When a defendant is faced with a class action complaint, sometimes the best strategy appears to be to settle quickly, before having to engage in costly litigation or burdensome discovery. But, as readers of this blog know, that strategy is not always as straightforward as it first seems. In today’s case, we have another example, where what first appeared to be a quick-and-painless settlement wound up taking eight years and visiting the Seventh Circuit Court of Appeals three times.
In 2000, a group of class-action plaintiffs sued Fleet Mortgage claiming that it had sold their personal information to telemarketers, in violation of the Fair Credit Reporting Act (FCRA) and various state consumer-fraud acts. Mirfasihi originally brought suit on behalf of two classes, one of people whose information was shared, and one of people who actually bought something from the telemarketers.
Fleet Mortgage negotiated a settlement of the entire case, which the trial court approved. But, based on the appeal of some objectors, the Seventh Circuit reversed, because the settlement had released the claims of the "information sharing" class without giving them anything in return. After the case was remanded, the parties negotiated a second settlement, with a heavy cy pres component. (The court found cy pres appropriate because the information sharing class’s claims were not worth much, if at all.) This settlement drew objections as well, and the Seventh Circuit again reversed and remanded, this time because the lower court had not "made an adequate effort to value the claims of the information-sharing class." On this second remand, the trial court found–after an extensive survey of the various state consumer-protection laws at issue–that the information-sharing claims had no value at all. The objectors appealed again, arguing that the information-sharing claims might be worth as much as a billion dollars, and that their lawyers deserved far more than the $18,750 fee they had received.
This time, the Seventh Circuit pulled no punches. Writing for the panel, Judge Posner first affirmed that the claims of the information-sharing class were worthless. Then, he proceeded to explain the primary dilemma that meritless class actions pose to all parties:
"We are disheartened that the litigation by the information-sharing class has been allowed to drag on for eight years, when it had no merit—and that as a matter of law, without need to take evidence. It is an example of the typical pathology of class action litigation, which is riven with conflicts of interest, as we discussed recently in Thorogood v. Sears, Roebuck & Co., supra, 547 F.3d at 744-46. The lawyers for the class could not concede the utter worthlessness of their claim because they wanted an award of attorneys’ fees. The lawyers for Fleet were reluctant to argue the utter worthlessness of the claim because they were able to negotiate a settlement that cost their client virtually nothing—provided they did not take such a strong stand that it jeopardized the class lawyers’ shot at a generous award of attorneys’ fees, and hence the settlement. And the objectors were motivated to exaggerate the value of the claim of the information-sharing class so that they could get a generous award of attorneys’ fees. At the very outset of the case, before certifying the class, the district court should have required the parties to present the belatedly presented survey of the consumer protection laws of the 50 states, plus argument concerning the scope of the Fair Credit Reporting Act, to demonstrate the existence of a colorable claim."
Class-action defense lawyers can learn several lessons from this opinion. First, early challenges to cases may be preferable to settlements, if for no other reason than they can test the merit of questionable claims. Second, certain classwide issues–like the feasibility of a nationwide class based on state law–do not have to wait until class discovery has been completed. And finally, if the plaintiffs don’t watch out for the interests of the absent class members, then the defendant may have to; not doing so may cost the defendant years and tens of thousands of dollars in appeals. As I’ve said before, sometimes, settling on the cheap can be a very expensive strategy.