Class Action Settlements in Louisiana

• Author: Kent A. Lambert
• Position: Partner in the New Orleans office of Phelps Dunbar, L.L.P

Kent A. Lambert is a partner in the New Orleans office of Phelps Dunbar, L.L.P. His practice emphasis is complex commercial litigation.

Introduction

The class action has enjoyed an enormous upsurge in the last decade, a trend that both the state and federal courts in Louisiana have witnessed first hand.¹ The spoils of victory in high-stakes class action suits continue to make attorneys millionaires tens and even hundreds of times over, and there is little reason to expect a quick end to the romance.²

An inevitable focal point for any practitioner swept up in this enthusiastic wave is the nebulous practice of class action settlements. As numerous critics have had recent occasion to observe, settlements have become such an integral part of modern class action litigation that they often appear to provide both the motive and the tactical engine driving high-profile class action suits.

As a general matter, settlements are a favored means for the resolution of legal disputes.³ This has been as true in the context of class action litigation as in the context of traditional non-class litigation. Class action settlements offer obvious benefits to litigants and courts alike by providing a valuable mechanism for disposing of massive lawsuits that threaten to usurp huge amounts of resources and time. At the same time, such settlements afford the members of plaintiffs' classes with certainty in their recovery, while simultaneously providing class action defendants with the benefits of res judicata extended across an entire class of potential claimants.⁴ Increasingly, however, critics are claiming that many class action suits are meritless inventions of over-aggressive plaintiffs' counsel, pursued solely for their potential to extort favorable settlements through the risk that even de minimus individual damage claims will be multiplied at the class level into massive sums of money that can empty even the deepest corporate pockets.⁵ These critics argue that, at the very least, the high agency cost of class action litigation is too often magnified by non-adversarial settlements.⁶

Perceptions of opportunistic, if not outright collusive, settlements by class counsel have recently led to charges that most class settlements, policed by an overburdened judiciary with little incentive to oppose them,⁷ are choreographed by the class attorneys to line their own pockets with huge sums of money garnered at the direct expense of the class members whom they are supposed to be serving. These and similar criticisms have gained an audience among the courts⁸ and legal scholars⁹ around the country-not to mention within the national media.¹⁰ As a result of the increasing resonance of such criticisms within the legal community and the public in general, practitioners and courts must be prepared to deal with the fallout, both in terms of mastering evolving procedural requirements and in terms of overcoming (or exploiting) increasing hostility to many heretofore "common" class action settlement techniques.

The recent adoption in Louisiana of a new procedural scheme for class actions, based upon Rule 23 of the Federal Rules of Civil Procedure, presents a unique opportunity to take a fresh look at this crucial facet of class action practice within the state. However, even at the federal level, a recent succession of landmark Supreme Court decisions has drastically altered the procedural landscape within which class action settlements must be crafted.

This article provides a practical introduction to some of the most important procedural issues surrounding the settlement of class action lawsuits, both under the Federal Rules of Civil Procedure and the new articles governing class actions in Louisiana's state courts. Part I of this article surveys the basic mechanics of class action settlement procedures. Part II discusses how these procedures have been and could be applied to safeguard against abuses of the class action mechanism.

I The Nuts And Bolts of Settlement Practice Under The Federal Rules of Civil Procedure

A An Introduction To Rule 23(E)

Federal Rule of Civil Procedure 23(e) provides that "[a] class action shall not be dismissed or compromised without the approval of the court, and notice... to all members of the class in such manner as the court directs."¹¹ Thus, "class actions" cannot be compromised without first obtaining court approval and affording proper notice (and an opportunity to be heard) to absent class members.¹²

Clearly, Rule 23(e) paints with a broad brush. It leaves to the courts the task of working out the practical details. Building on Rule 23(e), the Federal Judicial Center's current Manual for Complex Litigation-a commonly-cited resource for federal courts handling class action suits-suggests a two-stage process. First, the proposed settlement should be submitted to the court for preliminary approval. Second, an order is entered providing for notice of a formal "fairness hearing," during which the court will make a final determination as to whether the settlement is fair, reasonable, and adequate.¹³

This approach has been parsed by the courts into five distinct steps: (1) the preparation and submission of a joint stipulation of settlement by class and defense counsel; (2) a preliminary hearing at which the court makes an initial determination as to whether to require notice of the settlement to class members and hold an evidentiary hearing with respect to the fairness, reasonableness, and adequacy of the proposed settlement; (3) the issuance of notice to all class members, as directed by the court, disclosing the terms of settlement, the options available to class members, and the date, time, and location of the evidentiary hearing; (4) an evidentiary hearing, at which time the parties, objectors, and any intervenors are required to present arguments and evidence bearing upon the fairness, adequacy, and reasonableness of the proposed settlement; and (5) the issuance of a final judgment approving or disapproving of the proposed settlement.¹⁴

B The Settlement Agreement

The formal settlement process begins with the confection of a joint stipulation of settlement for submission to the court. At a minimum, the stipulation must set forth the essential terms of the proposed settlement, including "the amount of settlement, form of payment, manner of determining the effective date of settlement, and any recapture clause."¹⁵ As will be seen, counsel must be cognizant of myriad factors in approaching the confection of a potential class action settlement. These factors will have a direct impact upon the interests of their clients and the prospects of court approval. They include: (1) the timing of the settlement (e.g., pre- or post- certification); (2) the parties to the settlement, particularly the settling class (including such issues as the impact upon future unrealized claims, the types of claims to be covered, and the like); (3) the consideration being offered (e.g., is any of the consideration non-pecuniary, as in the case of "coupon settlements," "reverter-fund settlements," and "monitoring settlements,"); (4) whether all or any portion of the settlement consideration will be borne by insurers; (5) the risk of adverse publicity (or the potential for favorable publicity) for the client;¹⁶ and (6) the extra-jurisdictional impact of the proposed settlement on other like-actions.¹⁷Ordinarily, the settlement will also provide for the payment of administration costs, including notice expenses, distribution and claim/opt-out processing expenses, and the like. Typically, these costs are either borne directly by the defendant or are deducted from the settlement fund.¹⁸

This is also the appropriate occasion for class counsel to address the question of attorneys' fees in cases involving a common fund settlement. Usually this can be accomplished through the submission of a petition for the allowance of fees and expenses to be paid out of the fund, although a stipulation by class counsel that total fees will be limited to a certain percentage may also be an appropriate alternative in some situations.¹⁹ The concern here is to ensure that absent class members are provided with enough information to allow them to calculate, or at least fairly estimate, their net recoveries in connection with their evaluation of the proposed settlement.²⁰

Ultimately, however, the stipulation should be tailored to its purpose, which is to enable the court to make an informed "preliminary" determination as to the "fairness" of the proposed settlement. To that end, common practice is to supplement the stipulation with formal memoranda and supporting affidavits. These documents can flesh out the background for the proposed settlement, including a summary of the suit's subject matter and procedural history, a discussion...