The folks at the Litigation Impact Journal have noted that the decision to grant review in Duran was foreshadowed by Justice Werdegar’s concurrence in his own majority opinion in the California Supreme Court’s highly publicized decision last month in Brinker Restaurant Corp. v. Superior Court.  In that concurrence, Justice Werdeger argued that “[r]epresentative testimony, surveys, and statistical analysis all are available as tools to render manageable determinations of the extent of liability [in wage and hour cases].”  In Duran, the court will have an opportunity to explore that issue in more detail.

What to do with unclaimed settlement funds is a common problem facing class action litigants.  There are at least four methods of distributing unclaimed settlement funds:  (1) reversion of unclaimed funds back to the defendant; (2) payment to those claimants who did make claims on a pro rata basis; (3) letting the funds escheat to the state; and (4) a cy pres award to a charitable organization.  All of these methods have been the subject of criticism, but the practical reality is that something has to be done with funds from a class action settlement that are not claimed by class members.

Recently, the First Circuit Court of Appeals issued a decision that outlines the circumstances under which a court may approve a cy pres distribution of unclaimed settlement funds.  In In re: Lupron Marketing and Sales Practices Litigation, Case Nos. 10-2494, 11-1329 (1^st Cir., Apr. 24, 2012), the parties had agreed to a provision that gave the trial court discretion on the distribution of any unclaimed funds from a settlement of claims alleging overcharging for the medication Lupron.  The Court had ordered that $11.4 million in unclaimed funds be distributed to a non-profit cancer center for the purpose of treating diseases for which Lupron was commonly prescribed.  Although the First Circuit expressed “unease with federal judges being put in the role of distributing cy pres funds at their discretion,” it found that the trial court had not abused its discretion.

In reaching this decision, the First Circuit adopted the “reasonable approximation” test for evaluating whether a district court’s cy pres award constitutes an abuse of discretion.  Under the “reasonable approximation” test, which had previously been applied by the Seventh, Eighth, and Ninth Circuits, the Court looks to whether the cy pres distribution is to a recipient that reasonably approximates the interests being pursued by the members of the class.  The Court listed a number of non-exclusive factors to be considered in making this determination:

(1)        the purposes underlying statutes claimed to have been violated;

(2)        the nature of the injury to the class members;

(3)        the characteristics and interests of the class members;

(4)        the geographic scope of the class;

(5)        the reasons why the settlement funds have gone unclaimed; and

(6)        the closeness of the fit between the class and the cy pres recipient.

The opinion more generally has an interesting discussion of some of the policy arguments for and against each potential alternative method of disposing of unclaimed funds.  Relying on the American Law Institute’s Principles of the Law of Aggregate Litigation, the First Circuit rejected the presumption suggested by the concurrence in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5^th Cir. 2011), that any residual funds in a class action settlement should be returned to the defendant.  The Court also cited the ALI Principles in rejecting escheat to the state as the preferred option of disposing of unclaimed settlement funds.  The opinion lists a variety of policy reasons why unclaimed funds should not be given pro-rata to the claimants who do participate, including that this method creates a windfall and leads to perverse incentives to prevent participation in a settlement by absent class members.

Like the Fifth Circuit’s decision in Klier last year, the First Circuit’s decision in In re: Lupron Marketing and Sales Practices Litigation illustrates the need for parties to be specific in the settlement agreement about the means of distributing unclaimed settlement funds.  Failure to take care in specifying how unclaimed funds are to be distributed can lead to additional unwanted and expensive litigation with objectors, and can force the court to make a public policy-driven decision that may be inconsistent with the desires of both parties to the settlement.

• Moving for summary judgment instead of moving to dismiss on the pleadings;
• Moving to strike the class allegations or for an early ruling on class certification, leaving for a later date the matter of the plaintiffs’ individual claim; or
• Simply filing an answer and waiting until the record is more well-developed before raising a potentially dispositive legal argument, either in a later motion for summary judgment or a motion for judgment on the pleadings.

Without question, every defendant has an incentive to obtain resolution of a class action in the quickest, most efficient way possible.  However, filing a motion to dismiss is not the most efficient means of resolution in every case.  If the motion is unsuccessful, the trial court can develop preconceived notions about the strength of the plaintiff’s claims if they are attacked too early based on an undeveloped record.  This is a risk especially where the trial judge has a reputation of denying motions to dismiss without serious analysis.  But beyond the possibility that the motion will be denied, there is a potential downside to winning an early motion to dismiss on the pleadings.  Having to defend a successful motion to dismiss on appeal can be an unnecessary expense in comparison to the available alternatives, and there is a risk of an unfavorable appellate ruling that can cause lasting harm on remand.  Another consideration is that winning a dispositive motion prior to class certification will only bind the named plaintiff and doesn’t bind other class members (although in practice, defendants are usually willing to take the risk of future lawsuits if it means getting the current one dismissed).

There are two common scenarios in which defendants are successful in obtaining early dismissal of class action claims.  The first is where the plaintiff’s underlying legal theory is a novel one.  One recent example is a putative class action filed against New York Law School alleging that the school misrepresented its employment statistics, causing students to attend law school with the hopes of significant employment prospects, only to find themselves with limited job options upon graduation.  A state court recently dismissed the case in a lengthy opinion that relies heavily on factual matters of which the court took judicial notice (link courtesy of www.abovethelaw.com).  Another example is a putative class action in California challenging McDonald’s alleged practice of using toys in Happy Meals to entice children to buy unhealthy food.  That case was dismissed last week, in a written decision that does not contain any analysis of the court’s reasons for sustaining the defendant’s demurrer (presumably, the court articulated the reasons orally). 

There is no particular reason to believe that either of these decisions will be reversed on appeal, but the risk of reversal is present in almost any decision granting a motion to dismiss due to the individual plaintiff’s failure to state a claim.  Even if the plaintiff’s legal theory is novel or borderline frivolous, there is always a danger that an appellate panel, left to analyze the case from the perspective of pure application of the law based on the facts viewed in the light most favorable to the plaintiff, will find that the plaintiff has stated a claim.  This creates the related risk that due to the undeveloped state of the record, the appellate court will make generalized statements about the viability of the cause of action that will make it more difficult to obtain summary judgment or a denial of class certification later.  This risk is most evident where the named plaintiff has alleged facts that, while implausible, would state an individual claim if accepted as true, but where the facts alleged are so individualized to the named plaintiff that they wouldn’t possibly support a common claim on a class-wide basis.  In that situation, it is important to at least consider the alternative approaches of attacking class certification or filing a motion for summary judgment on a more well-developed record.

A second common scenario where defendant can obtain early dismissal of a class action is where there is a possible complete legal defense to the plaintiff’s class claims, but the defense is based on an unsettled question of law.  In that situation, a win in the trial court may only guaranty years of litigation in the appellate courts rather than putting an end to the dispute.  There may be strategic advantages to a defendant testing the legal theory early in the case anyway, but it is always important to consider other approaches.  One situation in which the defendant may be better off waiting to raise a potentially dispositive legal defense is where the facts are likely to show that the plaintiff’s claim is baseless as a matter of fact, so that an early motion for summary judgment may be a more efficient alternative.

Of course, there is no set formula for deciding whether to file an early motion to dismiss.  Instead, the decision requires an analysis of a variety of different variables that will depend on the specific case.  A non-exhaustive list of the factors includes:

• the strength of the legal arguments and the extent to which the law is settled;
• the style and predilections of the trial court judge;
• the extent to which discovery can be limited or stayed if a motion to dismiss is pending;
• the likelihood of reversal given the composition and leanings of the applicable appellate court;
• the existence of alternative defenses, such as those based on facts outside the pleadings;
• the likelihood that the case will survive class certification; and
• the perceived willingness of the named plaintiffs and their attorneys to explore settlement or to abandon the case following an adverse trial court ruling;
• the effect of long-term uncertainty over a challenge to a particular business practice as the case awaits resolution in the appellate courts; and
• the cost of defending the judgment on appeal in comparison to the amount at stake in the litigation.

There are many situations in which the cost and potential long-term risks of seeking an early dismissal are outweighed by the benefits of a quick win in the trial court.   But, while filing an early motion to dismiss is always a strategy to consider, it is important to at least consider alternatives that may be only slightly more costly in the short term and may provide a better foundation for a win in the trial court to remain a win forever.

It is commonplace for settlements to include no binding admission of liability. A settlement is by definition a compromise. We know of no precedent that supports the proposition that a settlement will not be found to be fair, adequate, reasonable, or in the public interest unless liability has been conceded or proved and is embodied in the judgment. We doubt whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined.

There is a corollary to this statement, which holds that a settlement does not have to fully compensate alleged victims in order to be fair and reasonable.  Too often, I hear statements by the media, members of the public, and even lawyers and judges, that are critical of a class action settlement because it does not fully compensate the members of a class or because it does not force a defendant to fully pay for the alleged harm.  As the Second Circuit panel’s opinion reminds us, a settlement is a compromise.  Except perhaps in the rare case where liability has already been proven, it is not unfair or unreasonable that a class action settlement does not provide full relief for the alleged victims of some as-yet unproven wrong.  You can bet that I will be citing this decision the next time I face that sort of argument in a class action settlement.

The procedural history of McReynolds is interesting, because the plaintiffs had actually moved for reconsideration of an earlier denial of class certification after the decidedly pro-employer decision in Dukes was announced.  Although the trial court judge was unconvinced to change his earlier decision, he did agree that Dukes presented a good basis for reconsideration of the class action issue, and expressly stated in his decision that he believed the case was a good candidate for an interlocutory appeal under Rule 23(f).

The Seventh Circuit accepted the appeal, and reversed the denial of class certification.  The Seventh Circuit panel recognized that individualized issues would prevent certification of any claims for back pay or damages, but held that certification of the issue of whether the defendant’s challenged employment policies had an adverse impact on members of a protected class would still be appropriate under Rule 23(b)(2), which allows a class to be certified for the purpose of awarding injunctive relief, and Rule 23(c)(4), which allows certification of particular issues.  Essentially, the case would be certified for the purpose of deciding whether the defendant’s challenged policies created a disparate impact to members of a protected class and for the purpose of ruling on plaintiffs’ request to enjoin the practices.  Any claims for back pay, compensatory or punitive damages would then have to be brought as separate proceedings. 

In reaching its conclusion, the court drew a key factual distinction between the practices being challenged in the case before it and the practices that had been challenged in Dukes.  In McReynolds, the practice being challenged was the company-wide policy of “permitting brokers to form their own teams and prescribing criteria for account distributions that favor the already successful—those who may owe heir success to having been invited to join a successful or promising team.”  The court distinguished this policy, which it characterized as a firm-wide policy of Merrill Lynch, from the allegations in Dukes, which were that the lack of a uniform corporate policy on discrimination created too much discretion in local managers to create locally discriminatory policies.

I’ll be posting more on this decision within the coming week, so stay tuned…

Frankel has done an excellent job of summarizing the issues in the case as well as today’s Second Circuit Court of Appeals decision holding that the federal courts lack jurisdiction over the case under the Class Action Fairness Act (CAFA) as a result of the securities exception in 28 U.S.C. §§ 1332(d)(9)(C) and 1453(d)(3), so I won’t re-summarize the article here but simply commend it to your reading.  The case is BlackRock Fin. Mgmt. Inc. v. The Segregated Account of Ambac Assur. Corp., 11-5309-cv(L), (2d Cir., Feb. 27, 2012).

Although the use of Article 77 to create a binding settlement that does not require an opportunity to opt out may be a novel strategy, the case highlights an often-overlooked option that may be available in any class action litigation involving a trust, benefits plan, or other fund with a custodian or trustee.  This would include certain banking and securities cases or class actions filed under the Employee Retirement Income Security Act (ERISA) against a party other than the trustee.  Rather than having to negotiate with class action lawyers, it may be possible in these contexts to come to a global resolution of a dispute by negotiating with the trustee and then seeking court approval of that agreement.  Even if a class action is pending, resolution of the dispute with the trustee may provide grounds to defeat class certification on superiority grounds, since a settlement with a party having a fiduciary responsibility to the beneficiaries of the fund can be an adequate and significantly more efficient means of resolving any dispute.

• This February 6 post from John Lewis discussing the impacts, both on employment cases and otherwise, of the Second Circuit’s recent Amex III decision.
• This February 6 Post from Greg Mersol discussing a recent federal court decision holding that the pleading standards articulated in Iqbal and Twombly do not apply to affirmative defenses in class actions.
• This January 20 post from John Lewis discussing the U.S. Supreme Court’s most recent pro-arbitration opinion in CompuCredit Corp v. Greenwood.

Even if you aren’t an employment lawyer, I would strongly suggest adding www.employmentclassactionreport.com to your list of favorites!