For the first time in 15 years, Rule 23 of the Federal Rules of Civil Procedure has been amended. The amendments mostly address class settlements, and they come during a pivotal time for class litigation. With changeups in the composition of the Supreme Court and circuits across the nation split on many class action issues, the long-term impact of these amendments on federal class action practice is likely to be significant.
The changes further codify precedent establishing that Rule 23’s requirements are rigorous, including in the context of settlement. On the one hand, the changes should afford more certainty in the settlement process. On the other, the amendments may be a harbinger of stricter standards for class-wide settlements. The new rules contemplate increased court involvement and scrutiny, and will likely increase settlement costs and, by extension, the potential for more class action trials.
In this article, we briefly describe the amendments to Rule 23, dive into the commentary, and flag some of the more nuanced changes that may be coming for all involved in class litigation.
Rule 23’s New Notice Requirements
Rule 23(c)(2), which governs notice to class members, has long required “the best notice [to class members] that is practicable under the circumstances,” without explaining how that notice should happen. The new amendments clarify that notice can be conveyed by various means including electronically. At first glance, this amendment appears to simply reflect the trend of allowing notice via modern technology, a boon to settling defendants who previously have incurred substantial printing and mailing costs.
But the amendments do more than simply indicate courts can allow notice by means like email. The place to dig in is the extensive commentary, which suggests that courts take a harder look at what notice will be “appropriate” under the circumstances. Whereas before all courts had to consider was the “best practicable” standard, now courts must consider what is “appropriate.” The comments confirm that the difference matters.
The advisory committee cautions that the appropriate form of notice will depend on the characteristics of each particular class, and it will be important to evaluate the unique circumstances of each case in choosing the right method (or combination of methods). For example, notice by electronic means may make sense in a class action asserting technology-based claims. But such means might not be appropriate in other contexts, especially when (for example) the notice is being provided to a special population, such as the elderly.
Indeed, the committee emphasizes that in deciding what is an “appropriate” notice, courts should evaluate the “content and format” of the notice, depending on the audience. This signals that courts will be expected to take a more active role in ensuring that notice fairly informs the class members of their rights in an understandable, reasonably clear manner.
The committee explains that the overall governing standard is to enable the class to make “informed decisions” about whether to opt-out, saying that “attention should focus” on ensuring that there is a “convenient as possible” method. Note the committee did not say a practical or appropriate method—but the most “convenient” after being sufficiently informed. What information class members will need to be sufficiently informed, and what will be a sufficiently convenient opt-out mechanism will certainly be adjudicated in the months to come.
All of this commentary suggests that courts might accept the invitation to take a harder look at the notice process, pushing the parties and counsel to spend more time and resources (and potentially seek expert help) to create—and validate—a notice process. Defense counsel may use the changes to press for less costly notice methods (e.g., those not requiring postage); plaintiffs’ counsel may use them to push for multiple notice methods to try to up the claim rate.
Preliminary Class Settlements on the Ropes
The amendments upend the standard for seeking preliminary approval before class notice is sent out. The commentary highlights that giving notice “is an important event” and should only be done if there is a “solid record supporting the conclusion that the proposed settlement will likely earn final approval.” Parties seeking settlement approval under Rule 23(e)(1) must now show that the court will be able to approve the settlement and, if no class is certified yet, “certify the class for purposes of judgment on the proposal.”
Overall, these changes suggest that parties must make a much higher showing at the preliminary stage. That includes details about anticipated litigation outcomes, the risks of continuing the litigation, and other pending or anticipated litigation that is related. Courts already generally considered such factors, but the amendments now suggest they should always be assessed. As a practical matter, these amendments are likely to lead to more aggressive class discovery earlier in the case. At the point at which the parties seek preliminary approval, the parties must now demonstrate both class certification and final approval are warranted. Indeed, the commentary suggests that the parties should be ready to submit all facts and arguments that they would typically raise in the final approval hearing at the “new” preliminary approval stage.
The committee notes now also make clear that defendants will not be prejudiced if things go south during the settlement approval (perhaps anticipating fewer proposed settlements will be approved under this new rubric): “[i]f the settlement is not approved, the parties’ positions regarding certification for settlement should not be considered if certification is later sought for purposes of litigation.”
Another point raised by the commentary is the concern about the disconnect in many cases between attorney fees and benefits to the class. The committee notes that “[i]n some cases, it will be important to relate the amount of an award of attorney’s fees to the expected benefits to the class. One way to address this issue is to defer some or all of the award of attorney’s fees until the court is advised of the actual claims rate and results.” In other words: courts should see what benefit goes to the class before approving the settlement and fees. This concern about class relief and attorney’s fees is commonly raised in courts across the country, and many believe the Supreme Court will wade into the issue soon. The increased scrutiny on plaintiffs’ counsel fee awards make another appearance in the new settlement standards, which we tackle next.
Changing Up Class Settlements
Rule 23(e)(2) requires that a court approve a settlement “after a hearing and only on finding that it is fair, reasonable, and adequate.” The big change is that Rule 23 now sets out criteria for making this determination, codifying a standard that previously varied from court to court. Such considerations include:
- The adequacy of class representatives and class counsel;
- Whether the settlement was negotiated fairly;
- The adequacy of the relief provided to the class; and
- Whether class members were treated equitably relative to each other.
The streamlining alone provides increased certainty. There should be fewer questions as to what factors will direct the court’s decision; before, there could be a dozen factors (or more). This made settlements unpredictable and drove up litigation costs. Under the new criteria, it should also be easier to determine the likelihood of settlement approval—but that increased certainty comes at a cost.
By picking some factors and leaving out others, the amendments change the state of play. First, the amendments and commentary place a stronger emphasis on the parties’ process for litigating the case and negotiating. This may require counsel to engage in more thorough negotiations—and keep better documentation of the process. The notes also point out that involving a mediator or other neutral party can help.
Another new focus is the relief provided to the class and attorney’s fees. This is a hot-button issue, as the “relief actually delivered to the class” will now be a “significant factor” in approving attorney awards. The committee is also “concern[ed]” about “inequitable treatment of some class members vis-à-vis others.” This is likely a nod to creative settlement strategies like cy pres and pro rata distributions. Tightening the standards for attorney fees and class relief may make it nearly impossible to settle cases alleging de minimis damages and difficult-to-ascertain classes (like the Frank v. Gaos case at the High Court right now).
The committee notes also suggest more scrutiny should be leveled on class counsel and the class representative. Rather than just rely on the resumes and boilerplate submitted by the attorneys, the committee presses courts to look at how counsel has handled the case itself.
Cracking Down on Bad-Faith Objectors
The rise in “professional objectors” has not been well received. These rent-seeking attorneys hope one or both of the parties will quickly pay them rather than risk delaying the settlement. The Rules used to allow any class member to simply object. Now, an objection must “state whether it applies only to the objector, to a specific subset of the class, or to the entire class, and also state with specificity the grounds for the objection.” This specificity requirement puts a new burden on those seeking to challenge settlements. Perhaps most importantly, any “payment in connection with an objection” must be disclosed and approved by a court, further discouraging counsel who might wish to buy off objectors from doing so. This means, in turn, that negotiating parties will need try to address the kinds of issues that might draw objections (e.g., relatively small relief versus the claims alleged, varying relief to class members based on criteria that does not withstand scrutiny, or a negotiating process that could be attacked as insufficient).
Rule 23’s amendments should in some ways lead to a more streamlined, predictable class action settlement process. Predictability should make navigating settlement easier. But there are big changes here, especially when you dive into the extensive commentary.
These rule changes may be signaling changing winds in the notice process and class settlements more generally. Courts will need to consider what constitutes appropriate notice in each case. And the additional scrutiny on class relief and attorney’s fee awards is likely to raise the stakes for plaintiffs and defendants alike.