Article New York Law Journal

Class Action Settlement Approval in an Era of Heightened Judicial Scrutiny

Recent case law highlights that settling a class action is fundamentally different than settling an individual one. The courts take seriously their obligation to scrutinize class action settlements—and often decisions made years before a settlement can hinder the ability to settle a case on a classwide basis.

Have you ever been left scratching your head after receiving a check for 17 cents as part of a class action settlement? “Why did I get this?” you ask. “The recovery doesn’t cover postage!” you exclaim. And you wonder: “What did the lawyers get?” These concerns aren’t new—in fact, nearly 15 years ago, Congress passed the Class Action Fairness Act (CAFA) to curb perceived abuses in the class action settlement process. Part of that is a requirement that federal courts approve class action settlements. In the past year, courts have been reviewing proposed class action settlements with greater rigor, resulting in several high profile rejections of settlements—sometimes early in the settlement approval process. This article sets forth a brief overview of these developments, and then provides three pointers for navigating the settlement approval process.

The process of reviewing a class action settlement under CAFA typically works like this. First, the proposed settlement is submitted for preliminary approval and certification of a settlement class. Next, notice of the proposed settlement is provided to members of the putative class, as well as to relevant state and federal regulators. Then, putative class members are given an opportunity to object to, or to opt out of, the settlement. Finally, the court conducts a final hearing to address the fairness of and any remaining concerns with the proposed settlement. This process takes at least four months—and can even take years from time-to-time.

Historically, the real test for class action settlements has been at the final fairness hearing. Courts rarely denied preliminary approval or denied certification of a settlement class. But in the past year, there have been several high profile cases that shut down proposed settlements even at those early stages. And the settlements that have cleared those early hurdles have faced increased scrutiny at the final fairness hearing as well.

One high profile case is the Hyundai and Kia fuel economy litigation in the Ninth Circuit. There, plaintiffs sought to certify a nationwide class of individuals claiming that advertisements about certain Hyundai and Kia models overstated their fuel economy. The district court issued a tentative ruling denying certification of a nationwide class based on differences in state law—i.e., because many different state laws governed class members’ claims, the requirement that common questions “predominate” over individual ones couldn’t be satisfied. After that tentative denial, the parties reached a nationwide class settlement and submitted it to the court for approval under CAFA. The district court then granted certification for settlement purposes of the same nationwide class that it had previously held could not be certified, holding that its concerns about the differences in state law were less acute in the settlement context. The district court ultimately granted final approval of the settlement, and objectors appealed. The Ninth Circuit reversed, holding that the district court had improperly certified the settlement class. In particular, the Ninth Circuit was concerned about the predominance requirement, noting that there was nothing about the settlement context that permitted the district court to apply a less rigorous analysis of the predominance requirement than did before the parties had reached a settlement agreement. (As of this writing, the Ninth Circuit decision is pending review en banc).

So what do Hyundai/Kia and cases like it mean for class action litigators who have determined that a class settlement is in the best interest of their clients? Here are three pointers to help navigate the increasingly-turbulent waters of CAFA approval.

Know Your Endgame

 The Hyundai/Kia litigation makes clear the importance of knowing your endgame. Defendants often oppose class certification for various reasons. But class certification can also be the vehicle for resolving a large number of cases simultaneously—whether via summary judgment, trial, or settlement. This is particularly true in sprawling, complex, multidistrict litigation like in Hyundai/Kia, where the alternative to class certification is potentially hundreds (or even thousands) of cases. So before seeking or opposing class certification, counsel should ask themselves how a case will play out if certification is granted or denied. Would plaintiffs really be willing to take hundreds of cases to trial if certification is denied? Is the defendant willing to incur the expense of seriatim trials—and to make witnesses available for all of them? Does the defendant have powerful legal defenses such that a dispositive ruling on summary judgment is likely? Is settlement the endgame? Questions like this can help guide the strategy when faced with a motion for class certification—because without a strategy for how the case will play out, an order granting or denying class certification can be a pyrrhic victory.

Credibility Is Key

Credibility with courts is always important, but it is especially crucial in the settlement context. In the litigation context, of course, courts rely on the crucible of the adversarial process to help expose flaws in opposing parties’ positions. But once the parties have entered into a settlement agreement, they are typically aligned in seeking court approval. So the court is left to its own evaluation of the record—sometimes with an assist from objectors—to assess the fairness of a settlement. It is critical to ensure that the court is comfortable with the materials that have been supplied, and that the court consider the parties’ counsel to be transparent brokers who are not overreaching with the settlement. Even the appearance of overreach can be fatal to a proposed settlement. The recent rejection of the settlement in the Yahoo data breach litigation is a good example. There, the court rejected a proposed settlement—at the preliminary approval stage, no less—for a number of reasons, including seeking attorney fees for attorneys that the court had not approved to work on the case and inadequate disclosures to absent class members about the size of the settlement and the release of claims. The tenor of the opinion makes clear that the court was unsatisfied with the information supplied by the parties. Ensuring that reviewing courts consider the parties and their counsel to be credible is key to ensuring that settlements make it through the approval process.

Get a Mediator

The animating principle of CAFA was fairness—Congress was concerned with “sweetheart” deals where plaintiffs’ lawyers received large fees, defendants received a broad release, and class members received relatively little. This same concern animates judicial review of class settlements today. For example, in a recent case alleging fraudulent marketing practices of online wine, a New Jersey federal court rejected a proposed settlement that was fairly opaque in calculating the recovery to class members, while awarding $1.7 million to attorneys in fees. The settlement drew numerous objectors—including both the U.S. Department of Justice and from state regulators. The court was not satisfied that it had the information it needed to evaluate the fairness of the settlement, and even commented that it was not certain that class counsel had adequate appreciation of the merits of the case before negotiating the settlement.

Mediators can help. A mediator can explain to the court how the settlement was negotiated at arms’ length, identify the strengths and weaknesses of the parties’ claims and defenses, and explain why the settlement is fair to the class and fair to the attorneys. A mediator affidavit not only can provide information that the parties themselves are reluctant to put into the record—what attorney is comfortable identifying the weaknesses in their case in a public filing?—but also does so more credibly than an attorney who stands to benefit from the settlement. For example, in a recent TCPA case in Illinois, the reviewing court was considering a $17.5 million settlement that included a $5.3 million attorney fee award. In rejecting the settlement, the court noted that “[c]lass counsel strongly urge that the settlement represents a reasonable resolution of the claims when one balances the strengths and weaknesses of the claims of the class. And their opinion is worthy of consideration. But the Court cannot simply defer to them, particularly when they stand to gain millions of dollars from the proposed settlement.” A mediator affidavit, of course, would not be subject to the same criticism.

The bottom line is that the recent case law highlights that settling a class action is fundamentally different than settling an individual one. The courts take seriously their obligation to scrutinize class action settlements—and often decisions made years before a settlement can hinder the ability to settle a case on a classwide basis.

Dan Donovan and Ragan Naresh are litigation partners in the Washington, D.C. office of Kirkland & Ellis who frequently lecture on topics related to class action litigation. Carrie Bodner is a litigation partner in the firm’s New York office whose practice includes litigating class actions.