The curious complications with back-end opt-out rights.

Author:Wasserman, Rhonda
 
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ABSTRACT

In recent years, class members have been afforded delayed, or "back-end," opportunities to opt out of a class action once the terms of the settlement are disclosed. These back-end opt-out rights may afford only limited rights to sue outside the confines of the class action. For example, opt-out plaintiffs may be permitted to seek compensatory, but not punitive damages. Does the federal court that approved the settlement have authority to enjoin back-end opt-out plaintiffs from seeking relief in state court that exceeds the limits built into the back-end opt-out right?

Three sets of curious complications may arise if the federal court seeks to enter such an injunction. First, if diversity is lacking between the opt-out plaintiff and the defendant, and the plaintiff sues on only state law claims, the federal court may lack subject matter jurisdiction to grant an injunction. The federal court may also lack personal jurisdiction over an opt-out plaintiff who has no contacts with the state in which the federal court sits. Second, federalism complications are likely to crop up. Both the Anti-Injunction Act and the Younger abstention doctrine limit the authority or federal courts to issue injunctions against pending state court proceedings. Finally, equitable and practical considerations may counsel against micromanagement of state court litigation by a federal judge.

The objective in identifying these complications is not to question the wisdom of back-end opt-out rights, but rather to facilitate their use. This Article suggests a variety of steps that courts and counsel can take to enforce the limits built into back-end opt-out rights without unnecessarily intruding upon the prerogatives of state court judges, exposing back-end opt-out plaintiffs to onerous litigation in fora with which they have no contacts, or rendering their preserved rights meaningless. Among other recommendations, this Article urges federal and state courts to collaborate in the enforcement of back-end opt-out rights.

TABLE OF CONTENTS INTRODUCTION I. TYPOLOGY OF BACK-END OPT-OUT RIGHTS II. AN ILLUSTRATION OF THE COMPLICATIONS: THE FEN-PHEN LITIGATION A. The Underlying Facts B. The Terms of the Settlement: Four Opt-out Rights C. Federal Judicial Regulation of Fen-phen Litigation in State Court III. JURISDICTIONAL COMPLICATIONS A. Subject Matter Jurisdiction 1. Removal Jurisdiction 2. Ancillary Jurisdiction B. Personal Jurisdiction over Class Members Who Opt Out 1. Phillips Petroleum Co. v. Shutts 2. Back-end Opt-out Plaintiffs and Consent 3. Jurisdiction to Enjoin 4. Jurisdictional Reach of Federal Courts IV. FEDERALISM COMPLICATIONS A. Authority Granted by the All Writs Act B. Limits Imposed by the Anti-Injunction Act 1. "Expressly Authorized by Congress" Exception 2. "To Protect Its Judgments" Exception 3. "In Aid of Its Jurisdiction" Exception C. Younger Abstention V. EQUITABLE AND PRACTICAL COMPLICATIONS A. Equity B. Practical Concerns CONCLUSION INTRODUCTION

Much ink has been spilt critiquing the class action vehicle and exploring creative means to ensure that the named representative, class counsel, the court, and even the defendant protect the interests of absent class members. Although the Federal Rules of Civil Procedure contain numerous requirements designed to achieve this objective, (1) these protections often prove inadequate or illusory. Commentators have recommended a host of reforms to bring the interests of class counsel into closer alignment with the interests of the class and to address other problems endemic to aggregate litigation. Among other things, scholars have recommended changing the method by which class counsel and counsel representing class members who opt out are compensated; (2) barring the simultaneous negotiation of a settlement of the merits and a fee award; (3) auctioning off the class claim to the highest bidder, thereby uniting ownership and control of the suit; (4) developing a more collaborative or consultative relationship between the trial judge and class counsel; (5) emphasizing the defendant's obligation to ensure that absent class members are adequately represented; (6) and requiring greater judicial scrutiny of the settlement and taking other steps to ensure that the fairness hearing provides a meaningful constraint on class counsel. (7)

To ensure that absent class members can make an informed decision about whether to participate in a class action or to opt out and sue separately, scholars have advocated that class members be afforded a delayed opportunity to opt out. In particular, commentators have suggested that absent class members should have an opportunity to opt out when they learn of the details of the proposed settlement's when they hear objectors' challenges to the terms of the settlement, (9) or when they see the judicially-crafted distribution plan and can determine how much they will actually recover. (10) Expressing concern for future claimants who may not even know they have been injured until after the initial opt-out period has expired, some commentators have suggested that absent class members should have an opportunity to opt out after they learn of the existence or the extent of their injuries. (11)

In 2003, the Supreme Court adopted a modest delayed opt-out reform by amending the Federal Rules of Civil Procedure to provide district courts with explicit authority to decline to approve a settlement "unless it affords a new opportunity to request exclusion to individual class members who had an earlier opportunity to request exclusion but did not do so." (12) Among the factors a district court may consider in exercising its discretion are "changes in the information available to class members since expiration of the first opportunity to request exclusion." (13) The Advisory Committee Notes acknowledge that if initial class certification and settlement of the case occur proximately in time, the court may order simultaneous notice of certification and settlement, which "avoids the cost and potential confusion of providing two notices and makes the single notice more meaningful." (14) Nevertheless, the Rule recognizes the potential need for a second opportunity to opt out if the initial opt-out right was afforded before the terms of the settlement were known. (15) The Advisory Committee Notes implicitly encourage the parties to include a delayed opt-out right in the settlement agreement itself: "An agreement by the parties themselves to permit class members to elect exclusion at this point by the settlement agreement may be one factor supporting approval of the settlement." (16)

When settlement agreements provide for delayed opt-out rights, sometimes referred to as "downstream" or "back-end" opt-out rights, they may deny absent class members the same unlimited opportunity to sue the defendant that the class members would have had if they had opted out at the time of initial certification. Instead, absent class members exercising back-end opt-out rights may be permitted to sue the defendant in tort, but not for punitive damages; to sue for only certain conditions; or to seek binding arbitration without the opportunity to litigate in court. (17)

Although commentators have debated the extent to which backend opt-out rights protect absent class members, (18) few have discussed how the limitations built into back-end opt-out rights should be enforced, leaving many unanswered questions. For example, if a federal court approves a class action settlement, but a state court entertains the independent action filed by the opt-out plaintiff, which court determines the scope of the restrictions on the right to sue? Which court determines whether evidence that the plaintiff seeks to offer, purportedly in support of a permissible claim, may be excluded because it also supports a claim barred by the settlement agreement? Stated more generally, which court has authority to enforce the limits inherent in the back-end opt-out right?

Although the class action court that approved the settlement may view itself as best equipped to interpret the terms of the settlement agreement and the restrictions on the opt-out right, (19) three sets of curious complications may arise if the class action court attempts to regulate the subsequently filed state court action by enjoining the back-end opt-out plaintiff from proceeding with her state court suit. First, if diversity is lacking between the opt-out plaintiff and the defendant, and if the plaintiff sues on only state law claims, the federal court may lack subject matter jurisdiction to grant an injunction. The federal court may also lack personal jurisdiction over a back-end opt-out plaintiff who has no contacts with the state in which the federal court sits. Second, even if the federal court has jurisdiction to proceed, federalism complications are likely to arise. Both the Anti-Injunction Act (20) and the Younger abstention doctrine (21) limit the authority of federal courts to issue injunctions against pending state court proceedings. Finally, equitable and practical considerations may counsel against micromanagement of state court litigation by a federal judge.

The objective in identifying these complications is not to question the wisdom of back-end opt-out rights, but rather to facilitate their use by suggesting a variety of steps that courts and counsel can take to enforce the limits built into back-end opt-out rights without unnecessarily intruding upon the prerogatives of state court judges, exposing back-end opt-out plaintiffs to onerous litigation in fora with which they have no contact, or rendering their preserved rights meaningless.

Parts I and II of this Article provide the backdrop for a meaningful discussion of these complications. Part I identifies four different circumstances in which back-end opt-out rights have been granted. Part I demonstrates that, in some cases, downstream opt-out rights are granted to provide...

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