Seven Steps to a Successful Class Action Settlement
By John B. Isbister, Todd B. Hilsee, and Carla A. Peak
The settlement of a class action is no different from the settlement of any litigation: The parties want peace and predictability within a reasonable period of time, not the burdens and uncertainties of further litigation. However, when settling a class action, the parties must observe certain procedures to bind absent class members. In addition, a class action settlement is far from a private arrangement. The 2003 changes to Federal Rule of Civil Procedure 23 and the Class Action Fairness Act of 2005 (CAFA) make class action settlements very visible and public (see sidebar on page 18, concerning notice to government officials). Because of this transparency and the enormous stakes involved in class litigation, many people may examine the details of a class settlement and have an opportunity to criticize and object. Nonetheless, savvy counsel on both sides of class action litigation can achieve the peace and predictability they desire by following the steps discussed below.
1. Know the rules and the process.
Counsel should expect the court to examine critically any proposed class settlement. District courts have been charged to act as “a fiduciary of the class” when considering a proposed class action settlement and are subject to “the high duty of care that the law requires of fiduciaries.” Counsel should begin their consideration of settlement and negotiations with a clear understanding of the process for the approval of a class action set out in Rule 23(e). The rule is intended to protect the interests of absent class members, to ensure that the court is well informed about the class settlement, and to ensure that the court expressly scrutinizes its terms.
2. Negotiate wisely.
Courts closely examine the manner in which a class action has been negotiated to determine whether the deal was the result of an arm’s-length process. Counsel should keep detailed notes of all discussions as evidence of the propriety of the settlement negotiations. Plaintiffs’ counsel should be especially prepared to explain the steps taken to ensure that the class was fairly represented in negotiations, for example, by being ready to show the named plaintiffs’ participation in monitoring negotiations. In some cases, counsel may want to involve a mediator or other neutral to serve as another set of eyes watching over the interests of the absent class members.
Courts particularly look for signs that a class action settlement resulted from a “reverse auction”—a defendant’s collusive agreement with the attorney who is willing to accept the lowest class recovery, often in exchange for generous attorney fees. By this tactic, the defendant hopes to preclude all other claims. Courts have had no problem rejecting class settlements that are the product of a reverse auction.
Similarly, the Supreme Court has directed courts to scrutinize closely “settlement only” class actions—classes certified for settlement early in the case. Because there has been no extended discovery and litigation between adversaries, courts will more closely examine the strengths and weaknesses of the case and the terms of the settlement. Counsel who reach a speedy resolution must therefore establish that they had sufficient information to do so.
The settlement negotiations must also involve all the right people. If members of the class have divergent interests and plaintiffs’ counsel cannot fairly represent the interests of all class members, then plaintiffs’ counsel should identify potential subclasses and appropriate representatives who can be brought into settlement discussions. Similarly, counsel should identify possible objectors and consider involving them in the settlement discussions. In particular, counsel can expect attorneys who represent individual members of the class or counsel who have filed their own related class actions to object to any settlement that will affect their lawsuits. Consumer groups or state agencies with an interest in the litigation should also be consulted.
Finally, Rule 23(e)(2) requires the parties to disclose anything that might be considered a side agreement. Accordingly, the parties should refrain from discussing any settlement term that they do not intend to include in the settlement agreement.
3. Negotiate a fair deal.
To approve a class action settlement, the judge must find the settlement fair, adequate, and reasonable. To decide this, courts apply multifactor tests that vary slightly by circuit. The following are some well-recognized factors:
- the complexity and duration of the litigation
- the reaction of the class to the settlement
- the stage of the proceedings
- the risks of establishing liability
- the risks of establishing damages
- the risks of maintaining a class action through trial
- the ability of the defendants to withstand a greater judgment
- the range of reasonableness of the settlement in light of the best recovery
- the range of reasonableness of the settlement in light of all the attendant risks of litigation
When negotiating a settlement, counsel should consider the evidence that will demonstrate each factor because, without sufficient evidence, the court can refuse to approve the settlement.
CAFA describes certain settlement provisions that counsel should avoid. It expressly restricts “negative value” settlements in which class members incur a loss to compensate class counsel, and it prohibits settlements in which some class members receive more than others “solely” because they live closer to the courthouse.
CAFA also requires courts to scrutinize coupon settlements—when members of the class may receive relatively valueless pieces of paper, while class counsel receives large fee awards. Under CAFA, if a settlement uses coupons, the value of the coupons actually redeemed—not predicted to be redeemed—determines the value of the settlement for the purpose of determining attorney fees. Because the amount of the fee award cannot be determined until the time to redeem the coupons has expired, there will be an inevitable delay in the payment of any fee award. This delay and the uncertainty of how many coupons will be redeemed has made plaintiffs’ attorneys reluctant to enter into coupon settlements in federal court. Although this CAFA provision seems geared to discourage coupon settlements, the legislative history explains that coupon settlements may be appropriate in certain circumstances, for example, when they provide real value to class members or when the individual claims at issue are very small.
Cy pres relief is considered when the class is very large, the recovery per class member very small, and the cost of administering the settlement likely to exceed the benefit to individual members of the class. Courts closely scrutinize cy pres settlements to ensure that the interests of the plaintiff class are aligned with the interests of the proposed recipient of the relief.
Injunctive relief settlements, particularly when the action originally sought damages, provoke questions about the worth of the injunction and the value of the claims that are being released. Counsel should therefore be prepared to present expert evidence on the value of any injunction.
Courts disfavor “reverter” clauses, which specify that unclaimed funds revert to the defendant. Reverter clauses allow counsel to agree to an inflated settlement amount that serves as the basis for calculating attorney fees, and they provide an incentive to discourage members of the class from making claims.
Finally, be prepared to justify any difference in compensation that will be awarded to different members of the class. The justification should include evidence that the differences are based upon credible legal and economic analysis. If there is no underlying predicate for the differences, the settlement is vulnerable to attack.
4. Plan an effective campaign.
The parties must also satisfy Rule 23’s notice requirements. In 2003, Rule 23(c)(2)(B) was amended to require notice in clear, concise, and easily understood language. The Advisory Committee Notes accompanying the rule explain that this change was a “reminder of the need to work unremittingly at the difficult task of communicating with class members.” The Supreme Court has similarly set a high standard for notice to satisfy due process. The parties must give notice in a manner reflecting a “desire to actually inform” absent class members. To achieve this, experts opine that notice must get to the class, be noticed, and be read and understood.
More and more courts recognize and rely on “reach” calculations to determine whether notice was adequately disseminated. Reach calculations provide logical and objective answers to the key question: How many class members will be notified as a percentage of the class universe?
The following are common notice dissemination and reach flaws:
- Low reach—The notice plan does not demonstrate and quantify reach to 70–90 percent of the class.
- Not targeted—The Wall Street Journal, for example, does not reach the average consumer.
- Geographically insufficient—Adver-tising in a large metropolitan area may do little to reach class members residing in distant small towns, and readily available statistics proving as much may have been ignored.
- Scattershot placement of notices—Cherry-picking a few newspapers may result in a mere gesture that does not satisfy due process.
- The notice does not account for how class members obtain information—are they frequent radio listeners, magazine readers, or television watchers?
Being noticed is the essential purpose of a class action notice; therefore, a conscious effort must be made to design an effective and “noticeable” notice. It must grab the attention of class members, alert them that they may be affected, and provide them a compelling reason to read on, for example, by highlighting a potential recovery. A simple and prominent headline on the notice—highlighting who should read it and why it is important to them—goes a long way toward ensuring that class members will actually notice a settlement notice.
Once there is a plan to reach the class and the notice has been well designed, Rule 23(c)(2)(B) comes into play. This rule is intended to minimize confusion on the part of class members by requiring that notices not contain complex language or legalistic jargon. Despite this rule’s directive and the model notices posted at www.fjc.gov that illustrate appropriate practices, problems relating to the content of notices persist. For example, notices frequently:
- are too lengthy
- omit pertinent information
- don’t explain terms for laypeople
- attempt to solicit clients for lawyers
- vilify the defendant
- sell rather than inform about the settlement
- scare people out of participating, objecting, or opting out
- create hurdles for class member to exercise their rights
- create language, cultural, and other barriers
- limit class member response and participation
Successful notice programs, if expertly designed with the foregoing themes in mind, are affordable, noticeable, understandable, and can withstand collateral attack.
5. Use all existing tools to notify.
The environment in which courts must provide class action notice is rapidly changing. Our population is becoming increasingly mobile, and new technologies have spawned a flood of information. A notice will be received by class members who are faced with thousands of other advertisements each day. Nonetheless, expertly designed notice campaigns can overcome these challenges.
Approximately 14 percent of U.S. residents move annually, but only about 40 percent of people who move report a change of address to the U.S. Postal Service. In addition, many people have been displaced either temporarily or permanently due to natural disasters such as hurricanes. To overcome these challenges, most notice experts employ careful mailing and re-mailing protocols, such as address-updating services before mailing and again on mailings returned as undeliverable.
Over 80 percent of U.S. adults now access the Internet, and this number is growing. The great majority of today’s class action cases involve a party-neutral website, allowing class members to get information 24/7. Gone are the days when class members were expected to go to the courthouse to review case files. Today, information is available at the click of a mouse.
Email has become an increasingly popular form of communication, and email notification is often contemplated by counsel. However, notices via email must be carefully designed to overcome spam filters and the recipient’s delete button. For example, an email notice should carry an appropriate subject line and return address. Whether email notice satisfies Rule 23’s “best practicable” requirement for “individual notice to all members who can be identified through reasonable effort,” when a postal address is available, has yet to be established.
Two of the most common forms of advertising are radio and television. Despite common fears of soaring costs for such media, these methods, in appropriate cases, need not break the bank. If properly crafted, radio and television notices can convey important information in 30 seconds. In addition, a broadcast schedule can be developed to target the class to minimize funds spent on ads that class members will never see.
Other ways to achieve efficient notice abound. Courts commonly approve using informational press releases or public service announcements, which can help spread the word through credible news sources and electronic media. Although nothing guarantees that any news stories will result, if they do, class members may obtain additional opportunities to learn about their rights.
6. Watch the attorney fees.
Class actions are often criticized as benefiting the attorneys more than the class. Therefore, questions about the fairness of a class action settlement are often tied closely to concerns about the fees awarded to class counsel. Stated simply, an excessive attorney fee provision is an invitation to challenge a settlement.
Rule 23(h) recognizes that members of the class have an interest in any proposed fee awarded to counsel. The rule requires plaintiffs’ counsel to make any request for attorney fees by motion under Rule 54(d)(2). The district court “may” hold a hearing, but it must make findings of fact and conclusions of law. Class members must be given notice of the motion and the right to object. Though not stated in the rule, the notice should include the amount of attorney fees and costs being sought. Significantly, the 2003 revision to Rule 23 did not resolve the question of whether the loadstar or percentage of the fund approach should be used in awarding a fee.
In addition to scrutiny from the class, active judicial involvement in awarding fees occurs even when there are no objections. In particular, “clear sailing provisions”—in which the defendant agrees that it will not contest counsel’s fee request—sometimes trouble courts. Accordingly, when requesting fees, counsel should focus on results actually achieved for the class, avoid clear sailing provisions, and be prepared to provide the court with sufficient support for the fee petition.
7. Establish a user-friendly claims process.
The benefits of a settlement should be readily available to as many class members as practicable. Do not make class members jump through hoops to obtain the benefits to which they are entitled. Moreover, convenient response mechanisms are effective and affordable. Allow people to access information and claim forms via the Internet or a toll-free number. Do not require class members to mail their objection or exclusion request to numerous places. When considering settlement administration, demand flawless execution and diligent statistical reporting, such as how many mailings were sent, how many were returned, how many were re-mailed, how many responses were received, and how these mailings were handled. Work with a claims administration vendor with the most up-to-date services, tools, and phone systems, and make sure the administrator is able to print and mail large volumes quickly. And look for a claims administrator that does not promote methods that impair effective notice to class members, such as mailing fine-print notices just to save money.
Every class action is unique, and every class action settlement presents its own challenges. However, following these seven steps should help the parties secure the peace and finality that they seek.
Editor's Note: Class action settlements and related topics will be explored at the upcoming 13th Annual National Institute on Class Actions in San Francisco (October 30) and Washington, D.C. (November 20).
Keywords: Class actions, settlement
- Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, 280 (7th Cir. 2002).
- See id. at 283.
- See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).
- Manual for Complex Litigation (Fourth) § 21.612 (2007).
- FED. R. CIV. P. 23(e)(1)(C).
- E.g., Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 117 (2d Cir. 2005).
- See 28 U.S.C. § 1712(a).
- Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 315 (1950).
- Todd B. Hilsee et al., "Do You Really Want Me to Know My Rights?," 18 GEO. J. LEGAL ETHICS 1359, 1369 (2005).
- See, e.g., In re Serzone Prods. Liab. Litig., 231 F.R.D. 221, 236 (S.D. W. Va. 2005).
- See Hospitality Mgmt. Assoc., Inc. v. Shell Oil Co., 591 S.E.2d 611, 616–21 (S.C. 2004).
- See Manual for Complex Litigation (Fourth) § 21.312 (2007).