Classwide settlements are different from regular settlements in a few important ways. Most notably, they require approval from the court, which must ensure that the settlement is "fair, reasonable, and adequate." That extra step raises an important question, when does a classwide settlement bind the parties: when it’s signed, or when it’s approved? Earlier this year, the Third Circuit provided an answer in Ehrheart v. Verizon Wireless.
The case involves the Fair and Accurate Credit Transaction Act (FACTA), which required merchants to obscure credit-card information on receipts. The statute was intended to prevent identity theft, but proved controversial in class-action litigation because it allowed plaintiffs to sue for staggering damages even when the violation was technical and no consumer could have been harmed. As a result, Congress passed the Clarification Act, which removed liability for technical violations that did not result in any harm to the consumer.
In Ehrheart, the named plaintiff sued Verizon for a technical FACTA violation. Verizon began settlement negotiations, reached a final agreement, and got preliminary (but not final) approval from a federal district court in Pennsylvania. Before the final approval hearing, the Clarification Act became law. So Verizon moved to vacate the preliminary approval order (which the court granted), and then for judgment on the pleadings (which the court also granted). The plaintiffs, who had just watched what was likely a lucrative settlement vanish before their eyes, appealed.
On appeal, Verizon argued that a classwide settlement agreement is not binding until the court has issued its final approval order. (This argument makes sense; if the court does not approve the settlement, the parties have to start from scratch.) While the argument had convinced the trial court, the Third Circuit did not accept it.
In vacating its order granting preliminary approval to the settlement, the District Court lost sight of three important points that guide our decision today. First, there is a restricted, tightly focused role that Rule 23 prescribes for district courts, requiring them to act as fiduciaries for the absent class members, but that does not vest them with broad powers to intrude upon the parties’ bargain. Second, a strong public policy exists, which is particularly muscular in class action suits, favoring settlement of disputes, finality of judgments and the termination of litigation. Third, our jurisprudence holds that changes in the law after a settlement is reached do not provide ground for rescission of the settlement.
What can defendants learn from this? Keep an eye on all circumstances surrounding a case; you never know when legislative action may moot the plaintiffs’ claims. More importantly, don’t sign a settlement agreement unless you’re willing to be bound by it no matter what happens.