Notice of Class Action Settlement: Don't Forget the Regulators
By Robert DeWitte – November 30, 2015
The settlement of any class action in federal court can involve a complex array of administrative challenges. Notice of the settlement may go to class members in a myriad of ways, limited in their diversity only by the communication options available. Administration of the settlement beyond notice presents another set of challenges as well, from fielding class member inquiries and processing claims to ensuring the distribution of settlement awards is done with painstaking care.
But class members are not the only parties that must receive notice. Under the Class Action Fairness Act (CAFA), 28 U.S.C. § 1715, “[n]ot later than 10 days after a proposed settlement of a class action is filed in court, each defendant that is participating in the proposed settlement shall serve upon the appropriate State official of each State in which a class member resides and the appropriate Federal official, a notice of the proposed settlement[.]” Even aside from the complexity inherent in providing notice to the class, this requirement can present challenges itself and, if not handled properly, injects uncertainty into the settlement approval process.
To limit that uncertainty, four key issues merit close attention: (1) the timing of the notice; (2) the contents of the notice; (3) the “appropriate” officials to be provided with the notice; (4) and post-notification inquiries, if any.
Timing: When Must This Be Done?
Section 1715(b) requires that notification to appropriate government officials (about which more below) be provided “[n]ot later than 10 days after a proposed settlement of a class action is filed in court[.]” While settling parties operating under heavy time constraints can perhaps be forgiven for breathing a sigh of relief once preliminary approval papers are filed with the court, the administrative work is just beginning: The clock started ticking on the CAFA notification deadline as soon as the preliminary approval papers were filed. Failing to send the CAFA notification when required can also delay final settlement approval, as section 1715(b) also provides a 90-day window for these government officials to review the settlement prior to final approval, and section 1715(d) prohibits a court from granting final approval of a settlement until 90 days after CAFA notification has been served. Accordingly, a delay in serving CAFA notification can delay final approval. Of course, the nightmare scenario is a failure to effectuate CAFA notification entirely, because not only does section 1715(d) appear to preclude final approval altogether, but if it were granted, under section 1715(e), a class member can refuse to comply with and choose not to be bound by a settlement if they prove that the notice was not provided.
Contents: What Must Be Included?
Contained in the CAFA notification packet are various court documents specified by section 1715(b), certain non-publicly filed documents that may exist, a list of class members who reside in each state, and their proportionate share of the settlement or, if that is not feasible, a reasonable estimate of the number of class members residing in any given state, as well as their proportionate share.
While much of this requirement can be satisfied without complex analysis simply by pulling together the documents set forth with reasonable clarity in section 1715(b), complexity arises when it comes to section 1715(b)(7), which addresses the list of class members to be included in the notice. While identifying class members is an issue inherent to many class action settlements, the timing of the CAFA notification can raise additional complexity. In many settlements, the class list may be drawn from multiple data files containing various types of identifying information—information that can be expensive to consolidate. In such cases, the obligation to consolidate that information under the settlement agreement may not become enforceable until after preliminary approval. Accordingly, a defendant may have hard choices to make about how best to identify and separate class members and their shares of the settlement by state without incurring significant costs. For example, in some antitrust and securities settlements, class members’ identities and shares of the settlement are often determined by a complex analysis of purchase and/or sales data submitted during the claims-filing period.
Even in simpler cases, if class member contact information or data is available, identifying the proportion of class members in each state is still by not simple. For example, in many settlements of Telephone Consumer Protection Act litigation, the parties have only a list of phone or fax numbers. While the parties could choose to conduct an expensive data analysis process to estimate the state-by-state breakdown, to reduce costs it may instead be sufficient to conduct an analysis of the area codes of the phone numbers and extrapolate state membership after cross referencing which area codes are located in which states. In still other scenarios, counsel may choose to explain that the parties do not yet know the state-by-state composition of the class. In those situations, in some circumstances, it may be advisable to send a supplemental CAFA notification once that information is available.
Recipients: Who Are the “Appropriate” Officials?
As noted above, section 1715(a) dictates that CAFA notification be sent to a set of “appropriate” federal and state officials. The first step is to determine which states are at issue in the first place. This requires a careful evaluation of the applicable class definition—given that people often move, a review of the class list alone may not be definitive, as class members may have moved to different states since that data was compiled. The class definition, however, is the ultimate guide of who is actually covered by a class action settlement. If the class definition can be construed to encompass class members nationwide, then the defendant would be wise to err on the side of caution and notify the applicable official in every state. If, however, the class definition is clearly limited to current residents of a certain state or set of states, the defendant may need to notify only the applicable officials of that state or states. While settling parties might rather limit the CAFA notification to a certain set of states (most often in such situations, just one state), if the class definition could be construed as to allow a resident outside the state at issue to be a class member, best practices recommend providing notice to all.
Defendants would also be wise in cases where a nationwide class is at issue to include officials in all United States territories as well, unless of course individuals residing in those territories are excluded from the class. A prudent touchstone to return to is the question of who is intended to be bound by the settlement; once answered, ensure that officials who preside over any area in which an individual intended to be bound resides is provided notice.
The next question is who exactly qualifies as the “appropriate” official. While CAFA provides guidance, the devil is in the details. For example, the appropriate federal official is usually the U.S. attorney general—except when she isn’t, such as when the defendant is a depository institution, in which case notice must be provided to the official with the “primary Federal regulatory or supervisory responsibility” over the defendant, assuming “some or all of the matters alleged” in the underlying class action are subject to regulation or supervision by that official. Even in such a case, defendants would be wise to also provide notice to the U.S. attorney general.
Who exactly is the appropriate State official can be even less clear. In that instance, the statute similarly instructs that notice should go to the official with the “primary regulatory or supervisory responsibility” over the defendant, or which “licenses or otherwise authorizes the defendant to conduct business in the State, if some or all of the matters alleged” in the underlying class action are subject to regulation by that official.
These requirements can be difficult to elucidate. When the defendant is a depository institution, the default rule is to provide notice to each state’s banking commissioner (whose exact title can vary by state). But the default rule does not apply in all situations, particularly where the depository institutions are regulated only by federal bodies. When the defendant operates in another industry, however, defendants would be wise to perform a careful review of whether there are state-specific officials pertinent to the particular industry that need to be provided with notice. Insurance companies, for example, may need to notify state insurance commissioners, while companies operating in other industries, such as consumer products, environmental affairs, or even Native American land reservations may need to provide notice to otherwise obscure officials. If there is no specific official regulatory body governing a given industry or licensing certain businesses in that state, notice should be provided to the applicable state attorney general. According to the safe harbor provision found in section 1715(e)(2), this will at a minimum ensure that you avoid the nightmare scenario in which class members can simply choose not to be bound by a settlement agreement.
Having identified which officials should actually get notice, however, is only half the battle—the next question is where those officials are actually physically located. It is not uncommon for governmental authorities to change offices or for the officeholder to change; indeed, a key challenge in CAFA notifications is ensuring that the mailing list is up to date. Counsel may want to consult with a notice provider to assist with this process.
While many settlements do not receive significant scrutiny from the recipients of CAFA notification, some do, and the issues that arise as a result of that scrutiny can be unpredictable. Some settlements prompt close attention and can even draw a challenge from the applicable “appropriate” government officials. Certain states can be attentive to the number of class members in their state impacted by a settlement, and in those cases, the type of settlement can warrant particular attention, sometimes correlated with current events of immediate importance to those states. Among the subjects that attract the most attention from attorneys general are the scope of a given release, the award to class members, the complexity of the claims process from the perspective of class members, and more recently, the likely payout to class members in their state. Just as courts have continued to ratchet up the scrutiny of class action settlements, so too have recipients of CAFA notification.
Keywords: litigation, class actions, notice of settlement, Class Actions Fairness Act, regulators
Robert DeWitte is director of class action services at KCC, LLP, in Chicago, Illinois.