7.4 Resolution of Class Actions
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.
A. Negotiations
Ethical considerations are somewhat different in class action lawsuits. One commentator pointed out that 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.”/157/ 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./158/ 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.”/159/
Persons initiating the class action are to 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./160/ In another case, the court 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./161/
B. Notice, Settlement, and Fairness Proceedings
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./162/ 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./163/ This amendment reverses the rule in most circuits requiring approval of the settlement of pre-certification class actions./164/
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./165/
Similar to the settlement approval revision, Rule 23(e)(1)(B) requires notice only where the settlement binds the class through claim or issue preclusion and is not required when the settlement only binds the individual class members. This notice must explain the proposed settlement or dismissal to the class members, specify a means for them to file objections to the proposed terms, set forth any deadline for filing such objections, and inform them of the date of the hearing where their objections will be considered./166/ 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. As with pre- or postjudgment notices, class members’ current addresses must be located if possible and/or notification through some other mechanism must be ensured. However, Rule 23 does not necessarily require the party sending the notice to “exhaust every conceivable method of identification.” /167/This notice need not be individualized.
The court is required to ensure that the settlement is fair, adequate, reasonable, and not based on collusion. The court has a “heavy, independent duty” in making the approval as the settlement process is more susceptible to abuse than the “adversarial process.”/168/ 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.”/169/ The court must balance a variety of factors in reaching this determination. These standards are expressed in various ways by the courts but are fundamentally the same inquiries./170/
The 2003 Amendments added Rule 23(e)(2) requiring the parties to disclose any side agreements to the settlement. This rule seeks 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.”/171/ The court may only approve or disapprove the agreement; the court may not rewrite it./172/
As indicated above, notice of the proposed settlement should indicate the date and time of a hearing on the motion and invite any objectors to be present./173/ Rule 23(e)(1)(C) now requires that a court may approve a settlement only after a hearing. Further, Rule 23(e)(3) now requires that in (b)(3) actions, the court may refuse to approve the settlement without giving class members another opportunity to opt-out. Another important 2003 amendment was the addition of Rule 23(h) setting forth in detail the requirements necessary for a court to award attorney fees in class actions.
The standard of review for decisions regarding settlements is “abuse of discretion.”/174/ However, a review of an interpretation of the agreement is de novo./175/ There was a split in the circuit courts as to whether one who objected to the settlement needed to seek intervention status in order to appeal an approval. The Supreme Court’s decision in Devlin v. Scardelletti/176/ resolved the matter. Devlin held that because the objector was a member of the class bound by the agreement, he had standing to appeal./177/
157. Graham C. Lilly, Modeling Class Actions: The Representative Suit As an Analytic Tool, 81 NEB. L. REV. 1008, 1032 (2003). See also MANUAL FOR COMPLEX LITIGATION (FOURTH), supra note 1, § 21.61.
158. Evans v. Jeff D., 475 U.S. 717 (1986). See Chapter 9, Section IV of this MANUAL.
159. Manual for Complex Litigation (Fourth), supra note 1, §§ 13.24 and 21.7.
160. In re Hager, 812 A.2d 904 (D.C. 2002). For a discussion of the ethical challenges in class action representation, see generally Julie Klaus, Saving the Class Action: Developing and Implementing a Model Rule of Professional Conduct for Class Action Litigation, 16 Georgetown J. of Legal Ethics 352 (2003).
161. Griesz v. Household Bank (Illinois), N.A., 176 F.3d 1012, 1013 (7th Cir. 1999).
162. 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).
163. Fed. R. Civ. P. 23(e)(1)(A) advisory committee’s notes, 2003 amends.
164. 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, 126 S. Ct. 2969 (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”).
165. MANUAL FOR COMPLEX LITIGATION (FOURTH), supra note 1, § 21.632-.633.
166. 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 rejected one written in legalese so dense even lawyers would have trouble understanding it).
167. Burns v. Elrod, 757 F.2d 151, 154 (7th Cir. 1985); Handschu v. Special Serv. Div., 787 F.2d 828, 832-33 (2d Cir. 1986) (publication over period of weeks in several newspapers was sufficient); 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).
168. Laube v. Campbell, 333 F. Supp. 2d 1234, 1238 (M.D. Ala. 2004).
169. MANUAL FOR COMPLEX LITIGATION (FOURTH), supra at note 1, § 21.61.
170. Compare Rutter and Willbanks 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 a list of criteria courts have utilized in weighing those factors).
171. Fed. R. Civ. P. 23(e)(2) advisory committee’s notes 2003 amends.
172. MANUAL FOR COMPLEX LITIGATION (FOURTH), supra at note 1, § 21.61.
173. As indicated, the reaction of class members may be considered as a factor in the approval process. See supra note 154 and accompanying text. 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). 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).
174. Joel A. v. Giuliani, 218 F.3d 132, 139 (2d Cir. 2000), (Clearinghouse No. 53,230).
175. Waters v. Int’l Precious Metals Corp., 237 F.3d 1273, 1277 (11th Cir. 2001).
176. Devlin v. Scardelletti, 536 U.S. 1 (2002).
177. For an examination of the import of this holding, which is outside the scope of this chapter, see Leading Cases, II. Federal Jurisdiction and Procedure, 116 HARV. L. REV. 332 (2002).
Updated 2006