it appears at
“Bidlenscik,” probably as a result of unfamiliarity with Slovak
names.
3
Taylor was practicing law as Robert G. Taylor II, P.C.
His firm employed defendant Cletus P. Ernster III.
6
provided that, if the asbestos suits were filed in a state other than
Local Counsel’s home state, Texas law would govern the
contingent fee contract.
Taylor’s fee arrangement is key for understanding
Plaintiffs’ case. First, it meant that employment as Local
Counsel could only be profitable as volume, rote work because
Local Counsel would keep only one to two percent of any
client’s recovery. Local Counsel had little incentive to focus on
any particular case. Since many recoveries were in the range of
a few thousand dollars, Local Counsel collected very little from
any particular representation. Second, the fee arrangement
meant that, all things being equal, co-counsel representations
were less profitable to Taylor than representations of direct
clients because of the fee-splitting involved. Third, the
arrangement meant that the one to two percent Local Counsel
cut, when aggregated among all Local Counsel, as it was from
Taylor’s perspective, represented a sizeable amount given the
hundreds of millions of dollars of recoveries.
Taylor himself had entered into upstream co-counsel
agreements with Fitzgerald and Pritchard, who in turn entered
into an upstream co-counsel agreement with Joseph B. Cox, Jr.,4
to negotiate settlements, for which Cox would receive four
percent of all gross settlements. Plaintiffs allege that they were
never informed of the various co-counsel arrangements.
4
Cox was doing business as Joseph B. Cox Jr., P.C. and
as Cox & Cox, LLP. We refer to Taylor, Ernster, Pritchard,
Fitzgerald, Cox, and their respective firms collectively as
“Defendants.”
7
Cox negotiated settlements with asbestos defendants
W.R. Grace, Owens Corning, Fiberboard, and the Center for
Claims Resolution (CCR), an organization created by 19
asbestos defendants to settle asbestos claims. Under the terms
of all the settlements, the payout varied both by level of injury
and by the home state of the claimants. In all the settlements
negotiated by Cox, Northerners received payouts that were
between 2.5 and 18 times lower than those received by plaintiffs
from Mississippi and Texas (Southerners). Northerners, who
joined in the Mississippi actions nonetheless received a larger
settlement than similar asbestos plaintiffs from Pennsylvania,
Ohio, and Indiana usually receive in their home state courts.5
Defendants, in settling these cases for Southerners, did
not have to share their fees with Local Counsel, as they had to
do with Northerners. Plaintiffs allege that the difference in the
settlement payouts to Northerners is attributable to this incentive
of Defendants to allocate a greater percentage of aggregate
settlements to Southerners in order to minimize Local Counsel’s
percentages. This marginal percentage difference becomes
significant in light of the scale of the settlements. The record
contains the approximate or maximum values of eleven of the
5
We note, however, that there was an incentive for
Defendants not to bring suit in Pennsylvania, Ohio, and Indiana.
If suit was brought in the home state of a Local Counsel,
Defendants received a smaller percentage of Local Counsels’
fees, 90% for Pennsylvania and 80% for Ohio and Indiana, as
opposed to 97.5% for Pennsylvania and 95% for Ohio and
Indiana if suit were brought outside of Local Counsels’ home
state.
8
nineteen settlement agreements negotiated by Defendants.6 We
calculate these eleven settlement agreements to total some $400
million. Therefore, on just this portion of the total settlements,
Defendants stood to gain up to $10 million (2.5% of $400
million) at the expense of Northerners (and Local Counsel),
depending on how the settlements were allocated between
Northerners and Southerners.
Defendants reply to this allegation by asserting that the
settlements were not aggregate settlements that they then
allocated as they saw fit. Instead, Defendants claim that the
plaintiffs in the settled cases were presented with offers that
varied for different individuals based on factors such as the type
of injury or asbestos exposure, lifestyle habits like smoking, and
geographic origin. Defendants claim that geographic origin is
an appropriate factor in determining settlement value because
jury verdicts in northern states are traditionally lower than in
southern states and because, in southern courts, jury verdicts for
Northerners are typically lower than for Southerners in their
home state. For the purposes of this appeal, we need not resolve
whether these settlements were aggregated, but we note that
there is language in some of the settlement agreements that
6
These eleven settlements are American Optical, CCR,
Combustion Engineering, Flintkote, Halliburton, Ingersoll-
Rand, Kaiser, Met Life Insurance, Owens-Illinois, Owens-
Corning and Fiberboard, and Uniroyal. The record did not
permit us to calculate the settlement values in the agreements
with 3M, Babcock & Wilson, Garlock, W.R. Grace & Co.-
Conn., Georgia Pacific, Harbison-Walker, LAQ, and
Westinghouse.
9
strongly supports the contention that they were aggregate
settlements.7 Moreover, the very documents Defendants cite in
their brief refer to the settlements as aggregate.8
7
See JA507 (American Optical settlement) (“AO agreed
to pay a total of” $34.25 million and “Met life agreed to pay a
total of” $20 million “in full and final settlement of all claims of
the Pritchard Plaintiffs”); JA528 (CCR settlement) (estimating
CCR’s potential funding obligation); JA630 (Combustion
Engineering settlement) (“In payment of 6,982 Taylor and/or
Pritchard claims, CE agrees to pay $22,438,563.00, allowing
substitutes for disqualified cases.”); JA810 (Kaiser settlement)
(“KACC agrees to settle the claims of all Present Claimants by
paying to Plaintiffs’ Counsel in trust for all the Present
Claimants a total not to exceed” $20.5 million); JA837 (Met
LifeInsurance settlement) (“The maximum funds paid pursuant
to this Agreement shall not exceed” $13.82 million); JA852
(Owens-Illinois settlement) (“. . . in no event shall Owens-
Illinois pay more than” $3 million); JA914 (Uniroyal settlement)
(“In no event shall Uniroyal pay more than a total of $150,000
in settlement of all such Ohio, Indiana, and Pennsylvania
cases.” ).
8
Acknowledgment for Full Release/Non-Malignant-
Pennsylvania, Signed by John Dinio (“. . . these settlements
were part of an aggregate settlement . . .”); Letter of March 31,
2000 from Local Counsel Aimee Manuel to Ernest Gishnock, (“.
. . these may be considered aggregated settlements . . .”); and
Letter of May 14, 2001 from Robert G. Taylor II to William
Deem (“. . . you have authorized settlement negotiations of your
claims in the aggregated.”).
10
After each of the settlement agreements was negotiated,
the Northerners received various disclosures. These disclosures
were made by Local Counsel and by Parapro Enterprises, Inc.,
a paralegal service associated with Taylor. The Northerners
were presented with a release, a check, and a disbursement
sheet. The release was explained orally to Northerners by
Parapro paralegals. The disclosures did not reveal the
settlements’ material terms or the nature of Defendants’
involvement in the cases. The written disclosures stated that
further information about the settlements was available on
request. The record does not state whether any of the Plaintiffs
sought to avail themselves of this information.9 Plaintiffs have
introduced evidence that neither the Parapro paralegals nor
Local Counsel were themselves aware of the full terms of the
settlements or even had access to the complete settlement
agreements.
The Plaintiffs brought suit in the Western District of
Pennsylvania on behalf of a putative class of Northerners.
Plaintiffs have not sued their Local Counsel or Parapro.
Plaintiffs alleged several counts, including breach of fiduciary
duty, aiding and abetting breach of fiduciary duty, and
conspiracy to breach fiduciary duty. Specifically, Plaintiffs
have alleged that Defendants breached their fiduciary duties of
undivided loyalty and candor. Plaintiffs allege that Defendants
owed them a fiduciary duty as their counsel; that Defendants
9
An internal Parapro memorandum indicates that
Plaintiff Bidlencsik had asked whether plaintiffs in “other
states” were getting more than those from Ohio to which the
Parapro representative responded that she did not know.
11
engaged in an undisclosed, multiple representation; that
Defendants had a conflict of interest regarding their multiple
representation because of the fee arrangements that gave
Defendants a larger percentage of Southerners’ recoveries than
of Northerners’ and that this created an incentive for Defendants
to negotiate settlements that paid more for Southerners’ claims
than for Northerners’; and that Defendants never gave proper
disclosure of this conflict of interest or of the full terms of the
settlement offers.
The District Court denied Plaintiffs’ class certification
motion for four reasons. First, the District Court found that
individual questions about disclosures, reliance, causation,
damages, and choice of law predominated over issues common
to the class, so the motion for class certification failed to meet
the requirements of FED. R. CIV. P. 23(b). Second, the District
Court also concluded that, because of the predominance of
individual questions, a class action was not the most efficient
way to litigate the matter. Third, the District Court denied class
certification on the ground that the Plaintiffs were not typical of
the putative class of Northerners because six of the eight
Plaintiffs had not qualified for the CCR settlement offer.
Finally, the District Court held that the Plaintiffs were
inadequate class representatives because their interests were no
longer aligned with other Northerners due to the fact that they
were no longer represented by Defendants in asbestos litigation,
unlike other Northerners, and that this would create a conflict of
interests between them and the putative class.
The parties cross-moved for summary judgment. The
District Court denied Plaintiffs’ motion and granted Defendants’
12
motion because it found that Plaintiffs had failed to present
evidence of actual harm or evidence that Defendants’ non-
disclosures were the proximate cause of their harm, both
required elements in all of Plaintiffs’ claims. The District Court
defined the actual harm requirement as a showing of any
evidence that “‘but for’ defendant attorneys’ conduct,
[Plaintiffs] could or would have received more favorable
offers.” The District Court noted that there was record evidence
from representatives of the asbestos defendants that “even
though Pennsylvania, Ohio, and Indiana plaintiffs undoubtedly
received less money than the Mississippi plaintiffs, they still
received higher settlement offers than those normally paid to
asbestos claimants from those states because of the leverage
these northern claimants gained from being joined with the
Mississippi claimants in a Mississippi court.” The District
Court also noted that Plaintiffs’ claims that they would have
received higher settlements were only speculation, as “Plaintiffs
have adduced no evidence that they would have obtained more
favorable offers from any of the other asbestos defendants with
whom they settled their claims.” Finally, the District Court
found that plaintiffs have failed to present evidence from which
a reasonable person could conclude that defendants[’] alleged
non-disclosures proximately caused any plaintiff to accept
settlements they would not have otherwise accepted. Rather, the
evidence shows that plaintiffs either were given or had direct
access to such information but chose to remain unaware, and at
best did not recall basic facts surrounding when, where and if
they read the documentation presented to them explaining the
settlement.
Plaintiffs have appealed both the denial of class
13
certification and summary judgment in respect to three claims:
breach of fiduciary duty, aiding and abetting a breach of
fiduciary duty, and civil conspiracy to breach of fiduciary duty.
Plaintiffs have not appealed from the grant of summary
judgment to Defendants on claims of fraud, conspiracy to
defraud and convert, legal malpractice, conversion, and
violation of deceptive trade practices laws.
The District Court had subject matter jurisdiction under
28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. §
1291. We undertake a plenary review of grants of summary
judgment. Gottshall v. Consol. Rail Corp., 56 F.3d 530, 533 (3d
Cir. 1995). Summary judgment is only appropriate if there are
no genuine issues of material fact and the movant is entitled to
judgment as a matter of law. FED. R. CIV. P. 56(c). In reviewing
the District Court’s grant of summary judgment, we view the
facts in a light most favorable to the non-moving party.
Gottshall, 56 F.3d at 533.
II. Discussion
A. Choice of Law
The lynchpin of the District Court’s decisions on class
certification and summary judgment was its determination that
all of Plaintiffs’ causes of action required a showing of
causation and actual injury. The District Court noted that the
putative class had individualized injuries, which impeded class
certification, while the individual Plaintiffs had not shown any
14
personal injury, thereby defeating their action. We agree with
the District Court that, if Plaintiffs must show causation and
actual injury, they lose on both parts of their appeal. We
disagree with the District Court, however, as to whether the
relevant law requires a showing of causation and actual injury.
The District Court’s determination that actual injury was
required in all of Plaintiffs’ causes of action was not based on an
analysis of any particular state’s laws, even though this is a
diversity action. In a diversity action, the court “must apply the
choice of law rules of the forum state to determine what
substantive law will govern.” Klaxon Co. v. Stentor Elec. Mfg.
Co., 313 U.S. 487, 496 (1941). This action was commenced in
the United States District Court for the Western District of
Pennsylvania, so the District Court properly turned to
Pennsylvania’s choice of law rules.
Before a choice of law question arises, there must first be
a true conflict between the potentially applicable bodies of law.
On Air Entm’t Corp. v. Nat’l Indem. Co., 210 F.3d 146, 149 (3d
Cir. 2000). If there is no conflict, then the district court sitting
in diversity may refer interchangeably to the laws of the states
whose laws potentially apply. Id. If there is a conflict between
the potentially applicable laws, then Pennsylvania uses the
“significant relationship” test of the Restatement (Second) of
Conflicts of Laws. Griffith v. United Air Lines, Inc., 203 A.2d
796, 801-06 (Pa. 1964); Troxel v. A.I. duPont Inst., 636 A.2d
1179, 1180-81 (Pa. Super. 1994).
In this case, the District Court determined that there was
no conflict of laws between Ohio, Indiana, and Pennsylvania as
15
to the requirement of harm and thus stated that under
Pennsylvania’s choice of law rules it did not need to determine
which law applied. The District Court did not, however, give
any consideration to Texas law.10
Plaintiffs did not object to the District Court’s choice of
law ruling either at trial or in their original appellate briefs.
Plaintiffs contended, however, that the District Court erred in
requiring causation (including reliance) and actual injury as
elements of their breach of fiduciary duty claims. In support of
this contention, Plaintiffs cited cases from Texas and other
jurisdictions.
To resolve the confusion about whether actual injury is
required for a breach of fiduciary duty claim, we requested letter
memoranda from the parties. The letter memoranda addressed
the questions of fiduciary duty, what jurisdiction’s law governed
the fiduciary duty at issue here, and whether the law of that
jurisdiction or jurisdictions required a showing of actual injury
to sustain an action for breach of fiduciary duty.
10
We are puzzled by this failure to consider Texas law
since one of Plaintiffs’ claims, not a part of this appeal, was for
violation of the deceptive trade practices laws of Texas, Ohio,
Pennsylvania, and Indiana, and Attachment I to Plaintiffs’
Supplemental Brief in support of their motion to the District
Court for class certification was entitled “Elements of Plaintiffs’
Causes of Action Under Texas Law.” Moreover, Plaintiffs
agreements with Local Counsel provide that the agreements “shall be
enforced and interpreted pursuant to the laws of Texas.”
16
1. Plaintiffs Did Not Waive the Choice of Law Issue
Defendants contend that the District Court correctly
decided the choice of law question and that Plaintiffs have
waived the issue in any case. Generally, failure to raise an issue
in the District Court results in its waiver on appeal. Bagot v.
Ashcroft, 398 F.3d 252, 256 (3d Cir. 2005). There are
exceptions to this rule, however. First, there are certain issues,
such as subject matter jurisdiction, which cannot be waived.
E.g., United States v. Cotton, 535 U.S. 625, 630 (2002).
Second, even if an issue was not raised, “[t]his Court has
discretionary power to address issues that have been waived.”
Bagot, 398 F.3d at 256. Indeed, we have been reluctant to apply
the waiver doctrine when only an issue of law is raised. See,
e.g., id.; In re Am. Biomaterials Corp., 954 F.2d 919, 928 (3d
Cir. 1992). “This court may consider a pure question of law
even if not raised below where refusal to reach the issue would
result in a miscarriage of justice or where the issue's resolution
is of public importance.” Loretangeli v. Critelli, 853 F.2d 186,
189-90 n.5 (3d Cir. 1988).
When considering waiver issues, we are also always
mindful of the prophylactic and prudential origins of the
doctrine. As the Supreme Court noted in Hormel v. Helvering,
the waiver doctrine is
essential in order that parties may have the opportunity
to offer all the evidence they believe relevant to the
issues . . . [and] in order that litigants may not be
surprised on appeal by final decision there of issues upon
which they have had no opportunity to introduce
17
evidence.
312 U.S. 552, 556 (1941). The corollary of Hormel is that we
are less inclined to find a waiver when the parties have had the
opportunity to offer all the relevant evidence and when they are
not surprised by issues on appeal.
In this case, we do not believe that Plaintiffs waived the
choice of law issue. We conclude instead that the District Court,
in determining that “Defendant attorneys assert, and plaintiffs do
not disagree that, for purposes of this summary judgment
motion, no true conflict of laws exists,” overlooked the fact that,
while the parties agreed that there was no true conflict of laws,
they disagreed as to what law should apply.11 The issue of
which state’s law to apply is inherent in the parties’ positions
throughout this case. Defendants claim that the law in all the
relevant jurisdictions requires a showing of actual harm for
breach of fiduciary duties, while Plaintiffs assert that it does not
when the remedy sought is disgorgement, citing to Texas law.
11
See, e.g., Appellants’ Brief at 39 n.11 (citing Model
Rule of Professional Conduct in text and then citing Mississippi,
Texas, Pennsylvania, Indiana, and Ohio rules of professional
conduct in footnote as in accord); Appellants’ Brief at 40 n.12
(same). See also Attachment I to Plaintiffs’ Supplemental Brief
in Support of Their Motion for Class Certification, “Elements of
Plaintiffs’ Causes of Action Under Texas Law,” filed before the
District Court on March 2, 2004, included in II Joint Appendix
474.
18
Moreover, even if choice of law issues are waiveable,12
and Plaintiffs failed to raise the issue before the District Court
and on appeal, the exceptions to the waiver doctrine would
apply here. Plaintiffs’ repeated and insistent citation to Texas
law as providing the governing standard alerted this Court to the
choice of law issue. Because of our concern about this issue,
prior to oral argument we requested letter memoranda on it from
all parties and at oral argument the issue was discussed by them.
Thus, the issue has been fully developed on appeal, and
Defendants have not suffered any unfair surprise or
disadvantage from our concern that we decide the case under the
correct law. Defendants would not have argued their case
differently if Plaintiffs had explicitly raised the issue on appeal.
Indeed, Defendants themselves cited Texas cases at several
12
We have not adopted a consistent rule regarding
whether choice of law issues are waiveable. In Parkway Baking
Co., Inc. v. Freihofer Baking Co., 255 F.2d 641, 646 (3d Cir.
1958) and United States v. Certain Parcels of Land, 144 F.2d
626 (3d Cir. 1944) we held that choice of law questions cannot
be waived. As we noted in Certain Parcels, “The appropriate
law must be applied in each case and upon a failure to do so
appellate courts should remand the cause to the trial court to
afford it opportunity to apply the appropriate law, even if the
question was not raised in the court below.” Id. at 630. In
Neely v. Club Med Mgmt. Servs., 63 F.3d 166, 180 n.10 (3d
Cir. 1995) (en banc), however, we considered the choice of law
question waived. Neely, however, did not specifically overrule
Parkway Baking or even address that case. We need not resolve
the tension between Neely and Parkway because we do not
believe that Plaintiffs waived the choice of law issue.
19
points in their appellate brief for the point that Plaintiffs have
misinterpreted Texas law, rather than arguing that Texas law is
inapplicable. Moreover, the Plaintiffs’ clearly raised the issue
in the District Court as evinced by their Supplemental Brief to
the District Court in support of their motion for class
certification, which included a five-page attachment entitled
“Elements of Plaintiffs’ Causes of Action Under Texas Law.”
This Supplemental Brief was included on Appeal in Volume II
of the Joint Appendix. Accordingly, even if the issue were to be
considered waived, it still would be appropriate for us to
consider it.
Turning to the conflict of law issue, it is necessary to
examine the law of all the relevant jurisdictions. The District
Court only discussed Pennsylvania, Ohio, and Indiana law in its
choice of law discussion. It did not consider Texas law, even
though Plaintiffs routinely cite Texas caselaw and Texas
Disciplinary Rules of Professional Conduct in their briefs, the
record includes the document entitled “Elements of Plaintiffs’
Causes of Action Under Texas Law,” one of Plaintiffs’ original
causes of action (which has not been appealed) was for breach
of Texas deceptive trade practices law, and Plaintiffs’ contracts
with Local Counsel state that they are to be enforced and
interpreted according to Texas law. Therefore, the most that we
can read from the District Court’s opinion is that Plaintiffs
agreed that there was no conflict among the laws of
Pennsylvania, Ohio, and Indiana, not what Plaintiffs believed
the law in those states to be, much less whether Plaintiffs
believed that the law of those states conflicted with Texas law
or which state’s law should govern.
20
Such a reading is consistent with the substance of the
parties’ arguments. Plaintiffs claim that Texas law should
govern and that Texas does not require a showing of actual harm
for a court to order disgorgement, rather than compensatory
damages, as a remedy for breach of fiduciary duty. Plaintiffs
also contend that, even if Pennsylvania, Ohio, or Indiana law
applies, those states have never addressed the particular scenario
of a suit seeking disgorgement rather than compensatory
damages for a breach of fiduciary duty, but that every other
jurisdiction that has addressed the issue has followed the Texas
rule. The Defendants, in contrast, claim that the law in all the
relevant jurisdictions requires a showing of actual harm.
In view of these positions, our first task is to ascertain
what jurisdiction’s law applies. Following Pennsylvania choice
of law analysis, we must determine if there is a conflict that
necessitates selection of a jurisdiction’s law.
2. There are Multiple Conflicts of Laws
Plaintiffs contend that Texas law governs the fiduciary
duties. Defendants, on the other hand, assert that, if there is a
true conflict, Pennsylvania, Ohio, and Indiana law applies.
Thus, the first question in a Pennsylvania choice of law analysis
is whether there is a true conflict between Texas, Pennsylvania,
Ohio, and Indiana law.
The true conflict question is complicated by the fact that
some states differentiate actions for breach of fiduciary duty by
21
an attorney from legal malpractice and from violation of state
disciplinary rules, while other states equate two or all three
causes of action. There is undoubtedly substantial overlap
among the three, and state courts have not always been precise
in their language when discussing these matters. Nonetheless,
there is a conflict of law on each of Plaintiffs’ claims, although
the conflict and the result it causes varies from claim to claim.
a. Breach of Fiduciary Duty
Under Texas law, “a client need not prove actual
damages in order to obtain forfeiture of an attorney’s fee for the
attorney’s breach of fiduciary duty to the client.” Burrow v.
Arce, 997 S.W.2d 229, 240 (Tex. 1999). Also Yaquinto v.
Sergerstrom, (In re Segerstrom, 247 F.3d 218, 226 n.5 (5th Cir.
2001). The Texas rule accords with the rule adopted in several
other states, the Restatement (Second) of Trusts § 243, the
Restatement (Second) of Agency § 469, and the Restatement
(Third) of the Law Governing Lawyers, §§ 37, 55. It also
comports with the two circuit level decisions on the issue,
Hendry v. Pelland, 73 F.3d 397 (D.C. Cir. 1996) (applying D.C.
law), Frank v. Bloom, 634 F.2d 1245, 1257-58 (10th Cir. 1980)
(applying Kansas law).
Defendants argue that Texas law does require actual
damages for a breach of fiduciary duty claim. This is incorrect.
Texas requires actual damages only if a plaintiff seeks to
recover damages for actual harm. Liberty Mut. Ins. Co. v.
Gardere & Wynne L.L.P., 82 Fed. Appx. 116, 118 (5th Cir.
2003) (under Texas law “[n]ot all forms of recovery require a
client who is suing his attorney to prove that the attorney’s
22
actions caused the client injury . . ..”); Two Thirty Nine Joint
Venture v. Joe, 60 S.W.3d 896, 910 (Tex. App. 2001), rev’d on
other grounds, 145 S.W.3d 150 (“Generally, the proper measure
of damages in a legal malpractice case is that amount of
damages that would have been collectible but for the wrongful
act or omission of the attorney.”) (emphasis added). Thus, in
Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 159
(Tex. 2004), the Texas Supreme Court required causation and an
injury for a legal malpractice claim based, inter alia, on an
alleged breach of fiduciary duty. When only fee forfeiture is at
issue, actual harm need not be proven because “[i]t is the agent’s
disloyalty, not any resulting harm, that violates the fiduciary
relationship and thus impairs the basis for compensation. An
agent’s compensation is not only for specific results but also for
loyalty.” Burrow, 997 S.W.2d at 238.
At first blush, Pennsylvania, Indiana, and Ohio law seem
to indicate that claims for breach of fiduciary duty require
actual harm. Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind. App.
1994); McConnell v. Hunt Sports Enter., 725 N.E.2d 1193, 1215
(Ohio App. 1999); Pa. S.S.J. I.13 § 4.15 (1991).14 Whether these
states would require a showing of actual harm in a situation in
13
Suggested Sample Jury Instructions.
14
Troublingly, the decisions cited by the District Court
for the proposition that the Plaintiffs must show actual injury,
Kituskie v. Corbman, 714 A.2d 1027, 1030 (Pa. 1998) and
Gilman v. Hohman, 725 N.E.2d 425, 428-29 (Ind. App. 2000),
are legal malpractice cases, a form of negligence actions, rather
than fiduciary breach actions.
23
which only disgorgement is requested is, however, an open
question. The issue has never been resolved by these states’
courts. Arguably, they might adopt the well-considered position
of every jurisdiction that has considered the issue, which is to
require harm only for damages, not for the equitable remedy of
disgorgement.
Plaintiffs are currently seeking “disgorgement of
Defendants’ legal fees collected with respect to the Cosey and
Raken actions, as well as compensatory and punitive
damages.”15 Thus, there is not a direct conflict of laws between
Texas and Pennsylvania, Ohio, and Indiana, but there is a
potential conflict of laws. We have found no authority as to
how to treat such a hypothetical conflict of laws, but we will
treat it as if there were an actual conflict.
The end result is the same, however, whether or
not there is a conflict. If Pennsylvania, Ohio, and Indiana
should follow Texas law, there would not be a requirement of a
showing of actual harm in order to maintain an action for
disgorgement for breach of fiduciary duty. On the other hand,
if Pennsylvania, Ohio, and Indiana did not follow the Texas rule,
there would be a conflict, but, as analyzed below in Section
II.A.3, we conclude that Texas law would apply under the
Pennsylvania choice of law rules’ “significant relationship”
15
In this case, disgorgement would likely result in a larger
recovery for Plaintiffs than compensatory damages.
Disgorgement could entail up to 39% of their total recovery
(Taylor’s 97.5% of the 40% contingent fee to Local Counsel),
whereas compensatory damages could be de minimis.
24
analysis.16 Either way, the same rule applies—no showing of
actual harm is required to maintain an action for disgorgement
for breach of fiduciary duty. Thus, even if there is a conflict
here, it does not affect the outcome.
b. Civil Conspiracy to Breach Fiduciary Duties
There might be a conflict of laws regarding the element
necessary to prove a civil conspiracy for breach of fiduciary
duties. In large part, this conflict depends on how one believes
a Texas court would apply Texas civil conspiracy law to Texas’s
limited requirements for breach of fiduciary duty when
disgorgement is sought.
Texas requires both a conspiracy and a breach of
fiduciary duty to maintain a claim of civil conspiracy to breach
fiduciary duties. Finish Line P’ship. v. Kasmir & Krage, L.L.P.,
2000 Tex. App. LEXIS 7744 (Tex. App. 2000). Therefore,
Plaintiffs cannot proceed on their civil conspiracy claim under
Texas law unless they can also proceed on their breach of
fiduciary duty claim, as discussed above.
16
We note that under Pennsylvania choice of law rules’
“significant relationship” analysis, among Pennsylvania, Ohio,
and Indiana, there is not a state with a superior relationship to
this case. Therefore, if Texas law did not apply, we would still
have to determine if there was a conflict among these states’
laws and that seeking certification from three separate state
supreme courts, including two that are not within our Circuit,
could significantly delay resolution of this case.
25
Texas generally requires actual injury for civil conspiracy
claims, Chon Tri v. J.T.T., 162 S.W.3d 552, 556 (Tex. 2005).
However, in light of the absence of an injury requirement for
breach of fiduciary duty and Texas’ definition of civil
conspiracy as “a combination by two or more persons to
accomplish an unlawful purpose or to accomplish a lawful
purpose by unlawful means,” Triplex Commc’ns v. Riley, 900
S.W.2d 716, 720 (Tex. 1995), we think it an open question
whether Texas law requires actual harm for a claim of civil
conspiracy to breach fiduciary duty.
Pennsylvania law appears to require injury for a civil
conspiracy. Goldstein v. Phillip Morris, Inc., 854 A.2d 585, 590
(Pa. Super. Ct. 2004) (listing injury as a necessary element), but
cf. Grose v. P&G Paper Prods. (In re Grose), 866 A.2d 437,
440-441 (Pa. Super. Ct. 2005) (not listing injury as a necessary
element although injury existed). Ohio requires proof of an
underlying claim and actual damages in a claim for civil
conspiracy. Williams v. Aetna Fin. Co., 700 N.E.2d 859, 868
(Ohio 1998). Indiana also requires harm for a civil conspiracy.
Indianapolis Horse Patrol, Inc. v. Ward, 247 Ind. 519, 522 (Ind.
1966); Winkler v. V.G. Reed & Sons, 638 N.E.2d 1228, 1234
(Ind. 1994). As noted above, though, these states have not
addressed the unique situation of a claim for disgorgement for
breach of fiduciary duties. This is an area of unsettled law, but
we believe it a fair presumption that civil conspiracy to breach
fiduciary duties will follow the law for breach of fiduciary
duties, so, as explained above, we will presume a conflict of
laws on the civil conspiracy claim too.
c. Aiding and Abetting Breach of Fiduciary Duties
26
Proof of a breach of fiduciary duty is required to maintain
a claim of aiding and abetting a breach of fiduciary duty. Toles
v. Toles, 113 S.W.3d 899, 917 (Tex. App. 2003); Kline v.
O'Quinn, 874 S.W.2d 776, 786-87 (Tex. App.1994); State v.
Galloway, 2005 Ohio App. LEXIS 4861, **9 (Ohio Ct. App.
2005); Williams v. Aetna Fin. Co., 700 N.E.2d 859, 868 (Ohio
1998); State Bd. of Med. Educ. & Licensure v. Ferry, 94 A.2d
121, 123 (Pa. Super. Ct. 1953). Indiana does not appear to
recognize civil aiding and abetting; that term is used only in
Indiana criminal law. Comm’r v. RLG, Inc., 755 N.E.2d 556,
560-561 (Ind. 2001).
States vary on whether damages are required for such a
claim. Pennsylvania appears not to have such a requirement.
Thompson v. Glenmede Trust Co., 1993 WL 197031 (E.D. Pa.
1993) (aiding and abetting a breach of fiduciary duty does not
require actual harm); but see Koken v. Steinberg, 825 A.2d 723,
732 (Pa. Commw. Ct. 2003) (hesitantly adopting Thompson).
Similarly, Texas only requires an underlying breach of fiduciary
duty, Toles, 113 S.W.3d at 917, which does not require actual
injury. Burrow, 997 S.W.2d at 240. Ohio, however, appears
to require an injury. Williams, 700 N.E.2d at 868 (approving of
the discussion in Halberstam v. Welch, 705 F.2d 472 (D.C. Cir.
1983) (injury required for aiding and abetting claim).
Accordingly, there is a true conflict of laws between Texas and
Pennsylvania on the one hand and Ohio (and Indiana) on
the other as to aiding and abetting a breach of fiduciary duty.
3. Under What Law Were the Fiduciary Duties
Created?
27
Since, as we have noted, there is a conflict of laws,
Pennsylvania law requires us to undertake a “significant
relationship” analysis to determine which jurisdiction’s law
applies. Of the relevant jurisdictions, Texas has by far the most
significant relationship with the action. The legal representation
of the Plaintiffs (and class members) was conceived of in Texas,
solicited from Texas, and primarily controlled by lawyers
licensed to practice in Texas. Taylor and Cox are licensed to
practice law in Texas, and Texas is the primary locale of their
practices. None of the Defendants are licensed to practice law
in Ohio, Indiana, and Pennsylvania. As Defendants could not be
subject to disciplinary action in those states, it would be odd to
then subject them to related fiduciary duties in those
jurisdictions when there is another jurisdiction with more
significant interests in the matter.
Taylor sought to broaden his asbestos “inventory” by
hiring lawyers in Ohio, Indiana, and Pennsylvania to recruit
class members and serve as local counsel. Taylor served as lead
counsel for all of the Northerners’ asbestos claims, handled the
negotiation of the settlements in question, held himself out as
their counsel, and received 95% of their contingent fees. Most
of the communication with the Northerners was via Parapro, a
Texas corporation headquartered in Houston, Texas, and
Taylor’s contract with Parapro provided that Texas law would
govern that relationship.
The Texas Supreme Court has expressed its concern
about the potential conflicted duty of loyalty when class action
lawyers negotiate settlements without judicial oversight. Gen.
Motors Corp. v. Bloyed, 916 S.W.2d 949, 954 (Tex. 1996).
28
This is in marked contrast to Mississippi. Mississippi courts do
not oversee settlements of class actions because that state does
not recognize such actions. USF&G Ins. Co. v. Walls, 911 So.
2d 463, 467 (Miss. 2005). Thus, the Texas Supreme Court’s
concern about regulation of attorneys is particularly pertinent in
this case. Fiduciary duties are designed not only to protect the
principal, but also to regulate the fiduciary agent. See
Restatement (Second) of Agency § 469. Ultimately, suits for
breach of fiduciary duty that seek disgorgement as opposed to
compensatory damages are focused on regulating the behavior
of the fiduciary, not remedying the harm to the client. This is
such a suit, and it is Texas, not Pennsylvania, Ohio, or Indiana,
that has an interest in regulating the behavior of Texas attorneys.
Finally, Taylor’s contracts with Local Counsel required
Local Counsel to include provisions in their contingent fee
arrangements that Texas law would govern the contracts if suit
was not brought in Local Counsel’s home state. Local Counsel
dutifully complied and included provisions stating “this contract
shall be enforced and interpreted pursuant to the laws of Texas”
in their retainer agreements with Plaintiffs. Although we
generally enforce choice of law clauses, see Assicurazioni
Generali, S.P.A. v. Clover, 195 F.3d 161, 164 (3d Cir. 1999);
see also Restatement (Second) of Conflict of Laws, § 187,
Plaintiffs are not in fact litigating the provisions of the contract
in this action. Nonetheless, the fiduciary duty at issue arose
under the contracts. It follows then that the duty created by the
contracts should be enforced under the law chosen as applicable
by the contracts. We would reach the same conclusion without
the contractual choice of law provisions, but their existence
supports our reasoning.
29
Defendants note that Defendants reside currently in three
different states, Texas, Mississippi, and North Carolina, that “all
of the alleged misleading disclosures or non-disclosures
occurred in Pennsylvania, Ohio, and Indiana” and that
“[P]laintiffs’ relationship with the [D]efendants was centered in
Pennsylvania, Ohio, and Indiana, where [P]laintiffs engaged
[L]ocal [C]ounsel as their lawyers . . . [and] agreed pursuant to
their retainer agreements that [L]ocal [C]ounsel might associate
with lawyers from other states.”
These factors are unconvincing. Defendants’ current
residencies are irrelevant to the issue of where the fiduciary duty
arose and was breached. The claim that Plaintiffs’ relationship
with Defendants centered in Pennsylvania, Ohio, and Indiana is
also specious, as Plaintiffs did not have any direct relationship
with Defendants. Defendants’ claim that the breach of the
fiduciary duty of candor occurred in the northern states is
debatable. The essence of Plaintiffs’ claim is non-disclosure.
There was no location in which the disclosure had to be made;
the only requirement is that it be made. Arguably, the non-
disclosure itself looks at the party to whom the disclosure is
owed. Those plaintiffs were located in Pennsylvania, Ohio, and
Indiana. But, fiduciary duty is also designed to regulate the
fiduciary and to ensure that the fiduciary performs his duties.
The alleged conduct causing the non-disclosure occurred (or
rather failed to occur) in the Defendants’ law offices, i.e., Texas
for Taylor and Cox, and Mississippi for Pritchard. The location
of the breach of the duty of candor is not conclusive, and
Defendants neglect to mention Plaintiffs’ other allegation, which
is the breach of fiduciary duty of loyalty. Any such breach
clearly did not occur in Pennsylvania, Ohio, or Indiana, but in
30
Texas, which was where those owing loyalty could be found and
was the nexus of the alleged conflicted multiple representation.
In sum, the weight of a “significant relationship” analysis for
choice of law strongly favors the application of Texas law.
B. Defendants Owed Plaintiffs A Fiduciary Duty.
Defendants have argued that the choice of law issue is
superfluous because they do not owe the Plaintiffs a fiduciary
duty. We find such a suggestion preposterous. Defendants
acted as counsel for all the Northerners, including the Plaintiffs:
they held themselves out as the Northerners’ attorneys, they
entered into agreements regarding representation of the
Northerners, they signed and filed pleadings on the Northerners’
behalf, negotiated settlements for the Northerners’ claims, and
collected attorneys’ fees from the Northerners. Clearly, the
Defendants were acting as the Plaintiffs’ attorneys.
It is well-settled law, regardless of jurisdiction, that
attorneys owe their clients a fiduciary duty. Akron Bar Ass'n v.
Williams, 104 Ohio St. 3d 317, 320 (Ohio 2004) (“The attorney
stands in a fiduciary relationship with the client and should
exercise professional judgment solely for the benefit of the
client and free of compromising influences and loyalties.”); In
re Tsoutsouris, 748 N.E.2d 856, 859 (Ind. 2001); Office of
Disciplinary Counsel v. Monsour, 549 Pa. 482, 486 (Pa. 1997)
(“This public trust that an attorney owes his client is in the
nature of a fiduciary relationship involving the highest standards
of professional conduct.”); Arce v. Burrow, 958 S.W.2d 239,
246 (Tex. Ct. App. 1997), rev’d on other grounds, 997 S.W.2d
229 (Tex. 1997). The duty includes undivided loyalty, candor,
31
and provision of material information. Willis v. Maverick, 760
S.W.2d 642, 645 (Tex. 1998) (provision of information material
to the representation).
Defendants argue that “the fiduciary duties of disclosure
at issue in this case were properly assumed and performed by
each plaintiff’s individually retained local counsel in
Pennsylvania, Ohio, or Indiana.” The performance of the duty
is a question of fact for the jury, although some acts, as a matter
of law, cannot constitute performance.17 If Local Counsel did
not perform their fiduciary duty, it does not matter that they
assumed the duty because the fiduciary duty of co-counsel is a
17
We note that even the examples of disclosure that
Defendants choose to cite in their brief are inadequate to
constitute disclosure in an attorney client situation. Defendants
cite a form called “Acknowledgment for Full Release/Non
Malignant” that states: “You have the right to find out the terms
of the Agreement . . . and a copy of same will be available for
your review.” Defendants also cite a letter dated March 31,
2000, that states “Again, these may be considered aggregated
settlements[,] and you are invited to schedule a time to come by
our offices to see and read the entire settlement agreement as
well as a list identifying the amount of money each client is
being offered under this settlement.”
While we recognize that additional facts in the record or
that may be adduced at trial could support a finding of adequate
disclosure, these statements alone do not constitute anything
close to adequate disclosure.
32
joint obligation.18 Even if the duty of disclosure is itself
delegable, the duty of loyalty is inherently not, and in this case
disclosure was necessary to fulfill the duty of loyalty. Thus,
Local Counsel’s alleged failure to fulfill the fiduciary duty of
disclosure could hardly excuse the Defendants.
The fiduciary duty that an attorney owes clients is not a
matter to be taken lightly. The duty may not be dispensed with
or modified simply for the conveniences and economies of class
actions. As then Judge Cardozo observed in In the Matter of
Rous, “[m]embership in the bar is a privilege burdened with
conditions.” 221 N.Y. 81, 84 (1917) (Cardozo, J.). Among
those conditions are the ethical obligations of giving clients full
and meaningful disclosure of conflicts of interest so that the
client may decide if the representation is in his or her best
interest and of the terms of proposed settlement agreements, as
it is the client’s, not the attorney’s, decision whether to settle a
case. TEX. DISCIPLINARY R. PROF’L CONDUCT 1.03 (duty to
keep client informed); 1.04(f) (fee division); 1.08(f) (disclosure
of aggregate settlements). Even when clients are viewed as
mere “inventory”, they are still owed the renowned “punctilio of
an honor the most sensitive.” Meinhard v. Salmon, 249 N.Y.
458, 464 (N.Y. 1928) (Cardozo, J.). As the Texas Disciplinary
Rules of Professional Conduct state the “obligation of lawyers
18
We note that neither Texas’ Disciplinary Rules of
Professional Conduct nor the Model Rules of Professional
Conduct directly address the question of allocation of
professional duties in a co-counsel relationship, but in the case
of duty of loyalty, its non-delegability is so patent as to be
axiomatic.
33
is to maintain the highest standards of ethical conduct.” TEX.
DISCIPLINARY R. PROF’L CONDUCT, Preamble.
This is the cost of doing business as an attorney at law,
and we will not countenance shortcuts. Disclosures to clients
must be meaningful, by which we mean something beyond form
disclosures, as clients must understand a conflict to give their
informed consent to an intelligible waiver. Indeed, we are
embarrassed to have to explain a matter so elementary to the
legal profession that it speaks for itself: all attorneys in a co-
counsel relationship individually owe each and every client the
duty of loyalty. For it to be otherwise is inconceivable. There
is no question that defendant attorneys owed Plaintiffs fiduciary
duties.19
Because the District Court erred in its choice of law
ruling, we will reverse the grant of summary judgment and will
remand all of Plaintiffs’ claims for adjudication under applicable
Texas law. Certain Parcels of Land, 144 F.2d at 630 (remand
appropriate when District Court erred on choice of law).
C. Class Certification
The District Court’s choice of law error does not affect
the legal standard used to determine class certification. Class
certification is a matter of federal statutory law, even when a
19
We note that, even if Plaintiffs authorized settlement
negotiations of their claims in aggregate, that alone does not
constitute consent to the settlement nor waiver of disclosure of
the complete settlement terms.
34
federal court sits in diversity. Nevertheless, a proper focus on
fiduciary duty in this case changes our view of typicality,
adequacy, predominance, superiority, and inconsistent standards
of care as these elements present themselves in our
consideration of class certification. Although class certification
is a matter of federal statutory law (even when a federal court
sits in diversity), a proper focus on fiduciary duty in this case
may affect the District Court’s view of typicality, adequacy,
predominance, superiority, and inconsistent standards of care as
these elements present themselves in its consideration of class
certification. Thus, we will vacate the District Court’s denial of
class certification and we will direct the District Court to
reconsider whether to certify the class in light of the application
of Texas law.
III. Conclusion
The District Court erred in its choice of law analysis,
which led it to require that Plaintiffs demonstrate actual harm in
a claim of breach of fiduciary duty when the remedy sought is
disgorgement. We will vacate the District Court’s grant of
summary judgment to the Defendants and we will vacate the
denial of class certification and we will remand the case for
adjudication in light of applicable Texas law.
FUENTES, Circuit Judge, dissenting.
In my view, plaintiffs’ failure to brief and argue the
choice of law issue before the District Court and in their opening
35
brief on appeal constitutes waiver of that issue. Although the
majority itself notes that “[p]laintiffs did not object to the
District Court’s choice of law ruling either at trial or in their
original appellate briefs,” part II.A, supra at ***, it concludes
that the choice of law issue was not waived. I believe the
majority’s conclusion is contrary to our existing precedent, and
I therefore respectfully dissent.
In their opening brief on appeal, plaintiffs summarized
their points as follows:
I. There is no genuine issue of material fact
that defendants committed serious and
substantial breaches of their fiduciary duties.
II. The District Court abused its discretion in
refusing to certify the class.
Plaintiffs’ brief makes no mention of a choice of law issue, nor
was the issue raised in the opposition or reply briefs. Prior to
argument, at the Court’s direction, counsel were requested to
submit letter memoranda addressing the following issues:
I. If [defendants] owe [plaintiffs] fiduciary duties,
under what jurisdiction’s law were these duties
created?
II. Is actual harm a required element of a breach
of fiduciary duty claim in that jurisdiction?
36
In response to these questions, for the first time, plaintiffs
argued that under Pennsylvania’s choice of law rules, Texas
substantive law should apply. Predictably, defendants argued in
favor of the District Court’s conclusion that the law of
Pennsylvania, Ohio, and Indiana should apply. As the majority
points out, Texas law is more favorable to the plaintiffs than the
law of the other relevant states because it explicitly provides for
disgorgement in a breach of fiduciary duty action without a
showing of actual harm. See Part II.A.2.a, supra at ****.
We have stated on numerous occasions that “an
appellant’s failure to identify or argue an issue in his opening
brief constitutes waiver of that issue on appeal.” United States
v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005). See also United
States v. Vazquez, 271 F.3d 93, 107 (3d Cir. 2001) (en banc)
(finding issue waived where appellant failed to raise it either in
the District Court or initially on appeal). And, although our
jurisprudence has not always been consistent on this point, our
full court stated in Neely v. Club Med Management Services,
Inc., that “choice of law issues may be waived.” 63 F.3d 166,
180 & n.10 (3d Cir. 1995) (en banc).
In the majority’s view, choice of law was “inherent in the
parties’ positions throughout this case” because plaintiffs cited
repeatedly to Texas law in arguing that they satisfied the
requirements for a breach of fiduciary duty claim. Although
plaintiffs did cite Texas law to this Court and to the District
Court, they also cited cases and rules from many other states in
37
support of their position.20 The District Court could not
reasonably have been expected to interpret this endless stream
of citation as an indication that plaintiffs were raising a choice
of law argument, or as an assertion that Texas law applied.
See Brennan v. Norton, 350 F.3d 399, 418 (3d Cir. 2003)
(“‘[T]he crucial question regarding waiver is whether [plaintiff]
presented the argument with sufficient specificity to alert the
district court.’”) (quoting Keenan v. City of Philadelphia, 983
F.2d 459, 471 (3d Cir. 1993)).
In my view, plaintiffs’ references to Texas law did not
satisfy our usual requirement that all issues be clearly articulated
in a party’s briefs to avoid waiver. See, e.g., Pa. Dep’t of Pub.
Welfare v. U.S. Dep’t of Health and Human Servs., 101 F.3d
939, 945 (3d Cir. 1996) (holding an issue waived despite a
“conclusory assertion” regarding the issue in a brief); Laborers’
Int’l Union of N. Am., AFL-CIO v. Foster Wheeler Corp., 26
F.3d 375, 398 (3d Cir. 1994) (“An issue is waived unless a party
raises it in its opening brief, and for those purposes a passing
reference to an issue . . . will not suffice to bring that issue
before this court.”) (internal quotation marks omitted). See also
Fed. R. App. P. 28 (requiring briefs on appeal to contain “a
statement of the issues presented for review” and “appellant’s
contentions and the reasons for them”).
20
In their brief to this Court, plaintiffs cited cases from
Texas, Pennsylvania, California, Georgia, New York, Delaware,
and Minnesota, among other jurisdictions, regarding breach of
fiduciary duty doctrine.
38
While we have discretion to consider issues that have
been waived, we should do so only in “exceptional
circumstances,” such as where “‘the public interest requires that
the issues be heard or manifest injustice would result from the
failure to consider such issues.’” In re Gen. DataComm Indus.,
Inc., 407 F.3d 616, 624 n.13 (3d Cir. 2005) (quoting Brown v.
Philip Morris Inc., 250 F.3d 789, 799 (3d Cir. 2001)). Here, no
urgent public interest calls for special treatment, nor did
anything in the District Court’s handling of the case below
constitute such grievous error that a “manifest injustice” may
result.21 Cf. Bagot v. Ashcroft, 398 F.3d 252, 256 (3d Cir. 2005)
(finding exceptional circumstances to overcome waiver where
the Court’s failure to consider an argument “would result in the
substantial injustice of deporting an American citizen”).
Accordingly, I would decline to review the District
Court’s conclusion that the laws of Indiana, Ohio, and
Pennsylvania are applicable in this case. Thus, I would affirm
21
In fact, even if the choice of law issue had not been
waived, a close question would be presented as to which state’s
law applies under Pennsylvania’s choice of law analysis. That
analysis turns on “which state has the greater interest in the
application of its law,” and requires a consideration of the
“weight of a particular state’s contacts . . . on a qualitative rather
than quantitative scale.” Troxel v. A.I. duPont Inst., 636 A.2d
1179, 1181 (Pa. Super. 1994). The District Court reasonably
could have concluded that Pennsylvania, Ohio, and Indiana have
a greater interest in application of their laws than Texas, on the
ground that plaintiffs are from those three states and that the
alleged breach of the duty to disclose occurred in those states.
39
the judgment of the District Court. As the majority
demonstrates, the courts of Pennsylvania, Ohio, and Indiana
appear to require a showing of actual harm for a breach of
fiduciary duty claim, and for the related claims of civil
conspiracy to breach fiduciary duty and aiding and abetting
breach of fiduciary duty. See Part II.A.2, supra p. ***. Although
those courts have not specifically addressed whether the actual
harm requirement applies in a disgorgement action, there are no
grounds for presuming a disgorgement exception in those
jurisdictions.
As the majority itself concedes, if plaintiffs are required
to show actual injury to succeed on their claims, they lose as to
both elements of their appeal. See Part II.A, supra p. ***.
Plaintiffs cannot demonstrate that, absent defendants’ alleged
conduct, they would have achieved a better outcome. For this
reason, I would affirm the District Court’s grant of summary
judgment and, consequently, would not reach the class
certification issue.
40