The decline of class actions.

Author:Klonoff, Robert H.
Position:III. New Rigorous Federal Case Law H. Settlement Certification through Conclusion, with footnotes, p. 800-838 - F. Hodge O'Neal Corporate and Securities Law Symposium: The Future of Class Actions
  1. Settlement Certification

    In many cases, plaintiffs' counsel and defendants are able to agree upon the terms of a classwide settlement even before the court has certified a class. (415) Indeed, the very uncertainty over whether a class would even be certified often helps to bring the two sides to the bargaining table. In Amchem Products, Inc. v. Windsor, (416) a putative class action involving alleged injuries from asbestos, the Supreme Court held that, when class certification is sought simultaneously with approval of a classwide settlement, the parties cannot avoid rigorous compliance with Rule 23. Although the Court said that, in the settlement context, "a district court need not inquire whether the case, if tried, would present intractable management problems [when certification is sought under Rule 23(b)(3)]," the Court concluded that the other requirements of Rule 23 (including the four requirements of Rule 23(a) and the other requirements of (b)(3) (excluding manageability)) "demand undiluted, even heightened, attention in the settlement context." (417) The Court based its decision, inter alia, on the text of Rule 23(b)(3), which does not differentiate for certification purposes between a litigation class and a settlement class. (418) Applying the predominance requirement to the settlement class before it, the Court held that the "sprawling class the District Court certified" failed to satisfy that requirement. (419) The Court flatly rejected the argument that a settlement class should be approved--without regard to the certification requirements--as long as it was fair:

    [C]ourts must be mindful that the Rule as now composed sets the requirements they are bound to enforce.... Federal courts ... lack authority to substitute for Rule 23's certification criteria a standard never adopted--that if a settlement is "fair," then certification is proper.... [C]ertification cannot be upheld [in this case], for it rests on a conception of Rule 23(b)(3)'s requirements irreconcilable with the Rule's design. (420) A number of courts have invalidated settlements in light of Amchem. For example, in In re Grand Theft Auto Video Game Consumer Litigation, (421) the district court decertified a settlement class of consumers pursuing fraud claims, holding that Rule 23(b)(3) predominance was defeated by the need to prove individualized reliance and the need to apply multiple states' laws. (422) The court relied on the Second Circuit's decision in Denney v. Deutsche Bank AG, (423) which in turn relied heavily on Amchem. (424) Echoing Amchem, the Grand Theft Auto court stated that "[t]rial manageability issues aside, ... the 'requirements of [Rule 23(a) and (b)] should not be watered down by virtue of the fact that the settlement is fair or equitable.'" (425)

    Likewise, in In re Ephedra Products Liability Litigation, (426) the district court relied heavily on Amchem in refusing to certify a settlement class of plaintiffs who had ingested an allegedly dangerous dietary supplement. The court stated:

    In Amchem, the Court... rejected the argument ... that certification requirements are relaxed when litigation is to be obviated by a settlement. "[P]roposed settlement classes sometimes warrant more, not less, caution on the question of certification." ... Application here of Rule 23 standards reveals that the proposed certification is deficient for, inter alia, some of the same reasons addressed in Amchem. (427) The refusal of some courts to certify settlement classes is not the only consequence of Amchem. Many recent mass actions have settled outside of the class action process. For instance, the highly publicized multidistrict Vioxx and Zyprexa pharmaceutical claims settled without class certification. (428) In his concurring opinion in Sullivan v. DB Investments, Inc., (429) Judge Scirica related this phenomenon to Amchem. He opined that class settlement of mass tort cases had become problematic as a result of the Supreme Court's opinion, "leading some practitioners to avoid the class action device." (430) Judge Scirica further noted that "some observers believe there has been a shift in mass personal injury claims to aggregate non-class settlements." (431)

    This alternative settlement route is troublesome: unless the court chooses to treat a case as akin to a class action and thus carefully reviews the settlement and the amount of attorneys' fees, (432) the settling plaintiffs receive none of the protections that Rule 23(e) and Rule 23(h) provide for class actions, including judicial evaluation of the fairness of the settlement and the reasonableness of attorneys' fees. (433) AS Judge Scirica stated: "[The increase in large non-class settlements] is significant, for outside the federal rules governing class actions, there is no prescribed independent review of the structural and substantive fairness of a settlement including evaluation of attorneys' fees, potential conflicts of interest, and counsel's allocation of settlement funds among class members." (434)

    Some courts, notwithstanding Amchem, have relaxed the Rule 23 criteria for settlement classes. For instance, one district court has noted in the choice-of-law context that "courts are more inclined to find the predominance test met" when the case involves a settlement class rather than a litigation class. (435) Other courts have emphasized Amchem's holding that the manageability component of (b)(3) does not apply to (b)(3) settlement classes without grappling with possible predominance issues posed by the particular case. The Third Circuit took this latter approach in a recent en banc decision, Sullivan v. DB Investments, Inc. (436) In upholding a settlement class despite state law differences, the court noted: "The correct outcome is even clearer for certification of a settlement class because the concern for manageability that is a central tenet in the certification of a litigation class is removed from the equation." (437) The court stated that "we can find no persuasive authority for deeming the certification of a class for settlement purposes improper based on differences in state law." (438) The court reached this conclusion notwithstanding numerous cases holding, in the trial context, that the existence of multiple state laws defeats predominance as well as manageability. (439) Indeed, in Amchem itself, the Court quoted the Third Circuit's decertification order, which noted that "[d]ifferences in state law ... compound [the] disparities" among class members. (440)

    The Second Circuit's recent decision in In re American Intern. Group, Inc. Securities Litigation (441) is another example of a court focusing on Amchem's manageability holding as a way to approve a settlement. There, the district court had refused to certify a (b)(3) class because it found that the fraud-on-the-market presumption did not apply to the plaintiffs' securities fraud claims, and therefore, that predominance was not satisfied. (442) The Second Circuit, however, held that, under Amchem, "a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement." (443) The court reasoned that, since "a securities fraud class's failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating 'intractable management problems' at trial," and since "settlement eliminates the need for trial," the class's failure to qualify for the Basic v. Levinson presumption did not preclude certification of a settlement class. (444) This case, however, ignores the fact that--putting aside manageability--reliance issues raise a predominance problem, (445) and Amchem held that predominance must be satisfied even for settlement classes.

    Numerous commentators have been critical of Amchem. (446) For example, prominent plaintiff lawyer Elizabeth Cabraser has stated: "[T]he multibillion-dollar settlement, rejected by the Supreme Court, was lost forever, and thousands of claimants who would gladly have traded their pristine due process rights for substantial monetary compensation have been consigned to the endless waiting that characterizes asbestos bankruptcies." (447)

    As indicated above, the rigorous scrutiny of Rule 23's requirements presents a number of practical problems in the settlement certification context. First, as Judge Scirica observed, Amchem has led some practitioners to avoid the class action route altogether, (448) resulting in an increase in mass actions settling outside the class action process. (449) The settling plaintiffs are thus deprived of the protections of Rule 23(e) and Rule 23(h). Moreover, requirements that are important only in the context of litigation should not play a role in the settlement context. Amchem's conflation of class settlement with class litigation undermines the benefits of avoiding litigation and may result in plaintiffs being unable to pursue socially beneficial settlements. (450)

    In 1996 the Advisory Committee proposed creating a fourth type of class under Rule 23(b), often referred to as the "settlement class." The proposed rule provided that "the parties to a settlement [may] request certification under subdivision (b)(3) for purposes of settlement, even though the requirements of subdivision (b)(3) might not be met for purposes of trial." (451) As the draft Advisory Committee Notes stated regarding that proposed rule:

    [C]ertification of a (b)(3) class is affected by the many differences between settlement and litigation of class claims or defenses. Choice-of-law difficulties, for example, may force certification of many subclasses, or even defeat any class certification, if claims are to be litigated. Settlement can be reached, however, on terms that surmount such difficulties. Many other elements are affected as well. A single court may be able to manage settlement when litigation would require resort to many courts. And...

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