You have navigated the treacherous waters of class action litigation and finally negotiated a settlement after years of hard labor. So now the parties just have to sign off on the agreement and get it before the presiding judge for approval, correct? Well, it’s not quite that simple most of the time. Due in large part to the magnitude of the settlement affecting absent class members, there are several mileposts to surmount to obtaining final approval of the settlement. Below are some procedures and issues for you to consider when tackling a class action settlement. Like other Class Actions 101 articles, this isn’t meant to be a detailed treatise of class action settlements; it is a basic blueprint of what a plaintiff’s counsel might expect to see at the time of settlement.
We have just negotiated a settlement with the defendants after years of litigation. Now what?
First you must file a motion for preliminary approval of the proposed class action settlement with the court. As suggested by the title of the motion, the court makes a preliminary determination on the fairness, reasonableness, and adequacy of the proposed settlement so that notice of the proposed settlement may be given to the class and a hearing may be scheduled to make a determination regarding the fairness of the proposed settlement. The preliminary motion generally lays out the road map for the settlement, including a definition of the settlement class, the notice and claims process, the release and waiver of claims that arise out of or could have been raised in the litigation, anticipated attorney fees and expenses, service or incentive awards for class representatives, and a brief description of the arm’s-length settlements. Courts tend to evaluate the merits of a proposed settlement to ensure it is the product of legitimate negotiations, fair to the entire class, and not deficient in any obvious manner before the time and expense of administration commences and a final approval hearing is scheduled. If a class has not already been certified (the parties can reach an agreement on a class-wide settlement before a class has been certified), the court may also conditionally certify a class for settlement purposes while holding off on final approval until the final approval hearing, where class members can voice any objections to the proposed settlement. The purpose of conditional certification is to permit the notice process to go forward, while recognizing that the certification is for settlement purposes only and that the class will not be certified if the settlement does not receive final approval. Be aware that some circuits do not approve the use of “conditional certification,” so be sure to examine relevant case law.
This sounds like our work is just beginning. So how does one go about tracking down these class members to notify them of the proposed settlement and fairness hearing?
You will need to find a reputable class action administrator that can work with both plaintiffs and defendants to help design a notice and claim form that will reach as many class members as possible. Your notice to class members must be deemed “adequate”: It must give the best notice possible given the circumstances and be likely to reach absent class members. Following the preliminary approval of the class action settlement, the chosen class action administrator will construct a list of class members from a host of varying sources that may include the defendant’s internal customer or employee records and will implement the notice plan approved by the court—generally some combination of mailing the notice and claim form and publishing notice in media that are reasonably calculated to reach the target class members (but this needs to be tailored to your case). The administrator will also undertake claims processing services, including claim form design, claim form and opt-out processing, class member inquiry services, and analytics of the effectiveness of the notice plan and class member response rate. As discussed further below, response rate can be an important factor at the final approval hearing, so it will be imperative to implement an efficient claims system. Once the settlement has been approved at the final hearing, the administrator will likely be charged with managing the settlement fund and benefit distribution to class members, as well as paying the court-approved fees and expenses to attorneys and incentive awards to class representatives.
So what information will we have to provide in the notice to class members?
While the specifics of a class notice depend on the context of a given case, the general information set forth in a class notice tends to include a summary of the litigation, the relief that has been proposed to the class, a claim form to that relief, instructions on how to opt out of the settlement, and pertinent dates, including deadlines for submitting claims and objections to the settlement. The notice will also provide the final approval hearing date, the court’s address, and a toll-free number and email address to the administrator for class members to use if they have any questions concerning the settlement.
I’ve read that there is a notice requirement under the Class Action Fairness Act, on top of notice to class members. How do I go about satisfying this requirement?
The Class Action Fairness Act (CAFA) requires defendants who are party to a settlement agreement to notify the “appropriate” state and federal officials of the settlement within 10 days of the filing of the preliminary settlement agreement. These officials can be the United States Attorney General, a state attorney general, or any state regulator who oversees the conduct at issue in the settlement agreement. Further, the number of state regulators apt to receive notice will correspond with the states where settlement class members reside. The contents of this notice can be found under 28 U.S.C. § 1715(b). A court is restricted from granting final approval to a settlement until 90 days have elapsed from the date of service of notice to the regulators. While this may seem cumbersome and bit of overkill, this notice requirement adds another layer of protection to class members to guard against collusive agreements made to the detriment of the settlement class members.
OK, how do we approach the delicate topic of requesting attorney fees and expenses?
Not to worry: Plaintiffs’ attorneys are certainly expected to request attorney fees and expenses for the work they have undertaken on the litigation. However, there are a few guidelines to keep in mind when making this request. As recently discussed in a federal appellate opinion, a crucial guideline is the relationship between the actual relief made available to the class members and the requested attorney fee award. Although there is no rigid formula, a court will likely take into consideration what monetary and injunctive relief the class members received, the ease (or difficulty) of navigating the claims process from a class member’s perspective, the amount of work put into the case by the plaintiff attorneys depending on where in the litigation the case is settled, and references to awards given by other courts if circumstances are sufficiently similar.
When evaluating the reasonableness of attorney fees, courts will take into account the complexity of the case; the amount of hourly rates for addressing complex, contingent fee class action litigation; the quantity and quality of work performed by class counsel during the course of the litigation; and whether the requested fees are made under a lodestar or percentage of the common fund methodology. Many firms base their attorney fee request on the lodestar methodology, which is the hours they expended multiplied by a reasonable hourly rate, and sometimes a further enhancing multiplier, reflecting counsel’s success. A more straightforward fee application may involve fees constituting a percentage of the total common settlement fund. Expect the court to give attorney fee requests close scrutiny as they tend to form the basis for many an objection to class action settlements. For instance, the Ninth Circuit requires the requested lodestar attorney fees to be checked against a hypothetical common fund where the fees are generally not to surpass 25 percent of the common fund.
May the plaintiffs request an incentive award for the class representatives?
Yes, it is customary for plaintiffs to request an incentive award for class representatives to compensate for time and resources devoted to the case in representing the interests of the settlement class members. Other factors include any personal or professional risk the class representative may have assumed during the course of representing the class. However, the granting of an incentive award is within the court’s discretion, and the incentive award should bear a reasonable relationship to the total relief made available to the settlement class as well ensuring the award does not impair the adequacy of the class representative. In other words, a large incentive payment compared with the available settlement relief to the class may warrant a close examination of the payment to ensure the class representative was not unduly influenced to breach his or her fiduciary duties to the class members.
If there are unclaimed or surplus funds after the claims process is completed and attorney fees have been paid, can these funds be funneled to a charitable organization or what are we do with them?
Yes, a court may permit allocation of the leftover settlement proceeds—often referred to as “residual funds”—to a charitable entity following distribution of settlement funds to class members. Such funds are generally unclaimed or otherwise unavailable for distribution to class members. This allocation is generally referenced as a cy pres distribution. Cy pres distributions have recently come under scrutiny; in one recent example, a federal appeals court denied a cy pres distribution when it found that the plaintiffs had not demonstrated to the court that they had exhaustively sought to distribute settlement funds to the class members and that the recipient was sufficiently aligned with the interests of the settlement class. For that reason, parties to a settlement would be well served to construct an efficient claims process geared toward garnering as many responses from the settlement class as feasible. Any cy pres distribution should be earmarked toward a charitable cause that is demonstrably aligned with the interests of the settlement class.
May individuals object to the settlement? If their objections are overruled, do these objecting individuals have any recourse to appeal the settlement?
So much for thinking objections come up only during witness testimony. A member of the settlement class may file an objection to the settlement and, of course, the objecting settlement class member—an “objector”— must list good-faith reasons as the basis of his or her objection. The basis for the objection could be related to issues we previously touched on, including insufficient relief to the settlement class, a request for excessive attorney fees, or a cy pres recipient without a rational relationship to the settlement class’s interests. If the district court decides to overrule the objections at the final approval hearing, the objector may file an appeal to the settlement. At that point, a court of appeals can evaluate whether the district court abused its discretion in finding that a class action settlement was fair, reasonable, and adequate.
Once we make it to the final settlement approval hearing, can we finally breathe a sigh of relief?
The short answer is “probably.” The better answer will note that a variety of factors can affect the probability that the final approval hearing order can survive any appellate scrutiny. In certifying a settlement class, the court must not only determine whether a proposed settlement is “fair, reasonable, and adequate” under Federal Rule of Civil Procedure 23(e) but must also ensure that each of Rule 23’s requirements are satisfied. The court will evaluate any objections to the settlement, ascertaining the number of class members that opted out of the settlement, consider the percentage of class members who submitted claims, compare the relief actually claimed by the class to the requested attorney fees, approve of any cy pres recipient and award, and generally determine whether the settlement plan that was presented at the preliminary approval hearing was sufficiently executed.
And that is a basic overview of a class action settlement on the plaintiffs’ side.
Keywords: litigation, class actions, settlement, notice, attorney fees, cy pres, objection