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.

Reverse Auction Ploy by Competing Class Counsel Creates Right of Intervention by Class Members Whose Settlement Demands Were UnderbidIn a case that reveals the darker aspects of what can sometimes be an ugly competition for the class counsel role, the Eleventh Circuit rendered an opinion last week finding that a group of plaintiffs were entitled to intervene in a class action settlement by a rival group of plaintiffs.

In Technology Training Assocs., Inc. v. Cin-Q Autos., Inc., a group of plaintiffs and their class counsel filed a class action similar to one already pending, then immediately announced a $20 million settlement. The class claims involved unsolicited “junk” faxes sent to over 180,000 recipients in alleged violation of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227. The plaintiffs who had filed the earlier (and still pending) similar class action moved to intervene pursuant to Rule 24, Fed. R. Civ. P., alleging that the defendant and the second group of plaintiffs were collusively settling on more favorable terms with the second plaintiff group, in what is known as a “reverse auction,” to knowingly undercut the higher demands of the first group. The motion to intervene argued that the second group of plaintiffs were inadequately representing the intervenors’ interests because some of those second plaintiffs’ claims were (or could be) barred by the statute of limitations, unlike the claims of the intervenors, which gave the second group of plaintiffs greater incentive to reduce their demands. The district court, however, denied the movants’ motion to intervene, finding that the movants could object at the “fairness hearing” rather than intervene.

In reversing the district court, Chief Judge Carnes, writing for the court, noted that Rule 24’s right to intervene was independent of Rule 23’s procedural protections such that “Rule 23’s procedural protections” did not “mean the movants fail to satisfy Rule 24(a)(2)’s third prong[,]” as the district court found.  In light of this finding, the court went further and analyzed whether the movants for intervention had satisfied their burden of showing that the settling plaintiffs’ representation of the movants’ interest “may be” inadequate. The court found that the movants had met this “minimal” burden, agreeing that the settling plaintiffs had a greater incentive to settle because their claims may be barred by the statute of limitations, an issue the movants did not have.

Even more telling, though, was the court’s finding that the record evidence showed that “plaintiffs’ counsel … deliberately underbid the movants in an effort to collect attorney’s fees while doing a fraction of the work that movants’ counsel did.” Slip Op. at 10. This evidence included some damning emails exchanged between counsel for the defendants and counsel for the low bidding plaintiffs. The court stated that this evidence not only showed that the settling plaintiffs’ (and their counsel’s) interests were aligned with the defendant, such that “plaintiffs cannot be expected to adequately represent the movants’ interests[,]” but also that such a “desire to grab attorney’s fees instead of a desire to secure the best settlement possible for the class” constituted a violation of counsel’s “ethical duty to the class.” (citing Am. Bar Ass’n, Ethical Guidelines for Settlement Negotiations § 4.2.2 (2002)).

The Eleventh Circuit’s decision in Technology Training Assocs., Inc. should serve as another warning to settling litigants that reverse auction settlements are likely to draw increased judicial skepticism, and that communications in the course of such reverse auctions may well become evidence against the settlement.

CFPB’s Effort to Axe Class Waivers Gets Axed by the SenateBy the hair of its chinny chin chin, the Senate voted on Tuesday to nullify the CFPB’s previously announced final rule that would have prohibited banks, credit card companies, and other financial service entities from utilizing arbitration agreements to block or limit class action suits by consumers.

The vote took place pursuant to the Congressional Review Act, 5 U.S.C. § 801 et seq., which allows Congress to invalidate regulations promulgated by executive agencies within 60 legislative days of publication by a simple majority vote in both the House and Senate. After a long, heart-felt debate on the Senate floor, all Democrats and two Republicans (Sens. Lindsey Graham of South Carolina and John Kennedy of Louisiana) voted against nullification, but the resulting 50-50 tie was broken by Vice President Mike Pence.

The House had already voted overwhelmingly in favor of nullifying the rule in July. The only remaining piece of the puzzle for complete nullification is the blessing of President Trump. Given the Trump administration’s views on regulation and the president’s continued praise for those opposing this rule, the likelihood of the president disapproving this nullification appears extremely small.

Under the Congressional Review Act, the nullification not only kills this version of the rule, but also prohibits the issuance of “a new rule that is substantially the same … unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.” As such, there is little chance that any type of rule limiting arbitration clauses will be issued in the foreseeable future.

Arbitration clauses with class waivers have been an effective tool for avoiding class litigation thanks to cases such as AT&T v. Concepcion, which held that the Federal Arbitration Act generally preempted state rules that classified arbitration clauses with class waivers in consumer contracts as unconscionable (563 U.S. 333, 340 (2011)). Thanks to the Senate’s vote on Tuesday, companies can continue relying on these types of holdings, utilizing arbitration clauses, and limiting a consumer’s ability to join or initiate a class action lawsuit.

The Senate’s vote also avoids potential constitutional challenges to the CFPB’s rule. As such arbitration agreements are made generally enforceable under the Federal Arbitration Act, the CFPB’s rule prohibiting a certain class of such agreements could be challenged as a revision to the FAA that only Congress could accomplish through the normal legislative process — and therefore could not delegate to the CFPB to decide. In addition, the CFPB’s structure has been challenged as unconstitutional in a case pending before the D.C. Circuit en banc, and the U.S. Chamber of Commerce had just filed suit to enjoin the rule as being inconsistent with the limitations imposed by the Dodd-Frank Act.

While the full extent of political backlash to Congress’ action remains to be seen, several groups and individuals immediately spoke out on each side of this Congressional decision. CFPB Director Richard Cordray stated minutes after the vote, “Wall Street won and ordinary people lost.” Similarly, Sen. Elizabeth Warren (D-Mass.) turned her attention directly toward President Trump, asking him to follow through on his promises of standing up to Wall Street. Conversely, Keith A. Noreika, Acting Comptroller of the Currency, released a statement praising the Senate for the vote, stating that the rule would have increased the cost of credit for hardworking Americans and had a detrimental impact on small community banks. In the coming days, there will undoubtedly be vigorous rhetoric on both sides of this decision, but the fact remains that the rule has likely been stopped in its tracks.