Two recent circuit court opinions – a spirited one from the Seventh Circuit, and a milder one from the Ninth – shine a spotlight on judicial approval of class action settlements and offer sharply divergent approaches to how much scrutiny (and how much skepticism) district courts must apply when considering the fairness of a proposed settlement. At issue in both cases: how to assign a dollar figure to the value of the settlement to the class. The cases are worth careful review for both plaintiffs’ counsel and defense counsel in negotiating and presenting class-wide settlements.
In the first case, Eubank v. Pella Corp., No. 13-2091 (7th Cir. June 2, 2014), Judge Richard Posner, writing for a unanimous panel, reversed the approval of a class settlement of a case alleging that Pella sold defective windows to consumers. The plaintiffs argued that the settlement was worth $90 million, which was more than sufficient to justify the $11 million award of fees to class counsel. Citing the judicial duty to scrutinize settlements to ensure fairness to the class, the court deconstructed the claim that the settlement was worth $90 million. Its conclusion: the settlement was in fact worth at most only $8.5 million – and “[c]lass counsel sold out the class.”
The basis for this ruling was an evaluation of the claim procedure that the settlement required class members to navigate before they were entitled to any recovery. The procedure required class members to submit their claims either to Pella itself or to an arbitration procedure. Both procedures permitted a long list of defenses Pella could assert to deny or defeat recovery, and required applicants to fill out lengthy claim forms “so complicated that Pella could reject many of them on the ground that the claimant had not filled out the form completely and correctly.” Moreover, some class members were entitled not to cash but to coupons or a warranty extension. In light of these obstacles and limits on relief, only a small fraction of eligible class members had submitted claims by the date of the approval hearing. The court consequently determined the class was unlikely to recover anywhere near the $90 million alleged.
The court’s opinion was colored by other major problems it saw in the settlement, including “almost every danger sign in a class action settlement that our court and other courts have warned district judges to be on the lookout for.” Those danger signs included a significant conflict of interest presented by the relationship between lead class counsel and a class representative (they were in-laws), ethical violations by lead class counsel leading to an investigation by the state attorney disciplinary board, and an advance payment of attorneys’ fees to lead class counsel before notice was sent to the class.
The second case, Laguna v. Coverall North America, Inc., No. 12-55479 (9th Cir. June 3, 2014), reflects a more lenient and deferential approach to scrutiny of proposed class settlements. The class included California franchisees of a janitorial franchising company who alleged that the company had violated its agreements by removing customer accounts from them without cause. The proposed settlement provided for modest monetary payments to former franchise owners and included pledges by the company to assign customer accounts to current franchisees, conditioned on the payment by those franchisees of the full amount of outstanding franchise fees.
Noting that “we have never required a district court to assign a monetary value to purely injunctive relief,” the court refused to require the district court to assign a particular monetary value to that relief. The court also evaluated the fee award to class counsel and found it justified under the “lodestar” method for calculating fee awards (a reasonable hourly rate times the hours reasonably spent on the litigation). The court saw no reason to delve more deeply into the details of the settlement to evaluate the fairness of the settlement amount compared to the compensation for class counsel.
Eubank and Laguna represent two distinct approaches to judicial scrutiny of the fairness of class settlements. Some of this may have been driven by the facts of the two cases – Eubankin particular came with several unusual red flags. Still, the two opinions show that plaintiffs and defendants alike should approach class settlements with their eyes open to potential challenges to obtaining judicial approval.