This survey summarizes recent decisions scrutinizing class action settlements. After the 2018 revision of Federal Rule of Civil Procedure 23(e) altered the standard by which federal district courts must approve class action settlements, judges appear more skeptical of arrangements that they perceive as unfair to absent class members. As exemplified by the cases described below, class settlement approval is increasingly contingent upon a determination of fairness, in the overall settlement, in the amounts allocated to the class attorneys, and potentially, even in the amount paid to the class representatives.
Federal Rule of Civil Procedure 23(e) makes plain that claims brought on behalf of a certified (or proposed to be certified) class “may be settled, voluntarily dismissed, or compromised only with the court’s approval.” Rule 23 has always required a court considering approval to review the proposed settlement to ensure that it is “fair, reasonable, and adequate,” but until the 2018 amendment, the factors used to make that assessment varied by individual circuits. The Advisory Committee’s 2018 Amendment to Rule 23(e)(2) was meant to “focus the court and the lawyers on the core concerns of procedure and substance that should guide the decision whether to approve the proposal.” The Committee added a list of four factors that federal courts must address in connection with settlement approval:
These factors are similar to, but not entirely based on, those adopted in several circuits.
Despite the committee’s attempt at standardizing settlement approval, district courts generally still look to the relevant circuit’s factors in addition to those articulated by the 2018 amendment to Rule 23(e)(2). For example, in Humphrey v. Stored Value Cards, a judge in the Northern District of Ohio considered final approval of a nationwide class action settlement in a lawsuit challenging a bank’s prepaid debit card program for incarcerated persons under the Electronic Fund Transfer Act (“EFTA”) and Ohio state-law equivalents. In approving the settlement, the court considered both the Rule 23(e)(2) factors and the Sixth Circuit’s own factors.
As one might expect, multi-factor analyses of proposed settlements provide courts, either sua sponte or prompted by an objector, with additional avenues to scrutinize a class settlement. As the examples below show, heightened scrutiny of proposed settlements is now increasing.
In perhaps the most extreme example of zealous application of the new Rule 23(e)(2) factors to defend absent class members, in Lusk v. Five Guys Enterprises, LLC (“Lusk IV”), a judge in the Northern District of California denied preliminary settlement approval for the fourth time. The plaintiff alleged that the Five Guys burger franchise violated the federal Fair Credit Reporting Act (“FCRA”) and California credit reporting laws by, inter alia, failing to make required disclosures when pulling putative class members’ credit reports during their consideration for employment.
Senior Judge Anthony Ishii first denied preliminary approval of the parties’ proposed settlement in December 2019, reasoning that the plaintiff “failed to demonstrate that the proposed settlement agreement offer[ed] adequate relief to the class.” The court rejected the settlement under the adequate class relief factor (Rule 23(e)(2)(C)) based on each of the four sub-factors provided by the rule and associated Advisory Committee Notes because the plaintiff ’s “risk assessment” was not specific to the individual case and failed to sufficiently explain the settlement calculus—in other words, the named plaintiff did not justify the amount of money he extracted from the defendants; pre-settlement discovery was insufficient; attorney’s fees were “unreasonably high”; and the class’s release of liability was overbroad.
The court’s most serious concern was the “risk assessment,” which concerned weighing “[t]he amount of the settlement in light of the Class’s potential recovery, discounted by the risk of the adjudication on the merits.” As the court stated: “The amount offered in the proposed settlement agreement is generally considered to be the most important consideration of any class settlement.” Here, the court found that the settlement amount could not be justified for two reasons: (1) the named plaintiff ’s lack of meaningful justification for settling rather than continuing to litigate; and (2) because the plaintiff entirely failed to account for the credit reporting claims in analyzing the risk.
The second, perhaps less intuitive factor—the amount of discovery conducted in the case—was referred to by the court and in the Advisory Committee Notes as part of the “procedural” factors for courts to consider. Finding that discovery was adequately conducted requires an explanation of the “specific type of discovery and the amount of discovery conducted” that is not “too generalized to satisfy the court that the parties . . . conducted sufficient discovery.” The court rejected the settlement on this basis as well because it found that it was not clear that “the discovery conducted by the parties allowed the parties, and particularly [the plaintiff,] to sufficiently evaluate the merits of each claim” and the plaintiff ’s failure to address claims—including the credit reporting claims—in his risk assessment “possibly suggests that no discovery was conducted as to those claims.” Such inadequate discovery served as an indication to the court that the settlement was unfair to the absent class members.
Evaluating the third factor, the amount of attorney’s fees, the court was again confronted with the total settlement amount. This time, the court considered the overall amount, $1.2 million, in conjunction with proposed attorney’s fees of $400,000. These so-called common fund awards concerned the court because when plaintiffs’ attorneys recover fees from the common fund “the relationship between the class members and class counsel ‘turns adversarial.’” Importantly for the court, the Ninth Circuit had set a 25 percent “benchmark” for attorney’s fees in common fund cases. Where the fees in Lusk I accounted for 33.3 percent of the common fund amount and the plaintiff provided no persuasive justification for an upward adjustment, the court rejected this amount as unfair to the absent class members.
Finally, the court held that the named plaintiff did not adequately explain the basis for releasing the defendant from all claims. Because the court found that the settlement was unfair to the absent class members under each factor, it denied preliminary approval of the settlement.
After the court denied a second lackluster attempt at preliminary settlement approval, the plaintiff took a third bite at the apple. Although the court found that the agreement appropriately reduced the attorney’s fees to 25 percent of the settlement amount ($300,000 on $1.2 million), the court again took issue with the plaintiff ’s failure to adequately account for the credit reporting claims. The agreement submitted to the court released the defendants from “any claims based on the federal Fair Credit Reporting Act” and associated state laws. However, the plaintiff “entirely omit[ted] these claims from his risk assessment.” As the court saw it, the plaintiff ’s proposed class-wide settlement was essentially requiring absent class members to give up something (the FCRA and California credit reporting claims) in exchange for nothing. The court concluded that “this outcome seems unfair, unreasonable, and inadequate” under Rule 23(e). The court also found that the proposed basis for recovery inequitably treated class members because it failed to “account for apparent distinctions amongst the class members based on the class claims.”
According to the court, this last deficiency—inequitable class treatment—was still not remedied in the plaintiff ’s fourth attempt at preliminary settlement approval. Where the court in Lusk IV continued to see deficiencies in the value of the claims relative to the absent class members’ sacrifice (releasing claims against defendants), it recognized “the possibility that this prolonged inability to secure preliminary approval and conditional certification is a result of insufficient effort to lay a foundation for such relief.” As a possible remedy, the court suggested that “an appropriate path forward may include additional pre-certification discovery.”
Requiring additional discovery can seem counterintuitive to achieving an early class settlement. However, the renewed focus on absent class members in the amended Rule 23(e), as evidenced in Lusk, may make additional discovery necessary and, accordingly, increase the time needed to conclude the settlement process.
Because the amendment to Rule 23(e) is relatively recent, the federal circuit courts are just beginning to review cases that allow them to incorporate the new factors into their own jurisprudence. One such case, Johnson v. NPAS Solutions, LLC, involved a settlement agreement in a case brought under the Telephone Consumer Protection Act (“TCPA”). After only eight months of litigation, the defendant reached a settlement with the would-be lead plaintiff over allegations that it had violated the TCPA by using an automated telephone dialing system to contact him and the putative class without his consent. The plaintiff quickly filed for preliminary certification and settlement approval, which the district court granted less than one month after the notice of settlement. Critically, the district court’s order allowed an incentive award for the lead plaintiff not to exceed $6,000; set the opt-out deadline and the objection deadline for the same date—three months from preliminary approval; and set the deadline for the parties’ briefs and attorney’s fees petition eighteen days after the opt-out/objection deadline.
One lone objector challenged both the district court’s settlement procedure and the substance of the settlement agreement. The objector challenged the procedure as improper under both Rule 23 and the Due Process Clause of the Constitution, contending primarily that it was improper to set the deadline for the attorney’s fees petition for after the objection deadline. She further objected to both the settlement amount and the $6,000 incentive award for the named plaintiff.
At the outset, the Johnson court expressed concern over the current state of class action settlements:
The class-action settlement that underlies this appeal is just like so many others that have come before it. And in a way, that’s exactly the problem. We find that, in approving the settlement here, the district court repeated several errors that . . . have become commonplace in everyday class-action practice.
As to the procedural challenge, the Eleventh Circuit agreed with the objector that “Rule 23(h)’s plain language requires a district court to sequence filings such that class counsel file and serve their attorneys’ fee motion before any objection pertaining to fees is due.” It held that the plain language of Rule 23(h) “requires that any class member be allowed an opportunity to object to the fee ‘motion’ itself, not merely to the preliminary notice that such a motion will be filed.” Nevertheless, the court declined to award the objector relief on this basis because it found the error to be harmless.
Instead, the Johnson court took issue with the district court’s approval of an “incentive payment” to the class representative. The panel accepted the objector’s argument that two nineteenth century Supreme Court cases prohibited incentive awards to lead plaintiffs that serve only to “compensate class representatives for their time” and to “promote litigation by providing a prize to be won.” The incentive award to the TCPA plaintiff in NPAS Solutions, the court said, was an impermissible “salary, [] bounty, or both.” The plaintiff protested that incentive awards are commonplace and thus cannot possibly be prohibited by one-hundred-fifty-year-old Supreme Court jurisprudence, but the court rejected this argument.
As a result of this case, the Eleventh Circuit is presently an outlier in its handling of class representative incentive awards. Apparently recognizing the uniqueness of this decision, the Johnson court concluded that “[i]f the Supreme Court wants to overrule Greenough and Pettus, that’s its prerogative. Likewise, if either the Rules Committee or Congress doesn’t like the results we’ve reached, they are free to amend Rule 23 or to provide for incentive awards by statute.” An Eleventh Circuit panel reaffirmed NPAS Solutions when reversing an incentive award for the class representatives in an FCRA case, In re Equifax Inc. Customer Data Security Breach Litigation. Because the law of the circuit was clear from NPAS Solutions, the only question before the Equifax panel with respect to the incentive award was whether the district court’s approval of the award voided the entirety of the settlement. The court took the more limited “administratively feasible” approach and remanded the approval solely for the purpose of vacating the incentive award.
While the Ninth Circuit has explicitly rejected the NPAS Solutions approach to incentive awards, the other circuits have not expressly addressed this issue. Objectors and district courts in these other circuits concerned that a class representative’s goals have diverged from the class—thus raising doubts about the settlement’s fairness under Rule 23(e)—could adopt this methodology as a means of curbing lead plaintiffs’ enthusiasm for quick settlements.
Class action settlements are a common feature of federal court litigation. They enable plaintiffs—including unnamed class members—to receive the relief they believe they deserve, give defendants a mechanism for avoiding costly litigation, and allow courts to clear dockets and avoid discovery disputes and trials. As more courts apply the new factors in Rule 23(e), additional scrutiny of proposed class settlements can be expected.
