John O'Brien Jun. 2, 2014, 5:26pm

A federal appeals court has overturned the approval of a multi-million dollar class action settlement, describing it as “inequitable – even scandalous.”

The U.S. Court of Appeals for the Seventh Circuit on Monday overturned a settlement involving window-maker Pella Corporation that was estimated to be worth $90 million, though the court feels its value is much, much less.

Class counsel was to receive $11 million in fees. One of those lawyers was Highland Park attorney Paul M. Weiss, who is facing possible discipline after the Illinois Attorney Registration and Disciplinary Commission lodged a complaint against him over accusations he sexually harassed five former female employees and two other women.

The Seventh Circuit’s opinion, authored by Judge Richard Posner, says U.S. District Judge James B. Zagel ignored both the objectors' arguments and signs it and other courts have warned judges “to be on the lookout for.”

“In this case, despite the presence of objectors, the district court approved a class action settlement that is inequitable – even scandalous,” Posner wrote for the panel that included Judges Ann Claire Williams and John Daniel Tinder.

He added, “The case underscores the importance both of objectors (for they are the appellants in this case – without them there would have been no appellate challenge to the settlement) and of intense judicial scrutiny of proposed class action settlements.”

The opinion mentions the benefits of class action lawsuits, but also notes that judges accustomed to adversary proceedings aren’t always qualified to judge a settlement’s fairness when both attorneys on both sides are seeking the same outcome.

“The defendant cares only about the size of the settlement, not how it is divided between attorneys fees and compensation for the class,” Posner wrote. “From the selfish standpoint of class counsel and the defendant, therefore, the optimal settlement is one modest in overall amount but heavily tilted towards attorneys fees.”

The litigation against Pella that spurred the recent ruling began in 2006 over allegations the company's ProLine Series of windows had a defect that allowed water to enter, damaging a wooden frame and the house itself.

Two classes were certified – one of customers who had already replaced or repaired the alleged defect and one of customers who hadn’t done so yet.

Initially, the only named plaintiff in the case was a dentist whose son-in-law was lead counsel for the class. His son-in-law is Weiss, the founder and senior partner of Complex Litigation Group.

Weiss is waiting to find out whether he will receive discipline from the Illinois Supreme Court for alleged misconduct unrelated to the Pella litigation.

A Hearing Board of the ARDC in April recommended Weiss be suspended from the practice of law for 30-months. The Supreme Court has the final say in most attorney discipline matters.

In 2008, the ARDC launched disciplinary proceedings against Weiss in a complaint that eventually grew to include allegations of sexual harassment and unethical lewd conduct against seven women.

The complaint against Weiss details claims of assault, battery, phone harassment, public indecency and disorderly conduct stemming from Weiss’ alleged interactions with the women between 2000 and 2010.

Weiss, for instance, is specifically accused of asking five former female employees to have sex with him, inappropriately touching them, repeatedly calling them at home and of exposing himself to them, as well as two other women.

The ARDC Hearing Board held five days of hearings in Weiss' disciplinary case last year, when Weiss’ attorney Samuel J. Manella conceded that his client was “not a ‘choir boy,’ is difficult to work with, can ‘talk like a sailor,’ and can be tough and demanding” personally and professionally.

Manella told the board, however, that the allegations against his client were brought by “Weiss-haters” who were seeking to destroy Weiss for personal reasons or to claim some of his money. He said Weiss “might be a jerk … but he’s not a criminal.”

In its April report and recommendation, The ARDC panel said it believed the allegations against Weiss to be credible, with evidence in six of the seven counts supporting disciplinary action.

Weiss' wife Jamie E. Weiss -- the daughter of the Leonard Saltzman, the plaintiff in the Pella litigation -- is a partner at Weiss’ firm. The Weisses were previously sued by attorney Eric D. Freed, Weiss' former law partner at Freed & Weiss, over allegations they misappropriated assets at the firm.

A panel of the First District Appellate Court in December 2013 ruled in favor of Weiss,  determining that Freed needed to find some way other than arbitration to resolve their ongoing dispute over the firm's dissolution.

Freed had refused Weiss' request for arbitration and then apparently changed his mind, asking a judge to compel arbitration. The judge denied the motion and the appellate court affirmed that ruling. 

In the Pella litigation, an objector to the settlement had argued “the dissolution and descent into open warfare that consumed Freed & Weiss in 2011 and 2012 clearly rendered that firm inadequate class counsel, especially in light of the articulated financial needs of the partners that drove the settlement of this case," according to the panel's opinion.

“The impropriety of allowing Saltzman to serve as class representative as long as his son-in-law was lead class counsel was palpable,” Posner wrote.

Four more named plaintiffs were added after the case was filed and opposed approval of the settlement.

“But pursuant to a motion filed by George Lang, who at the time was a partner of Weiss, four other class members were added as named plaintiffs (Lang says that Weiss rather than he picked them),” Posner wrote.

The four new plaintiffs supported approval of the settlement.

Lang, however, now represents the four plaintiffs who were replaced and filed objections to the settlement. Ted Frank, founder of the Center for Class Action Fairness,  also represents an objector.

Posner wrote that $11 million in fees in a $90 million settlement is not usually a problem, but that the settlement did not specify how much money would be received by class members, only a procedure by which class members could claim damages.

“So there was an asymmetry: class counsel was to receive its entire award of attorneys fees up front; class members were to obtain merely contingent claims, albeit with a (loosely) estimated value of $90 million (actually far less, as we’ll see)," he explained.

Zagel, the district court judge, approved the settlement before a deadline for filing claims and made no attempt to estimate how many claims were likely to be filed, Posner wrote.

The Seventh Circuit panel also took issue with the facts that any reduction in the $11 million in attorneys fees revert to Pella and not to class members.

“The settlement should have been disapproved on multiple grounds,” Posner wrote.

“Only a tiny number of class members would have known about the family relationship between the lead class representative and the lead class counsel – a relationship that created a grave conflict of interest; for the larger the fee award to class counsel, the better off Saltzman’s daughter and son-in-law would be financially – and (which sharped the conflict of interest) by a lot.

“They may well have had an acute need for an infusion of money, in light not only of Weiss’ ethical embroilment, which cannot help his practice, but also of the litigation against him by his former law partners and his need to finance his new firm.”

Posner also said Weiss’ troubles with the ARDC should have been reason enough to disqualify him from serving as class counsel.

Stephanie L. Stewart, an attorney for Weiss, told the Madison-St. Clair Record in April that they planned to appeal the ARDC’s findings and the board's proposed suspension.

The ARDC "has pursued ‘ethics’ charges against Mr. Weiss related primarily to allegations of sexual harassment, despite a specific rule that prohibits ethics charges for sexual harassment against an attorney unless a court or administrative agency has found that the attorney committed sexual harassment (no court or administrative body has ever found that Mr. Weiss committed sexual harassment),” Stewart wrote in a statement.

“And despite the fact that Mr. Weiss has never been criminally charged for any of this conduct, the ARDC has pursued these ethics claims by charging him solely with committing ‘criminal’ conduct (one additional charge that Mr. Weiss engaged in conduct prejudicial to the administration of justice was recommended to be dismissed by the Hearing Board).

Stewart's statement went on to say, “We intend to appeal these issues. At trial, the ARDC’s main witness admitted to previously lying under oath about the events in question, and another witness who claimed Mr. Weiss had inappropriately touched her leg admitted that Mr. Weiss had never committed criminal conduct (as to her, the Board recommended dismissal of all of the charges against Mr. Weiss). All charges but one involve alleged conduct that occurred more than a decade ago, and none involved clients or the practice of law.”

Posner also noted that despite the $90 million estimate, Pella Corp. only estimated the value of the settlement at $22.5 million. Members of the class could either file a claim that had a maximum damages award of $750 or submit to arbitration.

Posner said the claim forms require a claimant to submit “arcane” data, including the purchase order number, glass etch information, product identity stamp and unit identification label.

“And that’s assuming that class members even attempt to file claims,” he wrote.

“The notice of settlement that was sent to them is divided into 27 sections, some with a number of subsections.

“Considering the modesty of the settlement, the length and complexity of the forms, and the unfamiliarity of the average homeowner with arbitration, we’re not surprised that only 1,276 claims (of which 97 sought arbitration) had been filed as of February 2013, out of the more than 225,000 notices that had been sent to class members.

“The claims sought in the aggregate less than $1.5 million and were likely to be worth even less because Pella would be almost certain to prevail in some, maybe most, of the arbitration proceeding.”

In addition to overturning the approval of the settlement, the Seventh Circuit removed Saltzman as lead plaintiff and Weiss’ firm as class counsel. The four named plaintiffs who were removed after they objected to the settlement were reinstated as lead plaintiffs.

Posner concluded that after “eight largely wasted years, much remains to be done in this case."

Editor's note: This story was first published in Legal Newsline.

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