[Note: Many thanks to the folks at the WLF Legal Pulse for asking me to write this entry. It’s cross-posted there.]

Given the stakes of class actions, which transform small-dollar claims into bet-the-company litigation, settlements are hardly unusual. And given the minuscule recoveries most class members receive compared to their lawyers’ multi-million paydays, neither are objections to those settlements. What is unusual is for a court to reject a settlement because of these objections. And what’s even more unusual is for the court to put a small doctrinal booby trap into its rejection. But last week, the Second Circuit did just that.

The class action in question, In re Literary Works in Electronic Databases Copyright Litigation, involved a copyright challenge. The plaintiffs were freelance authors; the defendants were large publishers with electronic databases. The plaintiffs accused the defendants of "publishing" their articles in various electronic databases (like LEXIS/NEXIS) without their permission and without paying them. Back in 2001, the Supreme Court endorsed their theory in a parallel case, N.Y. Times Co. v. Tasini.

In the years since, the plaintiffs’ claims were consolidated before the Southern District of New York, and underwent extensive mediation in front of mediation guru Kenneth Feinberg. By 2005, the parties had reached a classwide settlement that the district court approved. The settlement compensated three different categories of class members:

  • Category A included works registered with the US Copyright Office in time to be eligible for statutory damages under the Copyright Act.
  • Category B included works registered with the Copyright Office by 2002, but not in time to qualify for statutory damages.
  • Category C–which comprised more than 99% of the claims–included later- and unregistered works.

Many authors held claims that fell into more than one category. As structured, the settlement would pay (on average) around $1,000 for each Category A claim, $150 for each Category B claim, and $60 for each Category C claim. The settlement was capped at $18 million. If the freelancers submitted more than $18 million in claims, a provision known as the "C reduction" kicked in. The "C reduction" did just what it said on the label; it reduced the payments to Category C claimants until the $18 million cap was reached. If it exhausted the C claims, it reduced A and B claims on a pro rata basis.

The settlement drew a number of objections, primarily from authors in Category C. By the time they appealed the order approving settlement, the objectors had identified three major problems: (1) the release was too broad (it released all future claims, which gave the publishers a free pass to republish any articles they had already wrongfully published); (2) the class representatives had sold out the Category C claimants with the "C reduction"; and (3) the settlement process had been unfair.

The majority (the panel split, 2-1) was unconcerned about the breadth of the release. In fact, it specifically noted that in most classwide settlements, if one did not release all future claims, the defendant had no real incentive to settle. It also found the process challenge to be moot.

But the majority was concerned with the adequacy of the class representatives under Rule 23(a)(4). One key measurement of adequacy is whether there are any conflicts of interest in the class. Here, the majority found that the "C reduction" showed that "[t]he selling out of one category of claim for another is not improbable …" And it saw only one solution:

Only the creation of subclasses, and the advocacy of an attorney representing each subclass, can ensure that the interests of that particular subgroup are in fact adequately represented.

That’s right. Each subclass would require its own independent attorney.

The rationale is simple: how can the value of any subgroup of claims be properly assessed without independent counsel pressing its most compelling case?

(Emphasis added.) But while the rationale may be simple, the execution is likely to be anything but. Class-action lawyers are a notoriously competitive lot. Many of them find it extremely difficult to work with each other, in part because they find it hard to trust each other. So finding a separate lawyer (presumably from a separate firm) for each subclass who will "press its most compelling case" will be extraordinarily difficult for them. This is good news for defendants, who often watch class actions rife with conflicts of interest get certified. Of course, class-action lawyers are also notably inventive; it will be interesting to see what they come up with to get around this requirement.