Settlement opinions are often not that interesting. The vast majority of them are by-the-numbers approvals of proposed settlements that offer little insight about how Rule 23 works. This is especially true of preliminary approval opinions. But every once in a while, a court refuses even the preliminary approval of a settlement.  When that happens, class action lawyers can usually learn a few things about how not to settle a case.

Better v. YRC Worldwide Inc., No. 11-2072-KHV, 2013 U.S. Dist. LEXIS 163569 (D. Kan. Nov. 18, 2013), is such a case. It was a proposed settlement of a securities class action that was denied preliminary approval twice. Why? Because settling counsel tried several tactics the court viewed unfavorably. Among them:

Trade a release for nothing. Most settlements only work if the absent class members receive something of some value in exchange for their release of claims. In this case, one subclass of investors received nothing, but still relinquished their reight to sue.

"As noted, regarding the first category of class members, i.e. those who purchased shares between April 24, 2008 and April 22, 2009 and sold those shares before April 23, 2009, the Court found that named plaintiffs did not explain why it is appropriate for them to negotiate a settlement which requires some absent class members to surrender their claims for nothing in return. The proposed amended agreement remains the same, i.e. it requires those class members to surrender their claims for nothing in return.

(Internal citations omitted.)

Leave one of your subclasses unrepresented. How did that subclass wind up in such a poor position? It turns out that none of the named plaintiffs were members. Instead of finding named plaintiffs that could represent each subclass, counsel had put forward those named plaintiffs they had as represent in the entire class generally. The court was not impressed.

It appears that each named representative purports to serve generally as a representative for the entire settlement class, even though the interests of that representative are not the same as class members who hold claims which fall into other groups. Under these circumstances, plaintiffs have not shown that the named representatives are adequate representatives for the entire settlement class.

Offer no information about your cy pres distribution. Cy pres relief has become much more controversial over time. There are two possible responses to that problem who including cy pres relief in a settlement. One is to bulletproof the provision by including as much information as possible and complying with every reasonable restriction on the relief. The other is to keep the proposal vague and hope no one is interested in digging deeper. Unfortunately, as this case demonstrates, that tactic can backfire.

Here, the amended settlement proposes to twice distribute settlement funds to class members who timely submit claims and then distribute any remaining funds to the cy pres recipient. Without more information, the Court cannot determine whether the amount of remaining funds would be too small to make further individual distributions economically viable. See Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07(b). The parties point to no specific reasons that would make further distributions to class members impossible or unfair. See id. Also, the record contains no information as to whether the parties have any pre-existing relationship or connection with FINRA or the FINRA Foundation. Before approving the proposed cy pres clause, the Court would require such information to determine whether the parties have designated the beneficiary at arms length.

The takeaway here is simple: there’s is no such thing as a shortcut to a class settlement. If there are apparent problems with a settlement, it’s best to address them head on. Otherwise, when the court engages in its fiduciary duty to rigorously review the settlement, the parties may find themselves still litigating.