Center for Legal & Responsible Commerce

Fixing the Class Action Device

Preventing abuse of the Class Action so that it Continues to be a Viable Tool to deter Corporate Wrongdoing

After reading this article’s companion article “Why Class Actions Are Necessary,” one inescapable conclusion you reached was the need for judicial reform.  While this article will discuss changes judges need to make in their handling of class actions, reform by even an overwhelming majority of the judges in the U.S. will not fix the problems alone.

Part of the reason many class action settlements have little value to the class is because the class representative and class counsel have little bargaining power. Usually, if a case is appropriate for class adjudication, there will be thousands of geographically diverse, potential putative class members available and willing to serve as class representatives.1  Once a class action is filed, copy cat suits tend to be filed in other forums, enabling a defendant to shop not only for favorable forums, but for weak opposing counsel who are just looking for large attorney’s fees2 in exchange for selling the claims of class members for pennies on the dollar.  Faced with the prospect of not being able to recover even the costs advanced in researching and filing their suit, original class counsel will often accept a low amount for the class and lower than reasonable attorney’s fees. Intervention in these sham settlements by honest counsel often has no effect as many judges are eager to approve settlements and dispose of a case.3

Once defendants have found weak counsel, defendants are free to propose coupon settlements for class members with substantial damages and overly broad settlements.4  The first thing judges must accept is that coupon settlements and cy pres distributions are to be disfavored. Coupons should only be allowed upon a strong showing by both plaintiff and defendant that they are necessary in order to ensure the class receives some compensation.5 Judges need to examine not only the size of the common fund relative to the number of likely claimants, but whether the size of the common fund is adequate relative to the allegations in the complaint and their respective merit.  Judges also need to accept responsibility for protecting the class once settlement has been proposed.  It should be assumed that collusion is occurring between class counsel, class representative(s) and the defendant when a settlement is proposed that provides coupons or small discounts to the class, generous releases for the defendant, large attorney’s fees or large incentive awards, especially where no merits discovery was conducted.  Other warning signs include: the proposal of an notice and opt-out period of less than three months, lots of opt-outs, and especially the filling of objections or motions to intervene. With respect to the last warning sign, judges should be taking advantage of the analysis being provided to the court by objectors/intervenors.  Often the objectors/intervenors will include attorneys who have experience with the claims being settled against the defendant and can provide valuable analysis to the court, as to the actual value of the proposed settlement, and the merits of the claims to be released.  Courts need to remember that it is not the burden of objectors/intervenors to prove the settlement is unfair or unreasonable, but the burden of the class counsel, class representative, and defendant(s), whose interests are now aligned, to prove that the settlement is fair and reasonable.6 While we find coupons to be of questionable value, cy pres distributions are far more suspect.

Cy pres distributions require far greater scrutiny and should only be used for common fund remainders.  Absent some statutory damage cap or bankrupt defendant, it is almost impossible to conceive of a scenario where the class cannot receive a common fund large enough to justify the issuance of coupons, instead of checks.  In cases where the class members need to file a claim form, there should be no remainder.7  One of the most common reasons given for cy pres is the impossibility of identifying the purchasers who were affected by the alleged violation.  However, in the modern world of data mining, most retailers keep detailed profiles and purchasing records on most of their customers, even those who pay cash or use gift cards in conjunction with a “preferred shopper” card and can query their database to determine who the exact class members are. Assuming that a cy pres is appropriate, the court must still ensure that the cy pres recipient is somehow related to advancing the cause of the class, or preventing harms similar to those that caused this class from occurring in the future.  Too often cy pres awards are going to the favorite charities of the lawyers, and not to groups that work to prevent violations of the law similar to the violation(s) complained of by the class.8

Some of the aforementioned problems could be avoided by close scrutiny during the class certification stage of the litigation.  Some courts already hold auctions between class counsel to determine who will be appointed counsel for the class.  As required by the new FRCP 23(g), courts should not only look at the fee the attorneys are expecting to receive, but the experience of counsel, the research done prior to filing for class certification, and the resources counsel will commit to representing the class.  In looking at experience, the court should not only look at the number of class actions handled or certified in the past, but the outcome of those cases.  Class counsel would be unlikely to agree to a sham settlement if it could impact their ability to be class counsel in subsequent cases. The problem is, how does a court determine if prior class action settlements were shams, without conducting a hearing as to each class counsel candidate’s settlement record?

If courts were making the detailed findings of fairness that they should already be making before final approval of settlement, this would not be a problem. Unfortunately, too many settlements are being approved without evidence as to the potential class recovery had the case gone to trial and the class prevailed on their meritorious claims.  Many classes are receiving final settlement approval without any formal discovery and any presentation to the court as to what the value of the claims would be.  Further, courts are failing to look at what claims are being released as part of the settlement.  Too often, settlement agreements are being approved that release claims not raised by the complaint, and if they had been pursued, would have resulted in significant damages.  Further, too many state court judges are approving settlements that involve significant federal claims.  Federal class action reform would not be necessary if state court judges showed a little restraint.9  While judges may be reluctant to deny final approval to a settlement they initially approved, and allowed significant sums to be spent on notice to the class, two things must be remembered.  First, the court was operating in the dark when it approved the settlement notice as the only parties before it at that time had a unity of purpose.  Second, if there is good chance that the court will listen to the objectors, the parties are less likely to spend the significant sums necessary to send notice to the class.10

One of the large problems with class actions as they currently exist is that multiple overlapping class actions can be filed in several state courts.11  Rather than removing all of these lawsuits to the already overburdened federal courts, as the “Class Action Fairness Act of ____”12 would do, a mechanism should be established by states to allow coordination between the courts of various states. This system would be similar to the coordination that currently occurs in the federal system via the Judicial Panel on Multidistrict Litigation.  Even absent this explicit coordination system, judges could require the parties to disclose all other pending class actions against the defendant on the same issue(s) and refuse to certify a class if it would appear that the class before it would be a highly redundant action.

The class action device does have problems, but the solutions being proposed by class action “reformers” seek to kill the device, not fix it.  Inundating the federal courts with class actions will only allow for more collusive settlements as federal judges will not have the resources to give each proposed class settlement the scrutiny it requires.  The judiciary could put an end to collusive settlements if its members made a concerted effort to thoroughly evaluate the merits of the proposed settlement.  No change in the law or rules of civil procedure will stop, or is capable of stopping collusive settlements, if the judiciary is not going to engage in thorough review of settlement proposals, the kind of review that is necessary under existing statutory and case law.13

1Geographic diversity is one element of the impracticability of joinder analysis under FRCP 23(a)(4).

2Large relative to the time spent, costs advanced and risks taken by counsel in pursuing the class litigation.

3While one would think class members would opt out of sham settlements, it has been well established that most class members have a hard time understanding the traditional class notice, let alone appreciating the fact that they could be a member of overlapping class actions that are proceeding around the country. Judges would be wise to doubt the merits of a settlement where the class notice does not follow the new, simplified, class action notice form advanced by the Federal Judicial Center. There is simply no good reason for a class notice that exceeds two to three pages, or significantly exceeds the complexity of the FJC’s model.

4Class action “reformers” really have no shame. While proposing “reform” to eliminate coupon settlements, the “reform” movement is being funded by some of the most frequent class action defendants who are the ones proposing coupon settlements. Does anyone really believe class counsel approaches the defendant(s) and proposes a worthless coupon settlement for the class?

5It should be noted that compensation requires not only the receipt of a coupon, but the coupon must be likely to be used (i.e., If the class action is over contaminated food products, the likelihood of a consumer using their settlement coupon, to buy more food from the same manufacturer, is not very likely). It is also unlikely that where a coupon is justified because of the small amount of damage done, the coupon is going to be used if it can only be used on a major purchase (e.g., $100 of your next new car purchase). It should also be considered that people currently submit rebates and receive checks for less than a dollar, so the necessity of a coupon is truly questionable. Finally, since the coupon is going to result in the defendant getting additional business, the judge needs to make sure, to the extent possible, that the defendant is not benefitting from additional sales as a result of the issuance of a coupon as opposed to a check for the same amount.

6See In re General Motors Corp. Engine Interchange Litig., 594 F. 2d at 1126 n.30; In re Matzo Food Products Litig., 156 F.R.D. 600, 605 (D.N.J. 1994) ("The burden of proving the fairness of the proposed settlement is on the proponents."); H. Newberg & A. Conte, Newberg on Class Actions§11.42 at 11-94 (3d ed. 1992).

7Remainders should only exist because class members did not feel it was worth their time to fill out a claim form, or because settlement checks were issued but not cashed.

8In re Matzo Food Prods. Litig., 156 F.R.D. 600, 606 (D.N.J. 1994)(rejecting settlement because payment went to charity rather than to class members)

9For an example of a state court approving a clearly collusive settlement, see Matsushita v. Epstein, 516 U.S. 367,116 S. Ct. 873, 134 L. Ed. 2d 6 (1996), and the 9th Circuit’s initial opinion of the Delaware state court action in the now withdrawn opinion, reported at 126 F.3d 1235 (9th Cir. 1997).

10The author realizes that if the settlement is a sweet deal for the defendant, the defendant will risk the cost of sending a class settlement notice, even if the settlement is rejected. Plaintiff counsel on the other hand might not be as agreeable if one consequence of the settlement agreement being rejected by the court, is a simultaneous decertification of the class. If a judge is convinced that the settlement agreement is inadequate, then it should re-examine the adequacy of representation issue it addressed when first certifying the class.

11It should be noted that while this article seems come down hard on state court judges, the federal judiciary is not free from blame.

12Class action “reformers” have been trying for years to get class action “reform” pushed through Congress. Class action reform has been attempted on and off since the 1970's. Recently, there have been “Class Action Fairness Acts” of 1997 - 2004, each class action fairness act being a recycling of the same ideas that failed several times before. No one seems to have noticed that the proponents of “reform” claim there is a need to protect class members with a “class member bill of rights” yet the “Class Action Fairness Act” makes no mention of protecting the rights of class members. In fact, the “Class Action Fairness Act” is really the business community’s misguided effort to eliminate class actions. Defendants have apparently failed to realize that class actions are a mixed bag, and by eliminating the bad (potentially massive liability), they have eliminated the good (the ability to settle thousands if not millions of claims relatively efficiently).

13Despite the Report of the (Federal) Civil Rules Advisory Committee setting forth specific factors in their comments to FRCP 23(e)(1), many federal district courts approve class settlements without addressing these issues, and other courts merely accept the conclusory statements of class counsel addressing these factors in determining the fairness of a proposed settlement. According to the comments to FRCP 23(e)(1), the factors needing to be addressed are: (A) a comparison of the proposed settlement with the probable outcome of a trial on the merits of liability and damages as to the claims, issues, or defenses of the class and individual class members; (B) the probable time, duration, and cost of trial; (C) the probability that the class claims, issues, or defenses could be maintained through trial on a class basis; (D) the maturity of the underlying substantive issues, as measured by the information and experience gained through adjudicating individual actions, the development of scientific knowledge, and other facts that bear on the ability to assess the probable outcome of a trial on the merits of liability and individual damages as to the claims, issues, or defenses of the class and individual class members; (E) the extent of participation in the settlement negotiations by class members or class representatives, a judge, a magistrate judge, or a special master; (F) the number and force of objections by class members; (G) the probable resources and ability of the parties to pay, collect, or enforce the settlement compared with enforcement of the probable judgment predicted under (A); (H) the existence and probable outcome of claims by other classes and subclasses; (I) the comparison between the results achieved for individual class or subclass members by the settlement or compromise and the results achieved - or likely to be achieved - for other claimants; (J) whether class or subclass members, or the class adversary, are accorded the right to opt out of the settlement; (K) the reasonableness of any provisions for attorney fees, including agreements with respect to the division of fees among attorneys and the terms of any agreements affecting the fees to be charged for representing individual claimants or objectors; (L) whether the procedure for processing individual claims under the settlement is fair and reasonable; (M) whether another court has rejected a substantially similar settlement for a similar class; and (N) the apparent intrinsic fairness of the settlement terms. 
Report of the Civil Rules Advisory Committee, May 20, 2002, pp. 57-59.