Antitrust Law Daily Wrap Up, TOP STORY—MDPa: Settlement of RICO Claims in “Kids for Cash” Juvenile Detention Conspiracy Approved, (Dec 17, 2012)

By Tobias J. Gillett, J.D., LLM.

The federal district court in Wilkes-Barre, Pennsylvania has approved settlement of the RICO lawsuit over the “Kids for Cash” scandal, involving a conspiracy between two judges and the builder and operator of two juvenile detention facilities (Wallace v. Powell, December 14, 2012, Caputo, A.). In doing so, the court certified classes for settlement and awarded attorneys’ fees and costs

The “Kids for Cash” scandal concerned an alleged conspiracy, uncovered in 2009, between two Luzerne County, Pennsylvania Court of Common Pleas judges—Mark A. Ciavarella, Jr. and Michael T. Conahan—and the builder and operator of two private, for-profit juvenile detention facilities—Robert K. Mericle and his company, Mericle Construction, Inc. Under the scheme, the judges would disproportionately sentence juveniles to detention in exchange for kickbacks from the builder and operator.

The present order settled RICO lawsuits brought by children who had appeared before the judges and the parents of the children, seeking compensation for the unlawful conspiracy and deprivations of the juveniles’ rights.

Settlement Agreement

Under the settlement agreement, Mericle and his company and the County of Luzerne and its affiliated present and former employees and instrumentalities will pay compensation to the members of the two identified classes, one consisting of children and the other consisting of parents who had suffered injuries related to the detention of their children, with Mericle and his company agreeing to pay $17,750,000, less attorneys’ fees and costs.

The agreement provides for basic benefits to the children’s class, on a scale of $500 to $5,000, depending on whether the individual children spent time in a juvenile facility and whether a juvenile was detained in a Mericle facility or another facility. The agreement also provides for basic benefits to the parent class, with parents receiving the actual amounts of court costs or payments to Luzerne County.

In addition, the agreement establishes an enhanced benefit fund of $8,035,000, with any funds left over after distribution of the basic settlement fund added to the enhanced benefit fund. The enhanced benefit fund grants flat reimbursements of $4,000 to any juvenile that spent 90 days or more in a non-Mericle detention facility. The agreement also divides up payment of the enhanced benefit fund according to a point system, with points awarded for those juveniles who were 13 years or younger at the time of their first appearance before the judges; for number and length of detentions; for physical injury or illness suffered during detention, as well as the severity of the illness or injury; for psychological or emotional harm suffered as a result of detention, and its severity; for harm to the children’s education, and its severity; and for suicide committed as a result of detention (although no verified claims of suicide were presented).

Class Certification

The court approved certification of the classes, concluding that the classes met the requirements of Federal Rules of Civil Procedure 23(a) and 23(b)(3). Rule 23(a) demands that a putative class must satisfy the requirements of “numerosity, commonality, typicality, and adequacy of representation.” Rule 23(b)(3) permits certification of a class if “questions of law or fact common to class members predominate over any questions affecting only individual class members, and . . . a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”

The over 3,000 members of the classes easily exceeded the 40 members specified as the number the Third Circuit believes generally satisfies the numerosity requirement. The fact that all the plaintiffs’ claims turned on issues regarding whether the Mericle conspired with the judges to deprive the plaintiffs of their constitutional rights, whether the defendants organized an enterprise for RICO purposes, and whether the defendants “participated in the affairs of an entity through a pattern of racketeering activity” satisfied the commonality requirement, as all claims arose “from the same nucleus of operative facts and involve[d] the same legal theories.”

The typicality requirement was also met, as the legal theories for both classes would be the same for all members of the classes. Finally, as the plaintiff attorneys had the experience, skill, and qualification to conduct the litigation, and as the interests of the representative plaintiffs were aligned with the interests of the proposed classes, the adequacy requirement was also satisfied. Therefore, the court determined that Rule 23(a) did not bar certification of the putative classes.

The court also concluded that the putative classes satisfied Rule 23(b). The court found that the RICO claims would involve common questions regarding the conduct of Mericle and the other defendants, including whether they participated in activities together, whether an enterprise existed, whether racketeering had occurred, and whether the racketeering had occurred through an established pattern. Moreover, the plaintiffs had “presented a plausible theory for proving a class-wide injury as a result of the racketeering activities of the alleged enterprise. Therefore, the court held that the predominance inquiry had been fulfilled.

A class action would be superior to other means of prosecuting the lawsuit because it would be better than “allowing piecemeal litigation of the exact claims in countless lawsuits,” because the individual claims would be small in comparison to the costs of bringing a lawsuit, and because the court had subject matter and personal jurisdiction over the parties. The court therefore certified the classes for settlement purposes. In addition, the court determined that the members had received adequate notice of the settlement.

Fairness of the Settlement

The court also approved the settlement as “fair, adequate, and reasonable,” conducting an inquiry under the factors the Third Circuit identified in its 1975 opinion in Girsh v. Jepson (521 F.2d 153). Under these factors, the court determined that the complexity of the litigation would “prolong the litigation and reduce the value of any recovery to the class.” The court observed that none of the approximately 3,910 class members had objected to the settlement, while only 14 had opted out. Moreover, the court found that settlement had been reached only after almost three years following commencement of litigation, giving sufficient time for the parties to engage in discovery, to adequately appreciate the strengths and weaknesses of their cases, and participate in arm’s-length negotiations.

The risks of establishing liability favored settlement, as the plaintiffs could have difficulty proving all elements of their claims, and subsequent motions and appeals would have resulted in “protracted litigation and accumulating expenses,” in the court’s view. In addition, Mericle had indicated it would vigorously oppose class certification except for settlement purposes, leading to the possibility of decertification.

Although Mericle Construction, as a large commercial real estate corporation, might have been able to withstand a larger judgment, and although the precise maximum amount that the plaintiffs could recover was unclear, the court noted that insurance did not cover the claims, the benefits to be paid under the settlement had been placed in escrow, all opt-outs had been resolved, and the risks of litigation were clear, leading the court to believe the settlement was “still fair, reasonable, and adequate.” Moreover, the plaintiffs presented an ethics expert who testified to the adequacy of the settlement.

The court also noted that the class members had been given the opportunity to opt out, that the attorneys’ fees were reasonable, and that the procedure for processing claims under the settlement was fair and reasonable. Therefore, the court approved the settlement.

Attorneys’ Fees and Costs

The court approved class counsel’s request for attorneys’ fees and expenses in the amount of $4,335,000, under a percentage-of-recovery method. As the number of claims from the Parent Settlement Class would exceed the amount of funds set aside to satisfy the claims of that class, the counsel had requested that the amount of the award of attorneys’ fees and costs be reduced by the amount necessary to satisfy the claims of that class.

The court found that the fees requested fees would amount to less than 25% of the benefit fund, “well within the range of reasonable fees” employed in the Third Circuit, and that was not a “mega-fund” suggesting a lower percentage. Moreover, no class members had objected to the fee application. The counsel’s extensive experience and ability, and the lengthy duration and complexity of the litigation also supported the reasonableness of the award. The risk of non-payment from the contingent fee arrangement, and the 26,630.18 hours devoted to the case by the class counsel alone, also weighed in favor of the award. Awards in similar cases indicated that the award in this case was not unreasonable, and the fee request was below the 30-40% routinely negotiated for private contingent fee cases. In addition, the counsel had contributed benefits that could not be attributed to work by other groups.

The lodestar cross-check favored the award as well. The lodestar for the plaintiffs’ counsel of record amounted to $10,754,199, and the lodestar for the class counsel alone amounted to $8,520,861. Based on the number of hours spent prosecuting the action, the hourly rate for the counsel of record would be approximately $308, and the hourly rate for the class counsel would be approximately $320. Although these amounts were higher than those typically approved in the Scranton-Wilkes-Barre area, the extensive experience of the class counsel and the complex legal services provided rendered the award “acceptable.”

Moreover, the additional hours that would be spent processing claims and allocation appeals would reduce the hourly rate substantially. As the award of $4,335,000, compared to a lodestar of $10,754,199, yielded a multiplier of significantly less than one, the court found the lodestar cross-check supported the award.

The cases are Nos. 3:09-cv-286, 3:09-cv-0291, 3:09-cv-0357, 3:09-cv-0630, 3:09-cv-2535, and 3:10-cv-1405.

David S. Senoff (Caroselli Beachler McTiernan & Conboy) for Florence Wallace. Jane S. Sebelin (Sebelin Law Offices PC) for Robert J. Powell. Mark A Ciavarella, Jr., pro se. Michael T. Conahan, pro se. Bernard M. Schneider (Brucker Schneider & Porter) for PA Child Care LLC. Alison Tanchyk (Morgan, Lewis & Bockius LLP) for Robert K. Mericle. Deborah H. Simon (Elliott, Greenleaf & Siedzikowski) for County of Luzerne.

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