Defendants walk a thin tightrope over a deep chasm when they have to litigate and settle a class action. On the one hand, litigating a class action vigorously requires the defendant to argue that a class is not certifiable. On the other, to settle a case on a classwide basis, the parties have to convince the court to certify a class.
At the best of times, a defendant may have to explain in one class action why it did not oppose certifying a settlement class in a similar lawsuit. But the danger of this tightrope is even clearer when a settlement falls through. Then, defendants face the possibility that most of their arguments against certification of a litigation class will be foreclosed.
For a stark example of this dilemma, look no further than Carnegie v. Household Int’l, Inc., 376 F.3d 656 (7th Cir. 2004). In Carnegie, the defendants were a bank and a tax preparer who jointly offered tax-refund anticipation loans. The plaintiffs alleged that the tax preparers never disclosed that they received a fee for offering the loan as well as an ownership interest in the loan, both evidence of self-dealing by a supposed fiduciary.
The parties settled, and the trial court approved the settlement, but the Seventh Circuit (Posner, J.) reversed, because it was worried about collusion between the plaintiff and defendant. On remand, the trial court refused to approve a settlement, asked the defendants for any objections to certification, and proceeded to certify a class over their objections. When the defendants appealed the certification, the Seventh Circuit held that – because
In the previous round of this protracted litigation the defendants had urged the district court to accept the giant class as appropriate for a global settlement, had prevailed in their urging, and so are now precluded by the doctrine of judicial estoppel from challenging its adequacy …
The consequences are less severe if the settlement merely falls apart at the trial court level. Instead of judicial estoppel, the defendant only has to explain to the court why it’s reversing itself on the arguments it made in favor of certification.
So what can defendants do to minimize these risks? Most important, they should think carefully about the implications of a class settlement before arguing for certification. Proposing a classwide settlement with an inadequate representative, or where common issues do not predominate, may pose long-term problems. If a settlement still appears to be the best bet, then the defendant should highlight the potential unmanageability of a class trial, even when briefing the fairness of the settlement. Should the settlement fall through, that will be the defendant’s best argument against certifying a class, and highlighting manageability problems may actually aid the settlement because it shows the court there may not be another means of getting the entire class the relief it seeks.