August 09, 2016 Practice Points

Sanctions for Forum Shopping the Approval of Class Action Settlements

By Eric Hudson

Class action counsel are likely familiar with the requirements of Rule 23 of the Federal Rules of Civil Procedure that apply to any settlement that is binding on class members. Specifically, Rule 23(e)(2) provides that, if any settlement or compromise would bind class members, then “the court may approve it only after a hearing and on finding that it is fair, reasonable, and adequate.” In a recent decision from the Western District of Arkansas, plaintiffs’ class counsel and defense counsel negotiated a settlement while a class action was pending in federal court, and the parties voluntarily dismissed the case and immediately filed a new action in state court seeking to certify a class and have the settlement approved. See Adams v. United States Auto. Ass’n, 2016 WL 4129115 (W.D. Ark. Aug. 3, 2016). Upon learning of the parties’ actions, the federal district court issued an order directing plaintiffs’ and defense counsel to show cause why sanctions should not issue for violations of Rule 11. Following briefing and oral argument, the court found Rule 11 violations against counsel, and the court sanctioned several of plaintiff’s counsel by issuing a written reprimand.

The district court’s rationale is important because the court rejected arguments by counsel that, because the Class Action Fairness Act of 2005 did not specifically reject this sort of forum shopping for class-settlement approval, the conduct was permissible. The district court noted the well-established law that, once subject-matter jurisdiction attaches, subsequent events do not divest the court of such jurisdiction. For CAFA to have divested federal courts of jurisdiction under the circumstances in Adams, the court found that Congress would have had to expressly state its intention to alter such well-settled law.

With respect to defense counsel, the court noted the “rock and a hard place” that counsel were between as a result of their client advising them that it had entered into previous settlements in this manner. Although such circumstances convinced the court not to impose sanctions, it held that defense counsel violated Rule 11 by acting contrary to the requirements of Rule 23 and well-established law in an effort to have another court address whether the proposed settlement protected the class members’ interests. The court went a step further and issued the sanction of a written reprimand against plaintiffs’ counsel. The court based its sanction on the “unequivocal” law in the Eighth Circuit that “a party is not permitted to dismiss merely to escape an adverse decision nor to seek a more favorable forum.” Id. (quoting Thatcher v. Hanover Ins. Group, Inc., 659 F.3d 1212 (8th Cir. 2011). Importantly, the court also emphasized that counsel did not invite the court’s review of the proposed tactic but instead “effected their dismissal in a manner calculated to evade review.”

Adams is therefore an important reminder that, once a federal court takes jurisdiction of a class action, it is improper to take steps to have another court approve a settlement for a class where the district court retains jurisdiction and is required under Rule 23 to protect the class members’ interests.

Keywords: litigation, mass torts, sanctions, class action settlement, subject-matter jurisdiction

Eric E. Hudson is with Butler Snow in Memphis, Tennessee.

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