Chapter § 5.13 Judicial Management of Class Action Settlements

• Jurisdiction: United States
• Publication year: 2020

§ 5.13 Judicial Management of Class Action Settlements

District courts act as fiduciaries of the class, subject to the “high duty of care that the law requires of fiduciaries.”²⁷⁴ Consistent with this duty, Federal Rule of Civil Procedure 23(e) mandates that the court approve settlements of “claims, issues, or defenses of a certified class—or a class proposed to be certified for purposes of settlement.”²⁷⁵ This rule “protects unnamed class members ‘from unjust or unfair settlements affecting their rights when the representatives become fainthearted before the action is adjudicated’ ” or they secure a settlement of their individual claims.²⁷⁶ Rule 23(e) does not require court approval for settlements with putative class representatives that resolve only their individual claims prior to class certification.²⁷⁷

A class action settlement approval procedure typically occurs in two stages: (1) preliminary approval, where prior to notice to the class, a court makes a preliminary evaluation of fairness and (2) final approval, where notice of a hearing is given to the class members and class members are provided the opportunity to be heard on the question of final court approval.²⁷⁸ We discuss both stages below.

[1] Preliminary Approval

At the preliminary approval stage, the parties submit the proposed settlement to the court to make a “preliminary fairness evaluation.”²⁷⁹ Several amendments to Rule 23(e) became effective in December 2018; these revisions largely codified existing case law.²⁸⁰ For instance, as for the preliminary fairness analysis, Rule 23(e)(1) states that a court must decide that, following notice to the class and a final fairness hearing, it would likely (1) approve the settlement upon considering the “fairness” factors under Rule 23(e)(2)²⁸¹ and (2) certify the proposed class for settlement purposes under the criteria set out in Rule 23(a) and at least one of the subsections of Rule 23(b).²⁸² If the settlement satisfies the two elements set forth above and “the parties’ proposed method of giving notice satisfies the requirements set out in Rule 23(c)(2)(B), the court will preliminarily approve the settlement²⁸³ and must then “direct notice in a reasonable manner to all class members who would be bound” by the proposal.²⁸⁴

[a] Rule 23(e)(2) Fairness Factors

Rule 23(e)(2) sets out the circumstances in which a court may approve a class settlement that would “bind class members.”²⁸⁵ A court may only approve such a settlement “after a hearing and only on finding that it is fair, reasonable, and adequate.”²⁸⁶ The text of Rule 23(e)(2) provides that, to make this determination, a court must consider (1) whether the class representatives and class counsel have adequately represented the class; (2) whether the proposal was negotiated at arm’s-length; (3) whether the relief provided for the class is adequate, taking into account (i) the costs, risks, and delay of trial and appeal, (ii) the effectiveness of any proposed method of distributing relief to the class, (iii) the terms of any proposed award of attorneys’ fees, and (iv) any agreements made in connection with the proposal; and (4) whether the settlement treats class members equitably relative to each other.²⁸⁷

The specific considerations in Rule 23(e)(2), also part of the 2018 amendments to Rule 23(e), weren’t intended “to displace the various factors that courts have developed in assessing the fairness of a settlement.”²⁸⁸ The 2018 advisory committee’s note explains that the “goal of this amendment is not to displace any factor, but rather to focus the court and the lawyers on the core concerns of procedure and substance that should guide the decision whether to approve” the settlement.²⁸⁹ Accordingly, some courts consider their legacy fairness factors when analyzing a proposed settlement.²⁹⁰

[b] Certifying a Class for Settlement Purposes

As discussed in section 5.02, Rule 23(a) prescribes four threshold requirements for all class actions that parties must satisfy: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation.²⁹¹ The parties must also “show that the action is maintainable under Rule 23(b)(1), (2), or (3).”²⁹²

In Amchem, the Supreme Court cautioned that a court must ensure that the parties satisfy the requisites of Rules 23(a) and (b), regardless whether the court is deciding if it will conditionally certify a class for settlement or for litigation; this inquiry must be separate from the court’s fairness review under Rule 23(e).²⁹³ The Court also held that in the context of a request for settlement-only class certification...