Jackie Kleiner v. The First National Bank of Atlanta, Hansell & Post, Richard Kirby and Richard M. Langway, George W. Morosani v. The First National Bank of Atlanta, Hansell & Post, Richard Kirby and Richard M. Langway

We consider whether the first amendment rationale of Bernard v. Gulf Oil Co.1 bars sanctions against a defendant and counsel for secretly soliciting exclusion requests from potential members of a Rule 23(b)(3) plaintiff class.

This appeal is the closing phase of a ground-breaking class action against the First National Bank of Atlanta2 filed by Jackie Kleiner, an Atlanta lawyer and real estate investor. The lawsuit, sounding in fraud, RICO and breach of contract, charged the Bank with reneging on its promise to peg the interest it charged smaller customers to the prime rate by undercutting the announced prime rate for the Bank's best commercial customers.3 Richard M. Kirby, a partner in the Atlanta law firm of Hansell & Post and an attorney experienced at class action litigation, undertook the Bank's defense.

On April 15, 1983, after over two years of discovery, the district judge certified certain of the contract claims for class action treatment. The tripartite plaintiff class, certified under Fed.R.Civ.P. 23(b)(3), numbered approximately 8,600 potential members.4

The following month Kirby served notices of deposition and subpoenas duces tecum on twenty-five prospective class members. Plaintiffs moved for a protective order to bar the Bank from badgering class members by taking their depositions. At a May 20 hearing on the motion, the court initially suggested that the Bank confine class member discovery to affidavits.5 Outspoken protests from plaintiffs, however, caused the court to reconsider its response. Opposing counsel argued that unilateral contacts by the Bank before the close of the exclusion period would intimidate eligible members, many of whom would be very worried about their credit ratings and their ability to borrow in the future. Counsel contended that many would be deterred from participating in the class, which was their right.

After extended discussion, the district judge granted the protective order subject to a proviso allowing the Bank to take depositions of five class members. Both sides were to have the opportunity to interview the deponents before the depositions, and plaintiffs would have the opening interview. The court took the broader question of unsupervised contacts between the Bank and class members under advisement pending further briefing, ruling:

At this time, I am going to let [defense counsel] take no more than five depositions. Otherwise, I am granting the motion for a protective order. However, if you can get me some law that convinces me that it is all right for you to otherwise be able to contact class members, then I will permit you to contact additional people informally.

Both Kirby and Richard M. Langway, general counsel for the Bank, attended the hearing.

A month later, on June 29, the district judge approved the class notice required under Fed.R.Civ.P. 23(c)(2). The notice, as approved, informed recipients that they would be included in the class unless they took the affirmative step of opting out by returning an exclusion request to the clerk of the district court within a stated time. The class members were also directed to address any inquiries to their choice of plaintiffs' or defense counsel.6 After further negotiation, August 13 was set as the date of mailing.

The following day, June 30, the district judge entered a sua sponte order amplifying the class notice ruling. According to the addendum, copies of the proposed replies to inquiries, as well as the inquiries themselves, were to be furnished to opposing counsel before being mailed. In addition, the district judge acknowledged the receipt of briefs on the ex parte contact issue and explicitly reiterated that the question of unsupervised Bank contacts with plaintiff class remained under advisement.

By mid-July, the Bank had seized upon the idea of soliciting class exclusion requests as a means to reducing its potential liability and quelling the adverse publicity the lawsuit had spawned.7 Kirby, alerted of the plan, researched the legality of a solicitation campaign. Meeting with top Bank managers on August 8, Kirby advised that a communications scheme would be lawful under the precepts of Bernard v. Gulf Oil Co. as long as the conversations were truthful and noncoercive. The lawyer warned that any such campaign, while legal, would be an extraordinary move likely to provoke the wrath of the court. He outlined the risks the Bank might court, including an injunction against further contacts, cancellation of the exclusion requests, and an order to issue corrective notice at Bank expense.

Without further hesitation, Thomas R. Williams, chairman of the board, canvassed the potential benefits and costs and resolved to proceed.8 The remainder of the discussion was devoted to specifics. In response to a question, Kirby opined that phone calls would be better than letters, given the danger that people would disregard letters as more "junk mail." Williams assigned Thomas Chapman, Bank marketing director, responsibility for coordinating all solicitation efforts in close consultation with Kirby and Langway.

Secrecy and haste shrouded the undertaking, which would coincide with the district judge's vacation. Neither the court nor opposing counsel were alerted to the telephone campaign, as was Kirby's intent. Chapman hurriedly organized a force of 175 loan officers to staff the telephones, while lawyers Kirby and Langway lent their assistance by reviewing and revising a briefing letter from Williams to the employees as well as a question-and-answer prompting sheet to be used by the loan officers. Kirby supplied Chapman with the class notice and exclusion request forms for reproduction. He also collaborated with the Bank's computer center to generate lists of potential class members broken down under each of the Bank's cost centers.

On August 11, two days before the scheduled date of class notice mailing, the Bank convened a meeting of the loan officers. Kirby and Langway sat in the front row. Board chairman Williams opened the meeting with brief introductory remarks, then turned the session over to Chapman. Chapman announced that the Bank was going to take "bold, decisive action which had no precedent." He informed the assembly that the Bank was commencing a "communications program" to insure that the class members in the Kleiner litigation understood the merits of the dispute and their right to opt out. Chapman went on to say that the officers would be asked to telephone the customers they knew best, and he exhorted them to "do the best selling job they had ever done." The officers were to proceed swiftly since, in Chapman's words, the court might halt the program. The objective, according to Chapman's notes, was to persuade the borrowers to "withdraw from the class."

Chapman repeatedly stressed that the conversations were to proceed on a "factual" plane, without arm-twisting or coercion. The loan officers, however, received "no facts beyond those listed in the Questions and Answers sheet, the letter to employees, and the class action notice.... Chapman himself knew little about the lawsuit except what was contained in the materials distributed at the meeting." Opinion of the district court at 20.

The loan officers dispersed into smaller groups where they were told to call the most receptive customers first and to avoid phoning antagonistic borrowers altogether. They were handed computer lists of customers marked "Friend" and "Foe" as well as score sheets lined with columns for tallying opt-out commitments and the dollar amounts of the corresponding loans. The telephone campaign began immediately afterward.9 The Bank eventually succeeded in reaching a little over 3000 customers, nearly 2800 of whom decided to exclude themselves. Many decided to do so before they received the court-approved notice. By August 12 the Bank had reaped opt-out commitments from customers representing a sum total of $694,997,218 in past or present loans.

The district judge, just back from a two-week vacation, held a hearing on August 24 at plaintiffs' request. When apprised of the campaign, she immediately cited Kirby for contempt and restricted communication to class members by all parties and their counsel to approved responses to individual inquiries. She further denied the Bank permission to depose borrowers who had agreed to opt out. Hansell & Post was cited for contempt the following week. An evidentiary hearing was calendared for October 5.

At an in-chambers conference on September 15, the district judge stated that the proceedings were "in the nature of a disciplinary proceeding" rather than for civil or criminal contempt. The contempt citations were later vacated. The district judge explained that the charges against counsel were grounded in violations of the orders dated May 20 and June 30 as well as in Model Rules 4.2 and 8.4(d) of the A.B.A. Model Rules of Professional Conduct (1983).10 The court lodged additional charges against the Bank for violation of Local Rule 221.2 of the Northern District of Georgia.11

Following the October hearing, which lasted three days, the court issued an exhaustive order on November 8 declaring the solicitation scheme illegal. The trial court found that Kirby, Hansell & Post, and Langway had rendered advice in bad faith and had knowingly taken part in the illegal opt-out campaign. The court further found that the Bank had acted in bad faith and that the written briefing documents had contained misleading portrayals of fact. As a sanction, the court imposed a $50,000 fine on Kirby and Hansell & Post payable to the clerk of the court. Kirby, his firm, and the Bank were additionally assessed attorneys' fees and costs incident to class notice and the subsequent disciplinary proceeding, which totalled $58,577. Both Kirby and Langway were disqualified from further representation in the case.12 As a final measure, the district court ruled that the exclusion requests would be voidable following entry of judgment. The Bank, Langway, Kirby and Hansell & Post immediately petitioned for review.

Since the date of argument before this court, the underlying litigation proceeded to settlement.13 Under the terms of the court-approved agreement, all qualifying class members who requested exclusion are entitled to void such requests and participate in the distribution of the settlement on equal footing with the remaining class members. The stipulation awarding attorneys' fees by its terms encompasses the district court's award of fees and costs incident to class notice and the disciplinary proceeding. The parties correctly argue that the settlement has mooted issues of attorneys' fees, costs, and the legality of the voidable exclusion sanction. The issue of the injunction against communication with members of the plaintiff class similarly lapsed into mootness upon conclusion of the litigation. See Hammond Clock Co. v. Schiff, 293 U.S. 529, 55 S.Ct. 146, 79 L.Ed. 639 (1934); 13A C. Wright & A. Miller, Federal Practice and Procedure, Sec. 3533 at 271 (1975).

We remand to the district court with instructions to vacate as moot those portions of the November 8, 1983 order ordering attorneys' fees, costs, voidable opt-out exclusions, and cessation of defense communications with members of the plaintiff class. United States v. Munsingwear, 340 U.S. 36, 39, 71 S.Ct. 104, 106, 95 L.Ed. 36 (1950).

A different result must obtain with respect to the fines and disqualification imposed upon counsel. The $50,000 fine assessed against Kirby and Hansell & Post was imposed pursuant to the inherent powers of the district court and is not subject to revocation by the parties. The issue of the fine thus remains alive.

We reach the same conclusion with respect to disqualification of counsel. The unique nature of a class action necessitates participation of counsel even after the settlement is approved by the court. Notice of the settlement must be sent to all class members. Individual claims must be filed, negotiated, and paid. Counsel for both sides bear the primary responsibility for administering the settlement, usually a lengthy process. The Bank can still be hampered, then, by its counsel's inability to appear before the court in this case.14

III. DID THE COMMUNICATIONS CAMPAIGN VIOLATE LAW?

Petitioners argue that they cannot be held to account because their actions were not in derogation of law. The district court held otherwise, 102 F.R.D. 754 grounding its order for sanctions in violations of the May 20 protective order, the June 30 class notice order, Local Rule 221.2, and the Model Rules of Professional Conduct. Because we conclude that the defense campaign violated the protective and class notice orders, we do not reach the question of the constitutional validity of Local Rule 221.2.15

Kirby acknowledges the existence of the May and June rulings but argues that the orders did not involve and therefore did not ban opt-out solicitations. According to Kirby, the sole effect of the directives was to limit the number of depositions the Bank could take, leaving the Bank free to initiate contacts by other means.

In essence Kirby argues that the mandate of the district court cannot exceed the corners of the motion that requested it. Such a conception runs counter to the Court's preeminent role in managing the notification process, In re Air Crash Disaster at Florida Everglades, 549 F.2d 1006, 1012 n. 8 (5th Cir.1977), and effectively would stymie the court whenever it sought to respond to an unfolding and often unpredictable sequence of events.

This appeal is a case in point. The plaintiffs originally moved for a ban on depositions out of concern for harassment. The district judge's suggestions recommending the substitution of affidavits and the pitched debate that followed widened the inquiry to the larger issue of intimidation through all forms of unsupervised contacts. Viewed in context, the import of the resulting order was unmistakable. The decision to take the question of informal contacts with class members under advisement acted as an order which barred opt-out solicitations and similar communications until further notice. With a single narrow exception, defense counsel were not to contact prospective class members.

Kirby's argument necessarily would reduce the devices of briefing and advisement to a nullity. As the district court succinctly noted, "counsel are not permitted to discount the Court's unqualified instructions in light of colloquy which precedes a ruling or in light of the Court's perceived reason for an order." Opinion of the district court at 34. We therefore conclude that the May 20 ruling and the companion June ruling prohibited the Bank's communications campaign. The orders, which were directed to counsel as agents of the Bank, were binding on the Bank in its capacity as principal. See Link v. Wabash R.R. Co., 370 U.S. 626, 633-34, 82 S.Ct. 1386, 1390, 8 L.Ed.2d 734 (1962); Durrett v. Jenkins Brickyard, Inc., 678 F.2d 911, 916 (11th Cir.1982).

Similarly, we do not fault the orders for perceived procedural defects under Fed.R.Civ.P. 65(d). Rule 65(d) states that injunctions and restraining orders must set forth the reasons for their issuance and identify, with reasonable detail, the acts to be restrained. The orders at issue, however, are of a different ilk. The lower court correctly characterized the rulings as directives to counsel in their capacity as officers of the court, pursuant to the court's inherent power to manage its cases. See Fed.R.Civ.P. 23(d)(2). The more relaxed prerequisites of Rule 23(d)(2) therefore applied, as the district court noted:

Findings of fact and technical precision are unnecessary for such direction to be valid; rather the direction must only be (a) within the Court's power and (b) specific enough so that counsel may understand what conduct or action is required.

Opinion of the district court at 34. The trial court justifiably found that both criteria were "amply met in the instant case." Id.

IV. AUTHORITY UNDER RULE 23 TO BAN OPT-OUT SOLICITATIONS

Rule 23(b)(3), which affords class relief when common questions of law or fact predominate and the class action mechanism is superior to other means of adjudication, provided the vehicle for the Kleiner litigation. The events of this case draw into question the lower court's authority under the federal rules or statutes to forbid defense contacts with the plaintiff class for the purpose of eliciting exclusion requests.16 See Gulf Oil Co. v. Bernard, 452 U.S. 89, 99, 101 S.Ct. 2193, 2199, 68 L.Ed.2d 693 (1981).

With the introduction of the 23(b)(3) class action in the 1966 amendments to the Federal Rules, courts acquired the authority to consolidate similar claims in order to avoid repeated trials of identical proof even though the cases could fairly be litigated on an individual basis. The resulting economy of effort and uniformity of result was achieved,17 however, only at the cost of binding individual class members through the res judicata effects of litigation over which they lacked control. Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rule of Civil Procedure (I), 81 Harv.L.Rev. 356, 390, 392 (1967).

The dualistic design of the 23(b)(3) class action underscores the tension between individual autonomy and the search for consistency and truth. Its promulgation is proof of the preference for class adjudication of cumulative claims, yet the device is unique among Rule 23 class actions in giving eligible members the right of exclusion from the class.18 Fed.R.Civ.P. 23(c)(2)(A). Alternatively, individual class members are entitled to intervene as of right. To effectuate these safeguards, the court must "direct to the members of the class the best notice practicable under the circumstances," informing them of the opportunity to exclude themselves or to participate in the judgment, whether favorable or not. Rule 23(c)(2).

When confronted with claims pressed by a plaintiff class, it is obviously in defendants' interest to diminish the size of the class and thus the range of potential liability by soliciting exclusion requests.19 See Comment, Restrictions on Communication By Class Action Parties and Attorneys, 1980 Duke L.J. 360, 363. Such conduct reduces the effectiveness of the 23(b)(3) class action for no reason except to undermine the purposes of the rule. See In re General Motors Corporation Engine Interchange Litigation, 594 F.2d 1106, 1140 n. 60 (7th Cir.1979).

A unilateral communications scheme, moreover, is rife with potential for coercion. "[I]f the class and the class opponent are involved in an ongoing business relationship, communications from the class opponent to the class may be coercive." Note, Developments in the Law--Class Actions, 89 Harv.L.Rev. 1318, 1600 (1976). See also H. Newberg, Newberg on Class Actions, current supp. Sec. 2690f (Feb.1984); Comment, 1980 Duke L.J. at 363. This litigation is illustrative. The class consisted of Bank borrowers, many of whom were dependent on the Bank for future financing. Bank customers affected by the litigation included "those who anticipated seeking a note 'rollover,' new loans, extension of lines of credit, or any type of discretionary financial indulgence from their loan officers, and who did not have convenient access to other credit sources." Opinion of the district court at 25-26. As the district court pointed out, the high number of exclusion requests was witness to the inherent coercion of the Bank's machinations.

In view of the tension between the preference for class adjudication and the individual autonomy afforded by exclusion, it is critical that the class receive accurate and impartial information regarding the status, purposes and effects of the class action.20 This is especially important since the court must not consider the probable outcome of the case in passing on class certification. Eisen v. Carlisle & Jacquelin, 17 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974). The "best practicable notice" envisioned by the Rule is notice that conveys objective, neutral information about the nature of the claim and the consequence of proceeding as a class. In re Nissan Motor Corporation Antitrust Litigation, 552 F.2d 1088, 1104-05 (5th Cir.1977).

Unsupervised, unilateral communications with the plaintiff class sabotage the goal of informed consent by urging exclusion on the basis of a one-sided presentation of the facts, without opportunity for rebuttal. The damage from misstatements could well be irreparable. See Zarate v. Younglove, 86 F.R.D. 80, 90 n. 13 (C.D.Cal.1980). Concomitantly, a solicitations scheme relegates the essential supervision of the court to the status of an "afterthought." See Opinion of the district court at 36. In this case, the carefully constructed edifice of check and countercheck, notice and reply, was obliterated when the telephones were lifted from their cradles. The Bank's actions obstructed the district court in the discharge of its duty to "protect both the absent class and the integrity of the judicial process by monitoring the actions before it." Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 331, 100 S.Ct. 1166, 1170, 63 L.Ed.2d 427 (1980); see In re Air Crash Disaster, 549 F.2d at 1012 n. 8; 2 H. Newberg, supra, at 1189. The Bank's subterfuge and subversion constituted an intolerable affront to the authority of the district court to police class member contacts. Accordingly, we hold that the trial court had ample discretion under Rules 23(b)(3) and 23(d)21 to prohibit the Bank's overtures.

The essence of petitioners' claim is a first amendment challenge to the disciplinary action of the trial court. They attack the May 20 and June 30 orders as an unconstitutional prior restraint, arguing that the rulings were neither specific nor "narrowly tailored to address an immediate, compelling danger" in conformance with Bernard v. Gulf Oil Co., 619 F.2d 459 (5th Cir.1980) (en banc), aff'd, 452 U.S. 89, 101 S.Ct. 2193, 68 L.Ed.2d 693 (1981).

"[I]t has never been deemed an abridgement of freedom of speech or press to make a course of conduct illegal merely because the conduct was in part initiated, evidenced, or carried out by means of language, either spoken, written, or printed." Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 502, 69 S.Ct. 684, 690, 93 L.Ed. 834 (1949). Petitioners' speech was expression of a commercial variety,22 which until recently fell outside the ambit of the first amendment. In Virginia State Board of Pharmacy v. Virginia Citizens Council, 425 U.S. 748, 96 S.Ct. 1817, 48 L.Ed.2d 346 (1976), the Supreme Court announced that commercial speech would henceforth receive limited first amendment protection consonant with its role in assuring the proper allocation of resources and the formation of informed decisions. Id. at 762, 765, 96 S.Ct. at 1827. Subsequent Supreme Court cases have delimited the contours of the right accorded commercial speech.

As a threshold matter, untruthful or misleading speech has no claim on first amendment immunity. Central Hudson Gas Co. v. Public Service Commission, 447 U.S. 557, 566, 100 S.Ct. 2343, 2351, 65 L.Ed.2d 341 (1980); Virginia Pharmacy Board, 425 U.S. at 771, 96 S.Ct. at 1830. Commercial speech merits constitutional safeguards only to the extent it is accurate, in keeping with its purpose of insuring the free flow of reliable information crucial to independent decisionmaking. No constitutional objection thus inheres in banning "forms of [commercial] communications more likely to deceive the public than to inform it...." Central Hudson, 447 U.S. at 563, 100 S.Ct. at 2350 (citations omitted). Commercial speech that is protected is legitimately subject to stricter governmental regulations than that allowed for noncommercial expression, see Virginia Pharmacy Board, 425 U.S. at 771-72 & n. 24, 96 S.Ct. at 1830-31 n. 24; United States Postal Service v. Athena Products, Ltd., 654 F.2d 362, 367 (5th Cir. Unit B 1981), cert. denied, 456 U.S. 915, 102 S.Ct. 1768, 72 L.Ed.2d 173 (1982), consistent with the "subordinate position in the scale of First Amendment values" assigned to commercial speech. Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456, 98 S.Ct. 1912, 1918, 56 L.Ed.2d 444 (1978).

In the brief life of the commercial speech doctrine, the Supreme Court has repeatedly warned that traditional prior restraint safeguards do not necessarily extend to questions of commercial speech. See Central Hudson, 447 U.S. at 564 n. 6, 571 n. 13, 100 S.Ct. at 2350 n. 6, 2354 n. 13; Friedman v. Rogers, 440 U.S. 1, 10 & n. 9, 99 S.Ct. 887, 894 n. 9, 59 L.Ed.2d 100 (1979); Virginia Pharmacy Board, 425 U.S. at 771-72 n. 24, 96 S.Ct. at 1830-31 n. 24. Commercial speech is marked by a resilience not found in political commentary or discourse in ideas. Virginia Pharmacy Board, 425 U.S. at 771 n. 24, 96 S.Ct. at 1830 n. 24. Unlike news reportage commercial speech is amenable to advance verification because the speaker ordinarily "seeks to disseminate information about a specific product or service that he himself provides and presumably knows more about than anyone else." Id. For these reasons, commercial speech seldom implicates the traditional concerns underlying the prior restraint doctrine.

In an uncompromising stance, petitioners ignore the generic distinctions between pure and commercial speech and argue that the prior restraint strictures announced in the en banc decision in Bernard23 must apply with equal force to their case. An assessment of their claim requires a reexamination of Bernard in light of the doctrine governing commercial speech.

Bernard was spawned from a set of successive race discrimination claims lodged by black employees of the Port Arthur, Texas Gulf Oil plant. An initial EEOC proceeding had culminated in a conciliation agreement providing for back pay. Dissatisfied with the resolution reached by the EEOC, plaintiffs, represented by local counsel in affiliation with the NAACP Legal Defense and Education Fund, filed a class action against Gulf alleging race discrimination.

Before the date of class certification, Gulf requested an order limiting communications by plaintiffs and their counsel with actual or potential class members. The company attested that counsel for plaintiffs had advised potential class members that they stood to double their recovery by refusing to sign releases in favor of Gulf under the conciliation agreement. Without first corroborating Gulf's unsworn allegations or specifying findings of fact, the trial court entered an order barring parties and counsel from contacting the plaintiff class without advance approval. The disputed order was patterned after a model order contained in the Manual for Complex Litigation, pt. II, Sec. 1.41 (1973 ed.). 619 F.2d at 463-64.

On review, a panel of the former fifth circuit affirmed the district court. 596 F.2d 1249 (5th Cir.1979). The court en banc vacated the panel opinion, 604 F.2d 449 (5th Cir.1979), and reversed the district court on first amendment grounds. Holding that the attempted solicitations constituted protected, non-commercial political expression24 which called "into play the full panoply of First Amendment safeguards against prior restraint," 619 F.2d at 473, the en banc court refused effect to the order as an unconstitutional prior restraint. The disputed order was constitutionally deficient because the suppressed expression posed no certain threat of direct, immediate and irreparable harm; because the order was not narrowly drawn and limited to the least restrictive means of regulation; and because it lacked predicate findings of particular abuses. Id. at 473-77.

On review, the Supreme Court affirmed the en banc court. Gulf Oil Co. v. Bernard, 452 U.S. 89, 101 S.Ct. 2193,