Petition — Arthur Andersen & Co. v. Kramer
Supreme Court brief1976
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q JUN LO 4976
Supreme Court of the United: States
October Term, 1975
No. 75-1791
ARTHUR ANDERSEN & CO.,
Petitioner,
0.
MITCHELL A. KRAMER and DAVID C. HARRISON,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT.
OLIvER C. BwwpLe,
MATTHEW M. STRICKLER,
RICHARD Z. FREEMANN, JR.,
20th Floor, United Engineers
Building,
30 South 17th Street,
Philadelphia, Pennsylvania. 19103
CuHaRLES W. Boanp,
135 South LaSalle Street,
Chicago, Illinois. 60603
Attorneys for Petitioner.
Of Counsel:
BALLARD, SPAHR, ANDREWS
& INGERSOLL,
20th Floor, United Engineers
Building,
30 South 17th Street,
Philadelphia, Pennsylvania. 19103
Witson & MCILVAINE,
135 South LaSalle Street,
Chicago, Illinois. 60603
international Printing Co., 711 So. 50th St. Phila., Pa. 19143 — Tel. (215) 727-8711
TABLE OF CONTENTS.
Page
EE sestccadsaetichbacesasdesdecesescesbes 1
EE Kontb cen edd inns pon sus inemcaseiee> dances 1
I onc ih sWedawabeepescéeends de cess 2
STATUTORY PROVISIONS AND RULES INVOLVED ............... 2
i cen nceveecdsinucceenetene 3
REASONS FOR GRANTING THE WRIT ...............0-00eeee: 19
I. The Basis on Which the Court of Appeals Declined to
Entertain Jurisdiction Over Petitioner's Appeal Is
Contrary to This Court’s Holding in Cohen, as
Applied in Eisen IV, and Is in Conflict With Rulings
of Other Circuits ........ oesccccccccecccccccencs 19
II. The District Court’s Decision Allowing Kramer to
Proceed as Class Representative Is a Final Collateral
Order Presently Appealable Under 28 U. S. C. § 1291
and Involves Ethical Considerations Which Require
ND BP Se GD hinccctccccdcdincosecces 23
1. The Seriousness of the Issue Presented for Review 24
2. The Disadvantages of Denying Justice by Delay 31
EE dn idusidnnatedsnbegeee$008 0949 s0s cdnees dee 3+
Aprenpix A (Opinion of Court of Appeals) ............... Al
Apprenpix B (October 1, 1974 Opinion of District Court) .... A20
Appennix C (April 17, 1975 Opinion of District Court) ..... A24
TABLE OF CITATIONS.
Cases: Page
American Pipe & Construction Co. v. Utah, 414 U. S. 538
CRIED o vcccocnvccpddvccuesunncsececcdsesddecoecses 26
Bersch v. Drexel Firestone, Incorporated, 519 F. 2d 974
(1975), cert. denied, 96 S. Ct. 453 (1975) ............- 33
Blackie v. Barrack, 524 F. 2d 891 (9th Cir. 1975), petition for
cert. filed (44 U. S. L. W. 3518) .........-ceeeeeeeees 21
Blue Chip Stamps, et al. v. Manor Drug Stores, 421 U. S. 723
CETEE a0 vdscanuac duadues diskeniiedusshaceeneneason 16, 29
Bogus v. American Speech & Hearing Association, — F. Supp.
— (Civ. No. 74-849, E. D. Pa., August 7, 1975) ........ 17
Cohen v. Beneficial Industrial Loan Corp., 337 U. S. 541
CDG eo vvdsctivtvncsiccccrcéosdctscvsnests 14, 19, 20, 23, 34
Cotchett v. Avis Rent A Car System, Inc., 56 F. R. D. 549
CB, Ge WE. F. BERD ccccncccscvccéccssvcedesicvcscess 16, 26
Draganescu v. First National Bank of Hollywood, 502 F. 2d
550 (5th Cir. 1974), cert. denied, 421 U. S. 929 (1975) ..17, 22
Eisen v. Carlisle & Jacquelin (“Eisen IV”), 417 U. S. 156
CEE ce vvcccccsdunvececeddncescénuseqeded 14, 19, 20, 22, 24
Glenn v. Arkansas Best Corporation, et al., 525 F. 2d 1216
CE GR, BEG cccen ve yesscevscevescisedecveséseces 22
Gonzales v. Cassidy, 474 F. 2d 67 (5th Cir. 1973) .......... 32
Graybeal v. American Savings & Loan Association, 59 F. R. D.
T CB Dh GS Bae tence ceckesndcdccsscssevesscocsets 16, 26
Hackett v. General Host Corp., 455 F. 2d 618 (3d Cir. 1972),
cert. denied, 407 U. S. 925 (1972) ................ 20, 21, 22
Hansbury v. Lee, 311 U. S. 32 (1942) ..............eeeeee 32
Harmar Drive-In Theatre, Inc. v. Warner Bros. Pictures, Inc.,
239 F. 2d 555 (2d Cir. 1956), cert. denied, 355 U. S. 824
COREE) oc cccdcccdctdvesaveccecetcavescncsenessassés 17
Hellerstein v. Mr. Steak, Inc., 531 F. 2d 470 (10th Cir. 1976) 22
In Re Cessna Aircraft Distributorship Antitrust Litigation,
518 F. 2d 213 (8th Cir. 1975), cert. denied sub. nom.
Cessna Aircraft v. White Industries, 44 U. S. L. W. 3282
(Maw. E0, BEUB) ccccccscccccccsecccosscecessccescces 21
In re Hotel Telephone Charges, 500 F. 2d 86 (1974) ....... 27
ee rTP aE —
TABLE OF CITATIONS (Continued).
Cases: Page
In Re Master Key Antitrust Litigation, 528 F. 2d 5 (2d Cir.
EE didn Oh cdheredc indus Veen sdidwdacsteecen dees 21
King v. Kansas City Southern Industries, Inc., 479 F. 2d 1259
DE Sn, Colo cc dadcecéwadncas ei eeopeuseeusé 21
Kriger v. European Health Spa, Inc. of Milwaukee, Wis., 56
Fo Oe A ee Cie GS WOU BEND oc vc cc cccecedccccsesss 17, 26
Sagers v. Yellow Freight Systems, Inc., 68 F. R. D. 686 (N. D.
EE Uibediecukdauaens cundnses 64080600000eads 32
Seiffer v. Topsy’s International, 520 F. 2d 795 (10th Cir.
1975), cert. denied, 96 S. Ct. 779 (1976) .............. 22
Shields v. First National Bank of Arizona, 56 F. R. D. 442
Ee EE ccd allel dk va kueeks oe coh¥es Genre eae 17, 26
Shields v. Valley National Bank of Arizona, 56 F. R. D. 448
TT Uc ti vadanteuseisswesedbbexedesescces 17
Stavrides v. Mellon National Bank & Trust Company, 60
ek oe rr Oe ED anc nccedenesessccucdes 27
Suffolk Roadways, Inc. v. Minuse, 287 N. Y. S. 2d 965 (1968) 25
Turoff v. The May Company, — F. 2d — (No. 75-1697) (6th
EE wacns Sena GUKCASERUESOESSCs baseeynceus 26
Uniweld Products, Inc. v. Union Carbide Corporation, 385 F.
2d 992 (5th Cir. 1967), cert. denied, 390 U. S. 921 (1968) 22
60 Columbia St. v. Leofreed Realty Corp., 110 N. Y. S. 2d 417
(Sup. Ct., N. Y. Co. 1952), affd. per curiam, 120 N. Y. S.
i Ce MD cobs cnschdncsatueovevdseaess 25
Statutes:
28 U.S. C.:
ES, citi beets edd subieildbes oils wide ud ine 1
tem cduvhingessuédahbus sesee sear 2, 13, 19, 23, 34
DT Kicks dudskasahbekGuasbbedesbendenksceouees 14,19
TABLE OF CITATIONS (Continued).
Rules and Other Authorities: Page
Federal Rules of Civil Procedure:
— f Pee 9, 10, 16
Rule BO(a)(4) ..cccccccdcccccccccvccscesneeseseues 2, 24
DDE Ble) ....00000000%0eedauevensneeeneeeaenen 18
DRG-DEIA) ..nccccccvccccccccoscsccevesuseuapepenanes 17
DODRO AND) ...0000cccccecdsdacesucsen eee eenennenne 17
DRS-200(B)(1)-(4) ......:0000scnnnenecnmeneeelene 17
DURUM AD ...cccsvccssesescunesenecueeneeneaeneae 17
DOB-TEMB) on cvcccccvccccccesecececensseveneeneanneee 17
DURE A) occcccccccicccccccscsensecebenesneaae 16
DUT-AUMA NBD o.cccccvccccccccecnedbuuaninenenneel 16
DETR AD(E) 2. cccccevccccescdceccsccsveseuenneneeee 18
DEFT-ROIL A(T) .occcceccccccccessccecsseceueeneeeeeuee 18
BG BD occ ccccccvcccccccccsevccccescensssuennneaeneeenee 17
BS BS nn ccccccccscccccccecesesecesssunsseuunennnEEe 16
WS BS. ncccccccccescccevescescsces. ses enn enenEn—EE 16
BS BO. cccccvccccccdceccocsesecsstasuenneneeeeae 17
BG Fh on cccccvccccccevccsnecss ob6sneenee nnn nnnnannE 16
EC 8-5 ..... s ecceeseccccesoscenneeeseseeununennnnnn—nE 18
Formal Opinion 338 ABA Standing Committee on Ethics and
Professional Responsibility ..............eeeeeeeseees 24, 25
Other:
Burger, The Necessity for Civility, 52 F. R. D. 211 (1971) .. 31
Carrington, The Ethical Crises of American Lawyers, 36
Univ. of Pittsburgh Law Rev. 35 (Fall 1974) ..........
The Importance of Being Adequate: Due Process Require-
ments In Class Actions Under Federal Rule 23, 123 Uni-
versity of Pennsylvania Law Review 1217 (May, 1975) 32
Code of Professional Responsibility:
Ganasdliy ....ccoccccceccevserscessoseneeueeeeeenae 27
Camen 8 gemanallly ..nccccccscccvccccssccccestesceess 16
Canen © ganeselly ...ccsccscccccccccsesecessovssusen 17
Canen © ganenallly ...ccccccsccccccccssccsesesseuseees 6
-™ weer
Three
IN THE
Supreme Court of the United States
October Term, 1975
No.
ARTHUR ANDERSEN & CO.,
Petitioner,
0.
MITCHELL A. KRAMER and DAVID C. HARRISON,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT.
The petitioner, Arthur Andersen & Co. (“Andersen”),
respectfully prays that a writ of certiorari be issued to re-
view the judgment and opinion of the United States Court
of Appeals for the Third Circuit entered in this proceeding
on April 20, 1976.
OPINIONS BELOW.
The opinion of the Court of Appeals, not yet reported,
appears in Appendix A, infra, pp. Al-Al9. The two opin-
ions of the District Court for the Eastern District of Penn-
sylvania, dated October 1, 1974 and April 17, 1975, appear
in Appendix B, infra, pp. A20-A23 and Appendix C, infra,
pp. A24-A32, respectively.
JURISDICTION.
The judgment of the Court of Appeals for the Third
Circuit was entered on April 20, 1976. This petition for
certiorari was filed within 90 days of that date. This
Court's jurisdiction is invoked under 28 U. S. C. § 1254(1).
2 Petition for Writ of Certiorari
QUESTIONS PRESENTED.
1. Whether refusal by the Court of Appeals to take
jurisdiction of petitioner's appeal, on the theory that the
collateral order doctrine is never applicable to any aspect
of a class action determination, was error when the appeal
presented a serious and unsettled question of professional
impropriety by an attorney in his role as class representa-
tive.
2. Whether the District Court erred in concluding that
an attorney was adequate to represent a class notwithstand-
ing a flagrant record of professional impropriety in the
comztzncement and prosecution of the suit, thus depriving
petitioner of the certainty that a judgment on the merits in
its favor would be res judicata as to the unnamed class
members.
STATUTORY PROVISIONS AND RULES INVOLVED.
United States Code, 28 U.S. C. § 1291:
Final decisions of District Courts.
“The courts of appeals shall have jurisdiction of
appeals from all final decisions of the district courts of
the United States, the United States District Court for
the District of the Canal Zone, the District Court of
Guam, and the District Court of the Virgin Islands,
except where a direct review may be had in the Su-
preme Court.”
Federal Rules of Civil Procedure, Rule 23(a) (4):
Class Actions.
“(a) Prerequisities to a Class Action.
One or more members of a class may sue or be
sued as representative parties on behalf of all only if
... (4) the representative parties will fairly and ade-
quately protect the interests of the class.”
ape. Ne aT
ge me
Petition for Writ of Certiorari 3
STATEMEN1 OF THE CASE.
A. Preliminary.
This suit, a class action brought under the federai se-
curities laws, was commenced by a Philadelphia lawyer,
Mitchell Kramer, who named himself both as class repre-
sentative and as counsel to the class. Because the under-
lying securities had been purchased jointly, Kramer also
named his co-owner, David Harrison, as a party plaintiff.
While Harrison assented to his role as a party plaintiff, he
disclaimed any responsibility for prosecuting the suit as a
class representative. For this reason, Harrison was treated
by the Court of Appeals solely as a class member in its
determination that Kramer was not qualified to act as
class counsel because his interest as class counsel in re-
covering a potential award of counsel fees conflicted
head-on with his interest as class representative in recover-
ing only $219.07 in alleged damages.
Although the Court of Appeals readily accepted juris-
diction over petitioner's appeal involving the challenge to
Kramer's qualifications te act as class counsel because the
issue involved “a serious question of impropriety’, it re-
fused to accept jurisdiction in respect of petitioner's com-
panion appeal involving the challenge to Kramer's qualifi-
cations to act as class representative, even though the
conduct and ethical considerations underlying the one ap-
peal were precisely the same as those underlying the other.
B. Facts.
1, The Filing of a Strike Suit.
On January 6, 1969, the two plaintiffs herein, Mitchell
A. Kramer, Esquire, and David C. Harrison, Esquire, pur-
chased as tenants in common 50 shares of the common
stock of defendant Scientific Control Corp. ( “Scientific” ).
4 Petition for Writ of Certiorari
The purchase was made with partnership funds, allegedly
in reliance upon a company prospectus which had become
effective on October 28, 1968 (Krame~ 66a-67a; Harrison
98a, 108a-109a).' The stock was sold a month later, based
upon Kramer's “personal 10% rule” that “if the stock
dropped 10%, he [Kramer] would sell it automatically”
(Marron 270a), and resulted in an aggregate net loss to the
plaintiffs of $438.13 (Kramer 80a).
Between February 1969, when Kramer and Harrison
sold their stock, and July 1971, the month before the com-
plaint herein was filed, there were no developments which
bear on this case: Kramer and Harrison had no financial
interest in Scientific, and had “no official information pro
or con, bad or good, about Scientific Control during that
period” (Kramer 82a).
In July 1971, Kramer received a four-page Question-
naire in blank from the SEC requesting information about
the Scientific shares which had been registered in plaintiffs’
names (Kramer 8la; Second Amended Complaint, Ex-
hibit A, 45a-48a). By this time, the partnership of Kramer
and Harrison had dissolved and Kramer was in practice as
a “sole proprietor” with one salaried associate, Robert M.
Britton, Esquire (Kramer 57a; Harrison 124a). Rather
than filling out and returning the Questionnaire to the
SEC, Kramer decided instead to file suit immediately and
instructed his associate to go to the local business library
to consult Moody's “cut sheet” for a list of persons who
could be named as defendants ( Britton 234a; Kramer 72a-
73a). Without any further investigation and without ref-
erence to any documents other than the prospectus and the
“cut sheet”, Kramer then instructed Britton to file a com-
1. References are to the depositions taken herein by name of
deponent and the page number in the Appendix filed by Andersen
in the Court of Appeals.
Petition for Writ of Certiorari 5
plaint in Kramer’s and Harrison’s names * containing allega-
tions of a “general nature” that the prospectus “failed to
disclose material misstatements and all that sort of thing”
(Britton 20la, 235a-238a ).
2. The Creation of a Conflict of Interest by Kramer
in Naming Himself as Class Representative and
in Having the Sole Associate in His Office Ap-
pear as Class Counsel.
In his complaint, Kramer not only named himself as a
party plaintiff, he also had himself named as representative
of a class comprised of all purchasers of Scientific stock
from October 31, 1968 to November 21, 1969 (15a-16a).°
Kramer did not name himself, however, as the attorney.
Instead, he instructed Britton, his employee, to sign the
complaint even though, at the time, Britton had been ad-
mitted to practice for scarcely a year and had had virtually
no experience in securities litigation (Britton 244a).
Kramer s reason, as it later developed, was to conceal (a)
his conflicting interest as ciass counsel in a potential award
of counsel fees far in excess of the $219.07 he sought in
damages and (b) his conflicting obligation to withdraw
from the case as class counsel because of his duty as class
representative to testify on behalf of the class.
The Court of Appeals did not address the questions
of “whether Kramer was the de facto attorney” or “the
2. Harrison had been solicited by Kramer to ap as a party
plaintiff because of their joint ownership in the underlying securi-
ties (Harrison 10la, 123a, 129a).
3. Although Harrison gave Kramer “permission” to “use my
name as one of the class representatives”, he made it abundantly
clear to Kramer that he himself wanted nothing to do with the
prosecution of the suit and disclaimed any responsibility for its
conduct, including the selection of pectin | and payment of ex-
penses, thus effectively eliminating himself as a Sone fide repre-
sentative of the class (Harrison 10la, 105a-107a, 113a, 123a,
134a; Appendix A, infra, p. Al3). ,
6 Petition for Writ of Certiorari
motivations of Kramer as a plaintiff, as a class representa-
tive, or as an attorney-employer or attorney-partner of the
attorney who formally appeared for the plaintiffs”. In-
stead, it held that an “appearance” of professional impro-
priety in violation of Canon 9 of the Code of Professional
Responsibility had been created by virtue of the appoint-
ment by I<ramer of the sole associate in his office as class
counsel.‘ Appendix A, infra, pp. A7, Al4. The record
makes it very clear, however, that Kramer was the de facto
attorney in the case and that his efforts to create a false
impression to the contrary involved him in an ever widen-
ing circle of deceit and professional impropriety.
3. Kramer’s False Denials That He Was Ever the
De Facto Attorney.
At his deposition, taken in January 1974, Kramer in-
sisted that Britton, and later Kapustin, were and always
had been the attorneys representing plaintiffs and the class
—not himself. Thus (Kramer 74a):
“Q. Now, when Mr. Britton worked for you prior
to the filing of this lawsuit, I take it he was under
your general supervision and control as an employee-
lawyer?
A. When he was working on my cases, or his
cases, yes.
Q. That would likewise apply to this lawsuit?
A. No, it would not.
Q. Why is that?
A. Because we considered this his case as other
cases that he brought into the office were.
4. When Britton left Kramer's employ on ra 15, 1972,
Kramer unilaterally discharged him as class counsel of record and
replaced him with his (Kramer's) new associate, Stephen Kapustin
(docket # #52, 53 at 4a).
PRT ee Re, ETT Pees
Petition for Writ of Certiorari 7
Q. Did he bring this case in?
A. No. He brought it in the sense that I as a
plaintiff came to him as an attorney and asked him to
handle the case.”
Continuing (id., at 75a):
“A. It was his case.
Q. What do you mean by ‘his case’? Did he
have a proprietary interest in it?
A. Yes, he handled the case. He was to get a
fee, if there were any, on the case.”
According to Kramer, Britton had agreed to represent
him, and the class, in this protracted litigation with the
understanding that he, Britton, would receive any counsel
fees awarded by the Court (Kramer 6la-62a).
But the record, and particularly Britton’s testimony,
establishes to the contrary beyond any reasonable dovt:
(1) that Kramer never told or even hinted to Britton that
the case was his throughout the entire period that Britton
worked on it (Britton 207a, 209a-210a, 218a-219a, 222a-
226a, 256a); (2) that there was nothing in writing on the
subject even though it was Kramer's practice to reduce
contingent fee arrangements to writing (id., at 25la-252a);
(3) that, in his own mind, Britton was acting as Kramer's
employee, not as his attorney, when Kramer instructed
him to prepare the complaint (id., at 253a-254a); (4) that
at the time the complaint was filed Britton didn’t have any
knowledge about how fees were determined in class
actions (id., at 256a); (5) that Britton’s actual expectation
was that if the case was settled he might “be in for a raise
or a bonus of some kind” (id., at 257a); (6) that when
Britton left Kramer's office and was supplanted on the case
by Kramer's new associate, Stephen Kapustin, Britton
understood fully that the case was Kramer's, not his (id., at
8 Petition for Writ of Certiorari
193a-194a); (7) that Kramer's construct of his fee arrange-
ment with Britton was conveyed to Britton for the first
time on the very eve of Britton’s deposition, almost two
years after Britton had left Kramer’s employ (id., at
223a-224a, 258a-263a); (8) that costs related to the suit,
such as the filing of the complaint, service costs, and
Britton’s trip to Washington, D. C., were all paid for by
Kramer's law firm out of firm assets (id., at 197a-199a); (9)
that Kramer’s firm paid “all the overhead”, including
Britton’s and Kapustin’s salaries and the salaries of their
secretaries (id., at 187a; Kramer 96a); (10) that the com-
plaint was filed in a backer bearing the firm name of
“Kramer, Harrison and Bernstein” (docket #1 at 2a); (11)
that all other papers filed by plaintiffs in this suit to and
including March 6, 1974, are with but one exception in
backers bearing the firm name of “Mitchell A. Kramer”
(docket ##2, 17, 30, 34, 46, 48-49, 52-55, 61, 63 82 & 105
at 2a-7a); (12) that the papers filed by plaintiffs from March
6, 1974 to date are all in backers bearing the firm name of
“Kramer and Salus” (docket ##112-113, 121, 129, 133-
134, 137-148, 151-164, 167, 170-171, 178-179, 183 & 196 at
7a-10a); (13) that Kramer's partner, Herbert A. Salus, Jr.,
has entered his appearance herein as counsel of record for
plaintiffs (docket #162 at 8a); and (14) that all 49 letters
addressed by plaintiffs to the Court and parties of record
were written on stationary bearing Kramer’s firm name
(docket #202 at 10a).
The tempting news that Kramer had conveyed to
Britton on the eve of Britton’s deposition, that the case
had been Britton’s from its inception and during the entire
period of his employment in Kramer's office and that
Britton was therefore in line for an ultimate award of
counsel fees, was nearly more than Britton could resist.
Thus, with respect to the preparation of the original com-
plaint, Britton at first was all braggadocio:
AO EIN Be
TT PEEK) EL ee er Hee.
Petition for Writ of Certiorari 9
“I did what was necessary to get the complaint to-
gether. (189a)
“I developed—the facts, as claimed in the Com-
plaint. . . . (196a)
“.. . I made the appropriate allegations in the Com-
plaint regarding class actions. (216a)
“I was handling the case entirely, I did everything on
the case. (221a)
“I prepared the whole thing.” (236a)
During a short recess, however, Britton experienced a
“queasy feeling” about the strictures of Rule 11 of the Fed-
eral Rules of Civil Procedure and the glaring discrepancy
between the “good ground” it requires as a condition to the
signing of a complaint and the absence of any factual basis
to support the allegations of fraud in the original complaint,
and, upon the resumption of his testimony, placed full re-
sponsibility for the preparation and filing of the original
complaint squarely on Kramer's shoulders. Thus (id., at
243a-244a ):
“Tue Witness: The first Complaint which was
filed in the Summer of 1971, were conclusions that
were made by Mitchell and were conveyed to me in
my capacity as then-associate, and whatever you term
it now, well, I mean, fine. But I was working for him
at that time and he analyzed these things, I prepared
the Complaint, but the Complaint was prepared in ac-
cordance with what I was told regarding the conclu-
10
Petition for Writ of Certiorari
sions of fraud after his analyzing these documents
and me looking at them. It wasn’t an independent
decision to any extent on my part as to what conclu-
sions these things led to. He analyzed these things,
the prospectus: and so forth, and asked me to file a
Complaint. I was working as an associate and being
paid on a weekly basis. He said, “Let’s file a Com-
plaint, and we filed—I don’t want there to be—even
any illusion to the possibility that I, independently,
without proper justification—because I have a queasy
feeling about this, came and filed a Complaint against
your client or anybody else’s client without very suf-
ficient justification under Rule 11 or any other Rule.
These conclusions were reached by Mitchell, who is
an experienced attorney, who had experience in these
areas, who analyzed these things, who came up with
these conclusions that there was a fraud involved as a
result of the bankruptcy, as a result of the prospectus,
as a result of the Moody’s information, and that these
were the parties that were to be sued.”
Continuing (id., at 244a-245a):
“Finally, I acted as his attorney but under his guidance
and direction. I just wanted to make that clear, that
at the time the Complaint was filed, I had, for all prac-
tice [sic] purposes, six months’ experience. The other
six months—six months’ experience with Mitchell.
The other six months had nothing to do with this type
of law and those conclusions were reached by Mitchell
and those allegations were—the decisions regarding
those allegations were reached by Mitchell in his ca-
pacity as an attorney. You can't separate the two.
And the situation as it was back at that time was as
you would picture it and I just don’t want you or any-
body else to have any misunderstanding regarding
PS PIERS gg ey TI Ys
Oe ee ee
Petition for Writ of Certiorari 11
that. He arrived at these—in all the analyzing of all
these documents throughout the course of this thing,
he helped me all along. I handled the preparing of
the papers—but the nitty-gritty of the decisions re-
garding what was happening here, I obviously relied
heavily on his experience in these particular things.”
And finally (id., at 245a-246a):
“The briefs and so forth I prepared entirely—al-
most entirely on my own although he may have read
them over. The nitty-gritty as to what was wrong or
what happened here was arrived at as a result of
analyzing all of these documents which we've been
talking about for the last couple of hours; and those
decisions, unless 1 saw something in there, from my
expertise, which was limited were arrived at to a large
extent by Mitchell’s expertise, which, from what he
had told me, was unlimited.
“So I just wanted to clarify that, on the record,
anything regarding Rule 11, I felt was justified because
I was relying on s6mebody who had an unlimited
amount of experience and concluded quite affirma-
tively that there was something improper and some-
thing missing or a misstatement from the financial
statements, and records, and so forth and so on.
“Okay. Does that pretty much cover it?
“Mr. Kapustin: Oh, yes.”
Kramer was simply at a loss to explain why, if Britton
really was the attorney for the class as Kramer claimed,
Kramer had refused to let the case out of his ( Kramer’s )
office when Britton left (Kramer 87a-88a ):
“Q. Well, it was Mr. Britton’s case. Why isn't
it still his case?
12 Petition for Writ of Certiorari
Mr. Kapustin: Objection.
A. Because he is no longer in our law firm.
Q. Why didn’t you let him take it with him?
Mr. Kapustin: Objection.
Q. (Continued.) You had given it to him, hadn’t
you?
A. Yes.
Q. Well, why didn’t you let him take it with him?
A. I preferred to have somebody in the office.
Q. Why?
A. I don’t know why.”
And further (id., at 89a-90a):
“Q. You have already stated that you want to
keep the case in the office. Why?
Mr. Kapustin: I think I will have to object
to that also.
Q. (Continued.) Answer the question.
Mr. Kapustin: And I direct him not to an-
swer.
Q. (Continued.) Do you refuse to answer this
question?
A. Yes.
Q. Well, the fact is, you want to keep control of
the case, don’t you, Mr. Kramer?
Mr. Kapustin: Objection.
Q. (Continued.) Answer the question, sir.
Mr. Kapustin: I direct the witness not to
answer.
Q. (Continued.) You refuse to answer the ques-
tion?
A. Yes.”
Se ee a 2 ~y
Petition for Writ of Certiorari 13
As to Kramer’s claimed interest in maintaining this
suit at any personal cost to himself for a maximum re-
covery of $219.07 (Kramer 80a), Kramer testified: (1)
that he had “no idea” what the cost of notice to the class
might be (id., at 64a); (2) that if the cost of notice should
run to $200,000 he would pay it (id., at 65a); and (3)
that he had never asked Harrison to pay “any portion”
of the costs (id., at 60a). But Kramer, as noted, was also
at a total loss to explain why, upon receipt of the SEC
questionnaire, he had failed to fill it out or to cooperate
in any way with the SEC in its investigation (id., at
68a-69a, 7la-73a, 84a-85a).
4, The District Court Rulings and Petitioner’s Appeals
to the Court of Appeals.
On October 1, 1974, the District Court certified the
action as a class action (Appendix B, infra, pp. A20-A23).
Because discovery on Kramer’s adequacy as a class repre-
sentative had not been completed and because that issue
had not been briefed or, argued, petitioner moved for a
reconsideration (docket #172). The motion for recon-
sideration was denied on April 17, 1975 (Appendix C,
infra, pp. A24-A32) and petitioner filed its notice of ap-
peal on May 16, 1975 (180a).
On June 20, 1975, petitioner moved in the District
Court to disqualify Kramer and his firm as class counsel
(docket #197 at 10a). That motion was denied on June
30, 1975 (277a), and petitioner filed its notice of appeal
from that decision on July 9, 1975 (337a).
Both of petitioners appeals were prosecuted under
28 U. S. C. § 1291 on the ground that the decisions of
the District Court certifying Kramer as class representative
and qualifying him as class counsel were “final” decisions
under the collateral order doctrine enunciated by this
14 Petition for Writ of Certiorari
Court in Cohen v. Beneficial Industrial Loan Corp., 337
U. S. 541 (1949), and applied by this Court to class deter-
minations in Eisen v. Carlisle & Jacquelin (“Eisen IV”),
417 U. S. 156 (1974). Because of the close interrelation-
ship between the issues presented on the merits, peti-
tioner’s two appeals were consolidated by the Court of
Appeals for purposes of briefing and argument.
5. The Decision of the Court of Appeals.
In its opinion, the Third Circuit recognized that the
class certification issue was closely “related” to the dis-
qualification-of-class-counsel issue (Appendix A, infra, p.
A6), in fact so closely related that had Andersen “won on
that [the class certification] score . . . the disqualification
[of class counsel] issue might never have surfaced” (id., at
A15). While the Third Circuit held that the disqualifica-
tion-of-class-counsel issue was ripe for review under the
collateral order doctrine because it was “too important to
be denied review” (id., at A5), and because it presented
“a serious question of impropriety” (id., at A5), the Court
simply brushed aside the class certification issue on the
basis of its rigid, and we submit, inconsistent position that
no aspect of a class determination is ever appealable under
the collateral order doctrine. Such decisions, the Court
noted, may be appealed only if first certified for inter-
locutory review by the District Court pursuant to 28
U. S. C. § 1292(b), and only if the District Court’s cer-
tification is thereafter found acceptable to the Court of
Appeals. Thus (id., at A4):
“As we recently stated: ‘[T]his court has taken a
strong position that a class certification decision, per
se, is not an appealable final order under 28 U. S. C.
§ 1291. Hackett v. General Host Corp., 455 F. 2d 618
Petition for Writ of Certiorari 15
(3d Cir.), cert. denied, 407 U. S. 925 (1972). To
qualify for interlocutory review in this circuit a class
certification decision must be attended by special
factors which take it outside the ambit of the general
rule. Katz v. Carte Blanche Corp., 496 F. 2d 747, 756
(3d Cir.) (in banc), cert. denied, 419 U. S. 885
(1974).” Ungar v. Dunkin’ Donuts of America, Inc.,
— F. 2d —, Nos. 75-1625/6 (3d Cir., Mar. 3, 1976).
We will review class action certification decisions if
the parties satisfy two conditions precedent, neither of
which may be expected absent special circumstances—
an order by the district court judge and permission
from this court. 28 U.S.C. § 1292(b). See generally
Note, Interlocutory Appeals in the Federal Courts
Under 28 U. S. C. § 1292(b), 88 Harv. L. Rev. 607
(1975). Here, appellant met neither of the condi-
tions. Accordingly, we will grant appellees’ motion
to dismiss the appeal at No. 75-1673.”
Continuing (id., at A5-A6):
“The appeal at No. 75-1849 stands on a different
footing. Where a serious question of impropriety
arises in the context of a motion to disqualify an at-
torney from proceeding to trial, this court has invoked
the collateral rule of Cohen v. Beneficial Industrial
Loan Corp., 337 U. S. 541 (1949). Accordingly, we
have held that district court orders denying such mo-
tions may be appealable under 23 U. S. C. § 1291.
Kroungold v. Triester. 521 F. 24 763, 765 (3d Cir.
1975); American Roller Co. v. Budinger, 513 F. 2d
982, 983 (3d Cir. 1975); Greene v. Singer Co., 509
F. 2d 750 (3d Cir. 1971) (sur motion to dismiss ap-
peal). We believe that the questions presented in the
appeal at No. 75-1849 are ‘“ ‘too important to be de-
16 Petition for Writ of Certiorari
nied review and too ‘independent of the cause’ itself
to require that appellate consideration be deferred” ’.
Ibid. at 751. We hold, therefore, that the order deny-
ing the motion to disqualify plaintiffs’ counsel qualifies
for immediate review.” (Footnote omitted).
Turning to the merits of the appeal on the disquali-
fication-of-class-counsel issue, the Court held that since an
appearance of professional impropriety had been created
when Kramer named himself as class representative and
appointed his only associate as class counsel, it need not
concern itself with whether any substantive impropriety
had occurred (id., at 7). In doing so, the Court declined
to review, either in the context of Kramer's qualification
to act as class counsel or, and more to the point in respect
of the instant petition, his adequacy to act as class repre-
sentative, any of the following questions of professional
impropriety:
(1) Whether Kramer, as the de facto attorney,
filed a complaint in federal court without good ground
in violation of Rule 11 of the Federal Rules of Civil
Procedure and DR7-102(A);
(2) Whether the suit was filed by Kramer as a
strike suit for the purpose of obtaining counsel fees in
violation of EC 7-4 and DR7-102(A)(2). Compare
Blue Chip Stamps, et al. v. Manor Drug Stores, 421
U. S. 723, 740-743 (1975);
(3) Whether in naming himself as class repre-
sentative and appointing himself as de facto class
counsel, Kramer solicited employment from the un-
named members of the class in violation of Canon 2
generally, EC 2-4 and EC 2-8. Compare Graybeal v.
American Savings & Loan Association, 59 F. R. D. 7,
14 (D. D. C. 1973); Cotchett v. Avis Rent A Car
PES ST CTR
SO eR ren Re 4.
Petition for Writ of Certiorari 17
System, Inc., 56 F. R. D. 549, 554 (S. D. N. Y. 1972);
Shields v. First National Bank of Arizona, 56 F. R. D.
442, 444, (D. Ariz. 1971); Shields v. Valley National
Bank of Arizona, 56 F. R. D. 448, 450 (D. Ariz. 1971);
(4) Whether Kramer solicited employment from
Harrison after contacting him for the purpose of ob-
taining his joinder in a class action in violation of
DR2-104(A)(5);
(5) Whether in maintaining this suit with firm
funds, firm personnel and firm facilities, Kramer vi-
olated EC 5-8 and DR5-103(B). Compare Bogus v.
American Speech & Hearing Association, — F. Supp.
—, (Civ. No. 74-849, E. D. Pa., August 7, 1975);
(6) Whether in refusing to withdraw as class
counsel after he had sworn under oath that he would
testify as a witness on behalf of the class, Kramer vi-
olated DR5-101(B)(1)-(4) and DRS-102(A). Com-
pare Draganescu v. First National Bank of Hollywood,
502 F. 2d 550 (5th Cir. 1974), cert, denied, 421 U. S.
929 (1975); Harmar Drive-In Theatre, Inc. v. Warner
Bros. Pictures, Inc., 239 F. 2d 555 (2d Cir. 1956), cert.
denied, 355 U. S. 824 (1957); Kriger v. European
Health Spa, Inc. of Milwaukee, Wis., 56 F. R. D. 104,
105-6 (E. D. Wis. 1972);
(7) Whether in requiring an untrained and in-
experienced lawyer to appear as counsel of record in
a complex class action brought under the federal secu-
rities laws against 29 defendants, Kramer violated EC
1-2, DR2-103(A) and Canon 6 generally;
(8) Whether in denying under oath that he had
ever acted as attorne; de facto, and affirming under
oath that he, as client, and Britton, as attorney, had
reached a fee agreement at the outset of the case,
18
Petition for Writ of Certiorari
Kramer committed perjury or otherwise violated DRT-
102(A)(5) and EC 8-5;
(9) Whether in having Kapustin convey to Brit-
ton on the eve of Britton’s deposition a false account
of the relationship that allegedly existed between
Kramer and Britton while Britton was counsel of
record, Kramer violated DR7-102(A)(7)-(8); and
(10) Whether in requiring counsel of record to
communicate with the Court on stationery, and to file
pleadings, all bearing his firm name, Kramer violated
DR2-102(B)-(C).
Petition for Writ of Certiorari 19
REASONS FOR GRANTING THE WRIT.
I
The Basis on Which the Court of Appeals Declined to
Entertain Jurisdiction Over Petitioner's Appeal Is
Contrary to This Court’s Holding in Cohen, as Ap-
plied in Eisen IV, and Is in Conflict With Rulings of
Other Circuits.
As noted, the Court of Appeals for the Third Circuit
has adopted a mechanical rule of law which bars any early
appeal involving any aspect of a class determination unless
first certified by the District pursuant to 28 U. S. C.
1292(b ) as an interlocutory order qualifying for immediate
appeal and thereafter found acceptable for review by the
Court of Appeals.
The Third Circuit’s refusal to engage in an analysis
of whether a class action decision can ever be a final col-
lateral order appealable under § 1291 was in error. In
Eisen IV, supra, at 169-172, this Court, after painstaking
analysis, specifically concluded that the collateral order
doctrine could and should be applied to class action rulings
in order to determine whether those decisions are immedi-
ately appealable under § 1291. Thus (id., at 169-170):
“At the outset we must decide whether the Court
of Appeals in Eisen III had jurisdiction to review the
District Court’s orders permitting the suit to proceed
as a class action and allocating the cost of notice.
Petitioner contends that it did not. Respondents
counter by asserting two independent bases for appel-
late jurisdiction: first, that the orders in question con-
stituted a ‘final’ decision within the meaning of 28
U. S. C. § 1291 and were therefore appealable as of
right under that section.... Because we agree with
20 Petition for Writ of Certiorari
the first ground asserted by respondents, we have no
occasion to consider the second.” (Emphasis added;
footnote omitted ).
Continuing (id., at 172):
“Like the order in Cohen, the District Court’s judg-
ment on the allocation of notice costs was ‘a final dis-
position of a claimed right which is not an ingredient
of the cause of action and does not require considera-
tion with it.’ id., at 546-547, and it was similarly ap-
pealable as a ‘final decision’ under § 1291. In our
view the Court of Appeals therefore had jurisdiction
to review fully the District Court’s resolution of the
class action notice problems in this case, for that
court’s allocation of 90% of the notice costs to respond-
ents was but one aspect of its effort to construe the
requirements of Rule 23(c)(2) in a way that would
permit petitioner's suit to proceed as a class action.”
(Footnote omitted ).
The Third Circuit’s dogged adherence to its ruling in
Hackett v. General Host Corp., 455 F. 2d 618 (3d Cir.
1972), cert. denied, 407 U. S. 925 (1972), which predated
Eisen IV, simply rejects this Court’s clear ruling in the lat-
ter case. Not every class action ruling by a district court
will be immediately appealable under Cohen, but at least
the Circuit Courts are required to apply the Cohen test in
order to determine whether the decision is then appealable.
Despite Eisen IV, a clear split has developed among
the Circuit Courts on the question of whether they are re-
quired to subject early appeals of class action decisions to
the Cohen analysis. The Second and Eighth Circuits have
taken the position that class action determinations ap-
pealed prior to final judgment must be exposed on an ad
hoc basis to the Cohen standards when deciding whether
ee Ee SES wee
Petition for Writ of Certiorari 21
appellate jurisdiction exists. See In Re Master Key Anti-
trust Litigation, 528 F. 2d 5, 9-13 (2d Cir. 1975);* and In
Re Cessna Aircraft Distributorship Antitrust Litigation,
518 F. 2d 213 (8th Cir. 1975), cert. denied sub. nom.
Cessna Aircraft v. White Industries, 44 U. S. L. W. 3282
(Nov. 11, 1975). See also Judge Rosenn’s concurring
opinion herein (Appendix A., infra, p. Al9), wherein he
eschews an absolutist position by noting that a class certifi-
cation order will not “usually” meet the Cohen test. By
necessary implication, however, he is prepared to evaluate
each such appeal in the light of Cohen.
On the other hand, the Third, Seventh and Ninth
Circuits have absolutely refused to apply the collateral
order doctrine when the appeal before them involves any
aspect of a class action certification. See Appendix A,
infra, and cases cited therein; King v. Kansas City Southern
Industries, Inc., 479 F. 2d 1259 (7th Cir. 1973) (per
curiam ); and Blackie v. Barrack, 524 F. 2d 891 (9th Cir.
1975), petition for cert. filed (44 U. S. L. W. 3518).°
5. In Master Key the Second Circuit described its approach as
follows (id., at 10):
“We have not chosen to adopt a strict rule denying appeal-
ability for class a tion certification orders in all cases [citation
omitted], recognizing that there may be ‘exceptional circum-
stances’ under which interlocutory review of such orders may
be appropriate. (Footnote omitted. )
6. The Second Circuit noted this split between the circuit
courts in Master Key as follows (id., at 10, n. 8):
“8. We note in passing that at least three circuits have taken
the view that class action certification orders can never be
appealable as ‘final orders’ under 28 U. S. C. §1291. See
lackie v. Barrack, 524 F. 2d 891 (9th Cir. 1975); King v.
Kansas City Southern Industries, Inc., 479 F. 2d 1259 (7th Cir.
a Ae 3 curiam ); Hackett v. General Host Corp., 455 F. 2d
618 (3d Cir.), cert. denied, 407 U. S. 925, 92 S. Ct. 2460, 32
L. Ed. 2d 812 ( ey) See also In re Cessna Aircraft Dis-
tributorship Antitrust Litigation, 518 F. 2d 314 (8th Cir. 1975).
This is the view recommended for our circuit by Judge
Friendly in his concurrence in ag v. April Industries,
Inc., 520 F. 2d 650, 659-60 (2d Cir. 1975). The Ninth Circuit,
22 Petition for Writ of Certiorari
The recent decisions of the Tenth Circuit emphasize
the need for a clear statement on this issue, for they flirt
with both approaches, but do not conclusively establish
which one they will follow. Compare Hellerstein v. Mr.
Steak, Inc., 531 F. 2d 470 (10th Cir. 1976), with Seiffer v.
Topsy’s International, 520 F. 2d 795 (10th Cir. 1975), cert.
denied, 96 S. Ct. 779 (1976).
The folly of the Third Circuit’s wooden rule that the
collateral order doctrine must not be applied to the District
Court’s class action decision in this case is revealed by
the appellate court’s expressed willingness to apply the
very same doctrine to the very same facts when presented
in the form of a motion to disqualify counsel.’ Eisen IV
specifically instructs all appellate courts that class action
decisions are not immune from analysis under the col-
lateral order doctrine, and it follows that the Third Cir-
cuit’s decision to exalt its pre-Eisen IV ruling in Hackett
over the ruling in Eisen IV involves an erroneous appli-
cation of law and should be reversed.
6. (Cont'd. )
in Blackie v. Barrack, supra, reasoned that the exceptional
circumstances which justify review of a collateral order under
Cohen v. Beneficial Industrial Loan Corp., 337 U. S. 541, 69
S. Ct. 1221, 93 L. Ed. 1528 (1949), cannot be present in cases
challenging class action certifications because effective review
of the claim of improper certification can be had at the con-
clusion of the trial.”
7. An even more bizarre result was reached by the Fifth Cir-
cuit in Glenn v. Arkansas Best Corporation, et al., 525 F. 2d 1216
1975) where the Court sidestepped its earlier rulings that disquali-
cation-of-counsel issues are immediately appealable (See, e.g.,
Draganescu v. First National Bank of Hollywood, supra, and
Uniweld Products, Inc. v. Union Carbide Corporation, 385 F. 2d
992 (5th Cir. 1967), cert. denied, 390 U. S. 921 (1968)) and
refused to entertain an appeal from the qualification of plaintiff,
Glenn, as class counsel on the ground that the issue “was intrin-
sically the same as the challenge of Glenn as a representative of
the Class under Rule 23” (id., at 1217). The effect of this ruling
makes the appealability of the denial of a motion to disqualify
counsel turn upon the untenable distinction whether or not counsel
purports to represent a class.
Petition for Writ of Certiorari 23
Il.
The District Court’s Decision Allowing Kramer to Proceed
as Class Representative Is a Final Collateral Order
Presently Appealable Under 28 U. S. C. § 1291 and
Involves Ethical Considerations Which Require Ex-
position by This Court.
Andersen asserted before the Third Circuit that the
District Court’s determination that Kramer could proceed
in this litigation as class representative was a final decision
under 28 U. S. C. § 1291, and was therefore immediately
appealable. The decisions of this Court o» the issue of
appealability under § 1291 establish that there are three
questions to be answered in ascertaining whether a par-
ticular order constitutes a “final decision”. They are:
(1) whether the decision is final in the sense that it is
not “tentative, informal or incomplete”; (2) whether the
decision involves a collateral issue in the sense that it is
separable from the “merits” of the claims upon which
relief is sought; and (3) whether the issues presented for
review are “serious and unsettled” questions, “too impor-
tant” to be denied review. As this Court summed it up
in Cohen (supra, at 546):
“This decision appears to fall in that smail class
which finally determine claims of right separable from
and collateral to, rights asserted in the action, too
important to be denied review and too independent
of the cause itself to require that appellate considera-
tion be deferred until the whole case is adjudicated.
The Court has long given this provision of the statute
this practical rather than a technical construction”.
That the decision of the District Court qualifying
Kramer as class representative is neither tentative nor an
ingredient of plaintiffs’ cause seem too, apparent to require
24 Petition for Writ of Certiorari
extended discussion. Since the District Court twice con-
sidered and twice upheld Kramer’s role as class repre-
sentative, its decision cannot be considered tentative,
informal or incomplete.* Nor can it seriously be argued
that a determination regarding Kramer's ability to repre-
sent the class has any effect upon the resolution of plain-
tiffs’ Securities Acts claims against the defendants. The
ruling in this regard is plainly no different than the order
permitting Kramer to act as class counsel—an order con-
sistently recognized to be collateral to the merits of the
case. See Appendix A, infra, and cases cited therein.
The real focus here is upon the seriousness and im-
portance of the issue presented for review and upon a
weighing of the disadvantages of denying justice by delay
against the disadvantages of piecemeal review.
1. The Seriousness of the Issue Presented for Review.
The starting point is, of course, the Third Circuit’s
explicit and emphatic recognition, as noted above, of the
seriousness of the issue presented by Kramer’s conduct.
That seriousness stems from the fact that it involves the
ethics of the bar, the interpretation and administration of
those ethics by the judiciary, and the importance that such
ethics have to the general public. Of crucial importance
in this regard is the circumstance that Kramer, first and
foremost, is an attorney and officer of the court. It makes
no difference that the issue ‘nvolves Kramer’s role as class
representative as opposed to his role as class counsel. As
Kramer's associate, Britton, astutely observed, “You can’t
separate the two”. Formal Opinion 336 of the American
Bar Association’s Standing Committee on Ethics and Pro-
fessional Responsibility states:
8. The fact that the District Court’s order was made in the
context of a Rule 23 determination, which is subject to possible
modification, does not require a different conclusion in this case
any more than it did in Eisen IV.
Petition for Writ of Certiorari 25
“In regulating a lawyer's nonprofessional as well
as professional conduci, the Code of Professional
Responsibility charted no new course. It is recog-
nized generally that lawyers are subject to discipline
for improper conduct in connection with business
activities, individual or personal activities, and activi-
ties as a judicial, governmental, or public official. . . .
As stated in E. C. 1-2, the ‘public should be pro-
tected from those who are not qualified to be lawyers
by reason of a deficiency in . . . moral standards.’
It would be utterly incongruous with the entire tenor
of the code to find that its provisions regarding law-
yers who engage in fraud, deceit, misrepresentation
... do not apply to them when they are acting as
individuals or as public servants.” (Emphasis added).
Accord: Suffolk Roadways, Inc. v. Minuse, 287 N. Y. S. 2d
965, 970 (1968 ); 60 Columbia St. v. Leofreed Realty Corp.,
110 N. Y. S. 2d 417 (Sup. Ct., N. Y. Co. 1952), affd. per
curiam, 120 N. Y. S. 2d 295 (App. Div. 1953).
The record below -presents a dramatic albeit sorry
illustration of the ethical complications and difficulties
which must inevitably arise when a practicing attorney
brings a lawsuit on his owa, naming himself on the one
hand as representative of a class of potentially thousands
of unnamed plaintiffs, and appointing himself on the other
hand as legal counsel to the entire plaintiff class without
having ever met or spoken to one of them. We submit
that the inevitable potential for such complications, and
the concomitant public distrust of lawyers that such poten-
tial engenders, dictate adoption of an uncompromising
rule of law forbidding the practice without qualification.
It is submitted further that an outspoken opinion at the
highest appellate level swiftly and resolutely announcing
26 Petition for Writ of Certiorari
such a standard would have particular relevance in the
present climate of disrespect for lawyers and indeed for
the judicial system as a whole.®
The importance of the issue is further underscored
by the circumstance that in refusing to review Kramer's
qualifications to act as a class representative concomitantly
with its review of his qualifications to act as class counsel,
the Court of Appeals effectively deprived itself of the op-
portunity to consider the appropriate remedy to be applied
to Kramer's conduct when viewed as a whole. Disqualifi-
cation of Kramer as counsel is an inadequate cure for his
misconduct, as it leaves undecided the crucial question
of whether such misconduct has disqualified him to
represent the class which has been certified. The over-
whelming weight of authority among the district courts
supports the view that the more appropriate cure in the
case of a plaintiff who files a complaint naming himself as
class representative and class counsel is to refuse him class
certification. See, e.g., Kriger v. European Health Spa.,
Inc. of Milwaukee, Wis., supra; Shields v. First National
Bank of Arizona, supra; Cotchett v. Avis Rent A Car Sys-
tem, Inc., supra; and Graybeal v. American Savings &
Loan Association, supra. Accord: 1 uroff v. The May Com-
pany, — F. 2d — (No. 75-1697) (6th Cir. 3/16/76). The
underlying rationale of these decisions is that class actions
should not be permitted to proceed when instituted by an
attorney for improper and self-serving purposes. This
remedy, rather than the mere disqualification of counsel,
prevents the creation of onerous class litigation where none
previously existed and reestablishes the status quo with-
out prejudicing anyone's interests. See American Pipe &
Construction Co. v. Utah, 414 U. S. 538 (1974). The
9. See, e.g., Carrington, The Ethical Crises of American Law-
yers, 36 Univ. of Pittsburgh Law Rev. 35 (Fall 1974).
Petition for Writ of Certiorari 27
Ninth Circuit articulated this rationale in In re Hotel Tele-
phone Charges, 500 F. 2d 86, 91 (1974) as follows:
ar In view of the nonexistent, or miniscule re-
coveries that are likely to accrue to the supposedly in-
tended beneficiaries, it is not surprising that most of
the named plaintiffs are attorneys acting as counsel
for themselves. Considering that this action has been
primarily generated and financially supported by the
lawyers who possibly stand to realize astronomical
fees, and not the individuals whose potential claims
in any event are de minimis we find the Court's con-
clusion in Berley v. Dreyfus Co., 43 F. R. D. 397, 398
(S. D. N. Y. 1967) applicable here:
‘... we think that paragraph (b)(3) read as a
whole reflects a broad policy of economy in the © se
of society’s difference-settling machinery. One method
of achieving such economy is to avoid creating law-
suits where none previously existed. This is in part
why “the extent and nature of any litigation . . . al-
ready commenced”. is pertinent to the required find-
ing. If a class of interested litigants is not already in
existence the court should not go out of its way to
create one without good reason.’ ” (footnotes omitted ).
It would serve no useful purpose to catalogue each
respect in which the Code of Professional Responsibility
has been violated in this case. Any one of them is more
than sufficient to require the disqualification of plaintiffs
as class representatives herein.
As stated in Stavrides v. Mellon National Bank &
Trust Company, 60 F. R. D. 634, 636-7 (W. D. Pa. 1973):
“The issue then becomes whether questions which
seek to establish unethical conduct by plaintiffs’ coun-
28 Petition for Writ of Certiorari
sel are relevant to the question of whether the class
should be declared. Put another way, if defense
counsel do discover unethical conduct can that that
fact properly be used as a basis for an argument seek-
ing denial of class action status?
“Although the cases on this subject are not legion, it
it is apparent that unethical conduct by plaintiffs
counsel may result in a denial of the class action mo-
tion. Korn v. Franchard Corp., C. C. H. Fed. Sec.
Law Reptr. {§ 92,845 (S. D. N. Y. 1970). Taub v.
Glickman, 14 F. R. Serv. 2d 847 (S. D. N. Y. 1970);
Simon v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,
16 F. R. Serv. 2d 1021 (N. D. Tex. 1972).
“These cases stand for the proposition that class action
status should be denied where counsel’s unethical con-
duct has been or is prejudicial to the interests of the
class, or results in creating a conflict of interest be-
tween the attorney and the class and the attorney is,
therefore, obviously unable to protect the interests of
the class.”
Continuing (id., at 637):
“We think that these cases are correct and that it is
proper for courts to consider the ethical conduct of
plaintiffs’ counsel in deciding whether to certify a
class. As the Third Circuit pointed out in Greenfield
v. Villager Industries, Inc., 483 F. 2d 824 (3rd Cir.,
filed June 21, 1973) there is a unique relationship
between the plaintiffs’ counsel and the members of
the class:
. in addition to the normal obligations of an
officer of the court, and as counsel to parties to
Petition for Writ of Certiorari 29
the litigation, class action counsel possess, in a
very real sense, fiduciary obligation to these not
before the court.”
And finally (ibid):
“In assessing the ability of the plaintiffs’ counsel to
carry out his fiduciary duties to absent class members
we think the court should use its ‘broad administra-
tive, as well as adjudicative power’ as ‘guardian of the
rights of the absentees’ to see that the absentees are
represented by counsel who is ethically as well as in-
tellectually competent to represent them.”
To require a lawyer to have a client before commenc-
ing class action litigation cannot have any adverse impact
upon the public’s ability to right wrongs. It will, however,
have a deleterious impact on counsel's ability to commence
such litigation, suc sponte, in the hope of generating large
counsel fees for himself. If the class action device is
available to an attorney without the restraining influence
of a class representative whose individual interests are
limited to a recovery of his own damages, it becomes an
almost irresistible instrument for vexatious litigation be-
cause the lawyer, unlike the layman, is fully initiated into
the power that the mere commencement of such a suit has
to produce settlement without regard to the merits.
As Justice Rehnquist recently had occasion to observe
in Blue Chip Stamps, et al v. Manor Drug Stores, supra, at
740:
“ .. [I]n the field of federal securities laws governing
disclosure of information even a complaint which by
objective standards may have very little chance of
success at trial has a settlement value to the plaintiff
out of any proportion to its prospect of success at trial
so long as he may prevent the suit from being resolved
30 Petition for Writ of Certiorari
against him by dismissal or summary judgment. The
very pendency of the lawsuit may frustrate or delay
normal business activity of the defendant which is
totally unrelated to the lawsuit.”
Continuing (id., at 741):
“The potential for possible abuse of the liberal
discovery provisions of the Federal Rules of Civil
Procedure may likewise exist in this type of case to a
greater extent than they do in other litigation. The
prospect of extensive deposition of the defendant's
officers and associates and the concomitant opportun-
ity for extensive discovery of business documents, is
a common occurrence in this and similar types of liti-
gation. To the extent that this process eventually pro-
duces relevant evidence which is useful in determining
the merits of the claims asserted by the parties, it
bears the imprimatur of those Rules and of the many
cases liberally interpreting them. But to the extent
that it permits a plaintiff with a largely groundless
claim to simply take up the time of a number of other
people, with the right to do so representing an in ter-
rorem increment of the settlement value, rather than
a reasonably founded hope that the process will reveal
relevant evidence, it is a social cost rather than a
benefit.”
And finally (id., at 742-743):
“Obviously there is no general legal principle
that courts in fashioning substantive law should do
so in a manner which makes it easier, rather than more
difficult, for a defendant to obtain a summary judg-
ment. But in this type of litigation, where the mere
existence of an unresolved lawsuit has settlement
value to the plaintiff not only because of the possibility
that he may prevail on the merits, an entirely legi-
Petition for Writ of Certiorari 31
timate component of settlement value, but because
of the threat of extensive discovery and disruption of
normal business activities which may accompany a
lawsuit which is groundless in any event, but cannot
be proven so before trial, such a factor is not to be
totally dismissed.”
2. The Disadvantages of Denying Justice by Delay.
Permitting an attorney to act as class representative
although he has engaged in unethical behavior by, inter
alia, stirring up litigation, amounts to a judicial im-
primatur upon that conduct which is readily perceptible to
not only all of the other class members but to the general
public. If it is improper for an attorney to do what Mr.
Kramer did in this case—and Andersen strenuously con-
tends that it is—an appellate court statement outlawing
such conduct several years hence will not eradicate ‘he un-
favorable impression drawn by the class members and the
public in the intervening years. In other words, the Dis-
trict Court’s approval, and the Circuit Court’s apparent
approval, of Mr. Kramer's conduct spreads wider and
deeper as each day passes, for as Chief Justice Burger had
occasion to observe in an address to the American Law
Institute (52 F. R. D. 211, 215):
“When a lawyer flouts the standards of professional
conduct once, his conduct will be echoed in multiples
for years to come and long after he leaves the scene.”
Moreover, it is clear that there exists a real possibility
that Andersen will suffer irremedial harm if Mr. Kramer is
not removed from the role as representative plaintiff in this
matter. The question is whether a final judgment rendered
in this case with Mr. Kramer as class representative wold
32 Petition for Writ of Certiorari
be entitled to res judicata effect in other courts in the
future. In other words, if Andersen is successful on the
merits of this case and has judgment entered for it and
against the class of plaintiffs, would it still be possible for a
dissatisfied class member to challenge the validity of that
judgment against him on the ground that he had not been
adequately represented in the proceeding? If that person
were not adequately represented, it would be a denial of
his due process rights to bind him by the resultant judg-
ment. Hansbury v. Lee, 311 U. S. 32 (1942).
In Gonzales v. Cassidy, 474 F. 2d 67, 74 (5th Cir.
1973) the appellate court addressed this issue with the
following conunent:
“As a general rule though, a judgment in a class
action will bind the absent members of the class. The
exception to this general rule is grounded in due
process. Due process of law would be violated for
the judement in a class suit to be res judicata to the
absent members of a class unless the court applying
res judicata can conclude that the class was adequately
represented in the first suit. Hansberry v. Lee, 311
U. S. 32, 61 S. Ct. 115, 85 L. Ed. 22 (1942). See Sam
Fox Publishing Co. v. United States, 366 U. S. 683,
691, 81 S. Ct. 1309, 6 L. Ed. 2d 604 (1961); Dierks v.
Thompson, 414 F. 2d 453 (1st Cir. 1969); Eisen v.
Carlisle and Jacquelin, 391 F. 2d 555 (2nd Cir. 1968);
Mersay v. First Rep. Corp. of America, 43 F. R. D. 465
(S. D. N. Y. 1968).” (Footnote omitted).
Cf., Sagers v. Yellow Freight Systems, Inc., 68 F. R. D. 686,
689 (N. D. Ga. 1975). See also The Importance of Being
Adequate: Due Process Requirements In Class Actions
Under Federal Rule 23, 123 University of Pennsylvania
Law Review 1217 (May, 1975). As the Second Circuit
Petition for Writ of Certiorari 33
Court of Appeals noted in Bersch v. Drexel Firestone, In-
corporated, 519 F. 2d 974, 996 (1975), cert. denied, 96
S. Ct. 453 (1975):
“*". . [I)£ defendants prevail against a class they
are entitled to a victory no less broad than a defeat
would have been.”
In sharp contrast to the serious harm which will occur
if prompt appellate review is denied in this case, there can
be no disadvantages of substance in permitting the im-
mediate appellate consideration of the limited questions
presented here. Petitioner's appeal, as noted, does not in-
volve the appealability of class determinations as such,
but rather one particular aspect of such a determination
which, when addressed and settled with appropriate guid-
ance from this Court, is never likely to surface again.
34 Petition for Writ of Certiorari
CONCLUSION.
The issue presented herein should have been sub-
jected to a Cohen analysis by the Third Circuit, and if it
had been the matter would have been found to be im-
mediately appealable under § 1291, for the issue is a
crucial one which cannot be fully rectified by reversal after
final judgment. Thus, the damage involved if review is
deferred far outweighs the one-time impact this case will
have on the appellate courts if a prophylactic rule barring
such conduct is established by this Court.
June 10, 1976.
Respectfully submitted,
OLIVER C. BIDDLE,
MATTHEW M. STRICKLER,
RicHARD Z. FREEMANN, JR.,
20th Floor, United Engineers
Building,
30 South 17th Street,
Philadelphia, Pennsylvania. 19103
CHARLES W. Boanp,
135 South LaSalle Street,
Chicago, Illinois. 60603
Attorneys for Petitioner.
Of Counsel:
BALLARD, SPAHR, ANDREWS & INGERSOLL,
20th Floor, United Engineers Building,
30 South 17th Street,
Philadelphia, Pennsylvania. 19103
Wiutson & MCcILVAINE.
135 South LaSalle Street,
Chicago, Illinois. 60603
OO ee ee
APPENDIX A.
UNITED STATES COURT OF APPEALS
For THE Tuirp Circuir
Nos. 75-1673 and 75-1849
MITCHELL A. KRAMER and DAVID C. HARRISON
0.
SCIENTIFIC CONTROL CORP.; ARTHUR ANDER-
SEN & CO.; H. L. FEDERMAN & CO.; W. C.
BAKER; W. D. RAY; J. J. BONNESS; L. J. RAT-
NER; NELSON McKINNEY; R. D. FREEDMAN;
HAM SWYTER; R. T. GOWAN; D. A. W. YOUNG;
I. ©. DEAL and E. E. SPECKS; KLEINER, BELL
AND CO., INC.; JOHN B. BAIRD; DONALD G.
O'NEAL; NORMAN C. YOUNG; CLYDE WIL-
LIAMS; VAN CALVIN ELLIS; H. L. FEDERMAN,
PATRICK S. MARTIN; WILLIAM C. WEATHER-
FORD; HENRY W. HOOKER; MERRILL J. WHIS-
TON; ARTHUR E. SPECKHARD; WILLIAM C.
LEE; JOSEPH T. JONES and GEORGE JAGGERS
ARTHUR ANDERSEN & CO., Appellant in
Nos. 75-1673 and 75-1849
APPEAL FROM THE UNITED STATES District CourT FOR THE
EASTERN Districr OF PENNSYLVANIA
(D.C. Civil No. 71-1954)
(Al)
A2 Appendix A
Argued February 11, 1976
Before: ALpISERT, Grppons and RosEnNn, Circuit Judges.
Oliver C. Biddle, Esq.
Richard Z. Freeman, Jr., Esq.
1035 Land Title Building
Philadelphia, Pennsylvania 19110
Charles W. Boand, Esq.
135 South LaSalle Street
Chicago, Illinois 60603
Attorneys for Appellant
Of Counsel:
Ballard, Spahr, Andrews &
Ingersoll
1035 Land Title Building
Philadelphia, Pennsylvania 19110
Wilson & Mcllvaine
135 South LaSalle Street
Chicago, Illinois 60603
Steven Kapustin, Esq.
313 South Seventeenth Street
Philadelphia, Pennsylvania 19103
Attorney for Appellees
Opinion of the Court
(Filed April 20, 1976)
ApIsERT, Circuit Judge.
May a member of the bar who is a plaintiff class
representative in a class action proceeding under Rule
23(b)(3) of the Federal Rules of Civil Procedure desig-
nate as his counsel a member or employee of his law firm?
Appendix A A3
This is the question presented in the appeal at No. 75-1849
from an order denying appellant’s motion to disqualify
plaintiffs’ counsel. Also raised, at No. 75-1673, is the issue
whether the district court erred in certifying the class.
F. R. Civ. P. 23(a), (c). We answer the first question in
the negative; we do not reach the second, for want of an
appealable order.
Mitchell A. Kramer and David C. Harrison, then law
partners, purchased as joint tenants 50 shares of Scientific
Control Corp. stock on January 6, 1969. They sold the
stock one month later at a net loss of $438.13. During
the summer of 1971, after Kramer and Harrison had dis-
solved their partnership, Kramer received a four-page
questionnaire from the Securities and Exchange Commis-
sion requesting inf.rmation on the transaction in Scientific
Control stock. Kramer did not answer the SEC inquiry.
Instead, after communicating with Harrison and receiving
his permission, Kramer filed suit,’ naming himself and
Harrison as plaintiffs. The complaint named as defend-
-ants Scientific Control Corp. and certain officers and
directors; H. L. Federman & Co., an underwriting firm;
and Arthur Andersen & Co., the certified public accounting
firm and appellant herein. Robert M. Britton, then an
associate in Kramer’s office, signed the complaint. Britton
later moved to dismiss as to several named defendants,
to add several defendants, and to amend the complaint;
still later, he moved for a class action determination.
Shortly before Britton left the employ of Kramer in July
1972, he withdrew as counsel and Steven Kapustin, then
1. The complaint as amended alleged claims under the Securi-
ties Act of 1933, the Securities Exchange Act of 1934, and the
regulations thereunder, as well as common law claims predicated
on pendent jurisdiction. See Kramer v. Scientific Control Corp.,
365 F. Supp. 780 (E. D. Pa. 1973) (district court opinion denying
motions to dismiss).
Oe
A4 Appendix A
replacing Britton as an associate but now a partner of
Kramer, entered his appearance.
On October 1, 1974, the district court granted plain-
tiffs’ deferred motion for a determination that the action
proceed as a Rule 23(b)(3) class action. 64 F. R. D. 558
(E. D. Pa. 1974). On April 17, 1975, the district court
denied a motion for reconsideration of its class action
certification or, in the alternative, for a certification pur-
suant to 28 U. S. C. § 1292(b). 67 F. R. D. 98 (E. D.
Pa. 1975). The appeal at No. 75-1673 followed; appellees
have moved to dismiss this appeal for want of jurisdiction.
Two months later, on June 20, 1975, appellant moved
the district court, inter alia, to disqualify plaintiffs’ coun-
sel because “[t]here exists an irreconcilable conflict of
interest between the representation by Kramer & Salus
[the firm in which Kapustin is now a partner] of the named
plaintiffs and the members of the class purported to be
represented by the named plaintiffs; 2. The Code of Pro-
fessional Responsibility bars such representation . . . .”
Appendix at 272a. The district court, treating the motion
as one for reargument or reconsideration of its April 17th
order and, as such, untimely, denied the motion. Ibid. at
277a. Appellant then noticed the appeal at No. 75-1849.
I.
As we recently stated: “[T]his court has taken a strong
position that a class certification decision, per se, is not an
appealable final order under 28 U. S.C. § 1291. Hackett v.
General Host Corp., 455 F. 2d 618 (3d Cir.), cert. denied,
407 U. S. 925 (1972). To qualify for interlocutory review
in this circuit a class certification decision must be attended
by special factors which take it outside the ambit of the
general rule. Katz v. Carte Blanche Corp., 496 F. 2d 747,
756 (3d Cir.) (in banc), cert. denied, 419 U. S. 885
(1974).” Ungar v. Dunkin’ Donuts of America, Inc., — F.
Appendix A A5
2d —, —, Nos. 75-1625/6 (3d Cir., Mar. 3, 1976). We will
review class action certification decisions if the parties
satisfy two conditions precedent, neither of which may be
expected absent special circumstances—an order by the
district court judge and permission from this court. 28
U. S. C. §1292(b). See generally Note, Interlocutory
Appeals in the Federal Courts Under 28 U.S. C. § 1292(b),
88 Harv. L. Rev. 607 (1975). Here, appellant met neither
of the conditions. Accordingly, we will grant appellees’
motion to dismiss the appeal at No. 75-1673.
The appeal at No. 75-1849 stands on a different foot-
ing. Where a serious question of impropriety arises in the
context of a motion to disqualify an attorney from proceed-
ing to trial, this court has invoked the collateral rule of
Cohen v. Beneficial Industrial Loan Corp., 337 U. S. 541
(1949). Accordingly, we have held that district court
orders denying such motions may be appealable under 28
U.S.C. § 1291. Kroungold v. Triester, 521 F. 2d 763, 765
(3d Cir. 1975); American Roller Co. v. Budinger, 513 F. 2d
982, 983 (3d Cir. 1975); Greene v. Singer Co. 509 F. 2d 750
(3d Cir. 1971) (sur motion to dismiss appeal ).? We believe
that the questions presented in the appeal at No. 75-1849
are “‘too important to be denied review and too inde-
pendent of the cause itself to require that appellate con-
sideration be deferred’”. Ibid. at 751. We hold, there-
2. We do not hold that every ruling relating to conflict of
interest by an attorney should activate the Cohen rule.*
3. “Every interlocutory order involves, to some degree, a
potential loss. That risk, however, must be balanced against
the need for efficient federal judicial administration as evi-
denced by the Congressional prohibition of piecemeal appel-
late litigation. To accept [a emt view is to invite the
inundation of appellate dockets with what have heretofore
been regarded as nonappealable matters.” Borden Co. v.
Sylk, 410 F. 2d 843, 846 (3d Cir. 1969).
Greene v. Singer Co., supra, 509 F. 2d at 751.
A6 Appendix A
fore, that the order denying the motion to disqualify
plaintiffs’ counsel qualifies for immediate review.
Il.
Having established our appellate jurisdiction to review
the denial of the motion to disqualify, we now properly
turn to the question of the scope of our appellate review.
It has been said that a district court’s decision to grant
or deny such a motion may be reversed only for an abuse
of discretion. See Kroungold v. Triester, supra, 521 F. 2d
at 765 & n. 2. Recently, however, we observed that in many
contexts disqualification motions present purely legal is-
sues, subject to full appellate review. American Roller Co.
v. Budinger, supra, 513 F. 2d at 985 n. 3. Once again, this
possible discrepancy need not detain us here. As pre-
viously rehearsed, pages 3-4 supra, in this case the district
court treated the motion to disqualify counsel as a motion
to reconsider the class action certification decision. The
issue on certifying plaintiffs as class representatives—
whether they would “fairly and adequately protect the in-
terests of the class”, F. R. Civ. P. 23(a)(4), when their
counsel was an employee (and later a partner) in Kramer's
firm—was related, but not identical, to the issue posed by
the disqualification motion. Reducing the distinction to
its bare essentials, the former issue relates to who may
serve as class representative, while the latter relates to who
may serve as counsel. The trial court failed to perceive the
difference and consequently erred.
Il.
We take as our starting point Lord Herschell’s re-
mark to Sir George Jessel: “[I]mportant as it was that
people should get justice, it was even more important that
they should be made to feel and see that they were getting
Appendix A A7
it.”* From this has emerged what may be described as an
axiomatic norm, if not a legal doctrine or concepiion,* viz.,
that the appearance of conduct associated with institutions
of the law be as important as the conduct itself. Indeed,
this notion is at least an implicit predicate of the Code of
Professional Responsibility,’ drafted by the American Bar
Association and implemented by the courts, including the
United States District Court for the Eastern District of
Pennsylvania,® to govern behavior of attorneys. The im-
portance of this notion cannot be gainsaid. Canon 9 of the
Code of Professional Responsibility, which Local Rule 11
in the district court made applicable to counsel, declares:
“A lawyer should avoid even the appearance of profes-
sional impropriety.” Canon 9 is case law in this court:
“[A] court may disqualify an attorney for not only acting
improperly but also for failing to avoid the appearance
3. 2 J. B. Artay Vicrortan CHANCELLORS 460 (1908).
4. See Pound, Hierarchy of Sources and Forms in Different
Systems of Law, 7 Tut. L. Rev. 475, 484-85 (1933).
5. The Preamble to the Code of Professional Responsibility
states in part: “[I]n the last-analysis it is the desire for the respect
and confidence of the mer bers of his profession and of the society
which he serves that should provide to a lawyer the incentive for
the highest possible degree of ethical conduct. The possible loss
of that r and confidence is the ultimate sanction.”
The Code of Judicial Conduct—which the ABA adopted in
1972 and which the Judicial Conference of the United States
eee pr at its April 1973 meeting to govern the conduct of
ederal judges—is to similar effect. Canon 2 of the judicial conduct
code states: “A Judge should avoid impropriety and the appearance
of pas in all his activities.” The Commentary elaborates:
“Public confidence in the judiciary is eroded by irresponsible or
improper conduct by judges. . . TA judge] must therefore accept
restrictions on his conduct that might be viewed as burdensome
the ordinary citizen and should do so freely and willingly.” 69
F. R. D. 273, 274 (1976).
6. Local Rule 11 provides that the ABA’s ethical guidelines
“shall become standards of conduct for attorneys of this Court.”
See Kroungold v. Triester, supra, 521 F. 2d at 765 n. 3.
A8 Appendix A
of impropriety.” Richardson v. Hamilton International
Corp., 469 F. 2d 1382, 1385-86 & n. 12 (3d Cir. 1972), cert.
denied, 411 U. S. 986 (1973).
These considerations form the backdrop to our ap-
proach in this appeal. Thus, we are not concerned with
(a) factual determinations whether Kramer was the de
facto attorney in these proceedings or whether it was
variously Britton or Kapustin; or (b) the quality of the
professional services rendered by counsel on behalf of the
plaintiff class; or (c) the motivations of Kramer as a plain-
tiff, as a class representative, or as an attorney-employer
or attorney-partner of the attorney who formally appeared
for the plaintiffs. In the view we take, we may assume that
Kramer is not and was never the attorney in fact, that the
professional representation rendered variously by Britton
and Kapustin is of the highest caliber, and that Kramer's
interest in these proceedings is limited to his role as a
named plaintiff and member of the class. With these
assumptions we proceed.
IV.
In the federal courts, the right of parties to “plead
and conduct their own cases” * has been protected by stat-
ute since the beginning of our natior Faretta v. Cali-
fornia, 422 U. S. 806, 812 (1975). Indeed, in the criminal
context, one has a constitutional right to represent himself.
Ibid. at 836. Thus, we take it as settled that any plaintiff
qua plaintiff—including Kramer were he not also a class
representative—may represent himself pro se.
Appellees do not appear to contest seriously that, in
the circumstances of this case, it would have been improper
for Kramer, the class representative, to designate himself
as counsel for the class. In his deposition, Kramer stated
7. 28 U.S. C. § 1654.
Appendix A A9
that he would not accept any portion of a court-awarded
attorney's fee derived from this case “[b]ecause I thought
that as a plaintiff in the purported class action case I could
not benefit from the case other than as a member of the
class, and could not benefit differently from other members
of the class.” App. at 77a. We agree.
The very nature of this litigation—a Rule 23(b) (3)
class action for money damages—suggests the possibility
that success, either by verdict and judgment or by settle-
ment, would result also in a court-awarded attorneys’ fee
from the fund created for the benefit of the class. Federal
courts have long recognized “the historic power of equity
to permit the trustee of a fund or property, or a party
preserving or recovering a fund for the benefit of others in
addition to himself, to recover his costs, including his at-
torneys’ fees, from the fund or property itself or directly
from the other parties enjoying the benefit.” Alyeska
Pipeline Service Co. v. Wilderness Society, 421 U. S. 240,
257 (1975); see, e.g., Sprague v. Ticonic National Bank,
307 U. S. 161 (1939). See generally 7A C. Wricut & A.
MILLER, FEDERAL PRACTICE AND ProcepurE § 1803 (1972);
Dawson, Lawyers and Involuntary Clients: Attorney Fees
from Funds, 87 Harv. L. Rev. 1597 (1974).° We have sub-
scribed to these general views. Lindy Bros. Builders, Inc.
wv. American Radiator & Standard Sanitary Corp., 487
F. 2d 161, 165 (3d Cir. 1973); see SEC v. Aberdeen Secu-
rities Co., 526 F. 2d 603, 607 (3d Cir. 1975).
Thus, Kramer acted wisely in the position articulated
in deposition. Clearly he perceived that he could be ac-
cused of a conflict of interest were he to anticipate a share
8. Dawson summarized the theory thusly: “|A] benefit to the
benefit
a gee
benefited by being ‘created, increased or protected’... .” 87 Harv.
L. Rev. at 1626.
Al0 Appendix A
of the potential court-awarded attorneys’ fee in addition
to his recovery as a member of the class.
Appellee Kramer also demonstrated an awareness of
fealty to the spirit of Canon 9 of the Code of Professional
Responsibility: “A Lawyer Should Avoid Even the Ap-
pearance of Professional Impropriety.” Given the pos-
sible conflict of interest ° between the class member plaintiff
qua plaintiff and the class member plaintiff qua counsel,
under circumstances in which an equitable fund may be
created from which an attorneys’ fee may be awarded,’
we agree that a plaintiff class representative could not,
with complete fidelity to Canon 9, serve as class counsel.
Appellees argue that Kohn v. American Metal Climax,
Inc., 458 F. 2d 255 (3d Cir.), cert. denied, 409 U. S. 874
(1972), and Kahan v. Rosenstiel, 424 F. 2d 161 (3d Cir.),
cert. denied, 398 U. S. 950 (1970), can be read as holding
to the contrary. We disagree. The challenge raised in this
appeal, see pages 5-6 supra, was not presented to the court
in those cases. Thus it cannot be said that we have con-
sidered, adjudicated and set forth a holding regarding the
duality problem.’
9. Ethical rules emanating from Canon 5 may also indicate a
conflict. See especially DR 5-101 and DR 5-102. DR 5-101(B)
provides, in part, that “[a] lawyer shall not [with certain excep-
tions] accept employment in contemplated or pending litigation if
he knows or it is obvious that he or a lawyer in his ought to
be called as a witness... .”
10. There might be cases, appropriate to class action treat-
ment, where success would not result in a beneficial fund for the
class. See F. R. Civ. P. 23(b)(2). In such circumstances, the
conflict of interest impediments to an attorney-plaintiff class repre-
sentative also serving as counsel might not be present. We do not
decide the rule that should obtain in such circumstances.
10a. “A decision is not authority as to any questions of law
which were pot raised or presented to the court, and were not con-
sidered and decided by it, even though they were logically present
in the case and might have been argued, and even though such
questions, if considered by the court, would have caused a different
judgment to be given.” H. Brack, Law or JupicIAL PRECEDENTS
37 (1912).
Appendix A All
Having concluded that the attorney-plaintiff class rep-
resentative may not also serve as counsel for the class in
cases such as this, we must now consider the effect of
Canon 9 on the situation in which the partner (or em-
ployee) of the attorney cl--< representative is chosen as
counsel.
V.
Historically, members of this nation’s bar both have
formed cutting edges and have wielded shields in zealous
efforts to vindicate and protect interests of all kinds—in-
dividual, public, and social; economic, political, cultural,
and personal. As private attorneys general and frequently
in class action contexts, they have guided litigation insist-
ing that legislative mandates be obeyed, administrative
regulations respected, and constitutional guarantees ob-
served. Often their intense advocacy has generated con-
troversy in both the private and public sectors. Often
issues they probe are sensitive, provocative and disputa-
tious. Recently, however, critics have challenged the
altruism of some class action lawyers and charged that the
paramount motivation for such litigation was counsel's
desire to generate substantial fees. The cynic’s argument
may have a certain validity. But that validity need not
serve as the basis for our every rule; nor does it detract
from, nor should we lose sight of, the fundamental lauda-
tory purposes of the class action device:
Its historical purpose was to alleviate the burden on
the court and its facilities in cases where a claim was
common to a large number of persons. . . . Its use in
claims for damages is justified where the public policy
considerations of efficient court administration out-
weigh the potential prejudice to persons in interest
who are not parties to the proceedings, but who may
Al2 Appendix A
nevertheless become legally bound by an adjudication
as if they were in fact parties litigant.
Also influencing the general acceptance of class
actions has been recognition of the fact that the col-
lective or accumulative technique of this device makes
possible an effective assertion of many claims which
otherwise would not be enforced, for economic or
practical reasons, were it not for the joinder pro-
cedure. The 1966 amendments to Rule 23 are a re-
statement and reinforcement of public policy, mutually
expressed by the Judicial Conference of the United
States, its advisory committee on Rules of Civil Pro-
cedure, the Supreme Court, and the Congress, which
candidly facilitate and encourage the use of class
actions.
Greenfield v. Villager Industries, Inc., 483 F. 2d 824, 831
(3d Cir. 1973) (footnote omitted ).
Thus, a class action is a special type of legal proceed-
ing. Our inquiry become’ necessary only because an at-
torneys fee may emanate from an equitable fund, creating
a possible conflict between the interests of the plaintiff
class members represented by Kramer and the interest of
Kramer's partner Kapustin * in maximizing his award as
attorney for the class.
Appellees suggest that, in this case, there are ade-
quate safezuards against professional impropriety: “(1)
Both plaintiffs have stated that they receive no portion of
any attorney's fee that is awarded in this case; (2) No
close association exists between plaintiff Harrison and the
counsel to the class as they have never been professionally
associated; (3) Both plaintiffs, although attorneys, have
11. Presumably, Britton, Kramer's former employee, might also
petition for an award from the fund. See App. at 190a.
Appendix A A13
stated that their role in this litigation is limited to that of
a party plaintiff.” Appellees’ Brief at 23.”
Whatever effectiveness such disclaimers might have in
defending against an accusation of professional impropriety
lodged against Kramer or Harrison, they do not meet the
criticism that retention of Britton and later Kapustin
contravened the appearance of propriety. And it is the
appearance, not the fact, of impropriety which Canon 9 is
designed to eliminate.
As Ethical Consideration 9-2 of the Code of Profes-
sional Responsibility cautions in part, “[ojn occasion,
ethical conduct of a lawyer may appear to laymen to be
unethical.” Laymen generally understand basic partner-
ship attributes. The word “partner” has a meaning among
the laity ** that does not vary substantially from its juris-
prudential ramifications."* Implicit in the term is a sharing
12. A fair reading of Harrison’s deposition testimony reveals
that his interest in these proceedings is that of a class member, i.e.,
to recover as a joint owner any ages relating to the stock in
Scientific Control he held with Kramer. Kramer asked him to be
a plaintiff and designated counsel for them. Harrison said that at
no time had he discussed with Kramer or Kapustin any oa
tion for Kapustin. “I left it completely in Mr. Kramer's
basically for personal reasons,” he said. App. at 10la. By com-
ison, Kramer testified that his interest in the litigation was so
_ that he, as class representative, would advance the costs, even
if they amounted to $100,000 or $150,000. Ibid. at 79a.
13. “Partner” is defined by Webster's as “a person who takes
art in some activity in common with another or others; associate;
e.g.,] a) one of two or more persons engaged in the same business
enterprise and sharing its ts and risks... .” Wesster’s New
Worvp Dicrionary 1036 (2d college ed. 1970).
14. Black’s defines “partner” as “[a] member of copartnership
or firm; one who has united with others to form a partnership in
business.” Partnership is defined as:
A voluntary contract between two or more competent
persons to place their money, effects, labor, and skill, or some
or all of them, in lawful commerce or business, with the under-
standing that there shall be a proportional sharing of the
profits and losses between them.
Al4 Appendix A
of profits and losses. Esoteric internal protections in writ-
ing or under oath, insulating the plaintiff-attorney partner
from participating in a fee, can hardly dissipate the lay
notion that action by one partner is action for the partner-
ship. Accordingly, we cannot agree that an appearance of
an improper conflict of interest inherent in one partner’s
dual role as class representative and as class counsel van-
ishes when his partner is substituted as class counsel. To
argue as appellees do is to argue against reality, against the
vagaries of human nature, and against widely-held public
impressions of the legal profession. Thus, if one concludes,
as we do, that an appearance of impropriety, at a minimum,
ensues when an attorney class representative also serves as
counsel for a class that may benefit from an equitable
fund, substituting a partner as counsel will not suffice as an
antidote. If we are to provide force and vigor to Canon 9,
a prophylactic rule prohibiting appointment of a partner
as counsel is mandated in such circumstances. What we
have said concerning substitution of a partner of the
attorney-class representative applies equally to substitution
of an attorney-employee or office associate as counsel.
Finally, appellees argue that disqualification of Kap-
ustin at this late date would deprive the class of the fa-
miliarity with the case he developed during its pendency.
Subsumed in this argument is the contention that appel-
14. (Cont'd. )
A partnership is an association of two or more persons to
carry on as co-owners a business for profit.
Partnership is a synallagmatic and commutative contract
made between two or more persons for the mutual participa-
tion in the profits which may accrue from property, credit,
skill, or industry, furnished in determined proportions by the
parties.
Partnership is where two or more persons agree to c
on any business or adventure together, upon the terms of
mutual participation in its profits and losses.
Biack’s Law Dictionary 1330-31 (3d ed. 1933) (citations omitted).
Appendix A Al5
lant dallied unnecessarily in presenting its disqualification
motion to the district court. On this record, we are un-
persuaded by either claim.” The motion to disqualify was
filed within two months of the denial of reconsideration of
the class action certification decision. Defendants cer-
tainly could not be faulted for litigating the class certifica-
tion first. Had they won on that score, the action might
have gone forward as an individual action, in which case
the disqualification issue might never have surfaced. See
pages 7-8 supra. Concomitantly, we cannot accept the
proposition that disqualifying Kapustin now will work an
undue hardship on the class. The district court, which has
supervised the progress of this case—slow though it may
have been—, has stated that “[t]he issue of liability is not
complex and should not consume too much trial time.” 67
F. R. D. 98, 102 (denying motion to reconsider class certifi-
cation). That being so, it follows logically that it should
not require new counsel an inordinate amount of time to
become sufficiently familiar with the case to proceed to
trial.
15. Ethical Consideration 9-2 instructs: “When explicit ethical
guidance does not exist, a lawyer should determine his conduct by
acting in a manner that promotes public confidence in the integrity
and efficiency of the legal system and the legal profession.” (foot-
note omitted). The conclusion we reach today will govern similar
actions in the future; it will not affect litigations already concluded.
We recognize that there may now be pending class actions in
which counsel arguably ought to be disqualified under the rule we
announce today. Further, we a se that in such pending
actions an argument might be made, in extraordin circum-
stances, that “explicit ethical guidance [did] not exist” heretofore
and that invocation of the rule announced herein would not
“promot[e] public confidence in the integrity and efficiency of the
legal system and the legal profession.” We should not and do not
decide how such a hypothetical case would be decided. Resolution
of the issue must await an actual case or controversy, which should
be decided in the first instance by the district court with the
benefit of full briefing from counsel.
Al6 Appendix A
VI.
As we have observed previously in a constitutional
context, “although the right to counsel is absolute, there
is no absolute right to a particular counsel.” United States
ex rel. Carey v. Rundle, 409 F. 2d 1210, 1215 (3d Cir.
1969), cert. denied, 397 U. S. 946 (1970). We have con-
cluded that vindication of the Code of Professional Respon-
sibility requires the following rule: no member of the bar
either maintaining an employment relationship, including
a partnership or professional corporation, or sharing office
or suite space with an attorney class representative during
the preparation or pendency of a Rule 23(b)(3) class
action may serve as counsel to the class if the action might
result in the creation of a fund from which an attorneys’
fee award would be appropriate.
The appeal at No. 75-1673 will be dismissed for want
of jurisdiction. In the appeal at No. 75-1849, the order of
the district court denying the motion for disqualification of
appellees’ counsel will be reversed and the proceedings
remanded.
RosEnn, Circuit Judge, Concurring
I join fully in the court’s opinion and disposition of
the case. I write to make several additional points.
First, and most importantly, I understand the court
to hold only that an attorney cannot act as counsel to a
class when (a) the action might result in the creation of a
fund from which an attorney's fee may be awarded, and
(b) the named class representative is also the class counsel
or an attorney professionally associated with the attorney
seeking to act as class counsel. I thus do not understand
the court’s rule to bar an attorney from bringing a class
Appendix A A17
action as plaintiff and acting as the named class representa-
tive so long as class counsel is an attorney not profes-
sionally associated with the plaintiff attorney. Further-
more, I do not understand the opinion to bar an attorney
from acting as counsel to a class of which he might be a
member, or to a class with claims similar or identical to
claims in which the attorney has a beneficial interest.
Some examples may serve to clarify my point. If a
client seeks the advice of an attorney with respect to pos-
sible fraudulent dealings in the shares of a corporation in
which the attorney is also 2 shareholder and if an action
to recover losses due to those fraudulent dealings would _
assert a claim the attorney could also assert as a share-
holder, I see no reason to require the attorney to decline
representing the class of persons with like claims, or to
decline membership in the class for him or herself. Simi-
larly, if the attorney's spouse or the law firm in which the
attorney is a partner owned the stock, I think the attorney
need not decline the representation of the class. Also, if
an attorney’s corporate client, in which the attorney owns
stock, brought an antitrust class action on behalf of it and
other corporations, I do not think the attorney need de-
cline representing the class.
I think these situations are distinguishable from the
facts of the instant case primarily because there is no ap-
pearance of financial conflict of interest and no appearance
of improper solicitation—i.e., that the attorney-plaintiff
and class counsel collusively use the class action mechanism
to acquire clients.’ Furthermore, to the extent the named
class representative has substantive dut’ss to perform—
1. I do not mean to suggest, nor do I understand the panel's
opinion to suggest, that we are concerned only with the appear-
ances, rather the reality, of improper solicitation. I assume
that if and when the latter does occur, it can be adequately dealt
with through normal bar disciplinary procedures.
Al8 Appendix A
such as monitoring the performance of class counsel or
agreeing to a settlement—the fact that the representative
and counsel are somewhat independent insures that the
representative will exercise unconstrained judgment.
Secondly, it is inevitable that this decision will pose
some problem for district courts that have already certi-
fied classes in which the named representative and class
counsel are professionally affiliated. It is my view that in
such already ongoing cases automatic disqualification of
counsel on defendant’s motion is not mandated by this de-
cision. Where it is possible for the class to obtain substi-
tute counsel without substantially prejudicing the inter-
ests of the class or substantially delaying the action, the
district court should disqualify counsel. There may be
cases that have progressed so far and are so complex that
requiring substitution of counsel would substantially delay
the termination of the litigation and substantially harm
the interests of the class members. In such instances, the
district court may allow the litigation to proceed to ter-
mination without change in representative or counsel. The
choice, in my view, lies in the informed discretion of the
district court.
Finally, although I join the court’s judgment on the
jurisdictional issues, I continue to adhere to the views I
expressed in my dissent in Hackett v. General Host Cor-
poration, 455 F. 2d 618, 626 (3d Cir. 1972), cert. denied,
407 U. S. 925 (1972). There I argued that denial of class
certification is an appealable order because, first, it quali-
fies as a collateral order under the doctrine of Cohen v.
Beneficial Finance Co., 337 U. S. 541 (1949), and second,
it effectively terminates much class action litigation and
thus is, in every meaningful sense, a final order. On the
other hand, a class certification order does not terminate
litigation, nor, in my view, does it ordinarily create the
Appendix A Alg
kind of prejudice necessary to invoke the coliateral order
doctrine.”
2. The prejudice nece to establish jurisdiction unde. the
collateral order doctrine is that Y + =| be peed lus*
without review. Hackett, supra, F. at 627 (Rosenn, J.,
dissenting); Samuel v. University of Pittsburgh, 506 F. 2d ,
359 (3d Cir. 1974). See, e.g., Eisen v. Carlisle and Jacquelin, 417
U. S. 156, 169-72 (1974), where the lack of appellate review of the
district court's o requiring defendants to pay 90% of the costs
of notice to class members would have irreparably foreclosed de-
fendants from contesting that order. The prejudice resulting from
merely having to continue to defend the suit is, in my view, usually
cient to invoke appellate jurisdiction. But see Herbst v.
International Telephone and Telegraph Corp., 495 F. 2d 1308 (2d
Cir. 1974).
A20 Appendix B
APPENDIX B.
IN THE
UNITED STATES DISTRICT COURT
For THE EASTERN District OF PENNSYLVANIA
Civit Action No. 71-1954.
MITCHELL A. KRAMER
and
DAVID C. HARRISON
v.
SCIENTIFIC CONTROL CORP., et al.
Memorandum Opinion.
BECHTLE, J. October 1, 1974.
Plaintiffs, two Philadelphia lawyers, brought this ac-
tion on August 9, 1971, alleging that they purchased 50
shares of Scientific Control Corp. on January 6, 1969, and
that less than 30 days later sold them at a loss of over $400.
They also aver in the twice-amended complaint that the
stock was initially offered for sale pursuant to a prospectus
dated October 31, 1968, and that during the period October
31, 1969, through November 21, 1969, Scientific Control
Corp. issued various financial reports. They claim that
those reports, as well as the prospectus, contain material
false statements and omissions. No one has sought to
intervene in the action as a party plaintiff. As far as we
know, no similar action has been brought against any one
or more of the defendants.
Appendix B A2]
Plaintiffs have filed a motion pursuant to Fed. R. Civ.
P. 23(c)(1) for a determination that this case may proceed
as a class action. In their motion, now before us, they ask
that they be determined to be class action representatives
of all persons except defendants who purchased stock of
Scientific Control Corp. “pursuant to or in reliance on” the
prospectus and all other written and oral communications
regarding the corporation’s financial condition from the
date of the initial offering to November 21, 1969. De-
fendants do not dispute that there were other purchasers
of the stock during that period and that they are too nu-
merous to be joined conveniently in this action.
Defendants opposing the motion impugn the motives
of plaintiffs in buying and selling the stock and then bring-
ing this action. They claim that plaintiffs brought the
action not to recover the $400 loss but to profit from court-
awarded counsel fees in a class action. Therefore, they
maintain that the prerequisites of Rule 23(a)(4) are not
met.’
Assuming the impropriety of plaintiffs’ motives in in-
stituting the action, we do not believe the unnamed mem-
bers of the proposed class should be penalized for that
reason. From our observation of the manner in which
plaintiffs have proceeded with this action up to this junc-
ture, we conclude that they will fairly and adequately
protect the interests of the class.” This action may proceed
as a Rule 23(b)(3) class action.
1. Subdivision (4) of Rule 23(a) provides: “(a) Prerequisites
to a Class Action. e or more members of a class may sue or
sued as representative parties on behalf of all only if ... (4) the
representative parties will fairly and adequately protect the inter-
ests of the class.”
2. Plaintiffs need not have a large damage claim in order to
resent the class. The size of their claim is not dispositive of
whether they will ~~ oe | represent the class. Eisen v. Carlisle
& Jacquelin, (Eisen 391 F. 2d 555, 563 (2nd Cir. 1968); 7
Wright & Miller, Fed. & Proc. § 1767.
A22 Appendix B
The decision to allow this case to so proceed does not
mean that the opportunity to raise the question of improper
motive has been foreclosed in this case. Defendants’ ob-
jection to the class action based on that issue is more prop-
erly addressed to the amount, if any, of plaintiffs’ right to
recover damages (Rochez Bros., Inc. v. Rhoades, 491 F. 2d
= 410 (3rd Cir. 1973) ) and to be awarded attorneys’
ees.
Plaintiffs’ motion will be allowed.
Appendix B A23
IN THE
UNITED STATES DISTRICT COURT
For THE EASTERN DisTHicT OF PENNSYLVANIA
Civil Action No. 71-1954.
MITCHELL A. KRAMER and DAVID C. HARRISON
v.
SCIENTIFIC CONTROL CORP., et al
Memorandum Opinion.
BEcHTLE, J. : October , 1974
Anp Now, To Wrr, this Ist day of October, 1974, Ir Is
Ornverep that plaintiffs’ motion for a determination that
this action may proceed as a Rule 23(b)(3) class action
and that plaintiffs be determined to be representatives of
the class is granted.
Louis C. BEcuTLE, J.
A24 Appendix C
APPENDIX C.
_——_—_-_-__—
IN THE
UNITED STATES DISTRICT COURT
For THE EASTERN District OF PENNSYLVANIA
Civil Action No. 71-1954.
MITCHELL A. KRAMER and DAVID C. HARRISON
v.
SCIENTIFIC CONTROL CORP.; and ARTHUR AN-
DERSON & CO.; and H. L. FEDERMAN & CO.; and
KLEINER, BELL AND CO., INC.; and JOHN B.
BAIRD; and DONALD G. O’NEAL; and L. T. RAT-
NER; and NORMAN C. YOUNG; and CLYDE WIL-
LIAMS; and VAN CALVIN ELLIS; and H. L.
FEDERMAN; and PATRICK S. MARTIN; and
WILLIAM C. WEATHERFORD; and ERNEST E.
SPECKS; and HENRY W. HOOKER; and MER-
RILL J. WHISTON; and ARTHUR E. SPECKHARD;
and WILLIAM S. LEE and JOSEPH T. JONES.
Memorandum and Order.
BECHTLE, J. April 17, 1975
This Court permitted this case to proceed as a class
action on October 1, 1974, after delaying that decision
until after it had ruled on defendants’ various motions to
dismiss.‘ Defendants now ask this Court to revoke that
1. See, 365 F. Supp. 780 (1973).
Appendix C A25
Order. For reasons hereinafter stated, we will deny their
motion for reconsideration.
While a class action determination is never irrev-
ocable, Seligson v. Plum Tree, Inc., 61 F. R. D. 343 (E. D.
Pa. 1973), the proponents of revocation or modification of
a class action Order should, at minimum, show some newly
discovered facts or law in support of their desired action.
Defendants have not met that minimum. The grounds
they list now include those which they gave previously or
could have asserted earlier but did not. It seems that the
two named plaintiffs are incapable of acting as class rep-
resentatives.
Plaintiffs are members of the law firm which employs
the lawyer who represents them. Defendants’ main ground
is that a conflict of interest between plaintiffs and the class
they represent is inherent in their being represented by
their own law firm.’ In the case of Umbriae, et al v. Amer-
ican Snacks, Inc., (E. D. Pa. C. A. No. 74-549, decided
January 27, 1975), plaintiffs sought to represent a class
of debenture holders who purchased the securities after
relying upon a misleading prospectus. One of the named
plaintiffs was a partner of the law firm representing the
plaintiffs. The case was transferred from this District to
the United States District Court for the District of Massa-
chusetts under 28 U. S. C. § 1404(a). Nevertheless, Judge
Higginbotham, as the transferor Judge, fortunately ex-
pressed his opinion on how he would have resolved the
attorney-representation conflict issue, if the matter were
not transferred, as follows (Slip Opinion, pp. 16-17):
“Touche Ross contends that a conflict of interest exists
between the representative parties and the class be-
2. This was the principal ground pressed by defendants in
originally opposing the class action motion.
A26
Appendix C
cause the named plaintiffs, Cletus Lyman, Esquire,
is an attorney and partner with counsel for plaintiffs,
Richard A. Ash, Esquire, in the law firm of Lyman &
Ash. The remaining named plaintiffs, defendants
claim, are ‘siblings’ of Cletus Lyman. It is in the na-
ture of the motion practice on class determination is-
sues that defendants, who naturally have no interest
in the successful prosecution of the class suit against
them, are called upon to interpose arguments in op-
position to class determination motions verbally
grounded upon a concern for the ‘best’ representation
for the class while the implicit, but nonetheless real,
objective of their vigorous legal assaults is to insure
‘no’ representation for the class. Of course I must
assess defendants’ argument upon its intrinsic merit,
but on this issue it is my judgment that Lyman’s status
as an attorney, his business relationship with counsel
for plaintiffs, and his family relationship with the other
named plaintiffs do not create interests which are
adverse to those of the class, and thus neither the
named plaintiffs nor counsel for plaintiffs should be
disqualified from class representation. Although
Cletus Lyman may benefit through his partnership
in the law firm of Lyman & Ash from an award of legal
fees, if plaintiffs are successful in the present litigation,
this interest does not in my opinion create substan-
tially more of a risk that the suit would be compro-
mised unfairly as respects class interests than would
exist if there were no relationship between the rep-
resentative partics and counsel for plaintiffs. The
vision of substantial counsel fees might cloud the judg-
ment of counsel for plaintiffs and the representative
parties but the court does not in granting a motion for
class determination entrust to the representative
Appendix C A27
parties ultimate responsibility for determining the fair-
ness to the class of settlement decisions which com-
promise class interests. Any compromise or dismissal
of a class action must be approved by the court and
notice of the proposed compromise or dismissal must
be given to all class members; judicial approval should
be granted only after the court determines that the
compromise is in the interest of the entire class. Fed.
R. Civ. P. 23(e)."° Euresti v. Stenner, 458 F. 2d 1115
(10th Cir. 1972). In my estimation the safeguard
provided in Rule 23(e) against litigation compromises
unfair to the class as a whole are adequate to insure
protection of class interest under the representation
of these named plaintiffs and counsel. Kramer v. Sci-
entific Control Corp., 365 F. Supp. 780 (E. D. Pa.
1973) (See also Slip Opinion of October 1, 1974).
Blumberg, et al. v. Barrett (E. D. Pa., C. A. No. 73-237,
decided December 27, 1974), is not to the contrary. In
that case, this Court found there was a conflict created by
having Malcolm Blumberg, Esquire, as one of the named
plaintiffs. This was not just because he was a member of
the law firm representing plaintiffs, but for the reason that
the law firm was a close ‘riend and business associate of
another named plaintiff, William Richman, whose interest
clashed with those of the absent class members. In fact,
the plaintiffs should have sued Richman but omitted to
do so.
“10. Fed. R. Civ. P. 23(e) reads:
‘Dismissal or Compromise. A class action shall not be dis-
shel @ com soumieed without the approval of the court,
and notice of the proposed dismissal or compromise shall be
iven to all members of the class in such manner as the court
ects.”
A28 Appendix C
Moreover, Rule 23(d) * allows some latitude for the
District Court to take appropriate action to guard against
any conflicts of interest which would crop up in the course
of the action. Kauffman o. Dreyfus Fund, Inc., 434 F. 2d
727, 737 (3rd Cir. 1970).
Plaintiffs purchased their shares of Scientific stock
from the brokerage firm of Merrill, Lynch, Pierce, Fenner
and Smith, I»corporated (“Merrill Lynch”). A number of
former shareholders of Scientific commenced actions in the
United States District Courts against Merrill Lynch for the
role it played in selling stock to the public. One of the
actions was brought in the Northern District of Texas,
another in the Southern District of New York. Defendants
contend that the failure of plaintiffs to name Merrill Lynch,
a former client of theirs, as a defendant in this action dis-
qualifies them from representing the class. That plaintiffs
chose not to sue Merril! Lynch for reasons other than the
fact that they had previously represented that firm is sup-
ported by the record.
The most important one is that there is no proof that
the brokerage firm recommended that plaintiffs make the
purchases. Second, the actions against Merrill Lynch are
based on that firm’s alleged misrepresentations and omis-
sions of material facts in its written and oral statements.
In an action brought against the brokerage firm in the
Northern District of Texas, the Fifth District has ruled that
the case was not appropriate for class action treatment be-
cause of the nonstandardized form of the alleged misrepre-
sentations. Simon v. Merrill Lynch, Pierce, Fenner and
Smith, Inc., 482 F. 2d 880 (1973). The District Court for
3. Rule 23(d)(2) provides in part: “In the conduct of actions
to win) this rule — the court may make appropriate orders:
(2) requiring, for the protection of the nenban of the class
or otherwise for the fair conduct of the action, that notice be
given .. . of the opportunity of members to signify whether they
consider the representation fair and adequate .
Appendix C A29
the Southern District of New York held the class action
motion in the case before it in abeyance to permit the plain-
tiffs in the case to submit additional evidence regarding the
sale of stock by the brokerage firm. Mascolo v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 61 F. R. D. 481
(1973). So, even if Merrill Lynch had suggested to plain-
tiffs that Scientific stock would be a good investment, a
class action against that firm would be ill-advised. Finally,
there has been no showing that Mitchell Kramer's prior
representation of Merrill Lynch will prevent plaintiffs from
adequately representing the clas. here.
Another ground offered by defendants supporting
their contention that plaintiffs should be disqualified from
representing the class is that the latter have demonstrated
their inability adequately to protect the interest of the class
by their failure to take steps to ascertain the identity of, or
give notice of this action to, members of the class. There
has been undue delay. Scientific, one of the defendants, is
not without contributing fault. In cases of this type, the
identity of each member of the class is usually learned
from one of the defendants’ records or its stock transfer
agent. If defendants were really concerned about the in-
terest of the class, they could have offered information to
plaintiffs which would have facilitated an earlier ascertain-
ment of the class composition. The excuse given by Scien-
tific for not cooperating is that it is no longer doing busi-
ness. However, its transfer agent, Republic National Bank
of Dallas, Texas, is still functioning. Though Scientific
informed plaintiffs that it did not have the stock transfer
list, neither that corporation nor the bank told them that
the transfer records are stored in Dallas, Texas, under a
court order in the case of Reilly v. Merrill Lynch (C. A.
3-6130E ), a case originating in the Northern District of
Texas and later transferred to the Southern District of
New York, where it was consolidated with Mascolo v.
A30 Appendix C
Merrill Lynch. Plaintiffs’ counsel did not learn of the im-
poundment until recently. Plaintiffs have advised the
Court that they will microfilm those lists now that they
have been permitted to do so by the District Court for the
Southern District of New York.t They have also advised
the Court that if the transfer records do not contain suffi-
cient information for them to provide individual notice,
they are prepared to notify the class by publication, which
would be “the best notice practicable under the circum-
stances” as required by Fed. R. Civ. P. 23(c) (2).
Under the heading that plaintiffs’ claims are not
typical of those of the class they represent because al-
legedly they have suffered no damages under § 11(e) of
the Securities Act of 1933, 15 U. S.C. § 77k(e), defendants
are attempting to have this Court reconsider its ruling on
their motion to dismiss the second amended complaint.
Plaintiffs bought their 50 shares, not when the stock was
originally offered to the public but in the market or over-
the-counter transaction from Merrill Lynch. They sold
the shares in the market one month later at a loss. Both
the purchase and sale occurred before the filing of the
original complaint in this action. Subsection (3) of § 11
places a limit on the amount recoverable in this type of
action. Defendants would have us read the words “(not
exceeding the price at which the security was offered to the
public)” appearing twice in subsection (3) as though it
meant only the price at which the security was listed by
the issuer in the original offering to the public rather than
the price when plaintiffs later bought the stock in the open
market. Defendants have cited no authority supporting
their interpretation. We adhere to our former ruling.
4. By Or i
sae Ss ES. I lr Se Me
take place and plaintiffs have advised that the stock transfer records
of Scientific Control C ti i amin ’ ;
month in Dallas, ——_" ise ae ed and copied this
Appendix C A31
Because plaintiffs have alleged in their Second
amended complaint that they relied on oral as well as
written misrepresentations, defendants argue that common
questions of fact and law do not exist for class action treat-
ment. Plaintiffs do not deny that the oral statements may
have varied as to each individual class member or group.
However, the violation of the disclosure rule in the pros-
pectus and other documents will be the same for the class.
This common nucleus of statements satisfies the predom-
inance of common questions requirement of Rule
23(b)(3). See, Bisgeier v. Fotomat Corporation, 62
F. R. D. 113 (N. D. IIL, 1972); In re Memorex Security
Cases, 61 F. R. D. 88 (N. D. Cal. 1973); Vernon J. Rockler
and Co. v. Graphic Enterprises, Inc., 52 F. R. D. 335,
344-346 (D. Minn. 1971).
Finally, and in the alternative, defendants request
that our Order of October 1, 1974, permitting this case to
proceed as a class action be certified pursuant to 28 U. S. C.
§ 1292(b) so that an immediate appeal from that Order
may be taken. As pointed out by Judge McGlynn in Blum-
berg, et al. v. Barrett, et al, supra, because of the binding
effect of a judgment in a class action upon “those who are
defined to be in the class and who after notice have not
affirmatively sought to exclude themselves,” the question
of adequacy of representation of the class is not to be
lightly regarded. This case has been on our dockets since
August 9, 1971. Trial on the merits cannot take place until
the class has been given an opportunity to respond after
being notified under Rule 23(c)(2). The issue of liability
is not complex and should not consume too much trial time.
Plaintiffs who stand to lose the most if the class action de-
termination is overturned on appeal are willing to proceed
to trial. In my opinion, trial on the merits should not be
further delayed. The motion will be denied.
A32 Appendix C
IN THE
UNITED STATES DISTRICT COURT
For THE EASTERN DisTRICT OF PENNSYLVANIA
Civil Action No. 71-1954.
MITCHELL A. KRAMER and DAVID C. HARRISON
v.
SCIENTIFIC CONTROL CORP., et al
Order.
Anp Now, to Wir, this 17th day of April, 1975, Ir Is
OrpERED that the motion of defendants for reconsideration
of plaintiffs’ motion for class action determination is
denied.
It Is FURTHER ORDERED that defendants’ alternative
motion for certification pursuant to 28 U. S. C. § 1292(b)
is also denied.
Louis C. BECHTLE, J.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.