March 06, 2019 Articles

Judicial Skepticism and the Class Action Settlement Approval Process

Obtaining preliminary approval today requires much more time and attention to detail than in the past.

By Jason J. Thompson

Historically, judges greeted the news of a class action settlement with open arms. Often the approval process was more of a victory lap than a rigorous exercise. But no more. Today judges are demanding more rigorous analysis of the class claims and damages; the list of Rule 23 approval criteria keeps growing; and the threshold for fairness is vague.

A thread running through the change is judicial skepticism. Courts rely less on the learned views of class counsel and instead look for more facts, evidence, and data to test the fairness of a settlement. In fact, most circuits have expressly directed trial courts to look for signs of collusion among the parties—that is, agreements that benefit the plaintiff lawyers and the defendant to the detriment of the class members. For example, in In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935 (9th Cir. 2011), the court identified three telltale signs of collusive settlement agreements: (1) a claims-made process, (2) a “clear sailing” provision as to class fees, and (3) a reversion of unclaimed settlement funds to the defendant.

Obtaining preliminary approval today requires much more time and attention to detail than in the past. The preparation should begin early—well before filing the motion for preliminary approval—because it must include attention to the current criteria and will likely depend on collaboration with opposing counsel.

Changes to the Preliminary Approval Process

The evidence of a heightened standard for approval is not just anecdotal. Recently, the Rule 23 Subcommittee of the Advisory Committee on Civil Rules issued changes to Rule 23 that went into effect December 1, 2018. Some of the changes directly relate to the preliminary approval process and should therefore be considered when preparing a class case for settlement:

  • Providing for electronic class notice—Rule 23(c)(2)(B)
  • The proposed settlement was negotiated at arm’s length—Rule 23 (e)(2)(B)
  • The relief provided for the class is adequate, taking into account
    • the costs, risks, and delay of trial and appeal;
    • the effectiveness of any proposed method of distributing relief to the class, including the method of processing class-member claims, if required;
    • the terms of any proposed award of attorney’s fees, including timing of payment; and
    • any agreement required to be identified under Rule 23(e)(3)—Rule 23(e)(2)(C)
  • Class members are being treated equitably relative to one another—Rule 23(e)(3)(D)

Second, courts are issuing orders outlining what they expect in a motion for preliminary approval. For example, the U.S. District Court for the Northern District of California recently issued Procedural Guidance for Class Action Settlements. The court was clear in announcing the purpose behind the guidelines and the consequences of ignoring them:

Parties submitting class action settlements for preliminary and final approval in the Northern District of California should review and follow these guidelines to the extent they do not conflict with a specific judicial order in an individual case. Failure to address the issues discussed below may result in unnecessary delay or denial of approval. Parties should consider this guidance during settlement negotiations. Parties should also consider the suggested language below when drafting class notices.

Id.

The guidelines set forth instructions regarding an array of topics ranging from the approval motion, the settlement itself, and claim administration, and include the following, for example:

  • A list of eight specific requirements for every motion for preliminary approval;
  • Details as to settlement administration;
  • Requirements for class notice, opt-outs, objections, incentive, and cy pres awards; and
  • Requests for attorney fees.

One of the more novel requirements is for lead class counsel to disclose information on settlement distributions to class members from at least one past class action settlement lead counsel managed. Id., Preliminary Approval ¶ 11.

Decisions from across the country regularly deny preliminary approval in a variety of case types. The opinions provide a growing list of items that trial courts are looking for in a preliminary approval motion, and these should be researched before filing an approval motion.

A recent example is In re Yahoo Inc. Customer Data Security Breach Litigation, No. 5:16-md-02752, in the U.S. District Court for the Northern District of California. The judge rejected preliminary approval of a $50 million data breach settlement. The following were among the half-dozen deficiencies she identified:

  • An inadequate explanation as to why it took 32 law firms to do the work;
  • Failure to adequately disclose the size of the settlement fund, the scope of nonmonetary relief, and the size of the class; and
  • Inadequate disclosure as to how much would be spent on credit monitoring services or class notice and settlement administration.

The judge explained, “Without knowing the total size of the settlement fund, class members cannot assess the reasonableness of the settlement.” She concluded, “The parties’ lack of disclosure also inhibits the court’s ability to assess the reasonableness of the settlement.” She also pointed to the discovery record, noting, “The current record is devoid of such information.”

The Practical Effects of Today’s Standard for Class Action Settlement Approval

Class action settlement approval requires trial courts to pay more attention to what was done by the class action lawyers during discovery, the benefits of the settlement, and how those benefits are shared among class members.

The changes to the Rule 23(e) approval process create some new challenges, and some serious problems, for class action practitioners. To begin, preliminary approval is no longer judged under a relaxed standard. Promising to support the settlement at the final fairness hearing simply won’t work anymore. Rule 23 now expressly requires a hearing and review of the criteria listed in subsection (e).

Next, a failure to explain and model the best-case scenario on damages is likely to be fatal to a preliminary approval motion. Courts are separating the evaluation of the class benefits into two parts. First, the damages must be modeled under a best-case scenario—as if the plaintiff wins on all counts and under all conditions. Once modeled, that amount is then compared with the actual amount being provided in the settlement before the court can pass on the fairness of the settlement.

Of course, this raises a problem because providing such a damages model requires a sufficiently developed record on a best-case scenario. Furthermore, constructing a damages model, especially for submission in court, typically requires the use of expert witnesses. Experts are expensive, require sufficient data and evidence, and take time to do their work. This all leads to delay and increased cost.

Intra-class conflicts also require more attention today. For example, in a multi-state settlement, class members from states with more advantageous laws that provide for increased damages must be carefully addressed in the preliminary approval motion. While this is nothing new for class action lawyers, the new approval process certainly calls more attention to differences among class members. See Fed. R. Civ. P. 23(e)(3)(D). The allocation-of-benefits plan should probably be expressly included in the settlement talks or mediation to be sure both sides are on the same page as to how those claims will be treated and presented to the court.

Another area of concern is the class definition. Meeting the demands of today’s heightened standards may produce smaller classes. A reduction in the scope of the class may lessen the challenges to modeling damages or explaining away intra-class conflicts. However, it might also result in dropping class members from the case and leaving them without any relief.

For example, call-center cases under the Fair Labor Standards Act involve off-the-clock work during the opening and closing of computer programs used on the job. However, the at-home workers often have another off-the-clock claim relating to problems logging in and connecting to the company server, commonly called “tech-time claims.” Those claims typically involve more individual issues and are thus harder to certify than the boot-up and shut-down claims of the agents who work in the office.

Under today’s standards, the parties must develop a more extensive record as to the value of the tech-time claims as compared with the time spent opening and closing computer programs. The at-home workers, or the tech-time claims, might simply be dropped from the case rather than conducting more discovery and incurring expert costs to complete an adequate presentation for the court.

In addition, the class release will now attract more attention than ever. Parties should consider whether they have a sufficient record to explain the value of released claims or why they are dismissing certain claims still in complaint. The obvious advantage to dismissal is it eliminates the need to release the claim, which in turn eliminates the need to model the damages. But there are problems with dismissing claims as part of a settlement, including adequately explaining why, from the absent class members’ perspective, pursuing the claims makes no sense in light of the proposed settlement.

Even settlement administration questions require more attention. Information about how the parties anticipate distributing the class benefits, monitoring claims during the administration process, and solutions for anticipated distribution difficulties may be needed. That information should be supported by declarations from the settlement administrator and supported by the discovery record.

Last, when requesting fees, class counsel would be wise to include detailed information to explain how they staffed the case efficiently. This should include explaining how they assigned work to the appropriate level of staff—from paralegal to senior partner—and providing examples.

Conclusion

The 2018 changes to Rule 23(e), the Northern District of California Procedural Guidance for Class Action Settlements, and decisions like In re Yahoo collectively serve as a warning to class action practitioners that past practices are no longer acceptable. They also identify the criteria, and necessary level of detail in explaining the criteria, that lawyers must present when seeking preliminary approval of a class action settlement today.

Parties can no longer wait until the approval motion to explain why their settlement is fair, adequate, and reasonable, or assume that a good settlement will sell itself. The underlying discovery record, selection of claims, and class definitions must be better developed to support their eventual settlement. This is hard to do when there is no settlement and, instead, the parties are engaged in a battle.

Negotiating a class settlement and preparing the preliminary approval motion under today’s standards will be more cumbersome, complicated, and expensive. Whether all the increased attention, and skepticism of the lawyers, will prove to be the prescription for healthier class action settlements remains to be seen.

Jason J. Thompson is a shareholder at Sommers Schwartz, P.C., in Southfield, Michigan.


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