Judicial consideration of class action settlements was a trend we reported on at the end of 2013, and it proved to be a trend yet again in 2014. This year, we saw the courts continue to engage in considerable scrutiny of proposed class action settlements. In both Canada and the United States, courts demonstrated that they had no qualms about rejecting settlements that they deemed to be unfair. The multi-faceted test for settlement approval gives the court wide latitude to evaluate a proposed settlement. Recent decisions have also held that the court should also examine “circumstantial fairness”, which requires consideration of the settlement in context, institutional fairness and whether access to justice would be perceived to be achieved on an objective basis.
This means that when negotiating a class action settlement, counsel must think broadly about any contextual factors that will impact the fairness and reasonableness of the settlement. Addressing such factors may require counsel to think creatively in structuring the settlement, and about how the class counsel fees are factored into the equation.
The test for settlement approval is whether, in all of the circumstances, the settlement is fair, reasonable and in the best interests of the class. We discussed the factors that a court must consider here.
Based on the settlements that were approved and rejected in 2014, we recommend that counsel give consideration to the following in crafting a settlement:#1 – Settlement Structure: “Claims-Made” Versus “All-In”
In a previous post, we discussed the fact that the number of class members that actually apply to receive part of the settlement fund (the “take-up rate”) is typically low.
In order to limit exposure when take-up rates may be low, defence class counsel might consider a “claims-made” settlement, as was the structure approved by the court in Fulawka v. The Bank of Nova Scotia, discussed here. Under this structure, only class members that submit claims will receive payment. This is in contrast to an “all-in” settlement, where the defendant pays a global sum from which class members will be paid out. In the latter scenario, when take-up rates are low, the remaining amount is distributed to charities under the cy-pres doctrine. The “claims-made” settlement ensures that all that will participate in the settlement are compensated appropriately. Of course, this strategy is best suited to situations where a defendant can reasonably ascertain the possible scope of the class (as would have been the case in Fulawka, as the class was comprised of employees seeking payment for overtime work) such that it is possible to estimate the total payout at the end of the day.#2 – Class Counsel Fees: Should Bear A Relationship To The Benefit Received By the Class
Class counsel fees are always scrutinized by the court, and particularly how the fees relate to the benefits that will be received by the class through the settlement. In Waldman v. Thomson Reuters Canada Limited, Perell J. commented that it is not wrong to make the class counsel fee part of a settlement agreement, but “how it is done matters”. Perell J. suggested providing the court with “options” that will allow it to link the class counsel fee to the benefit to be received by the class. For example, the class counsel fee might be linked to the take-up rate, such that class counsel does not receive a disproportionate benefit to the access to justice obtained by the class. Given that take-up rates are routinely low, this may be an option to consider when structuring the class counsel fee arrangement.
Ultimately, class action practitioners should bear it mind that it is not simply the substantive and procedural attributes of the settlement that will be considered. The court will look at the settlement, in all circumstances of the case, and determine whether access to justice can be said to have been achieved.