A class action settlement that allows the compensated plaintiffs to sue the defendant a second time for the same loss.  A settlement fund from which the defendant is permitted to compensate itself for settling such “second lawsuits.”  Hard to imagine?  Think again.

The Seventh Circuit recently gave its final blessing to a complicated settlement scheme that contained precisely such elements.  Though clearly a product of creative lawyering, the court refused to hold such a settlement unenforceable merely because some parties were able to exploit a loophole.

The unusual settlement, initially approved by an Illinois federal judge  in In re: Trans Union Privacy Corp., resolved a series of class actions alleging Trans Union’s unlawful sale of lists of consumer credit reports.  Trans Union agreed to compensate class members through a combination of basic credit monitoring services and one of the following:  (i) cash from a $75 million settlement fund, (ii) additional credit monitoring services, or (iii) the right to bring their claims a second time, provided they did so on an individual basis and not as part of another aggregate action.  For those who elected option (iii), Trans Union agreed to waive the statute of limitations defense for any individual action commenced within two years.

Yet another twist:  Should any of those individual lawsuits brought by class action members result in a settlement or judgment against Trans Union, the settlement agreement permitted Trans Union to reimburse itself out of the $75 million settlement fund.  Trans Union was not permitted to reimburse itself for defense costs, but could dip into the fund only to satisfy a settlement or judgment.  No restrictions were placed on Trans Union’s authority to settle the claims, thus giving Trans Union a powerful incentive to settle all claims rather than bear the cost of defending them.

Following the settlement, more than 70,000 individual lawsuits were filed on behalf of class members who had elected option (iii).  Most were filed in Nueces County, Texas, which the Seventh Circuit characterized as “presumably the jurisdiction with the lowest filing fee the lawyers could find.”  Trans Union settled the cases and sought to reimburse itself to the tune of $35 million from the settlement fund.  The district court approved the settlement and permitted the reimbursement.

One of the class counsel attempted to block the reimbursement to Trans Union, arguing that the individual lawsuits were really, in substance, class actions that were prohibited under the settlement.  Counsel also argued that Trans Union should not be reimbursed for settling claims it could easily have defeated, some of which were asserted after the two-year statute of limitations of waiver had expired.

The Seventh Circuit, in essence, held the class to its agreement.  Because each of the post-settlement lawsuits was filed on behalf of a single plaintiff, the lawsuits did not meet the contractual definition of a “class action”—even though, the court acknowledged, the analysis might be different under CAFA.  As to the merits of the settlements, the court pointed to the unfettered authority given Trans Union to settle even the weak cases:  “The Settlement Agreement gave Trans Union complete discretion to fold even a winning hand.”

Perhaps the moral of the story is twofold.  First, “outside the box” settlements are entirely permissible, if otherwise deemed fair and reasonable.  Second, such settlements must be crafted with particular care, as they are especially vulnerable to unintended consequences.