A. Certification standard. Courts engage in a two-pronged analysis when assessing the propriety of class action settlements. First, courts assess whether a proper class exists. This analysis is vital in cases where the parties reach settlement prior to class certification.1 Second, courts assess "whether a proposed settlement is fundamentally fair, adequate and reasonable."2 To determine whether class action settlements meet the standards of "fundamental fairness," "adequacy" and "reasonableness" courts examine a number of factors, including:
the strength of the plaintiffs' case;
the risk of further litigation;
the risk of maintaining class action status throughout the trial;
the amount offered in settlement;
the extent of discovery completed; and
the reaction of class members to the proposed settlement.3
Defendants can help shape all of these factors by strategically timing motions to dismiss to point out weaknesses in plaintiff's case and motions for settlement certification, crafting terms of proposed settlements, and demonstrating the value of the settlement to class members, often through experts. By doing so, defendants can increase the likelihood of class settlement approval while decreasing the possibility for challenge.
B. Other issues: (1) Class representatives. Courts assess the adequacy of a class representative in various respects, the most typical inquiry being whether the representative suffered in the same manner as other class members might have suffered.4 In Molski, the Ninth Circuit held that the class representative was inadequate and reversed the lower court's settlement class certification. In that case, plaintiffs sued an owner and operator of service stations for violations of the Americans with Disabilities Act and the Unruh Civil Rights Act. The appellate court determined that the class representative was not a victim of the type of incidents that class members suffered, and was troubled by the class representative's release of claims under the relevant statutes.5 Defendants can avoid this predicament by conducting thorough discovery of the class representative and aggressively challenging his or her adequacy if it becomes clear that the representative has not suffered the same harm as the class members, or by prevailing upon plaintiffs' counsel to add additional representatives to shore up deficiencies.
(2) Reverter and clear sailing provisions. In a May 2005 decision, Sylvester v. Cigna Corp.,6 the United States District Court for the District of Maine, set a brightline rule against reverter7 and clear sailing8 clauses deeming them presumptively collusive. In that case, health insurance plan subscribers brought a class action suit against CIGNA insurance plan administrators alleging wrongful calculation of coinsurance payment amounts. Before the plaintiffs' class certification motion was filed, the parties reached a settlement agreement, which contained reverter and clear sailing clauses. The Court found that reverter clauses are generally "suspect and need to be viewed cautiously since they undercut the deterrent effect of class actions" by permitting a defendant to recover funds not claimed by class members.9 The Court also cautioned against clear sailing clauses stating they "decouple" plaintiffs' counsel's financial incentives from those of the class "thereby increasing the risk that the actual distribution will be misallocated between attorneys' fees and plaintiffs' recovery." The Court concluded that "the presence of both a reverter clause and a clear sailing clause should be viewed with even greater suspicion and not be presumed fair to the class."10 Indeed, the Court affirmatively stated that the "presence of these two provisions in any settlement agreement should present a presumption of unfairness that must be overcome by the proponents of the settlement."11
(3) Attorneys' fees. Assessment of attorneys' fees in the context of cash settlements is relatively simple for a court. The greater the cash benefits provided to the class relative to the cash payment to class counsel, the higher the likelihood of approval. Where the contrary is true and attorneys' fees surpass the benefit derived by the class, the more likely a court will refuse settlement certification and approval. Unreasonably high fees can be seen as possible evidence that class counsel agreed to an unfair settlement on behalf of class members (i.e., monetary award or less injunctive relief) in exchange for those high fees. Defendants can easily protect against such misperceptions by refusing to discuss attorneys' fees until after the class settlement itself is reached. While this procedure may not eliminate entirely the risk of conflict, it at the very least weakens the inference that class counsel agreed to settlement terms because of the promise of unreasonably high legal fees.
In cases where the benefit to the class is non-monetary (i.e. warranties, coupons, discounts, or securities), courts, often assisted by experts retained by defense counsel, or sometimes plaintiff's counsel, engage in a valuation of the award to determine the cash-value of the awarded benefit. Recently passed federal and state legislation grants courts close oversight authority over attorneys' fee provisions and bars from approval class action settlements that result in a net loss to class members after attorneys' fees are paid.12 For example, in 2003, the Texas Legislature passed the Texas Tort Reform law, which imposes fairly stringent restrictions for class action practice in Texas. The Texas law provides that if class recovery includes non-cash benefits ( e.g. coupons), then the total attorneys' fee award must be in the same proportion of cash and non-cash as the recovery obtained by class members.13 The Texas legislation also limits the total amount of attorneys' fees that may be awarded by requiring the court to calculate fees through the lodestar method,14 which considers various factors (i.e. complexity of the case, skill of the attorney, novelty of the issues, and whether the fee is a contingent).15 These statutory reforms are consistent with the courts' view that unreasonably high fees are inconsistent with the obligation to protect the interests of the class, not just as a matter of fairness but also as a matter of due process and adequate representation.
(4) Conflict of laws. The conflict of laws analysis conducted by the Shutts court, highlights the importance of assuring that the law being applied by the court does not conflict with the laws of any other state potentially interested in the lawsuit. Shutts instructs that defendants of nationwide class action settlements may need to conduct a 50-state survey to assure that no conflict of law exists both with respect to the substantive claims being settled and the relief being offered in the settlement. Defendants of multi-state class actions should similarly survey the laws of all states that may be connected to the lawsuit. For example, if a multi-state settlement includes class members in Texas, the parties must consider whether a coupon settlement must comply with the Texas Tort Reform Act restrictions on attorneys' fees, which, inter alia, impose the requirement that if the class receives a cash and coupon benefit, any attorneys' fee award must be paid in cash and coupon in the same proportion.16 Similarly, if a class action settlement relates to claims brought under state consumer protection statutes that, by their terms, apply to state residents or consumers only, the parties may be required to have a member of the class from each state as a class representative.
V. The Class Action Fairness Act Of 2005
The prior discussion illustrates the response of courts and state legislatures to the advent of numerous, large multi-state and national class actions and settlements. In 2005, Congress also responded by enacting the Class Action Fairness Act of 2005 (CAFA) which attempts to reduce forum shopping and greatly expands the oversight and jurisdiction of federal courts over class actions, including class action settlements. Congress cited "abuses of the class action device" as a principle motivation for the Class Action Fairness Act,17 noting that "[c]lass members often receive little or no benefit from class actions, and are sometimes harmed, such as where  counsel are awarded large fees, while leaving class members with coupons or other awards of no value."18
CAFA requires courts to hold a fairness hearing to review a coupon settlement and to issue written findings.19 Prior to CAFA, attorneys' fees in cases involving coupon settlements were approved based upon an analysis comparing attorneys' fees to the value of all coupons issued to the class. Under CAFA, in order to be approved, attorneys' fees must be based on the value of the coupons actually redeemed by the class members.20 Courts may now also require defendants to contribute a portion of the value of the unredeemed coupons to charitable or governmental organizations.21 Of course, this increased scrutiny of coupon settlements may lead to less flexibility for parties trying to negotiate a class action settlement because plaintiff's counsel may now demand more cash settlements.
Significantly, CAFA limits courts' authority to approve class action settlements under which any class member would be required to pay class counsel more money than the class member receives in the settlement thus rectifying the problem found in Homeside.22 Also, CAFA bars approval of class action settlements that pay greater amounts to some class members based on their closer geographic proximity to the court.23
Also, under CAFA, parties seeking approval of a class action settlement must give notice to the appropriate state official of every state in which a class member resides and to the appropriate federal official within ten days of filing the settlement with the court. Both state and federal officials may then file an objection to the settlement. To give state and federal officials ample time to act, courts cannot approve a settlement until at least ninety days after defendants provide the requisite notice. The notice provisions could make it more difficult, time consuming and expensive to gain approval of a class action settlement if federal and state officials take a more active role in objecting to settlements which may not have otherwise been on their radar screens but for the CAFA notice provisions. Even though CAFA is widely viewed as legislation passed to benefit corporate defendants, some of its provisions, such as the attorneys' fee restrictions and the notice provisions, may negatively impact defendants' ability to negotiate and obtain approval of class action settlements.
The lessons learned from Shutts, Homeside Lending, and CAFA by class action practitioners are numerous. Defendants must carefully scrutinize the impact of the proposed settlement on the rights of class members, paying close attention not to create incentives - through attorneys' fees, for example - for quick settlements that courts may perceive as tainted by conflicts of interest or, worse, collusion. The consistent threads that run through the recent decisions and legislation are a steadfast adherence to due process principles and an inclination to protect the rights of absent class members.
Given the legislation and case law discussed above, then, when crafting a settlement, defendants should ask themselves these questions to assure that all requirements for approval are met:
Does the settlement class satisfy the predominance requirement?
Which state's law is to be applied and are the constitutional standards set forth in Shutts satisfied?
Are there conflict of law issues with respect to substantive claims or the settlement relief that would either defeat predominance or violate due process requirements?
Should a 50-state case law survey be conducted to analyze conflict of law issues?
Does the settlement structure negatively impact the class in any way which would trigger the stricter minimum contacts analysis applied in Homeside?
Does the settlement comply with due process notice requirements?
Is the notice in plain English, not legalese?
Is the notice being provided in a manner to provide reasonable notice to all known class members?
Is notice being directed to appropriate federal and state officials if required?
Do the class representatives adequately represent the class?
Would discovery or a motion to dismiss bring to light any deficiencies?
Do the class representatives represent all of the necessary jurisdictions implicated by the class action?
Is it necessary to negotiate with class counsel to replace or add class representatives to address deficiencies or conflicts?
Should the settlement provide for confirmatory discovery?
Does class counsel adequately represent the class? Do any conflicts exist?
Are attorneys' fees reasonable in comparison to the compensation awarded to the class?
Are attorneys' fees to be paid out of the economic benefit to be conferred upon the class?
Is the defendant agreeing to a reverter or clear-sailing provision in the settlement agreement? 1 See Amchem, 521 U.S. at 620 ("[s]uch attention is of vital importance, for a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold.").
2 See Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998)
3 See Molski v. Gleich, 318 F.3d 937, 953 (9th Cir. 2003)
4 See Molski, 318 F.3d at 955.
5 See Molski, 318 F.3d at 955-56.
6 369 F. Supp. 2d 34 (D. Me. 2005).
7 A reverter clause provides that any portion of a settlement fund that is not claimed by class members as of a certain date would be returned to the defendant.
8 A clear sailing clause provides that defendant will not oppose an attorney's fees request that falls below negotiated limit.
9 Id. (internal quotations omitted)
10 Id. at 46.
11 Id. (emphasis in original)
12 28 USC 1713.
13 See C.P.R.C. 26.003.
16 Tex. R. Civ. P. 42(i)(2).
17 Class Action Fairness Act of 2005, Pub. Law 109-2, 109th Cong. (2005).
19 28 USC 1712(e).
20 28 USC 1712(a).
2128 USC 1712(e).
22 28 USC 1713.
23 28 USC 1714.
Published May 1, 2007.