January 30, 2015
In 2014, with the dust finally starting to settle following the Supreme Court’s blockbuster class action rulings in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend, lower courts continued to grapple with significant class action issues. One discernible trend during the past few years has been increased appellate scrutiny of the entire class action mechanism. From the initial assessment of federal jurisdiction, to the class certification determination, to the impact of offers of judgment to individual plaintiffs under Rule 68, to the settlement process, to how to apply damages methodologies in class litigation, courts have focused on tightening and defining the rules by which class actions will (or will not) proceed. Last year was no exception, with courts continuing to take careful looks into the class action device at all stages of the litigation.
As a result of this increased scrutiny, class action lawsuits are becoming more challenging and costly for plaintiffs to litigate. Yet despite these increased challenges and costs, the plaintiffs’ bar continues on an aggressive march–by most accounts, class action filings have continued to increase even after Dukes and Comcast.
This update provides an overview and summary of the key cases in which these trends have developed in 2014. Part I discusses how courts applied and interpreted the Supreme Court’s guidance from Dukes and Comcast in 2014. Part II discusses how federal courts have wrestled with applying the Constitutional requirement of standing to absent class members, and the circuit split that has developed on “no injury” class actions that urgently requires Supreme Court resolution. Part III discusses the implied Rule 23 requirement of ascertainability, as more and more class actions are challenging everyday consumer purchases for which there are not complete, consistent, or detailed proofs of purchase to demonstrate class membership. Part IV addresses the increasing scrutiny of individual offers of settlement pursuant to Rule 68, especially when such offers have the effect of mooting a class representative’s ability to pursue both individual and class relief. Finally, Part V provides an update on the trend in some federal circuits of applying increased scrutiny in reviewing the fairness of proposed class action settlements.
In 2014, both state and federal appellate courts issued significant rulings interpreting the Supreme Court’s landmark decisions in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). Two important aspects of these decisions–the use of statistical sampling and the impact of individualized damages issues–received particular attention in 2014, with multiple courts issuing conflicting interpretations of Dukes and Comcast. Most notably, the California Supreme Court, the Pennsylvania Supreme Court, and the Ninth and Tenth Circuits issued conflicting decisions regarding the use of statistical sampling and extrapolation in class actions in the wake of Dukes‘s unanimous rejection of “Trial by Formula.” Further, decisions from the Ninth and Fifth Circuits deepened an existing circuit split over the relevance of individualized damages issues to Rule 23(b)(3)’s predominance requirement following Comcast.
Given these conflicting interpretations of Dukes and Comcast, it is only a matter of time before the Supreme Court once again takes up these significant issues, and a number of petitions for certiorari are already pending (with more expected) to seek to resolve these questions.
A. “Trial by Formula” After Dukes
In Dukes, the Supreme Court unanimously rejected the use of statistical sampling and extrapolation to circumvent resolution of individualized inquiries in a class trial. The plaintiffs in Dukes proposed, and the Ninth Circuit endorsed, a procedure in which “[a] sample set of the class members would be selected,” and the “percentage of claims determined to be valid would then be applied to the entire remaining class . . . without further individualized proceedings.” 131 S. Ct. at 2561. The Supreme Court “disapprove[d]” this “novel project” of “Trial by Formula,” and held that, because the Rules Enabling Act “forbids interpreting Rule 23 to ‘abridge, enlarge or modify any substantive right, . . . a class cannot be certified on the premise that [a defendant] will not be entitled to litigate its statutory defenses to individual claims.” Id. (quoting 28 U.S.C. § 2072(b)).
Although the Court premised its rejection of “Trial by Formula” on the Rules Enabling Act, the use of statistical sampling and extrapolation to eliminate the class action defendant’s right to present individualized defenses also raises serious due process concerns. Those concerns were placed before the California and Pennsylvania Supreme Courts in 2014–and those courts came to very different conclusions.
The California Supreme Court squarely held that a “Trial By Formula” approach raises due process concerns. In Duran v. U.S. Bank National Association, 59 Cal. 4th 1 (2014), employees claimed they were improperly denied overtime compensation. The court overturned a $15 million verdict that was the product of a trial that adjudicated claims of a 21-person sample set, and the results were extrapolated to the remaining class members. In doing so, the court unanimously concluded that the trial court’s “decision to extrapolate classwide liability from a small sample, and its refusal to permit any inquiries or evidence about the work habits of [employees] outside the sample group,” impermissibly “deprived” U.S. Bank of its right to litigate its defenses to liability. Id. at 35.
Echoing Dukes, the California Supreme Court explained that “the class action procedural device may not be used to abridge a party’s substantive rights,” and thus “a class action trial management plan may not foreclose the litigation of relevant affirmative defenses, even when these defenses turn on individual questions.” Id. at 34. Significantly, the court grounded its holding in “both class action rules and principles of due process.” Id. at 35. While the court declined to resolve definitively “whether or when sampling should be available as a tool for proving liability in a class action,” it instructed that “any class action trial plan, including those involving statistical methods of proof, must allow the defendant to litigate its affirmative defenses.” Id. at 40.
By contrast, the Pennsylvania Supreme Court faced a similar set of facts and concluded that the plaintiffs’ extrapolation evidence did not create any due process concerns. Braun v. Wal-Mart Stores, Inc., Nos. 32 EAP 2012, 33 EAP 2012, — A.3d –, 2014 WL 7182170 (Pa. Dec. 15, 2014). Braun, like Duran, was a wage-and-hour case that was tried to verdict. The plaintiffs obtained a $187 million judgment based largely on extrapolation from a sample of employee records. For example, plaintiffs’ expert used time records from 1998 to 2001 to calculate the number of rest breaks class members purportedly missed from 2001 to 2006. Id. at *3. Despite this extensive use of extrapolation, the Pennsylvania Supreme Court upheld the verdict and rejected the defendant’s due process argument. Id. at *6. It reasoned that “the now-disapproved ‘trial by formula’ process at issue in Dukes was not at work” because the extrapolation evidence related only to “the amount of damages to the class as a whole,” rather than “liability to the entire class.” Id. One justice dissented, and sharply criticized the “majority’s relaxed approach to class-action litigation” and its approval of a trial procedure based on “simple averaging and extrapolations” that “would never hold up to peer review as a matter of science.” Id. at *9 (Saylor, J., dissenting).
The Pennsylvania Supreme Court was not the only tribunal viewing the permissibility of “Trial by Formula” as hinging on whether it is used to establish liability or damages. In another case, the Tenth Circuit similarly upheld the use of extrapolation in a class action trial “to approximate damages,” and held that Dukes “does not prohibit certification based on the use of extrapolation to calculate damages.” In re Urethane Antitrust Litig., 768 F.3d 1245, 1257 (10th Cir. 2014). The Ninth Circuit has also viewed the analysis as depending on liability versus damages, but it has determined that statistical sampling is acceptable to “determine liability so long as the use of these techniques is not expanded into the realm of damages.” Jimenez v. Allstate Ins. Co., 765 F.3d 1161, 1167 (9th Cir. 2014) (emphases added). None of these decisions, however, has offered any principled reason for limiting the Supreme Court’s rejection of “Trial by Formula” to certain types of issues, and there is nothing in Dukes to suggest that the Court intended to allow the use of statistical sampling and extrapolation to resolve either damages or liability.
In sum, these courts appear to have latched on to an irrelevant distinction to avoid the Supreme Court’s ruling in Dukes. These decisions indicate that the permissibility of “Trial by Formula” after Dukes continues to vex courts around the country, and there is good reason to believe that more courts will address this important issue in the year ahead. Given the conflicts among the lower courts, it is possible that the Supreme Court will have to revisit this issue and confirm that replacing individualized proceedings with the statistical sampling and extrapolation violates the due process rights of class action defendants and allows the class action procedural device to impermissibly alter the substantive law.
B. Damages Issues and Predominance After Comcast
In a sharply divided 5-4 decision, the Supreme Court in Comcast reversed certification of an antitrust class action after concluding that plaintiffs had proposed to rely on a flawed damages model that fell “far short of establishing that damages are capable of measurement on a classwide basis.” 133 S. Ct. at 1433. The Court explained that in the absence of a valid damages model, plaintiffs could not “show Rule 23(b)(3) predominance” because “[q]uestions of individual damage calculations will inevitably overwhelm questions common to the class.” Id. In other words, Comcast held that damages issues, like liability issues, could justify the denial of certification under Rule 23(b)(3). The dissenting opinion in Comcast attempted to minimize the significance of the majority’s ruling, claiming that it should not be read as altering the “well nigh universal” rule that “individual damages calculations do not preclude class certification under Rule 23(b)(3).” Id. at 1437 (Ginsburg & Breyer, JJ., dissenting). Given the conflicting messages from the Comcast majority and dissenting opinions, it is perhaps not surprising that the courts of appeals almost immediately split over the meaning of Comcast.
In the months following Comcast, the Sixth, Seventh, and Ninth Circuits all issued decisions that appeared to narrow the relevance of damages issues to the assessment of Rule 23(b)(3)’s predominance requirement. See In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 722 F.3d 838, 860-61 (6th Cir. 2013) (citing Comcast dissenting opinion with approval); Butler v. Sears, Roebuck & Co., 727 F.3d 796, 801 (7th Cir. 2013) (holding that individualized damages issues do not preclude a finding of predominance “[i]f the issues of liability are genuinely common issues”); Leyva v. Medline Indus. Inc., 716 F.3d 510, 514 (9th Cir. 2013) (holding that “[t]he amount of damages is invariably an individual question and does not defeat class action treatment” (quotation marks and citation omitted)). By contrast, both the Tenth and D.C. Circuits held that after Comcast, individualized damages issues can preclude certification under Rule 23(b)(3). See Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213, 1220 (10th Cir. 2013) (holding that “predominance may be destroyed” if “damages determinations will require individualized inquiries”); In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d 244, 253 (D.C. Cir. 2013) (“No damages model, no predominance, no class certification.”).
In 2014, the circuit split deepened, as the Fifth Circuit held that it was “a misreading of Comcast” to view that decision as “preclud[ing] certification under Rule 23(b)(3) in any case where the class members’ damages are not susceptible to a formula for classwide measurement.” In re Deepwater Horizon, 739 F.3d 790, 815 & n.104 (5th Cir. 2014). The Ninth Circuit also reaffirmed its view that, notwithstanding Comcast, individualized damages issues cannot defeat class certification, and it deemed the Fifth, Sixth, and Seventh Circuit’s similar decisions on this issue to be “compelling.” Jimenez, 765 F.3d at 1167-68.
A significant number of circuits have thus firmly adopted the Comcast dissent’s view that would have left unaltered the traditional rule that individualized damages issues do not preclude class certification under Rule 23(b)(3). But it is hard to square that interpretation of Comcast with the actual language of the majority’s opinion, which both the Tenth and D.C. Circuits have faithfully followed. Until the Supreme Court confirms that it meant what it said in Comcast, and again addresses this important issue–which affects almost every Rule 23(b)(3) class action–the lower courts will no doubt continue to reach conflicting conclusions regarding the impact of individualized damages determinations on the ability of a case to proceed as a class action.
Another lingering area of confusion is whether the “irreducible constitutional minimum” of Article III standing applies with equal force to both the named plaintiffs in a class action and the absent class members. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). In individual actions, a plaintiff can bring a claim only if (1) he has suffered an “injury in fact”; (2) there is a “causal connection between the injury and the conduct complained of” so that the injury is “fairly . . . trace[able] to the challenged action of the defendant”; and (3) the injury is “likely” to be “redressed by a favorable decision.” Id. at 560-61. Although the Rules Enabling Act forbids interpreting Rule 23 to “abridge, enlarge or modify any substantive right,” 28 U.S.C. § 2072(b); Dukes, 131 S. Ct. at 2561, federal and state courts have divided sharply on how to apply standing requirements in class actions.
For example, the Seventh Circuit has held that “as long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied.” Kohen v. Pac. Inv. Mgmt. Co., 571 F.3d 672, 676 (7th Cir. 2009); see also In re Nexium Antitrust Litig., Nos. 14-1521, 14-1522, 2015 WL 265548, at *2, *7 (1st Cir. Jan. 21, 2015) (“We conclude that class certification is permissible even if the class includes a de minimis number of uninjured parties,” because the court had “confidence that a mechanism would exist for establishing injury at the liability stage of this case” and thus would weed out uninjured plaintiffs before entry of judgment).
By contrast, the Eighth Circuit has held that “[i]n order for a class to be certified, each member must have standing and show an injury in fact that is traceable to the defendant and likely to be redressed in a favorable decision.” Halvorson v. Auto-Owners Ins. Co., 718 F.3d 773, 778 (8th Cir. 2013) (emphasis added). The D.C. and Second Circuits have agreed. In re Rail Freight Fuel Charge Antitrust Litig., 725 F.3d 244, 252 (D.C. Cir. 2013) (“[W]e do expect the common evidence to show all class members suffered some injury.”); Denney v. Deutsche Bank AG, 443 F.3d 253, 263-64 (2d Cir. 2006) (same). Decisions from the Ninth Circuit have been mixed, but the most recent opinion to issue from that court followed Denney and held that “‘[n]o class may be certified that contains members lacking Article III standing.'” Mazza v. Am. Honda Motor Co., 666 F.3d 581, 594 (9th Cir. 2012) (quoting Denney, 443 F.3d at 264).
The circuit split was placed in focus by In re Deepwater Horizon, 739 F.3d 790, 796 (5th Cir. 2014). The Fifth Circuit concluded that it did not have to resolve the disagreement, because the operative complaint adequately alleged that every class member had standing and thus satisfied even the Second Circuit’s more restrictive test. Id. at 804. The court affirmed certification of the settlement class and rejected BP’s argument that the district court should have considered evidence demonstrating that some claimants were not injured by the accident, because courts are not permitted to conduct “an evidentiary inquiry into the Article III standing of absent class members during class certification.” Id. at 805-06.
The Supreme Court has not spoken definitively on this circuit split, but it has emphasized repeatedly that the standing requirement is a “hard floor of Article III jurisdiction that cannot be removed,” Summers v. Earth Island Inst., 555 U.S. 488, 497 (2009), and that “[i]n an era of frequent litigation [and] class actions, . . . courts must be more careful to insist on the formal rules of standing, not less so,” Ariz. Christian Sch. Tuition Org. v. Winn, 131 S. Ct. 1436, 1449 (2011). And aside from the fundamental requirements of Article III, classes in which elements of the plaintiffs’ claims such as injury, causation, or reliance cannot be manageably proven on a classwide basis should mean that the proposed class fails to satisfy the commonality or predominance requirements of Rule 23. See, e.g., In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d at 253 (holding that class certification should be denied where “a case turns on individualized proof of injury”).
Until the Supreme Court addresses this issue, defendants should continue to focus on the lack of absent class member injury when faced with overly broad classes that sweep in persons who have no viable claim. While in some jurisdictions this argument may not defeat class certification, it may nonetheless have persuasive force at trial. Note, for instance, the experience of Whirlpool in its long-running litigation in which plaintiffs allege that its washing machines are allegedly defective and prone to developing mold. When the Sixth Circuit affirmed class certification and rejected Whirlpool’s arguments regarding the impropriety of certifying a class action containing a significant percentage of uninjured class members, the court noted that Whirlpool would have the opportunity at trial to attempt to “prove that most class members have not experienced a mold problem” because that would defeat the plaintiffs’ claim that the washers “are defectively designed.” In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 722 F.3d 838, 857 (6th Cir. 2013). When the Supreme Court denied review, Whirlpool proceeded to trial and an Ohio jury ruled in favor of the company on October 30, 2014.
Nearly five years ago, our 2010 fall update on class action developments correctly predicted “the rise of ascertainability as an independent check on class certification.” This requirement, while not specifically enumerated in Rule 23, gained momentum in the last year. As plaintiffs’ lawyers have strategically focused their litigation on small everyday purchases–such as food products sold without written agreements containing arbitration clauses–courts have increasingly been confronted with the issue of how to identify product purchasers and other class members.
For example, in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013), the Third Circuit confronted a proposed class of consumers who purchased an over-the-counter vitamin. The court underscored that class membership of any proposed class must be ascertainable using “reliable and administratively feasible” evidence. Id. at 308. Because defendants have a due process right to challenge whether a person is a class member, the court rejected plaintiffs’ offer to use affidavits from class members attesting to their class membership. Id. at 307-12. Observing that putative class members were unlikely to have “documentary proof of purchase, such as packaging or receipts” of their $10 vitamin purchases, and that Bayer had no list of purchasers because it did not sell its over-the-counter vitamins directly to consumers, the Third Circuit vacated the order certifying the class, holding that the district court did not adequately confirm the ascertainability of the class. Id. at 304, 307-12; see also EQT Prod. Co. v. Adair, 764 F.3d 347, 358-59 (4th Cir. 2014) (decertifying class because of “serious ascertainability issues” where the district court “failed to rigorously analyze whether the administrative burden of identifying class members . . . would render class proceedings too onerous”).
Recently, in a case brought on a pro bono basis by a law firm that typically defends class actions, the Third Circuit clarified that Carrera‘s ascertainability analysis does not apply to putative class actions brought under Rule 23(b)(2)–at least when only injunctive and declaratory relief are sought. Shelton v. Bledsoe, No. 12-4226, — F.3d –, 2015 WL 74192, at *5-6 (3d Cir. Jan. 7, 2015). In explicitly limiting the ascertainability requirement to Rule 23(b)(3) classes, the Third Circuit joined the First and Tenth Circuits. The court noted that the ascertainability requirement is tied to “procedural protections,” such as “notice and opt-out rights,” and when those protections are not at issue (as can be the case in a Rule 23(b)(2) action), having a precise class definition is not as critical. Id. at *6. This construction of the ascertainability requirement suggests that plaintiffs’ lawyers might start pursuing more Rule 23(b)(2) class actions, at least where the claims involve small everyday purchases for which it would otherwise be impracticable to identify class members.
California state courts have likewise begun to apply an exacting ascertainability requirement in recent years. For instance, in 2014, the Court of Appeal affirmed an order decertifying a class that was “not reasonably ascertainable without an individualized or file-by-file analysis.” Hale v. Sharp Healthcare, 232 Cal. App. 4th 50, 58 (2014). The court explained that the ascertainability test “requires class members to be readily identifiable without unreasonable time and expense,” and there, class members were not readily identifiable because determining class membership would require individualized analysis of each patient’s payment record to discern whether a government health care program ultimately paid for the patient’s urgent care. Id. at 59.
In 2014, there was also a renewed focus on the hurdles to ascertainability in consumer class actions from district courts in the Ninth Circuit, although those courts have not uniformly embraced the Third Circuit’s approach in Carrera. See, e.g., Sethavanish v. ZonePerfect Nutrition Co., No. 12-2907-SC, 2014 WL 580696, at *4-6 (N.D. Cal. Feb. 13, 2014) (adopting Carrera and denying certification because plaintiff did not “present any method for determining class membership, let alone an administratively feasible method”); In re POM Wonderful, LLC, No. ML 10-02199 DDP (RZx), 2014 WL 1225184, at *6 (C.D. Cal. Mar. 25, 2014) (decertifying class in part because there was “no way to reliably determine who purchased [d]efendant’s products or when they did so”). But see, e.g., McCrary v. The Elations Co., No. EDCV 13-00242 JGB (OPx), 2014 WL 1779243, at *8 (C.D. Cal. Jan. 13, 2014) (“While [Carrera] may now be the law in the Third Circuit, it is not currently the law in the Ninth Circuit. In this Circuit, it is enough that the class definition describes ‘a set of common characteristics sufficient to allow’ a prospective plaintiff to ‘identify himself or herself as having a right to recover based on the description.'” (citations omitted)); Lilly v. Jamba Juice Co., No. 13-cv-02998-JST, 2014 WL 4652283, at *4 (N.D. Cal. Sept. 18, 2014) (“Adopting the Carrera approach would have significant negative ramifications for the ability to obtain redress for consumer injuries.”).
The Ninth Circuit has the opportunity to address ascertainability issues in consumer class actions in Jones v. ConAgra Foods, Inc., which currently is being briefed (No. 14-16327). In that case, the district court held that plaintiffs’ proposed class–which involved dozens of different food products across several brands (such as Hunt’s canned tomato products, PAM cooking sprays, and Swiss Miss hot cocoa beverages)–was not ascertainable because class members could not recall whether the small-dollar purchases contained the challenged “100% natural” labeling statement. Jones v. ConAgra Foods, Inc., No. C 12-01633 CRB, 2014 WL 2702726, at *10 (N.D. Cal. June 13, 2014) (“Even assuming that all proposed class members would be honest, it is hard to imagine that they would be able to remember which particular Hunt’s products they purchased from 2008 to the present, and whether those products bore the challenged label statements.”).
In Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), the Supreme Court decided whether an offer of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure may moot a plaintiff’s right to pursue both individual and collective relief in the context of a federal Fair Labor Standards Act (“FLSA”) claim. There were high hopes that this decision would resolve the split among the circuits on the issue of whether a complete offer of relief to a named plaintiff is sufficient to moot that plaintiff’s claims. Those hopes were dashed when a majority of the Court concluded that the issue had not been properly presented, and thus assumed, without deciding, that the plaintiff’s claims were mooted by the Rule 68 offer. Several dissenting justices exclaimed that it would be “wrong, wrong, and wrong again” to conclude that an unaccepted settlement offer moots a claim. Id. at 1533 (Kagan, J., dissenting).
This unresolved split in Genesis Healthcare has left lower courts wrestling with how to proceed in class actions where a defendant makes an offer of judgment (under Rule 68) that provides the complete measure of individual relief that the named plaintiff seeks. Several circuits have held that such an offer cannot moot a class action, notwithstanding the Court’s conclusion that an individual whose claim is moot cannot pursue a collective claim under the FLSA. In so holding, these circuits have cited the distinction between the nature of and procedure in an FLSA action, on the one hand, and a class action under Rule 23, on the other. See Gomez v. Campbell-Ewald Co., 768 F.3d 871, 875-76 (9th Cir. 2014); Mabary v. Home Town Bank, N.A., 771 F.3d 820, 825 (5th Cir. 2014). Other circuits have reached the same conclusion, and have cited the reasoning of the Genesis Healthcare dissent as the basis for their holding–namely, that a rejected statutory offer of judgment would not moot the individual plaintiff’s claim because an unaccepted settlement offer is a legal nullity, and has no operative effect. Stein v. Buccaneers Ltd. P’ship, 772 F.3d 698, 704 (11th Cir. 2014). The Eleventh Circuit also opined that “[e]ven if the individual claims [were] somehow deemed moot, the class claims remain live, and the named plaintiffs retain the ability to pursue them.” Id.
In other circuits, an offer of complete relief can moot individual and class claims. See, e.g., Doyle v. Midland Credit Mgmt., Inc., 722 F.3d 78, 81 (2d Cir. 2013); Hrivnak v. NCO Portfolio Mgmt., Inc., 719 F.3d 564, 567-68 (6th Cir. 2013). But there has been some pause in the face of the strong dissent in Genesis Healthcare. See Scott v. Westlake Servs. LLC, 740 F.3d 1124, 1126 n.1 (7th Cir. 2014) (dissenting opinion in Genesis Healthcare provides “reasons to question our approach to the problem”). Yet because the parties “did not challenge [the] circuit’s view,” in Scott, the Seventh Circuit stated that it “will continue to await a resolution of the split.” Id.
What this means for litigants is that the strategic approach to early settlement offers under Rule 68 will likely be dictated by the circuit in which the parties are litigating, and there are still circuits in which a complete offer of relief will bar a plaintiff from proceeding with a class action lawsuit. Accordingly, while Justice Kagan’s dissent has put a spotlight on this issue, it appears that litigants, like the Seventh Circuit in Scott, will just have to “continue to await a resolution of the split.” Id.
Unlike in other types of cases, settlements in class actions require court approval. In our February 2013 class action update, we discussed how this process was becoming more difficult in the last few years. We covered Ninth Circuit decisions that subjected pre-certification settlements to an even higher degree of scrutiny (In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935 (9th Cir. 2011)), and drew tighter limits around the selection of charities for cy pres distributions of settlement funds (Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012); Nachshin v. AOL LLC, 663 F.3d 1034 (9th Cir. 2011)). Since that update, the trend of increased settlement scrutiny has continued and spread to other Circuits. Judges have generally become more proactive in policing class action settlements for signs of unfairness or potential collusion; the underlying concern is that class counsel may bargain away the rights of their clients in exchange for a substantial fee.
In November 2013, in Marek v. Lane, 134 S. Ct. 8 (2013), the U.S. Supreme Court denied a petition for certiorari filed by four objectors to a class settlement that contained a cy pres component. In a separate statement, Chief Justice Roberts raised a number of “fundamental concerns” about the cy pres mechanism as it is used in class action litigation–“including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on.” Id. at 9. Although Marek did not provide the appropriate vehicle to answer these questions, Chief Justice Roberts concluded: “In a suitable case, this Court may need to clarify the limits on the use of such remedies.” Id.
A few weeks ago, the Eighth Circuit Court of Appeals cited the Chief Justice’s concerns in vacating the cy pres portion of a class action settlement. In re BankAmerica Corp. Sec. Litig., No. 13-2620, 2015 WL 110334 (8th Cir. Jan. 8, 2015). That court clarified that cy pres distributions of unclaimed settlement funds are appropriate “only when it is not feasible to make further distributions to class members . . . except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.” Id. at *2 (quotation marks and citation omitted; emphasis in original). Moreover, the court held that class members must ordinarily have a say in the selection of a cy pres recipient: “[U]nless the amount of funds to be distributed cy pres is de minimis, the district court should make a cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient. This gives class members a voice in choosing a ‘next best’ third party and minimizes any appearance of judicial overreaching.” Id. at *4; see also In re Baby Prods. Antitrust Litig., 708 F.3d 163, 174 (3d Cir. 2013) (vacating approval of class settlement and directing district court to consider the degree of direct benefit provided to the class: “Barring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds.”).
In addition to cy pres, another recurring topic in recent class settlement decisions is the propriety of so-called “clear sailing” agreements, in which a defendant agrees not to oppose class counsel’s fee award up to a specified maximum value. The Ninth Circuit has described clear sailing agreements as one of the “subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations.” In re Bluetooth, 654 F.3d at 947; see also Redman v. RadioShack Corp., 768 F.3d 622, 637 (7th Cir. 2014) (“Clear-sailing clauses have not been held to be unlawful per se, but at least in a case such as this, involving a non-cash settlement award to the class, such a clause should be subjected to intense critical scrutiny by the district court.”). California courts, by contrast, have taken a more pragmatic approach, recognizing that clear sailing agreements may facilitate completion of settlements by giving defendants a more predictable measure of their total exposure. See, e.g., Laffitte v. Robert Half Int’l Inc., 231 Cal. App. 4th 860, 884 (2014) (“In the absence of any of the recognized warning signs of collusion or other evidence of collusion, the inclusion of a clear sailing provision in the settlement agreement did not constitute a breach of fiduciary duty on the part of class counsel.”).
A trio of strongly worded Seventh Circuit opinions issued last year, all written by Judge Richard Posner, also illustrates what appears to be growing judicial skepticism toward class settlements that provide no real value to the class and yet are accompanied by significant plaintiff fee awards. In Eubank v. Pella Corporation, 753 F.3d 718 (7th Cir. 2014), the Seventh Circuit reversed the approval of a “scandalous” settlement that contained “almost every danger sign in a class action settlement that our court and other courts have warned district judges to be on the lookout for.” Id. at 721, 728. The case involved a class counsel with numerous conflicts of interest, an $11 million fee award compared with approximately $8.5 million in actual value for class members, an “incomplete and misleading” class notice, and overly complicated claims forms. Id. at 728. In short, “Class counsel sold out the class.” Id. at 726; see also Pearson v. NBTY, Inc., 772 F.3d 778, 780-81 (7th Cir. 2014) (reversing settlement approval where the district judge valued the settlement “at the maximum potential payment that class members could receive,” even though that figure “ha[d] barely any connection to the settlement’s value to the class”); Redman, 768 F.3d at 630-31 (reversing approval of settlement that would have provided $10 coupons to class members because, among other reasons, the district court had overestimated the value of the coupons for class members in approving a $1 million fee award).
Of course, even with this increased skepticism toward class settlements, many settlements will still be able to pass muster. See, e.g., Wong v. Accretive Health, Inc., 773 F.3d 859 (7th Cir. 2014) (affirming approval of a $14 million class settlement and rejecting a number of the objectors’ arguments); Laguna v. Coverall N. Am., Inc., 753 F.3d 918, 925 (9th Cir. 2014) (affirming approval of class settlement because, among other reasons, “Plaintiffs faced real dangers in proceeding on their case in light of menacing precedents from the United States Supreme Court”), vacated due to settlement, 772 F.3d 608 (9th Cir. 2014). Yet the recent trend still points decidedly toward the application of heightened scrutiny of settlement terms, notice and claims processes, counsel’s fee award, and the overall value of the settlement for class members. The reality of this heightened scrutiny is that class actions may as a practical matter be more difficult to settle. It is not likely a coincidence, then, that in 2014 we saw several class action trials, with some notable victories for defendants.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers:
Theodore J. Boutrous, Jr. – Co-Chair, Appellate and Constitutional Law Group and Transnational Litigation Group – Los Angeles (213-229-7000, firstname.lastname@example.org)
Gail E. Lees – Co-Chair, Class Actions Group – Los Angeles (213-229-7163, email@example.com)
Andrew S. Tulumello – Co-Chair, Class Actions Group – Washington, D.C. (202-955-8657, firstname.lastname@example.org)
Christopher Chorba – Co-Chair, Class Actions Group – Los Angeles (213-229-7396, email@example.com)
Kahn A. Scolnick – Los Angeles (213-229-7656, firstname.lastname@example.org)
Timothy W. Loose – Los Angeles (213-229-7746, email@example.com)
Bradley J. Hamburger – Los Angeles (213-229-7658, firstname.lastname@example.org)
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