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Chicago attorney Paul Weiss thought he struck a pretty good deal with America Online Inc. — $25 million to settle Illinois state court allegations that AOL charged thousands of customers for services they did not request. Then his mail arrived from Los Angeles federal court warning: You’ve got trouble. Plaintiffs’ lawyers overseeing federal class actions consolidated in Los Angeles rushed to federal court asking for an injunction to block the AOL settlement in the St. Clair County, Ill., court — and they got it. They accused AOL, Weiss and his colleagues of engaging in what’s known as a “reverse auction,” in which the defendant agrees to settle with the lawyers who will make the cheapest offer. U.S. District Judge Ronald S.W. Lew prohibited AOL from settling in the state court action “to prevent the type of forum-shopping that can occur from reverse auctions” and because of the “likelihood of eviscerating” his court’s jurisdiction over the federal multidistrict litigation. In re America Online Spin-Off Accounts Litigation: Duessent v. America Online Inc., No. 05-55714. The Illinois case is: O Leary v. America Online Inc., No. 03-L-491. A LEGAL FIRST “I have never seen anything like this before, never, not even remotely close,” said Weiss of Freed & Weiss. Neither had AOL. The company has asked the 9th U.S. Circuit Court of Appeals to step in and let the Illinois nationwide class settlement proceed. The court agreed in late June to act on an emergency basis. The court is expected to issue a ruling within the next few weeks. AOL declined to comment, but papers filed by its lawyer, former Whitewater prosecutor Kenneth W. Starr of Chicago’s Kirkland & Ellis, state, “[T]his collateral attack on the state court settlement is not about the litigants but about the lawyers. The MDL plaintiffs’ lawyers want to scuttle the Illinois settlement because they (as opposed to their clients) do not receive compensation from that settlement.” AOL contends that Lew’s order violates the Anti-Injunction Act, which does not allow a federal court to enjoin state court proceedings except in very limited circumstances. “The real dispute here, thus, is between the MDL plaintiffs’ lawyers and the Illinois plaintiffs’ lawyers, and they need to work out that dispute among themselves,” according to Starr and colleague Christopher Landau. Lew cited the rarely-used All Writs Act as authorization to compel action of nonparties in a position to frustrate the administration of justice. He accused AOL of secretly settling with the Illinois plaintiffs when negotiations were unsuccessful in the federal case. The All Writs Act allows a federal judge to issue orders to parties outside a particular lawsuit, even though the court may not have any federal jurisdiction in its own right. Plaintiffs’ attorney C. Brooks Cutter of Kershaw Cutter & Ratinoff in Sacramento, Calif., told the appeals court, “In short, AOL attempted a pre-emptive strike on the district court’s jurisdiction. “AOL chose a risky path when it negotiated a secret settlement in [Illinois] and rushed into state court to obtain preliminary settlement approval without prior notice to [Lew,]” Cutter wrote in reply to AOL’s assertions. He has asked the 9th Circuit for oral arguments. The combined federal class actions claim that more than 6 million AOL subscribers inadvertently ordered what’s known as spinoff accounts between 1999 and 2003 through allegedly deceptive pop-up ads. The tactic allegedly raised $500 million for AOL. Cutter contends that Weiss and the other Illinois lawyers stand to collect nearly $7 million in fees if that settlement proceeds. Focusing on fees “completely ignores the benefit conferred to the class, which if you just focus on the cash component is worth at least $25 million,” Weiss said. In addition, Weiss said the deal provides credits toward AOL service with no cap on potential claims and gives $1 million to charity. Weiss also said the Illinois settlement allows the Los Angeles plaintiffs to opt out if they object to its terms. Even the U.S. Chamber of Commerce weighed in with an amicus argument in support of AOL, calling Lew’s order “unprecedented, doctrinally unsound and potentially ruinous to defendants.” The jurisdiction fight turns the typical forum quest on its head. The St. Clair County court has been dubbed one of the “hellhole” state jurisdictions among defense lawyers who usually rush to move cases out of plaintiff-friendly sites to friendlier federal courts. Here, AOL fights to stay in the state court while plaintiffs’ lawyers, typically averse to federal jurisdiction, fight to keep a case in a federal court.

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