Federal Rule of Civil Procedure 23(e)(2) requires courts to subject proposed class action settlements to scrutiny to ensure that they are fair, reasonable, and adequate. In some recent decisions, the Ninth Circuit has reversed district court approvals of class action settlements, finding that the district courts did not sufficiently exercise that function. I had the privilege of discussing two of these cases and their practical significance for class action lawyers with Adam Polk, co-chair of the American Bar Association’s Class Actions and Derivative Suits Committee, in the committee’s “Common Questions” podcast. Our first conversation concerned the case of Kim v. Allison and a proposed settlement concerning the Tinder dating app. Our second conversation, which has not yet been published, concerned an even more recent decision involving a franchisor of massage services. A link to our conversation in the Tinder case can be found here.
I have written before about one of the peculiar characteristics of a class action settlement; namely, that once a class action settlement is reached, the interests of the named plaintiffs and the defendant in obtaining settlement approval are aligned, which makes the court’s role as fiduciary to the members of the class all the more important. That lack of adversity is present in class counsel’s fee petition as well. A defendant is generally indifferent to the amount of fees to be awarded to class counsel, because the fee award often represents nothing more than an amount to be allocated to class counsel out of a larger sum that the defendant has already agreed to pay. Class members, on the other hand, often have a real stake in the amount of the fee award, because the larger the attorneys’ slice of the settlement pie, the less pie remains for distribution to the class. At the time the fee petition is presented, therefore, class counsels’ interests conflict with
Class action settlements are complicated affairs. They can take months or even years to negotiate, followed by months to send notice and obtain trial court approval, and months or years longer if an approval order is appealed. The agreements memorializing class action settlements are often dozens of pages long or longer. They sometimes involve claims processes run by third-party vendors who are hired to manage years of complex data. Objections can require extensive briefing and at times result in evidentiary hearings. Between the attorneys’ fees incurred in the settlement process as well as costs of administration, class action settlements often result in expenditures of hundreds of thousands of dollars if not more.
So why do parties and their lawyers on both sides subject themselves to such a burdensome, time-consuming and expensive process? When you cut through all the posturing and all of the carefully crafted details of the written agreement and court submissions, what are the core terms at the heart of the settlement?
A few months ago, I posted about a surprising decision of a divided panel of the Eleventh Circuit which held that incentive awards (a/k/a “service awards”) in class action settlements are prohibited by arguably analogous Supreme Court decisions from the 1880s. While we wait to see whether the Eleventh Circuit will grant a pending petition for rehearing en banc in Johnson v. NPAS Solutions, LLC, we should take note of a per curiam decision of the Sixth Circuit reaching a different result. In Shane Group Inc. v. Blue Cross Blue Shield of Michigan, 2021 WL 129067 (6th Cir., Jan. 14, 2021), the court rejected an objection to service awards to be paid to certain named plaintiffs, holding that they did not amount to an unlawful “bounty.” The Sixth Circuit thus implicitly rejected the reasoning of its sister court. In upholding the service awards, it held, “[o]n this record, . . . those payments correlate to the
For years, class action settlements typically have included incentive payments to named plaintiffs. The payments usually represent a very small percentage of the overall settlement payout, and are designed to compensate named plaintiffs for their time and trouble in service to the class. By way of a simple hypothetical, a million dollar settlement might include an incentive payment of $5,000 to a named plaintiff, in addition to that person’s share of the payment to the class. Class counsel invariably request incentive payments as a component of the overall settlement, defendants generally agree to them, class members rarely object to them, and courts typically approve them. Because incentive awards tend to be such a small percentage of the settlement, usually dwarfed by the fees and costs class counsel request, the settling parties and the court spend very little time on them. After all, the thinking goes, named plaintiffs did have to do some work in representing the class, so it is only fair that they get compensated.
As I have discussed in earlier posts, there are multiple stakeholders to class action settlements, including named plaintiffs, absent class members, class counsel, defendants, and the courts. Conflicts can arise within some of these groups, and perhaps most often arise among the class members themselves. A settlement that looks good to one named plaintiff or their counsel, for example, might not look good to another member of the class or their counsel. The ability of dissenting class members to object to a proposed settlement is one safeguard that can assist a court in determining whether a class action settlement satisfies Rule 23(e)(2)’s “fair, reasonable, and adequate” standard.
When an objection is brought in good faith and has merit, it can result in a better deal for the class. Unfortunately, not all objections are made in good faith. Rather, some are made with the sole objective of enriching the objector and the objector’s counsel, with no accompanying benefit to the settlement class. And often parties and their
Fundamental to the ability to settle a class action is understanding the interests that are being represented by the parties and other stakeholders. Although any given case might present its own unique circumstances, in general the interests can be described as follows.
- Named Plaintiffs. The interests of the named plaintiffs are the most obvious and immediate, yet also can be viewed, and often are treated, as the least important. That’s because the named plaintiffs have chosen to serve as representatives of a larger group, and in so doing, have agreed to pursue the greater good rather than simply act in their own self-interest. That they have done so does not mean that they have relinquished their personal interests in the settlement; only that they have assumed a responsibility to look beyond them to support a settlement that is fair to everyone they seek to represent, which by sheer math dilutes their own stakes in the outcome. And because most named plaintiffs do not
In previous posts, I have discussed the roles of two of the players in class settlements: defense counsel and class counsel. For the third and final installment in this series, I will discuss the role of the third and most important player: the judge.
No class settlement can happen unless approved by a judge. Because most of the people affected by a class settlement are absent class members who are not before the court and have no real relationship with any of the attorneys, the judge has a special responsibility to protect their interests. That responsibility arises because of the potential for a conflict of interest between the named plaintiff and the named plaintiff’s counsel, on the one hand, and the class members who will be bound by the settlement, on the other. The process for settlement approval is designed to protect those absent class members from the risk of collusion between and among the named parties, in other words, the
In Part 1 of this series, I explained the role of defense counsel in class action settlements. In this Part 2, I will explore the role of class counsel.
I embark on this journey with some trepidation, because as a defense counsel myself I have always been on the outside looking in to the plaintiff’s side of the class action settlement process. However, I have settled enough class actions that I believe I can speak with some authority on the issues, even if a few of the details might get a bit blurred in the process.
As a starting point, class counsel must tackle the same tasks I described in Part 1 — negotiating the key terms, drafting the agreement, and seeking court approval — but has the lead role with respect to the latter. Like defense counsel, class counsel need to seek the best deal they can extract from the other side and that, at a minimum, will
In a case strikingly similar to a case that had been before the Supreme Court last term and that involves the same defendant and the same well-traveled objector, a unanimous panel of the Third Circuit vacated and remanded a district court’s approval of a Rule 23(b)(2) class action settlement that included cy pres payments but no payments to class members. Its decision addresses important questions arising from a controversial approach to class action settlements.
The reader may recall the case of Frank v. Gaos, in which the Supreme Court had granted certiorari to review a settlement that had a significant cy pres component but no money going to the class. We wrote about the case in our First Class Defense blog, and you can find that post here. The defendant in Frank v. Gaos was Google, and the case challenged Google’s use of “referral headers” in its search results that transmitted data about the user