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Media Alerts - Koby v. Helmuth - Ninth Circuit
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March 29, 2017
  Koby v. Helmuth - Ninth Circuit
Headline: The Ninth Circuit panel held that a magistrate judge was not required to obtain consent from four million class members before approving a class action settlement, but also held that the magistrate judge abused her discretion by approving the settlement because there was no evidence that the injunctive relief afforded by the settlement had any value to the class members, yet to obtain it they had to relinquish their right to seek damages in any other class action.

Areas of Law: Federal Rules of Civil Procedure 23(e)(2), 28 United States Code § 363(c), Article III and Due Process Clause of United States Constitution

Issues Presented:
(1)(a) Whether 28 U.S.C. § 363(c) required the magistrate judge to obtain the consent of the four million class members before entering final judgment, and (b) whether not requiring the class members' consent would violate their Article III rights.
(2) Whether the magistrate judge abused her discretion in applying the FRCP 23(e)(2) "fairness" standard, when she approved a settlement which gave the unnamed plaintiffs nothing of value.

Brief Summary: After the parties engaged in settlement discussions for with the assistance of a magistrate judge, the named plaintiffs eventually consented to having the same magistrate judge conduct all further proceedings in the case, including the entry of final judgment, without the consent of the four million class members.. The district court entered an order authorizing the magistrate judge to exercise jurisdiction over the case, and she presided over all further proceedings. Under the terms of the settlement agreement ultimately reached, the parties agreed to seek certification of a nationwide, settlement-only class under Federal Rule of Civil Procedure 23(b)(2). The magistrate judge approved the settlement, without consent of the class members. The settlement gave the class members' monetary reward to a San Diego veterans charity, as well as injunctive relief rendered ineffective by an escape clause. The panel held that the magistrate had authority to enter judgment under 28 U.S.C. § 363(c) with only the consent of the named plaintiffs. The panel also found the settlement terms approved by the magistrate to be unfair to the class members under FRCP 23(e)(2), because the relief offered was of no real value them but only to the named plaintiffs and the class counsel.

Significance: 28 U.S.C. § 363(c) authorizes magistrate judges, "pon the consent of the parties," to "conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or court she serves." § 363(c)(1). The panel held that, in a settlement class action, "consent of the parties" does not include unnamed plaintiffs, but requires the consent of the named plaintiffs only. The panel also held that the magistrate judge abused her discretion in approving the class action settlement because the injunctive relief and cy pres damages did not benefit the unnamed plaintiffs. Thus, "ecause the settlement gave the absent class members nothing of value, they could not fairly or reasonably be required to give up anything in return."

Extended Summary: In 2009, Michael Koby, Michael Simmons, and Jonathan Supler brought a class action lawsuit against ARS National Services, Inc. ("ARS"), a debt collection agency, for violation of the Fair Debt Collection Practice Act ("FDCPA"). The named plaintiffs sued on behalf of a class of four million people across the U.S. who had been targets of ARS voicemails which violated the FDCPA.
Over the course of more than a year, the parties engaged in settlement discussions with the assistance of a magistrate judge. The named plaintiffs and ARS eventually consented to having the same magistrate judge conduct all further proceedings in the case, including the entry of final judgment. The district court entered an order authorizing the magistrate judge to exercise jurisdiction over the case, and she presided over all further proceedings.

Under the terms of the settlement agreement, the parties agreed to seek certification of a nationwide, settlement-only class under Federal Rule of Civil Procedure 23(b)(2). Because the class would be certified under Rule 23(b)(2), the parties agreed that no notice of any kind would be sent to the four million class members and that no one would be permitted to opt out of the class. ARS agreed to pay the maximum amount of damages allowed by FDCPA for both named and unnamed plaintiffs. The named plaintiffs received $1,000 each, and the unnamed plaintiffs got $35,000 total. The magistrate found that distributing the relief to four million unnamed plaintiffs would be impossible, as the reward would be less than a penny per class member. Instead, ARS agreed to give the unnamed plaintiffs' award as a cy pres donation to a San Diego veterans' charity organization. The settlement terms also enjoined ARS from reverting back to practices which violated the FDCPA in the agreement, though this term included an escape clause and ARS had already changed its procedures to conform to standards.

After conducting a fairness hearing at which Helmuth's counsel, ARS's counsel, and class counsel presented argument, the magistrate judge certified the proposed class under Rule 23(b)(2), approved the settlement as fair, reasonable, and adequate under Rule 23(e)(2), and entered judgment accordingly. Bernadette Helmuth, a class member, is an unnamed plaintiff who would be bound by the settlement agreement. She also happened to be a named plaintiff in a separate class action suit awaiting formal class certification against ARS, for the same violations of FDCPA, in the Southern District of Florida. Helmuth filed an objection to stay the settlement between ARS and Koby et. al., but the objection was denied.

The magistrate entered final judgment. Helmuth appealed, raising the following issues issues: First, whether requiring only the consent of the named plaintiffs, and not the four million class members, for the magistrate to be authorized to conduct the proceedings is permitted under 28 U.S.C § 363(c) and Article III of the U.S. Constitution. Second, whether the magistrate judge abused her discretion by applying the FRCP 23(e)(2) "fairness" standard, when she approved a settlement which gave the unnamed plaintiffs nothing of value.

The panel held that a magistrate only needs consent from named plaintiffs in a class action lawsuit under § 363(c). The language of the statute gives a magistrate authority to enter judgment on a class action lawsuit only if "the parties" consent; however it does not specify which parties in a class action lawsuit.
The panel pointed to the language and legislative intent of § 363(c) to find that consent of "the parties" constitutes only consent of parties involved in making litigation strategy decisions, such as the named plaintiffs in a class action lawsuit. § 363(c)(1) requires a court clerk to "notify the parties of the availability of a magistrate judge," which would be reasonable if the legislature meant to apply only to named plaintiffs. If "parties" were interpreted to include unnamed plaintiffs, § 363(c)(1) would require a clerk to somehow notify millions of unnamed plaintiffs, which is an unnecessary and unreasonable burden to impose on the courts. It would also be unreasonable to require the magistrate to seek consent from four million unnamed plaintiffs under § 363(c). Accordingly, the panel held "the parties" of § 363(c) was intended only to apply to named plaintiffs, and that the magistrate judge was required to get consent from only named plaintiffs.

Additionally, the panel noted that this interpretation of § 363(c) is consistent with FRCP 23 which necessarily limits consent requirements to named plaintiffs because, by its very nature, a class action lawsuit requires the named plaintiffs to make litigation decisions on behalf of unnamed plaintiffs. So, it could be said that not requiring unnamed plaintiffs' consent under § 363(c) is par for the course.

The Supreme Court has held that litigants in federal court have a personal right, under Article III, to adjudication of their claims by a judge who enjoys the salary and tenure protections afforded by Article III - protections that magistrate judges lack. But the panel further noted that the personal right to an Article III adjudicator may be waived, and a party's express or implied consent to adjudication by a magistrate judge constitutes a valid waiver of the right. Therefore, Article III does not categorically prohibit the named plaintiffs from waiving, on behalf of the class members they represent, the right to proceed before an Article III judge. Since the interests of a class representative must be found to be typical of the class members, the named plaintiffs can therefore be expected to protect the absent class members' interests in the exercise of the right conferred by Article III. The panel further held that "[l]imits imposed by the Due Process Clause on the enforcement of class judgments do not curtail a magistrate judge's authority under § 636(c) to enter judgment in the first instance - a judgment that at the very least will bind the named parties who consented to the magistrate judge's jurisdiction."

The panel went on to hold that the magistrate judge abused her discretion in applying the FRCP 23(e)(2) "fairness" standard, when she approved a settlement which gave the unnamed plaintiffs nothing of value. The panel found that the settlement agreement did not align with the interests of the class members and, thus, was an abuse of discretion by the magistrate to approve it.
ARS agreed to give a cy pres donation to a veterans' charity. The panel cited Nachsin v. AOL to show that cy pres donations must be "tethered to the objectives/interests" of unnamed plaintiffs. The magistrate was not offered any evidence which showed the chosen charity had any "nexus" to the class members. In fact, the four million unnamed plaintiffs, who are spread throughout the nation, had no geographic connection to the San Diego veteran charity's location.

Furthermore, the magistrate was never shown that a disproportionate amount of the class members were veterans. Thus, the magistrate entered judgment despite zero evidence that the cy pres donation had value to the unnamed plaintiffs.
The panel further found that "[t]he fact that class members were required to give up anything at all in exchange for worthless injunctive relief precluded approval of the settlement as fair, reasonable, and adequate under Rule 23(e)(2)."

Because the settlement agreement did not offer anything of value to unnamed plaintiffs, the magistrate abused her discretion by entering her final judgment. The panel reversed and remanded the terms of the settlement agreement.
To read the full opinion, please visit: "><br ">http://...../da...3-56964.pdf


Panel: Paul J. Watford and Michelle T. Friedland, Circuit Judges, and J. Frederick Motz, District Judge for the U.S. District Court for the District of Maryland, sitting by designation.
Argument Date: January 7, 2016
Date of Issued Opinion: January 25, 2017
Docket Number: 13-56964
Decided: Reversed and Remanded
Case Alert Author: Devin Bruen
Counsel: Jonathon Taylor (argued) and Deepak Gupta, Gupta Beck PLLC, Washington, D.C.; Donald A. Yarbrough, Fort Lauderdale, Florida; Steven M. Bronson, The Bronson Firm APC, San Diego, California; for Objector-Appellant.
Philip D. Stern (argued), Union, New Jersey; Robert E. Schroth, Sr. and Robert E. Schroth, Jr., Schroth & Schroth, San Diego, California, for Plaintiffs-Appellees.
Sean P. Flynn (argued), Gordon & Rees Scully Mansukhani, Irvine, California; David L. Hartsell, McGuire Woods LLP, Chicago, Illinois; for Defendant-Appellee.
Brian Wolfman, Institute for Public Representation, Georgetown University Law Center, Washington D.C.; Ira Rheingold, National Association of Consumer Advocates, Washington, D.C.; for Amicus Curiae National Association of Consumer Advocates.
Author of Opinion: Judge Paul J. Watford
Circuit: Ninth
Case Alert Supervisor: Glenn S. Koppel

Edited: 04/04/2017 at 03:20 PM by Glenn Koppel

    Posted By: Glenn Koppel @ 03/29/2017 07:50 PM     9th Circuit  

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