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Archive for April, 2011

Setting the Record Straight on Class Action Claims Aggregators

Posted in Articles, Class Action Trends, tagged , , , , on April 28, 2011| Leave a Comment »

Editor’s note: Earlier this month, I posted an entry entitled Class Action Claims Aggregators, the Latest Innovation in Entrepreneurial Litigation, an admittedly glib post that inaccurately described the phenomenon of private companies aggregating class action settlement claims for clients as a new one.  As it turns out, these services have existed for years.  Adam Savett, attorney and Director of Securities Class Actions for the class action claims aggregator Claims Compensation Bureau, LLC, the first class action claims aggregator, graciously agreed to author the following guest post describing the history of the industry and the services that these companies provide to their clients.  Adam’s comments and opinions are his own, but then again you probably guessed that given my documented ignorance about this subject.  Many thanks to Adam for his contribution to CAB.  -PK

The following is offered to expand upon a prior post discussing the existence and role of “class action settlement aggregators.”

It may surprise readers to know that this is not a new field at all, though the number of entrants has certainly accelerated in the last 5 years.  The field has been around for 15 years, though there is no accepted term to describe the services offered.  “Third party claims filer” and “bulk filer” are generally used in the class action arena to describe these entities.

There are a number of firms that operate in this space, and while the first firms to offer this service started with securities class actions, a number now also file claims in the antitrust field.  A few have also ventured into the consumer and mass tort fields.

The value that these firms bring to clients is ensuring that they are kept apprised of all settlements that may impact them, regardless of how far flung their operations may be.  In other words, if a class action notice is sent to a manufacturing plant, instead of to the corporate office, or whatever group might handle the oversight of claims filing (e.g. purchasing, legal, compliance), it may not be acted upon.

And that presumes that the notice reaches the class member at all.  Every year there are between 100 and 150 securities class action settlements (or SEC “Fair Funds” actions) and a large number of antitrust settlements as well.  Those settlements are administered by more than 30 different claims administrators, each using their own proprietary methodology for identifying and contacting potential claimants.

Given that the vast majority of securities are held in “street” name, there is no definitive list of the investors that bought or sold the impacted securities during the class period.  While most securities class action settlement notices require those that hold securities for the benefit of another (the so called “banks, brokers, and nominees” clause), the processes used by these firms to actually cascade notice to investors vary dramatically.

There are additional hurdles to just being made aware of potential claims in settlements.  Investors change custodial banks, brokerages, and investment managers frequently, and many of these service providers have no policy on reaching out to former clients to make them aware of settlements that include transactions from the time period when the investor was still a client.

In order to file and perfect a claim in most securities class action settlements, an institution will first need to determine whether they are eligible to participate in the litigation.  This typically involves comparing the definition of the class (the group of investors that are to be included in a given litigation) to the current, or more commonly, the historical securities transactions of the institution.  The class definition will typically spell out both which specific securities are included in the litigation as well as the period during which an investor had to purchase or sell the securities at issue, commonly called the “class period.” On the surface this sounds straightforward; the reality is far more complex.

As an initial matter, the class period for a federal securities fraud class action can span a period of five years.  Layered on top of that is the length of time that most cases take to reach the settlement stage – 2-5 years – and one can immediately sense that the data needed to file claims in settled cases can, and often is, quite historical.  This presents a real problem for institutional investors, as obtaining access to, searching through, and extracting 10+ year old securities transaction data is often not something that was planned for when custodial bank or prime brokerage relationships were initiated or terminated, or when internal fund management and accounting systems were built or sunset.  As noted in the 2009 Global Custodian Prime Brokerage Survey, nearly half of the respondents had started a new prime brokerage relationship during the prior 12 months.

Layered on top of the turnover, is the apparent failure to look to the future, when starting these new relationships.  Indeed, an analysis of more than 50 RFPs issued during the last 3 years for custodial bank or prime brokerage services revealed that less than 10% of the RFPs even mentioned securities class action claims filing, and an even smaller percentage mentioned access to historical information if and when a custodial relationship were to be terminated.  We have often encountered a reluctance on the part of a former custodian to grant a client access to their historical securities transaction information.

Just as importantly, the breadth of class action settlements continues to expand.  Whereas 10-15 years ago it was fairly common for a securities class action settlement to include just one security identifier (CUSIP, SEDOL, or ISIN), the cheap and ready access to the debt markets that was commonplace (at least until the credit and equities markets seized up in 2007) meant that an increasing number of companies issued debt securities or multiple tranches of preferred shares.  These debt securities are increasingly being included in securities class actions and the resulting settlements.  A quick analysis of settled cases finds that the percentage of settlements involving fixed income securities has dramatically increased over the years and now encompasses nearly 25% of all settlements in a given year.

The need for this data is becoming more important as regulators and beneficiaries are turning a keener eye on the size of securities litigation settlements and the failure of investors to file claims in settled cases.  The costs of not filing, or not filing properly, can be high indeed.  In January 2005, 40 mutual fund managers were sued by shareholders in class action lawsuits alleging that the funds had failed to collect nearly $2 billion in settlement payouts to which the funds (and the funds’ shareholders) were entitled.  The lawsuits alleged that the funds’ failure to claim this money was a breach of the manager’s fiduciary duty and a violation of federal law.  The lawsuits sought compensatory damages for all of the money that the funds left on the table, punitive damages and the forfeiture of all commissions and fees paid by fund shareholders.  In 2007, an investment advisor took a $56 million charge as a result of having to reimburse certain clients for claims filing mistakes.  More recently, several brokerage firms have been sued by clients for allegedly failing to notify them of the existence of settlements that they were eligible to participate in.

Antitrust cases can be even more difficult to track, as there are generally multiple defendants, and they rarely settle at the same time.  The claims administrators often rely on the records of the defendant to perform the notice function.  A particular class member may not receive notice if for example they bought products only from a non-settling defendant in a price-fixing or market allocation conspiracy, as they would not appear in the records produced or available to the settling defendant.

While I don’t dispute that this is an entrepreneurial endeavor, it is one that is unfortunately very much needed.  These firms assist clients such as institutional investors or multi-national manufacturers with researching, filing, tracking, and recovering money through class action settlements in the securities and antitrust fields.  They are able to verify, consolidate, format, submit, and then chase their clients’ claims with the benefit of subject matter expertise, and without forcing the client to use internal resources.  Examples of where the value add is easy to see are post-merger scenarios where records are in different locations and formats, or when an institutional investor has switched custodians, often depriving them of electronic access to the trading records needed to correctly fill out a claim form. 

About the Author:

Adam Savett is the Director of Securities Class Actions for Claims Compensation Bureau.

Adam is a former securities litigator who used to represent and advise institutional investors in all aspects of securities litigation. He speaks frequently on securities litigation, claims filing, and corporate actions issues, and his comments on those topics have appeared in a wide variety of publications.

Recently, Adam was named one of the 100 Lawyers You Need to Know in Securities Litigation by Lawdragon Magazine. He has published a number of articles and original research pieces on securities litigation topics and is also a member of the National Association of Public Pension Attorneys (NAPPA), the Professional Liability Underwriting Society (PLUS), SIFMA’s Corporate Actions Division, the American Bar Association (ABA), and the Hedge Fund Business Operations Association (HFBOA).

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Supreme Court Finds in Favor of Class Arbitration Waivers

Posted in Supreme Court Decisions, tagged , , , , , on April 27, 2011|

In the first of four highly anticipated rulings on class action issues this term, the United States Supreme Court has handed down a major victory for business interests.  In a 5-4 decision in AT&T Mobility LLC v. Concepcion, No. 09-893, the conservative majority held that the Federal Arbitration Act pre-empts state contract law principles in determining the enforceability of a class arbitration waiver–an arbitration agreement that expressly precludes arbitration on behalf of a class.  Here is a link to the slip opinion.  Prior opinions issued by many state courts have found class arbitration waivers unconscionable and have allowed class actions despite the existence of an express agreement in consumer contracts barring them. 

Importantly, Justice Scalia’s majority opinion goes beyond even the question originally presented for review, which was whether the FAA pre-empts state law “when when [class action] procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”  Instead, the majority’s decision appears to hold that the FAA preempts state law (and possibly even removes “unconscionability” as a basis for invalidating an arbitration clause even when not based on state public policy) even when the lack of a class action mechanism as a practical matter leaves plaintiffs with no remedy at all.

Justice Thomas’s concurring opinion gives a ray of hope to consumer interests seeking to pursue class action litigation in cases where a class arbitration waiver exists.  Justice Thomas agreed that the FAA preempts state decisions on whether an arbitration clause is unconscionable, but he notes that this decision does not necessarily preclude an argument that no agreement existed in the first instance, such as where the agreement is found to have been entered into as a result of coercion or fraud.  However, although he concedes that unconscionability rising to the level of a complete lack of mutual assent would be a basis to decline to enforce an arbitration agreement, he appears to conclude that unconscionability based purely on public policy would never be a basis to invalidate an arbitration agreement under Section 2 of the FAA, since it would not impact the formation of the arbitration agreement.  See Slip Op. at 4, n.* (Thomas, J., concurring).   So, if there is a ray of hope for plaintiffs, it appears to be a small one.

One big issue left unresolved after the Court’s decision is whether federal courts still have the power to declare class arbitration waivers invalid as a matter of substantive federal law.  For example, in In re American Express Merchants’ Litigation, No. 06-1871-cv, the Second Circuit Court of Appeals recently reaffirmed its decision invalidating a class arbitration waiver after an earlier decision was vacated by the Court to reconsider in light Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).  In doing so, the court evaluated the validity of a class arbitration waiver “under the federal substantive law of arbitrability,” not under state law contract principles.  See also Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007); Kristian v. Comcast Corp., 446 F.3d 25, 63 (1st Cir. 2006).  This analysis would not clearly be affected by the holding of the Supreme Court’s decision today, although the tone of the majority’s opinion would seem to call the invalidation of any class arbitration waiver provision into question.

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What Fraud Claims Make for a Good Class Action? Justice Breyer has an Idea.

Posted in Commentary, Securities Class Actions, Supreme Court Decisions, tagged , , , , , , , , , , , on April 25, 2011| Leave a Comment »

The United States Supreme Court heard oral argument today in the case of Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403.  A transcript of the argument is now available on the Court’s website. 

Erica P. John Fund involves the appropriate standard for assessing class certification in securities fraud cases brought under the “fraud on the market theory.”  Much of the argument was focused on whether the lower courts properly applied existing precedent in determining whether common issues predominated and whether the district court improperly considered the merits of the plaintiffs’ claim by requiring proof of loss causation at the class certification stage.  Many of these issues are unique to the securities fraud context.  The “fraud on the market” theory has been rejected in other contexts.  (See, e.g. CAB entry dated April 27, 2009.)  However, one seemingly off-the-wall hypothetical from Justice Breyer helps to illustrate what creates a common rather than an individualized question when evaluating either a securities fraud claim or another other fraud, misrepresentation, or nondisclosure claim: 

JUSTICE BREYER: Does your rule apply in all fraud cases? That is, a thousand farmers say, Mr. Jackson was our common buying agent, and the defendant lied to Mr. Jackson, and he relied on the lie.  It is a common issue whether he relied on the lie or he didn’t rely on the lie. I can understand somebody saying at the certification stage they have to see whether he’s really a common agent. But let’s imagine that’s assumed. The only question left is, did he rely or not rely?

Is that a question for the merits or is that a question for the common — for the —

MR. STERLING: Basic is really an exception that applies only –

JUSTICE BREYER: So you’re saying in the case that I just gave you reliance is for the merits?

MR. STERLING: Correct, Your Honor.

JUSTICE BREYER: Whether he really relied or didn’t rely, the common agent is for the merits?

MR. STERLING: But you couldn’t have

JUSTICE BREYER: Is that — is that your answer is?

MR. STERLING: No, Your Honor. You couldn’t have a case in that situation because reliance is an individual issue.

JUSTICE BREYER: No. A thousand people say Mr. Jackson is our common buying agent, and the defendant lied to this common buying agent, and he represented us. Relied on that. I’m asking if you that issue of reliance in an appropriate case is for the certification stage?

MR. STERLING: Yes, Your Honor, because

JUSTICE BREYER: Yes.

MR. STERLING: — you still have everybody having to say Mr. Jackson is my agent. That’s

JUSTICE BREYER: And they also have to prove there is a lie?

MR. STERLING: Right. And that’s a — but the individualized question of reliance is simply, is Mr. Jackson your agent or not? Because of that there is no common issue that — that predominates on reliance.

JUSTICE BREYER: Okay.

Slip op. at 44-45.

Setting aside the possibility of an individual question relating to the agency relationship, Justice Breyer’s hypothetical gets to the heart of what could make a fraud claim susceptible to class treatment.  First, although fraud requires reliance, in many contexts, it does not usually require reliance by the plaintiff.  In Justice Breyer’s hypothetical, a single party meets the reliance requirement for the entire class.  In other words, a false statement was made, and there was reliance because Mr. Jackson believed and acted upon it.  There could also be common causation of injury if, due to his reliance on the lie, Mr. Jackson paid $1 per thousand seed when he could have paid $.99 for seed with the same attributes somewhere else. 

The agency issue could very well be an individual issue, as Mr. Sterling surmised, but there really aren’t enough facts in the hypothetical to know this for sure.  For example, there could be a single document that all of the farmers signed, to which there is no dispute about authenticity, and which designates Mr. Jackson as the agent for all.  (Nor does Mr. Sterling’s answer probably help the defendant in a securities fraud case, since the “Mr. Jackson” in a “fraud on the market” claim is the market itself.  If it is an efficient market, so the theory goes, it sets the price that everyone pays regardless of their individual assent.)

The problem with the hypothetical, therefore, is not that it fails to describe the type of fraud claim that might be appropriate for class treatment but instead that it does not describe most real-life fraud cases that are brought as class actions.

In most fraud claims, however, neither the question of reliance nor the question of loss causation is a common question.  In most cases, the reliance that would have to be proved for any class member to prevail would be the class member’s own reliance.  Unless the case involves a situation in which no reasonable person would take any action other than the one that the plaintiff claims could have been taken for class members to avoid injury, reliance is probably not a common question.  Moreover, the existence of a common injury is not necessarily a common question in most cases because the existence of some better alternative often can only be evaluated on a case-by-case basis.  

For example, take away the common agent and change the hypothetical as follows, and the common issues go away: A seed salesman sells corn seed to 1000 farmers for $1 per thousand, and falsely claims, uniformly to each of the farmers, that the seeds grow ears of white-colored corn, but truthfully claims that the corn will be drought-tolerant and delicious.  In fact, they the seeds grow ears of slightly yellowish corn.  

Though the fraudulent statement was uniform, the lack of a common agent to rely on it injects problems with reliance and causation that should prevent this claim from being tried (fairly anyway) on a class-wide basis.  Proof of reliance will require that the color of the corn was an important attribute to each farmer, and that he would not have purchased the seeds if they had been advertised as being off-white.  Many farmers may not care what color the corn is, as long as it is drought-tolerant and delicious, and the only way to resolve the reliance question for sure is to adjudicate each farmer’s claim individually.  Proof of causation will require, in addition, that a given farmer had an alternative source of white corn available.  If not, and the farmer would have been compelled to buy the supplier’s seeds regardless of the color, then the false statement, even it if was relied upon, caused no injury.  Note that even in the hypothetical that includes a common agent, causation of injury may not be common because there may be farmers on whose behalf the agent would have been forced to buy the supplier’s seeds regardless of the false statement about color.  These same issues come up any time there was not one obvious course of action and palatable alternative that all members of a would-be class would take if the true facts had been revealed.

So, Justice Bryer’s hypothetical may illustrate the type of fraud claim that would be appropriate for a class action, the unique facts in the example can also serve to illustrate why many fraud claims should not be certified as class actions.

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Public Interest Objectors in Class Action Settlements

Posted in Articles, Class Action Settlements, Practice Tips, tagged , , , , , , , , , on April 21, 2011| 1 Comment »

Recently, I have commented on two types of objectors in class action settlements.  This March 31 entry discusses the problem of so-called “professional” objectors.  And this April 12 entry addresses objections raised by government officials.  There is at least one other type of organized objectors to class action settlements: public interest organizations.  (I use the term “organized objectors” to distinguish these types of objections from objections that may be sent in by individual class members who are not represented by separate counsel).  Mechanically, objections by public interest organizations may be accomplished in a manner similar to that used by professional objectors: through the representation of one or more settlement class members by lawyers employed by or cooperating with the organization.  However, unlike with professional objectors lawyers, the representation is usually pro bono.  Alternatively. as with objections by government officials, public interest objections to a settlement may be accomplished through amicus briefs to the court.

There are a variety of public interest organizations that file objections to proposed class action settlements.  These organizations have widely differing purposes and political agendas.  For example, the Center for Class Action Fairness (CCAF) was founded by attorney and leading tort and class action reform advocate (and contributor to the popular law blog, Overlawyered), Ted Frank.  CCAF is a nonprofit organization formed for the stated purpose of providing “pro bono representation to consumers and shareholders aggrieved by class action attorneys who negotiate settlements that benefit themselves at the expense of their putative clients.”  In this April 18, 2011 press release, Frank summarizes various cases in which his organization successfully objected to class action settlements that “will result in class members receiving over $5 million more than what their class attorneys were willing to negotiate.” 

At the other end of the political spectrum (at least from the perspective of tort reform) from CCAF, is Public Justice, an organization founded by leading trial lawyers that describes itself as “America’s public interest law firm.”  A stated objective of Public Justice is to fight interests aimed at “closing the courthouse doors so victims can’t hold the powerful accountable,” including fighting “class action bans and abuses.”  Like CCAF, Public Justice has successfully objected to or intervened in a variety of class action settlements.  Some of its work in this area is summarized in the article “Fighting Class Action Abuse,” which is available on its website.

A third organization, Public Citizen, is a consumer advocacy group that has the stated goal of preserving the right of consumers to seek relief through class actions.  However, according to its website, “[a]t the same time, we recognize that on occasion class action settlements may not be in the interest of all class members, and in such cases we have often represented class members in objecting to and seeking to improve the terms of such settlements.”

Although the political motivations of these organizations might be different, there are several key similarities between these groups.  First, their interest in objecting to a settlement is based on a sincerely held belief that their involvement is necessary to protect the public interest.  This means that they are not motivated by profit, but rather by a conviction that the settlement (or the system itself) is unfair.  Like government objectors, their goal is to gain disapproval of or modification to the settlement, not to extort a portion of the fee.

Second, regardless of the ultimate motivating philosophy, even public interest groups with drastically different political agendas can find the same kinds of settlements or settlement terms objectionable.  Not surprisingly, many of their objections are the same as those that a government official might make.  Coupon settlements are a natural target.  A conservative group formed to combat class action abuse might object to a coupon settlement because the fact that a coupon settlement was the best the plaintiffs’ could do for the putative class reflects that he case was a frivolous, lawyer-driven case that had no societal value in the first place.  A consumer advocacy group might object to the same settlement because of a perception that it is unfair for a defendant to profit from its own wrongdoing.  Where both groups might agree is that the court should not approve a settlement that includes little or no benefit to class members and a large payout to the plaintiffs’ lawyers.

One area in which right-leaning and left-leaning public interest groups may diverge is in their view of cy pres provisions in class action settlements, that is, distribution of any unclaimed funds to a charity.  Class action reform advocates object to cy pres distributions because they don’t benefit the members of the class, and are sometimes simply a tool used by trial lawyers to raise funds for their own pet causes.  Trial lawyers in turn, argue that cy pres is the best way to deal with unclaimed funds, because the alternative would be to let the money revert back to the defendant, which would allow the defendant to profit from its wrongdoing.  (Although I want to stay neutral, as a defense lawyer, I am compelled to point out that the fallacy in this reasoning is the class action settlement context, the defendant hasn’t been found to have done anything wrong.  Rather it has voluntarily agreed to provide some compensation in exchange for peace from further litigation).

As with objections by government actors, objections to class action settlements by public interest groups are rare, but they present a significant risk to approval of a settlement if they do occur.   There are a variety of steps that counsel can make to avoid these types of objections, including:

  • Ensure that the settlement notice is in plain English, understandable, and contains all information required by Rule 23(c)(2)(B).  The Federal Judicial Center guidelines for plain English notice provide an excellent template, but the template obviously must be tailored to each case in order to provide effective notice.  Hiring a qualified notice expert (not simply a settlement administrator) to help draft the notice and testify about the fairness of the notice plan can protect against possible objections to the fairness of the notice.
  • Make sure that the notice is delivered in a way that makes it truly the best notice practicable.  Intentionally using a method of notice that is unlikely to be read and appreciated by class members, in the hopes of reducing the response rate, is folly.  If you don’t do everything reasonable possible to give class members adequate notice of a settlement, you risk having the entire settlement disapproved after you have incurred the significant notice costs. In many cases, direct mail is still considered the best way of distributing notice.  Technology has made direct mail possible even in cases where the last known addresses of class members are a few years old.  Old addresses can be updated through the post office change of address system, as well as through various private databases.  Again, having a qualified notice expert can help.  If it is truly impossible to reach a sufficient number of class members through direct mail, then a published notice can be used as a supplement, but it is better to think of published notice as a last resort. 
  • Avoid settlement terms or arguments that exaggerate the true value of a benefit to be given to the class.  A settlement does not have to give class members 100% of the claimed damages in order to be fair.  It is, after all, the result of a compromise.  However, exaggerating the value of benefits, especially non-monetary benefits, is one of the surest ways to draw objections and skepticism from the Court.
  • Avoid unnecessary publicity.  Unnecessary publicity (by either the plaintiffs or the defendant) raises the risk that public interest groups will scrutinize it.  This is another reason to use direct mail when possible. 
  • If the settlement does include a cy pres component, try to find an organization that is likely to benefit some or all of the class members directly.  Distribution to any organization in which one of the lawyers has a personal affiliation or stake will raise a red flag.  Donations to a victim’s assistance fund, for example, are less likely to receive scrutiny than a donation to a lawyer’s law school.
  • In any settlement that may include unclaimed funds (whether those funds revert to the defendant, are distributed pro rata to other class members, or are distributed to a charity),  above all else, do whatever you can to ensure that class members have a fair opportunity to participate in the settlement.  You often can’t force class members to claim benefits, but you do have the power to make sure that there are no artificial barriers to participation.

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Class Action Claims Aggregators, the Latest Innovation in Entrepreneurial Litigation

Posted in Class Action Trends, tagged , , , , , , , , on April 14, 2011| 1 Comment »

An article published Tuesday by John D’Antona Jr. at Trader’s Magazine Online News entitled Getting a Piece of the Class Action Pie discusses a creative new idea for making a buck on class action settlements.  The article discusses a service offered by a New Jersey financial technology company called LiquidClaims, Inc.  According to the article, LiquidClaims has an algorithm that matches up investors with securities class action settlements, and automatically files a claim for settlement benefits on behalf of any of its clients who are class members, taking 30% of any recovery as its fee.

As far as I know, there is no common label for this type of service, but for lack of a better phrase, I’ll call LiquidClaims a “class action settlement aggregator,” since its service is essentially to aggregate settlement claims in order to create economies of scale for its clients in claiming class action settlement funds.  According to its website, LiquidClaims calls itself “the leader in settlement claims optimization.” 

So far, it appears that class action settlement aggregator phenomenon is limited to the securities area, but given American ingenuity, one would think that the business model will catch on in other areas as well.  We’ll keep our eyes peeled for future developments.

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When 36 AGs Object to Your Class Action Settlement, That’s Not a Good Sign

Posted in CAFA Requirements, Class Action News, Commentary, tagged , , , , , , , , on April 12, 2011| 5 Comments »

Rita Robinson, who writes the Boomer Consumer blog for the Seattle Post-Intelligencer, posted an entry titled Attorneys general oppose DirectBuy’s class-action lawsuit settlement discussing an amicus brief filed by Attorneys General from 34 states, Puerto Rico, and the District of Columbia objecting to a proposed settlement in a consumer fraud class action brought against online wholesale club DirectBuy, Inc. in the U.S. District Court for the District of Connecticut.

A copy of the brief is available for download here courtesy of the Washington Attorney General’s website.   The essential theory of the case was that the defendant “represented that paid DirectBuy memberships entitle customers to purchase goods from manufacturers and suppliers at actual cost when, in fact, Defendants receive kick-backs from the suppliers and manufacturers out of the purchase price paid by DirectBuy members — resulting in members paying more than the actual cost for such goods.”  Amicus Brief at 4.   The 34-page brief raises a variety of objections to the settlement, but the primary beef is that only benefit to claimants was membership extensions or discounts on future memberships, which they argue amounts to a “coupon” settlement.

The case illustrates the practical impact of a key but often overlooked component of the Class Action Fairness Act of 2005, the requirement that “appropriate” government officials be given notice of a proposed class action settlement in federal court.   This is a topic that was the subject of a series of CAB posts in 2008, which you can access at the links below:

As noted in June 25, 2008 entry, although CAFA requires that notice be given to state and federal officials, it is rare for those officials to take any action to object to the settlement after they receive it.  One exception, as exemplified by the DirectBuy case, is a coupon settlement.  (The other thing that can get officials’ attention is where the release in a proposed settlement purports to bind state officials, such as a clause that purports to release parens patriae claims by the state.)

Although CAFA requires notice to state officials, it does not give them any power to prevent the settlement.  In fact, state officials do not even have the express power to formally object to a settlement, which is why when they do act, it is usually in the form of an amicus (friend of the court) brief.  Ultimately, approval or disapproval of the settlement is still up to the trial court.  However, it should go without saying that if you’re a party or attorney seeking approval of a class action settlement, it’s much better not to have government officials filing an amicus brief critical of your settlement.

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Is the Key to Class Actions Under FRCP 23(b)(2) that the Plaintiff Seeks “Equitable” Relief, or that the Plaintiff Seeks “Monetary” Relief?

Posted in Class Action Decisions, Employment Class Actions, Federal Court Decisions, rule 23, tagged , , , , , , , , , on April 7, 2011| Leave a Comment »

Last week, Seventh Circuit Court of Appeals Judge Richard Posner authored an opinion addressing one of the key issues awaiting a ruling by the United States Supreme Court this term, holding that an employment discrimination class action seeking back pay could not be certified under FRCP 23(b)(2).   Here is a relevant excerpt from the opinion, Randall v. Rolls-Royce Corp., No. 10-3446, slip op.  at 12-14 (7th Cir., March 30 2011) (I have removed the internal citations for ease of reading),

[I]magine if the plaintiffs in this case were just seeking an injunction commanding basepay equalization between male and female employees.

But that’s not what they’re seeking, exclusively or even mainly; and indeed this isn’t a proper Rule 23(b)(2) suit.  Class action lawyers like to sue under that provision because it is less demanding, in a variety of ways, than Rule 23(b)(3) suits, which usually are the only available alternative. . . . Of particular significance, “plaintiffs may attempt to shoehorn damages actions into the Rule 23(b)(2) framework, depriving class members of notice and opt-out protections. The incentives to do so are large. Plaintiffs’ counsel effectively gathers clients—often thousands of clients—by a certification under (b)(2). Defendants attempting to purchase res judicata may prefer certification under (b)(2) over (b)(3).” . . . How far Rule 23(b)(2) can be stretched is the issue in the gigantic class action against Wal-Mart, Dukes v. Wal-Mart Stores, Inc. . . . now before the Supreme Court. The present case is not as big a stretch, but it is big enough. 

True, the only monetary relief sought is back pay; true, too—contrary to the common but erroneous notion that courts of equity can’t award monetary relief—they can do so if the award is merely incidental to the grant of an injunction or declaratory relief: “incidental” in the sense of requiring only a mechanical computation. That is the “clean-up” doctrine of equity. . . . In such a case, to make the class representative bring a second suit, for damages, on top of his injunctive action would create pointless redundancy. . . .

The plaintiffs argue that if only equitable relief is sought, a class action suit may be maintained under Rule 23(b)(2) even if the equitable relief is mainly monetary. We disagree. To read “injunctive” in the rule to mean “equitable” is to become mired in sticky questions of differentiating between “legal” and “equitable” actions—and such questions abound. . . .  We can avoid the mire by recognizing that Rule 23(b)(2) class actions are limited to cases in which “final injunctive relief or corresponding declaratory relief” is appropriate, rather than extending to all cases in which any kind of equitable relief is sought. . . . The monetary relief sought in a case, whether denominated legal or equitable, may make the case unsuitable for Rule 23(b)(2) treatment. . . .  As this case illustrates: calculating the amount of back pay to which the members of the class would be entitled if the plaintiffs prevailed would require 500 separate hearings. The monetary tail would be wagging the injunction dog. An injunction thus “would not provide ‘final’ relief as required by Rule 23(b)(2). An injunction is not a final remedy if it would merely lay an evidentiary foundation for subsequent determinations of liability.”

Could it be that the resolution of this issue is as simple as the recognition that “equitable” doesn’t mean “injunctive” and that class actions seeking monetary relief, whether “equitable” or “legal” can only be brought under Rule 23(b)(3), not Rule 23(b)(2)?  The Supreme Court should have an answer within the next two months.

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