stating that an ALJ could consider a portion of a doctor’s diagnosis which appears to be based on a claimant’s own statements as less significant than the doctor’s other findings
How later courts described this case
- stating that an ALJ could consider a portion of a doctor’s diagnosis which appears to be based on a claimant’s own statements as less significant than the doctor’s other findings
- “In a bid protest, we follow Administrative Procedure Act § 706 and set aside agency action ‘if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’” (quoting Palladian Partners, Inc. v. United States, 783 F.3d at 1252
Written by the judges who cited it.
The opinion
Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
4-17-1995
In Re: General Motors Corp.
Precedential or Non-Precedential:
Docket 94-1064
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Recommended Citation
"In Re: General Motors Corp." (1995). 1995 Decisions. Paper 98.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/98
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________________
Nos. 94-1064, 94-1194, 94-1195
94-1198, 94-1202, 94-1203, 94-1207
94-1208 and 94-1219
___________
IN RE: GENERAL MOTORS CORPORATION
PICK-UP TRUCK FUEL TANK PRODUCTS
LIABILITY LITIGATION
Jack French, Robert M. West, Charles E. Merritt,
Gary Blades, Dawn and Tracey Best, Gary and
Jackie Barnes, Betty Marteny, John and Mary
Southands, Edmund Berning, Dale W. Plummer,
Edmund and Anneta Casey, John and Connie Yonki,
Carl and Kathryn Corona, Dallas and Patricia
Nelson, Mynard and Mildred Duncan, Kirby L.
Stegman, DeWayne Anderson, Morris and Barbara Betzold,
Appellants in No. 94-1064
Rudolph Jenkins, William D. Cunningham,
Mather Johnson, Forrest Charles Ginn,
Buren William Jones and Martin D. Parkman,
Appellants in No. 94-1194
(Civ. No. 92-cv-06450)
_______________________________
Parish of Jefferson,
Appellant in No. 94-1195
The State of New York
Appellant in No. 94-1198
Elton Wilson, individually, and
Frank I. Owen, individually and on
behalf of the residents of the
State of Alabama
Appellants in No. 94-1202
City of New York
Appellant in No. 94-1203
Betty Youngs, Barbara Phillips,
Margaret Engel, Larry Swope,
Robbin Maxwell and Center for
Auto Safety
Appellants in No. 94-1207
Betty Youngs, Barbara Phillips,
Margaret Engel, Larry Swope,
Robbin Maxwell and Center for
Auto Safety
Appellants in No. 94-1208
Commonwealth of Pennsylvania,
Department of Transportation
Appellant in No. 94-1219
(Civ. No. MDL-961)
_________________________________________
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
___________________________________
Argued: August 11, 1994
Before: BECKER, ALITO, and GIBSON,*
Circuit Judges.
(Filed April 17, 1995)
JAMES A. SCHINK, ESQUIRE (ARGUED)
J. ANDREW LANAGAN, ESQUIRE
ROBERT B. ELLIS, ESQUIRE
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
GEORGE J. LAVIN, JR., ESQUIRE
FRANCIS P. BURNS, III, ESQUIRE
*
. Honorable John R. Gibson, United States Circuit Judge for the
Eighth Circuit, sitting by designation.
Lavin, Coleman, Finarelli & Gray
12th Floor Penn Mutual Tower
510 Walnut Street
Philadelphia, PA 19106
LEE A. SCHUTZMAN, ESQUIRE
E.D.WARD C. WOLFE
General Motors Corporation
New Center One Building
3031 West Grand Blvd.
P.O. Box 33122
Detroit, Michigan 48232
Attorneys for General Motors
Corporation, Appellee
ANDREW M. HUTTON, ESQUIRE
DEREK S. CASEY, ESQUIRE
PAUL Benton WEEKS, III, ESQUIRE
Michaud, Hutton, Fisher & Anderson
8100 East 22nd Street North
Building 1200
Wichita, Kansas 67226-2312
Attorneys for Jack French, Robert M.
West, Charles E. Merritt, Gary Blades,
Dawn Best, Tracey Best, Gary Barnes,
Jackie Barnes, Betty Marteny, John
Southards, Mary Southards, Edmund
Berning, Dale W. Plummer, Edmund Casey,
Anneta Casey, John Yonki, Connie Yonki,
Carl Corona, Kathryn Corona, Dallas
Nelson, Patricia Nelson, Mynard Duncan,
Mildred Duncan, Kirby L. Stegman,
Dewayne Anderson, Morris Betzold,
Barbara Betzold, Dennis Acuma,
Appellants
DIANE M. NAST, ESQUIRE (ARGUED)
WILLIAM E. HOESE, ESQUIRE
Kohn, Swift & Graf, P.C.
1101 Market Street, Suite 2400
Philadelphia, PA 19107-2927
ELIZABETH J. CABRASER, ESQUIRE (ARGUED)
MICHAEL F. RAM, ESQUIRE
Lieff, Cabraser & Heimann
275 Battery Street, 30th Floor
San Francisco, CA 94111-3339
Attorneys for Dennis Acuma,
John E. Martin,
Plaintiff Class/Appellees
JOHN W. BARRETT, ESQUIRE
Barrett Law Offices
404 Court Square North
P.O. Box 631
Lexington, MS 39095
Attorney for John Mayhall, Brendan
Hayes, Jimmy Benson, Jimmy Haddock,
Dennis Nabors, Marcia Baldwin,
Appellees
WILLIAM S. LERACH, ESQUIRE
Milberg, Weiss, Bershad, Hynes
& Lerach
600 West Broadway
Suite 1800
San Diego, CA 92101
Attorneys for William A. Lewis,
David Grubbs, Raymond Carver,
Johnny S. Martinez, Robert A. Flowers,
Stone Ridge Agri, Inc., James McKinnish,
Douglas A. Livingston,
Appellees
RICHARD S. SCHIFFRIN, ESQUIRE
Schiffrin & Craig
Three Bala Plaza East
Suite 500
Bala Cynwyd, PA 19004
Attorneys for Johnny S. Martinez,
Joseph St. Clair,
Appellees
PATRICIA J. CLANCY, ESQUIRE
Senior Deputy County Counsel
County of Santa Barbara
105 East Anapamu Street, Suite 201
Santa Barbara, CA 93101
Attorney for City of Los Angeles,
Alameda City, Santa Barbara City,
Utah City, Washington, City,
Amicus-Appellee
JAMES E. BUTLER, JR., ESQUIRE (ARGUED)
ROBERT D. CHEELEY, ESQUIRE
PETER J. DAUGHTERY
Butler, Wooten, Overby & Cheeley
1500 2nd Avenue
Columbus, GA 31902
Attorneys for Rudolph Jenkins,
William D. Cunningham, Mather Johnson,
Forrest Charles Ginn, Buren William
Jones, Martin D. Parkman,
HANS J. LILJEBERG, ESQUIRE
Jefferson Parish Attorney's Office
New Courthouse Building
Suite 527
Gretna, LA 70053
JERON J. LaFARGUE, ESQUIRE
Jefferson Parish Attorney's Office
1221 Elmwood Park Blvd.
Room 701
Harahan, LA 70123
Attorneys for Parish of Jefferson,
Appellant
G. OLIVER KOPPELL, ESQUIRE
Attorney General of the State
of New York
PETER H. SCHIFF, ESQUIRE
Deputy Solicitor General
NANCY A. SPIEGEL, ESQUIRE
Assistant Attorney General
ANDREA OSER, ESQUIRE
Assistant Attorney General
New York State Department of Law
The Capitol
Albany, NY 12224
Attorney for State of New York,
Appellant
MICHAEL J. EVANS, ESQUIRE
STEVEN D. KING, ESQUIRE
Longshore, Evans & Longshore
2001 Park Place
650 Park Place Tower
Birmingham, AL 35203
Attorneys for Elton Wilson,
individually, Frank I. Owen,
individually and on behalf of the
residents of the State of Alabama,
Appellants
JOHN HOGROGIAN, ESQUIRE
New York City Law Department
100 Church Street
New York, NY 10007
Attorney for City of New York,
Appellant
BRIAN S. WOLFMAN, ESQUIRE (ARGUED)
DAVID C. VLADECK, ESQUIRE
Public Citizen Litigation Group
2000 P Street, N.W., Suite 700
Washington, DC 20036
C. RAY GOLD, ESQUIRE
Center for Auto Safety
2001 S Street, NW
Washington, DC 20009
Attorneys for Betty Youngs, Barbara
Phillips, Margaret Engel, Larry Swope,
Robbin Maxwell, Center for Auto Safety,
Appellants
STEPHEN F.J. MARTIN, ESQUIRE (ARGUED)
Assistant Counsel In-Charge
STEVEN I. ROTH, ESQUIRE
Assistant Counsel
ROBERT J. SHEA, ESQUIRE
Assistant Chief Counsel
JOHN L. HEATON, ESQUIRE
Chief Counsel
Office of Chief Counsel
Department of Transportation
521 Transportation & Safety Bldg.
Harrisburg, PA 17120
Attorneys for Commonwealth of
Pennsylvania, Appellant
TABLE OF CONTENTS
I. FACTS, PROCEDURAL HISTORY, AND STANDARD OF REVIEW .................. 15
A. General Background.............................. 15
B. The Settlement Agreement........................ 18
C. Approval of the Settlement and Fees............. 20
D. The NHTSA Investigation......................... 23
E. Standard of Review.............................. 24
II. ANATOMY OF THE CLASS CLAIMS ................................... 25
III. RULE 23 - RELEVANT FUNDAMENTAL PRINCIPLES ...................... 27
IV. SETTLEMENT CLASSES .......................................... 33
A. Nature of the Device............................ 33
B. Perceived Problems of Settlement Classes........ 35
C. Arguments Favoring Settlement Classes........... 44
D. Are Settlement Classes Cognizable Under
Rule 23?....................................... 50
E. Are the Rule 23(a) and (b) Findings
Required for Settlement Classes? Does
Finding the Settlement to Be Fair and
Reasonable Serve as a Surrogate for the
Findings?...................................... 55
F. Can There be a Valid Settlement Class
That Would Not Serve as a Valid
Litigation Class?.............................. 64
V. IS THE SETTLEMENT CLASS PROPER HERE? ............................ 69
A. Were There Adequate Findings Under Rule
23(a)?......................................... 69
B. Could the Class Requisites Have Been Met
On The Current Record?......................... 70
1. Numerosity, Commonality, and
Typicality........................... 70
2. Adequacy of Representation................. 71
a. The Situation of the Fleet
Owners........................ 71
b. Did Counsel Adequately
Represent the
Interests of the Entire Class? 73
VI. Is the Settlement Fair, Reasonable, and Adequate?........ 82
A. Adequacy of Settlement - General
Principles..................................... 87
1. Valuation of the Settlement -
Introduction......................... 88
a. Plaintiffs' Witness Dr.
Itmar Simonsen................ 89
b. Inability of Class Members
to Use Certificates........... 91
c. Value of the Transfer
Option........................ 94
d. GM's Implicit Valuation of
the Claim..................... 96
2. Valuing This Settlement Relative to
The Relief Requested................. 98
a. The Retrofit Issue............... 99
b. Availability of Other
Remedies......................100
B. Complexity of the Suit..........................102
C. Reaction of the Class...........................103
D. Stage of Proceedings............................106
E. Risks of Establishing Liability.................109
F. Risks of Establishing Damages...................113
G. Risks of Maintaining Class Status................116
H. Ability to Withstand Greater Judgment...........120
I. Summary.........................................120
VII. APPROVAL OF THE ATTORNEYS' FEE AWARD ...........................122
VIII. OTHER ISSUES; CONCLUSION ...................................131
_____________________________
OPINION OF THE COURT
_____________________________
BECKER, Circuit Judge.
This is an appeal from an order of the District Court
for the Eastern District of Pennsylvania approving the settlement
of a large class action following its certification of a so-
called settlement class. Numerous objectors challenge the
fairness and reasonableness of the settlement. The objectors
also challenge: (1) the district court's failure to certify the
class formally; (2) its denial of discovery concerning the
settlement negotiations; (3) the adequacy of the notice as it
pertained to the fee request; and (4) its approval of the
attorneys' fee agreement between the defendants and the attorneys
for the class, which the class notice did not fully disclose,
thereby (allegedly) depriving the class of the practical
opportunity to object to the proposed fee award at the fairness
hearing.
The class members are purchasers, over a 15 year
period, of mid- and full-sized General Motors pick-up trucks with
model C, K, R, or V chassis, which, it was subsequently
determined, may have had a design defect in their location of the
fuel tank. Objectors claim that the side-saddle tanks rendered
the trucks especially vulnerable to fuel fires in side
collisions. Many of the class members are individual owners
(i.e., own a single truck), while others are "fleet owners," who
own a number of trucks. Many of the fleet owners are
governmental agencies. As will become apparent, the negotiated
settlement treats fleet owners quite differently from individual
owners, a fact with serious implications for the fairness of the
settlement and the adequacy of representation of the class.
While all the issues we have mentioned are significant
(except for the discovery issue), the threshold and most
important issue concerns the propriety and prerequisites of
settlement classes. The settlement class device is not mentioned
in the class action rule, Federal Rule of Civil Procedure 23.1
1
. Rule 23 provides, in pertinent part:
(a) Prerequisites to a Class Action. One or more members of
a class may sue or be sued as representative parties on behalf of
all only if (1) the class is so numerous that joinder of all
members is impracticable, (2) there are questions of law or fact
common to the class, (3) the claims or defenses of the
representative parties are typical of the claims or defenses of
the class, and (4) the representative parties will fairly and
adequately protect the interests of the class.
(b) Class Actions Maintainable. An action may be maintained
as a class action if the prerequisites of subdivision (a) are
satisfied, and in addition:
(1) the prosecution of separate actions by or against
individual members of the class would create a risk of
(A) inconsistent or varying adjudications with
respect to individual members of the class which would establish
incompatible standards of conduct for the party opposing the
class, or
(B) adjudications with respect to individual members
of the class which would as a practical matter be dispositive of
the interests of the other members not parties to the
adjudications or substantially impair or impede their ability to
protect their interests; or
(2) the party opposing the class has acted or refused
to act on grounds generally applicable to the class, thereby
Rather it is a judicially crafted procedure. Usually, the
request for a settlement class is presented to the court by both
plaintiff(s) and defendant(s); having provisionally settled the
case before seeking certification, the parties move for
simultaneous class certification and settlement approval. Because
this process is removed from the normal, adversarial, litigation
mode, the class is certified for settlement purposes only, not
for litigation. Sometimes, as here, the parties reach a
settlement while the case is in litigation posture, only then
moving the court, with the defendants' stipulation as to the
(..continued)
making appropriate final injunctive relief or corresponding
declaratory relief with respect to the class as a whole; or
(3) the court finds that the questions of law or fact
common to the members of the class predominate over any questions
affecting only individual members, and that a class action is
superior to other available methods for the fair and efficient
adjudication of the controversy. The matters pertinent to the
findings include: (A) the interest of members of the class in
individually controlling the prosecution or defense of separate
actions; (B) the extent and nature of any litigation concerning
the controversy already commenced by or against members of the
class; (C) the desirability or undesirability of concentrating
the litigation of the claims in the particular forum; (D) the
difficulties likely to be encountered in the management of a
class action.
(c) Determination by Order Whether Class Action to be
Maintained; Notice; Judgment; Actions Conducted Partially as
Class Actions.
(1) As soon as practicable after the commencement of an
action brought as a class action, the court shall determine by
order whether it is to be so maintained. An order under this
subdivision may be conditional, and may be altered or amended
before the decision on the merits. . . .
(e) Dismissal or Compromise. A class action shall not be
dismissed or compromised without the approval of the court, and
notice of the proposed dismissal or compromise shall be given to
all members of the class in such manner as the court directs.
class's compliance with the Rule 23 requisites, for class
certification and settlement approval. In any event, the court
disseminates notice of the proposed settlement and fairness
hearing at the same time it notifies class members of the
pendency of class action determination. Only when the settlement
is about to be finally approved does the court formally certify
the class, thus binding the interests of its members by the
settlement.
The first Manual for Complex Litigation [hereinafter
MCL] strongly disapproved of settlement classes. Nevertheless,
courts have increasingly used the device in recent years, and
subsequent manuals (MCL 2d and MCL 3d (in draft)) have relented,
endorsing settlement classes under carefully controlled
circumstances, but continuing to warn of the potential for abuse.
This increased use of settlement classes has proven extremely
valuable for disposing of major and complex national and
international class actions in a variety of substantive areas
ranging from toxic torts (Agent Orange) and medical devices
(Dalkon Shield, breast implant), to antitrust cases (the beef or
cardboard container industries). But their use has not been
problem free, provoking a barrage of criticism that the device is
a vehicle for collusive settlements that primarily serve the
interests of defendants -- by granting expansive protection from
law suits -- and of plaintiffs' counsel -- by generating large
fees gladly paid by defendants as a quid pro quo for finally
disposing of many troublesome claims.
After reflection upon these concerns, we conclude that
Rule 23 permits courts to achieve the significant benefits
created by settlement classes so long as these courts abide by
all of the fundaments of the Rule. Settlement classes must
satisfy the Rule 23(a) requirements of numerosity, commonality,
typicality, and adequacy of representation, as well as the
relevant 23(b) requirements, usually (as in this case) the (b)(3)
superiority and predominance standards. We also hold that
settlement class status (on which settlement approval depends)
should not be sustained unless the record establishes, by
findings of the district judge, that the same requisites of the
Rule are satisfied. Additionally, we hold that a finding that
the settlement was fair and reasonable does not serve as a
surrogate for the class findings, and also that there is no lower
standard for the certification of settlement classes than there
is for litigation classes. But so long as the four requirements
of 23(a) and the appropriate requirement(s) of 23(b) are met, a
court may legitimately certify the class under the Rule.
In this case the district judge made no Rule 23
findings, and significant questions remain as to whether the
class could have met the requisites of the rule had the district
court applied them. Principally at issue is adequacy of
representation. In particular, the objectors contend that there
is a conflict between the positions of individual owners on the
one hand and fleet owners on the other hand. The disparity in
settlement benefits enjoyed by these different groups, objectors
argue, creates an intra-class conflict that precludes the finding
of adequacy of representation required by the rule. Moreover,
they submit, the large number of different defenses available
under the laws of the several states involved also creates a
potentially serious commonality and typicality problem.
We conclude that the objectors' adequacy of
representation claim probably has merit. At all events, the
district court did not properly evaluate the differential impact
of the settlement on individual fleet owners, and should
determine on remand whether the conflicts among class members are
so great as to preclude certification (or at least sufficient to
require the creation of subclasses). The district court should
also focus on the commonality and typicality problems, to
determine whether the national scope of the class litigation and
the plethora of defenses available in different jurisdictions
prevent these requirements from being met.
For the reasons that follow at some length, we conclude
that, although settlement classes are valid generally, this
settlement class was not properly certified. We also conclude
that the settlement is not fair and adequate; more precisely, we
hold that the district court abused its discretion in determining
that it was, primarily because the district court erred in
accepting plaintiffs' unreasonably high estimate of the
settlement's worth, in over-estimating the risk of maintaining
class status and of establishing liability and damages, and in
misinterpreting the reaction of the class. Finally, although our
disposition of the foregoing issues makes it unnecessary for us
to pass on the approval of the attorneys fees, we clarify the
governing standards for these fee awards to guide the district
court on remand. We therefore reverse the challenged order of
the district court and remand for further proceedings.
I. FACTS, PROCEDURAL HISTORY, AND STANDARD OF REVIEW
A. General Background
Between 1973 and 1987, General Motors sold over 6.3
million C/K pickup trucks with side-mounted fuel tanks.2 In late
October 1992, after the public announcement of previously
undisclosed information regarding the safety of the fuel tank
placement in GM pickups, consumer class action lawsuits were
filed in several jurisdictions. The National Highway Traffic
Safety Administration ("NHTSA") commenced an investigation of the
alleged defects relating to side-impact fires on these trucks,
and consumer advocacy groups sought a recall.3
On November 5, 1992, plaintiffs in one action sought to
enjoin allegedly misleading communications to putative class
2
. The class includes both mid-and full-size trucks with
chassis model types C, K, R, or V.
3
. See note 5 infra.
members and filed an application for expedited discovery. On
November 8 and 9, 1992, GM filed notices of removal of this and
other state court actions, and a motion with the Judicial Panel
on Multidistrict Litigation ("MDL Panel") to transfer and
consolidate all actions for pretrial purposes under 28 U.S.C.
§ 1407. The MDL Panel transferred all related actions to the
District Court for the Eastern District of Pennsylvania on
February 26, 1993. Ultimately, dozens of actions were filed in
various courts throughout the United States on behalf of consumer
classes; the federal cases were dismissed, remanded to state
court, or transferred to the Eastern District of Pennsylvania.
On March 5, 1993, pursuant to an order of the
(transferee) District Court, plaintiffs filed a Consolidated
Amended Class Action Complaint seeking equitable relief and
damages that consolidated all of the actions under the MDL
caption and listed nearly 300 representative plaintiffs,
including both individual and fleet owners. The Complaint
alleged violations of two federal statutes; the Magnuson-Moss Act
and the Lanham Trademark Act; a variety of common law and
statutory claims, including negligence, fraud, breach of written
and implied warranty; and violations of various state consumer
statutes. The complaint sought, inter alia, an order remedying
the alleged abnormally high incidence of fuel-fed fires following
side-impact collisions by requiring GM to recall the trucks or
pay for their repair. (JA 37, 93.) GM answered this complaint,
denying all substantive allegations and raising numerous
affirmative defenses.
Also on March 5, 1993, plaintiffs filed a consolidated
motion for nationwide class certification. The court set July
19, 1993, the hearing date on this motion. On March 30, 1993, GM
moved to stay this litigation pending the outcome of the NHTSA
investigation, initiated in December 1992. This motion was
denied on June 4, 1993. Pursuant to a scheduling order issued by
the court, discovery during the spring of 1993 focused on class
certification issues. (JA1824-27.) During this discovery, GM
produced more than 100,000 pages of documents from prior C/K
pickup product liability lawsuits and GM's responses to NHTSA
information requests. Plaintiffs also had access to the
depositions and trial testimony in other cases involving the fuel
tank design of C/K pickups, including the jury trial in Moseley
v. GM, No. 90-V-6276 (Fulton County, Ga.). Plaintiffs consulted
with their own experts to evaluate this information. In
addition, depositions were taken of some GM personnel and certain
named plaintiffs. Discovery on the merits of the case had been
postponed until autumn 1993. Nothing in the record indicates
that, as of the spring of 1993, counsel had identified expert
witnesses for trial or deposed GM's engineering experts.
In the midst of these proceedings, the parties began
exploring a possible settlement of the litigation. These
discussions intensified in June 1993, at which time face-to-face
and telephonic meetings, both between the parties and among
plaintiffs' counsel, took place on virtually a daily basis. On
July 19, 1993, the parties reached a settlement in principle,
reduced the terms to writing, and informed the district court.4
For purposes of settlement only and without prejudice to GM's
substantial opposition to class certification, the named parties
agreed to the certification of a settlement class of C/K pickup
owners, described below.
B. The Settlement Agreement
In general terms, the settlement agreement provides for
members of the settlement class to receive $1,000 coupons
redeemable toward the purchase of any new GMC Truck or Chevrolet
light duty truck. Settlement certificates are transferable with
the vehicle. They are redeemable by the then current owner of
the 1973-86 C/K and 1987-91 R/V light duty pickup trucks or
chassis cabs at any authorized Chevrolet or GMC Truck dealer for
a fifteen month period. Settlement class members do not have to
trade in their current vehicle to use the certificate, and the
4
. GM reached a substantially identical agreement with counsel
representing a class of C/K pickup truck purchasers who are Texas
residents in Dollar v. General Motors, No. 92-1089 (71st Judicial
District, Marshall, Tex.)(JA1708, 1746). That settlement was
approved in November 1993, but was overturned on appeal on June
22, 1994. See Bloyed v. General Motors Corporation, Dollar et
al., 881 S.W. 422 (6th App. Dist., Tex. June 22, 1994), discussed
infra at VI(I). The Texas Supreme Court granted GM's Application
for Writ of Error on February 16, 1995 and set the case for oral
argument on March 21, 1995.
certificates can be used in conjunction with GM and GMAC
incentive programs.
The class members can freely transfer the certificate
to an immediate family member who resides with the class member.
Class members can also transfer the $1000 certificate to a family
member who does not reside with the class member by designating
the transferee family member within sixty days, running from the
date that GM mailed notice of the proposed settlement.
Additionally, the $1000 certificate can be transferred with the
title to the settlement class vehicle, that is, to a third party
who purchases the class member's vehicle.
In lieu of a $1,000 certificate, and without
transferring title to the settlement class vehicle, a class
member may instead request that a nontransferable $500
certificate (counterintuitively known as the "transfer
certificate") be issued to any third party except a GMC dealer or
its affiliates. This $500 certificate is redeemable with the
purchase of a new C or K series GMC or Chevrolet full-size pickup
truck or its replacement model. The $500 certificate cannot be
used in conjunction with any GMC or GMAC marketing incentive,
must be used on the more expensive full size models, and is
subject to the same fifteen-month redemption period as the $1,000
certificates. The class member must make a notarized request to
GM, and GM will mail the $500 certificate to the transferee
within 14 days of its receipt of the request for transfer.
Under the terms of the agreement, the approval of the
settlement and corresponding entry of final judgment would have
no effect upon any accrued or future claims for personal injury
or death, nor would it affect the rights of settlement class
members to participate in any future remedial action that might
be required under the National Traffic and Motor Safety Act of
1966, 15 U.S.C. §§ 1381 et seq. (1995).5 (JA 1750, 1763-64.)
The settlement agreement before us also provides that
plaintiffs' counsel would apply to the district court for an
award of reasonable attorneys' fees and reimbursement of
expenses, both to be paid by GM. GM reserved the right to object
to any fees or expenses it deemed to be excessive and to appeal
any amount awarded by the court over its objection. (JA 1750,
1755-56.) Plaintiffs' counsel filed their fee applications on or
about September 15, 1993; the fee applications remained in the
files of the clerk of the district court where class members
could theoretically review them, but no information about
attorneys' fees other than the fact that a fee application would
be made was included in the class notice. GM did not file any
formal objections to the fee applications.
5
. After oral argument in this case, United States
Transportation Secretary Federico Pena announced that NHTSA had
settled the proceeding involving the C/K trucks at issue here
without ordering a recall, finding an acceptable retrofit, or
giving any compensation to the truck owners. The settlement
provided that GM would contribute $51 million to general safety
programs unrelated to the trucks' alleged problems. See
Statement by Secretary Federico Pena on Dec. 2, 1994, Settlement
Regarding DOT Investigation of General Motors C/K Pickup Trucks.
C. Approval of the Settlement and Fees
The district court reviewed the substantive terms of
the settlement on July 12, 1993 and made the preliminary
determination, in Pretrial Order No. 7, entered July 20, 1993,
that the proposed settlement appeared reasonable. (JA 1828-33.)
Also in pretrial order no. 7, the court "provisionally" certified
the class of GM truck owners as a settlement class (i.e., for
settlement purposes only) pursuant to Rule 23(b)(3); however, the
court did not make findings that the requisites of Rule 23(a) or
23(b) were satisfied. (JA 1828-33.) The court approved the form
of and dissemination to putative class members of the combined
notice of the pendency of the action and the proposed settlement
pursuant to Rules 23(c)(2) and 23(e). The class definition
included all persons and entities who purchased in the United
States (except for residents of the State of Texas) and were
owners as of July 19, 1993 of (1) a 1973-1986 model year General
Motors full-size pickup truck or chassis cab of the "C" or "K"
series; or (2) a 1987-1991 model year General Motors full-size
pickup truck or chassis cab of the "R" or "V" series. (JA 1828.)
On August 20 and 21, 1993, GM mailed the notice to all registered
owners of class vehicles (including nearly 5.7 million vehicles),
and it published the full text of the notice in USA Today and The
Philadelphia Inquirer on August 27, 1993.
In response to the notice, over 5,200 truck owners
elected to opt out of the class, and approximately 6,500 truck
owners (a number which includes fleet owners who own as many as
1,000 vehicles each) objected to the settlement. The objectors'
filings contained many overlapping claims. The recurring
contentions were that: (1) the settlement does nothing to fix
the trucks (JA 1854,55,57); (2) even with the $1,000 coupon, many
owners would be unable to purchase a new truck given their high
cost (with list prices from $11,000 to $33,000); (3) state and
local government fleet owners would not be able to redeem all of
their certificates (by buying new vehicles) within the short
redemption period (fifteen months), and they might be further
restricted from using the coupons by competitive bidding
procurement rules; and (4) GM and class counsel colluded in a
manner that compromised the interests of the class and that would
preclude a finding of adequate representation. GM rejoined with
voluminous material emphasizing the substantial risks plaintiffs
faced not only in maintaining class treatment but also in
establishing liability and damages.
A settlement fairness hearing was held on October 26,
1993 during which the objectors who submitted written briefs were
permitted to speak. The district court approved the settlement
in a Memorandum and Order dated December 16, 1993. In that
order, the court confirmed its Pretrial Order No. 7, which had
provisionally certified the settlement class. Although the court
still made no findings that the requisites of Rules 23(a) and (b)
were met, it did set forth findings of fact and conclusions of
law to justify its approval of the settlement as fair, reasonable
and adequate based on the nine-factor test established in Girsh
v. Jepson, 521 F.2d 153 (3d Cir. 1975).
The court found that the total economic value of the
settlement was "between $1.98 billion and $2.18 billion." (App.
1727) Against the prospect of settlement, the court weighed each
of the nine Girsh factors. It concluded that "the complexity,
expense and likely duration of the litigation would be mammoth."
(op. 6)(JA 1708, 1713) Although the settlement was reached at an
early stage of the litigation, just four months after the
consolidated complaint was filed, the court found that this did
not weigh against the settlement because the court believed that
the parties had access to "extensive discovery on the same issues
of product defect that was previously conducted in the various
personal injury actions that have been litigated throughout the
country." (op. 8-9)(JA1715-16) The district court also found
that the reaction of class members to the proposed settlement
supported approval citing "the infinitesimal number of truck
owners who have either objected to or sought exclusion from the
settlement." (JA1715.)
Noting the divided results of the personal-injury jury
trials and the numerous defenses GM could raise, the court found
that "a substantial risk in establishing liability" weighed in
favor of approval. Similarly, the court found that "[p]erhaps
the greatest weakness in the plaintiffs' case is the lack of
proof of economic damages." (JA1721.) The court also addressed
the objection that the settlement did not provide for a recall or
a "fix," explaining that "no objector that complains that the
settlement fails to retrofit the alleged defect has been able to
come forth with a practical and safe modification for the trucks
that has been designed, evaluated and tested." (JA1736.)
On December 20, 1993, four days after approving the
settlement, the district court also approved the class counsel's
request for attorneys' fees in the amount of $9.5 million.
Although the court did not believe at that time that it needed to
review that fee award, to which GM had agreed, it subsequently,
on February 2, 1994, issued an "amplified order" evaluating the
award in greater detail. The court determined that the fee
request was reasonable under both a lodestar analysis and the
percentage-of-recovery method (see Part VII infra). (JA 1775.)
D. The NHTSA Investigation
While this case was under submission to this court, the
NHTSA investigation continued. Over the objections of some of
NHTSA's engineers who had determined that the trucks complied
with relevant safety standards, on October 17, 1994, Secretary of
Transportation Federico Pena announced the agency's finding that
the trucks contained a safety defect creating an increased and
unreasonable risk of side-impact fires. The determination was
based on the allegedly enhanced risk of side-impact fires
relative to Ford pickups that resulted from GM's placement of the
fuel tanks outside the frame rails. GM challenged the propriety
of the public meeting NHTSA planned to hold and NHTSA's authority
to order a recall of vehicles that met all relevant safety
standards. On December 2, 1994, Secretary Pena announced the
settlement of the C/K pickup investigation wherein GM contributed
over $51 million for a variety of safety programs unrelated to
the pickups, and admitted no liability.6
E. Standard of Review
Each of the issues presented here is reviewable for
abuse of discretion. See Bryan v. Pittsburgh Plate Glass Co.,
494 F.2d 799 (3d Cir.), cert. denied, 419 U.S. 900 (1974)
(approval of proposed class action settlement); In re School
Asbestos Litig., 921 F.2d 1338, 1341 (3d Cir. 1990), cert.
denied, 499 U.S. 976 (1991) (class certification); Lindy Bros.
Builders, Inc. v. American Radiator & Standard Sanitary Corp.,
540 F.2d 102, 115 (3d Cir. 1976) (award of reasonable attorney's
fees); Marrogquin-Manriquez v. INS, 699 F.2d 129, 134 (3d Cir.
1983), cert. denied, 467 U.S. 1259 (1984) (scope of discovery).
An appellate court may find an abuse of discretion where the
"district court's decision rests upon a clearly erroneous finding
of fact, an errant conclusion of law or an improper application
of law to fact." International Union, UAW v. Mack Trucks, Inc.,
820 F.2d 91, 95 (3d Cir. 1987), cert. denied, 499 U.S. 921
(1991). A finding of fact is clearly erroneous when, although
6
. See note 5 supra.
there is evidence to support it, the reviewing court, based on
the entire evidence, concludes with firm conviction that a
mistake has been made. Oberti v. Board. of Ed. of Borough of
Clementon Sch. Dist., 995 F.2d 1204, 1220 (3d Cir. 1993).
II. ANATOMY OF THE CLASS CLAIMS
The consolidated class complaint filed on behalf of the
nationwide class of GM truck owners (except those from Texas)
alleged violations of the Magnuson-Moss Warranty Act, 15 U.S.C.A.
§ 2310(d)(1) (1995); and the Lanham Act, 15 U.S.C.A. § 1125(a)
(1995); and a variety of state common law and statutory claims,
including strict liability in tort for selling a dangerously
defective product; negligent design; negligent misrepresentation;
fraud (based on defendants' alleged course of conduct in the
advertising, promotion, and sale of the GM pickups intentionally
concealing material facts about a dangerous latent defect);
breach of warranty, including written (from vehicle warranties),
express (from public representations by GM), implied (warranties
of merchantability) and statutory warranties; and finally
violations of various state consumer protection statutes. (JA37).
The case did not involve any pickup trucks that had actually
experienced fuel tank fires caused by side-impact collisions.
Moreover, personal injury or death claims were expressly omitted
from the complaint as well as from the settlement -- class
members remain free to pursue such claims if any should accrue.
The aggregated treatment of these claims was
potentially complicated by the differences in underlying facts.
The trucks at issue had nineteen different fuel tank systems;
proof might thus be required for each design on relevant issues.
Furthermore, unlike the federal securities laws where there is a
presumption of reliance on a material misrepresentation, see
Basic v. Levinson, 108 S. Ct. 978 (1988), plaintiffs would likely
have had to prove individual reliance on the allegedly misleading
materials under the various state laws applicable to most of
these claims. More fundamentally, the complaint itself invoked
state laws that implicated different legal standards on, for
example, the warranty claims (the laws contain various privity
requirements or the need for an allegedly defective product to
fail in service before a warranty claim can be sustained),
negligent misrepresentation, negligence, and strict products
liability. The state laws implicated by the filing of the
nationwide class action also differed on such issues as statutes
of limitations, whether pickup trucks are "consumer products;"
the application of durational limits on implied warranties; the
requirement of reliance to recover for fraud, misrepresentation,
and warranty claims; whether intent is a required element of
negligent misrepresentation claims; whether comparative fault is
a defense; and the relevant test for plaintiffs' design defect
claims.
III. RULE 23 - RELEVANT FUNDAMENTAL PRINCIPLES
Before turning to the precise questions at issue on
this appeal, it is important that we consider the several basic
purposes served by class actions in our contemporary, complex
litigation-laden legal system. One of the paramount values in
this system is efficiency. Class certification enables courts to
treat common claims together, obviating the need for repeated
adjudications of the same issues. See Vol. 1 HERBERT NEWBERG & ALBA
CONTE, NEWBERG ON CLASS ACTIONS § 1.06 (Third Ed. 1992); General Tel.
Co. v. Falcon, 457 U.S. 147, 149 (1982).
The Supreme Court has articulated other important
objectives served by class actions. Class actions achieve "the
protection of the defendant from inconsistent obligations, the
protection of the interests of absentees, the provision of a
convenient and economical means for disposing of similar
lawsuits, and the facilitation of the spreading of litigation
costs among numerous litigants with similar claims." United
States Parole Comm'n v. Geraghty, 445 U.S. 388 pinpoint (1980).
The Court has explained the significance of the last goal as
an evolutionary response to the existence of injuries
unremedied by the regulatory action of government.
Where it is not economically feasible to obtain relief
within the traditional framework of a multiplicity of
small individual suits for damages, aggrieved persons
may be without any effective redress unless they may
employ the class-action device.
Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 339
(1980); see also Vol 1 NEWBERG & CONTE § 1.06 at 1-19. Cost
spreading can also enhance the means for private attorney general
enforcement and the resulting deterrence of wrongdoing. Id. §
1.06 at 1-18 to 1-20.
The law favors settlement, particularly in class
actions and other complex cases where substantial judicial
resources can be conserved by avoiding formal litigation. See
NEWBERG & CONTE § 11.41 at 11-85 (citing cases); Cotton v. Hinton,
559 F.2d 1326, 1331 (5th Cir. 1977); Van Brankhorst v. Safeco
Corp., 529 F.2d 943, 950 (9th Cir. 1976). The parties may also
gain significantly from avoiding the costs and risks of a lengthy
and complex trial. See First Com. Corp. of Boston Customer Accts
Litig., 119 F.R.D. 301, 306-07 (D. Mass. 1987). These economic
gains multiply when settlement also avoids the costs of
litigating class status -- often a complex litigation within
itself. Furthermore, a settlement may represent the best method
of distributing damage awards to injured plaintiffs, especially
where litigation would delay and consume the available resources
and where piecemeal settlement could result, in the Rule
23(b)(1)(B) limited fund context, in a sub-optimal distribution
of the damage awards. See, e.g., In re Dennis Greenman
Securities Litig., 829 F.2d 1539, 1542 (11th Cir. 1987).
Thus, courts should favor the use of devices that tend
to foster negotiated solutions to these actions. Prima facie,
this would include settlement classes. True, it was once thought
that mass tort actions were ordinarily not appropriate for class
treatment, see Fed. R. Civ. P. 23 Advisory Committee's note,
subdivision (b)(3), 39 F.R.D. 69, 103 (1966). It has also been
argued that mass tort cases strain the boundaries of Rule 23.
See Bruce H. Nielson, Was the 1966 Advisory Committee Right?:
Suggested Revisions of Rule 23 to Allow More Frequent Use of
Class Actions in Mass Tort Litigation, 25 HARV. J. LEGIS. 461
(1988) (suggesting necessity of rule revisions to accommodate
class action treatment of mass torts). However, the
applicability of Rule 23 to mass tort cases has become
commonplace, and the use of the class action device, specifically
the (b)(3) class, has created some of the largest and most
innovative settlements in these contexts. Prominent examples
include the recent $4.2 billion settlement of the breast implant
litigation. See In re Silicone Gel Breast Implant Prods.
Liability Litig., 1994 WL 578353 (N.D. Ala. 1994).
Despite the potential benefits of class actions, there
remains an overarching concern -- that absentees' interests are
being resolved and quite possibly bound by the operation of res
judicata even though most of the plaintiffs are not the real
parties to the suit. The protection of the absentees' due
process rights depends in part on the extent the named plaintiffs
are adequately interested to monitor the attorneys (who are, of
course, presumed motivated to achieve maximum results by the
prospect of substantial fees), and also on the extent that the
class representatives have interests that are sufficiently
aligned with the absentees to assure that the monitoring serves
the interests of the class as a whole. In addition, the court
plays the important role of protector of the absentees'
interests, in a sort of fiduciary capacity, by approving
appropriate representative plaintiffs and class counsel.
Another problem is that class actions create the
opportunity for a kind of legalized blackmail: a greedy and
unscrupulous plaintiff might use the threat of a large class
action, which can be costly to the defendant, to extract a
settlement far in excess of the individual claims' actual worth.
Because absentees are not parties to the action in any real
sense, and probably would not have brought their claims
individually, see Mars Steel v. Continental Illinois National
Bank & Trust, 834 F.2d 677, 678 (7th Cir. 1987), attorneys or
plaintiffs can abuse the suit nominally brought in the absentees'
names. As one court has noted, "[t]his fundamental departure
from the traditional pattern in Anglo-American litigation
generates a host of problems . . . ." Id.
The drafters designed the procedural requirements of
Rule 23, especially the requisites of subsection (a), so that the
court can assure, to the greatest extent possible, that the
actions are prosecuted on behalf of the actual class members in a
way that makes it fair to bind their interests. The rule thus
represents a measured response to the issues of how the due
process rights of absentee interests can be protected and how
absentees' represented status can be reconciled with a litigation
system premised on traditional bipolar litigation. Moreover, the
requirement in Rule 23(c) that the court decide certification
motions "as soon as practicable," see note 1 supra, aims to
reduce even further the possibility that a party could use the
ill-founded threat of a class action to control negotiations or
the possibility that absentees' interests could be unfairly
bound. Hence, the procedural formalities of certification are
important even if the case appears to be headed for settlement
rather than litigation.
This expanded role of the court in class actions
(relative to conventional bipolar litigation) continues even
after certification. While the parties in a normal suit do not
ordinarily require a judge's approval to settle the action, class
action parties do. Rule 23(e) provides: "A class action shall
not be dismissed or compromised without the approval of the
court, and notice of the proposed dismissal or compromise shall
be given to all members of the class in such manner as the court
directs." FED. R. CIV. P. 23(E). Courts and commentators have
interpreted this rule to require courts to "independently and
objectively analyze the evidence and circumstances before it in
order to determine whether the settlement is in the best interest
of those whose claims will be extinguished." 2 NEWBERG & CONTE §
11.41 at 11-88 to 11-89. "Under Rule 23(e) the district court
acts as a fiduciary who must serve as a guardian of the rights of
absent class members. . . . [T]he court cannot accept a
settlement that the proponents have not shown to be fair,
reasonable and adequate." Grunin v. International House of
Pancakes, 513 F.2d 114, 123 (8th Cir.) cert. denied, 423 U.S. 864
(1975); Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983); Sala
v. National RR Passenger Corp., 721 F. Supp. 80 (E.D. Pa. 1989);
see also Piambino v. Bailey, 610 F.2d 1306 (5th Cir.), cert
denied, 449 U.S. 1011 (1980).
Before sending notice of the settlement to the class,
the court will usually approve the settlement preliminarily.
This preliminary determination establishes an initial presumption
of fairness when the court finds that: (1) the negotiations
occurred at arm's length; (2) there was sufficient discovery; (3)
the proponents of the settlement are experienced in similar
litigation; and (4) only a small fraction of the class objected.
See 2 NEWBERG & CONTE § 11.41 at 11-91.
As noted above, this court has adopted a nine-factor
test to help district courts structure their final decisions to
approve settlements as fair, reasonable, and adequate as required
by Rule 23(e). See Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir.
1975). Those factors are: (1) the complexity and duration of
the litigation; (2) the reaction of the class to the settlement;
(3) the stage of the proceedings; (4) the risks of establishing
liability; (5) the risks of establishing damages; (6) the risks
of maintaining a class action; (7) the ability of the defendants
to withstand a greater judgment; (8) the range of reasonableness
of the settlement in light of the best recovery; and (9) the
range of reasonableness of the settlement in light of all the
attendant risks of litigation. Id. The proponents of the
settlement bear the burden of proving that these factors weigh in
favor of approval. See GM Interchange, 594 F.2d 1106, 1126 n.30
7th Cir. 1979); Holden v. Burlington Northern, Inc., 665 F. Supp.
1398, 1407 (D. Minn. 1987); MCL 2d §30.44. The findings required
by the Girsh test are factual, see Malchman v. Davis, 706 F.2d at
434; Plummer v. Chemical Bank, 668 F.2d 564, 659 (2d Cir. 1982),
which will be upheld unless they are clearly erroneous,
Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982), cert.
denied, 464 U.S. 818 (1983); In re Corrugated Container Antitrust
Litig., 643 F.2d 195, 207 (5th Cir. 1981).
IV. SETTLEMENT CLASSES
This appeal challenges (among other things) the
district court's class certification order. Before we may
address the propriety of the court's order we must first decide
whether it is ever proper to certify a class for settlement
purposes only. We therefore begin our analysis with a closer
look at how settlement classes operate.
A. Nature of the Device
As we have explained above, a settlement class is a
device whereby the court postpones the formal certification
procedure until the parties have successfully negotiated a
settlement, thus allowing a defendant to explore settlement
without conceding any of its arguments against certification.
Despite the directive of Rule 23(c) that courts certify actions
as soon as practicable, when a class action has been filed before
the settlement has been arrived at courts will often delay the
certification determination during the pendency of settlement
discussions. If the settlement negotiations succeed, courts will
certify the class for settlement purposes only and send a
combined notice of class pendency and settlements to the class
members. Thus, by the time the court considers certification,
the defendant has essentially stipulated to the existence of the
class requirements since it now has an interest in binding an
entire class with its proffered settlement.
By specifying certification for settlement purposes
only, however, the court preserves the defendant's ability to
contest certification should the settlement fall apart. Because
the court indulges the assumption of the class's existence only
until a settlement is reached or the parties abandon the
negotiations, settlement classes are also sometimes referred to
as temporary or provisional classes. Sometimes the specification
may also be seen as assuming that the class may only meet the
requirements of Rule 23 if the action is settled, and that
certification may in fact be inappropriate if the action will
actually be litigated. In any event, notwithstanding that there
is an absence of clear textual authorization for settlement
classes, many courts have indulged the stipulations of parties by
establishing temporary classes for settlement purposes only.
See, e.g., Mars Steel v. Continental Illinois Nat'l Bk. & Trust,
834 F.2d 677 (7th Cir. 1987); Weinberger v. Kendrick, 698 F.2d 61
(2d Cir. 1982), cert. denied, 464 U.S. 818 (1983); In re A.H.
Robins Co., 880 F.2d 709, 738-39 (4th Cir. 1989); In re Dennis
Greeman Sec. Litig., 829 F.2d 1539, 1543 (11th Cir. 1978);
Plummer v. Chemical Bank, 668 F.2d 564 (2d Cir. 1982); In re Beef
Industry Antitrust Litig., 607 F.2d 167, 173 (5th Cir. 1979);
Malchman v. Davis, 706 F.2d 427, 433-34 (2d Cir. 1983); In re
Taxable Mun. Bond Sec. Litig., 1994 WL 643142 (E.D. La. Nov. 15,
1994); In re Silicone Gel Breast Implant Prod. Liab. Litig., 1994
WL 578353 (N.D. Ala. Sept. 1, 1994); In re First Commodity Corp.
of Boston, 119 F.R.D. 301, 306-08 (D. Mass. 1987); In re
Bendectin, 102 F.R.D. 239, 240 (S.D. Oh. 1984), rev'd on other
grounds, 749 F.2d 300 (6th Cir. 1984); In re Mid-Atlantic Toyota
Anti-trust Litig., 564 F.Supp. 1379, 1388-90 (D. Md. 1983); In re
Chicken Antitrust Litig., 560 F.Supp. 957, 960 (N.D. Ga. 1980).
There has been a great deal of commentary, both
critical7 and laudatory,8 of the use of these "settlement
classes." And some courts have criticized these accommodations
7
. See, e.g., John C. Coffee, Jr., The Corruption of the Class
Action, WALL ST. J. Sept. 7, 1994, at A15.
8
. 2 Newberg & Conte § 11.27 (First) § 1.46; Roger H. Transgrud,
Joinder Alternatives in Mass Tort Litigation, 70 CORNELL L. REV.
779 (1985); Bruce H. Nielson, Was the 1966 Advisory Committee
Right?: Suggested Revisions of Rule 23 to Allow More Frequent
Use of Class Actions in Mass Tort Litigation, 25 HARV. J. LEGIS.
461, 480
of the negotiating parties and expressed their ambivalence while
continuing nonetheless to use them. See, e.g., Mars Steel, 834
F.2d 677 (7th Cir. 1987) (describing considerable dangers of
settlement classes but ultimately upholding the settlement).
Before we interpret the dictates of Rule 23 with respect to
settlement classes, it will be useful to survey both the
criticism and the praise.
B. Perceived Problems of Settlement Classes
A number of commentators, particularly the authors of
the first edition of the Manual for Complex Litigation, have
voiced serious concerns about settlement classes. These
criticisms have focused on the fact that Rule 23, a carefully
constructed scheme intended to protect the rights of absentees
that necessarily relies on active judicial participation to
protect those interests, does not authorize a separate category
of class certification that would permit a dilution of or
dispense with the subsection (a) criteria. § 1.46; see also Mars
Steel v. Continental Ill. Nat'l Bank & Trust, 834 F.2d 677, 680
(7th Cir. 1987); In re Baldwin United, 105 F.R.D. 475 (S.D.N.Y.
1984). Other criticisms focus on the potential prejudice to the
parties and the institutional threat posed to the court. See,
e.g., Coffee, supra note 10.
Rule 23 does not in terms authorize the deferral of
class certification pending settlement discussions. Indeed,
Rule 23(c) provides: "As soon as practicable after the
commencement of an action brought as a class action, the court
shall determine by order whether it is to be so maintained."
Fed. R. Civ. P. 23(a) (emphasis supplied). Deliberately delaying
a class certification determination so that settlement
discussions can proceed clearly does not represent an effort to
resolve the issue "as soon as practicable." As Judge Posner has
noted, "[i]t is hard to see why the propriety of maintaining the
suit as a class action could not 'practicably' have been
determined much earlier. And, common though the practice of
deferring class certification while settlement negotiations are
going on is, it not only jostles uneasily with the language of
Rule 23(c)(1) but also creates practical problems." Mars Steel,
834 F.2d at 680.
The danger here is that the court cannot properly
discharge its duty to protect the interests of the absentees
during the disposition of the action. Because the class has not
yet been defined, the court lacks the information necessary to
determine the identity of the absentees and the likely extent of
liability, damages, and expenses of preparing for trial. See MCL
2d § 30.45 at 243 ("No one may know how many members are in the
class, how large their potential claims are, what the strengths
and weaknesses of the parties' positions are, or how much the
class will benefit under the settlement."); In re Baldwin United,
105 F.R.D. 475, 481 (S.D.N.Y. 1984). Moreover, the court
performs its role as supervisor/protector without the benefit of
a full adversarial briefing on the certification issues. With
less information about the class, the judge cannot as effectively
monitor for collusion, individual settlements, buy-offs (where
some individuals use the class action device to benefit
themselves at the expense of absentees), and other abuses. See
In re Beef Indus. Antitrust Litig., 607 F.2d at 174. For
example, if the court fails to define the class before settlement
negotiations commence, then during the settlement approval phase
the judge will have greater difficulty detecting if the parties
improperly manipulated the scope of the class in order to buy the
defendant's acquiescence.
Settlement classes also make it more difficult for a
court to evaluate the settlement by depriving the judge of the
customary structural devices of Rule 23 and the presumptions of
propriety that they generate. Ordinarily, a court relies on
class status, particularly the adequacy of representation
required to maintain it, to infer that the settlement was the
product of arm's length negotiations. Cf. Weinberger v.
Kendrick, 698 F.2d 61, 74 (2d Cir. 1983) (noting protracted
nature of negotiations in approving settlement); City of Detroit
v. Grinnell, 495 F.2d 448, 463 (2d Cir. 1974) (same); In re
Baldwin-United, 105 F.R.D. 475, 482 (S.D.N.Y. 1984) (same).
Where the court has not yet certified a class or named its
representative or counsel, this assumption is questionable.
In effect, settlement classes can, depending how they
are used, evade the processes intended to protect the rights of
absentees. Indeed, the draft of the MCL (Third), although
considerably more receptive to settlement classes than the
earlier editions of the Manual, explains that "[t]he problem
presented by these requests is not the lack of sufficient
information and scrutiny, but rather the possibility that
fiduciary responsibilities of class counsel or class
representatives may have been compromised." MCL (Third) (draft)
at 193. Even some courts successfully using these devices to
achieve settlements apparently recognize these dangers since they
certify these actions more cautiously than ordinary classes.
See, e.g., Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30,
33 (3d Cir. 1971) (court must be doubly careful where negotiation
occurs before certification and designation of a class counsel);
In re Beef Antitrust Litig., 607 F.2d 167, 176-77 (5th Cir. 1979)
(examining though ultimately rejecting the charge that collusion
precluded the certification of the settlement class); Simer v.
Rios, 661 F.2d 655, 664-66 (7th Cir. 1981) (requiring a higher
showing of fairness where settlement negotiated prior to
certification); Weinberger v. Kendrick, 698 F.2d 61, 69 (2d Cir.
1982) (judge made findings about discovery and counsel).
In particular, settlement classes create especially
lucrative opportunities for putative class attorneys to generate
fees for themselves without any effective monitoring by class
members who have not yet been apprised of the pendency of the
action. Moreover, because the court does not appoint a class
counsel until the case is certified, attorneys jockeying for
position might attempt to cut a deal with the defendants by
underselling the plaintiffs' claims relative to other attorneys.9
Unauthorized settlement negotiations occurring before the
certification determination thus "create the possibility of
negotiation from a position of weakness by the attorney who
purports to represent the class." GM Interchange Litigation, 594
F.2d 1106, 1125 (7th Cir. 1979). Pre-certification negotiations
also hamper a court's ability to review the true value of the
settlement or the legal services after the fact. See supra at
36. In addition, unauthorized negotiations also result in denying
other plaintiffs' counsel information that is necessary for them
to make an effective evaluation of the fairness of any settlement
that results. See GM Interchange, 594 F.2d at 1125.
Framed as an issue of Rule 23(a) requisites, these
considerations implicate adequacy of representation concerns:
"[a]rguments in opposition to settlement classes have merit when
they are addressed to the problem of inadequate representation or
possible collusion among the named plaintiffs and some or all
defendants." In re Baldwin-United Corp., 105 F.R.D. 475, 480
9
. These sorts of dynamics have led some critics to accuse class
action attorneys of ethical violations. While we emphasize that
counsel here committed no such violations, we do not preclude the
possibility that these violations could occur.
(S.D.N.Y. 1984). Another court has warned that the "danger of a
premature, even a collusive, settlement [is] increased when as in
this case the status of the action as a class action is not
determined until a settlement has been negotiated, with all the
momentum that a settlement agreement generates . . . ."; Mars
Steel, 834 F.2d at 680; see also Malchman, 706 F.2d at 433
(recognizing special potential for collusion or undue pressure by
defendants in settlement negotiations); Weinberger, 698 F.2d at
73 (requiring a higher showing of fairness to accommodate greater
potential for improper settlement). Settlement classes, which
constitute ad hoc adjustments to the carefully designed class
action framework constructed by Rule 23, lack the regulatory
mechanisms that ordinarily check this improper behavior: "There
is in fact little or no individual client consultation and no
judicial oversight of a hidden process of wheeling and dealing to
maximize overall recovery and fees for hundreds and thousands of
massed cases." In re Joint Eastern & Southern District Asbestos
Litigation, 129 B.R. 710, 802 (E & S.D.N.Y. 1991) (discussing the
ramifications of class treatment of mass torts).
In addition to these procedural problems (and the
problems created for a judge trying to evaluate both class status
and the adequacy of a class settlement simultaneously) the
earlier achievement of settlement through the use of a settlement
class also can lead to a settlement that may provide inadequate
consideration in exchange for the release of the class's claims.
With early settlement, both parties have less information on the
merits. That is, they have less information on the membership of
the class, on the size of potential claims, on whether the
settlement purports to resolve class or individual claims, on the
strengths and weaknesses of the case, and on how class members
will benefit from the settlement. See MCL 2d § 30.45 at 243-44; 2
NEWBERG & CONTE § 11.09 at 11-13. Without the benefit of more
extensive discovery, both sides may underestimate the strength of
the plaintiffs' claims.
Turning to the question of due process rights, we note
that class members may, as a result of these information
deficiencies, not be in a fair position at this early stage to
evaluate whether or not the settlement represents a superior
alternative to litigating. Perhaps more troubling in light of
the reality that absentees tend to lack a real understanding of
the actions supposedly pursued in their names is that, "where
notice of the class action is . . . sent simultaneously with the
notice of the settlement itself, [the settlement class paradigm],
the class members are presented with what looks like a fait
accompli." Mars Steel, 834 F.2d at 680-81. Thus, even if they
have enough information to conclude the settlement is
insufficient and unsatisfactory, see In re Beef Antitrust Litig.,
607 F.2d 167, 173 n.4 (5th Cir. 1979), cert. denied, 452 U.S. 905
(1981), the mere presentation of the settlement notice with the
class notice may pressure even skeptical class members to accept
the settlement out of the belief that, unless they are willing to
litigate their claims individually -- often economically
infeasible -- they really have no choice.
In a different vein, a number of cases have also
criticized settlement classes on the grounds that they create an
opportunity for "one-way intervention," allowing putative class
members to wait to see whether they think the settlement is
favorable before deciding whether they want to be bound by it.
See McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 420 (7th
Cir. 1977); Watkins v. Blinzinger, 789 F.2d 474, 475 n.3 (7th
Cir. 1986) ("A deferred ruling [on certification] converts the
class action to an opportunity for one-way intervention, which
Rule 23 is designed to avoid. . . ."); Premier Electrical Constr.
Co. v. National Electrical Contractors Ass'n, Inc., 814 F.2d 358,
363 (7th Cir. 1987) (criticizing delay of certification).
Because class members have the opportunity to wait until the
outcome is known (i.e., the settlement's terms are determined) to
decide whether they want to be bound by the result, courts and
defendants are exposed to the same potential for multiple
lawsuits that class actions are designed to avoid, and the
supposed advantages of settlement classes are largely eroded.
Perhaps more troubling, the possibility of pre-
certification negotiation and settlement may facilitate the
filing of strike suits. Since settlement classes can involve a
settlement achieved either before or after the filing of class
claims, recognition of the settlement class device allows
plaintiffs to file as class actions cases that counsel never
intended to have certified, but instead only to settle the claims
individually. Mars Steel, 834 F.2d 677, 681 (7th Cir. 1984)
("[Plaintiffs will be tempted to add class claims in order to
intimidate the defendant, then delete them by way of
compromise."). Knowing that they would not face judicial
scrutiny if they settle before certification, plaintiffs' lawyers
face no deterrent from attempting to extract larger settlements
by threatening class litigation than they could with the cases
filed individually.
In many respects then, the failings of settlement
classes are a function of the dearth of information available to
judges attempting to scrutinize the settlements in accordance
with their Rule 23(e) duties. Because the issue of certification
is never actively contested, the judge never receives the benefit
of the adversarial process that provides the information needed
to review propriety of the class and the adequacy of settlement.
This problem is exacerbated where the parties agree on a
settlement of the case before the class action is filed, since a
motion for certification and settlement are presented
simultaneously.
Last, but by no means least, the use of settlement
classes also risks transforming the courts into mediation forums.
See Coffee, supra note 9 at A15. Cases could be filed without
any expectation or intention of litigation, with the
foreknowledge that the natural hydraulic pressure for settlement
may in fact lead to a class settlement, especially given the
incentive a defendant has to bind as many potential claimants as
possible with an approved class settlement. Courts may approve
these class settlements even if the case is highly inappropriate
for class treatment, since judges confronting the reality of
already over-taxed judicial resources, see Proposed Long Range
Plan for the Federal Courts (March 1995) at 9-12, may feel
constrained to dispose of such onerous litigation through the
settlement class device. The losers in this type of scenario are
not only inadequately represented class members but also the
federal courts as an institution, because their resources are
further sapped by entertaining cases that arguably do not belong
there.10 This increased burden will be especially problematic if
the standards for certification are relaxed for settlement
classes; as this appeal demonstrates, proceedings attendant to
settlement class certification can consume considerable federal
judicial time.
C. Arguments Favoring Settlement Classes
Although settlement classes are vulnerable to potent
criticisms, some important dynamics militate in favor of a
10
. Because the parties do not come before the court until the
action has settled, some courts have even expressed concern that
such cases do not present a case or controversy for Article III
purposes. Cf. Carlough v. Amchem Products, Inc., 834 F. Supp.
1437, 1462-67 (E.D. Pa. 1993).
judge's delaying or even substantially avoiding class
certification determinations. Because certification so
dramatically increases the potential value of the suit to the
plaintiffs and their attorneys as well as the potential liability
of the defendant, the parties will frequently contest
certification vigorously. As a result, a defendant considering a
settlement may resist agreeing to class certification because, if
the settlement negotiations should fail, it would be left exposed
to major litigation. See In re Beef Indus. Antitrust Litig., 607
F.2d 167, 177-78 (5th Cir. 1979) ("[A blanket rule against
settlement classes] may render it virtually impossible for the
parties to compromise class issues and reach a proposed class
settlement before a class certification . . . ."); In re Baldwin
United, 105 F.R.D. 475 (S.D.N.Y. 1984).
In mass tort cases, in particular, use of a settlement
class can help overcome certain elements of these actions that
otherwise can considerably complicate efforts to settle. These
hurdles include "the large number of individual plaintiffs and
lawyers; . . . the existence of unfiled claims by putative
plaintiffs; and . . . the inability of any single plaintiff to
offer the settling defendant reliable indemnity protection
. . . ." Transgrud, 70 CORNELL L. REV. at 835. By using the courts
to overcome some of the collective action problems particularly
acute in mass tort cases, the settlement class device can make
settlement feasible. The use of settlement classes can thus
enable both parties to realize substantial savings in litigation
expenses by compromising the action before formal certification.
See 2 NEWBERG & CONTE § 11.09 at 11-13. Through settlement class
certification, courts have fostered settlement of some very
large, complex cases that might otherwise never have yielded
deserving plaintiffs any substantial renumeration.
Settlement classes also increase the number of actions
that are amenable to settlement by increasing the rewards of a
negotiated solution, in at least four ways. First, the prospect
of class certification increases a defendant's incentive to
settle because the settlement would then bind the class members
and prevent further suits against the defendant. Second,
settlement classes may reduce litigation costs by allowing
defendants to stipulate to class certification without forfeiting
any of their legal arguments against certification should the
negotiations fail. Third, because the payment of settlement
proceeds, even relatively small amounts, may palliate class
members, settlement can reduce differences among class members,
and thus make class certification more likely, increasing the
value of settlement to the defendant, since a larger number of
potential claims can thus be resolved. Fourth, the use of
settlement classes reduces the probability of a successful
subsequent challenge to the class-wide settlement. By treating
the class as valid pending settlement, a temporary class
facilitates notice to those persons whom the court might consider
part of the class. The expanded notice afforded by access to the
customary class action notification process protects both the
absentees and the defendants by eliminating negotiations between
the defendants and the named plaintiffs with respect to the class
definition that could leave the defendant vulnerable to
additional suits by absentees whose interests, a court later
determines, were not adequately served or protected. 2 NEWBERG &
CONTE § 11.27 at 11-40 (citing Midland Mut. Life Ins. Co. v.
Sellers, 101 B.R. 921 (Bankr. S.D. Ohio 1989)). Increasing the
certainty that the settlement will be upheld augments the value
of settling to the defendant and consequently the amount
defendants will be willing to pay. Thus, delaying certification,
in contravention of a strict reading of Rule 23, encourages
settlement, an important judicial policy, by increasing the
prospective gains to the defendant (and thus potentially to the
plaintiffs as well) from exploring a negotiated solution.
Moreover, critics of settlement classes may
underestimate the safeguards that still inhere. Although courts
are often certifying settlement classes with sub-optimal amounts
of information, and without the full benefit of the processes
meant to protect the absentees' interests, the provisional
certification of a settlement class does not finally determine
the absentees' rights. When the simultaneous notice of the class
and the settlement is distributed to the proposed class,
objecting class members can still challenge the class on
commonality, typicality, adequacy of representation, superiority,
and predominance grounds -- they are not limited to objections
based strictly on the settlement's terms. 2 NEWBERG & CONTE §11.27
at 11-40 (citing Midland Mut. Life Ins. Co. v. Sellers, 101 B.R.
at 921).
Furthermore, the view that, in settlement class cases,
the court lacks the information necessary to fufill its role as
protector of the absentees, may reflect an assumption that the
court's approval always comes early in the case. See 2 NEWBERG &
CONTE § 11.27 at 11-43 to 11-44. While it often does, the
certification decision is sometimes made later in the case, when
the parties have presumably developed the merits more fully (in
discovery or in the course of wrangling over the settlement
terms) and when prior governmental procedures or investigations
might have also yielded helpful information. Id. Whatever the
timing of the certification ruling, the judge has the duty of
passing on the fairness and adequacy of the settlement under Rule
23(e) and also of determining whether the class meets the Rule's
requisites under 23(a).11 Whether or not the court certifies the
class before settlement discussions, these duties are the same.
2 NEWBERG & CONTE § 11.27, at 11-46.
Although a judge cannot presume that the putative class
counsel actively represented the absentees' interests, the court
11
. We are somewhat dubious of the court's ability to discharge
its duties completely under these circumstances. See Part IVE
infra.
can still monitor the negotiation process itself to assure that
both counsel and the settlement adequately vindicate the
absentees' interests. Thus, there is no reason to inflexibly
limit the use of settlement classes to any specified categories
of cases (for example, those cases with few objectors, those
which do not involve partial settlements,12 or those which do not
involve an expanded class). Even apparently troublesome
litigation activity, such as expanding the class just before
settlement approval at the defendant's request, is no more free
from judicial scrutiny in a settlement class context than it
would be otherwise. The court still must give notice to the now-
expanded class and satisfy itself that the requisites of class
certification are met. Id. at 11-49. Since the party advocating
certification bears the burden of proving appropriateness of
class treatment, David v. Romney, 490 F.2d 1360 (3d Cir. 1974),
where the procedural posture is such that the court lacks
adequate information to make those determinations, it can and
should withhold the relevant approvals. 2 NEWBERG & CONTE § 11.27
at 11-46.
But even if the use of settlement classes did reduce a
judge's capacity to safeguard the class's interests, it does not
necessarily impair the ability of absentees to protect their own
12
. MCL 2d expressed concern about partial settlements
(settlements only as to certain plaintiffs or certain defendants)
since "[m]embers of the settlement class will almost certainly
find it difficult to understand their position in the
litigation." MCL 2d § 30.45.
interests. Individual class members retain the right to opt out
of the class and settlement, preserving the right to pursue their
own litigation. See Premier Elec. Const. Co. v. N.E.C.A., Inc.,
814 F.2d 358 (7th Cir. 1987) (criticizing settlement classes
because they create opportunities for one-way intervention). In
fact, the use of the settlement class in some sense enhances
plaintiffs' right to opt out. Since the plaintiff is offered the
opportunity to opt out of the class simultaneously with the
opportunity to accept or reject the settlement offer, which is
supposed to be accompanied by all information on settlement, the
plaintiff knows exactly what result he or she sacrifices when
opting out. See 2 NEWBERG & CONTE § 11.27 at 11-51. See In re
Beef Industry Antitrust Litigation, 607 F.2d at 174.
In sum, settlement classes clearly offer substantial
benefits. However, the very flexibility required to achieve
these gains strains the bounds of Rule 23 and comes at the
expense of some of the protections the Rule-writers intended to
construct. As Judge Schwarzer has explained:
one way to see [the settlement class] is as a
commendable example of the law's adaptability to meet
the needs of the time -- in the best tradition of the
Anglo-American common law. But another interpretation
might be that it is an unprincipled subversion of the
Federal Rules of Civil Procedure. True, if it is a
subversion, it is done with good intentions to help
courts cope with burgeoning dockets, to enable
claimants at the end of the line of litigants to
recover compensation, and to allow defendants to manage
the staggering liabilities many face. But as
experience seems to show, good intentions are not
always enough to ensure that all relevant private and
public interests are protected. The siren song of Rule
23 can lead lawyers, parties and courts into rough
waters where their ethical compass offers only
uncertain guidance.
William W. Schwarzer, Settlement of Mass Tort Class Actions:
Order Out of Chaos, CORNELL L. REV. (forthcoming).
D. Are Settlement Classes Cognizable Under Rule 23?
Although not specifically authorized by Rule 23,
settlement classes are not specifically precluded by it either;
indeed, Judge Brieant has read subsection (d), giving the court
power to manage the class action, as authorizing the creation of
"tentative", "provisional", or "conditional" classes through its
grant of power to modify or decertify classes as necessary.
See, e.g., In re Baldwin-United Corp., 105 F.R.D. 475, 478-79
(S.D.N.Y. 1984). And because of the broad grant of authority in
Rule 23(d), at least one commentator has noted that the validity
of temporary settlement classes is usually not questioned. 2
NEWBERG & CONTE §11.22 at 11-31. Courts apparently share this
confidence. Indeed, one court believed that "[i]t is clear that
the Court may provisionally certify the Class for settlement
purposes." South Carolina Nat'l Bank v. Stone, 749 F.Supp. 1419,
(D.S.C. 1990).
We believe that the "provisional"13 or "conditional"14
conception of the settlement class device finds at least a
colorable textual basis in the Rule. Rule 23(d) enables a court
to certify a class, if it complies with its duty to assure that
the class meets the rule's requisites by making appropriate Rule
23 findings (see Part IV(E) infra). Some courts appear to have
concluded that the built-in flexibility of the Rule, which
enables the court to revisit the requisites and modify or
decertify the class should its nature change dramatically during
the negotiation process, renders it acceptable to determine class
status after settlement and thus avoid scrutinizing and
adjudicating class status at an earlier stage when the outcome is
unknown. See, e.g., In re Baldwin-United, 105 F.R.D. at 483; In
re Beef Antitrust Litig., 607 F.2d at 177 ("[T]he Court finds
that a conditional class should be certified for the purpose of
considering the proposed settlements.")
Alternatively, some courts have conceived of settlement
classes as a "temporary assumption" by the court to facilitate
settlement. See Mars Steel, 834 F.2d at 680; In re Beef Indust.
13
. The terms "tentative" and "provisional" appear to be used
interchangeably.
14
. "Conditional" is actually a term that can be properly
applied to all class actions, even those that are certified in
the normal process. Under Rule 23(c)(1), the court retains the
authority to re-define or decertify the class until the entry of
final judgment on the merits. This capacity renders all
certification orders conditional until the entry of judgment.
See MCL 2d § 30.18.
Antitrust Litig., 607 F.2d at 177; 2 NEWBERG & CONTE § 11.27 at 11-
50. The arguments of the late Herbert Newberg, one of the
leading advocates of settlement classes, reflect an assumption
that the Rule 23 determinations are merely postponed, not
eliminated:
On analysis, however, it would appear that this
argument [that courts using settlement classes
circumvent the need to test the propriety of the class
action according to the specific criteria of Rule 23]
may be rebutted by perceiving the temporary settlement
class as nothing more than a tentative assumption
indulged in by the court . . . . The actual class
ruling is deferred in these circumstances until after
hearing on the settlement approval . . . . At that
time, the court in fact applies the class action
requirements to determine whether the action should be
maintained as a class action . . . .
2 NEWBERG & CONTE § 11.27 at 11-50.15 Newberg posits, therefore,
that the temporary assumption conception of the settlement needs
no special authorization since the court eventually follows the
ordinary certification process, only deferring it until the
settlement approval stage.
Courts have also relied on the more general policies of
Rule 23 -- promoting justice and realizing judicial efficiencies
-- to justify this arguable departure from the rule.
15
. See also In re Mid-Atlantic Toyota Antitrust Litig., 564 F.
Supp. 1379, 1388 n.13 (D. Md. 1983) ("Completely ancillary to the
proposed settlement, [a temporary settlement class] lasts only as
long as the period betwen the preliminary approval of the
settlement and the court's final determination on the settlement.
In effect, a temporary settlement class serves only as a
procedural vehicle for providing notice to putative members of a
proposed class . . . .").
[T]he hallmark of Rule 23 is flexibility . . . .
Temporary settlement classes have proved to be quite
useful in resolving major class action disputes. While
their use may still be controversial, most Courts have
recognized their utility and have authorized the
parties to compromise their differences, including
class action issues through this means.
Weinberger, 698 F.2d at 72-73. One commentator found implicit
authorization for settlement classes under a settlement-oriented
interpetation of Rule 23:
[Rule 23] provides that a court may certify a common
question class action when it will prove "superior to
other available methods for the fair and efficient
adjudication of the controversy." A judicially
supervised and approved class action settlement, like a
judicially supervised trial, is a means of hearing and
determining judicially, in other words "adjudicating,"
the value of claims arising from a mass tort. As a
result, if conditional certification of the case as a
common question class action for settlement purposes
would enhance the prospects for a group settlement,
then Rule 23 authorizes certification.
Roger H. Transgrud, Joinder Alternatives in Mass Tort Litig., 70
CORNELL L. REV. 779, 835 (1985) (footnotes ommited).
It is noteworthy that resistance to more flexible
applications of Rule 23 has diminished over time. See In re
Taxable Mun. Bond Secur. Litig., 1994 WL 643143, *4 (E.D. La.
1994) (commenting upon this trend). The evolution of the
reception accorded settlement classes has manifested itself in
the successive versions of the Manual for Complex Litigation.
The first edition of the Manual criticized the initiation of
settlement negotiations before certification, and discouraged all
such negotiations. See MCL 1st § 1.46. The second edition
recognizes the potential benefits of settlement classes but still
cautioned that "the court should be wary of presenting the
settlement to the class." MCL §30.45 at 243. The (draft) third
version acknowledges that "[s]ettlement classes offer a commonly
used vehicle for the settlement of complex litigation" and aims
only to supervise rather than discourage their use. See MCL §
30.45 at 192.
A survey of the caselaw confirms the impression that
resistance to settlement classes has diminished: few cases since
the late 1970's and early 1980's even bother to squarely address
the propriety of settlement classes. Moreover, no court of
appeals that has had the opportunity to comment on the propriety
of settlement classes has held that they constitute a per se
violation of Rule 23. See, e.g., Ace Heating & Plumbing Co. v.
Crane Co., 453 F.2d 30, 33 (3d Cir. 1971) (finding no prohibition
but granting absentees standing to appeal settlement approval);
Marshall v. Holiday Magic, Inc., 550 F.2d 1173, 1176 (9th Cir.
1977) (describing how court approved combined notice of the
pendency of the class and the terms of the proposed settlement);
In re Beef Antitrust Litig., 607 F.2d 167 (5th Cir. 1979);
Corrugated Container Antitrust Litig., 643 F.2d 195, 223 (5th
Cir. 1981) (upholding settlement despite pre-certification
negotiations with some defendants); Weinberger v. Kendrick, 698
F.2d 61 (2d Cir. 1982); Mars Steel, 834 F.2d 677, 681 (7th Cir.
1987) (criticizing settlement classes but ultimately approving
settlement). But some courts recognize that this practice
represents a significant departure from the usual Rule 23
scenario and thereby counsel that courts should scrutinize these
settlements even more closely.
We acknowledge that settlement classes, conceived of
either as provisional or conditional certifications, represent a
practical construction of the class action rule. Such
construction affords considerable economies to both the litigants
and the judiciary and is also fully consistent with the
flexibility integral to Rule 23. A number of other jurisdictions
have already accepted settlement classes as a reasonable
interpretation of Rule 23 and thereby achieved these substantial
benefits. Although we appreciate the concerns raised about the
device, we are confident that they can be addressed by the
rigorous applications of the Rule 23 requisites by the courts at
the approval stages, as we discuss at greater length herein. For
these reasons, we hold that settlement classes are cognizable
under Rule 23.
E. Are the Rule 23(a) and (b) Findings Required for
Settlement Classes? Does Finding the Settlement
to Be Fair and Reasonable Serve as a Surrogate for the Findings?
There is no explicit requirement in Rule 23 that the
district judge make a formal finding that the requisites of the
rule have been met in order to certify a class. However, most
district judges have routinely done so, assuming that it was
required, and in published opinions, a number of courts have
endorsed or at least acknowledged the compelling policy reasons
for doing so. See, e.g., Eisenberg v. Gagnon, 766 F.2d 770, 785
(3d Cir. 1985); Plummer, 668 F.2d at 659; Interpace Corp. v.
Philadelphia, 438 F.2d 401, 404 (3d Cir. 1971); MCL 2d § 30.13
("The judge should enter findings and conclusions after the
hearing, addressing each of the applicable requirements of Rule
23(a) and (b)."). For example, where there has been some dispute
over certification, a court should give the litigants,
particularly the absentees, some statement of the reasons for its
decision. Eisenberg, 766 F.2d at 785. Articulated findings also
simplify the review of complex cases generally. Id. With
respect to settlement classes, we hold that courts must make the
findings because the legitimacy of settlement classes depends
upon fidelity to the fundaments of Rule 23.16
Inasmuch as collusion, inadequate prosecution and
attorney inexperience are the paramount concerns in pre-
certification settlements, see Malchman, 706 F.2d at 433; Beef,
607 F.2d at 174, the need for the adequacy of representation
finding is particularly acute in settlement class situations,
given the inquiry's purpose of detecting cases where there is a
"likelihood that the litigants are involved in a collusive suit
16
. This conclusion is supported by the text of Rule 23(e).
That section provides that "class action" may not be compromised
without court approval, and arguably a case is not a "class
action" in the absence of such findings.
. . . ." Eisen v. Carlisle & Jacquelin, 391 F.2d 555, 562 (2d
Cir. 1968).
There appears to be no authority contra this practice.
Indeed, the courts and commentators that have endorsed settlement
classes have seemed to assume that the approving court made the
requisite class determinations at some point. For example,
Newberg's argument rebutting the charge that the "tentative
assumption" of class status by the court to foster settlement
evades the Rule's strictures continues:
The actual class ruling is deferred in these
circumstances until after [the] hearing on the
settlement approval, following notice to the class. At
that time, the court in fact applies the class action
requirements to determine whether the action should be
maintained as a class action . . . .
2 NEWBERG & CONTE § 11.27 11-50. See also Whitford v. First
Nationwide Bk., 147 F.R.D. 135, 142 (WD Ky. 1992) (disregarding
even the possibility that these classes would not have to meet
all of the normal certification requisites). Even the cases
where the courts did not recognize a need to make the
determinations demonstrate a heightened concern for fairness and
a more cautious approach to settlement approval. See Ace Heating
& Plumbing Co. v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971)
(court must be doubly careful where negotiation occurs before
certification and designation of a class counsel); Mars Steel,
834 F.2d at 681 (applying a higher standard of fairness); Simer
v. Rios, 661 F.2d 655, 664-66 (7th Cir. 1981) (requiring a higher
demonstration of fairness); Weinberger v. Kendrick, 698 F.2d 61,
69 (2d Cir. 1982) (emphasizing the extensive discovery and
ability and experience of counsel).
Some courts have certified settlement classes "without
articulating or consciously applying Rule 23 tests." 2 NEWBERG &
CONTE § 11.27 at 11-52. See, e.g., Mars Steel, 834 F.2d at 681
(suggesting that the certification procedure may not be
necessary to combat the potential for abuse created by the use of
settlement classes since that potential is "held in check by the
requirement that the judge determine the fairness of the
settlement . . ."); Weinberger v. Kendrick, 698 F.2d at 73
(determination that proposed settlement is fair, reasonable and
adequate substitutes for Rule 23 findings); In re Beef Antitrust
Litig., 607 F.2d 167, 177 (5th Cir. 1979); City of Detroit v.
Grinnell, 495 F.2d 448, 464-65 (2d Cir. 1974) (rejecting
contention that the court erred when it approved a settlement and
acquiesced in the settlement's assumption of the existence of a
proper class). Some courts neglecting the findings have taken
the view that the notice of proposed settlement, which must be
preliminarily approved by the court, "carries the necessary
implication that the action complies with Rule 23." Beef, 607
F.2d at 177.
We disagree both with this suggestion and with the
conclusion that a fairness determination is a surrogate for Rule
23 findings.17 Even if we set aside the problem of the court's
inadequate information, the inquiry into the settlement's
fairness cannot conceptually replace the inquiry into the
propriety of class certification. Normally, a court makes the
required commonality and typicality determinations by referencing
the original class complaints in order to assure that the claims
alleged by the named plaintiffs are common to the class (although
the class need not share every claim in common, Hassine v.
Jeffes, 846 F.2d 169, 177-78 (3d Cir. 1988)), and that the claims
alleged by the named plaintiff occupy approximately the same
position of centrality to the named plaintiffs as they do to the
rest of the class. Weiss v. York Hosp., 745 F.2d 786, 810 (3d
Cir. 1984), cert. denied, 470 U.S. 1060 (1985). Neither the
existence of a settlement nor the terms of settlement affect the
nature of this important inquiry.
The Rule 23(a) class inquiries (numerosity,
commonality, typicality, and adequacy of representation)
constitute a multipart attempt to safeguard the due process
rights of absentees. Thus, the ultimate focus falls on the
17
. We note in this regard that other courts have made the
determinations of adequacy of representation and homogeneity of
the class when evaluating the fairness of the settlement for the
express purpose of assuring that they possess enough information
to execute their Rule 23(e) duty. See In re Beef Industry
Antitrust Litig., 607 F.2d at 173 n.4 (quoting ARTHUR R. MILLER, AN
OVERVIEW OF FEDERAL CLASS ACTIONS: PAST, PRESENT AND FUTURE (Federal
Judicial Ctr. 1977)); see also In re Baldwin-United Corp., 105
F.R.D. 475, 483 (S.D. N.Y. 1984) (making findings in the opinion
which preliminarily approved the settlement).
appropriateness of the class device to assert and vindicate class
interests. Conversely, however, the process of negotiation does
not reveal anything about commonality and typicality. One might
argue that these requisites are merely means to the end of
vindicated rights, and that observing the process of negotiation
could demonstrate adequate vindication -- the true aim of the
Rule. In our view, a court cannot infer that the rights of the
entire class were vindicated without having assured that
commonality and typicality were satisfied.
The 23(b)(3) determination is also important in the
regulatory scheme. To be certified as a (b)(3) class, the judge
must determine that "questions of law or fact common to the
members of the class predominate over any questions affecting
only individual members and that a class action is superior to
other available methods for the fair and efficient adjudication
of the controversy." FED. R. CIV. P. 23(b)(3).18 But the
settlement approval inquiry is far different from the
certification inquiry. In settlement situations, the superiority
requirement arguably translates into the question whether the
settlement is a more desirable outcome for the class than
individualized litigation, and may assure that the settlement
has not grossly undervalued plaintiffs' interests. But even if
18
. As the case before us involves a damages class under Rule
23(b)(3), we do not address the application of the (b)(1) and
(b)(2) requisites which, without the important right to opt out,
involve different considerations.
this is so, a point we neither concede nor decide, there remains
the concern about conflicts between those appointed to represent
class interests -- the lawyers and named plaintiffs -- and the
rest of the class. These concerns, particularly acute with
settlement classes, concentrate the focus of the certification
inquiries on the representational elements.
Certainly, evaluating the settlement can yield some
information relevant to the adequacy of representation
determination under 23(a)(4). The settlement evaluation involves
two types of evidence: a substantive inquiry into the terms of
the settlement relative to the likely rewards of litigation, see
Weinberger, 698 F.2d at 73; Protective Comm. for Indep.
Stockholders v. Anderson, 390 U.S. 414, 424, 88 S. Ct. 1157, 1163
(1968), and a procedural inquiry into the negotiation process.
The focus on the negotiation process results from the realization
that a judge cannot really make a substantive judgment on the
issues in the case without conducting some sort of trial on the
merits, exactly what the settlement is intended to avoid. See
Malchman v. Davis, 706 F.2d at 433. Instead, the court
determines whether negotiations were conducted at arms' length by
experienced counsel after adequate discovery, in which case there
is a presumption that the results of the process adequately
vindicate the interests of the absentees. Weinberger, 698 F.2d
at 74; City of Detroit v. Grinnell, 495 F.2d at 463; Baldwin-
United, 105 F.R.D. at 482 ("In order to supplement judicial
examination of the substance of a compromise agreement, and
because a court cannot conduct a trial in order to avoid a trial,
attention must be paid to the process by which a settlement has
been reached.").
Although the procedural focus on the fairness
determination yields information pertinent to the adequacy of
representation inquiry, it cannot fully satisfy the inquiry.
That is because reliance on the negotiation process used to
approve the settlement to satisfy the class certification
requirements puts excessive pressure on the settlement approved
determinations, and, more fundamentally, such a reliance may be
circular. Cf. NEWBERG & CONTE § 11.28 at 11-54 (suggesting a
greater need for a court to carefully articulate if reasons for
settlement approval where the class was not separately
certified).
Courts approving settlements have examined the
negotiating process in light of the "experience of counsel, the
vigor with which the case was prosecuted, and the coercion or
collusion that may have marred the negotiations themselves."
Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983) (citing
Weinberger, 698 F.2d at 73; Grinnell, 495 F.2d at 465.). Some of
these courts have suggested that the fact that vigorous, arm's
length negotiations occurred should allay concerns about adequacy
of representation. But these inferences depend on the implicit
assumption that the lawyers actually negotiating really were
doing so on behalf of the entire class, see 2 NEWBERG & CONTE §
11.28 at 11-59, assumptions which are clearly unjustified in a
context where the potential for intra-class conflict further
emperils the class's representation. Far too much turns on the
adequacy of representation to accept it on blind faith.
Without determining that the class actually was
adequately represented, the district judge has no real basis for
assuming that the negotiations satisfactorily vindicated the
interests of all the absentees. The focus on the negotiation
process also cannot address the part of the adequacy of
representation inquiry intended to detect situations where the
named plaintiffs are unsuitable representatives of the absentees'
claims. To state that class members were united in the interest
of maximizing over-all recovery begs the question. Although that
observation might allay some concern about a conflict between the
attorney and the class, a judge must focus on the settlement's
distribution terms (or those sought) to detect situations where
some class members' interests diverge from those of others in the
class. For example, a settlement that offers considerably more
value to one class of plaintiffs than to another may be trading
the claims of the latter group away in order to enrich the former
group.
In short, the prophylactic devices used by judges to
approve these pre-certification settlements without ever formally
certifying the class fail to satisfy the requirements of Rule 23.
Without determining that the class claims are common and typical
of the entire putative class and that the class representatives
and their counsel are adequate representatives, we have no
assurance that the district court fully appreciated the scope and
nature of the interests at stake.19 Finally, we note that courts
adopting the view that the formal class determinations are not
necessary for settlement classes may be contravening not only the
language of the rule but also the Supreme Court's requirement in
General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 160,
102 S. Ct. 2364, 2372 (1982) (disapproving the trial court's
insufficient scrutiny of the named plaintiff's capacity to
adequately represent the class), that "[a]ctual, not presumed,
conformance with Rule 23(a) remains, however, indispensable."
Thus, while we approve the provisional certification of a
19
. In Malchman v. Davis, 706 F.2d at 433, the court was
satisfied by the district court's determination that the
settlement class satisfied the adequacy of representation inquiry
noting: "There is no doubt that the district court must make an
independent evaluation of whether the named plaintiffs were
adequate representatives of the class . . . . A judge has an
obligation to consider whether the interest of the class are
adequately represented." (citing East Texas Motor Freight Sys.,
Inc. v. Rodriguez, 431 U.S. 395, 403-06, 97 S.Ct. 189, 96-98
(1977)); see also Plummer, 668 F.2d at 659 & n.4. We agree that
this is an appropriate focus given the heightened potential for
collusion, buy-offs and other abuses in settlement class
situations where the negotiations occur before the court appoints
class representatives and counsel. We still believe, however,
that courts should assure that settlement classes meet all of
the requirements of 23(a) and (b). This prescription is
consistent with the heightened duty of courts in class action
settlements to assure that the absentees' rights are adequately
protected.
settlement class to facilitate settlement discussions, final
settlement approval depends on the finding that the class met all
the requisites of Rule 23.
F. Can There be a Valid Settlement Class That
Would Not Serve as a Valid Litigation Class?
As we have previously explained, courts using the
settlement class device must at some point definitively certify
the class and satisfy themselves that the requisites of Rule 23
have been satisfied. To avoid that process entirely would
dismantle the rule's carefully constructed mechanism that serves
to protect absentees' due process rights. Moreover, despite some
courts' suggestions that the standards are less rigorous for
settlement classes, we do not believe that Rule 23 authorizes
separate, liberalized criteria for settlement classes.
At the outset we note that, while some other courts
have nominally complied with the rule, they appear to have
assumed that lower standards apply in settlement class cases.
See Officers for Justice v. Civil Serv. Comm'n of San Francisco,
688 F.2d 615, 633 (9th Cir. 1982), cert. denied, 459 U.S. 1217,
103 S. Ct. 1219 (1983) ("[C]ertification issues raised by class
action litigation that is resolved short of a decision on the
merits must be viewed in a different light."); Fisher Bros. v.
Phelps Dodge Indus. Inc., 604 F. Supp. 446, 450 (E.D. Pa. 1985);
In re Dennis Greenman Securities Litig., 829 F.2d 1539, 1543
(11th Cir. 1987) ("In reviewing settlement certifications, a
special standard has been employed."); A.H. Robins, 880 F.2d at
740 (in deciding whether to certify a class, settlement is at
least an important factor in favor and might even be a per se
ground for certification); Manual.2d at §30.45. Other courts
have stated that settlement reduces the potential conflicts among
the class and thus enhances the likelihood of meeting the
criteria, presumably the same criteria a litigation class must
satisfy. See, e.g., Bowling v. Pfhizer, Inc., 143 F.R.D. 141,
159 (S.D. Oh. 1992). Newberg is of this view. See 2 NEWBERG &
CONTE §11.28, at 11-58.
According to Newberg, though settlement does not impact
the numerosity requirement it may indeed increase the likelihood
of meeting the commonality and typicality inquiries. "Typicality
of claims in a settlement class context requires proof that the
interests of the class representative and the class are commonly
held for the purposes of receiving similar or overlapping
benefits from a settlement." 2 NEWBERG & CONTE §11.28 at 11-58.
On this theory, because the court has delayed the findings until
the outcome of the litigation (i.e., the settlement agreement) is
known, the judge conducts the inquiry based on the relative
rewards to the class members rather than based on the various
legal claims of class members. So long as all plaintiffs get
similar benefits from the settlement, irrespective of the
different strengths of their initial claims, the commonality and
typicality inquiries are viewed as likely to be satisfied.
Under this approach, the adequate representation
inquiry is also simplified in the settlement class context by a
result-oriented approach toward the class requirement findings.
Rather than asking whether the lawyers have sufficient resources
and skills to prosecute the action (as would be the case with
customary class certification procedures), courts, it is said,
need only determine, in hindsight, whether the settlement was
negotiated at arms' length, and whether the negotiations were
long, thorough and deliberative. See In re Corrugated Container
Antitrust Litig., 643 F.2d 195, 212 (5th Cir. 1981) (adequacy
judged by sufficiency of settlement); In re Domestic Air Transp.
Antitrust Litig., 148 F.R.D. 297, 341 (N.D. Ga. 1993)
(inequitable distribution). Courts adopting this approach
require proof only that named plaintiffs' and class interests are
not antagonistic. See, e.g., Goodman v. Lukens Steel Co., 777
F.2d 113, 123 (3d Cir. 1985) (relying on absence of conflict to
find adequate representation); Lewis v. Curtis, 671 F.2d 779, 788
(3d Cir. 1982) (finding named plaintiff an adequate
representative despite small stake in litigation and ignorance of
facts and claims); Steiner v. Equimark Corp., 96 F.R.D. 603, 610
(W.D. Pa. 1983) ("The key question [for the adequacy of
representation inquiry] is whether their interests are
antagonistic."). In these cases, courts have effectively relied
on the settlement's terms -- the outcome of the action -- to find
the required absence of antagonism.20
We disagree with this approach, championed primarily by
Newberg. There is no language in the rule that can be read to
authorize separate, liberalized criteria for settlement
classes.21 Although we acknowledge the need for flexible
interpretation of Rule 23 to enable it to achieve its broader
purposes of vindicating difficult individual claims and
conserving judicial resources, see Beef, 607 F.2d at 177-78
(discussing the policy needs for flexibility); Ace Heating, 453
F.2d at 33 (recognizing need to give small claimants who did not
20
. For example, in finding adequate representation, one court
noted: "[S]o long as all class members are united in asserting a
common right, such as achieving the maximum possible recovery for
the class, the class interests are not antagonistic for
representation purposes." In re Corrugated Container Antitrust
Litig., 1980-1 Trade Cas. (CCH) ¶63, 163 at 77,788 n. 10 (S.D.
Tex. 1979), aff'd, 643 F.2d 195 (5th Cir. 1981) (citing WRIGHT &
MILLER, FED. PRACTICE & PROCEDURE CIVIL § 1768, at nn.7 & 8).
21
. Indeed, if any difference in standards is warranted, pre-
certification settlement may raise the adequacy of representation
standard. Since this inquiry must ascertain "whether there has
been any collusion or undue pressure by the defendants on would
be class representatives," see First Comm. Corp. of Boston
Consumer Accts. Litig., 119 F.R.D. 301, 308 (D. Mass 1987);
Alvarado Partners LP v. Mehta, 723 F. Supp. 540, 546 (D. Colo.
1989), it must carry greater weight in the settlement class
context where there is an enhanced potential for those evils.
Thus, while the other 23(a) findings remain important when the
action settles, the need to assure an absence of collusion and an
alignment of interests assumes an especially crucial role.
Reliance, for the class requisites analysis, on the settlement's
terms and process also increases the importance of an independent
conclusion of adequate representation (i.e., one not derived
solely by reference to the nature of the negotiations).
opt out the right to appeal a settlement approval), we emphasize
that Rule 23 is designed to assure that courts will identify the
common interests of class members and evaluate the named
plaintiff's and counsel's ability to fairly and adequately
protect class interests. See Katz v. Carte Blanche Corp., 496
F.2d 747, 757 (3d Cir. 1974). Thus, actions certified as
settlement classes must meet the same requirements under Rule 23
as litigation classes. To allow lower standards for the
requisites of the rule in the face of the hydraulic pressures
confronted by courts adjudicating very large and complex actions
would erode the protection afforded by the rule almost entirely.
Judge Posner has explained the animating concern behind
this strict application. "The danger of a premature, even a
collusive, settlement is increased when as in this case the
status of the action as a class action is not determined until a
settlement has been negotiated, with all the momentum that a
settlement agreement generates . . . ." Mars, 834 F.2d at 680.
The foregoing discussion has focused on adequacy of
representation, but the presence of commonality and typicality
are equally important to the class action regime. Certifying a
class without the existence of questions common to the class (or
where the class representatives' claims are not typical) perverts
the class action process and converts a federal court into a
mediation forum for cases that belong elsewhere, usually in state
court. On the other hand, the cases that make the settlement
class device appear most useful are cases presenting the most
unwieldy substantive and procedural issues, i.e., those diversity
cases in which plaintiffs from many states are confronted with
differing defenses, differing statutes of limitations, etc. --
precisely those cases that stretch the Rule to its outer-most
limits.
This is a troublesome issue -- and a close one. Many
mass tort actions have this problem. The School Asbestos cases
and the Breast Implant cases had it, and this case does, as well.
It may initially seem difficult to envision an actual trial of
these cases because of the differing defenses certain to be
raised under the various bodies of governing law. While the
problem may be overstated,22 settlement classes still serve the
useful purpose of ridding the courts -- state and federal -- of
this albatross even though the case may never have been triable
in class form. But if that were the primary function of the
settlement class, the federal courts would have become a
mediation forum, a result inconsistent with their mission and
limited resources. In sum, "a class is a class is a class," and
a settlement class, if it is to qualify under Rule 23, must meet
22
. In the School Asbestos case, 789 F.2d at 996, the panel
asked counsel to analyze all the claims and defenses and write a
report reflecting whether the differing claims and defenses
evidence a small number of patterns that would be amenable to
trial through a series of special verdicts. The plaintiffs came
up with a demonstration that the claims and defenses were
reducible to four patterns. That, in our view, was sufficient to
satisfy the commonality and typicality inquiries. The same might
be true in this case.
all of its requirements. The district court should keep these
matters in mind on remand.
V. IS THE SETTLEMENT CLASS PROPER HERE?
A. Were There Adequate Findings Under Rule 23(a)?
Certain of the objectors in this case contend that the
district court committed plain error by never actually certifying
the class as required by Rule 23. See Brief of French Objectors
at 18. This, of course, would be a serious error, since without
certification there is no class action, and "[i]n a settlement
entered without class certification the judgment will not have
res judicata effect on the claims of absent class members."
Simer v. Rios, 661 F.2d 655, 664 (7th Cir. 1981).
The district court certified the class provisionally in
a pre-trial order. See Pretrial Order No. 7. We have already
noted that provisional certification constitutes an acceptable
means of facilitating settlement negotiations. See 2 NEWBERG &
CONTE §11.27 at 55-56. It appears that the court believed that
it certified the class by "confirming" the provisional
certification in its order approving the settlement. (JA 1708,
1745.) However, the court did not make the findings we hold that
Rule 23 requires, not even upon approving the settlement.
Because we hold today that courts employing settlement classes
must still make findings that the class complies with Rule 23(a)
and the appropriate parts of Rule 23(b), the court's failure to
comply with the rule in this respect is a plain error of law, and
hence an abuse of discretion, requiring that the certification be
set aside.
Our conclusion that the settlement class was not
properly certified does not mean that the class could not be
certified on remand. Accordingly, we must consider whether the
existing record is adequate to support class certification, or
whether further record development is required.
B. Could the Class Requisites Have Been Met
On The Current Record?
1. Numerosity, Commonality, and Typicality
As we have explained, a class action -- whether
certified for settlement or litigation purposes -- must meet the
class requisites enunciated in Rule 23. The district court did
not make findings on these issues. The numerosity requirement of
Rule 23(a) is plainly satisfied in this action encompassing
nearly six million truck owners. The commonality and typicality
inquiries of 23(a), however, raise substantial concerns about the
sufficiency of this class. The record currently lacks the facts
needed to establish these requisites, and the defendants also
ardently maintain that the applicability of different defenses to
different groups of plaintiffs would prevent the class from
satisfying the commonality and typicality requirements. At this
juncture, we leave open the possibility that, on remand, the
district court may indeed find facts sufficient to support these
elements.
2. Adequacy of Representation
a. The Situation of the Fleet Owners
This settlement class appears to fail to meet Rule
23(a)'s adequacy of representation test. The adequacy of
representation inquiry has two components intended to assure that
the absentees' interests are fully pursued: it considers whether
the named plaintiffs' interests are sufficiently aligned with the
absentees, and it tests the qualifications of the counsel to
represent the class. See Weiss v. York Hospital, 745 F.2d 786,
811 (3d Cir. 1984); 2 NEWBERG & CONTE § 11.28 at 11-58. On the
first prong, we are not satisfied that the interests of various
class members were sufficiently aligned; indeed the settlement
appears to create antagonism within the class. While some courts
have been satisfied that there is no intra-class conflict where
"all class members are united in asserting a common right, such
as achieving the maximum possible recovery for the class," In re
Corrugated Container Antitrust Litig., 1980-1 Trade Cas. (CCH) ¶
63, 163 at 77, 788 n.10 (S.D. Tex. 1979), aff'd. 643 F.2d 195
(5th Cir. 1981), we disapprove such a myopic focus on the
settlement terms.
In this case in particular, the conclusion that the
settlement -- that (supposedly) maximized class recovery --
satisfied the requirement that class members' interests not be
antagonistic ignores the conspicuous evidence of such an intra-
class conflict in the very terms of this settlement. The
substantial impediments to fleet owners using these certificates
creates a conflict between their interests in this settlement and
those of individual owners. (The named plaintiffs are all
individual owners.) Moreover, the dubious value of the transfer
option, see Part VI(A)(1)(c) infra, one of the principal
responses to the fleet owners' objection, does little to reduce
the disparity in the prospective value to the different sections
of the class.
This is not a case where some plaintiffs share the
prospect of a future claim with other class members who currently
have such a claim. The fleet owners will never enjoy the
benefits of the settlement terms, such as the intra-household
transfer option, intended specifically for the benefit of
individual owners. Thus, we must be concerned that individual
owners had no incentive to maximize the recovery of the
government entities; they could skew the terms of the settlement
to their own benefit. Not surprisingly, the settlement leaves
fleet owners with significantly less value than individual
owners. At the very least, the class should have been divided
into sub-classes so that a court examining the settlement could
consider settlement impacts that would be uniform at least within
the sub-classes.
b. Did Counsel Adequately Represent the
Interests of the Entire Class?
The other aspect of the adequacy of representation
test, whether counsel is qualified and serves the interests of
the entire class, also gives us reason to pause. Courts
examining settlement classes have emphasized the special need to
assure that class counsel: (1) possessed adequate experience;
(2) vigorously prosecuted the action; and (3) acted at arms
length from the defendant. See, e.g., Malchman, 706 F.2d at 433;
Alvarado Partners, 723 F. Supp. at 546. The first criterion is
no problem, for these counsel clearly possess the experience and
skills to qualify them to pursue these sorts of actions. But the
second and third points require attention in view of lack of
significant discovery and the the extremely expedited settlement
of questionable value accompanied by an enormous legal fee.
Before addressing the latter points, it is necessary to
begin with some legal theory discussing the structural nature of
fee arrangements in class actions of this type, having in mind
that even honorable counsel -- like class counsel here -- may be
compromised by the possibility of a large fee.
(1) Class Action Attorneys' Fees
Theory and Structure
Beyond their ethical obligations to their clients,
class attorneys, purporting to represent a class, also owe the
entire class a fiduciary duty once the class complaint is filed.
See 2 NEWBERG & CONTE § 11.65 at 11-183; Greenfield v. Villager
Indus., Inc., 483 F.2d 824, 832 (3d. Cir. 1973). The large fees
garnered by some class lawyers can create the impression of an
ethical violation since it may appear that the lawyer has an
economic stake in their clients' case. But class actions cannot
be analyzed in the same framework as conventional bipolar
litigation. Because of the collective action problems associated
with cases where individual claims are relatively small, WRIGHT,
MILLER & KANE, 5 Federal Practice and Procedure § 1754 at 49, and
the social desirability of many class suits (the private
enforcement model), id. at 51; Sprogis v. United Airlines, Inc.
444 F.2d 1194 (7th Cir. 1971), large attorneys' fees serve to
motivate capable counsel to undertake these actions. Thus, large
fee awards standing alone do not suffice to show that the
representation was inadequate or unethical. These allowances
generally reflect the realization that the lawyer represents
numerous individuals with somewhat varying interests, not an
acceptance of the situation where the lawyer's personal interests
trump the interests of the entire class.
Some commentators blame the system of compensating
class action lawyers in a manner that fails to confront fully the
differences between class action litigation and classical bipolar
litigation for creating incentives that diverge markedly and
predictably from their clients' interests. The leading critic is
Professor Coffee. See John C. Coffee, Jr., Understanding the
Plaintiff's Attorney: The Implications of Economic Theory For
Private Enforcement of Law Through Class and Derivative Actions,
86 COLUM. L. REV. 669, 671-72 (1986) (noting that critics "have
argued that the legal rules governing the private attorney
general have created misincentives that unneccessarily frustrate
the utility of private enforcement. These critics have focused
chiefly on the conflicts that arise between the interests of
these attorneys and their clients in class and derivative actions
. . . .") (hereinafter Understanding the Plaintiff's Attorney);
Id. at 677 ("Ultimately, the most persuasive account of why class
actions frequently produce unsatisfactory results is the
hypothesis that such actions are uniquely vulnerable to collusive
settlements that benefit plaintiff's attorneys rather than their
clients."); John C. Coffee, Rescuing the Private Attorney
General: Why the Model of the Lawyer as Bounty Hunter Is Not
Working, 42 MD. L. REV. 215 (1983); John C. Coffee, The Unfaithful
Champion: The Plaintiff as Monitor in Shareholder Litigation, 48
SUM LAW & CONTEM. PROBS., 5 Summer 1985; Kevin M. Clermont & John D.
Currivan, Improving on the Contingent Fee, 63 CORNELL L. REV. 529
(1978); Murray L. Schwartz & Daniel J.B. Mitchell, An Economic
Analysis of the Contingency Fee in Personal-Injury Litigation, 22
STAN. L. REV. 1125 (1970).
Economic models have shown how conventional methods of
calculating class action fee awards give class counsel incentives
to act earlier than their clients would deem optimal. See
Coffee, Understanding the Plaintiff's Attorney, 86 COLUM. L. REV.
at 688. Because, under a percentage of recovery award mechanism,
the attorney will only enjoy a relatively small portion of
whatever incremental award he can extract from the defendant, the
defendant can pressure the plaintiffs' attorney into early
settlement by threatening to expend large sums on dilatory
tactics that would run the expenses up beyond what plaintiffs'
attorneys can expect to profit. Id. at 690. Rather than
presenting a possible solution, the lodestar method seemingly
exacerbates the problem of cheap settlement by divorcing the fee
award from the settlement's size, since plaintiffs' attorneys
have no incentive to take the risk on a trial for potentially
larger award to the class where their own fees will not
necessarily reflect the greater risk taken on trial. See also
id. at 718 (discussing how lodestar method may create structural
collusion).
Coffee also blames the principal-agent problem endemic
to class actions for creating a situation where the defendants
and plaintiffs can collusively settle litigation in a manner that
is adverse to the class's interest: "At its worst, the
settlement process may amount to a covert exchange of a cheap
settlement for a high award of attorney's fees. Although courts
have long recognized this danger and have developed some
procedural safeguards intended to prevent collusive settlements,
these reforms are far from adequate to the task." Id. at 714
n.121 (citing cases). A number of commentators have identified
settlements which afford only nonpecuniary relief to the class as
prime suspects of these cheap settlements. See Coffee,
Understanding The Plaintiff's Attorney, 86 COLUM. L. REV. at 716
n.129; JONATHAN R. MACEY & GEOFFREY P. MILLER, The Plaintiffs'
Attorneys Role in Class Action and Derivative Litigation:
Economic Analysis and Recommendations for Reform, 58 U. CHI. L.
REV. 1, 45 n.10 (1991); Nancy Morawetz, Bargaining, Class
Representation, and Fairness, 54 OHIO ST. L.J. 1, 5 n.40 (1993).
While courts may fail to appreciate adequately the
distinction between conventional bipolar litigation and class
actions in many respects, they may over-emphasize these
differences in other respects. To be sure, courts will be
willing to award fees in class actions that would appear
extraordinary and arguably improper in conventional litigation.
Nevertheless, some of the critiques based on ethical or collusive
concerns remain instructive. Although subsequent versions seem
to avoid a discussion, the Manual for Complex Litigation (First)
acknowledged the potential for attorney-class conflict. It
condemned fees that are paid separate and apart from the
settlement funds paid to the class because amounts "paid by the
defendant(s) are properly part of the settlement funds and should
be known and disclosed at the time the fairness of the settlement
is considered." MCL 1st § 1.46.
One court has noted that the "effect of such an
arrangement [where the counsel fees are not resolved and the
details not included in the class notice] may be to cause counsel
for the plaintiffs to be more interested in the amount to be paid
as fees than in the amount to be paid to the plaintiffs." In re
General Motors Corp. Engine Interchange, 594 F.2d at 1131.
Commentators have also noted how, where there is an absence of
objectors, courts lack the independently-derived information
about the merits to oppose proposed settlements. See Coffee,
Understanding the Plaintiff's Attorney, 86 COLUM. L. REV. at 714
n.131. Of course, by endorsing a practice where the class is,
for practical purposes, deprived of information concerning the
fees, courts foster a situation where there will be fewer
objectors.23
(2) The Stewardship of Counsel Here
A number of factors militate against the conclusion
that the class's interests were sufficiently pursued here.
First, the settlement arguably did not maximize the class
members' interests. Every owner received a coupon whose value
could only be realized by purchasing a new truck. Significant
obstacles existed to the development of a secondary market in the
transfer certificates given that the transfer restrictions and
their limited lifespan minimize the value of the transfer option.
Second, class counsel effected a settlement that would yield very
substantial rewards to them after what, in comparison to the $9.5
million fee, was little work.
23
. The information on fee agreements may prompt potential
objectors to oppose not only the awards but, also, to the extent
they conclude arm's length negotiations were compromised, the
adequacy of the settlement and the propriety of the class.
Third, the fact that the settlement involves only non-
cash relief, which is recognized as a prime indicator of suspect
settlements, increases our sense that the class's interests were
not adequately vindicated. The separate negotiation of the fee
agreement and the failure to disclose the amount of the award in
the class notice only enhance this sense that counsel may have
pursued a deal with the defendants separate from, and perhaps
competing for the defendant's resources with, the deal negotiated
on behalf of the class. And although the degree to which a
settlement hurts a defendant is not ordinarily a measure of the
settlement's adequacy, the fact that this settlement might
actually benefits GM by motivating current owners to buy new
trucks from the company (the settlement may arguably be viewed as
a GM sales promotion device) certainly does little to allay the
concern that the settlement did not advance the interests of the
class as much as it might have.
Fourth, our concern about the vigor of counsels'
prosecution of the class claims, specifically the possibility
that counsel did not do right by the class, is buttressed by the
legacy of Prandini v. National Tea Co., 557 F.2d 1015, 1021 (3d
Cir. 1977). In Prandini, this court recognized the potential for
attorney class conflicts where the fees, while ostensibly
stemming from a separate agreement, were negotiated
simultaneously. We characterized simultaneity of fee and
settlement negotiations as a "situation . . . having, in
practical effect, one fund divided between the attorney and
client." To respond to this danger of collusion between the
class counsel and defendant, Prandini and the Third Circuit Task
Force Report on court awarded attorney's fees disapproved fee
discussions until after the achievement and approval of
settlement. See Prandini, 557 F.2d at 1021; Court Awarded
Attorney's Fees, Report of the Third Circuit Task Force, 108
F.R.D. 238, 266 (1985) [hereinafter Task Force].24
In this case, there were strong indications that such
simultaneous negotiations in fact transpired. Indeed, there was
evidence in a letter from class counsel that at least some
portion of the fees and expenses had to have been negotiated
simultaneously with the settlement. (Butler Letter on fees,
Jenkins app. at 70-1). The court justified its dismissal of the
allegation of simultaneous negotiation by citing (1) a statement
in the letter that the "attorneys' fees were negotiated
separately, after we agreed on everything else," and (2) GM's
24
. Other courts and authorities have followed this guide. See,
e.g., Ashley v. Atlantic Richfield Co., 794 F.2d 128 (3d Cir.
1986); MCL 2d § 30.41; 2 NEWBERG & CONTE § 11.29 at 11-62
(recognizing potential for conflict where settlement and fees to
be paid by defendant simultaneously negotiated). To implement
this prophylactic bar fully, courts would have to require class
counsel to disclose all understandings as to fees, not simply
concluded, formal agreements. See MCL 2d § 34.42 at 237-39.
Although it recognized that this prophylactic rule could impede
some settlements by making it impossible for the defendant to
size up its total liability (i.e. the sum of the settlement
amount and any fees the defendant agrees to pay), Task Force 108
F.R.D. at 267-69, the Task Force concluded that avoiding the
conflicts justified this cost.
reservation of the right to contest any award of fees that it
deemed unreasonable. Even though we assume that these are
factual findings, thus ordinarily deserving deference, we think
these findings were made by reference to an erroneous legal
standard. Indeed, neither of these bases is persuasive,
especially in view of GM's acquiecence in a patently baseless
ground for augmenting the counsel fee, see Part VII infra.
In considering the adequacy of representation, we are
loath to place such dispositive weight on the parties' self-
serving remarks. And even if counsel did not discuss fees until
after they reached a settlement agreement, the statement would
not allay our concern since the Task Force recommended that fee
negotiations be postponed until the settlement was judicially
approved, not merely the date the parties allege to have reached
an agreement. We recognize that Evans v. Jeff D., 475 U.S. 717,
734-38, 106 S. Ct. 1531, 1541-43 (1986), overruled Prandini's
strict rule prohibiting simultaneous negotiations. However, many
of the concerns that motivated the Prandini rule remain, and we
see no reason why Jeff D. or its underlying policy of avoiding
rules that impede settlement preclude us from considering the
timing of fee negotiations as a factor in our review of the
adequacy of the class' representation. Consequently, the
likelihood that the parties did negotiate the fees concurrently
with the settlement in this case increases our concern about the
adequacy of representation.25
Nor would GM's reservation of the right to appeal the
fee award establish that the fee was negotiated separately since
the likelihood that GM would want to contest an award based on a
fee petition to which it agreed is quite small. The fact is
confirmed by GM's "lay down" position with respect to the fee
application. Although the Supreme Court clearly invalidated the
use of mulitipliers in lodestar awards in 1992, see City of
Burlington v. Dague, 112 S. Ct. 2638 (1992), GM did not apprise
the district court of this fact when it was approving the fee
award, or complain when the district court used a mulitplier in
the calculations. This posture of GM suggests that its
reservation of the right to appeal the fee award should not be
given great weight in determining whether the settlement and
attorney's fee were negotiated separately. But we hasten to add
that we have not resolved these factors. We only hold today that
the court did not make the necessary findings, and we remand to
the district court so that it can make the necessary Rule 23
findings.
The thrust of the foregoing discussion is that the
circumstances under which the settlement evolved, made possible
by the settlement class device, may have compromised class
25
. While the parties could have sought a waiver permitting
simultaneous negotiations, Task Force at 269, the parties did not
seek one here.
counsel in a manner raising doubts as to adequacy of
representation. The district court will examine this aspect of
the matter on remand. Perhaps, on a more developed record, the
adequacy of representation will be established. These concerns
underscore the importance of having the district court make Rule
23 findings. Although we do not believe that the class would
meet the requirements for certification on the current record, we
do not preclude the possibility that certification could be
properly supported on a more developed record. Thus, we remand
this action to the district court so that it can re-examine the
class certification and the settlement and, if appropriate,
certify the class by making the findings required by Rules 23(a)
and (b).
VI. IS THE SETTLEMENT FAIR, REASONABLE, AND ADEQUATE?
Invoking the correct standard of review under Girsh v.
Jepson, 521 F.2d 153, 157 (3d Cir. 1975), the objectors also
argue that the district court abused its discretion, when it
approved the settlement as fair, reasonable and adequate.
Because we leave open the possibility that the district court may
on remand properly certify the class pursuant to Part V of this
opinion, we must also address the district court's approval of
the settlement. Rule 23(e) imposes on the trial judge the duty
of protecting absentees, which is executed by the court's
assuring that the settlement represents adequate compensation for
the release of the class claims. See 2 NEWBERG & CONTE § 11.46 at
11-105 to 11-106. Some courts have described their duty under
Rule 23(e) as the "fiduciary responsibility" of ensuring that the
settlement is fair and not a product of collusion. In re Warner
Commun. Secur. Litig., 798 F.2d 35, 37 (2d Cir. 1986); see also,
Plummer v. Chemical Bank, 668 F.2d 654, 658 (2d Cir. 1982);
Grunin v. International House of Pancakes, 513 F.2d 114, 123 (8th
Cir.), cert. denied, 423 U.S. 864 (1975); Alvarado Partners L.P.
v. Mehta, 723 F. Supp. 540, 546 (D. Colo. 1989). At all events,
where the court fails to comply with this duty, absentees have an
action to enjoin the settlement. 2 NEWBERG & CONTE § 11.23.
In order for the determination that the settlement is
fair, reasonable, and adequate "to survive appellate review, the
district court must show it has explored comprehensively all
relevant factors." Malchman, 706 F.2d at 434 (citing Protective
Committee, 390 U.S. at 434; Plummer, 668 F.2d at 659). A number
of courts have recognized the need for a special focus on
precluding the existence of collusion. See Malchman, 706 F.2d at
433 (advocating a focus on the negotiation process to uncover
possible collusion); General Motors Interchange, 594 F.2d at 1125
(finding a need for heightened scrutiny of the settlement
stemming from the potential for collusive settlement).
The topic of class action settlement has received much
attention, which is understandable given the growing frequency of
the settlement of increasingly large claims through the class
action device. See In re A.H. Robins Co., 880 F.2d 709, 739-40
(4th Cir. 1989) (discussing the use of the device to settle
various mass tort cases); In re Taxable Municipal Bond Secur.
Litig., 1994 WL 643142 at *5 (noting the dramatic change in
attitudes of courts and commentators toward the settlement
class). The drive to settle class actions has also grown,
notwithstanding the potential for collusive settlements to
compromise absentee interests. Courts undertaking the special
role of supervising class action settlements are apparently
heeding the public policy in favor of settlement, see 2 NEWBERG &
CONTE § 11.41 at 11-85, and acknowledging the urgency of this
policy in complex actions that consume substantial judicial
resources and present unusually large risks for the litigants.
We have already noted the special difficulties the
court encounters with its duties under Rule 23(e) in approving
settlements where negotiations occur before the court has
certified the class. Because of such difficulties, many courts
have required the parties to make a higher showing of fairness to
sustain these settlements. See, e.g., Ace Heating & Plumbing Co.
v. Crane Co., 453 F.2d 30, 33 (3d Cir. 1971) ("[W]hen the
settlement is not negotiated by a court designated class
representative the court must be doubly careful in evaluating the
fairness of the settlement to the plaintiff's class."); General
Motors Interchange, 594
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