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:

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(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.

Due Process Strikes Back: Alabama Supreme Court Vacates $124M Class Settlement Attorneys’ Fee AwardThe Alabama Supreme Court recently vacated a substantial $124 million attorneys’ fee award in connection with a class action settlement (Lawler v. Johnson et al., No. 1151347, — So. 3d –, 2017 WL 4707517 (Ala. Oct. 20, 2017)). Lawler sets some important guideposts for attorneys’ fees in future class settlements in Alabama. The opinion also establishes that settlement objectors need not intervene as parties to have standing to appeal denial of objections. Litigants considering settlement of a class case, and their counsel, should take note.

Background

Lawler involved a claim arising out of the settlement of securities fraud litigation in 1999. The plaintiffs in the Lawler case alleged that the class in the earlier securities litigation was defrauded because the defendant and its insurer did not accurately disclose the amount of insurance available to settle the case. The Lawler litigation ultimately resulted in a $310 million class action settlement in May of 2016 that included an award by the trial court of fees to class counsel in the amount of 40 percent of the recovery, or $124 million.

A few more background facts are in order. The trial court’s preliminary approval order and “long-form” notice to class members that were posted to the settlement website (both approved by the trial court) provided that all objections to the settlement, including objections to class counsel’s fee request, had to be made in writing and on or before July 22, 2016. The order and long-form notice required class counsel to file their fee application by July 29, 2016, a week after the deadline for objections. The long-form notice advised only that class counsel would seek an attorney’s fee, to be paid out of the settlement proceeds, in an amount “not to exceed 40% of the settlement amount plus expenses not to exceed $3,000,000.”  No additional information about fees was disclosed prior to July 29, 2016, when class counsel filed their fee application requesting an award of 40 percent, or $124 million.

The “short-form” notice mailed to class members was inconsistent with the preliminary approval order and long-form notice with respect to the timing of objections. The short-form notice stated that class members could object to the settlement “by filing a written objection and/or by appearing at the settlement hearing.” The Supreme Court viewed this language as giving class members the option of doing either in order to timely object to any aspect of the settlement. No specific date for objections (other than appearance at the approval hearing) was set out in the short-form notice, though it did direct class members to the settlement website and long-form notice, which, as noted above, provided for a July 22 deadline for objections.

The schedule approved by the trial court and set out in the long-form notice required class members to make their objections to the fee request before class counsel was required to file their fee application. This meant that class members wanting to object to the fee request would have to do so without knowing the exact amount of the request, the amount of time expended by class counsel, or the nature of the work done by class counsel, and without having an opportunity to conduct discovery with respect to the fee request. Several objectors filed objections to the fee component of the settlement prior to the July 22 deadline. At least one objector filed an objection after the deadline and appeared at the approval hearing through his counsel. At the approval hearing, class counsel offered only generalized information regarding the time spent on the case and the specific work performed.

Following the approval hearing, the trial court approved the settlement as proposed, awarded class counsel the fees requested, and overruled all objections to the fee request. Several objectors appealed the attorney’s fee award to the Alabama Supreme Court.

The Ruling

The Supreme Court, in a lengthy opinion, overturned the trial court’s approval of the fee award and remanded for further proceedings.

  • The Court held, first, that objectors need not have been intervenors (none of the appellants had sought to intervene as parties) to have standing to appeal the denial of their objections to a class settlement. In so doing, the Court adopted the rationale of the U.S. Supreme Court in Devlin v. Scardelletti, 536 U.S. 1 (2002), and applied that ruling to all class actions, not just to those in which class members do not have the right to opt out.
  • Second, the Court held that objectors had the right to rely on the short-form notice, and that objections asserted at the fairness hearing could not be found untimely since that notice advised that class members could object “by filing a written objection and/or by appearing at the settlement hearing.” The significance of this holding is that ambiguities in and inconsistencies between various forms of notice given to class members will likely be construed in favor of objectors.
  • Third, the Court held that it “is irregular and indeed unlawful” under the due process clause to require objections to class counsel’s fee request before the fee application is required to be filed. The Court rejected the argument that, because class members were told the award could be “up to 40%” of the settlement, they could have timely objected to the “expected request.”
  • Fourth, the Court found that these procedural errors were not harmless, notwithstanding that objectors had full access to the filed fee application prior to the approval hearing and thus were able to respond to it at the hearing. The Court held that the time period between the filing of the fee application and the approval hearing (10 days or five business days) did not provide the objectors sufficient time to prepare their objections to the fee application. The Court noted that 10 days “surely borders on what due process requires.”
  • Fifth, the Court also noted that the fee application did not provide specifics regarding the amount of time expended by class counsel and the nature of the work that was done. The court concluded that class members were entitled to this information before making their objections and that the trial court should consider the information in making its fee award.