By Gerald L. Maatman, Jr. and Alex W. Karasik

Seyfarth Synopsis: In a lawsuit brought by a plaintiff class action firm alleging that objectors to class action settlements violated both RICO and Illinois state law by filing frivolous objections in order to seek payouts, an Illinois federal court denied in part the Defendant objectors’ motion to dismiss, holding it had subject-matter jurisdiction to hear the dispute and that a claim seeking injunctive relief for the objectors’ unauthorized practice of law could proceed.

In the class action landscape, where serial objectors frequently frustrate the settlement process by requesting payouts in order to withdraw objections, this case is a must-read for employers and class action defense attorneys.

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Case Background

In Edelson PC v. The Bandas Law Firm PC, No. 16-CV-11057, 2018 U.S. Dist. LEXIS 119305 (N.D. Ill. July 20, 2018), Plaintiff – a well-known class action plaintiffs’ law firm – alleged that Defendants regularly filed frivolous objections to class action settlements in order to leverage lucrative payoffs, and that as class action attorneys, they were forced to agree to the payoffs or else encounter significant delays in securing relief for class members. Plaintiff sued Defendants (who also included non-attorneys that allegedly aided the objector law firms by serving as class objectors) for violations of RICO and Illinois state law claims for abuse of process and the unauthorized practice of law, and further sought a permanent injunction under the All Writs Act. Id. at 2.

To say the least, Plaintiffs’ lawsuit is novel and a broadside attack on objectors.

Previously, on February 6, 2018, the Court granted Defendants’ motion to dismiss in part, and dismissed Plaintiff’s federal RICO claims for failing to allege predicate acts of racketeering. Id. The Court reserved judgment on Plaintiff’s state law claims, however, pending further briefing on whether it had subject-matter jurisdiction to hear them. In response to the Court’s order to show cause, Plaintiff argued that its state law claims were properly before the Court under either supplemental jurisdiction, 28 U.S.C. § 1367, or traditional diversity jurisdiction, 28 U.S.C. § 1332(a). In response, Defendant argued that supplemental jurisdiction was improper because Illinois courts remained open to Plaintiff and the putative class, and, further, that Plaintiff could not meet the $75,000 amount in controversy threshold required to bring the suit in diversity.

The Court’s Decision

The Court held that it had subject-matter jurisdiction to hear Plaintiff’s state-law claims, and granted in part and denied in part Plaintiff’s state law claims. First, the Court addressed Plaintiff’s argument that Illinois state courts were closed to many putative class members, and the Court therefore should retain supplemental jurisdiction to avoid unfair prejudice to the putative class as a whole. Id. at 10. The Court rejected this argument, noting that the Illinois Code of Civil Procedure provides that any plaintiff whose case is dismissed by a federal district court for lack of jurisdiction may refile his case in state court within one year, “whether or not the time limitation for bringing such action expires during the pendency of [the federal case].” Id. at 11. Accordingly, the Court held that the supplemental jurisdiction statute did not support continuing jurisdiction over Plaintiff’s remaining state-law claims.

Next, the Court addressed Plaintiff’s argument that the Court could hear its state-law claims under traditional rules of diversity jurisdiction, which require complete diversity of citizenship and an amount in controversy of more than $75,000. After dismissing several individual Defendants as dispensable parties, Defendants argued that in order for the Court to establish complete diversity, it must dismiss also dismiss any putative class members who are citizens of California or Texas — the states in which remaining the Defendants reside. The Court rejected this argument, noting it was “poorly founded” and that it “is black-letter law that the citizenship of putative class members is irrelevant for diversity purposes.” Id. at 13. After further finding that “there is no serious case to be made that Plaintiff has not put more than $75,000 in dispute,” the Court held that it had subject-matter jurisdiction to hear the merits of Plaintiff’s state law claims.

Turning to the merits of the state law claims, Plaintiff alleged that Defendants committed the common law tort of abuse of process by manipulating the class-action objection process to serve their own ends. Id. Noting that the tort abuse of process is narrow and disfavored by Illinois law, the Court explained that Plaintiff’s alleged injury — having to pay off Defendants to avoid litigating their objection — was insufficient to establish such a claim. As such, the Court dismissed Plaintiff’s abuse of process claim.

Plaintiff’s final claim sought an injunction against two of the Defendant attorneys for the unauthorized practice of law pursuant to the Illinois Attorney Act, alleging that the attorneys were ghostwriting the objections and coordinating sham mediation sessions despite not moving for pro hac vice admission or filing appearances in the case involving Plaintiff’s counsel where Defendants had objected. The Court explained that under the Illinois Attorney Act, other attorneys and law firms have standing to sue for such an injunction “[b]ecause the practice of law by an entity not licensed constitutes an infringement upon the rights of those who are properly licensed.” Id. at 18 (citation omitted). Defendants argued that this claim should have been brought in state court, and additionally argued that Plaintiff’s complaint technically did not argue that one Defendant was an unlicensed attorney. Id. at 18-20. The Court rejected these arguments, holding that federal courts could hear such claims, and that Defendants’ “clumsy attempt at linguistic gymnastics ignores the text of the . . . Illinois Attorney Act.” Id. at 21. Accordingly, the Court held that Plaintiff sufficiently stated a plausible claim for the unauthorized practice of law, and denied Defendants’ motion to dismiss this claim.

The Court concluded its opinion by opining it was “troubled by the fact that until now its decisions appear to leave Plaintiff and those similarly affected without an adequate remedy — and may fail to deter the Defendants from further rent-seeking [, and] that class counsel facing similar demands may be best served by calling the professional objector’s bluff and seeing the objector’s appeal through to its conclusion.” Id. at 22. But leaving a ray of optimism, the Court noted that the U.S. Supreme Court has recently transmitted an amendment of Rule 23 to Congress that, if effectuated, would require district court approval before any objector can withdraw an objection or appeal in exchange for money or other consideration.

Implications For Employers

Serial objectors to class action settlements have long frustrated employers and class action litigators by delaying the settlement certification process, and have especially enraged plaintiff-side class action attorneys who must decide whether to pay off the objectors or incur additional time and costs in fighting the objection. While Plaintiff’s RICO and abuse of process claims have now been dismissed in this case, the survival of the unauthorized practice of law clam is significant in that it could result in the Defendant serial objectors from being enjoined to engage in this practice in Illinois. It may also serve as a deterrent to other “professional objectors.”

As such, employers and class action attorneys should pay close attention to developments in this context, as this case and the U.S. Supreme Court’s potential amendment of Rule 23 will undoubtedly have an impact on the class action settlement objection practice that routinely impacts the cost of litigation.