Dewey v. Volkswagen Aktiengesellschaft

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

Nos. 10-3618, 10-3651, 10-3652 & 10-3798

_____________

JOHN M. DEWEY; PATRICK DEMARTINO;

PATRICIA ROMEO; LYNDA GALLO; RONALD B.

MARRANS; EDWARD O. GRIFFIN, ON BEHALF OF

THEMSELVES AND ALL OTHERS SIMILARLY

SITUATED

v.

VOLKSWAGEN AKTIENGESELLSCHAFT;

VOLKSWAGEN BETEILIGUNGS GESELLSCHAFT

M.B.H.; VOLKSWAGEN GROUP OF AMERICA, INC.

(FORMERLY KNOWN AS VOLKSWAGEN OF

AMERICA, INC.); AUDI AG; VOLKSWAGEN

GROUP OF AMERICA, INC., d/b/a AUDI OF

AMERICA, INC.; AUDI OF AMERICA, LLC;

VOLKSWAGEN DE MEXICO, S.A. DE C.V.

(D.N.J. 07-cv-02249)

_____________________

JACQUELINE DELGUERCIO; LYNDA GALLO;

FRANCIS NOWICKI; KENNETH BAYER,

1

INDIVIDUALLY AND ON BEHALF OF ALL

OTHERS SIMILARLY SITUATED

v.

VOLKSWAGEN AMERICA, INC.; VOLKSWAGEN

GROUP OF AMERICA, INC.; VOLKSWAGEN OF

AMERICA, INC., d/b/a AUDI OF AMERICA, INC.;

VOLKSWAGEN AG; AUDI AG; VOLKSWAGEN DE

MEXICO, S.A. DE C.V.; ABC ENTITIES 1-20

(D.N.J. 07-cv-02361)

_____________________

Lester Brickman, Darren McKinney, Michael Sullivan,

Joshua West,

Appellants in 10-3618

Volkswagen Group of America, Inc. s/h/a Volkswagen of

America, Inc., Volkswagen AG, Volkswagen de Mexico,

S.A. de C.V., Audi of America, LLC, Audi AG, and

Volkswagen Beteiligungs Gesellschaft M.B.H.,

Appellants at 10-3651

John M. Dewey, Patrick DeMartino, Patricia Romeo,

Ronald B. Marrans, Edward O. Griffin, Jacqueline

DelGuericio, Lynda Gallo, Francis Nowicki,

Kenneth Bayer,

2

Appellants in 10-3652

Daniel Sibley, David Stevens,

Appellants in 10-3798

_____________

On Appeal from the United States District Court

for the District of New Jersey

District Court Nos. 2-07-cv-02249 & 07-cv-02361

Magistrate Judge: The Honorable Patty Shwartz

Argued March 27, 2012

Before: FUENTES, SMITH, and JORDAN, Circuit

Judges

(Filed: May 31, 2012)

Angelo J. Genova

Dina M. Mastellone

Genova Burns Giantomasi & Webster

494 Broad Street

6th Floor

Newark, NJ 07102

Jay P. Saltzman

Samuel P. Sporn [ARGUED]

Schoengold & Sporn

19 Fulton Street

3

Suite 407

New York, NY 10038

Counsel for John M. Dewey, Patrick DeMartino,

Patricia Romeo, Ronald B. Marrans & Edward O.

Griffin

Adam M. Slater [ARGUED]

Matthew R. Mendelsohn

Mazie, Slater, Katz & Freeman

103 Eisenhower Parkway

Roseland, NJ 07068

Counsel for Jacqueline Delguercio, Lynda Gallo

& Francis Nowicki

Jeffrey L. Chase [ARGUED]

Keith A. Frederick

Herzfeld & Rubin

125 Broad Street

New York, NY 10004

Peter J. Kurshan

Chase, Kurshan, Herzfeld & Rubin

354 Eisenhower Parkway

Suite 1100

Livingston, NJ 07039

Counsel for Defendants Volkswagen of America,

Inc., Audi of America, LLC, Volkswagen AG, Audi

AG, Volkswagen Beteiligungs Gesellschaft M.B.H.,

Volkswagen de Mexico, S.A. de C.V., Volkswagen

Group of America, Inc. & Volkswagen Group of

America, Inc., d/b/a Audi of America, Inc.

4

Theodore H. Frank [ARGUED]

Center for Class Action Fairness

1718 M Street, N.W.

No. 236

Washington, DC 20036

Counsel for Lester Brickman, Darren McKinney,

Michael Sullivan & Joshua West

Gary W. Sibley, Esq.

The Sibley Firm

2414 North Akard

Suite 700

Dallas, TX 75201

David M. Nieporent

Samuel & Stein Law Office

38 West 32nd Street

Suite 1210

New York, NY 10001

Counsel for Daniel Sibley & David Stevens

________________

OPINION

________________

SMITH, Circuit Judge.

This appeal arises from the certification of a class,

5

the approval of a settlement, and the award of attorneys’

fees in a products liability suit concerning defective cars

manufactured by Volkswagen of America, Inc., Audi of

America, Inc., and related entities (collectively,

“Volkswagen”).1 As part of the settlement, one group of

class members (the “reimbursement group”) received the

right to reimbursement for certain qualifying damages,

paid from an $8 million fund. The remaining class

members (the “residual group”) were required to wait

until the reimbursement group made its claims. The

residual group could then make “goodwill” claims on the

remaining money in the fund. Those monies were to be

distributed pro rata amongst the residual claimants. The

District Court certified a single class containing both the

reimbursement group and the residual group. On appeal,

objectors Joshua West, Lester Brickman, Darren

McKinney, and Michael Sullivan (collectively the “West

Objectors”) argue that the representative plaintiffs in this

suit, all members of the reimbursement group, cannot

adequately represent the interests of the class members in

the residual group. We agree. We conclude that the

interests of the representative plaintiffs do not

sufficiently align with those of the unnamed plaintiffs in

the residual group, and that the class thus fails to satisfy

1

The full list of defendants includes: Volkswagen of

America, Inc.; Volkswagen AG; Volkswagen

Beteilingungs Gesellschaft M.B.H.; Audi of America,

Inc.; Audi AG; Volkswagen de Mexico, S.A. de C.V.;

Volkswagen Group of America; and Audi of America,

LLC.

6

Federal Rule of Civil Procedure 23(a)(4). We will

reverse the District Court’s order certifying the class and

remand for further proceedings.

I.

A.

In May 2007, two groups of plaintiffs (the “Dewey

plaintiffs” and the “Delguercio plaintiffs”) filed separate

class action suits against Volkswagen. On June 22, 2007,

the cases were consolidated for pre-trial purposes

because they raised substantially similar allegations: that

several models of Volkswagen and Audi automobiles had

defectively designed sunroofs that, when clogged by

plant debris and pollen, allowed water to leak into the

vehicle. While leakage could be prevented through

regular cleaning and maintenance, Volkswagen allegedly

failed to inform car owners of these preventive measures

because such a disclosure would acknowledge a design

defect, and would likely obligate Volkswagen to cover

any resulting damage under their warranty program.

The Dewey plaintiffs allege: (1) violations of New

Jersey’s Consumer Fraud Act (“NJCFA”); (2) violations

of the Uniform Commercial Code (“UCC”); (3) common

law fraud; (4) negligent misrepresentation; and (5) breach

of the duty of good faith and fair dealing. The

Delguercio plaintiffs allege: (1) breaches of express and

implied warranties; (2) improper repairs of vehicles; (3)

breach of the covenant of good faith and fair dealing; (4)

negligent misrepresentations; (5) violations of the

7

NJCFA; (6) unjust enrichment; and (7) fraud.

After two years of discovery, the parties notified

the Court that they were entering into settlement

negotiations. The Court suspended pretrial deadlines and

set a deadline for a joint motion for preliminary

settlement approval. On November 10, 2009, the District

Court approved the parties’ request to refer the case to a

magistrate judge “to conduct all settlement proceedings

and enter final judgment.” The case was referred to

Magistrate Judge Patty Shwartz.

B.

On January 29, 2010, the parties filed a joint

motion for preliminary approval of a settlement,

preliminary certification of a class, and appointment of

class counsel. The parties requested certification of the

following class:

(a) all Persons, other than officers,

directors, or employees of the

defendants, who purchased or leased,

new or used, the following settlement

class vehicles:

• 2001-2007 Volkswagen New

Beetle vehicles with Vehicle

Identification Numbers (VINs)

below 3VW---1C-7M514779,

equipped with sunroof;

8

• 2001-2005 Jetta A4 Sedan with

VINs with “9M” in position 7

and 8, and 2001-2005

Volkswagen Jetta Wagon A4

vehicles with VINs with “1J” in

position 7 and 8, equipped with

sunroof;

• 2001-2006 Volkswagen Golf

A4, Volkswagen GTI A4

vehicles with VINs with “1J” in

position 7 and 8, equipped with

sunroof;

• 2005-2007 Volkswagen Jetta

A5 vehicles with VINs with

“1K” in position 7 and 8,

equipped with sunroof;

• 2006-2007 Volkswagen

Golf/GTI A5 vehicles with

VINs with “1K” in position 7

and 8, equipped with sunroof;

• 1999-2005 Volkswagen Passat

B5 vehicles;

• 1997-2006 Audi A4 vehicles,

B5 and B6 Platforms in

MY2005, with VINs with “8E”

in position 7 and 8 with also

“J” or “L” or “V” or “P” or “X”

9

in position 4, and MY2005 and

MY2006, with VINs with “8H”

in position 7 and 8 (including

Cabrio, S, and RS versions);

• 1998-2005 Audi A6 C5

vehicles with VINs with “4B”

in position 7 and 8 (including

Allroad, S, and RS versions);

[the “reimbursement group”]

and

(b) all persons, other than officers,

directors, or employees of the

defendants, who currently own or

lease the following settlement class

vehicles:

• 1998-2000 and 2007-2009

Volkswagen New Beetle with

VINs 3VW---1C-7M514779 or

higher, equipped with sunroof;

• 1997-1999 Volkswagen Jetta

A3 with VINs with “1H” in

position 7 and 8, 1999-2000

Volkswagen Jetta A4s with

VINs with “9M” in position 7

and 8, and 2008-2009

Volkswagen Jetta A5 vehicles

10

with VINs with “1K” in

position 7 and 8, equipped with

sunroof;

• 1997-1999 Volkswagen

Golf/GTI A3 with VINs with

“1H” in position 7 and 8, 1999-

2000 Volkswagen Golf/GTI A4

with VINs with “1J” in position

7 and 8, and 2008-2009

Volkswagen Golf/GTI A5

vehicles with VINs with “1K”

in position 7 and 8, equipped

with sunroof;

• 1998 Volkswagen Passat B5

vehicles;

• 1997 Volkswagen Passat B4

and 2006-2009 Volkswagen

Passat B6 vehicles equipped

with sunroof;

• 2004-2009 Volkswagen

Touareg vehicles;

• 2005-2008 Audi A4 B7

Platform vehicles equipped

with sunroof, in MY2005, with

VINs with “8E” in position 7

and 8 and also “A” or “D” or

11

“K” or “G” or “U” in position 4

(including S and RS versions);

• 1997 Audi A6 C4 vehicles;

• 2005-2009 Audi A6 C6

vehicles equipped with sunroof

with VINs with “4A” or “4F”

in position 7 and 8 (including S

and RS versions);

• 1997-2009 Audi A8 vehicles

(including S versions)

[the “residual group”]

App’x A13-14. All of the representative plaintiffs in the

case are members of the reimbursement group.

The settlement agreement made three types of

relief available to the class. First, the settlement

agreement provided that all class members would receive

“[e]ducational preventative maintenance information.”

App’x A317. This information instructed class members

how to inspect and clean their sunroofs to avoid leakage.

Second, the settlement agreement designated

certain car models in the reimbursement group whose

owners or lessees would be eligible to take their cars to

any authorized Volkswagen dealership for removal of a

problematic valve on the sunroof and for inspection of

12

the sunroof drains and drain hoses. These service actions

would be performed free of charge to the class member.

Finally, the settlement agreement created an $8

million reimbursement fund that would be made

available to reimburse class members for certain

“reimbursable repairs.” 2 The settlement agreement

provided that the claims administrator would satisfy all

claims made by members of the reimbursement group for

reimbursable repairs. If the $8 million reimbursement

2

The agreement defined “reimbursable repairs” as:

cleaning, drying or replacement of

carpeting, including padding, and/or repair

or replacement of [specified components],

and/or repair and replacement of any

component of the sunroof drain system

and/or plenum drain system, in response to a

documented customer complaint or report of

water entering the passenger compartment

through or due to the sunroof drain system

or plenum area . . . of a Settlement Class

Vehicle . . . which cleaning, drying, or repair

or replacement was performed prior to the

date on which Notice is mailed by the

Settlement Administrator and for which

Proof of Repair is timely tendered.

App’x A311.

13

fund was not sufficient to satisfy these claims, the claims

would be “made on a pro rata basis.” App’x A320. If

there was money remaining in the fund after these

reimbursement claims were settled, it would be used to

satisfy “goodwill” claims consisting of: (1)

reimbursement claims made by members of the residual

group; and (2) reimbursements for nonreimbursable

repairs paid for by members of the reimbursement group.

App’x A321. The fund would accept goodwill claims up

to five years after the effective date of the settlement. 3

App’x A321-22. Five years after the effective date, any

money remaining in the fund would be “donated to an

educational, charitable, and/or research facility in the

United States and dedicated to specific projects and

programs benefitting automobile safety and/or

environmental technology . . . .” Id.

The District Court preliminarily approved the

settlement, preliminarily certified the class, and

appointed class counsel. The District Court’s Order

required that notice be communicated in three different

ways: (1) direct mail to all class members for whom

mailing addresses were available; (2) a class website with

an electronic version of the mailed notices and a claim

form; and (3) publication in USA Today. This notice was

3

The effective date was “the first date on which all

appellate rights with respect to the Judgment have

expired or have been conclusively exhausted in a manner

that affirms the Judgment.” App’x A307.

14

sent to approximately 4.2 million Volkswagen owners

and 2.1 million Audi owners.4

The District Court ordered the representative

plaintiffs to file a memorandum in support of final

settlement approval by June 17, 2010, with opposition

briefs due June 28, 2010. 5 The court also scheduled a

4

In June 2010, the parties mailed a second set of notices

to owners of approximately 550,000 class vehicles who

did not receive the first notice.

5

On July 12, 2010, after the June 28, 2010 deadline had

passed, the West Objectors moved for leave to file a

response to plaintiffs’ memorandum in support of final

settlement approval. The District Court denied the West

Objectors’ motion. On appeal, the West Objectors argue

that they were denied due process because the District

Court required that they file their objection before

representative plaintiffs filed their fee petition. As the

District Court noted in its opinion, the West Objectors

misunderstand the court’s scheduling order. The West

Objectors had until June 21 to file an opposition to the

fee petition, and until June 28 to file an opposition to

plaintiffs’ memorandum in support of final certification.

The West Objectors missed both of these deadlines.

Having cited no case law suggesting that due process

requires a District Court to allow objectors to file such

untimely response briefs, we conclude that the West

Objectors had a “reasonable opportunity” to respond to

15

fairness hearing for July 26, 2010. On June 9, 2010, the

representative plaintiffs filed a joint motion for attorneys’

fees in advance of the fairness hearing. In support of

their motion, they attached the expert report of Dr.

George Eads, an economist who placed the value of the

settlement at over $142 million.

On June 11, 2010, objectors Daniel Sibley and

George Stevens (the “Sibley Objectors”) filed an

objection to the settlement and a notice of intent to

appear at the fairness hearing. The Sibley Objectors

raised objections to the notice, the plan of allocation, and

representative plaintiffs’ fee petition. They did not at

that time argue that the Magistrate Judge lacked

jurisdiction over the case.

On June 14, 2010, the West Objectors, represented

by the Center for Class Action Fairness, filed an

objection to the settlement and a notice of intent to

appear at the fairness hearing. The West Objectors raised

several objections to the adequacy of representation, the

presence of an intra-class conflict, the fairness of the

settlement, and the requested attorneys’ fee award.

In total, in a class consisting of approximately 5.5

million members, 203 class members objected to the

plaintiffs’ papers, and that they simply failed to avail

themselves of the opportunity. Fed. R. Civ. P. 23(h).

16

settlement or the fee petition.6 Additionally, 1,119

potential class members opted out of the class and the

settlement.

C.

Finally, on July 26, 2010, the District Court held a

fairness hearing on the settlement agreement and the fee

petition. At the hearing, representative plaintiffs called

Eads to testify about the value of the settlement.

Volkswagen did not cross-examine Eads, but the

Magistrate Judge independently and thoroughly

examined Eads about his methodology. First, she asked

about the “subcategories” in Eads’s report—groups of

class members who received different sets of notices

based on their car models and the settlement benefits

available to them. She then asked Eads whether he

divided the class into the subgroups, or whether he knew

the basis for the divisions. Eads responded that the

lawyers had independently grouped the class members,

and that he was not aware of the method they used. He

noted, however, that the grouping did seem to have some

empirical basis grounded in the likelihood of

experiencing leakage. The Judge followed up by asking

6

Notice was directed to the owners of over six million

class vehicles. Because many of these owners were

“fleet buyers,” and owned multiple class vehicles, the

size of the class was appreciably lower than the size of

the class vehicle pool.

17

whether Eads had determined why the residual group was

excluded from seeking reimbursements.7 He responded

that he did not know why the residual group was

excluded, but said he assumed it was the product of

negotiations between counsel. 8

7

The residual group was, in fact, allowed to make

reimbursement claims. They were simply restricted to

making “goodwill” claims from the residual of the $8

million fund after the reimbursement group claims had

been paid. App’x A321.

8

After the District Court completed its questioning,

counsel for the West Objectors sought leave to cross-

examine Eads. The District Court declined to allow the

West Objectors to cross-examine Eads, noting that they

had failed to notify the parties of their intent to cross-

examine Eads prior to the hearing, and that the court had

already sufficiently questioned Eads. The West

Objectors argue on appeal that they were denied due

process when the District Court failed to allow them to

cross-examine Eads.

The West Objectors are correct that they have a

limited right to discovery that can, in certain

circumstances, include the opportunity to cross-examine

witnesses before the court. In re Cmty. Bank of N. Va.,

418 F.3d 277, 316 (3d Cir. 2005); see Greenfield v.

Villager Indus., Inc., 483 F.2d 824, 833 (3d Cir. 1973)

(noting that “an objector at a [fairness] hearing is entitled

to an opportunity to develop a record in support of his

18

After Eads finished testifying, the court asked for

argument from the objectors. Counsel for the West

Objectors spoke first, raising several arguments as to why

the proposed class failed to meet the requirements of

Rule 23, and why the settlement should be rejected.

After being pressed by the Magistrate Judge, counsel

contentions by means of cross-examination”). This right,

however, is not absolute. Rather, “[t]he District Court

has discretion to ‘employ the procedures that it perceives

will best permit it to evaluate the fairness of the

settlement.’” Id. (quoting In re Prudential Ins. Co. of

Am. Sales Practices Litig., 962 F. Supp. 450, 563 (D.N.J.

1997), aff’d 148 F.3d 283 (3d Cir. 1998)). The extent to

which the District Court’s procedures limit the objectors’

rights is “predicated on the total inadequacy of the record

upon which the settlement was approved and the ‘totality

of the circumstances surrounding the settlement hearing’

in which the objector was denied meaningful

participation.” Id. (quoting Girsh v. Jepson, 521 F.2d

153, 157 (3d Cir. 1975)). We review for an abuse of

discretion. See id. at 317.

In this case, the District Court did not abuse its

discretion in concluding that the totality of the

circumstances did not require further cross-examination

at the fairness hearing. The Magistrate Judge had already

thoroughly and effectively cross-examined Eads, and the

court assured the West Objectors that they could

substantively criticize Eads’ methodology during their

argument to the court.

19

stated that his primary argument was that there was “an

Amchem problem” 9 in that “[c]lass members who are

going to suffer damage in the future . . . are releasing

their claims and have no relief under this settlement and

they’re not represented by any of the current class

representatives because all of the class representatives

have current claims, not future claims.” App’x A1102.

In other words, counsel recast his earlier arguments in

adequacy of representation terms under Rule 23(a)(4).

After the remaining objectors made their

arguments, representative plaintiffs were given time for

further argument. Representative plaintiffs argued that

the class members all suffer common problems with the

drain systems that were “failing for the same reason.”

App’x A1108. Representative plaintiffs also suggested

that even if there were differences between class

members, “we’ve dealt with this through subclasses for

relief purposes.” App’x A1109. 10 The Magistrate Judge

9

Counsel was referring to the Supreme Court’s opinion

in Amchem Products, Inc. v. Windsor, 521 U.S. 591

(1996).

10

We find it remarkable that the parties continually

referred to different subcategories of plaintiffs in the

certified class as “subclasses.” At oral argument,

Volkswagen characterized the parties’ use of the term as

an “unfortunate choice of language . . . used by the

plaintiffs’ expert.” Oral Arg. Tr. at 23:19-21. We find

the use of the term problematic. The fact is that the

20

then allowed Volkswagen time for further argument.

Volkswagen first argued that there was no adequacy

problem, because “the Class representatives have the

same interest as everyone else . . . .” App’x A1128-29.

Volkswagen also pointed out that there were very few

objectors and opt-outs, and argued that the small number

implied that the settlement was fair.

D.

On August 3, 2010, the District Court issued an

order certifying the class, approving the settlement, and

granting representative plaintiffs’ fee petition. The

Magistrate Judge first addressed class certification,

addressing each of the Rule 23 requirements. Notably, as

to adequacy, the court found that there were no intra-

class conflicts because “[t]he named plaintiffs are in the

same position as the class members because each of them

owned or leased the subject vehicles that contained the

allegedly defective plenum or sunroof drain system,

receiving allegedly inadequate maintenance

recommendations and, as a result, suffered the same

injury.” App’x A82. The court further noted that “[t]he

fact that the relief class members receive may differ

parties did not propose and the court did not certify

separate subclasses. The use of the term is misleading, as

actual subclasses may have mooted the adequacy issue

raised in this very appeal. For purposes of this opinion

we refer to the seven groups identified by Dr. Eads as

“subcategories” rather than subclasses.

21

based upon the vehicle the member owned or leased does

not reflect antagonism or differing interests. Rather, it

reflects the compromise reached to address the frequency

[with which] problems were reported for each model.”

App’x A83.

After concluding that the Rule 23 requirements

were met, the court moved on to consider whether the

settlement was fair and reasonable, pursuant to Rule

23(e). In analyzing the reasonableness of the settlement,

the court considered the so-called Girsh factors:

(1) the complexity, expense and likely

duration of the litigation;

(2) the reaction of the class to the

settlement;

(3) the stage of the proceedings and the

amount of discovery completed;

(4) the risks of establishing liability;

(5) the risks of establishing damages;

(6) the risks of maintaining the class action

through the trial;

(7) the ability of the defendants to withstand

a greater judgment;

22

(8) the range of reasonableness of the

settlement fund in light of the best

possible recovery; and

(9) the range of reasonableness of the

settlement fund to a possible recovery in

light of all the attendant risks of

litigation.

Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975). The

court found that each of these factors either weighed in

favor of the settlement, or was neutral.

In order to analyze the reaction of the class to the

settlement, the second Girsh factor, the court considered

the objections to the settlement. The court noted that:

Several objectors asserted that the division

of class members into subclasses produced

conflicts of interest which led to inequitable

remedies. These divisions and the resulting

remedies are based on objective criteria,

namely the past frequency of failure and the

design of the vehicles. This is a reasonable

basis to decide the relief to be provided,

particularly where complete, individualized

relief for each class member could not be

negotiated. All class members, even those

in the subclass that receives only

preventative care information, receive

something of value. Thus, the division of

class members into subclasses receiving

23

different benefits based upon the type of

vehicle they own does not necessarily render

the settlement unfair or unreasonable, nor

does it show a conflict of interest that

renders the class representatives unable to

adequately represent the class.

App’x A102. Having concluded that the class met the

requirements of Rule 23 and that the settlement was “fair

and reasonable,” the court certified the class and

approved the settlement.

The court then considered the representative

plaintiffs’ petition for attorneys’ fees and incentive

awards. The court approved a fee award of $9.2 million,

and approved a $10,000 incentive award for each

representative plaintiff.

II.

The West Objectors and the Sibley Objectors

separately appeal from the District Court’s order

certifying the class, approving the settlement, and

granting representative plaintiffs’ fee petition. The West

and Sibley Objectors raise a host of issues on appeal.

Volkswagen and the representative plaintiffs also filed

cross-appeals. Because we conclude that the District

Court improperly certified the class, we limit our

discussion to two issues: (1) whether the Magistrate

Judge possessed, and consequently, whether this court

possesses jurisdiction over this case absent the

affirmative consent of the unnamed plaintiffs; and (2)

24

whether the class, as certified, satisfies the adequacy

requirement of Rule 23(a)(4).

A.

The District Court had diversity jurisdiction over

the case pursuant to the Class Action Fairness Act of

2005. See 28 U.S.C. § 1332(d). A magistrate judge may

exercise jurisdiction over a case in which a federal

district court had jurisdiction “[u]pon the consent of the

parties.” 28 U.S.C. § 636(c)(1). Where the parties

properly consent to allow the magistrate judge to exercise

jurisdiction over the case, 28 U.S.C. § 636(c)(3) permits

the parties to “appeal directly to the appropriate United

States court of appeals from the judgment of the

magistrate judge,” as opposed to appealing to the district

court that referred the case to the magistrate judge.

“Accordingly, [this court’s] final order jurisdiction to

review such an order arises from 28 U.S.C. § 636(c)(3) to

the extent it is final under 28 U.S.C. § 1291.” Skretvedt

v. E.I. DuPont De Nemours, 372 F.3d 193, 200 n.7 (3d

Cir. 2004).

The failure to satisfy the requirements of

§ 636(c)(1) deprives the magistrate judge of jurisdiction

over the case. See McQueen v. Beecher Cmty. Sch., 433

F.3d 460, 472 (6th Cir. 2006). Similarly, where the

requirements of § 636(c)(1) are not satisfied, we lack

jurisdiction under § 636(c)(3), and the parties must

appeal directly to the district court that referred the case

pursuant to the procedures outlined in 28 U.S.C. §

636(b)(1). Cf. Skretvedt, 372 F.3d at 200 n.7.

25

The Sibley Objectors argue that they, and other

unnamed class members, are “parties” within the

meaning of § 636(c)(1), and that their consent was

required in order for the Magistrate Judge to exercise

jurisdiction over the case. If the Magistrate Judge lacked

jurisdiction over the case under § 636(c)(1), this court

would lack jurisdiction pursuant to § 636(c)(3). Because

this issue concerns our jurisdiction over this appeal, we

address it even though the Sibley Objectors did not first

raise the issue in their written objection filed with the

District Court. Nesbit v. Gears Unlimited, Inc., 347 F.3d

72, 76-77 (3d Cir. 2003) (noting that jurisdiction is a

non-waivable issue, and that “courts have an independent

obligation to satisfy themselves of jurisdiction if it is in

doubt”). We review the issue de novo. See Great W.

Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d

159, 163-64 (3d Cir. 2010).

The Seventh Circuit rejected such an argument in

Williams v. General Electric Capital Auto Lease, Inc.,

159 F.3d 266, 269 (7th Cir. 1998). Williams held that

unnamed class members are not “parties” within the

meaning of § 636(c)(1); rather, “they are more accurately

regarded as having something less than full party status .

. . .” Id. at 269. As a result, the court held that the

affirmative consent of all unnamed class members is not

required in order for a magistrate judge to exercise

jurisdiction over a case. If an unnamed class member

objects to trying the case before a magistrate judge, that

class member has two options:

26

First, she may apply to the district court to

intervene under Rule 24(a), become a party

to the lawsuit, and then exercise her right to

withhold her consent to proceed before the

magistrate. Or, after the entry of final

judgment, the unnamed class member can

raise a collateral attack based on due process

against the named representative’s decision

to consent under § 636(c). . . . Alternatively,

the unnamed class member could try to

show in a collateral attack that the decision

to proceed before a magistrate judge was a

matter on which there was a. . . significant

intra-class conflict and that the notice the

absentee received was inadequate to inform

her of this conflict.11

Id. at 269-70. We agree with the Seventh Circuit that

unnamed class members are not “parties” within the

meaning of § 636(c)(1), and that their consent is not

required for a magistrate judge to exercise jurisdiction

over a case.

The Sibley Objectors argue that Williams was

11

The Sibley Objectors do not raise any possible intra-

class conflicts as concerns the decision to proceed before

the Magistrate Judge. The only intra-class conflicts that

they raise concern the interests and incentives of

representative plaintiffs in the process of negotiating the

settlement agreement.

27

implicitly overruled by Devlin v. Scardelletti, 536 U.S. 1

(2002). In Devlin, the Supreme Court held that unnamed

class members are parties “for the purposes of bringing

an appeal[.]” Id. at 9. Devlin did not consider §

636(c)(1), and in no way disturbed the reasoning in

Williams. Indeed, the Devlin court carefully limited its

holding, noting that “[un]named class members . . . may

be parties for some purposes and not for others.” Id. at 9-

10. The Supreme Court specifically stated that its

holding did not “conflict with any other aspect of class

action procedure.” Id. at 9. The fact that unnamed class

members may be parties for the purposes of bringing an

appeal does not mean that they are, ipso facto, parties

within the meaning of § 636(c)(1). As the Williams court

noted, such a “radical result” would “virtually eliminate

§ 636(c) referrals to magistrate judges in all potential

class actions, because it would de facto transform all

such cases into ‘opt-in’ style actions . . . .” Williams, 159

F.3d at 269. Consequently, we conclude that the

Magistrate Judge properly exercised jurisdiction over this

case.

B.

Federal Rule of Civil Procedure 23(a)(4) requires

that “the representative parties [in a class action] . . .

fairly and adequately protect the interests of the class.” 12

12

A similar requirement is found in the Due Process

Clauses of the Fifth and Fourteenth Amendments, which

“of course require[ ] that the named plaintiff[s] at all

28

The adequacy requirement has two components: (1)

concerning the experience and performance of class

counsel; and (2) concerning the interests and incentives

of the representative plaintiffs. In re Cmty. Bank of N.

Va., 418 F.3d 277, 303 (3d Cir. 2005) [hereinafter

“Community Bank I”]. 13 The West Objectors question

only the second component, arguing that two separate

intra-class conflicts prevent the representative plaintiffs

from adequately representing the entire class.

We review the District Court’s order certifying the

class for an abuse of discretion. See In re DVI, Inc. Sec.

times adequately represent the interests of the absent

class members.” Phillips Petroleum Co. v. Shutts, 472

U.S. 797, 811-12 (1985). The West Objectors do not

phrase their argument in constitutional terms, and even if

they did, it is unclear what differences, if any, exist

between the adequacy requirement under the Due Process

Clause and under Rule 23. See Samuel Issacharoff &

Richard A. Nagareda, Class Settlements Under Attack,

156 U. Pa. L. Rev. 1649, 1676 (2008).

13

“Although questions concerning the adequacy of class

counsel were traditionally analyzed under the aegis of the

adequate representation requirement of Rule 23(a)(4) . . .

those questions have, since 2003, been governed by Rule

23(g).” Sheinberg v. Sorensen, 606 F.3d 130, 132 (3d

Cir. 2010). Because the parties do not dispute the

adequacy of class counsel, we consider the adequacy

requirement strictly through the lens of Rule 23(a)(4).

29

Litig., 639 F.3d 623, 629 n.7 (3d Cir. 2011). Similarly,

“‘[w]here the district court has declined to certify a

subclass’ and treats all class members as falling within a

single class for purposes of a fund allocation, ‘we will

ordinarily defer to its decision unless it constituted an

abuse of discretion.’” Sullivan v. DB Invs., Inc., 667 F.3d

273, 326 (3d Cir. 2011) (en banc) (quoting In re Ins.

Brokerage Antitrust Litig., 579 F.3d 241, 271 (3d Cir.

2009)). An abuse of discretion “occurs if 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. [W]hether an incorrect legal

standard has been used is an issue of law to be reviewed

de novo.” In re Hydrogen Peroxide Antitrust Litig., 552

F.3d 305, 312 (3d Cir. 2009) (citations and internal

quotation marks omitted).

1.

The Supreme Court has twice considered this

component of the adequacy requirement, first in Amchem

Products, Inc. v. Windsor, 521 U.S. 591 (1996), and

second in Ortiz v. Fibreboard Corp., 527 U.S. 815

(1997). In Amchem, plaintiffs brought suit against

defendant manufacturers of asbestos products. The

parties reached an agreement to settle the case, then

sought certification from the district court of a settlement

class. Under the terms of the global settlement, the

benefits received varied significantly from class member

to class member. While some members could receive as

30

much as $200,000, others received nothing. The District

Court approved the settlement and certified the class.

This court reversed, concluding that “serious intra-

class conflicts preclude[d] th[e] class from meeting the

adequacy of representation requirement.” Georgine v.

Amchem Prods., Inc., 83 F.3d 610, 630 (3d Cir. 1996).

We acknowledged that all parties had an incentive to

maximize their recovery, but noted that “the settlement

does more than simply provide a general recovery fund[,]

[r]ather, it makes important judgments on how recovery

is to be allocated among different kinds of plaintiffs,

decisions that necessarily favor some claimants over

others.” Id.

Our opinion focused on the conflict between class

members who already manifested injuries and those who

had not yet manifested injuries. We recognized that class

members without manifest injuries would “want

protection against inflation for distant recoveries[,] . . .

sturdy back-end opt-out rights and ‘causation provisions

that can keep pace with changing science and medicine,

rather than freezing in place the science of 1993.’”

Amchem, 521 U.S. at 610-11 (quoting Georgine, 83 F.3d

at 630-31). These incentives contrasted with the

incentives of class members with manifest injuries, who

“would care little about such provisions and would

rationally trade them for higher current payouts.” Id. at

611.

The Supreme Court affirmed, stating that “[t]he

adequacy inquiry under Rule 23(a)(4) serves to uncover

31

conflicts of interest between named parties and the class

they seek to represent.” Id. at 625. The court agreed that

“the interests of those within the single class are not

aligned,” and suggested that the problem might be solved

if the class members were divided into “discrete

subclasses.” Id. at 626.

The Supreme Court revisited the issue two terms

later in Ortiz, 527 U.S. at 855-59. Ortiz also concerned a

settlement in a class action suit against an asbestos

manufacturer. The Fifth Circuit approved a settlement

that excluded a number of potential class members with

claims indistinguishable from the claims of the members

of the settlement class, and provided the same benefit for

all class members regardless of the strength of their

claims.

The Supreme Court reversed on adequacy grounds.

Id. The Court cited two specific intra-class conflicts that

rendered the named plaintiffs inadequate class

representatives. First, it noted that under Amchem,

present and future claimants have different incentives in

negotiating a settlement, and that present claimants

cannot adequately represent future claimants. Id. at 856-

57. Second, it noted that the class included plaintiffs

exposed both before and after the defendant’s insurance

policy had expired. Id. at 857-58. Because the pre-

expiration claimants had access to insurance proceeds,

they had access to a bigger pool of money from which to

recover. Post-expiration claimants lacked the incentive

to seriously pursue reimbursement under the relevant

32

insurance policies because they could not benefit from

such proceeds.

The Court again explicitly rejected the argument

that the class members all had the same incentive simply

because all members of the class wished for a maximum

recovery. Id. Rather, the Court concluded that the intra-

class conflicts prevented the representative plaintiffs

from adequately representing the entire class. The Court

reiterated that the adequacy issue could be avoided by

dividing the class “into homogeneous subclasses[.]” Id.

at 856. Further, the Court suggested that subclassing

may be necessary when a class can be divided into

“easily identifiable categories.” Id. at 832.

Since Ortiz, this Court has confronted the

adequacy requirement on several occasions. We have

recognized that the linchpin of the adequacy requirement

is the alignment of interests and incentives between the

representative plaintiffs and the rest of the class. See

Community Bank I, 418 F.3d at 307 (“[W]e recognize

that ‘adequate representation of a particular claim is

determined by the alignment of interests of class

members . . . .’” (quoting Wal-Mart Stores, Inc. v. Visa

USA Inc., 396 F.3d 96, 113 (2d Cir. 2005))); Sullivan,

667 F.3d at 336 n.5 (Scirica, J., concurring) (noting that

subclasses were not needed because “all indirect class

members have aligned interests”); In re Schering Plough

Corp. ERISA Litig., 589 F.3d 585, 602 (3d Cir. 2009)

(noting that adequacy focuses on “alignment of

interests”); In re Gen. Motors Corp. Pick-Up Truck Fuel

33

Tank Prods. Liab. Litig., 55 F.3d 768, 784 (3d Cir. 1995)

(requiring 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”); see also Richard A. Nagareda, Administering

Adequacy in Class Representation, 82 Tex. L. Rev. 287,

290 (2003) (“Dutifully following . . . the text of Rule

23(a)(4), current law focuses largely on aligning the

‘interests’ of the persons within the class. The idea is

that the ‘representative parties’ will ‘fairly and

adequately protect’ those interests and, in so doing,

legitimately bind absent class members to the resulting

judgment.”). Certain intra-class conflicts may cause the

interests of the representative plaintiffs to diverge from

those of the unnamed class members. The adequacy

requirement “is designed to ferret out” such conflicts of

interest, In re Visa Check/MasterMoney Antitrust Litig.,

280 F.3d 124, 145 (2d Cir. 2001), superseded by statute

on other grounds, as recognized in Bateman v. Am.

Multi-Cinema, Inc., 623 F.3d 708, 722 (9th Cir. 2010),

“and to ensure that the putative named plaintiff has the . .

. incentive to represent the claims of the class

vigorously.” In re Cmty. Bank of N. Va., 622 F.3d 275,

290 (3d Cir. 2010) [hereinafter “Community Bank II”].

Obviously, not all intra-class conflicts will defeat

the adequacy requirement. See 1 Joseph M. McLaughlin,

McLaughlin on Class Actions: Law & Practice § 4:30

(8th ed. 2011) (“Not all allegations of conflict will make

a proposed representative inadequate.”); cf. In re Pet

Food Prods. Liab. Litig., 629 F.3d 333, 344 (3d Cir.

34

2010). “The hard question concerning intraclass

conflicts asks which conflicts should matter . . . what

divisions should render the class representation so

defective in structure as to rise to the level of a

constitutional dereliction,” or violation of Rule 23(a)(4).

Samuel Issacharoff & Richard A. Nagareda, Class

Settlements Under Attack, 156 U. Pa. L. Rev. 1649, 1678

(2008). A “conflict must be ‘fundamental’ to violate

Rule 23(a)(4).” In re Literary Works in Elec. Databases

Copyright Litig., 654 F.3d 242, 249 (2d Cir. 2011); see

also Ward v. Dixie Nat’l Life Ins. Co., 595 F.3d 164, 180

(4th Cir. 2010) (“For a conflict of interest to defeat the

adequacy requirement, that conflict must be

fundamental.” (internal quotation marks omitted));

Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 959 (9th

Cir. 2009) (“An absence of material conflicts of interest

between the named plaintiffs and their counsel with other

class members is central to adequacy . . . .” (emphasis

added)); Valley Drug Co. v. Geneva Pharms., Inc., 350

F.3d 1181, 1189 (11th Cir. 2003) (“Significantly, the

existence of minor conflicts alone will not defeat a

party’s claim to class certification: the conflict must be a

‘fundamental’ one going to the specific issues in

controversy.”); 6 Alba Conte & Herbert B. Newberg,

Newberg on Class Actions § 3:26 (4th ed. 2002) (stating

that for a conflict to render representative plaintiffs

inadequate under Rule 23(a), the conflict “must be

fundamental”); cf. Community Bank II, 622 F.3d at 303

(“Here, there is an obvious and fundamental intra-class

conflict of interest . . . .”).

35

“A fundamental conflict exists where some [class]

members claim to have been harmed by the same conduct

that benefitted other members of the class.” Valley Drug

Co., 350 F.3d at 1189. A conflict is fundamental where it

touches “the specific issues in controversy.” Conte &

Newberg, supra, § 3:26; see also Valley Drug Co., 350

F.3d at 1189; McLaughlin, supra, § 4:30. A conflict

concerning the allocation of remedies amongst class

members with competing interests can be fundamental

and can thus render a representative plaintiff inadequate.

See Ortiz, 527 U.S. at 857; Amchem, 521 U.S. at 626-27.

A conflict that is unduly speculative, however, is

generally not fundamental. See Kohen v. Pac. Inv. Mgmt.

Co. LLC, 571 F.3d 672, 680 (7th Cir. 2009) (finding the

adequacy requirement satisfied because “[a]t this stage in

the litigation, the existence of such conflicts is

hypothetical.”); Robinson v. Metro-North Commuter R.R.

Co., 267 F.3d 147, 171 (2d Cir. 2001); McLaughlin,

supra, § 4:30.

We must thus address two questions: (1) whether

an intra-class conflict exists; and if so, (2) whether that

conflict is “fundamental.” We answer these questions by

independently considering the two intra-class conflicts

cited by the West Objectors to determine whether either

conflict causes a divergence of interests significant

enough to undercut the representative plaintiffs’ ability to

adequately represent the class.

2.

First, the West Objectors argue that there is an

36

intra-class conflict between those class members who

have already suffered leakage, and those who have not

yet suffered leakage. All of the representative plaintiffs

fall into the former category. The West Objectors argue

that this presents a classic Amchem conflict between

“past” claimants (those who have already suffered

damage) and “future” claimants (those who have not yet

suffered damage).

More specifically, the West Objectors argue that

representative plaintiffs had an incentive to prioritize

recovery for leakage-related damage that they sustained

over recovery for the failure to inform that was suffered

by the entire class. The Supreme Court specifically cited

a similar divergence of interests in Amchem, agreeing

with this court’s opinion below that “[a]lready injured

parties . . . would care little about [benefits that may be

important to future claimants] and would rationally trade

them for higher current payouts.” Amchem, 521 U.S. at

611. To properly analyze the intra-class conflict alleged

here, we must look to the class as certified as well as to

the terms of the settlement agreement. Id. at 627. An

intra-class conflict will not necessarily prevent

certification if the settlement agreement contains

sufficient structural protections to ensure that the

interests of the class will be adequately represented

despite the conflict. Id.

This case bears some resemblance to Amchem and

raises some of the same concerns. As in Amchem, there

are members of the putative class who are interested in

37

recovering immediate compensation for existing injuries

they sustained as a result of the defendant’s conduct, and

other members who are primarily concerned with

securing an adequate inflation-protected fund to provide

compensation for future injury caused by the allegedly

defective drain systems. However, the West Objectors

fail to recognize a critical distinction between the

representative plaintiffs here and the representative

plaintiffs in Amchem. The problem with the

representative plaintiffs in Amchem was that they “would

care little” for benefits that would have been valuable to

other members of the class. This is because once a class

member manifested symptoms of asbestos-related

injuries, that class member would be solely concerned

with obtaining a “generous immediate payment[ ]” for

the injury, not securing an “ample, inflation-protected

fund for the future.” Amchem, 521 U.S. at 626. This

resulted in a misalignment of interests—certain members

of the class had an incentive to pursue protections for

future claims, while the representative plaintiffs lacked

any such an incentive.

Here, on the other hand, the alignment of interests

is not so starkly problematic. A class member who has

already suffered leakage, and is thus a “past” claimant,

can continue to suffer leakage into the future to the same

extent as a future claimant, and can continue to make

future claims. 14 As such, past claimants also have an

14

The Settlement Agreement does distinguish between

leakage that occurs before notice is sent out, and leakage

38

incentive to protect the ability of class members to make

claims for future damage. Moreover, the settlement is

structured to ensure that even past claimants have an

incentive to protect the rights of all members of the class

to make future claims, and thus to align the interests of

the representative plaintiffs with those of the class. As

the District Court recognized, the representative plaintiffs

have “an interest in obtaining redress for future damage

or avoiding future damage caused by the allegedly

defective systems” that aligns with the interests of the

other members of the class. App’x A83. Thus, although

this case raises some of the same concerns that caused

the Supreme Court to invalidate the settlement in

Amchem, the misalignment of interests here is somewhat

different than the misalignment of interests in Amchem.

The West Objectors’ argument is not focused on

the alignment of these interests, but rather on their

magnitude. That is, the West Objectors worry that

because the representative plaintiffs can seek damages

for their past leakage, which makes up the vast majority

that occurs afterwards. The former is a “reimbursable

repair” that is eligible for immediate reimbursement,

while the latter is restricted to goodwill claims out of the

residual fund. The West Objectors have not alleged that

this distinction gives rise to an intra-class conflict.

Moreover, to the extent that any such conflict exists, it is

indistinguishable from the conflict between the

reimbursement group and the residual group, which we

discuss in Part III.B.3, infra.

39

of their damages, they will likely value future protections

less than class members with no leakage-related

damages. We reject this argument for two reasons.

First, it is unduly speculative. The “terms of the

settlement [and] the structure of the negotiations”

incentivized representative plaintiffs to seriously pursue

protections for future claimants. See Amchem, 521 U.S.

at 627. Nothing in the record suggests that representative

plaintiffs had reason to ignore this incentive. We cannot

conclude that the District Court abused its discretion

simply based on speculation about whether the structural

incentives created by the settlement sufficiently

motivated the representative plaintiffs to represent the

rest of the class. See Kohen, 571 F.3d at 680 (declining

to find an adequacy problem on the basis of a speculative

conflict); Robinson, 267 F.3d at 171 (same);

McLaughlin, supra, § 4:30.

Second, even if the representative plaintiffs did

value protections for future claimants less than other

members of the class, we do not believe that, again on

this record, their differing valuations would create a

fundamental conflict sufficient to undermine their ability

to adequately represent the class. See Gooch v. Life

Investors Ins. Co. of Am., 672 F.3d 402, 429 (6th Cir.

2012) (“Although significant conflicts make a plaintiff an

inadequate class representative, differently weighted

interests are not detrimental . . . [b]ecause few people are

ever identically situated . . . .”). The West Objectors’

argument—that representative plaintiffs derive less utility

40

from protections for future claims than those who have

only future claims—cannot create, at least on these facts,

a fundamental intra-class conflict sufficient to undermine

Rule 23(a)(4).

As the Sixth Circuit observed in Gooch, each class

member naturally derives different amounts of utility

from any class-wide settlement. Id. An older or even a

particularly myopic representative plaintiff, for example,

might value a front-loaded settlement more than other

members of the class. A coupon-clipping representative

plaintiff may derive more utility from a coupon-based

settlement than other members of the class. To hold that

these differing valuations by themselves render the

representative plaintiff inadequate would all but

eviscerate the class action device. Of course, such

differing valuations may be relevant to the ultimate

determination whether the settlement is fair and

reasonable. See Girsh, 521 F.2d at 157. We do not

think, however, that the difference in valuation here is

sufficient to call into question representative plaintiffs’

ability to adequately represent the class.

3.

The West Objectors argue that there is an intra-

class conflict between plaintiffs in the reimbursement

group and plaintiffs in the residual group. Because all

representative plaintiffs are in the reimbursement group,

the West Objectors argue, they cannot adequately

41

represent class members in the residual group. 15 We

15

Members of the reimbursement group that made out-

of-pocket payments for non-reimbursable repairs were

also eligible to submit claims for reimbursement from the

residual fund. This does suggest that the representative

plaintiffs had some incentive to maximize the residual

that would likely be available to the residual class. This

incentive does not, however, resolve the adequacy issue

raised by the West Objectors. The representative

plaintiffs’ incentive to maximize the aggregate size of the

reimbursement fund is separate from their interests in

allocating that fund amongst the class. The fundamental

intra-class conflict here is allocative in nature, see

Amchem, 521 U.S. at 626-27, and concerns the

representative plaintiffs’ incentive to shift the dividing

line between the residual and reimbursement groups in

order to maximize their own recovery, at the expense of

other members of the class who lacked a representative to

protect their interests. Even if the reimbursement group

managed to negotiate a reimbursement fund that was

expected to satisfy the claims of the residual group, there

remained a chance, however remote, that the fund would

not be sufficiently large. This risk of loss from any

shortfall lay primarily with the residual group. As such,

even if the reimbursement group had an incentive to

negotiate for a fund large enough to satisfy the required

residual claims, the potential risk of loss from any

shortfall would still create a problematic incentive to

carve out as many class members from the

42

agree.

The structure of the settlement agreement itself,

which divides a single class into two groups of plaintiffs

that receive different benefits, supports the inference that

the representative plaintiffs are inadequate. The

reimbursement group has priority access to the $8 million

fund. Only after their claims are satisfied can the

administrator satisfy goodwill claims from the residual

group. In order to sort the plaintiffs into these two

groups, representative plaintiffs sorted the various car

model runs 16 by their claims rates. On this spectrum of

claims rates, representative plaintiffs drew a line

delineating the boundaries between the two groups.

Those model runs with claims rates above the line were

placed in the reimbursement group. Those model runs

with a claims rate below the line were placed in the

residual group.17 It was this line-drawing exercise that

reimbursement group as possible. This incentive gives

rise to an adequacy problem.

16

Each car included in the class could be sorted into a car

model “run” which included other cars using the same

vehicle platform. App’x A1188-89.

17

There appears to be some dispute over whether or not

the assignment of individual plaintiffs was actually

based, as representative plaintiffs allege, on the relevant

claims rates. The West Objectors note several outlier car

models in the residual group with higher claims rates

43

exacerbated the adequacy problem here.

Every plaintiff in the class had an incentive to

maximize the number of plaintiffs in the residual group,

while ensuring that they themselves were in the

reimbursement group. That is, every plaintiff had an

incentive to draw the dividing line just beneath their

model run, placing as many cars as possible into the

residual group. Doing so would create the least amount

of competition for the first round of reimbursement

claims, and would thus give class members in the

reimbursement group the best chance at having their

claims satisfied in full.

The problem is that the interests of the

representative plaintiffs and the interests of the residual

group aligned in opposing directions. Representative

plaintiffs had an incentive to draw the line just beneath

their model runs, and to relegate everyone below the line

to the residual group. Class members in the residual

group had an incentive to lower the line just below their

model run such that they were included in the

reimbursement group but everyone below the line

remained in the residual group. Put simply,

representative plaintiffs had an interest in excluding other

than certain models in the reimbursement group. We

need not address this issue because we conclude that

even if representative plaintiffs did assign cars into the

various groups based on claims rates, they still could not

adequately represent the class.

44

plaintiffs from the reimbursement group, while plaintiffs

in the residual group had an interest in being included in

the reimbursement group. This is precisely the type of

allocative conflict of interest that exacerbated the

misalignment of interests in Amchem, 521 U.S. at 626-

27.

Volkswagen defends the adequacy of the named

representatives by pointing to our decision in In re

Insurance Brokerage Antitrust Litigation, 579 F.3d 241,

271-72 (3d Cir. 2009). In that case, we approved a

settlement in which different members of a single class

received different recoveries, but where no subclasses

were certified. The settlement agreement there calibrated

the amount of recovery based on the type of insurance

policy held by the plaintiff, providing that those class

members who held excess insurance policies received a

larger recovery than those who held other types of

insurance policies. We held that this allocation “is

simply a reflection of the extent of the injury that certain

class members incurred and does not clearly suggest that

the class members had antagonistic interests.” Id. at 272.

We affirmed because we found that subclasses were not

necessary.

That opinion, however, did not address the ability

of the representative plaintiffs to adequately represent the

class. Insurance Brokerage did not cite Rule 23(a)(4)

and cited neither Amchem nor Ortiz in its discussion of

whether subclasses were necessary. It did not discuss the

interests or incentives of the named plaintiffs in the suit.

45

Rather, it applied typicality and commonality principles,

discussing the similarity between the claims brought by

all class members, regardless of the type of insurance

policy held. Absent any discussion of misaligned

incentives or intra-class conflict, Insurance Brokerage

cannot govern our inquiry in this case.

Plaintiffs also argue that there is no fundamental

intra-class conflict here because the subcategories were

drawn up based on empirical data—i.e., the claims rates

amongst the various model runs. As a result, they argue,

the groups were divided based on empirical data, and the

incentives of the representative plaintiffs had no effect.

In support of their argument, they point to Eads’s

testimony at the fairness hearing suggesting that the

model runs in the reimbursement group had higher

claims rates than those in the residual group. Fairness

Hearing Tr. 35:13-36:12.

Any dividing line on the spectrum of claims rates,

however, would produce the same result—those above

the line would, in general, have higher claims rates than

those below the line. The problem with dividing the

class without having any representation from one of the

groups becomes clearly untenable in this case because of

who drew the line. Eads plainly stated that the line “was

decided by the lawyers.” 18 Id. at 35:13. However, the

18

The West Objectors argue that the District Court

should have excluded Eads’ testimony entirely, pursuant

to Daubert v. Merrell Dow Pharms., 509 U.S. 579

46

representative plaintiffs and their counsel could not

adequately represent the entire class in determining

where the line would lie, because the settlement provided

“no structural assurance” that the class representatives—

all of whom were in the reimbursement group and had

already suffered leakage—could adequately represent the

interests of the class members in the residual group.

Amchem, 521 U.S. at 627. Thus, on these facts, there is a

fundamental intra-class conflict between the

representative plaintiffs, all of whom are in the

(1993). Under Daubert, a District Court must review an

expert’s testimony to determine whether it may proceed

to the factfinder. Pineda v. Ford Motor Co., 520 F.3d

237, 247-48 (3d Cir. 2008). Daubert is not an all-or-

nothing test, however—a District Court can

independently consider whether each “particular

scientific [or technical] methodology is reliable.” Elcock

v. Kmart Corp., 233 F.3d 734, 745 (3d Cir. 2000)

(internal quotation marks omitted) (discretely analyzing

an expert’s various opinions under the lens of Daubert).

That is precisely what the Magistrate Judge did, engaging

in a painstaking analysis of Eads’ report, proceeding line-

by-line through his calculations, and omitting or

adjusting calculations that were inflated or based on

unreliable methods or assumptions. The District Court

did not abuse its discretion in declining to exclude Eads’

testimony in its entirety. United States v. Mitchell, 365

F.3d 215, 234 (3d Cir. 2004) (reviewing a District

Court’s decision to admit expert testimony for an abuse

of discretion).

47

reimbursement group, and those plaintiffs in the residual

group. We will reverse the District Court’s order

certifying the class because the representative plaintiffs

fail to satisfy the adequacy requirement in Rule 23(a)(4).

We see two ways by which the representative

plaintiffs may satisfy Rule 23(a)(4) on remand. First,

they can simply do away with the distinction between the

reimbursement group and the residual group, and allow

all members of the class to submit reimbursements with

no difference in priority. Without any need to draw a

line between themselves and other members of the class,

representative plaintiffs’ interest in maximizing their own

returns would align with the interests of the rest of the

class. Practically speaking, this does not appear to be a

problem in this case. Representative plaintiffs project

that the $8 million reimbursement fund will be sufficient

to satisfy the claims of those in the reimbursement group

and the residual group, if projected claim rates hold

true. 19 As such, there appears to be no need to create a

19

Volkswagen appears to suggest that the fact that the

residual is likely sufficient to satisfy the claims arising

out of the residual group implies that the representative

plaintiffs adequately represented the class. Such an

argument was made in Amchem, and was explicitly

rejected by the Supreme Court. Amchem, 521 U.S. at

626 (“The disparity between the currently injured and

exposure-only categories of plaintiffs, and the diversity

within each category are not made insignificant by the

District Court’s finding that petitioners’ assets suffice to

48

residual group.

Second, the parties could simply divide the groups

into subclasses that would be certified separately. The

Supreme Court has held that subclassing can resolve

conflicts of interest that might prevent representative

plaintiffs from adequately representing the class. See

Ortiz, 527 U.S. at 856 (holding that an intra-class conflict

“require[d] division into homogeneous subclasses . . .

with separate representation to eliminate conflicting

interests”); Conte & Newberg, supra, § 3:32 (discussing

the use of subclasses to address “competing interests in

distributing the monetary relief” available to the class).

For example, the class might be divided into a

reimbursement subclass and a residual subclass, each

with representative plaintiffs to ensure that their interests

are being accommodated.

What is clear at this stage, however, is that the

class as certified fails to satisfy Rule 23(a)(4).

Representative plaintiffs simply cannot adequately

represent the interests of the entire class. Despite the

exemplary manner in which the Magistrate Judge

pay claims under the settlement.”). The adequacy

requirement provides structural protections during the

process of bargaining for settlement. The fact that the

stars aligned and the class members’ interests were not

actually damaged does not permit representative

plaintiffs to bypass structural requirements.

49

conducted the fairness hearing, and her painstaking

efforts to adduce information not elicited by the parties

during that hearing, we conclude that she abused her

discretion in certifying the class. Accordingly, we will

reverse the District Court’s certification order.

C.

The parties also raise a host of issues concerning

the District Court’s analysis of representative plaintiffs’

fee petition. First and foremost, Volkswagen argues that

the District Court erred in its choice-of-law analysis

regarding the fee petition. Because our analysis of the

fee petition would turn on the language of the choice-of-

law provision in the settlement agreement, and because

the parties will need to negotiate a new settlement

agreement in light of our holding, we cannot decide these

issues now.20

20

We recognize that, as representative plaintiffs noted at

oral argument, these issues may arise again and may

necessitate another appeal. It is possible, however, that

they will not arise in the same form as currently

presented. The parties may choose to address these

issues if they draft a new settlement agreement. As such,

any decision now would be an impermissible advisory

opinion. See Sutton v. Rasheed, 323 F.3d 236, 248 (3d

Cir. 2003) (“[A] federal court has neither the power to

render advisory opinions nor to decide questions that

cannot affect the rights of litigants in the case before

them.” (internal quotation marks omitted)). We thus

50

III.

Rule 23(a)(4) was designed to ensure that the

representative plaintiffs in a class action suit adequately

represent the interests of the entire class. The structure of

the settlement here provides no such assurances. We

conclude that representative plaintiffs cannot adequately

represent the interests of the members of the class in the

residual group. We will reverse the District Court’s

certification order, and will remand for further

proceedings.

decline representative plaintiffs’ invitation to decide the

issues arising out of their fee petition.

51