The Class Action Weekly Wire – Episode 68: Settlement Issues In Class Action Litigation


Duane Morris Takeaway:
This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and associate Nick Baltaxe with their discussion of the settlement process in class action litigation and common issues that arise for both plaintiffs and defendants while crafting settlement agreements.

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Episode Transcript

Jennifer Riley: Thank you for being here again for our next episode of the weekly podcast the Class Action Weekly Wire. I’m Jennifer Riley, partner at Duane Morris, and joining me today is associate Nick Baltaxe. Thank you for being on the podcast, Nick.

Nick Baltaxe: Always a pleasure, Jen, happy to be here.

Jennifer: Today we’re discussing settlement issues in class action litigation over the past 12 months. Nick, how often are there settlements in class action litigation?

Nick: You know, class actions are typically not tried to verdict. Trials in these situations are rare, because financial exposure in most of these cases can be vast, and the possibility of an adverse verdict is usually an unacceptable risk to the employer. Because of that, most potential class actions are resolved either before or on the heels of a class certification order. Rule 23 not only provides a process for that certification of the class action, but also does provide a procedure for settlement of the class action claims as well. Specifically, Rule 23(e) lays out a three-part settlement approval process. It includes preliminary approval, then notice to the class, and final settlement approval.

Jennifer: And what would you say are some of the benefits of settling these types of cases?

Nick: You know there are benefits to everyone included. Early settlements offer plaintiffs relatively quick payments, and they get to kind of skirt around the longer, drawn out class certification and class litigation process. It’s a benefit to the defendant because it allows the defendants to end cases early, which usually avoids the costs of protracted litigation, and usually what is very expensive discovery. Also, there’s a benefit to the court system as they get to avoid needless litigation that clogs court dockets. Usually, when permitted, parties frequently choose to settle on a confidential basis, which also allows the avoidance of risk of adverse publicity which is a dynamic that can benefit both defendants and plaintiffs.

Jennifer: Are there any obstacles to settling or getting court approval of class wide settlements? Or what would you say some of the biggest obstacles are?

Nick: Yes. So, as we stated, there’s both a preliminary and a final approval process for these class settlements. In order to secure a court’s approval at the preliminary stage, the parties must provide sufficient information to the court to determine whether or not it will likely be able to approve the settlement and certify the classes solely for the purposes of the entry of judgment. Rule 23(e) includes a detailed list of factors for consideration before final approval, as well, including the quality of class representation. Whether the negotiation took place at an arm’s length, the adequacy of class relief, and the equitable treatment of the class members. Class notice at the preliminary approval stage is also governed by this rule and outlines the proper process for providing notice to the class members.

Jennifer: Thanks, Nick. The settlement approval process is far from a rubber-stamping process, at least in many courts. While the legal standards are rule-based, courts tend to apply the standards in less than identical fashion based on the case law of the federal circuit which within which they’re located, as well as based on their own discretion. So what might pass muster in one courtroom may not pass muster in another courtroom. Courts do tend to use a less rigorous standard for certification of a class for settlement purposes, though, as compared to non-settlement purposes. I think this is especially evident with the Rule 23(b)(3) requirement of predominance. What do you think this means for counsel crafting these settlements?

Nick: Yes, settlement on a class wide basis consistently poses strategic dilemmas both for plaintiffs and defendants alike. There are multiple issues that need to be considered recrafting the settlement. For example, how much can a defendant concede without compromising its ability to defend the case to the extent the settlement ends up falling through or is not approved; can we settle something on a class wide basis that may be too cheap, and therefore deemed to be inadequate or unfair when being reviewed by the courts; and finally, how extensive and broad can the release language be to cover the settlement parties without risking of that not being approved by the court.

Jennifer: And the courts can answer those questions on a very wide spectrum. So, now that we’ve laid out the settlement process, do you have any notable rulings that you wanted to discuss from the past 12 months?

Nick: So classified settlements require that plaintiffs show all the applicable requirements of Rule 23, and courts have, and will, deny approval to a proposed class-wide settlement if those requirements are not established. A good example is a case called Mercado, et al. v. Metropolitan Transportation Authority. In that case, the plaintiffs, who are a group of employees of the MTA, filed a collective action alleging that the defendant failed to pay overtime compensation in violation of the FLSA.

The parties ultimately settled the claims, and the plaintiffs filed a motion for preliminary settlement approval. However, the court denied the motion. While the parties had asserted that the litigation would have been protracted, expensive, and risky – and that the settlement provided close to maximum recovery for plaintiffs – the court found that the parties failed to provide any documentation to support their assertions concerning the ranges of possible recovery and the reasonableness of the settlement. The court also noted that the settlement agreement’s release was overly broad because it extended liability releases to various entities beyond the defendant as well as to individuals who are not part of the lawsuit. The court also examined attorneys’ fees and costs. In the case, the plaintiffs’ counsel sought a fee of one-third of the settlement proceeds and reimbursement of all costs. The court opined that the requested rates were reasonable, but the plaintiffs’ counsel failed to provide any evidence whatsoever to determine whether the costs were also reasonable. The court finally concluded the plaintiffs failed to address whether the conditional certification status of the collective action affected the settlement; whether they were requested service rewards for the named plaintiffs; and that the fees and the cost of the administration of the settlement fund were reasonable. Accordingly, the court denied the motion for preliminary settlement approval.

Jennifer: Nick, how often would you say that there are objections to class action settlements?

Nick: So there is also a process for class members to object to the settlement, and there are objections all the time in these situations to these settlements. Sometimes these objectors are even successful in overturning the settlement or getting it vacated on appeal. An interesting example from the past 12 months is a case called In Re Wawa, Inc. Data Security Litigation. In that case, the plaintiffs allege that their personal information was compromised following a data breach in which hackers gained unauthorized access to Wawa’s payment systems, therefore, compromising the credit and bank card data of around 22 million customers.

The case was ultimately settled for $9 million in gift cards and other compensation to customers, including $3.2 million for attorneys’ fees and costs. One of the class members, named Theodore H. Frank, objected to the settlement, arguing that the fee calculation was unreasonable, and arguing that the settlement was based on a constructive common fund that combined attorney and class recovery, therefore, making the fee award disproportionate to the amount that was being provided to the class members. The objector also raised concerns about side arguments between class counsel and Wawa.

The district court, however, approved the settlement and dismissed the objections. However, Frank appealed, and the Third Circuit vacated the district court’s ruling. The Third Circuit in doing so highlighted two key considerations in evaluating fee rewards: first, the relationship between the fee award and the benefit received by the class members; and second, any side agreements between class counsel and the defendant. The Third Circuit ruled that the district court on remand had to review the fee award with “fresh guidance” from the appellate level, particularly regarding arrangements between the parties prior to any settlement approval being granted. The Third Circuit also noted the parties’ “clear sailing” arrangement, under which Wawa agreed not to contest any fee petitions filed by class counsel for the consumers, and the fee reversion provision that any reductions in class counsel fees would be returned to Wawa rather than distributed to the class members. The Third Circuit made sure that both of those were being reviewed to determine whether or not they were fair and reasonable. The Third Circuit further opined the district court should consider whether the funds made available to the class members, rather than the amount claimed during the claims process, was the best measure of reasonableness, and whether the fee reward was reasonable in light of any other side agreements between class counsel and Wawa. With all those considerations in mind, the Third Circuit accepted the objection and vacated and remanded it to the district court.

Jennifer: Thanks, Nick. Very, very interesting, and a great example of an appellate court articulating the fairness considerations that should be applied by district courts in considering approval of class action settlements.

Well, I think we are about out of time here for today. So thanks so much for joining me, Nick, and thanks to our listeners for being here. We will be sure to give more updates on settlement issues in class action litigation on our blog, the Duane Morris Class Action Defense Blog, so stay tuned.

Nick: Thanks, all.

 

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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