“When in Doubt, Disclose”: Seventh Circuit Levies Sanctions for Undisclosed Class Conflict in Southwest Airlines Voucher Litigation

The Seventh Circuit’s message to the bar in Levitt v. Southwest Airlines Co. (In Re: Southwest Airlines Voucher Litigation), No. 13-3264 (7th Cir. Aug. 20, 2015), was “short and simple: when in doubt, disclose.” Slip Op. at 27.

The court delivered this message in an opinion by Judge David Hamilton, while meting out monetary sanctions for class counsel and one class representative, both of whom failed to disclose a conflict of interest. Considering that the failure to disclose could have led to rejection of the entire class settlement or to the court’s decertifying the class, the sanctioned parties should be relieved that they got off as lightly as they did.

The bulk of the court’s decision concerned whether the district court’s use of the lodestar method to calculate class counsel’s fee under the Class Action Fairness Act, 28 U.S.C. § 1712, was permissible. The court held that it was, creating a split with the Ninth Circuit in the process.

The undisclosed conflict of interest—that the lead class counsel and the class representative were co-counsel in a separate pending class action—was a side issue, raised for the first time on appeal by one of the two objecting class members.

Normally appellate courts do not consider issues raised for the first time on appeal. But the Seventh Circuit made an exception in this “rare instance,” holding that class members “were not obliged” to search for undisclosed conflicts of interest at the risk of waiver, particularly because this case settled before class certification, thus removing the defendant’s incentive to root out potential conflicts. Id. at 24. Moreover, the issue should have been addressed before the district court as part of inquiring into the adequacy of class representation under Rule 23(a)(4), but the failure to disclose the conflict prevented that from happening. In all events, the Seventh Circuit decided that the best course was to resolve the issue itself.

Fortunately for the parties, who doubtless wanted to avoid being sent back to square one, the court (repeatedly) found that the class had been made whole by “the unusual degree of success for the class in the settlement.” Id. at 26. Since the class got everything it could have hoped for, the court saw no sense in unraveling the settlement.

The court instead modified the settlement to remove the class representative’s $15,000 incentive award and to reduce counsel’s share of the attorneys’ fees by the same amount. It was a pragmatic decision, but the court also warned that in a different case, where the class had been affected adversely, “the consequences would be more severe.” Id. at 27.