Class Action Settlements

The Supreme Court Will Soon Weigh in on Class Arbitration and Cy Pres IssuesThe U.S. Supreme Court has decided to hear two important cases next year involving important issues for class action lawyers and the clients they serve.

In Lamps Plus Inc. v. Varela, the Supreme Court will decide “whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.” Recall that in Stolt-Nielsen, S.A. v. Animal Feeds International Corp., SCOTUS held in 2010 that a court could not order class arbitration unless there was a “contractual basis” for concluding that the parties have “agreed to” class arbitration, and that courts may not “presume” such consent from “mere silence on the issue of class arbitration” or “from the fact of the parties’ agreement to arbitrate” (Id. at 685, 687). Or as the Supreme Court stated in the 2013 decision in Oxford Health Plans LLC v. Sutter, “Class arbitration is a matter of consent: An arbitrator may employ class procedures only if the parties have authorized them.”

Seemingly clear enough, right? Apparently not. In the latest installment in the long series of guerilla warfare over the Federal Arbitration Act holdings of the U.S. Supreme Court, the Ninth Circuit inferred consent to arbitration from a clause that did not mention class arbitration at all. To get there, the Ninth Circuit construed phrases like “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings” and language granting the arbitrator the power to award “any remedy allowed by applicable law” to be contractual consent to class arbitration. And in remarkable contrast to the teachings of Stolt-Nielsen, the Ninth Circuit actually found support for its conclusion from the absence of any reference to class actions in the arbitration agreement. This obfuscation brings to mind the following quote:

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

The master here is clearly the Supreme Court, unless and until Congress decides to change the FAA, and we predict the Supreme Court will not allow interpretive creativity to substitute for clear express consent to class arbitration as a prerequisite to compelling it. The high stakes combined with the absence of appellate review, the fact that due process violations in the arbitration may allow the class to avoid a loss through collateral attack while the defendant is bound when it loses without any such recourse, and the summary and informal nature of arbitration all compel that result. Judge Fenrnadez, dissenting from the Ninth Circuit majority opinion, got it exactly right when he said the Ninth Circuit’s reasoning was a “palpable evasion of Stolt-Nielsen.” Courts hostile to arbitration have lost at least five of these arbitration fights with SCOTUS in the last 10 years. This should be the sixth.

In Frank v. Paloma Gaos, the Supreme Court will decide whether a class action settlement can provide a $5 million donation to charity and $2+ million to plaintiffs’ class action lawyers but no relief to class members. The issue, in legal jargon, refers to cy pres class action settlements. Five years ago, Chief Justice John Roberts wondered whether such charitable settlements could ever be fair and consistent with Due Process. This case will answer that question, one on which the federal rules committee responsible for amendments to Rule 23 was unable to reach consensus last year.

The interesting twist in this case involves how the dispute arose. Often corporate defendants are the ones complaining about cy pres relief in contested class actions and public debate, because cy pres distribution forces defendants to hand over money not to class members but only to plaintiffs’ class action lawyers and their favorite charities. Many feel this rewards and incentivizes class litigation that should never have been filed at all. In a cy pres settlement, however, the defendant has agreed to the cy pres nature of the settlement and has waived any right to object to it. So who objected and appealed? None other than professional class action objector Ted Frank. And when he petitioned for certiorari from affirmance of the settlement over his objection, the corporate defendant, Google, actually urged the Supreme Court not to take the case. That effort was not successful. So it will now be up to Mr. Frank—who is both a class member and an experienced class action lawyer—to convince the Supreme Court to stop class action settlements that, in his words, put the interests of class members “dead last.”

The precise issue the Supreme Court will decide is when, if ever, a court can approve a class action settlement that gives money to charity in lieu of providing relief to actual class members. The lower courts in the Google case decided that it was not feasible to divide $5 million among the 129 million members of the class, which was defined as consumers who used the Google search engine between 2006 and 2014, and that cy pres distribution was therefore preferable. The objector, Mr. Frank, is pitted as Daniel against a two-headed adversary representing the interests of corporate America and the plaintiffs’ class action bar. It will be interesting to see how the Supreme Court resolves the case and what limits it places on cy pres in such a matchup.

These two cert grants continue a decade long focus by the Supreme Court on important issues in class action practice. We’ll keep you posted on the outcomes.

Must the Rule 23 Predominance Requirement Be Satisfied for Purposes of a Class Settlement? The Ninth Circuit Says, “Yes.”In 2015, the Rule 23 Subcommittee to the Advisory Committee on Civil Rules floated the idea of amending Rule 23 to eliminate the predominance requirement for class certification in the settlement context. The suggestions included amendments to that effect within Rule 23(b)(3) itself, or alternatively creating a new Rule 23(b)(4) providing for settlement class certification:

23(B): A class action may be maintained if Rule 23(a) is satisfied and if:

* * * * * *

(4) the parties to a settlement [in an action to be certified under subdivision (b)(3)] request certification and the court finds that the proposed settlement is superior to other available methods for fairly and efficiently adjudicating the controversy, and that it should be approved under Rule 23(e).

The subcommittee explained the thinking behind this idea in draft official commentary to the possible new rule:

Concerns have emerged about whether it might sometimes be too difficult to obtain certification solely for purposes of settlement….Increasing confidence in the ability of courts to evaluate proposed settlements, and the tools available to them for doing so, provide important support for the addition of subdivision(b)(4)…. Subdivision (b)(4) does not require, however, that common questions predominate in the action. To a significant extent, the predominance requirement, like manageability, focuses on difficulties that would hamper the court’s ability to hold a fair trial of the action. But certification under subdivision (b)(4)assumes that there will be no trial. Subdivision (b)(4) is available only in cases that satisfy the common-question requirements of Rule 23(a)(2), which ensure commonality needed for classwide fairness. Since the Supreme Court’s decision in Amchem, the courts have struggled to determine how predominance should be approached as a factor in the settlement context. This amendment recognizes that it does not have a productive role to play and removes it.

The idea was controversial on both sides of the “v.” Many saw it as furthering the perception that class actions were more about making lawyers rich than protecting the interests of class members. Others, such as DRI, feared that it would cause more frivolous class actions to be filed in hopes of luring the defendant into a class settlement:

While it might make cases easier to settle on a class action basis, that is not a valid goal of the rules of procedure where the case is not otherwise deserving of class treatment. There is no good policy reason for a rule providing that claims which are too individualized to be certified as a class for litigation purposes is nevertheless certifiable as a class for settlement purposes….

By definition, what this proposal seeks to do is to enable the classwide settlement of cases in which individualized issues predominate, and foreclose consideration of those overriding individual differences in the settlement certification process. Such a rule, however, would present serious Constitutional concerns given the United States Supreme Court’s past indications that ignoring individual differences has Constitutional implications….If one assumes that the proposed change achieved its stated goal, and that the predominance of individual issues would then no longer be a concern in certifying settlement classes, then the logical result would be that virtually any claim could be pursued on a class basis. While the purports to maintain the “superiority” requirement for settlement classes, the proposed rule fails to articulate what “superiority” would mean once completely divorced from the traditional predominance inquiry. After all, from the narrow perspective of the convenience of the court and abstract efficiency, any class settlement is superior to the prospect of individual litigation by each member of the class. But if that alone is the effective meaning of superiority under this proposal—and it seems it would have to be if the predominance of individual issues is expressly removed from the equation for purposes of settlement—then superiority effectively becomes a rubber stamp for settlement classes. It is indeed difficult to imagine any putative class action that could not be certified for settlement purposes if the predominance of individual issues is truly no longer a concern. Would common law fraud class actions now be certifiable for settlement purposes despite the necessity of proving individual reliance in litigated individual cases? What about nationwide personal injury class actions? Mental anguish claims? How does the proposal guarantee otherwise?… In what sense is a proposed representative adequate and his or her claims typical if each individual’s claim admittedly turns on predominantly individual and not common facts? In what sense is representation for purposes of settlement “adequate” if the representative would not have the power to assert the claims of absent class members in litigation, and the bargaining leverage that comes with the willingness and ability to use that power?

The 23(b)(4) proposal would in fact create unavoidable perverse incentives on the part of counsel for both sides. Plaintiffs’ counsel would now have undeniable incentives, and indeed implicit permission in Rule 23 itself, to file otherwise uncertifiable class action complaints with the intent and purpose of using the cost and risks of defending them to force a class settlement. This problem already exists to a significant extent under the current version of Rule 23, and has been called the “blackmail effect” of class litigation. The 23(b)(4) proposal would make that problem much worse. The federal courts would surely see substantial increases in class action filings, since by definition it would then be entirely permissible to file suit with the aim and purpose of achieving settlement certification even for an otherwise uncertifiable class. These otherwise admittedly illegitimate class actions would then very frequently result in class settlements simply because it would very often be cheaper for defendants to settle these cases than litigate them. Indeed, once these cases are filed, both plaintiff’s counsel and defense counsel would have clear incentives to disregard individualized variations and differences in favor of a deal that, in the absence of Rule 23(b)(4), would surely have been deemed a collusive settlement. After all, Plaintiffs’ counsel in these cases would have little to bargain with in negotiating settlement of these cases, since the defendant would face no real threat of classwide liability in litigation….The abstract efficiency of settling numerous claims at once is simply not a reason in and of itself to certify a class where the underlying issues, claims and damages are predominantly individualized and varying rather than common. In terms of ensuring that the rights of absent class members are fairly represented in proceedings brought by a self-selected class representative, the fees and classwide release that would make such settlement certifications financially attractive to both would-be class counsel and the defendant are hardly a substitute for the identity of interests that the predominance requirement assures.

Ultimately, the 23(b)(4) settlement-without-predominance proposal was left on the cutting room floor, and does not appear in the Rule 23 amendments currently matriculating toward an effective date as early as late 2018. But lower courts are still struggling with the proper role of predominance in the class settlement context, and a recent case from the Ninth Circuit is a good illustration.

In the case of In re Hyundai & Kia Fuel Efficiency Litig., a nationwide class settlement was proposed in a putative class action alleging fuel efficiency misrepresentations by a car manufacturer. Before any settlement had been reached, the trial court had previously indicated that it would deny contested class certification due, among other things, to the fact that state law variations defeated predominance. But then a nationwide class settlement was reached, and for the trial court at least, these concerns disappeared. The trial court approved the nationwide class settlement without analyzing the choice of law issues and resulting state law variations as part of its predominance inquiry, reasoning that the settlement context mooted any such concerns. The Ninth Circuit vacated the class certification and settlement approval.

In doing so, the Ninth Circuit reminded the lower court of the Supreme Court’s admonition that Rule 23 “does not set forth a mere pleading standard.” Comcast Corp. v. Behrand and the Supreme Court’s specific admonitions about the application of Rule 23’s criteria to a class settlement agreed that:

To be sure, when “[c]onfronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there be no trial.” Amchem [Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997)].  But “other specifications of the Rule—those designed to protect absentees by blocking unwarranted or overbroad class definitions—demand undiluted, even heightened, attention in the settlement context.” Id. “Heightened” attention is necessary in part because a court asked to certify a settlement class “will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold.” Id. Indeed, in Amchem itself, the court determined that both factual differences among class members and differences in the state laws applicable to class members’ claims defeated predominance for a single nationwide settlement class. Id. at 624, 117 S.Ct. 2231….

A court may not justify its decision to certify a settlement class on the ground that the proposed settlement is fair to all putative class members. Indeed, federal courts “lack authority to substitute for Rule 23’s certification criteria a standard never adopted—that if a settlement is fair, then certification is proper.” Id. at 622…; see also Ortiz [v. Fibreboard Corp., 527 U.S. 815, 849 (1999)](holding that “a fairness hearing under Rule 23(e) is no substitute for rigorous adherence to those provisions of the Rule designed to protect absentees[.]”) ….

The Ninth Circuit then went on to echo the same concerns DRI had previously voiced about settlement class certification without predominance:

Because the district court made clear that it would be unlikely to certify the same class for litigation purposes, the class representatives were well aware that they would be unlikely to succeed in any efforts to certify a nationwide litigation class. Thus, by “permitting class designation despite the impossibility of litigation, both class counsel and court [were] disarmed.” Id. at 621, 117 S.Ct. 2231. Hyundai and Kia knew that there was little risk that they would face a nationwide litigation class action if they did not reach a settlement agreement. Accordingly, “[c]lass counsel confined to settlement negotiations could not use the threat of litigation to press for a better offer, and the court [faced] a bargain proffered for its approval without benefit of adversarial investigation.”

The majority clearly recognized that when a putative class action that has not been certified is proposed to be certified for settlement purposes, that necessitates two different inquiries: (1) does the proposed class satisfy the requirements for certification of any class under Rule 23(a) and (b), and (2) is the proposed settlement fair, reasonable and adequate under Rule 23(e). Those are two separate inquiries. Both under the plain language of Rule 23 and under binding Supreme Court precedent, they cannot be collapsed into one.

On remand, the district court will have to address predominance once again. It may well be asked to find the predominance requirement satisfied despite the state law variations. The argument would likely be that variation in state law is primarily a manageability problem—one of the considerations that the court normally must examine in assessing predominance and superiority, but one which the Supreme Court said in Amchem is indeed mooted to a large degree in the settlement context. But the trial court will still have to show that despite variations in state law, there remain common issues that are capable of common, classwide answers within the meaning of Wal-Mart Stores, Inc. v. Dukes. And holding courts and parties to that requirement is a good thing. Class certification should not be a judicial goal unto itself. Class actions are and should be a limited exception to the general rule that each individual litigant should have to prove his or her own claim on an individual day in court. And Rule 23(b)(3) class actions, the most “adventuresome” exception of them all, should be available only when proof of liability for one truly would be proof for all. The desire of a court to encourage settlement does not justify ignoring this fundamental due process limitation on the class action device.

This case illustrates another practice pointer as well. As a defendant, if you think you might be interested in settling a class action, you would be well-advised to explore that before filing a motion to strike class allegations or an opposition to class certification. Otherwise, as happened here, your arguments against class certification may be quoted back at you by objectors to your later-proposed settlement.

Class actions have dual natures. They start out as only individual cases, but they can become massive, collective cases where the rights of absent parties are adjudicated all at once. In most respects, class certification provides the clearest dividing line between when a case is just a case and when it is a full-blown class action. When that line gets blurred, however, strange results follow.

New York Court of Appeals Decision Requires Needless Notice of Individual Settlements in Putative Class ActionsConsider the New York Court of Appeals’ recent decision in Desrosiers v. Perry Ellis Menswear, LLC. This decision came from consolidated appeals that both raised this question: Under CPLR 908, must notice of an individual settlement be given to the class even if no class is certified? In both cases, the plaintiffs styled their complaints as class actions, but both cases were settled on an individual basis. Even though neither case had a class certified and even though neither settlement purported to affect the rights of absent class members, the cases came to the Court of Appeals from orders requiring that notice be given to class members before the cases could be closed.

The Court of Appeals affirmed, holding that CPLR 908 requires in such circumstances that notice go out to all members of an uncertified class. In other words, in New York, once a case has been styled as a class action, the defendant cannot enter into an individual settlement with the named plaintiff without providing notice to the entire class.

The court reached this conclusion by finding a textual ambiguity. CPLR 908 states:

A class action shall not be dismissed, discontinued, or compromised without the approval of the court. Notice of the proposed dismissal, discontinuance, or compromise shall be given to all members of the class in such manner as the court directs.

The court found the terms “class action” and “the class” to be ambiguous because the terms could mean “a certified class action” or something else such as “a case whose complaint contains class allegations.” It opted to adopt the second meaning, drawing on two sources: federal cases interpreting a previous version of a federal rule and a previous New York lower-court appellate decision from 1982. Neither compelled this conclusion—in particular, even the previous version of Federal Rule 23 was interpreted by most courts to make notice optional in the district court’s discretion.

This case creates serious practical problems for individual settlements.

  • First, who gets notice? Even when drafted by excellent counsel, initial class definitions in complaints are seldom clear enough to specifically identify an exact group of actual people. Some definitions are fail-safe, such as “all persons injured by defendant’s defective product.” Others define unascertainable classes, such as “all persons who relied on defendant’s television advertisements to purchase a product.” In a certified class action, the class definition receives judicial scrutiny and narrowing, which almost always results in changes to the class definition that make it narrower, clearer, and more workable. A major reason for individual settlement in many putative class actions is that the actual members of the class are unknown, impossible to identify in a feasible, cost-effective and efficient way, or not reasonably locatable for purposes of notice.
  • Second, notice costs money. Mailers and advertisements impose real costs that raise the price of litigation, and imposing these costs on individual settlements either raises the cost of settlement (to the defendant’s detriment) or reduces the amount available to the named plaintiff (to the plaintiff’s detriment).
  • Third, what is notice supposed to accomplish? The putative class members’ rights are not affected by an individual settlement, and they would have no standing to object to an individual settlement.
  • Fourth, and most troubling, sending notice of a settlement invites copycats. This ruling basically requires the defendant to run an advertisement that says to any list of people a plaintiff may name as a class “here is how much I paid someone like you for suing me.” That is not a public policy that promotes settlement.

It is not clear that this needless notice rule benefits any party in litigation. We expect that defendants will now refuse to settle putative class actions on an individual basis under this rule.  Why would they settle? The costs of notice and the burden of identifying every class member are incentives to settle putative class actions individually. If a defendant cannot get those benefits, it is has a much stronger incentive to fight. The court may have been thinking that by imposing requirements traditionally reserved for class settlements and litigation of certified classes on purely individual settlements, it has given defendants a stronger incentive to settle on a class-wide basis in order to get class-wide peace, since notice is going to have to be given to the class anyways. But that policy would only make sense if class settlement were a proper judicial or legislative goal in and of itself, which it is not.

The defendant also has all the more reason to remove cases in light of this decision. Desrosiers is limited to New York state court. While the language of CPLR 908 is based on the old federal Rule 23(e), the federal rule was clarified in 2003 to make doubly clear that notice is only required in a certified class or where the proposed settlement would bind class members.