Inside the Miller County Class-Action Strategy Invalidated by U.S. Supreme Court

When he finally got his chance in front of the U.S. Supreme Court on Jan. 7, Los Angeles attorney Theodore Boutrous Jr. wasted no time in complaining about the state of the court system in Miller County, Arkansas.

Boutrous was formally representing Standard Fire Insurance Co. But he spoke for dozens of other corporations that have complained that Miller County Circuit Court is a legal backwater where friendly elected judges help prolific local class-action attorneys exploit a loophole in federal law to force giant settlements in cases whose legal merits are never even considered.

Last week, the high court spoke about as strongly as it can: In a unanimous decision requiring fewer than 500 words, the justices gave Boutrous, Standard Fire and future class-action defendants a giant win.

Meanwhile, the decision crippled a legal strategy of minimizing the potential value of cases that had been remarkably successful for the Texarkana law firm of Keil & Goodson and two Texas firms, Nix Patterson & Roach and Crowley Norman.

In the seven years after Congress passed the Class Action Fairness Act of 2005 in an attempt to rein in class-action abuses, those three firms extracted more than $420 million in attorneys’ fees tied to out-of-court settlements — not jury verdicts — in 23 lawsuits, nearly all of them in Miller County. (How much money went to the class members, the individuals who were allegedly damaged, is less clear because the settlement agreements are often sealed.)

The Supreme Court’s decision “sends a pretty strong message that what the plaintiffs had been doing was not appropriate,” attorney Jeremy Rosen of Encino, Calif., told Arkansas Business last week. He had filed a brief in support of Standard Fire. “This should be enough to send a message to the courts that [the Class Action Fairness Act] means what it says and there are certain cases that Congress had deemed belong in federal court.”

Ironically, Knowles v. Standard Fire became the vehicle for clarifying the rules under CAFA even though it was never actually certified as a class-action case and only one plaintiff came forward.

“This case illuminates certain unappetizing, unfair aspects of the way trial lawyers have abused certain aspects of the class-action system,” attorney Dan Greenberg of Little Rock, former senior counsel of the Center for Class Action Fairness LLC of Washington, D.C., told Arkansas Business before the ruling last week.

Greenberg correctly predicted the Supreme Court’s decision, which he said would “rein in some of the trial lawyers’ worst excesses.”

(For descriptions of such alleged excesses, click here.)

The $5 Million Question

The case dates to March 2010, when hail damaged the Miller County home of Greg Knowles. Knowles — represented by Keil & Goodson of Texarkana, Ark., and Nix Patterson & Roach, which has an office in Texarkana, Texas — filed a lawsuit claiming that Standard Fire didn’t pay enough of his claim to cover a general contractor’s overhead and profit, which is 20 percent of an estimated job. Knowles said his Standard Fire agent never told him he was entitled to receive the money for the contractor.

Knowles’ lawsuit didn’t say how much Standard Fire should have paid for his specific claim.

But it did say this: Knowles sought to represent a class of hundreds or thousands of Arkansas policyholders, and he and the rest of the class would not seek more than $5 million in damages and attorneys’ fees.

Those two points are key. Under CAFA, a lawsuit involving a class of plaintiffs from multiple states can be moved out of a state court and into federal court by motion of the defendants. Similarly, the defendants can unilaterally move a class-action case into federal court if the plaintiffs claim damages, including attorneys’ fees, of more than $5 million.

Having the plaintiff stipulate from the get-go that the case is not worth more than a few million bucks might seem to be a good thing.

But defendants in cases filed in Miller County by Keil & Goodson, Nix Patterson and Houston-based Crowley Norman say the stipulations were a ruse to keep the cases in front of friendly local judges who would slow-walk defense motions while requiring the defendants to comply with expensive, exhaustive “discovery” demands for documents and other evidence.

Keil & Goodson partners Matt Keil and John C. Goodson, a member of the University of Arkansas Board of Trustees and husband of Arkansas Supreme Court Justice Courtney Hudson Goodson, didn’t return several calls seeking interviews about the Knowles case, either before or after the Supreme Court’s ruling.

Attorneys from Nix Patterson & Roach also didn’t return calls for comment, nor did Richard Norman, a Crowley Norman partner.

But their strategy has been consistent and undeniable. By January 2012, the three firms had filed more than 25 class-action complaints in Arkansas state courts in which they stipulated, before the cases were certified as class actions, that damages would be less than $5 million “in order to try to evade federal jurisdiction,” according to a brief filed in one of those cases by Little Rock defense attorney Lyn Pruitt.

The Supreme Court’s decision “takes away from the plaintiffs a huge ability to manipulate” where the case is filed, said Georgene Vairo, a professor at Loyola Law School at Los Angeles and author of “The Complete CAFA: Analysis & Developments Under the Class Action Fairness Act of 2005.”

“It’s definitely a win for the defendants,” she said.

(It was a loss for Arkansas Attorney General Dustin McDaniel. Click here to read more.)

‘This Catch-22’

Class-action defendants, especially those whose cases are assigned to Miller County Circuit Judge Kirk Johnson, have had a hard time getting a hearing to determine whether there’s enough of a legal question to even warrant discovery, said Rosen, the California lawyer who had filed a brief in support of Standard Fire.

Judge Johnson didn’t return calls for comment.

After a case is filed in Miller County, Rosen said, the plaintiffs’ attorneys begin pummeling defendants with requests to produce — at their own expense — thousands or even millions of pages of documents. The discovery costs alone could run into the millions, often more than the $5 million to which the plaintiffs have voluntarily limited total damages, before the case is even certified as a class action. Defendants complained that they had to comply with costly discovery demands even before they could get a hearing to determine whether they even belong in the lawsuit.

A judge in federal court, on the other hand, would set a hearing for the defendants “right away” to determine if the case is worthy of moving forward with discovery, Rosen said.

Defendants, he said, were being “forced into this Catch-22. They either have to spend a ton of money on discovery for years being stuck in limbo or settle. And that’s sort of where the plaintiffs want them.”

But not just any state court will do, according to Ted Frank, a founder of the Center for Class Action Fairness.

“If you don’t have the right to take these cases to federal court, the plaintiffs get to pick where they file their case,” Frank told Arkansas Business. “All they have to do is find the one friendly jurisdiction. For a long time, it was Madison County in southern Illinois, and now it looks like it’s Miller County.”

Knowles v. Standard Fire

Standard Fire wanted no part of Miller County justice, which had become infamous among defense attorneys. Even as they accused the plaintiffs of “forum shopping,” defense attorneys were also trying to choose the most favorable court for their clients.

But to bring the roof repair case under federal jurisdiction, Standard Fire found itself in the unenviable position of having to argue that Greg Knowles’ class-action case was actually worth more in damages than Knowles and his attorneys were seeking.

On Dec. 2, 2011, U.S. District Judge P.K. Holmes III of Fort Smith denied Standard Fire’s request to move to federal court because Knowles had stipulated that damages and costs wouldn’t exceed $5 million. The 8th U.S. Circuit Court of Appeals declined to rehear the case.

Standard Fire then asked the U.S. Supreme Court to “determine whether CAFA is a strong remedy for state court abuses in class actions, as Congress expressly intended, or if it has a loophole that allows plaintiff’s lawyers to easily avoid federal jurisdiction.”

The highest court announced in August that it would take the case and then heard oral arguments on the first Monday in January. The ruling last week sends the Knowles case back to U.S. District Court.

May It Please the Court

The importance of the $5 million question to the Keil & Goodson legal strategy was underscored when partner John Goodson’s wife, Arkansas Supreme Court Justice Courtney Hudson Goodson, attended the oral argument in the Knowles case. Afterward, she met briefly with Justice Antonin Scalia, who had been apprised of her husband’s interest in the case.

Boutrous, the lawyer for Standard Fire, told the high court that, by enacting the Class Action Fairness Act, Congress intended to quash the kind of legal shenanigans being perpetrated by plaintiffs’ attorneys that kept class-action cases in friendly state courts.

He told the justices that plaintiff Knowles shouldn’t be allowed to “affect or jeopardize or undermine the claims of absent individuals” by stipulating that the damages wouldn’t be more than $5 million.

As discovery in state court starts, Boutrous said, he feared that another policyholder might step forward and say the damages are worth more, and the next plaintiff wouldn’t be bound by Knowles’ stipulation.

Justice Sonia Sotomayor asked what was wrong with that scenario, since that would allow the case to be moved to federal court. Boutrous said waiting for another plaintiff wouldn’t solve the problem defendants are having with onerous and expensive discovery requests in the meantime.

He said the stipulation on damages was designed solely “to keep the case in state court, contrary to Congress’ intent.”

In Miller County, “it’s not speedy justice,” Boutrous said. “It takes five or six years to get a hearing on anything and then there’s no hearing, even on class certification.”

David Frederick, a Washington, D.C., attorney, argued the case for homeowner Greg Knowles, but he was, in effect, representing the lawyers who have made the $5 million stipulation a centerpiece of their business plan.

He said any proposed class representative and his attorneys always make a number of strategic judgments on how best to handle a class-action case. “And that entails judgments about whether to assert various legal theories here,” he said.

Frederick said Congress didn’t want every class-action case going to federal court because the courts didn’t have the money to deal with the potential wave of lawsuits.

At one point, Chief Justice John Roberts Jr. asked Frederick why the Knowles case was filed in Miller County Circuit Court.

“Because these are Texarkana lawyers who filed on behalf of all Arkansas residents and Texarkana, Ark., is a jurisdiction in Arkansas,” he said.