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?
Every case and every class action settlement has its own unique drivers, but a few basic and familiar concepts are common to the vast majority of them. And they come in two varieties – the aims of the plaintiffs and their counsel and the aims of defendants. Respectively, they can be thought of as the Relief and the Release.
The Relief. Class counsel know their objective before they file suit: they want the best possible deal for the class they seek to represent. Few class actions go to trial, and from the outset, plaintiffs’ counsel typically view settlement as the desired outcome. In most cases, they won’t have a target settlement amount when they commence the action because they will not yet have the data from which the amount can be determined. However, they will have a general idea of the magnitude of the claim based on the size of the defendant, the general size of the affected class, the extent of the harm allegedly inflicted on the class members, the nature of the claim and the legal remedies available if they can prove it, and the amounts of settlements achieved in comparable cases. The value of the relief to the class takes on heightened importance in class actions because of the need for judicial approval. It will determine whether a court will approve the settlement as fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e), or comparable state provision. It also will be a factor in determining the amount of the attorneys’ fees the court will award class counsel. While there will be a host of important, subsidiary issues to resolve, the relief to the class is the key factor in class counsel’s decision to settle.
The Release. Defendants, too, will be focused on the cost of the relief they are being asked to pay. They might look for non-monetary ways to bridge gaps in the parties’ settlement positions that add value to the settlement without adding to the out-of-pocket costs, such as forms of prospective injunctive relief or consensual undertakings that will benefit class members in the future. The amount they are willing to pay will depend, in part, on how they calculate their litigation risk, including the probable outcomes if the case were to go to trial and the expense of getting there, as well as their degree of risk aversion, the extent of disruption to their business caused by litigation, and perhaps other, less quantifiable issues, such as employee relations, public relations, and reputational risk. The bottom line for any defendant when settling a class action, though, is the importance of achieving global peace, defined as an agreement that terminates the current lawsuit and prevents future lawsuits over the same or related conduct. While there are a number of factors that contribute to the extent of the peace that a defendant buys when settling a case on a class-wide basis, there are two interconnected provisions of the settlement agreement that require special attention: the class definition and the release. Put simply, the class definition will determine who will be bound by the release, and the language of the release will determine what they are giving up by settling (or, for most class members, by not opting out of the settlement). Other provisions of a settlement, such as a “blow-up” provision (which allows a defendant to withdraw from the settlement if too many class members opt out) may also determine how much peace the settlement will buy, but the class definition and the release language are core considerations in a defendant’s decision to settle.
The Rest. At the risk of over-simplification, when one gets beyond the relief and the release, the rest is mostly process meant to ensure that the absent class members are getting a fair and equitable shake. It comes in the form of notice, opt-out provisions, and the right to object to the settlement. “The Rest” also includes the mechanics of how the settlement will work. For example, will each class member receive the same settlement amount? If not, how will each class member’s payment be calculated? Will there be a claims process, or will class members receive automatic payments? Will there be residual funds, and if so, how will they be dealt with? What will happen if a class notice or settlement check bounces back? These are important issues that also will require careful consideration and drafting and that a court will weigh it deciding whether to approve the settlement, but they are secondary to the issues of relief and release that drive the parties to agreement.
Take-Away. Not every class action should or will settle, but many do. To achieve settlement, parties and their counsel should stay focused on the core issues at the heart of any settlement: the relief that will be provided to the class, and the release that will be provided to the defendant. Once the parties agree on these core terms, they should be able to reach agreement on the rest.