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Posts Tagged ‘settlement approval’

I was privileged to be invited to participate in a recent mini-conference with the Rule 23 Subcommittee to the Advisory Committee on Civil Rules, the committee that evaluates and proposed changes to the Federal Rules of Civil Procedure for consideration by the Supreme Court.  Click this link to the materials for last week’s mini-conference, which was held in Dallas.

The mini-conference attendees included the Rule 23 Subcommittee, members of the larger Advisory Committee, and representatives of key stakeholders including: federal district court and circuit court judges; academic thought leaders; private plaintiffs’ attorneys; private outside defense attorneys; in-house corporate counsel; non-profit public interest attorneys; and public interest class action objectors.  During the mini-conference, the attendees were encouraged to provide oral feedback on a variety of proposals being considered by the Subcommittee.  Many participants had also provided written comments in advance of the conference, which can also be found by clicking the link in the first paragraph.

The topics under discussion by the subcommittee, and a short summary of the issues discussed during the mini-conference for each topic, are listed below.  Note that I have not given a comprehensive summary of every comment made during the discussion of each topic but have rather focused just on some of the highlights.  For another perspective on the mini-conference, be sure to check out this post from Jocelyn Larkin at the Impact Fund.

Any changes proposed by the subcommittee have to be published for public comment before going to the Supreme Court for approval.  They won’t ultimately go into effect until 2018 even if they are ultimately proposed and approved.  The Rule 23 Subcommittee is still accepting comments, so please feel free to offer your own suggestions.

Topic 1: Disclosures regarding proposed settlements

The Subcommittee’s current draft proposals contemplate providing more detailed guidance to courts in what factors should be considered in approving a class action settlement before ordering notice to be given to the proposed settlement class.  The most extensive proposal sets forth a mandatory list of types of information that must be provided to the trial court before the court orders notice.  The proposed committee notes also state, among other things, that an order to give notice of a proposed settlement to the settlement class is not “preliminary approval” of the settlement and is not a decision to certify the class.  The goal would be to foreclose any argument by the parties that the court has already decided key issues relevant to final approval before any class member has been given notice of the settlement and an opportunity to object.

Several participants expressed concern with including a “laundry list” of information that had to be provided in every case, when not all of the categories of information are relevant in all cases.  Others noted that the list of factors was better suited for the committee comments than in the rule itself, though it was pointed out that comments cannot be added to the rule in the absence of a change to the rule itself.  Several participants suggested inclusion of a “catchall” factor allowing the court to request information not included in the list.

Several comments were raised about the proposed comments clarifying that the determination is a not a “preliminary approval” of the settlement, noting that it could create due process concerns to have a procedure that forces a class member to decide whether to opt out before a determination has been made that class certification is appropriate.  Participant suggestions for addressing this concern included the possibility of using a phrase like “contingent certification,” which would be a formal class certification decision while making clear that the settlement has not been preliminarily approved.

Topic 2: Expanded treatment of settlement criteria

The second topic was whether the Subcommittee should provide more specific criteria in the rule about what the trial court must consider in giving final approval to a settlement.  The proposals contemplate expanding the limited statement in the current rule that the court must determine that a proposed settlement is “fair reasonable and adequate.”  Many of the Circuits have adopted their own tests for what must be considered, and though the factors to be considered tend to be similar, they are not identical from Circuit to Circuit.  One justification for a possible rule change would be to bring national uniformity to the process.  Another goal stated by the Subcommittee would be to encourage more involvement from objectors to ensure an adversarial process at final approval.

The Subcommittee posed the question to the participants whether there would be any value to establishing a uniform list of more detailed standards rather than relying on judicial gloss that may vary from Circuit to Circuit.  Resulting comments were mixed, with one participant commenting that this may be a “solution looking for a problem.”  As with the first topic, several participants noted that it would be good to include a catchall factor or statement that the list of enumerated factors is not exclusive.  Still others observed that courts will likely add factors over time anyway, so that we may end up in the same situation down the road, with the additional factors varying from Circuit to Circuit.  There was also significant discussion about whether the rule or comments should encourage more scrutiny over the amount of attorneys’ fees in comparison to class relief and the actual claims rate should be something that the rule should mandate courts evaluate.

Those who follow this blog probably know that my own feeling is that class relief in settlements should be evaluated based on the adequacy of notice and whether the settlement relief being made available to the class is fair reasonable and adequate in light of the strength of the claims and the litigation risks.  I submit that this evaluation should be made without regard to the claims rate (except to the extent that a low claims rate may require more scrutiny over the notice program) and without regard to the amount of attorneys’ fees being requested (except to the extent that attorneys fees are being paid at the expense of class relief).  However, many of the participants felt strongly that both fees and claims rate should be subject to more scrutiny than courts have traditionally given to those issues.

Topic 3: Cy pres provisions in settlements

The discussion next turned to one of the most controversial subjects in class action litigation today: whether and under what circumstances cy pres distributions can be included as part of a class action settlement.  The Subcommittee’s current proposal would expressly permit cy pres distributions, but would require priority to be given to direct payments to class members if class members can be identified and if the distribution would be economically feasible, and would require the distribution to be made to a cy pres recipient “whose interests reasonably approximate those being pursued by the class.”

Comments on this topic were as varied as one would expect.  One participant questioned whether it was appropriate for a rule of civil procedure to address a remedy not otherwise authorized by law, though another pointed out that the rule already does address fee awards payable only by agreement.  This led to a discussion about whether the proposed revisions would violate the Rules Enabling Act.  Several participants argued that cy pres distributions in settlements are a matter of contract and therefore should not be problematic, but others disagreed, pointing out that class action settlements are not like other private agreements because they are subject to supervision by the court.  One participant pointed out that cy pres awards can serve a beneficial public purpose by, for example, providing funding for organizations that improve access to justice.  Overall, though, there seemed to be general agreement among those who were not opposed to cy pres distributions altogether that cy pres recipients in class action settlements should bear some relation to the class members and their interests.  Several creative solutions to identifying appropriate cy pres recipients were discussed, including the option of polling class members as part of the notice and claims process.

Topic 4: Objectors

The next topic was objectors.  The current Subcommittee proposal would add a variety of requirements for objectors, including procedural requirements for perfecting a valid objection, and requirements for articulating what the objection is intended to achieve and on whose behalf, and requirements for court approval before objections can be withdrawn.  Other requirements under consideration include express requirements for disclosing any financial consideration being paid to an objector or attorney in exchange for withdrawal of an objection.

There was a near unanimity among the participants that “greenmail” objectors (some would just call them “blackmail” objectors) remain a problem in class action settlements and that it would be beneficial to have procedures to prevent litigants from raising frivolous objections to class action settlements for the sole purpose of attempting to extract a monetary payment.  Perhaps this was because greenmail objectors were one of the few groups not represented at the mini-conference, though I’m sure it’s not easy to identify attorneys willing to self-identify as representative of this group.  Most participants seemed generally supportive of the purpose behind the committee’s proposed rules.  Some questioned whether it was necessary to include an express rule provision that monetary payments to objectors be disclosed since the Class Action Fairness Acts already requires disclosure of any side agreements, but otherwise, this was not one of the more hotly debated topics.

Topic 5: Class Definition & Ascertainability

The Subcommittee is considering adding a section describing the requirements for how a class should be defined and determining whether the class is ascertainable.  This is an active issue in the courts, and one on which the Circuits are split.  The Subcommittee’s current proposal for defining ascertainability includes several alternative wording options, and numerous alternative definitions were proposed by participants and other interested parties in written submissions before the mini-conference, which are included as an appendix to the conference materials (see the link in the first paragraph above).

As has been true in the courts, much of the debate at the mini-conference focused on how to define what level of ascertainability should be required.  Possibilities include: 1) whether the class is defined in such a way that class members would know whether they are in the class, 2) whether the class members can be identified using objective criteria, 3) whether the identification of class members is administratively feasible, and 4) whether the specific members of the class can be both identified and located.  One participant noted that ascertainability is something that should only be an issue in Rule 23(b)(3) classes seeking monetary relief, as opposed to Rule 23(b)(2) classes, where notice is not required under the current rule.  Another participant made the comment that trial plans can be a useful tool in forcing the parties to define a class in a way that makes clear whether the class is identifiable and the class action manageable as a practical matter.

As with some of the other topics, the Subcommittee raised the question whether this is an issue that should be left to the courts to develop before a rule change is appropriate.  My best guess is that this is where the Subcommittee will end up on this issue, given the lack of consensus on how to define the ascertainability requirement.  Of course, one option would be to simply add a provision requiring that the class be “ascertainable” and then see what the courts do with it.

Topic 6: Settlement Class Certification

The Supreme Court issued its decision in Amchem Products, Inc. v. Windsor in 1997, holding that class certification for settlement purposes was subject to the same requirements as certification for litigation purposes.  Since then, courts have routinely certified settlement classes in cases in which certification would have been doubtful if it had been presented in the contested context.  Recognizing this practical reality, the Subcommittee is considering changes to Rule 23 that would expressly permit settlement class certification in situations where the settlement would be superior to other methods of adjudicating the controversy and the court otherwise finds that the settlement is fair, reasonable, and adequate, without the need to establish that the other elements of Rule 23(b)(3) (in particular, predominance).

From my point of view, the general sentiment of the discussion of this topic during the mini-conference seemed to be one of “if it ain’t broke, don’t fix it.”  The practitioners in the group seemed generally satisfied that the current jurisprudential climate seemed to be allowing settlements in those cases that needed to be settled as class actions, while other alternative procedures, like inventory settlements, had since been developed to permit settlements in mass tort cases of the type at issue in Amchem.  Some of the academics had serious reservations about the Constitutional implications of the proposed rule.  So, overall, the consensus seemed to be that no rule change was necessary at this point.

Topic 7: Issue Class Certification

Rule 23(c)(4) has long provided that class certification may be granted only as to certain issues and not an entire case.  However, the idea of “issue certification” has not been used in practice until recently.  Based on a perception that there was a Circuit split on whether certification of particular issues may be appropriate even if predominance could not be established as to an entire case, the Subcommittee is considering a change that would make clear that predominance is not a requirement for issue certification.  Accompanying this change would be a proposed change to Rule 23(f) that would permit interlocutory appeal of the court’s determination on the merits of the issue certified, prior to a final judgment.  However, since the change was originally suggested, the Circuits seemed to be coming into alignment, raising the question whether a rule change is necessary.

There was not a significant amount of debate at the – about this issue.  Most seemed to be content with the suggestion that the courts be allowed to develop the decisional law on the question of when issue certification is appropriate before a rule change is considered.  My own view is that it would be helpful to at least insert the requirement that the court determine that the resolution of the issue to be certified would “materially advance the litigation.” This would help avoid situations in which issue certification can potentially prolong expensive litigation that ultimately leads to no resolution all because of costs associated with resolving any individual facts in comparison to the amounts to be recovered or the number of class members who ultimately stand to benefit from a resolution of the issue in their favor.  However, the Subcommittee seems to be coming to the conclusion that issue certification reform is not a high priority at this point.

Topic 8: Notice

The Subcommittee has proposed a modification to the rule that is intended to make clear that the “best notice practicable” may include notice by email or other electronic means.  This is intended to remedy a perceived issue that the courts are reluctant to endorse electronic notice as a substitute for first class mail due to statements in the Supreme Court’s now 40-year decision in Eisen v. Carlisle & Jacquelin that best notice practicable is first class mail, when feasible.

Many attendees agreed that a specific reference to electronic notice would be a good idea and would help keep the rule consistent with modern technology and practice.  However, concerns included that electronic mail may deprive lower-income individuals of adequate notice in certain cases.  Another concern was whether the wording that the Subcommittee had proposed could be read to prioritize electronic notice over more traditional forms of notice.

Topic 9: Pick-Off and Rule 68

The rule changes being considered by the Subcommittee on this issue include proposing to amend Rule 68 to state that it does not apply to class actions brought under Rule 23, in an effort to put an end to the tactic of picking off putative class representatives by attempting to moot their individual claims with an offer of judgment.

Most of the attendees agreed that given the shift toward agreement in the federal Circuits that an unaccepted offer of judgment does not moot class claims, along with the fact that the Supreme Court has granted certiorari on that very issue in Campbell-Ewald Company v. Gomez, it would be premature to propose any significant revisions to the rules dealing with Rule 68 offers.

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Brian Wolfman, Co-director of the Institute for Public Representation at Georgetown University Law Center, has two excellent recent posts on Public Citizen’s Consumer Law and Policy Blog that provide food for thought on the need for class action reform, and the best way to achieve reform if it is needed.

In the most recent of the two articles, Paying the Lawyer’s Expenses in Class Actions, Wolfman discusses the social importance of allowing plaintiffs’ attorneys to recover their reasonable costs incurred in successfully pursuing a class action settlement or judgment, but discusses a recent case in which two attorneys from a prominent plaintiffs’ firm were sanctioned for having claimed reimbursement for fancy dinners and first class airline tickets.  Wolfman warns about the negative impact that this type of conduct has on public perception of class actions, and makes the valuable point that even minor abuses of the system for personal gain threatens to bring scrutiny to the class action mechanism more generally, which limits access to justice that class actions may provide in meritorious cases.

In an earlier article, Important 7th Circuit Decision Rejecting Shareholder Derivative Suit, Wolfman applauds Judge Frank Easterbrook’s opinion throwing out the settlement of a shareholder derivative suit after finding that the underlying suit lacked merit and should be dismissed.  Wolfman makes the point that rather than approving a settlement that provides little or no benefit to class members on the grounds that the merits of the claims are weak, the better solution from a public policy perspective is to dismiss the case entirely.  He sums up this point concisely, “[a]n obviously meritless case should not benefit the lawyers and no one else.”

The two articles illustrate two important conceptual principles on which many consumer advocates and corporate interests may find themselves in complete agreement: First, it is the potential for abuse of class actions, and not the class action mechanism itself, that often provides the basis for legitimate criticism.  Second, courts can preserve the fairness and integrity of class action mechanism without the need for systematic reform simply by applying common sense restraints in the face of clear abuse.  I think that both of these points are correct as a matter of principle, and they are both eloquently illustrated by Wolfman’s posts.

My only question is whether the idea of preventing abuse through the application by the courts of common sense constraints, while pure in theory, is truly realistic in practice.  It only works to the extent that all judges will act as carefully and thoughtfully as the judges in the two cases highlighted above.  If courts do not dismiss all frivolous cases when a defendant files a motion to dismiss, what choice does a defendant have as a practical matter but to consider buying peace on the best terms possible, which often means paying off the lawyers at the expense of a class that the defendant doesn’t believe was harmed anyway?  And, if some courts continue let frivolous claims proceed in the hopes that the parties will settle, or turn a blind eye to small excesses in fee and cost petitions, then basic human nature says that some (but certainly not all) plaintiffs’ lawyers will continue to commit these abuses, and some (but not all) defense lawyers will play along to serve their own interests.  In the end, the cynic will question whether relying on the diligence and intellectual honesty of the judiciary and the professional integrity of the bar is a realistic path to reform.

On the other hand, for those of us who are practitioners and not policymakers, professional responsibility, appeal to reason, diligence, and intellectual honesty are the only tools we have at our disposal at maintaining the integrity of the judicial process.

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David Lat posted an article on the legal industry blog Above the Law yesterday that caught my eye.  Lat’s post, entitled Benchslap of the Day: Second Circuit Rebukes Rakoffdiscusses the Second Circuit Court of Appeals’ per curium decision granting a stay pending the appeal of the lower court’s refusal to approve the settlement in SEC v. Citigroup Global Markets Inc., No. 11-5227-cv (2d Cir., Mar. 15, 2012).  Although the case is an SEC enforcement action and not a class action, I would argue that the following sentiment from the Second Circuit’s opinion applies with equal force in the class action context:

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.

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Vanderbilt law professor Brian T. Fitzpatrick has published a great new research paper titled The End of Objector Blackmail?  The paper discusses the problems of objectors blackmailing the parties to a class action settlement into paying them a portion of the fees at the threat of holding up final approval and resolution of the settlement.   Professor Fitzpatrick discusses the history of the problem, provides a statistical analysis of “quick-pay provisions,” which have been one approach to combatting the problem, and finally argues for an approach that prohibits settlements of objector appeals unless the settlement includes a modification to the underlying agreement. 

My own take on this issue, based purely on my own anecdotal observations, is that the objector blackmail problem has improved significantly over the past few years.  From a defendant’s perspective, it was never much of a problem to have class counsel forfeit a portion of their fee to an objector to hasten approval of a settlement, but many plaintiffs’ lawyers have started refusing to negotiate with objectors.   Two additional effective practical tools for fighting frivolous objectors include 1) asking the Court to require the posting of a substantial bond pending appeal of any objection to the settlement; and 2) asking the trial court for sanctions against frivolous objectors or their counsel.

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