A putative class action was filed in the Circuit Court of Polk County, Arkansas, and properly removed under the Class Action Fairness Act of 2005 (CAFA). An answer was filed, followed by a motion for partial judgment on the pleadings.  Then the court stayed the action on joint motion of the parties. At the initial mediation session, the possibility of dismissing this action and refiling in Arkansas State Court was discussed.  A second mediation was scheduled, and the Federal District Court continued the stay.  On March 16, 2015, the parties notified the court that they had reached agreement on almost all material terms and moved for a one-month extension to resolve outstanding issues. The U.S. District Court denied the motion, lifted the stay, and directed the parties to file an updated Rule 26(f) report. Shortly thereafter, the parties reached an agreement in principle.  The terms included dismissal of the Federal Court action and refiling the case in Arkansas State Court.  Defense counsel then withdrew the motion for partial judgment on the pleadings, and the parties filed a joint Rule 26(f) report proposing several dates for continued litigation, and the Federal Court entered a final scheduling order on the basis of the Rule 26(f) report.  A few weeks later, the parties executed a settlement agreement identifying the reviewing court as the Circuit Court of Polk County, and then jointly dismissed the Federal Court action by stipulation.

The District Court then sanctions both class counsel and defense counsel under both Rule 11 and the inherent authority of the Court:

“At least as early as the September 2014 mediation, at which dismissal and return to state court was a term in negotiations, Respondents treated the federal court system and its rules for class actions as a bargaining chip. A return to Arkansas state court for settlement purposes allowed Respondents to certify a settlement class in a court whose precedent prevented it from rigorously analyzing whether the class should have been certified, and to insulate the class settlement in that court both from reasonable objections by class members and from any substantive appellate review. All Respondents are complicit in this conduct. Plaintiffs’ counsel have embraced the practice of negotiating lucrative attorneys’ fees from various defendants using the threat of class action as leverage, as evidenced by their willingness here to negotiate a settlement that primarily benefits Plaintiffs’ counsel and USAA. Despite this Court not having certified a class, and knowing they would not ask this Court for an appointment as class counsel, while proceeding in this Court Plaintiffs’ counsel negotiated and signed a class settlement agreement before stipulating to dismissal of this action. Plaintiffs’ counsel used the lesser scrutiny of Arkansas state courts to entice defendants to stipulate to dismissal for refiling in a forum where it is possible to certify a potentially overinclusive and indeterminate class and settle on terms that will take less money from the defendants. Defense counsel removed this action to federal court and then took advantage of the more difficult certification and settlement process in this forum to negotiate a settlement designed to result in a lower payout to an overinclusive class in exchange for a high attorney’s fee.

“The result of Defense counsel invoking federal jurisdiction and then all Respondents treating that jurisdiction as a bargaining chip during pending litigation is that the Court was not treated as a forum in which to resolve a dispute but as leverage in negotiations that benefited everyone but the class members….

“Respondents have jointly abused the federal court system through their conduct in this case. That abuse was committed in a way designed to insulate Respondents’ actions from federal judicial scrutiny. When the terms of the return to state court were decided, Defense counsel withdrew the pending motion for partial judgment on the pleadings, perhaps concerned that the pending motion would call the Court’s attention to the case, or might otherwise impede their dismissal of the action, as occurred when the district court in Hamm converted a 12(b)(6) motion to a motion for summary judgment. See Hamm, 187 F.3d at 949 (affirming district court’s conversion of the motion); Id. at 950 (explaining that a converted 12(b)(6) motion precludes a plaintiff’s unilateral voluntary dismissal). In their last status report and request for continuance filed in this Court, the parties represented that they had “made substantial progress toward resolving this action”, not some future action to be filed in state court. After the agreement was reached to stipulate to dismissal and refile in Arkansas state court for certification and settlement, Respondents also jointly submitted a Rule 26(f) report in which they proposed several litigation deadlines to this Court, implying their intent to continue to litigate in this forum.  This conduct—knowingly aimed at evading properly-invoked federal judicial scrutiny and gaming the system established by the Federal Rules of Civil Procedure to dismiss for a purpose Respondents knew or should have known to be improper under those Rules—reveals some degree of bad faith on the part of Respondents.”


See Opinion and Order, Adams v. USAA, No. 2:14-cv-02013 [Rec. Doc. 61] (W.D. Ark. April 14, 2016).