On May 6, 2014, the U.S. Court of Appeals for the Tenth Circuit in Miller v. Basic Research, LLC, No.13-4048 (10th Cir. May 6, 2014), dismissed defendant’s appeal of a district court’s order enforcing a class settlement agreement, over defendants objection. The Tenth Circuit held that the case was an impermissible interlocutory appeal and that it therefore had no jurisdiction.

The ruling is important for employers in the process of settling workplace class actions. It illustrates that once material terms of settlement have been agreed upon, later attempts to abandon the agreement may be unsuccessful and notice may be sent to class, over defendant’s objection, before appellate review.

Background

Defendant, Basic Research, a manufacturer of a weight-loss dietary supplement called Akävar 20/50, marketed its drug as follows: “Eat all you want and still lose weight.” A class of purchasers filed suit, alleging that they relied on the marketing pitch, and that the slogan constituted false and misleading advertising.

The district court certified a class “limited to those persons who purchased Akavar in reliance on the slogan ‘Eat all you want and still lose weight.’” After class certification, the parties entered into mediation. Following negotiations, defendants’ counsel drafted and all parties signed a handwritten “Proposed Terms” document outlining the terms of an expected class settlement. The parties then filed a notice of settlement with the district court.  The notice stated that the mediation was “successful” and that the parties were preparing a formal settlement agreement.

At some point, defendants stopped participating in the drafting process. Plaintiffs subsequently moved to enforce what they argued was a binding contract. The district court granted plaintiffs’ motion. It concluded that the parties had agreed to the material terms of a settlement and that any ongoing disagreements concerned only “linguistic changes.” Miller v. Basic Research, LLC, 2013 WL 1194721, at *1 (D. Utah, Mar. 22, 2013). Defendants appealed, arguing that, amongst other things, their interests would be harmed by sending out notice of settlement prior to appellate review.

The Tenth Circuit Opinion

The Tenth Circuit never made it to the merits of the appeal. The Tenth Circuit focused its opinion on whether it had jurisdiction to hear the matter and concluded that it did not. The Tenth Circuit reasoned that because the district court had not yet reached its final decision, which would entail approving the proposed settlement, and because the defendants were unable to prove an exception to the final judgment rule, it lacked appellate jurisdiction.

The Tenth Circuit rejected defendant’s argument that granting enforcement of the settlement was the functional equivalent of issuing an injunction under 28 U.S.C. § 1292(a)(1) (providing appellate jurisdiction to review district court orders “granting, continuing, modifying, refusing or dissolving injunctions.”) Further, the Tenth Circuit did not find that it had appellate jurisdiction under the collateral order doctrine. The Tenth Circuit was not persuaded that delaying appellate review imposed serious consequences or that the district court’s decision would evade appellate review. The Tenth Circuit further stressed that the fairness to the plaintiff class would be addressed at the Rule 23 hearing.

Implications for Employers

This case is a cautionary tale for companies involved in class action settlements. A defendant has an interest in settling a class action, but it faces potential problems if it backs out of a “deal” when the parties’ memorandum of understanding is deemed enforceable and its terms disadvantage the defendant. As a matter of contract law, if material terms have been agreed upon, complete abandonment of the settlement negotiation by a defendant will not serve to kill the settlement. The agreement, although not final, may be far enough along to be enforced by the district court and such enforcement will not be immediately appealable. In the context of class settlement, this may result in class notice being issued notwithstanding defendants’ objections and prior to any appellate review.