Updated 2014 by Sarah Somers
Class counsel may determine that settlement of the case is appropriate. If a settlement is reached the court will hold a fairness hearing on the settlement and counsel must give notice of the settlement to class members. As in other aspects of class action litigation, the negotiation between the parties will be scrutinized by the court during the fairness hearing. The court will consider any conflicts between named plaintiffs and the class and issues such as attorney fees. Negotiation, notice of settlement and fairness proceedings are discussed below.
Ethical considerations are somewhat different in class action lawsuits. Class action negotiations are at risk of greater collusion between counsel because there is less client control than in individual suits and because the client to whom counsel is accountable may be “amorphous and widespread.”1 Defendants often seek to negotiate plaintiffs’ attorney fees as part of the overall settlement. The Supreme Court addressed this issue in Evans v. Jeff D., which held that this behavior on the part of defense counsel was not unethical.2 However, the Manual for Complex Litigation suggests that courts reviewing such settlements should examine them for the “fairness of the allocation between damages and attorney fees, noting that “[t]he ethical problem will be eased if the parties agree to have the court make the allocation.”3
Persons initiating the class action must be kept apprised of negotiations as they develop. In one disciplinary action, an attorney was suspended and required to pay a fine when he failed to inform his clients about negotiations, entered into a secret agreement in which he was to receive $225,000 in fees, agreed not to represent anyone with related claims and agreed to keep the agreement confidential. The District of Columbia Court of Appeals found this conduct to have violated eight different ethical rules.4 Courts have cautioned against the inadequacy of lawyer representation and the temptation that lawyers might face, particularly where the individual claims were small, to sell out the class.5
Counsel may seek to settle a putative class action prior to class certification. A "settlement class" is one that has been certified at the same time the settlement has been approved.6 Certification at the time of settlement approval binds all members of the class who have not opted out to the judgment.7 Settlement classes must satisfy all the requirements of Rule 23(a) and (b).8 Whether a class action would be manageable is not considered in settlement classes since the matter, by definition, does not proceed to trial.9 Because of increased possibilities of collusion, settlement classes are subject to more searching scrutiny.10
7.4.B. Notice and Settlement
As with many other aspects of class actions, during notice, settlement and fairness proceedings, the court is the protector of the class or putative class. Some courts describe the role of the court at this stage of the proceedings as a fiduciary one.11 Individual litigants are generally free to compromise their claims and plaintiffs are free to dismiss them voluntarily or, if the complaint has been answered, with the agreement of the defendant under Rule 41(a). Cases filed as class actions generally require more, as detailed in Rule 23(e), and this specific exception is indicated in Rule 41(a).
The 2003 amendments to Rule 23(e) are substantial and are designed to enhance judicial oversight of settlements. Rule 23(e)(1)(A) now provides that court approval is required for “any settlement, voluntary dismissal, or compromise of the claims, issues, or defenses of a certified class.” [Emphasis supplied.] This language was added to “resolve any ambiguity” of the previous language and to make clear that 23(e) applies only to a “certified class” and not to settlements with proposed class representatives that resolve only individual claims.12 This amendment reverses the rule in most circuits requiring approval of the settlement of pre-certification class actions.13
The approval by the court is a two-step process: the settlement is presented to the court, which makes a preliminary fairness evaluation. If the preliminary evaluation does not cast doubt on its fairness, the court directs that notice be given for a formal fairness hearing.14
Rule 23(e)(1)(B) requires notice where the settlement binds the class through claim or issue preclusion and is not required when the settlement only binds the individual class members. Settlement notice must be prepared in a reasonable manner in all class action settlements, regardless of whether it is a (b)(1), (b)(2) or (b)(3) class.15 This notice must explain the proposed settlement or dismissal to the class members16 , specify a means for them to file objections to the proposed terms 17 , set forth any deadline for filing such objections, and inform them of the date of the hearing where their objections will be considered.18 The form of such a notice should be submitted to the court for approval either as part of the settlement agreement itself or by separate motion. "Reasonable" notice is most commonly notice by mail, but may be supplemented or, when appropriate, replaced by notice by publication. Rule 23 does not necessarily require the party sending the notice to “exhaust every conceivable method of identification.”19 This notice need not be individualized. Because both the class and the defendants seek approval of the settlement, courts have shifted the burdens and costs of providing notice to the defendants when appropriate.
Defendants in settled class actions are now required to provide notice of such settlement within ten days of the filing of the agreement on certain federal and state officials.20 Generally, unless the defendant is a depository institution, the U.S. Attorney General must be served with such notice.21 The appropriate state official is defined in 28 U.S.C. § 1715(a)(2) and is often the primary regulator of the defendant. The content of the notice is prescribed in 28 U.S.C. § 1715(b). Of potential concern to plaintiffs is that the court may not give final approval of a proposed settlement until at least 90 days from the date the last defendant made notice on the appropriate government officials.22 With the exception set forth in 28 U.S.C. § 1715(e)(3), a class member is not obligated to comply with the agreement and is not bound by it if this notice is not provided.23
7.4.C. Fairness Hearings
The court is required to ensure that the settlement is fair, adequate, reasonable, and not based on collusion. Some courts also consider whether the settlement furthers the public interest.24 The court has a “heavy, independent duty” in making the approval as the settlement process is more susceptible to abuse than the “adversarial process.”25 As described by the Manual for Complex Litigation, the role of the court is to be a “skeptical client” as there is “typically no client with motivation, knowledge, and resources to protect its own interests.”26 The court must balance a variety of factors in reaching this determination of fairness. These standards are expressed in various ways by the courts but fundamentally involve the following inquiries27 : 1) a comparison of the strength of the plaintiff's case against the recovery proposed in the settlement); 2) the complexity and risks of continued litigation; 3) the presence of collusion in reaching a settlement; 4) the comments of class members; and 5) the stage of the proceedings and the amount of discovery completed.28 Rule 23(h) sets forth in detail the requirements necessary for a court to award attorney fees in class actions.
The 2003 Amendments added Rule 23(e)(3) requiring the parties to identify any side agreements to the settlement. This rule authorizes the court to require disclosure of “related undertakings that, although seemingly separate, may have influenced the terms of the settlement by trading away possible advantages for the class in return for advantages for others. Doubts should be resolved in favor of identification.”29 Rule 23(c)(3) does not contemplate discovery of information related to such agreements.30
A court approving a class action settlement must make findings of facts and conclusions of law to support its conclusion that the proposed settlement is fair, reasonable, and adequate. Those findings must identify and apply the factors employed to draw that conclusion and must be sufficiently detailed to provide an adequate explanation to the class and to the appellate court for possible review. Class members are, of course, permitted to make objections to the proposed settlement 31 and the court should address those objections in its findings and conclusions.32 The court may only approve or disapprove the agreement; the court may not rewrite it.33
The standard of review for decisions regarding settlements is “abuse of discretion.”34 However, a review of an interpretation of the agreement is de novo.35 Orders disapproving class settlement are generally not subject to interlocutory review.36 The Supreme Court held in Devlin v. Scardelletti37 that class members who objected to a class settlement were permitted to appeal approval of the settlement without needing to intervene.
Updated 2014 by Sarah Somers
- 1. Graham C. Lilly, Modeling Class Actions: The Representative Suit As an Analytic Tool, 81 Neb. L. Rev. 1008, 1032 (2003). See also Federal Judicial Center, Manual for Complex Litigation (Fourth) § 21.61 (2004).
- 2. Evans v. Jeff D., 475 U.S. 717 (1986). See Chapter 9.4 of this MANUAL.
- 3. Manual for Complex Litigation (Fourth), supra note 1, §§ 13.24 and 21.7.
- 4. In re Hager, 812 A.2d 904 (D.C. 2002). For a discussion of the ethical challenges in class action representation, see generally Julie Klusas, Saving the Class Action: Developing and Implementing a Model Rule of Professional Conduct for Class Action Litigation, 16 Geo. J. of Legal Ethics 353 (2003).
- 5. See In re Hager, 812 A.2d 904 (D.C. 2002); Griesz v. Household Bank (Illinois), N.A., 176 F.3d 1012, 1013 (7th Cir. 1999).
- 6. See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 618 (1997).
- 7. For a detailed discussion of settlement classes in a context in which approval of one was overturned, see In re GMC Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir.), cert. denied, GMC v. French, 516 U.S. 824 (1995).
- 8. Amchem Products, Inc. v. Windsor, 521 U.S. 591, 621 (1997).
- 9. Id. at 629.
- 10. Id. at 620.
- 11. See, e.g., Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, 279 (7th Cir. 2002) (citing In re Cendant Corp. Litig., 264 F.3d 201, 231 (3rd Cir. 2001).
- 12. Fed. R. Civ. P. 23(e)(1)(A) advisory committee’s notes, 2003 amends.
- 13. See, Gregory P. Joseph, 2003 Class Action Rules, in 2 Civil Practice and Litigation Techniques in Federal and State Courts 1 (A.L.I.-A.B.A. Course of Study 2003). See also Daniels v. Bursey, No. 03 C 1550, 2004 WL 2358291, 2004 U.S. Dist. LEXIS 20950 (N.D. Ill. Oct. 19, 2004, appeal dismissed 430 F.3d 424 (7th Cir. 2005), cert. denied sub nom. Koresko v. Bursey, 548 U.S. 904 (2006) (rejected claim that putative class action cannot be settled on an individual basis without court approval). But see Schick v. Berg, No. 1:03-cv-05513-LBS, 2004 U.S. Dist. LEXIS 6842 (S.D.N.Y. Apr. 20, 2004), aff’d, 430 F.3d 112 (2d Cir. 2005) (discussing policy protecting putative class member rights pre-certification). See also Manual for Complex Litigation (Fourth), supra note 1, § 21.61 (after describing potential abuses in pre-certification settlements states: “Use of the court’s supervisory authority to police the conduct of proposed class actions under Rule 23(d) may be appropriate in such circumstances”).
- 14. Manual for Complex Litigation (Fourth), supra note 1, § 21.632-.633.
- 15. Fed. R. Civ. P. 23(e)(1).
- 16. The notice need not explain all the details of the settlement so long as the agreement is otherwise made available on a website.
- 17. The notice need not offer all the reasons a class member might object to the settlement. Int'l Union v. Gen. Motors, 497 F.3d 615, 630 (6th Cir. 2007).
- 18. See In re Diet Drugs Prods. Liab. Litig., 226 F.R.D. 498, 517-18 (E.D. Pa. 2005). For an example of a notice found insufficient, see White v. Ala., 74 F.3d 1058, 1066 (11th Cir. 1996) (emphasizing that notice must be understandable and rejecting notice written in legalese so dense that even lawyers would have trouble understanding it).
- 19. Brecher v. St. Croix County, No. 02-C-0450-C (W.D. Wis. May 26, 2004); In re Prudential Ins. Co. of Am. Sales Practices Litig., 177 F.R.D. 216, 232 (D.N.J. 1997); see also Handschu v. Special Serv. Div., 787 F.2d 828, 832-33 (2d Cir. 1986) (publication over period of weeks in several newspapers was sufficient); Burns v. Elrod, 757 F.2d 151, 154 (7th Cir. 1985); Wyatt v. Sawyer, 105 F. Supp. 2d 1234, 1240 (M.D. Ala. 2000) (posting prominently in living areas of all facilities of mental institution, hand-delivered to residents and to advocates for whom hand-delivered deemed clinically inappropriate, mailed to legal guardians, mailed to consumer and advocacy organizations with statewide constituencies, and published in newspapers).
- 20. 28 U.S.C. § 1715(b).
- 21. 28 U.S.C. § 1715(a)(1).
- 22. 28 U.S.C. § 1715(d).
- 23. 28 U.S.C. § 1715(e)(1).
- 24. See Int'l Union, 497 F.3d at 631.
- 25. Laube v. Campbell, 333 F. Supp. 2d 1234, 1238 (M.D. Ala. 2004). See also, e.g., In re Dry Max Pampers Litigation, 724 F.3d 713, 715 (6th Cir. 2013) (noting that in class action settlements "there is always the danger that the parties and counsel will bargain away the interests of unnamed class members in order to maximize their own").
- 26. Manual for Complex Litigation (Fourth), supra note 1, § 21.61.
- 27. For a detailed discussion of these various factors, see 5-23 James Wm. Moore et al., Moore's Federal Practice - Civil § 23.164.
- 28. Compare Rutter and Willibanks Corp. v. Shell Oil Corp., 314 F.3d 1180, 1188 (10th Cir. 2002) ((1) whether fairly and honestly negotiated; (2) whether serious questions of law and fact exist and place ultimate outcome in doubt; (3) whether value of immediate recovery outweighs mere possibility of future relief after protracted and expensive litigation; and (4) whether parties judge settlement as fair and reasonable), with D’Amato v. Deutsche Bank, 236 F.3d 78, 86 (2d Cir. 2001) ((1) complexity, expense, and likely duration of litigation; (2) reaction of class to settlement; (3) stage of proceedings and amount of discovery completed; (4) risks of establishing liability; (5) risks of establishing damages; (6) risk of maintaining class action through trial; (and in damage actions); (7) ability of defendants to withstand a greater judgment; (8) range of reasonableness of settlement fund in light of best possible recovery; and (9) range of reasonableness of settlement fund to possible recovery in light of all litigation risks). See also Manual for Complex Litigation (Fourth), supra note 1, § 21.62 (setting forth nonexhaustive list of fifteen potentially relevant factors, along with list of criteria courts have utilized in weighing those factors).
- 29. Fed. R. Civ. P. 23(e)(2) advisory committee’s notes 2003 amends.
- 30. Id
- 31. Fed. R. Civ. P. 26(e).
- 32. As indicated, the reaction of class members may be considered as a factor in the approval process. See supra note 28 and accompanying text. See Beavers v. Am. Cast Iron Pipe Co., 164 F. Supp. 2d 1290, 1297-98 (N.D. Ala. 2001) (approval of settlement terms by the named plaintiffs and class representatives another factor favoring approval of settlement); United States v. City of Montgomery, 948 F. Supp. 1553, 1568 (M.D. Ala. 1996). In one instance, the opposition by 70 percent of a subclass led the Fifth Circuit to reject a settlement. Pettaway v. Am. Cast Iron Pipe Co., 576 F.2d 1157, 1217 (5th Cir. 1978). Failure to allow intervention of right in the remedy stage may compel an appellate court to vacate approval of a settlement agreement. See Benjamin by and through Yock v. Department of Public Welfare of Pennsylvania, 701 F.3d 938, 948 (3d Cir. 2012). The 2003 Amendments now require that any objections to the settlement may only be withdrawn with the court’s approval. Fed. R. Civ. P. 23(e)(4)(B).
- 33. Manual for Complex Litigation (Fourth), supra note 1, § 21.61.
- 34. Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 106 n.12 (2d Cir. 2005); Joel A. v. Giuliani, 218 F.3d 132, 139 (2d Cir. 2000).
- 35. F.W.F., Inc. v Detroit Diesel Corp., 308 Fed. App'x 389, 390 (11th Cir. 2009); Waters v. Int’l Precious Metals Corp., 237 F.3d 1273, 1277 (11th Cir. 2001).
- 36. Moran v. Gannon (In re Touch Am. Holdings, Inc. ERISA Litig.), 563 F.3d 903 (9th Cir. 2009).
- 37. Devlin v. Scardelletti, 536 U.S. 1 (2002).