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.