A class action settlement impacts not only the interests of the named parties that negotiate the settlement but also the interests of a much larger number of absent class members. To protect the interests of absent class members, Rule 23(e) of the Federal Rules of Civil Procedure (FRCP) obligates courts to approve class action settlements before they become final to ensure the settlements are “fair, reasonable and adequate.” (Although class action settlements differ slightly among the federal and states courts, many state procedural rules closely mirror those set forth in Rule 23.) It is thus important that the named parties take the appropriate steps to ensure the court approves class action settlements.
Once the parties negotiate a settlement resolving claims for the class, they seek preliminary approval by the court. The parties must demonstrate during the preliminary approval process (1) that the proposed settlement will likely be granted final approval and (2) that the court will likely certify the class for purposes of judgment on the settlement proposal. The court will consider for purposes of preliminary approval whether:
The parties should also identify for the court the proposed allocation of the settlement funds, settlement administrator, the methods of notice to absent class members, and content of the notice.
While class notice is not always required, the parties should anticipate that they will be required to provide notice of the proposed settlement to absent class members. Following the court granting preliminary approval of the settlement, Rule 23 requires the court to direct notice “in a reasonable manner” to every member of the class who would be bound by the proposed settlement. The parties should coordinate with the claims administrator to ensure that proper notice is disseminated to absent class members and to monitor any absent class members that opt out of the settlement.
The Class Action Fairness Act of 2005 (CAFA) requires that, within 10 days after filing a proposed settlement with a federal court that exceeds an amount in controversy of $5 million, every defendant involved must provide notice to the “appropriate federal official” and to the “appropriate state official” in every state where a class member resides. CAFA then provides government officials ninety days to review the settlement prior to final approval by the court.
Absent class members are ordinarily provided the opportunity to opt-out and/or object to the proposed class action settlement. The settling defendants should consider including a “blow provision” in the settlement agreement, which provides defendants an option to terminate the settlement agreement if a specified threshold of absent class members elect to opt out of the settlement. The class notice should also provide absent class members a deadline to file objections with the court prior to the hearing on final settlement approval. The parties should file a response to the objections prior to the hearing.
The parties should move the court for final approval of the class action settlement and seek a final approval hearing following expiration of the ninety-day CAFA notice period. The court must determine whether the settlement is “fair, reasonable, and adequate” to the class members. In doing so, the court will consider any objections filed by absent class members. If the court determines the settlement is fair, reasonable, and adequate, the court should grant final approval of the settlement.
The parties should carefully consider any other settlement requirements that are unique to claims that the parties are settling. For example, the Private Securities Litigation Reform Act of 1995 requires parties settling class action claims file under the Securities Exchange Act to ensure the final approval order includes “specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.”
