The U.S. Court of Appeals for the Seventh Circuit has dismissed an appeal from the final approval of a settlement in a class action against American International Group, brought by its competitors in the workers compensation insurance industry. The suit accused AIG of failing to report accurately the amount of workers compensation premium it had collected—a failure that allegedly forced other insurers to bear a larger share of losses in the residual market. Liberty Mutual Insurance and two of its subsidiaries had objected to the settlement and appealed from the final order of approval, but then, shortly after the Seventh Circuit heard oral argument in the case, they settled with AIG and voluntarily withdrew their appeal. In Safeco Ins. Co.of America v. American International Group, Inc., Nos. 12-1157, 12-1158, 12-1186, 12-1730, 12-1753 and 12-1764 (7th Cir. March 25, 2013), the court held—over Judge Posner’s sharp dissent—that it could dismiss the appeal without investigating the terms of Liberty’s settlement with AIG. Among other things, the court’s decision helps clarify the parameters for the withdrawal of an objection to a class action settlement under Rule 23(e)(5) of the Federal Rules of Civil Procedure.

A Long Road

States require all employers to purchase workers compensation coverage, but some employers in dangerous fields can’t find an insurer willing to sell it to them. In the 38 states served by the National Workers Compensation Reinsurance Association (NWCRA), insurers are assigned to provide coverage for these hard-to-insure employers. If the designated insurers suffer losses, those losses are shared by all the carriers that sell workers compensation insurance within the state. The losses are allocated pro rata, based on the amount of voluntary premium each insurer writes in a given year.

In 2006, AIG entered into a settlement with New York’s Attorney General, in which it admitted having failed to report accurately the amount of voluntary premium it collected during a period that began in the 1980s. For more than five years, that failure has been the subject of litigation in the Northern District of Illinois that pitted AIG against the hundreds of other insurers who were members of the NWCRA.

The battle began with a 2007 suit against AIG by the NWCRA’s attorney-in-fact, the National Council on Compensation Insurance (NNCI). AIG responded to that suit by asserting claims against several members of the NWCRA Board, including Liberty Mutual, Travelers, ACE and The Hartford. (Full disclosure: Jorden Burt represented The Hartford in this litigation.) AIG alleged that those insurers had also underreported workers compensation premium. Then Liberty, Travelers, ACE and The Hartford all filed counterclaims against AIG. Liberty’s pleading included claims for underreporting in the 38 states covered by the NCCI lawsuit, as well as in so-called “Non-Pool States.”

In 2009, the district court dismissed NCCI’s complaint for lack of standing. However, in anticipation of that ruling, Safeco and Ohio Casualty (two subsidiaries of Liberty Mutual) had filed a putative class action on behalf of all participating companies in the NWCRA, asserting the same underreporting claims that had appeared in NCCI’s complaint. The litigation proceeded under a new configuration: AIG was now the plaintiff in the original lawsuit, based on its claims against certain NWCRA Board members, to which four of the defendants had asserted counterclaims. AIG was also a defendant in the new action brought by Safeco and Ohio Casualty.

The Settlement

In August 2010, AIG offered to settle the claims in both lawsuits for $450 million. Under the proposed settlement, each member of the putative class in Safeco’s lawsuit would release AIG from underreporting claims in all 50 states.

The Board of the NWCRA endorsed the proposed settlement, but Liberty Mutual and its subsidiaries opposed it. In September 2010, the Board authorized a group of seven companies (ACE INA Holdings, Inc.; Auto-Owners Insurance Co.; Companion Property & Casualty Ins. Co.; FirstComp Insurance Co.; The Hartford Financial Services Group, Inc.; Technology Insurance Co. and The Travelers Indemnity Company) to negotiate a deal with AIG on its behalf. Those companies concluded an agreement in January 2011; they then sought and obtained leave to intervene as plaintiffs in Safeco’s class action, solely for the purpose of getting the settlement approved.

Safeco, Ohio Casualty and Liberty Mutual all objected to the settlement. They argued that AIG’s $450 million payment was unreasonably low. They asserted that the intervening plaintiffs were not adequate class representatives, because some of them were defendants in AIG’s lawsuit. Liberty Mutual was the only member of the settlement class with pending claims against AIG based on underreporting in the Non-Pool States, and Liberty argued that it was unfair for those claims to be released without additional compensation.

In February 2012, the district court overruled those objections and granted final approval. The three objectors appealed that ruling to the U.S. Court of Appeals for the Seventh Circuit.

The Withdrawal of the Appeal

While the appeal was still pending, the appellants announced that they had reached a separate agreement with AIG and wished to dismiss the appeal. The intervening plaintiffs stipulated to the dismissal under FRAP 42(b). The Rule provides that appeals may be dismissed by the clerk of the court, if all parties stipulate to the dismissal. Although that condition was satisfied in Safeco, it appears that the court misread the stipulation and believed that ACE had not signed the stipulation.

The court therefore concluded that the dismissal required court approval, and it ordered the parties to brief the question of “whether the settlement of the dispute underlying these appeals must be approved by the district court as affecting the class settlement.”

The court’s sua sponte order potentially raised issues under two different rules. One was the basis on which a court of appeals may refuse to dismiss an appeal under Rule 42 of the Federal Rules of Appellate Procedure. The second was whether the 2003 amendment to Rule 23(e)(5) of the Federal Rules of Civil Procedure makes the withdrawal of an objector’s appeal subject to court approval.

FRAP 42

After the parties had submitted their briefs, Judge Easterbrook, joined by Judge Manion, ruled that the court could dismiss the appeal without conducting an inquiry into the terms of Liberty’s settlement with AIG. Their opinion focused on the facts (i) that the members of the settlement class will all receive “exactly what they accepted before,” and (ii) that none of these class members had objected to Liberty’s new settlement. In light of those facts, Judge Easterbrook wrote, “[i]t is . . . hard to see how a live controversy remains, and courts should not issue opinions resolving litigation that the parties no longer want to pursue.”

Judge Posner strongly disagreed, arguing that permitting dismissal without an inquiry into the settlement was “insensitive to the risks of class action sell-out.” His focus was on the assertion by Liberty’s subsidiaries that certain class members (including Travelers, ACE, The Hartford and Liberty itself) received a disproportionate benefit from the release AIG is giving to the class as a whole, because those companies were defendants in AIG’s lawsuit. “For all we know,” he wrote,

the amount that AIG has agreed to pay Liberty to drop its appeal . . . includes a ‘bribe’ . . . to take the issue of equitable allocation of settlement proceeds among class members out of contention . . . .

Moreover, the dissent explained, this concern was not assuaged by the fact that none of the insurance companies who compose the settlement class had objected to Liberty’s deal, because

the opposition of Liberty’s subsidiaries to the settlement may have led other members of the class not to appeal the allocation of the settlement proceeds, trusting that someone (namely the Liberty group) was carrying the ball for them.

As Judge Easterbrook pointed out, however, the theory that Liberty had dissuaded other class members from appealing doesn’t hold up:

[W]hat issues would other class members have raised on appeal? None had complained about the settlement, so there was no adverse decision to appeal from.

Furthermore, any class member that feared a “sell-out” could still seek relief from the district court under Rules 60(b)(3) and (6).

FRCP 23(e)(5)

As amended in 2003, Rule 23(e)(5) provides that any member of a proposed class may object to a settlement that requires approval by a district court, and that “the objection may be withdrawn only with the court’s approval.” The Advisory Committee Note to the 2003 amendments states that “[o]nce an objector appeals, control of the proceeding lies in the court of appeals,” and that the appellate court “may undertake review and approval of a settlement with the objector.”

Judge Posner’s dissent quoted that Note and agreed that “the logic of the rule applies to the withdrawal of an objection on appeal.” Judge Easterbrook addressed the argument in this way:

Rule 23 . . . like the other civil rules deals with proceedings in district courts rather than courts of appeals. All the committee’s statement does is recognize that the court of appeals will decide what to do. For the reasons we have given, we do not think any further proceedings necessary.