Amending Rule 23 would add clarity to the settlement process and teeth to the protection of absent class members.  But to solve the real class settlement process, the Advisory Committee will have to look at why so many weak claims advance so far into litigation.

For the next few months, excepting my usual year-end posts, I am going to be taking a longer look at the various items on the Advisory Committee’s Study Agenda. And, in contrast to my usual stance in this blog, which tends to be “comment on the strategies, not the wisdom of the case,” I am going to editorialize.  (Why?  Because Rule 23 has not been amended yet, and if it is, I’d like it to be in a way that makes class action litigation better and more effective when it’s appropriate.)

The first item on the Study Agenda is possible amendment of Rule 23(e).  (I’ll take longer looks specifically at cy pres and objectors, both of which have been singled out for review.)

Rule 23(e) governs the settlement of class actions.  And, to be sure, Rule 23(e) generally could use some clarity.  As a standard for settlement approval, “fair, reasonable, & adequate” is nice but vague, kind of like Bill Pullman.  So courts have stepped in to fill the doctrinal gaps left by the standard, leaving us with an extensive and conflicting common law littered with disparate, redundant, complicated multi-factor tests.  As the ALI put it in its Principles of the Law of Aggregate Litigation:

The current case law on the critera for evaluating settlements is in disarray. Courts articulate a wide range of factors to consider, but rarely discuss the significance to be given to each factor, let alone why a given factor is probative.

(Emphasis added.)  (The First Circuit has made the same criticism.

So, for example, the Second Circuit requires a court to consider:

(1) the complexity, expense and likely duration of the litigation;
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings and the amount of discovery completed;
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining the class action through the trial;
(7) the ability of the defendants to withstand a greater judgment;
(8) the range of reasonableness of the settlement fund in light of the best possible recovery;
(9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.

(Internal citations omitted; line breaks added.)  The Ninth Circuit‘s standard is subtly different, requiring consideration of

among others, some or all of the following:
the strength of plaintiffs’ case;
the risk, expense, complexity, and likely duration of further litigation;
the risk of maintaining class action status throughout the trial;
the amount offered in settlement;
the extent of discovery completed, and the stage of the proceedings;
the experience and views of counsel;
the presence of a governmental participant; and
the reaction of the class members to the proposed settlement.

(Line breaks added.)  (And, to digress, one must ask why the “views of counsel” are relevant.  Is class counsel really going to admit they disagree with some settlement terms?)

In addition, there are a number of practices that have evolved in class action settlements that are not addressed by Rule 23(e), including the use of incentive awards for class representatives and the use of cy pres relief.

But while Rule 23(e) could benefit from some clarity, the real issue at stake here has very little to do with settlement approval.  The underlying issue is the skewed incentives that lead to poor settlements.

What do I mean by a poor settlement?  Let’s look at some of the more prominent settlement reversals in the last few years:

Mirfasihi v. Fleet Mortgage reversed a FCRA class action settlement that contained a large cy pres component.  Before its final disposition, the settlement bounced up and down to the Seventh Circuit a remarkable three times.  As Judge Posner wrote, the real problem was that neither side had an incentive to concede the “utter worthlessness of the claim.” Klier v. Elf Atochem, Inc. reversed a toxic-spill class action in which an $830,000 claims surplus was donated to charity rather than distributed to class members. Feder v. Frank reversed a settlement with a large coupon component.  The plaintiffs had alleged problems with their printer toner, but the trial court had called their evidence of liability and causation “weak.” Dewey v. Volkswagen Aktiengesellschaft reversed a settlement involving leaky sunroofs.  The named plaintiffs had divided the class up into those who were entitled to monetary relief (which included them) and those who were not.  (The distinction had to do with the claims rates for various Volkswagen models.)  The Third Circuit found this to be an irreconcilable conflict of interest.

Similarly, there have been a number of case in which courts have rejected preliminary approval of settlements because of their obvious deficiencies.  To name just a few:

In Tijero v. Aaron Bros. Inc., the Northern District of California rejected a wage-and-hours settlement in which the class members received only minimal relief in exchange for an overly broad release. In Better v. YRC Worldwide, the District of Kansas refused preliminary approval to a securities settlement that released claims for no compensation, and offered no information about the distribution of a substantial cy pres payment. In Figueroa v. Sharper Image, the Southern District of Florida refused to approve a consumer-fraud settlement that included a large coupon component, and injunctive relief of questionable value to the class.

In each of these cases, the primary problem was the gap between what the defendant thought the claims were worth, and what the plaintiffs’ counsel would accept in fees to go away.  Bad settlements spring from weak cases.  In weak cases, defendants don’t value the case at much, but plaintiffs’ counsel want (or need) a certain amount of fees.  So we wind up with little actual benefit to class members.  (We can assume both sides are working in good faith.  If the plaintiffs just screw up at the beginning, then they will have sunk costs into a loser, and the defendant won’t want to pay.  Or in some cases, like Figueroa, the defendant may not be able to afford more.)

Rule 23(e) is valuable, and it serves as an important check on class action settlements that do not benefit absent class members.  If there should be one guiding principle for Rule 23(e), it should be to watch out for the interests of the absent class members.  (Can I say this as a defense lawyer?  Yes.  Defendants and absent class members often have oddly converging interests.)

But Rule 23(e) is only addressing a symptom (questionable settlements), not the cause of the problem.  And the cause of the problem is that gap in valuation of class claims.  The fact is that the vast majority of bad class action settlements come from cases that should not have been brought in the first place.  Cases where it is clear from the time of the complaint that large numbers of class members have not been harmed (like in Mirfasihi or Dewey) or cannot be found (like in Klier) or where evidence of causation will be weak (like in Feder) are not cases that should survive preliminary scrutiny.  Once they do, the threat of (1) exorbitant discovery costs and (2) even a slim chance of a bet-the-company loss will usually compel some cost-of-litigation settlement.  When that is not enough to justify fees that would allow plaintiffs to break even, we see the kinds of “innovations” that eventually get reversed.

Politically, effective reform here will be extremely difficult.  Defendants are agnostic overall about bad settlements.  (The option is nice in individual cases, but conscientious defense counsel will advise their clients that cheap settlements often cost more in the long run.)  Objectors lack the political power to influence much reform.  Judges have a compelling (and admirable) interest in clearing their dockets that lead them to favor settlements of class actions where possible.  And any real reform directly threatens plaintiffs’ business model.  But bad settlements start with bad cases.  And no matter how unpleasant it may be in the short term, reducing the number of bad cases brought benefits everyone.