We all know the story: most class actions settle. Of course, some do not, especially where the court denies class certification or grants defendant’s dispositive motion. But as between settlement and trial, settlement is by far the more common course. 

So why do class actions settle so often? Typically they settle because settlement is the best vehicle for the parties to manage their costs and risks. For a defendant, taking a class action to trial can result in significant legal expense, and risks exposing the company to a potentially exorbitant verdict on class members’ aggregated claims. For plaintiffs, trial would commit class counsel to investing substantial resources, including attorney time and expert witness fees, with no guaranty of success or of ever being paid. If the parties can find a settlement amount and structure that both sides can live with, they have every incentive to settle the case rather than to gamble on the outcome. 

Before pursuing settlement, however, defendants often seek victory through pretrial motion practice, including opposing plaintiffs’ motion for class certification and, in some cases, moving to dismiss or for summary judgment. A litigation risk analysis performed before class certification may reveal a case valuation that is heavily discounted by the compound burdens plaintiffs bear of establishing all of the requirements for class certification as well as overcoming defendant’s motion for summary judgment and, if necessary, prevailing at trial. 

A strong argument for excluding plaintiffs’ expert testimony through a pre-trial Daubert motion may further reduce the case valuation. On the other hand, if plaintiffs prevail in pretrial motion practice, the value of the case, and the risks to defendants, can increase greatly. Nevertheless, many defendants shun pre-certification settlements, choosing instead to gamble on pretrial maneuvers even if they later decide not to gamble on the trial of a certified case.

So why might class action settlements take longer?

Because They Are Representative Litigation.

In individual cases, the decision to settle ends the proceedings. All that the parties generally need to do is agree on a number, draft a simple agreement (including a release), and file a stipulation of dismissal with the court. In class actions, in contrast, the decision to settle marks the beginning of what can be a long, complex and expensive process with no guaranteed outcome. The process for settling a class action is protracted because class actions are representative litigation and special care must be taken to protect the absent parties. A defendant considering whether to settle should first understand all of the time, effort and risks that class action settlements entail.

Because the Court Acts as a Fiduciary.

Federal Rule of Civil Procedure 23(e) requires court approval for any class action settlement.  To approve the settlement, the court must find that it is fair, adequate and reasonable. These requirements impose a fiduciary duty on the court to ensure that the class members’ rights are being protected. Once the class is certified, class counsel owes a fiduciary duty to its members, but the judge also is charged with the fiduciary responsibility of ensuring that class members are not being sold down the river by class and defense counsel who may be more interested in making a sweetheart deal than in ensuring fairness to absent class members. 

Because Settlement Agreements are Inherently Complex 

The first step toward settlement is to negotiate and draft the settlement agreement. But due to the complexity of many class action settlements, this process can take considerable time. First, the parties work to arrive at an agreement in principle incorporating the basic terms of settlement, such as the nature and amount of relief that will be offered to the class, the class definition (i.e., who is in and who is out), and the mechanics of payment (i.e., whether the parties will set up a common fund with automatic distributions or institute a claims process). 

After the parties agree on the relief to the class, they will negotiate the attorneys’ fee to be paid to class counsel, incentive payments to the named plaintiffs, and costs.  Most lawyers will not negotiate the amount of the attorneys’ fee or incentive payments until after they have fully defined the benefits to the class, to avoid any potential ethical conflict that might arise if class counsel were being paid from money that would otherwise be available to pay class members.

After they reach agreement on the basic terms, the parties will draft a comprehensive settlement agreement.  Although many of the elements of a class action settlement are well established, every deal is different, and it often takes months to arrive at a final document. Not surprisingly, the more complicated the settlement, the longer the process tends to take.  Unfortunately, some lawyers, once they know the case is settling, lose all sense of urgency, and their inattentiveness will slow the process down.

Because of Class Members’ Procedural Rights

Two key terms in any class action settlement agreement are the class definition and the release. The class definition describes who will be bound by the settlement, and the release describes the rights they are giving up.  Because settlement approval deprives class members of the right to pursue their claims, they are entitled to notice and an opportunity to be heard. The opportunity to be heard takes the form of an opportunity to object if the class member considers the settlement unfair. Class members also can choose to opt out of a monetary settlement in order to preserve their ability to pursue their individual claims. 

Crafting and distributing a suitable notice, and then allowing class members a meaningful opportunity to consider their options, take time. For this reason, class action settlement agreements build in substantial time for the notice administrator to mail the notice, and sometimes require time for additional address searches and second mailings for notices that bounce back as undeliverable. The agreements also build in time for class members, once they have received notice, to consider whether to object or opt out, to seek more information from class counsel or the settlement administrator and, if they choose, to consult with their own counsel. Objections typically have to be in writing and filed with the court sufficiently in advance of the final fairness hearing for the court’s review and evaluation, and preparing the objections also takes time. When all of the necessary intervals are added up, the settlement agreement will allow for a period of several months between preliminary and final approval.

The settlement agreement will specify the manner, content and timing of class notice, and the associated deadlines for opting out, objecting and submitting claims. The party responsible for notice usually will retain an experienced notice administrator, which may be the same as, or affiliated with, the company retained to administer the claims process. Depending on the number of class members and the availability of a class list containing names and addresses, notice may take the form of a postcard briefly describing the case and the settlement and directing class members to a website that the administrator will set up to provide additional information about the settlement and access to downloadable claim forms.

In addition to the website, the administrator will usually set up a hotline where class members can call with questions about the settlement. Where names and addresses are unavailable, notice may consist of publication notice through traditional media or, as is increasingly common today, social media. However notice is achieved, the notice administrator may need to estimate its “reach” and report the same to the court. The greater the reach, the more likely that the settlement will be approved.

Because They Will Be Reviewed at One or More Hearings

The court generally will schedule two key events to move the settlement forward. The first is the preliminary approval hearing. Most judges consider this an opportunity to take a first look at the settlement to make sure that its terms reflect a reasonable range of fairness, although some judges view the purpose of the hearing as simply to approve the class notice and the process that will be used to move the case towards the second, more important event, the final fairness hearing. The class notice will include the date, time and place of the final fairness hearing, during which the court will take a closer look at the settlement, ensure that the notice reached enough class members, and consider any objections that may have been raised. Most often, courts conduct this evaluation on the papers and with oral argument, but occasionally courts will conduct evidentiary hearings to consider objections. At the end of the hearing, the court may take the matter under advisement, causing more time to lapse before the settlement takes effect.

Class Action Settlements Take Longer When Objections Result in Appeals

If the court approves the settlement over class members’ objections, the objectors may appeal the court’s ruling before the settlement takes effect.  An appeal can extend the settlement process by many months, increasing the expense to the parties and the risk of ultimate failure. Some unscrupulous class members and their counsel exploit objections in order to pressure the parties to buy them off in exchange for withdrawing their objections and allowing the settlement to proceed unencumbered. In recent years, professional objectors have sprouted up who have no real interest in the lawsuit but seek to make a living through the opportunities for financial gain that class settlements afford.

Defendants and their counsel should ask several questions before embarking on the settlement path.

As should be clear by now, class action settlements are not for the faint of heart nor the impatient. It can take months to get from “yes” to a settlement agreement, weeks or more to get from the agreement to preliminary approval, several more months, necessitated by the time-consuming process for notice, opt outs and objections, to get to the final fairness hearing, and potentially more extensive delay if objectors appeal. And at every step of the way, the parties bear the risk that the settlement will ultimately be disapproved and all of their efforts will have been for naught.

Before embarking on the class action settlement process, then, defendants and their counsel need to consider carefully not only their willingness to pay the settlement amount, but also all of the other costs and risks that class action settlements entail. 

Here is a short list of some of the questions corporate decision-makers and their attorneys should ask before investing their time and resources in class action settlements.

  1. What is your litigation risk?  As some courts have recognized, class actions often place undue pressure on defendants to settle unmeritorious cases because they magnify the company’s exposure in the event the plaintiff wins. As disturbing as that reality is, it places a premium on analyzing the litigation risks at key junctures in the case. Whether you choose to perform a formal litigation risk analysis or something more informal, you should consider your likelihood of success on dispositive motions, at class certification and at trial, and the likely financial outcome if you lose. A thoughtful litigation risk analysis will help you place a settlement value on the case that can then be used to assess the benefits of any settlement that may be offered. The accuracy of the analysis will depend on how much information you have.  It therefore will become more accurate as you gather more facts through your own internal investigation and discovery, and as you become more familiar with your judge and opposing counsel.   
  2. What is your likely litigation expense?  This is another obvious question, although it also can be difficult to answer early in the case. A companion question that is easy to overlook is: what will be the legal expense of settlement? As can be seen from the description above, the class action settlement process itself takes time and costs money, and some settlements can require years of additional work (e.g., if there is a claims process with a long tail) that should be taken into account.   
  3. Will the settlement attract copycat lawsuits?  Sometimes a settlement of a statewide class action invites additional filings in other states, greatly multiplying the company’s exposure. If your company engaged in the same business practices in other states that are the focus of the statewide claims you are now facing, then you should consider settling on a nationwide basis, or at least make sure the attorneys’ fees award in the statewide settlement is not so rich that it will attract lawyers waiting in the wings or more filings by your current adversaries.   
  4. Will the settlement buy you peace?  The answer will depend largely on how you draft the class definition and the scope of the release. In drafting the class definition, you should ask whether it is expansive enough in time (its temporal scope) and space (its geographic scope) to include all persons who might become class members in a lawsuit involving the same or related subject matter. In drafting the release, you should ask whether it will encompass all of the types of claims from which you reasonably may seek protection.  You should also consider including in the settlement agreement a provision that allows your company to withdraw from the settlement if a threshold percentage of class members opt out.   
  5. Are you prepared to pay the price of fairness?  A class action settlement is valuable only if it is approved.  At the final fairness hearing, the trial court will have to decide whether the terms of the settlement are fair and reasonable to the class, and its determination could be overturned on appeal.  For the cases in which there are no objectors, judges will make the fairness determination based only on the presentation of counsel for the settling parties.  In other cases, objectors may oppose the settlement, either because they truly believe it is unfair to class members or, all too often, because they want to hold the settlement hostage until they are paid a ransom to go away. Even where there are no objectors, courts increasingly are taking closer looks at settlements to assess whether they treat potential class members fairly.  You and your outside counsel will want to make sure that the terms you are agreeing to will offer benefits to class members that can be defended as a fair and reasonable exchange for the rights they will be giving up by virtue of the release, viewed in light of the risks they bear of an unfavorable result if the litigation goes forward.   Happily, this is one area in which you and counsel for the settling plaintiffs have common interests, permitting what could be a helpful collaboration to craft a settlement that passes the fairness test.   
  6. Can you live with the attention the settlement will receive?  There is no such thing as a private class action settlement. The settlement agreement will be filed on the court’s docket and its fairness will be adjudicated in a public hearing. What’s more, there will be a class notice, which may include publication in newspapers or on the internet, and there likely will be a website describing the settlement. If your company has public relations professionals, you may want to include them in reviewing the class notice and the notice plan, and your management and board will need to understand that the settlement could well attract attention not only from potential class members and lawyers, but also from your customers and competitors.   
  7. How will the settlement affect your company’s reputation?  Will it signal to plaintiffs’ lawyers that you are an easy target, causing them to line up to bring the next lawsuit? Or will it signal to the marketplace that yours is a responsible company that cares about its customers and is prepared to take care of them when they are harmed? The answers to these questions will turn not only on the terms of the settlement, but also on the merits and seriousness of the claims in the underlying lawsuit.   
  8. How important is it to the company to put the litigation behind it and return to business as usual? Class litigation, like any significant litigation, can be unwelcome distraction from the daily needs of running a business. Some companies take a principled approach, choosing to fight rather than settle the unmeritorious case regardless of the resources and attention that defending the case may demand.  Other companies may decide that they would rather settle the matter and get on with their corporate lives, even though the case has no basis.  Each company, and each case, is different, but it is always worth considering the effects that ongoing litigation will have on the company’s operations.