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Class Action Countermeasures

Discussions of the Strategic Considerations Involved In Class Action Defense

Rule 23 Study Agenda – Ascertainability

Posted in Certification

The Subcommittee believes that drafting a formal ascertainability requirement is too difficult; it should try nonetheless.

The final topic the Subcommittee has announced it will examine is the possibility of adopting a formal ascertainability requirement. The topic was suggested by several judges of the Third Circuit, who formally requested the Subcommittee consider a formal ascertainability requirement when dissenting from a refusal to hear a Third Circuit ascertainability case en banc. The specific language of that request:

 I suggest that the Judicial Conference’s Committee on Rules of Practice and Procedure look into this matter. Rule 23 explicitly imposes limitations on the availability of class actions. Marcus adds another—that class membership is reasonably capable of being ascertained. If the Committee agrees with that, how easy (or how hard) must this identification be?

Despite this request, the Subcommittee has identified ascertainability as a “back-burner” topic. As it explained in its October 2014 Report:

 For current purposes, in light of the likely difficulty of drafting rule provisions on class definition, the question is whether the problems described warrant making the effort.

What are those difficulties? The Subcommittee appears concerned about determining the exact limits of the ascertainability requirement, likely judging it to be a political flashpoint. (I.e., plaintiffs will argue there should be no requirement; defendants will argue for full application of Carrera v. Bayer Corp. At that point, nothing the Subcommittee does will please anyone.)

Despite the fact that there will likely be some controversy, the Subcommittee should move this issue to the front burner. There is remarkable consensus among appellate courts that Rule 23 contains an implicit ascertainability requirement.   And, since that requirement is strong enough to support the denial of certification, it should not be implicit. Everyone—plaintiffs, defendants, and courts—would benefit from the clarity an explicit ascertainability requirement would bring. Among other benefits, a common text for reference would be invaluable.

Moreover, a strong ascertainabilty requirement would perform a valuable screening function on class actions. If the plaintiffs cannot define their class without reference to the merits (the common “fail-safe” problem), or if they do not have any feasible way of identifying class members for notice, the proposed class action is likely to be stillborn if certified. Moreover, the lack of a good class definition often speaks to deeper problems with a proposed class action. Identifying these issues sooner rather than later is in everyone’s interest.

This is exactly the kind of high-return work the Subcommittee should be focusing on: rationalizing Rule 23 and ensuring that it remains a vehicle for efficient representative actions.

Rule 23 Study Agenda – Issue Certification and Rule 23(c)(4)

Posted in Certification

The Advisory Committee should clarify the role of issue certification, by reinforcing that issue certification is only appropriate when a class is otherwise certifiable under Rule 23.  

One of the Advisory Committee’s “front burner” issues is whether to clarify Rule 23(c)(4), establishing either that it (1) only applies when the rest of Rule 23 has been met, or (2) is an alternative route to certification for plaintiffs willing to narrow the scope of their case. As the Subcommittee Report describes the current state of issue certification:

 Rule 23(c)(4) says that “[w]hen appropriate, an action may be brought or maintained as a class action with respect to particular issues.”  But Rule 23(b)(3) authorizes class certification under its provisions only when the court finds that common questions predominate and a class action is superior to other available methods for adjudicating the dispute.  Arguably, these two provisions are not entirely in synch.  Is predominance to be required only with regard to the issues specified, or must the entire case present predominant common questions?  Why would plaintiffs be satisfied with limited certification if they could have full certification?  Can they achieve predominance simply by dumping individual issues off the table?

Perhaps the existence of such questions explains the longstanding division in the courts about whether 23(c)(4) can be used in cases in which 23(b)(3) cannot be satisfied.  At least some courts seem to think that is not permissible.  But a different interpretation of the current rule might be that — at least with regard to manageability — Rule 23(c)(4) offers a technique that facilitates certification under Rule 23(b)(3).  In any event, it is clear that there is a division among the courts about how the current rule should be interpreted, and that it has existed for some time.  It is also reasonably clear that in some courts issue certification is quite popular.  It may be that a reconciliation of these two parts of the current rule is possible, perhaps by recognizing in 23(b)(3) that its requirements are subject to the alternative and more limited certification authority in 23(c)(4).  It is also possible that 23(c)(4) might be amended to elaborate on when use of issue certification is “appropriate.”  It is unnerving to have such a blatant division in the circuits about what the rules permit.

(Emphases added.)  There are two reasons for this “blatant division.”  The first is that, despite the drafters’ express belief that Rule 23(c)(4) was “obvious[ly]” just clarifying the process of certification under the first two sections of the Rule, its language is ambiguous enough to create confusion about where it fits into the certification scheme.

The second reason is that the stakes involved in establishing the proper role of issue certification are quite high. The question of how to interpret Rule 23(c)(4) is really a question of whether Rule 23(b)(3) has any teeth whatsoever. Even some of the courts that have allowed 23(c)(4) certification have explicitly recognized that it should only apply in limited circumstances (such as when the plaintiffs seek injunctive relief instead of monetary damages).

Professor Laura Hines has identified a strong argument—based in the structure and legislative history of Rule 23—that issue certification is only appropriate if the class is otherwise certifiable under Rule 23(a) and (b). (In fact, Rule 23(c)(4) was originally intended—as the late Benjamin Kaplan wrote—to make a “perfectly obvious point” about how the certification process would work under Rules 23(a) and (b).) And as the Supreme Court pointed out in Wal-Mart Stores, Inc. v. Dukes, Rule 23(b)(3) exists to ensure due process for class members seeking monetary damages: in other words, a monetary damages class is only appropriate when common issues predominate and the class action is superior to other methods of deciding the dispute. An “issues class” for monetary damages lacks those overall protections.

That structural argument is buttressed by sound judicial policy. When the entire class has been certified, it is possible to tell which claims are being tried, and what preclusive effect they will have, win or lose. Once a court begins carving up a class in order to make it certifiable, these questions become much murkier, undermining the original purpose of Rule 23.

If the Advisory Committee is going to allow issue certification even when Rule 23 has not otherwise been satisfied, it will need to think through all of the various effects of that decision in other parts of the Rule. Does an issues class have different notice requirements than a Rule 23(b)(3) class? (For example, does the class member need notice that she will be responsible for her own damages trial?) Is an issues class verdict a “judgment” under Rule 23(c)(3)? How are class attorneys to be compensated for prosecuting an issues class? Can one settle a Rule 23(c)(4) class without running afoul of the Court’s directions in Amchem and Ortiz?

Deciding the proper scope of of an issues class–like defining the proper scope of Rule 23(c)(4)–cannot be done effectively in a vacuum. Which is, of course, is what the structuralists have been arguing all along.

Rule 23 Study Agenda – Merits Inquiry

Posted in Certification

The Advisory Committee has signaled that the merits inquiry is a “back burner” issue for the next Rule 23 amendments.  Perhaps they should nudge it towards the front. 

 The role of the merits inquiry at certification is of vital interest to litigators, but less so to policymakers.  The Rules 23 Subcommittee, in the report from its October meeting, pointed out that, as far as it was concerned, the role of the merits inquiry did not rate a place on the “front burner.”

It’s clear why it came up, however.  Plaintiffs (and their advocates in academia) do not like the current state of the merits inquiry.  For a long time, plaintiffs (and courts that favored certification) relied on a misreading of the Supreme Court’s Eisen v. Carlisle & Jacqueline to blockade against either (1) inconvenient facts or (2) costly, time-consuming dives into certification-related issues.  Since the Supreme Court clarified the standard for merits inquiries in Wal-Mart Stores, Inc. v. Dukes, however, courts have engaged in increasingly closer scrutiny of the merits of plaintiffs’ claims as they try to discern how those claims will be tried.

It’s difficult to make a credible argument that courts should engage in less scrutiny during certification.  To do so would be to concede as truth one of several suspicions critics have of class actions.  Specifically, (1) that due process is simply not that important in class actions, or (2) that the class action really exists solely to leverage large settlements from corporate defendants.

It’s also difficult to envision a rules change that would make any difference in what the standard is.  As the Subcommittee puts it:

These developments place considerable stress on the prior notion that there is a useful dividing line between “class discovery” and “merits discovery.” They also may call for greater scrutiny of expert opinion evidence that is designed to show that all class members have been affected similarly by a common course of defendant conduct. Even a full-fledged Daubert evaluation of that proposed testimony may be necessary at the class-certification stage. At least in some circuits, it is said that when the party seeking certification and the party opposing it offer expert evidence, the court may have to choose between the contending expert views.

In terms of cost and effort, then, this relatively-recent development is clearly important.  And it appears to relate somewhat to rule changes that occurred in 2003.  But it is not clear what rule change would be appropriate to react to these developments, or that rule changes played a large role in bringing about the courts’ evolving attitude toward merits scrutiny in connection with certification.  And there is an argument that, even without something like a probability of success inquiry, there is a value to stricter scrutiny of the merits before cases are certified.

(Emphasis added.)  You won’t hear this blog argue against the value of stricter scrutiny of the merits of class actions, in no small part because so many of them fall apart once courts engage in rigorous inquiries.

But even if the Subcommittee is refraining change to the language of the Rule, and even if (by all indications) it is refraining for the right reasons, holding the debate is a good idea.  For one thing, there is a non-frivolous argument to be made that adding language about “rigorous analysis” that “probes beyond the pleadings” would help to cement the current understanding that appropriate merits inquiries are vital to striking the right balance at certification.  (They might, for example, cut down on the use of “no-injury” class actions by allowing the court to look at how many class members were actually injured under a given legal theory.)

Similarly, given the confusion about the appropriate level of scrutiny for certification, it’s clear some courts could use the reminder that they are not supposed to take the plaintiffs at their pleadings.

Most importantly, though, like with Rule 68, adopting language that reflects the Supreme Court’s “stringent” certification standard would actually assist the Subcommittee on its front-burner issues like appropriate class settlements.  Bad settlements occur when bad cases make it past the pleadings or past certification.  Tighten those gates, and there will be less need for vigilance at settlement.

Rule 23 Study Agenda – FRCP 68 and Mootness

Posted in Motions Practice

Courts look down on offers of judgment in class actions as a procedural trick.  Used properly, however, they are an effective early screen for cases that can’t be certified. 

One of the most heated debates in the last five years of class action practice has been the proper use of Rule 68’s offer of judgment.  Defendants like the offer of judgment because it can either moot a case early in (thus shutting down lawsuits that could cost hundreds of thousands of dollars to defeat in conventional litigation), and because the cost-shifting procedures place some of the financial risk of the case back on the plaintiff.  Plaintiffs’ counsel dislike the offer because it complicates the already-difficult task of finding an adequate named plaintiff, and because it shifts some of the financial risk back on them.

Many courts tend to view the offer of judgment as a cheap procedural trick.  Indeed, since the last time I surveyed the field, the Fifth and Eleventh Circuits have both held that offers of judgment do not moot class actions.

As a result, the Rule 23 Subcommittee for the Advisory Committee on Federal Rules has added the offer of judgment to its agenda.  (Judge Dow told the LCJ it’s because “the Damasco problem has spread.”)  As the Subcommittee describes the issue in its report of its October Meeting:

Rule 68 seems on its face to be about something quite different — it is not specifically designed to provide a vehicle to make cases moot, but instead to change the otherwise-applicable rule on cost shifting if an offer is not accepted and the plaintiff wins but does not do better at trial.  A Rule 68 offer may provide stronger support for a mootness argument, however, because a judgment is what plaintiffs seek, and a judgment (on specified terms) is what Rule 68 calls for the defendant to offer.  And the rule also contains specifics on entry of judgment if the offer is accepted that may provide further support for mootness arguments.

So one approach to this problem might be to amend Rule 68 to say that it may not be used in actions brought under Rule 23.

(Emphasis added.)  This proposal is misguided.  The Rule 23 subcommittee itself concedes several reasons it might not work.  First, the Subcommittee points out,  the defendant could still make a non-Rule 68 offer that resulted in the same argument over whether the case was moot.

Second, doctrinally, the majority view in appellate courts runs counter to the Supreme Court’s recent holdings that stress that a class action is an individual lawsuit until it is certified.  The Rule 23 subcommittee has recognized this reality as well:

 Restoring the pre-2003 requirement for court approval of dismissal might also restore the pre-2003 notion that a proposed class action was to be treated as such until the court rejected class certification.  Courts holding that a Rule 68 offer can moot a class action often say also that plaintiffs can prevent that from happening by moving promptly for class certification. Given the need for fuller presentations to support certification, however, that may be difficult.  And if Rule 23 now means that a case is not a class action until a court certifies a class, it is not clear why filing a motion to certify is critical for mootness purposes.

A third problem with this proposal that the Subcommittee does not address is that some defendants use the offer of judgment for its cost-shifting provision.  There is no compelling policy reason to remove this tool in class actions, but not other cases where the plaintiff may wildly overestimate her chances of success.

But it is worth asking what the real problem is with the offer of judgment.  Because, viewed from the perspective of making sure good class actions get brought while bad ones do not, the offer of judgment looks like an essential tool.

The logic runs like this: a “good” class action is not necessarily one that will win on the merits of the claim, but one where victory or defeat for the named plaintiff will properly apply to the entire class.  In other words, good class actions result from issues that actually affect large numbers of people in identical ways.

Under these circumstances, a strong class action will be derailed by losing a single named plaintiff, because plaintiffs’ counsel will either (1) have recruited more than named plaintiff to bring the case, or (2) it will be easy to identify others who have suffered the same wrong.

Moreover, the defendant will recognize this is the case.  In my experience, defendants don’t entertain offers of judgment in cases that have a good chance at certification, because they are well aware what they will face instead is a Chinese water torture of similar filings.  In those cases, offers of judgment simply embolden further filings.  Better to either beat the case completely on a dispositive motion, or settle it on favorable terms.

In addition, the cost-shifting mechanism offered by Rule 68 is an excellent deterrent to “bad” class actions, and often serves to focus discovery on essential issues.  (Plaintiffs tend to be more careful about burdensome discovery requests when they believe there is a danger they might actually have to pay their costs.)

Ultimately, there are two larger philosophical debates that underlie the controversy over the offer of judgment in class actions, both of which counsel for its continued application to Rule 23.  One, as the Subcommittee has recognized, is whether the class action is an individual case before certification, or some special litigation entity.  (As discussed above, that debate has largely been resolved by the Supreme Court.)

But the other philosophical debate that informs this issue is over who the law recognizes as controlling the class action.  If it’s the named plaintiff (as the current legal fiction holds), then it should be acceptable to moot a class action by making an offer to that plaintiff.  If the plaintiff had identified an actual classwide issue, then someone else will file the same case.  If—as many courts acknowledge in passing—counsel is really in charge, then allowing cost-limiting is essential.  Among other benefits, it offers an elegant solution to the agency problem academics worry about so much.  It forces counsel to think through the merits of their case at an early stage.  (If the case has a strong chance of certification, the risk of paying exorbitant costs is low.)  Fight this logic, and you are conceding that even bad class actions have blackmail potential because the threat of litigation cost will drive settlement of claims when the merits don’t warrant it.

Rule 23 Study Agenda – Notice Issues

Posted in Certification

Provisions to make notice of class certification cheaper and more effective are welcome, but they should also focus on making it more accessible once it arrives.

The Rule 23 Advisory Subcommittee is also looking at revising the provisions for class action notice.  From the report on its October meeting:

 In Eisen, the Supreme Court ruled in 1974 that only first- class mail notice of class certification in 23(b)(3) cases satisfies the rule. It seemed to have due process concerns in mind as well as interpreting Rule 23. It is clear that many regarded this ruling as unfortunate at or near the time it was made.

It is now clear that methods of notice not imagined in 1974 exist and might significantly facilitate the giving of effective, rapid, and much cheaper notice of class certification in 23(b)(3) actions.  Similarly, notice of certification of Rule 23(b)(1) and (b)(2) class actions might much easier than previously.  In 2001-02, a proposed amendment to require some sort of notice in (b)(1) and (b)(2) cases was vigorously opposed on the ground that the cost would drive away lawyers who might otherwise be willing to take such cases.  Perhaps that has also changed.

Attention has therefore returned to the notice topic. Committee members might share their experiences with use of notice by means other than by first-class mail for class actions (perhaps in state court or with regard to settlement approval in federal court), and more general views on the attractiveness of softening the Eisen command.

(Emphasis added.)

Improving the notice provisions to take account of technology that will make notice cheaper and more precise is a no-brainer.  Courts have for some time accepted web publication as a complement to direct-mailed notice, or in settlement cases, which are bound by different requirements. And emailed notice may also be feasible in many cases, although the Committee would be well-advised to make sure the notice doesn’t simply end up in the recipient’s spam folder.

Making sure the notice doesn’t end up in the Trash folder may be more difficult, however.  One of the largest problems with class action notices (whether mailed, emailed, or published somewhere) is that it’s obvious they were written by lawyers: they use small type, opaque language, and take forever to get to the information the absent class member would actually want.  These difficulties in part exist because the rules already in place regulating class notice are rarely enforced.

The central problem here may actually be a philosophical one rather than a logistical one.  Notice of a class action is generally agreed to be a necessity for due process.  But, because it can be so costly and time-consuming, courts often treat it (much as they do the adequacy requirement) as an obstacle to be overcome rather than a requirement to be met.  The lax enforcement of the rules regarding notice is evidence of a disturbing tendency to relax the requirements for a class action in order to allow more of them to exist.

As the Supreme Court has recently reminded us, there is no right to bring a class action, and the requirements imposed by Rule 23 are supposed to be difficult to meet.  That doesn’t mean that they should be needlessly costly (by, say, imposing a direct-mail requirement when most of the world uses email).  But it does mean that we should not sacrifice due process for convenience.

Brief Travel Interlude

Posted in Admin

My apologies for this abbreviated entry.  I’ve been traveling with family for the past week, and two small, jet-lagged children are not conducive to getting blog entries finished.  (When the laptop is open right now, it’s usually playing Doc McStuffins.)

But, in keeping with the focus on big ideas and trends that has started the new year on this blog, I’d like to let you know about a webinar the WLF is offering on Thursday, presented by two of my old colleagues, John Beisner and Jessica Miller.  (We all worked together at O’Melveny & Myers before I left for McGuireWoods and they left for Skadden.)  When these two talk about big trends in class actions, it is well worth a listen.  So go, listen, and report back next week for more on the Rules Committee’s Study Agenda.

Rule 23 Study Agenda – Objectors

Posted in Uncategorized

Oft-maligned objectors serve a valuable function in class actions.  Rather than trying to rein them in; the Advisory Committee should work on reducing the need for them. 

No one likes objectors.  Plaintiffs don’t like them because they stand in the way of getting paid.  Defendants don’t like them because they add expense and delay to an already expensive and drawn-out process.  Most judges don’t like them for the same reasons, going so far as to call them “remoras.”

Most judges, but not all.  Judge Posner has recognized the value objectors can offer. As he put it in his opinion last year in Eubank v. Pella:

American judges are accustomed to presiding over adversary proceedings. They expect the clash of the adversaries to generate the information that the judge needs to decide the case. And so when a judge is being urged by both adversaries to approve the class-action settlement that they’ve negotiated, he’s at a disadvantage in evaluating the fairness of the settlement to the class.

Enter the objectors. Members of the class who smell a rat can object to approval of the settlement. If their objections persuade the judge to disapprove it, and as a consequence a settlement more favorable to the class is negotiated and approved, the objectors will receive a cash award that can be substantial[.]”

(Emphasis added, internal citations omitted.)

The Rules Advisory Committee recognizes that regulating objectors can pose a difficult balancing act.  From its October 2014 Report:

The 2003 amendments specifically recognized in Rule 23(e)(5), as the courts had previously, that members of the class may object to a proposed settlement.  The Supreme Court held in 2002 that objecting class members could appeal the rejection of their objections.  At the time the 2003 amendments were developed, there was much discussion of the tension between ensuring that “good” objectors had an adequate opportunity to contest the attractiveness of the settlement and preventing “bad” objectors [from] using the objection process as a way to extract tribute from the settling parties, whose deal might be put on hold for years by objections in the district court, followed by an appeal.  In 2003, the rule was amended to direct that objections, once made, could be withdrawn only with the permission of the court.  The goal was to prevent hold-up behavior by objectors who would offer to drop their objections for a payment to them.  But that approval requirement may not have solved the problem, as it seems not to apply to a settlement reached only after the objector has filed a notice of appeal. The Appellate Rules Committee has received a proposal to build some sort of approval process into appellate practice to deal with this concern, but the logistics of such a response present some difficult questions.

(Emphases added.)

It will be interesting to see what proposal the Committee received.  Assuming that it is not simply a codification of the tactic of demanding large appeal bonds when an objector appeals, it could provide an intriguing new way to resolve the tension between “good” and “bad” objectors.

The difficulty is, of course, that from a lawyer’s standpoint, a “bad” objector is one who is opposing your settlement.  Ultimately, the presence of professional objectors is more a symptom of a settlement regime with serious flaws than it is one of the flaws themselves.  After all, remoras only show up where there is adequate food.

As a result, the best way to prevent costly, time-consuming objections is to encourage better settlements.  Reform the other parts of Rule 23(e), and you can cut down on objections of all types, “good” or “bad.”

This is, by the way, an area in which I recognize that I am speaking against some clients’ short-term interests.  Making it more difficult for objectors to do their jobs would make it easier to settle bad cases quickly and inexpensively.  But, as both an officer of the court and as someone who tries to keep my clients’ long-term interests in mind [http://www.classactioncountermeasures.com/2010/05/articles/strategy-1/grand-strategy-and-class-actions/], I’d rather see fewer bad cases leading to bad settlements than fewer legitimate objections.  That goal is harder to reach, but it makes for a better outcome for my clients, and for absent class members.

[Disclosure: I have on occasion worked pro bono for the Center for Class Action Fairness, a non-profit that objects to problematic class settlements.)

The Rules Advisory Committee Study Agenda – Cy Pres

Posted in Certification

Cy pres is an occasionally useful tool.  But limiting or eliminating it would clarify the underlying principles of the class action.   

In the last five years, the use of cy pres relief in settlements has become particularly controversial.  Various appellate courts have expressed suspicion about the use of cy pres in questionable settlements.  Even Justice Roberts has signaled that, given the right vehicle, he would like the Supreme Court to review the fairness of cy pres distributions.  Much of the controversy stems from two issues: (1) the potential for abuse of cy pres relief to inflate the value of bad settlements, and (2) the underlying philosophical justifications for allowing cy pres distributions.

Despite the growing controversy, the Rules Advisory Committee is considering formalizing the use of cy pres in Rule 23.  In its October 2014 report, the Rule 23 Subcommittee wrote that

The cy pres phenomenon is a matter of settlement, particularly in cases with small individual harms. There is no specific provision of Rule 23 that bears on this possibility. Some states do have specific provisions as a matter of state law. But the absence of a rule provision has not prevented use of this technique on occasion. And at least sometimes this sort of activity attracts criticism. For an example, see Chief Justice Roberts’ opinion regarding denial of cert. in Marek v. Lane, observing that “in an appropriate case, this Court may need to clarify the limits on the use of such remedies.” Maybe a rule change would be a way to do so as well. The ALI Aggregate Litigation provision on cy pres treatment has received considerable support in the cases and might provide a model.

(Emphasis added, internal citations omitted.)

The ALI’s take on cy pres—that it should be used only when there is unclaimed money in an escrow fund and further distributions to actual class members are not feasible—is largely considered a compromise position, albeit a fairly principled one.  (What is the defense-oriented critique?  Well, if the case had any merit and the settlement was negotiated based on merit rather than the “hydraulic pressure” of litigation costs and massive exposure, then why are there leftover funds?)

Many individual defendants can take or leave cy pres relief.  It can occasionally serve as a useful tool to close the gap between the cash a defendant is willing to spend for peace and the relief required to justify plaintiffs’ counsel’s fees.  (Since cy pres relief goes to third parties, it may tick different accounting boxes for some defendants than a cash payout.)  And there is nothing forcing a defendant to use a cy pres distribution in a class settlement.

If that’s the case, why would defendants bother opposing any attempt to enshrine cy pres relief in Rule 23?  There’s no question that some defendants (or defense counsel) may oppose cy pres because they need a third party to save them from themselves.  Much as someone watching his weight might understand that cutting sugar is good while still succumbing to the candy bar in front of him, it is possible to understand that overuse of cy pres will encourage more questionable settlements while still using it for temporary advantage in a current settlement.  For defense counsel in particular, watching client after client give in to this temptation against advice might motivate some strong advocacy against enshrining cy pres in Rule 23.  (I wouldn’t know; most of my clients don’t employ it.)

But the real stake here is the underlying theory of the class action.  There’s been a long debate over whether a class action is a “deterrent” “Private AG” action or an aggregation device to effect compensation for those who have been wronged.  Cy pres relief is perfectly consistent with conception of the class action as deterrent, and—as even its supporters admit—not at all consistent with any compensation theory.

And that raises some troubling questions.  Because if the class action is actually a deterrent device, then it likely violates the Rules Enabling Act, because it creates a new substantive law regime.  (After all, cy pres relief is not available to individual tort or contract claimants.)

One could argue that, since cy pres relief usually comes up at settlement, the parties are free to put in whatever provisions they want.  But enshrining cy pres relief in Rule 23(e) would go beyond simply allowing parties a greater freedom of terms.  It would actively be choosing between the deterrence and compensation models for the class action.

So the debate over cy pres relief really comes down to a debate over the legitimacy of the class action itself.  And it is likely to be a heated one.  After all, cy pres relief has become an integral part of many plaintiffs’ business model.  Despite the likely heat, the Advisory Committee would be on sounder footing were it to explicitly limit (or even disclaim) the use of cy pres relief.  Doing so would be consistent with the traditional rationale for the class action, and would avoid messy constitutional questions.


The Ten Most Significant Class Action Cases of 2014

Posted in Certification, Settlement

Year-end lists are funny things.  They take a sort-of arbitrary starting and stopping point, and then they cram a bunch of prejudices into a (usually) arbitrary number of items.  And then people take them kind of seriously.  But they can be handy ways of catching trends one did not see before.  And in a year that has seen the beginning of a new debate over the shape of Rule 23, looking at the trends in caselaw can be important.  This year’s cases include some pro-plaintiff and some pro-defendant, and some hard to quantify.  But most of them are notable because they highlight one (or more) of the key debates facing class action practice in the middle of the ‘Teens.  So, without further ado, and in order only of jurisdiction:

  • Halliburton Co. v. Erica P. John Fund (“Halliburton II”) (S. Ct.).  In its second review of the Halliburton case, the Supreme Court upheld the “fraud on the market” presumption of Basic, Inc. v. Levinson.  But it also contained important explication of how the Supreme Court would treat a merits inquiry at the class certification stage.
  • Dart Cherokee Basin Op Co LLC v Owens (S. Ct.). The Supreme Court held that a defendant is not required to submit evidence in favor of a removal petition; a short and plain statement is enough.  (The defendant may need to submit evidence in response to a motion to remand, but it cannot be faulted for not doing so at the outset.)  The Court also reaffirmed that there is no presumption against CAFA removals.
  • EQT Prod. Co. v. Adair (4th Cir.)With this opinion Fourth Circuit became the second Circuit Court of Appeals to clarify the ascertainability standard, joining the Third Circuit.  This is another topic on the Advisory Committee’s agenda, and the spread of a clearer, practical standard is likely to influence those discussions.  [Disclsoure – McGuireWoods worked on this case, although it did not represent either of the two titular parties.]
  • Mabary v. Home Town Bank, N.A. (5th Cir.); Stein v Buccaneers LP (11th Cir.).  Rule 68 offers of judgment have become one of the most controversial tools in the federal rules—at least as they are applied to class actions.  This year, the Fifth and Eleventh Circuits decided to weigh in on whether an offer of judgment can moot a class action, and both said “no.”  This leaves most of the appellate circuits holding against the practice (the Seventh Circuit remains a holdout).  Neither case addressed the use of a Rule 68 offer as a cost-limiting device.  Did I mention that (1) this is on the Advisory Committee’s Study Agenda, and (2) the Supreme Court has hinted the tactic might pass muster?
  • Eubank v. Pella Corp(7th Cir.).  Judge Posner has two settlement opinions in this year’s list.  In this first one, he reverses a settlement full of red flags, including close personal relationships between class counsel and some named plaintiffs, wholesale substation of named plaintiffs who objected to the settlement, and counsel whose contemporaneous ethics problems disqualified them from representing the proposed class.
  • Pearson v. NBTY, Inc. (7th Cir.).  Judge Posner’s second reversal of a class settlement zeroes in on several of the issues that will preoccupy the Rules Advisory Committee, including the proper role of objectors (he thinks they serve a valuable function in aiding the courts’ oversight of settlements), and the appropriate use of cy pres relief.  (Like many other judges, he would restrict it.)  Given the upcoming debates, this is likely to be an influential opinion.
  • Berger v. Home Depot USA, Inc., (9th Cir.).  The Ninth Circuit made a technical point, but an important one for plaintiffs seeking to appeal an adverse ruling in a class action.  Rather than take their chances on the very discretionary Rule 23(f) interlocutory appeal, a class plaintiff can stipulate to dismissal, and then appeal the adverse ruling; the stipulated dismissal is still “adverse” enough to justify the decision.  I’d expect to see quite a few of these going forward.
  • The Whirlpool trial verdict.  The Whirlpool washing machine cases have been closely watched since the Sixth and Seventh Circuits first affirmed certification of classes where the vast majority of class members had suffered no concrete harm.  The subsequent re-affirmation in light of Behrend made these cases even more important.  The trial verdict from the first classwide trial (in Ohio) vindicated Whirlpool, but also showed the dangers (to both sides) of certifying “no injury” classes.  While the victory has made the rhetorical debate over no-injury cases more interesting (plaintiffs claim it shows that the system works; defendants worry about the effects on absent class members who might have actual injuries), the fact of the verdict itself is likely to have serious impact on how plaintiffs and defendants alike try these cases going forward.
  • The Adequacy Trilogy.  Three district court cases took the Supreme Court’s direction to require affirmative evidence that Rule 23(a) has been met seriously, and decided to require affirmative evidence of adequacy: Diaz v. Res. Credits Sols., Inc., 297 F.R.D. 42, 52 (E.D.N.Y. 2014) (denying certification where “Plaintiff has not satisfied her burden of demonstrating she is an adequate representative of the putative class” because “the Court has been provided with no evidence concerning the Plaintiff’s basic knowledge of this lawsuit or whether she is able to make intelligent decisions based on advice from her counsel”); In re Kosmos Energy Ltd. Secs. Litig., 2014 U.S. Dist. LEXIS 36365, *38 (N.D. Tex. Mar. 19, 2014) (“plaintiffs seeking certification must produce actual, credible evidence that the proposed class representatives are informed, able individuals, who are themselves—not the lawyers—actually directing the litigation”); and Labou v. Cellco Partnership, 2014 U.S. Dist. LEXIS 26974 (E.D. Cal. Mar. 3, 2014) (“Plaintiff’s contention that she is an adequate representative simply because she pled she is an adequate representative falls short of that burden.”).  The end result added some life back into a long under-enforced requirement.


The Rules Advisory Committee Study Agenda – Rule 23(e)

Posted in Settlement

Amending Rule 23 would add clarity to the settlement process and teeth to the protection of absent class members.  But to solve the real class settlement process, the Advisory Committee will have to look at why so many weak claims advance so far into litigation.

For the next few months, excepting my usual year-end posts, I am going to be taking a longer look at the various items on the Advisory Committee’s Study Agenda. And, in contrast to my usual stance in this blog, which tends to be “comment on the strategies, not the wisdom of the case,” I am going to editorialize.  (Why?  Because Rule 23 has not been amended yet, and if it is, I’d like it to be in a way that makes class action litigation better and more effective when it’s appropriate.)

The first item on the Study Agenda is possible amendment of Rule 23(e).  (I’ll take longer looks specifically at cy pres and objectors, both of which have been singled out for review.)

Rule 23(e) governs the settlement of class actions.  And, to be sure, Rule 23(e) generally could use some clarity.  As a standard for settlement approval, “fair, reasonable, & adequate” is nice but vague, kind of like Bill Pullman.  So courts have stepped in to fill the doctrinal gaps left by the standard, leaving us with an extensive and conflicting common law littered with disparate, redundant, complicated multi-factor tests.  As the ALI put it in its Principles of the Law of Aggregate Litigation:

The current case law on the critera for evaluating settlements is in disarray. Courts articulate a wide range of factors to consider, but rarely discuss the significance to be given to each factor, let alone why a given factor is probative.

(Emphasis added.)  (The First Circuit has made the same criticism.

So, for example, the Second Circuit requires a court to consider:

(1) the complexity, expense and likely duration of the litigation;
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings and the amount of discovery completed;
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining the class action through the trial;
(7) the ability of the defendants to withstand a greater judgment;
(8) the range of reasonableness of the settlement fund in light of the best possible recovery;
(9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.

(Internal citations omitted; line breaks added.)  The Ninth Circuit‘s standard is subtly different, requiring consideration of

among others, some or all of the following:
the strength of plaintiffs’ case;
the risk, expense, complexity, and likely duration of further litigation;
the risk of maintaining class action status throughout the trial;
the amount offered in settlement;
the extent of discovery completed, and the stage of the proceedings;
the experience and views of counsel;
the presence of a governmental participant; and
the reaction of the class members to the proposed settlement.

(Line breaks added.)  (And, to digress, one must ask why the “views of counsel” are relevant.  Is class counsel really going to admit they disagree with some settlement terms?)

In addition, there are a number of practices that have evolved in class action settlements that are not addressed by Rule 23(e), including the use of incentive awards for class representatives and the use of cy pres relief.

But while Rule 23(e) could benefit from some clarity, the real issue at stake here has very little to do with settlement approval.  The underlying issue is the skewed incentives that lead to poor settlements.

What do I mean by a poor settlement?  Let’s look at some of the more prominent settlement reversals in the last few years:

  • Mirfasihi v. Fleet Mortgage reversed a FCRA class action settlement that contained a large cy pres component.  Before its final disposition, the settlement bounced up and down to the Seventh Circuit a remarkable three times.  As Judge Posner wrote, the real problem was that neither side had an incentive to concede the “utter worthlessness of the claim.”
  • Klier v. Elf Atochem, Inc. reversed a toxic-spill class action in which an $830,000 claims surplus was donated to charity rather than distributed to class members.
  • Feder v. Frank reversed a settlement with a large coupon component.  The plaintiffs had alleged problems with their printer toner, but the trial court had called their evidence of liability and causation “weak.”
  • Dewey v. Volkswagen Aktiengesellschaft reversed a settlement involving leaky sunroofs.  The named plaintiffs had divided the class up into those who were entitled to monetary relief (which included them) and those who were not.  (The distinction had to do with the claims rates for various Volkswagen models.)  The Third Circuit found this to be an irreconcilable conflict of interest.

Similarly, there have been a number of case in which courts have rejected preliminary approval of settlements because of their obvious deficiencies.  To name just a few:

  • In Tijero v. Aaron Bros. Inc., the Northern District of California rejected a wage-and-hours settlement in which the class members received only minimal relief in exchange for an overly broad release.
  • In Better v. YRC Worldwide, the District of Kansas refused preliminary approval to a securities settlement that released claims for no compensation, and offered no information about the distribution of a substantial cy pres payment.
  • In Figueroa v. Sharper Image, the Southern District of Florida refused to approve a consumer-fraud settlement that included a large coupon component, and injunctive relief of questionable value to the class.

In each of these cases, the primary problem was the gap between what the defendant thought the claims were worth, and what the plaintiffs’ counsel would accept in fees to go away.  Bad settlements spring from weak cases.  In weak cases, defendants don’t value the case at much, but plaintiffs’ counsel want (or need) a certain amount of fees.  So we wind up with little actual benefit to class members.  (We can assume both sides are working in good faith.  If the plaintiffs just screw up at the beginning, then they will have sunk costs into a loser, and the defendant won’t want to pay.  Or in some cases, like Figueroa, the defendant may not be able to afford more.)

Rule 23(e) is valuable, and it serves as an important check on class action settlements that do not benefit absent class members.  If there should be one guiding principle for Rule 23(e), it should be to watch out for the interests of the absent class members.  (Can I say this as a defense lawyer?  Yes.  Defendants and absent class members often have oddly converging interests.)

But Rule 23(e) is only addressing a symptom (questionable settlements), not the cause of the problem.  And the cause of the problem is that gap in valuation of class claims.  The fact is that the vast majority of bad class action settlements come from cases that should not have been brought in the first place.  Cases where it is clear from the time of the complaint that large numbers of class members have not been harmed (like in Mirfasihi or Dewey) or cannot be found (like in Klier) or where evidence of causation will be weak (like in Feder) are not cases that should survive preliminary scrutiny.  Once they do, the threat of (1) exorbitant discovery costs and (2) even a slim chance of a bet-the-company loss will usually compel some cost-of-litigation settlement.  When that is not enough to justify fees that would allow plaintiffs to break even, we see the kinds of “innovations” that eventually get reversed.

Politically, effective reform here will be extremely difficult.  Defendants are agnostic overall about bad settlements.  (The option is nice in individual cases, but conscientious defense counsel will advise their clients that cheap settlements often cost more in the long run.)  Objectors lack the political power to influence much reform.  Judges have a compelling (and admirable) interest in clearing their dockets that lead them to favor settlements of class actions where possible.  And any real reform directly threatens plaintiffs’ business model.  But bad settlements start with bad cases.  And no matter how unpleasant it may be in the short term, reducing the number of bad cases brought benefits everyone.