The US Department of Justice (DOJ) plans to take a more active role in reviewing and objecting to class action settlements under a rarely used procedure established by the Class Action Fairness Act (CAFA) more than a dozen years ago. CAFA, enacted in February 2005, significantly expanded federal court jurisdiction over class and mass actions, in addition to setting various rules and procedures related to the settling of class actions.

Under CAFA, 28 U.S.C. § 1715, when settling a class action, each defendant in the matter must serve upon the appropriate state official, generally the State Attorney General, and the US Attorney General, notice of the proposed settlement within 10 days of filing with the court. In theory, this provision was designed to give state and federal officials an opportunity to assess the fairness of proposed class settlements and intervene in the action to oppose the proposed settlement should they consider the terms of those settlements unfair.

In practical application, however, few proposed class settlements are challenged by state or the US Attorneys General. According to departing US Department of Justice Assistant Attorney General Rachel Brand, the DOJ receives on average 700 CAFA notices a year but has challenged only two class settlements since the enactment of CAFA. AAG Brand attributed part of the DOJ’s passivity to inefficiencies in mail delivery within the Department of Justice, stating that the notices were often not routed to DOJ attorneys with sufficient time to review and sometimes were not received until after final settlement approval had already been granted. In her recent comments regarding CAFA, Ms. Brand hinted that many of these inefficiencies have been corrected, putting the DOJ in a better position to review settlements.

AAG Brand also warned that “if a settlement isn’t fair or reasonable under CAFA, DOJ may file a statement of interest saying so.” Ms. Brand concluded her remarks on CAFA by cautioning to “be on the lookout in the coming days for the first example.”

This first example has already been filed. On February 16, 2018, one day after AAG Brand’s remarks, the DOJ Consumer Protection Branch filed a statement of interest in Cannon v. Ashburn Corporation, et al (1:16-cv-01452 D.N.J.), a class action concerning false advertisement related to discount wine prices, urging the court to reject a proposed class settlement in the case. The DOJ argues that the proposed settlement, which provides each class member with a $2 dollar non-transferable coupon and awards class counsel $1.7 million in attorneys’ fees, provides little value to consumers while enriching plaintiffs’ counsel to the tune of millions of dollars. As the DOJ succinctly argues in its statement “[e]ither plaintiffs’ claims are strong, in which case a settlement that has meaningful value to the class is required, or plaintiffs’ claims are meritless, in which case their counsel is not entitled to a massive fee.” Either way the settlement is not fair, reasonable or adequate as required by Federal Rule of Civil Procedure 23.

Ms. Brand’s comments and the DOJ’s filing in Cannon may indicate an increased government scrutiny of class action settlements. While increased scrutiny may in the end prove helpful in discouraging suits that are strictly attorney-fee driven in nature, in the short term the scrutiny injects a new level of uncertainty into the class settlement process for all parties.

Takeaways:

  • Class action settlements must be fair, reasonable and adequate to satisfy the requirements of Federal Rule of Civil Procedure 23.
  • Traditionally, courts have rejected proposed settlements that provide minimal or illusory benefit to the class, while enriching class counsel.
  • In its recently filed statement of interest, the DOJ argues that these factors warrant rejection of proposed class action settlements.
  • While it is still unclear how active the DOJ will be in this space, proposed class settlements that provide actual relief to class members are more likely to avoid DOJ scrutiny and warrant court approval.